Entries Tagged 'eu' ↓

National Debt and bond yield spread: Source: Economist

Since the financial crisis the bond yields in many European countries have diverged.

For example, in Greece which has government borrowing of over 100% of GDP, bond yields are now 2.5% higher than German bond yields.

The higher bond yields on Greek debt reflects the fact, investors are more nervous about buying Greek bonds because of the greater possibility of debt default.

Note in these statistics from Economist, Irish government borrowing is only 25% of GDP, but since 2007 Irish borrowing has increased sharply because of recession and bank bailouts.

Quantitative Easing in Eurozone

Suppose the ECB wanted to pursue quantitative easing in the Eurozone; this would involve buying government bonds to drive down long term interest rates. Clearly it would be a great boon for Greece if the ECB bought their government bonds; the yields would decrease, people would have more confidence in Greek debt and the inflationary impact of expanding the money supply would be limited by the size of the ECB and other countries fiscal restraint.

You can see how politically sensitive it would be for the ECB to decide which government bonds to buy. Do they buy bonds in countries with the highest interest rates, or do they have to buy bonds equally in all countries. Unsurprisingly the ECB is trying desperately hard to avoid even contemplating this unorthodox monetary policy.

Example of a AQA unit 4 question from June 2007. AQA paper available here

Note: Some of the data can’t be published online.

This is just a short guide to answer the question. I think it lacks – more use of data and more evaluation.

Explain why Free Trade is important to EU member countries

1:1 Exports are an important component of Aggregate Demand and therefore influence economic growth

1:2 Consumers rely on imports to enable higher living standards e.g cheap clothing imports from China and cars from the EU.

1:3 Free Trade is an important engine of growth

1:4 Free Trade increases competition and incentives to cut costs

1:5 Some countries have few natural resources therefore, trade is essential to enable them to have oil / petrol e.t.c

1:6 Trade helps technological innovation

Continue reading →

There has been much debate about whether Turkey should be admitted to the European Union. These are some of the benefits and costs which Turkey is likely to face if it is successful in joining the EU.

Benefits to Turkey of Joining the European Union EU

1. If Turkey join the EU they have the potential to benefit from higher growth and investment.
2. Membership of the EU will reduce barriers to trade (tariff barriers and non tariiff barriers). Therefore, it is easier for Turkish firms to export to the large EU market (nearly 0.5 billion). Turkey may have a competitive advantage because of lower labour costs.
3. Furthermore, joining the EU will increase competitiveness. Domestic monopolies will face greater competition from EU rivals. This should help to reduce prices and increase efficiency.
4. Another benefit from joining is that successful firms can benefit from economies of scale. As they sell to a wider EU market they can expand production and get lower costs.
5. Membership may encourage inward investment. Western EU firms will be attracted to invest in Turkey because of the new potential markets and lower labour costs.  This investment will help boost productivity and stimulate economic growth growth.

• However, Many Turkish firms may struggle to compete in the single market and could lose business to more efficient western firms. However, this lose of business may be most acute in the short term; in the longer term the increased competition may act as a spur to increase competitiveness.
• However, inward investment may not increase because Turkey’s infrastructure is insufficient.

6. Turkey may benefit from EU policies such as CAP, Regional Policy and Transport Funds. Turkey is one of the poorer areas in the EU and therefore is eligible to regional funds. Over time this could make a big improvement in the structure of the Turkish economy.Problems of Joining the EU

Continue reading →

Why didn’t the UK Join the Euro?

Joining the Euro would give the UK various advantages:

• predictability of exchange rates with Europe
• Easier for consumers to compare prices (price transparency)
• Lower transaction costs
• Encourages investment because of greater stability in trade.

However, despite these potential benefits the UK decided not to join and shows no indication of joining in the future.

Main reasons for not Joining the Euro.

1. Loss of Independent Monetary Policy

Joining Euro also causes a loss of an independent monetary policy. Interest rates are set by ECB and may not be suitable for UK.
Continue reading →

The original European Union (then called the EEC European Economic Council) was composed of 6 founder members.

• Belgium
• France
• Germany
• Italy
• Luxembourg
• Netherlands

The EEC came into existence with the Treaty of Rome 1954. Since then the EU has expanded its borders taking in most European Countries. Enlargement has generally been seen as a positive thing. Although, there have been concerns raised over the expansion into Eastern Europe (disparities in income have encouraged cross border migration. The big question which remains, is whether to admit Turkey into the EU club. This is a significant step because of the different religious (Muslim) and cultural background of Turkey.

First Enlargement of EEC 1973

• Denmark
• Ireland
• United Kingdom (The UK tried to join in the 1960s, but, De Gaulle famously said ‘non’) Continue reading →