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.

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

Explain possible reasons for changes in the pattern of trade between EU member countries and China

2:1. Extract B shows that between 2004 and 2005 there was a small 2% increase in exports to China. However, imports from China have increased by 23% leading to a worsening of the current account.

2:2 Economic Growth in the EU may have been strong. With strong economic growth people consume more imports. However, imports from other countries were less impressive. e.g. there was a fall in imports from Japan and imports from the US only increased by 1%

2:3. This suggests that China’s exports may have become relatively more competitive and attractive to the EU consumer, causing a rise in the share of imports from China. For example, the increased competitiveness may be due to lower labour costs in China, especially for labour intensive industries such as clothes and cuddly toys.

2:4 The exchange rate. An appreciation in the Euro relative to the Chinese Yuan would make EU exports less competitive and Chinese imports cheaper. This would explain the rise in imports relative to exports. However, we cannot see any data to back up this assertion.

2:5 Chinese firms could be targetting the EU market because they feel there is good potential.

3 assess the economic effects of large economies and trading blocs, such as the EU, adopting protectionist policies, including tariffs and quotas, against China;

3:1 Higher tariffs on imports from China will lead to higher prices for consumers. It will lead to a decline in consumer surplus and less choice, especially for manufactured goods mentioned in extract E such as Bras and underwear.

3:2 Import tariffs tend to lead to retaliation e.g. China places tariffs on EU exports. Therefore there is a net reduction in trade.

3:3 The law of comparative advantage states that tariffs lead to a loss of economic welfare, and lower living standards.

3:4 Tariffs may encourage firms to be inefficient. Extract E says France and Italy don’t like competition from China and therefore are blocking imports. But, this means that the government is encouraging inefficient and declining firms to stay in business.

3:5 However, free trade can be harmful. You could argue that tariffs give French and Italian clothing firms the opportunity to reinvest and try to boost competitiveness; this is better than allowing them to go out of business and cause unemployment.

3:6. Extract E also suggests that tariffs are good because it is reducing the consumerist mentality. i.e. people are spending too much on clothes they don’t need. Therefore, the tariffs are good and helping to reduce overconsumption

3:7. The extract is from an opinion in a magazine, it is not based on economic theory. Tariffs don’t stop people wanting to buy goods, it just means people buy more expensive domestic goods rather than the slightly cheaper imports. The problems of debt will not be solved by tariffs.

make a recommendation as to whether the EU should have free trade with China in high- tech equipment such as ICT products, giving justifications for your recommendation.

4:1 Free trade in ICT products has many advantages.

• Consumers will get lowest prices
• Increased competition will force EU firms to remain competitive.
• China has a growing economy and is likely to have increasing demand for ICT products in the future.
• Economies of scale. Free trade enables efficient firms to specialise and become more competitive.

4.2 In ICT, the EU has little to lose from free trade in the long term. The EU should not worry if Chinese firms become more competitive because consumers will benefit from lower prices and EU firms will switch to more suitable industries in the long term.

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

Problems of Joining the EU

1. A potential problem for Turkey is that labour may be attracted to move to the west, where wages are higher. In the EU there is free movement of labour and capital. This could rob the Turkish economy of young, skilled and motivated workers and lead to lower growth in the long term.

• However,  as the Turkish economy catches with the rest of Europe migration will occur less. There are already signs of Polish workers returning to Poland as the gap between the UK and Poland narrows.
• Western Europe may place temporary limits on migration of workers.
• Also the emigrant workers may gains skills and knowledge and then go back to Turkey.

2. Cost of Meeting EU regulations on environment, free trade and harmonisation of regulations. The EU has a lot of bureaucracy and rules for the production of goods.

3. Turkey may struggle with the EU’s controversial CAP. CAP tends to reward overproduction of goods and could lead to higher prices for some goods which have a minimum price under the CAP.

Income Inequality and the EU

There are various factors which will help to reduce income inequality between Turkey and the rest of the EU.

1. EU Funds Regional policy, CAP.
2. Inward investment from other western European firms.
3. Easier for Turkish firms to export. Growing market.
4. Experience of countries like Ireland and Poland suggest that the EU can help reduce income inequalities.

Evaluation

1. Turkish may lose its best workers to the west and so become worse off.
2. Farmers may struggle with CAP and requirements of western europe.
3. Economy not sufficiently developed to have 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.

2. Different Stage of the Trade Cycle.

The UK’s economy has been growing faster than the Eurozone. If the UK was in the Euro, interest rates might be too low causing an inflationary boom in the UK. This would be a return to the stop go cycle of the 80s. The MPC have been able to keep interest rates sufficiently high to prevent inflation going above inflation target.

3. Unique characteristics of UK Housing Market.

UK Housing market has a high ratio of house prices to income. It means that many homeowners face mortgage payments which are a high % of income. Therefore, UK homeowners are more sensitive to interest rate changes. More homeowners have variable mortgage as opposed to fixed rate. The effect is that a 25 basis point rise in interest rates has a more significant impact in the UK housing market and economy.

4. UK economy has been doing well without being in Euro.

The benefits of the Euro are relatively small.

See also:

• Why UK will never join Euro 

• 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’)

Second Enlargement of EEC 1981

• Greece

Third Enlargement of EEC 1986

• Portugal
• Spain

Fourth Enlargement of EU 1995

• Austria
• Finland
• Sweden

Fifth Enlargement of EU 2004

• Cyprus
• Czech Republic
• Estonia
• Hungary
• Lativa
• Lithuania
• Malta
• Poland
• Slovenia
• Slovakia

Hoping to Join in 2007-08

• Bulgaria
• Romania

Hoping to Join Accession talks

• Croatia
• Turkey

Notable Non Members of the EU

• Switzerland
• Norway

May Join EU Some Day

• Albania
• Belarus
• Bosnia
• Georgia
• Macedonia
• Moldova
• Montengro
• Serbia
• Ukraine

Related Notes

• European Union revision notes
• Arguments for Leaving EU 
• Costs and Benefits of EU