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EUCentreforGlobalAffairs� Located on Level 5 of Nexus 10 at the University of

Adelaide

� 1 of 5 EU Centres across Australia

� Part of the EU Centre Program

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Today’sPresentation� Part 1: Studying Economics at

the University of Adelaide� Part 2: What is the EU?� Part 3: Pros and Cons of the

Euro� Part 4: Solutions to Problems

with the Euro� Part 5: Q+A/Discussion

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StudyingEconomicsattheUoA� Bachelor of Economics (Advanced) concurrently

with a Bachelor of Arts (Major: Development studies/Minor: Politics)

� Economics involves Maths

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DifferencesbetweenEconomicsandEconomics(Advanced)� 95 ATAR for Advanced Economics

� Advanced Economics majors: Finance, Politics, Social Sciences

� Mentors

� Exclusive lectures and seminars

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AnyQuestionsonStudyingatUniversity?

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AnInterestingFact...� Economics emerged from

political philosophy duringthe Scottish Enlightenment(1700’s-early 1800’s)

� Adam Smith worked underthe “Design Principle”

� What does that mean?

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TheInvisibleHandIsGod’sHand

� The “Invisible Hand” is God’s hand

� “By pursuing [one’s] own interest he frequently promotes that of the society more effectually than when he really intends to promote it . . . and he is in this, and many other cases, led by an invisible hand.”

� Markets are self-equilibrating because God designed them to self-equilibrate

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WhytalkabouttheEU?� The European Union is an experiment

� Australia/EU Free Trade Agreement

� EU integration is just rapid globalisation

� TINA – There is No Alternative (to globalisation)

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TheEuropeanProject� Began with the European Coal and Steel Community

(1951)

� Three key parts of integration - Economic integration- Political integration- Social integration

� Is the European Project political or economic?

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EconomicIntegration� Economic integration first, the rest will follow

� European Economic Commission

� The European Project is integration through economic integration

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EuropeanExpansion� After 1995, the EU expanded from 12 member

countries to 28 member countries (pre-Brexit)

� More ambitious projects – single currency

� One important goal of the Euro was economic convergence however, it actually caused divergence

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TheEuro� By May 2002, the Euro had completely replaced

previous currencies

� Eurozone – Countries who use the EuroAustria Germany LuxembourgBelgium Greece MaltaCyprus Ireland the NetherlandsEstonia Italy PortugalFinland Latvia SlovakiaFrance Lithuania Slovenia

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TheEuro- Benefits� Economies of scale

� Comparative advantage

� No exchange rates

� Convergence through Gravity Model of Trade

� Gravity Model of Trade – countries trade with each other based on size and “distance”

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EvidencethattheEuroisfailing� The European debt crisis (2007-present)� Stagnant GDP growth: ≈ 0% increase in Eurozone vs

1% increase in US

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WorseStandardsofLiving

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WorseProductivity&Competitiveness

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� Real GDP per person of working age (age 15-65)

� 2007-2015: 0.6% increase in Eurozone vs 3.9% increase in non-Eurozone European countries

� Using real GDP per employed person

� 0.7% decrease in Germany vs 7.9% increase in US

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RampantUnemployment

� Eurozone unemployment in 2015: 11%

� Greek unemployment in 2013: 27.8%

� Eurozone youth unemployment: 22%

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TheEuro- Problems� Economic integration needs sufficient political

integration – evidenced by democratic deficit

� European Central Bank’s narrow mandate

� Lack of monetary sovereignty

� Lack of automatic stabilisers

� Migration and Divergence18

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ECB’sNarrowMandate� Unemployment – 10%

� GDP Growth – 0.8%

� Inflation – 3%

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MonetarySovereignty

� Monetary sovereignty – the power of the state to exercise exclusive legal control over its currency

� Eurozone countries do not have sovereign control of their currency

� This complicates fiscal policy

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FiscalPolicy’sProblems� Eurozone countries are do not have monetary

sovereignty

� The Troika (ECB, IMF, European Commission) want their money back – austerity

� Deficit reduction through decreased spending + increased taxes

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AutomaticStabilisers� Definition – a feature of the economy which

automatically helps to correct (positive or negative) fluctuations in GDP

� Examples: Exchange rate, unemployment benefits

� As for exchange rates . . .

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MigrationandDivergence� From 2007-2013: Ireland’s long-term emigrant

numbers increased by 75%; annual Greek migrants increased 2.5x

� Economies of Agglomeration – leads to divergence

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EconomiesofAgglomeration� Agglomerate – to gather into a mass or cluster

� By clustering together, businesses can take advantage of infrastructure, knowledge spillovers, skilled labour pools, and reduced transport costs

� Examples – Detroit car manufacturing, Silicon Valley

� Supply Chain will follow

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BarrierstoAgglomeration� Fixed Workers – agriculture

� Language barriers

� Any barriers to movement e.g. visas, passports, access to permanent residency

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ConvergenceorDivergence� Economies of Agglomeration can cause convergence

or divergence

� Convergence – Manufacturing movement from US/Europe to South East Asia

� Divergence – Urbanisation

� This can be dangerous for both the sending and receiving countries

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EurozoneDivergence� We’ve talked about labour divergence in the Eurozone

� The Eurozone also experienced capital divergence

� Although the ECB sets a single interest rate, different countries still pay different rates based on the confidence in the banking sector

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CapitalDivergence� Two factors determining confidence:

- Indebtedness- Ability of governments to bail out banks

� Low confidence = High interest rate

Downward Spiral: Capital leaves à Banks restrict lending à Economy contracts à Ability of government to bail out banks decreases à Interest Rate increases à …

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EuroProblems- Summary� Monetary policy ineffective because of ECB’s narrow

mandate

� Fiscal policy useless because of lack of monetary sovereignty

� Exchange rate is not a sufficient automatic stabiliser

� Euro created divergence via economies of agglomeration

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Solutions� Stiglitz’s solutions:- More Europe- Less Europe

� The European Commission’s solutions:- Carrying On- Nothing but the Single Market- Those Who Want More, Do More- Doing Less, More Efficiently- Doing Much More Together

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More/LessEurope� Stiglitz believes that the EU is caught in no man’s land

� More Europe:- Mutualisation of debt (removal of place-based debt)- Solidarity fund for stabilisation- Banking Union

� Less Europe:- A divorce into two or three currency groups

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TheEC’sOptions� “Too often, the discussion on Europe’s future has been

boiled down to a binary choice between more or less Europe. That approach is misleading and simplistic.” – White Paper on the Future of Europe

� Split into six categories- Single Market and Trade - Foreign Policy- Monetary Union - EU Budget- Migration and Security - Capacity to Deliver

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NothingbuttheSingleMarket� Single Market – Strengthened, but free movement of

people limited� Monetary Union – Euro is limited� Foreign Policy – Less collective policies� Capacity to Deliver – Collective action is limited,

decisions are made easier

� More economic integration, w/o Euro, lesspolitical integration

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ThoseWhoWantMore,DoMore� In all areas: functions will stay the same, and allow for

Member States to cooperate with who they want, when they want, in whichever areas they want

� Focus on voluntary integration, a move away from collective integration

� Possibility of creating sub-groups within EU: good or bad?

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DoingLess,MoreEfficiently� Single Market – Standards set to a minimum, but

enforcement is strengthened � Monetary Union – Increased stability, but reduced

employment/social policy� Foreign Policy – EU speaks with one voice� Capacity to Deliver – EU Citizens understand

decision-making better, priorities may be difficult to agree on

� Less Europe, but stronger Europe

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DoingMuchMoreTogether� Single Market – Strengthened through tax and

standards harmonisation, with stronger enforcement� Monetary Union – Steps taken to prevent divergence,

and fix other problems with Eurozone� Foreign Policy – EU speaks with one voice� Capacity to Deliver – Decision-making is faster,

enforcement is stronger

� More Europe

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Solutions– WhatDoYouThink?� More Europe or Less Europe?

� Those Who Want More, Do More?

� Nothing but the Single Market vs Doing Less, More Efficiently

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Q+AandDiscussion1. What does Brexit mean for the EU? Is it a sign that Less Europe is on the way?

2. Should we start more monetary unions? Or are they fool’s gold?

3. Is integration too hard? If so, which form (social/economic/political) is the hardest?

4. Has the Euro brought solidarity or frailty? Can the Euro bring solidarity?

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