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Development Economics III ECON3526: The Economics of European Integration III FINAL EXAM Friday 20th. July 2018, 11am - 1pm Answer three questions; all questions have equal weight. Answers will be graded on the quality of the economic analysis. Time allowed two hours. 1. To what extent has deeper integration, including monetary union, increased financial instability in the EU? What are the appropriate roles for EU institutions and for national governments in responding to financial crises? Why has it been difficult to make effective responses since 2010? 2. What are the main barriers to labour market integration within the EU? How has removal of restrictions on labour mobility within the EU exacerbated problems related to immigration from non-member countries? 3. How has the EU trade policy evolved and why? What are the main elements of the EU's Trade for All strategy adopted in 2012? How does the EU-Australia trade agreement that is currently being negotiated fit into the strategy? 4. Analyse the economic aspects of Brexit, focusing on: 1) economic reasons why the UK might be better off or worse off outside the EU, 2) economic issues that need to be resolved as the UK becomes a non-member of the EU. Development Economics III ECON3526: The Economics of European Integration III MIDSEMESTER EXAM Wednesday 11th. July 2018, 11.10am - 12.40pm Answer four questions; all questions have equal weight. Answers will be graded on the quality of the economic analysis and, where appropriate, use of diagrams to illustrate your arguments Time allowed ninety minutes. 1. Give two reasons why forming a customs union is more difficult than forming a classic free trade area (i.e. zero internal tariffs plus independent trade policies towards non-members) and one reason why it is easier. Do these reasons explain the relative success of the EU and EFTA after their formation? 2. If policymakers want to increase farmers' incomes, what are the advantages and disadvantages of supporting higher farm prices versus providing subsidies to farmers? Illustrate your answer with a diagram. 3. Explain why the founding members of the European customs union found it difficult to use preferential tariffs as an instrument of foreign policy, and why that is even more difficult in the twenty-first century? 4. The 1957 Treaty of Rome foresaw free movement of capital within the European Union, although this took 35 years to implement fully. How did the liberalization of capital flows affect EU members' decisions about their exchange rates? ECON3526 - midsemester exam 2018 - answer guide 1. Two reasons why forming a CU is more difficult: · need to agree on common external tariff · need to agree on use/share of tariff revenue One reason why CU is easier to create than a FTA · no need to worry about trade deflection. Relative success depended more on which countries were in the EU and EFTA - the EU had bigger more dynamic economies in late 1950s (Germany, France, Italy). 2. distinguish the starting point. For an import-competing good, price support worked like a tariff in the short-run, A subsidy shifts the supply curve down by the amount of the subsidy. If set to produce exactly the same increase in producer surplus as the price support, the net welfare cost will be the cost of the subsidy minus the producer surplus (ie the production distortion triangle), but the market price will be unchanged so that there is no consumption distortion. An added drawback of price support was because the domestic price was fixed there was no effective competition from imports (unlike a tariff, where imports did compete at the world price plus tariff) which meant that and EU farmers could keep on expanding supply at that price, often leading to excess supply and the need for government stockpiling. If the domestic market is in balance, supporting a higher price will producer surplus and consumer surplus. The excess supply must be bought and stored by the government. The cost to the government + consumer surplus > producer surplus. A subsidy can similar outcomes without the loss of CS. 3. They created a pyramid of preferences with most preferred partners at the top and least preferred at the bottom, but each time a partner was preferred another partner was discriminated against partners with most-favoured nation treatment (USA, Canada, Australia, NZ, Japan, South Korea, Taiwan) were the least preferred apart from Communist countries . Even among more preferred partners, countries were often more concerned about their position relative to competitors than the degree of preferential treatment itself. As the common external tariff it became harder to differentiate between trade partners by the size of the tariff charged on their exports to the EU. 4 This question requires an explanation of the Impossible Trinity: impossible to have fixed ER, free K flows and independent monetary policy. With regulated K flows there was some space to fix ERs and retain some mp independence, at least for the larger EU members. With no restrictions on K flows within the EU after 1992, members had to choose between fixed ERs and independent mp. Course ID: 109404 Final Exam 2019: Answer Notes There are no right or wrong answers; below are some points that should have been included. 1. Economic integration in Europe is often divided into a customs union phase and a single market phase. (1) What are the principal differences between the two, and (2) to what extent was the move to the second phase necessary to maintain the effective functioning of the customs union? (1) CU = free trade among members + common external trade policy The Single Market aims for an integrated market in goods, services, capital and labour. (2) NTBs had similar effect to tariffs on internal trade – Cassis de Dijon case highlighted the need for mutual recognition or harmonization of regulations. New protectionism in 1980s require internal border checks (e.g. with national quotas on car imports). Currency fluctuations hampered operation of the internal free trade and made common policies difficult to reconcile with free internal trade (e.g. CAP) ( the euro. Especially in the GVC context, effective internal free trade required free movement of capital and (especially short-term) labour – and Schengen. [Note: the move to the SM was not inevitable – compare The Southern African Customs Union (SACU) established in 1910 and still a CU rather than a SM. The question does not ask you to go into the details of the SM or of monetary union] 2. What were the main elements of the agreement negotiated between the EU and the UK in 2017-18 for the latter’s exit from the European Union? How would a hard Brexit on 31 October 2019 differ from the negotiated Brexit? Analyze the differences in the economic consequences of the two modes of Brexit. Three or four elements: (1) the financial bill, (2) position of EU residents in UK and UK residents in EU27, (3) Ireland, and (4) subsequent trade relations - the last is not in the negotiated agreement, but to be negotiated after the exit agreement has been ratified. The negotiated Brexit would minimize change, although if it includes leaving the single market there will be economic costs (higher trade costs; loss of SM access e.g. for banks) – labour migration, control over regulations, etc. A hard Brexit, i.e. not ratifying an agreement, may not resolve (1) and (2) ( bitterness in negotiating (4) and to a hard border in Ireland. Other economic consequences depend on how (4) is negotiated – consider the alternatives and how likelihood of the various solutions may vary with hard or soft Brexit. 3. How and why have EU trade policies towards non-members evolved since the Treaty of Rome? What are the main drivers of the EU’s external trade policy in 2019? Initially high external tariffs were reduced via multilateral negotiations within GATT in the 1960s. A pyramid of preferential treatment was constructed because countries had differing attitudes towards how different non-members should be treated, and the customs union had no other foreign policy instruments. Unstable as tariffs( and partners worried about their status relative to others. 1980s new protectionism against imports from new industrializing economies in East Asia – outlawed after 1990 and in WTO. Since 1990s, ( GVCs ( ( emphasis on internal efficiency, and access to imports ( greater competitiveness. External trade policy increasingly open New trade technologies ( need to reach agreement on WTO+ issues (e.g. e-commerce, big data) ( deep agreements with major trade partners. Page 1 of 2 Final Page ECON3526 - midsemester exam 2019 - answer guide 1. In perfect competition firms are identical; free entry and exit ensure no mark-up and there rea no scale economies. The gains from trade arise form specialization by comparative advantage, i.e. resources move from uncompetitive to competitive sectors. In monopolistic competition similar-sized firms produce different varieties of the good so they have some monopoly power (i.e. face a downward-sloping demand curve so that P=AC at a point where scale economies exist). There are two additional sources of gains from trade: · Economies of scale because the equilibrium firm size is bigger in the larger market · Consumers have a greater choice of varieties of the good’ You could use a diagram to show how the combined market is associated with larger n for each country’s consumers, but it is not asked for. If firms are heterogeneous · An added source of gain may be a sorting effect as more efficient firms survive and the least efficient die. The policy implication of heterogeneous firms is that governments should not promote industries as this will help both good and bad firms. Support for efficient firms would be better, but governments may be poor at identifying those – and they may not need help. 2. use the standard diagram to show that the variable levy (or price floor) creates the same wedge between the world and domestic price as a tariff does (B&W Fig 9.2). The variable levy is worse than a tariff because a fall in the world price is not passed on to domestic consumers (and the triangles become larger) If the support price is above the equilibrium price (S>D), then the surplus must be bought and stockpiled. In B&W Fig 9.6 this is due to technological change shifting the supply curve to the right so that the EU becomes an exporter of the good; the CAP price floor exacerbates the surplus, which can only be sold on international markets with the help of an export subsidy (area cdef) or given away as food aid, either of which depresses the world price, and hurts food-exporting countries. 3. Main sources of finance for the Commission were customs duties and a portion of members’ value added taxes (GST). These revenues would be roughly proportional to the member’s national income. Between 1969 and