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Institutions of EU

Institutions of EU. Council of the EU (NB! Not the same thing as European Council!) Main legistalitive body comprising of ministers Commission Proposes new legislation, oversees execution Parliament Approves commission Works together with council in legislative issues Court of Justice

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Institutions of EU

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  1. Institutions of EU • Council of the EU (NB! Not the same thing as European Council!) • Main legistalitive body comprising of ministers • Commission • Proposes new legislation, oversees execution • Parliament • Approves commission • Works together with council in legislative issues • Court of Justice • Oversees that national legislation is aligned with EU law

  2. Democracy in EU • Members of Parliament (766) electeddirectlybycitizen • The number of MEPs per country is proportional to populationsize (notlinearly, though!) • Mostlegislationhas to beapprovedby the parliament as well as the council (”twochambers”) • Members of the Councilareministersfrom the membercountries • Councilmembersrepresenttheir home countries; number of votesdepends on population • Depending on issue, eitherunanimity of qualifiedmajority is required • Votingruleswillchange in 2014 (Lissabon Treaty) • Commissionersarechosenfrommembercountries (and approvedby the parliament) • Commissionersarenotsupposed to advocate national interests

  3. Democracy in EU: Council voting rules • The currentCouncilvotingrules: In order for a proposal to bepassed • 50% (if proposal was made by the Commission) or 67% (all other cases) of the members states, • 74% of the voting weights, which are based on the country’s size (Germany and France have 29, Finland only 7), and • 62% of the EU population • New votingrules in 2014: In order for a proposal to bepassed • Majority of countries: 55% if acting on a proposal from the Commission or else 72%, and • Majority of population: 65%. • Also, there have to be at least 4 countries voting against the proposal (and therefore the 3 biggest countries do not have an automatic veto right)

  4. EU Policies and Legislation • EU legislation supercedes national legislation • EU wide legislation needed in order for the single market to function • E.g. differences in environmental and social policy would distort competitive advantage, social dumping • EU policies only in sectors that affect cross borders

  5. EU Policies • Social policy • Regional policy • Agricultural policy • Environmental policy • Competition policy • Industrial policy • Transportation policy • Trade policy (vis à vis rest of the world)

  6. Example: Environmental Policy • Drivers: • Transfrontier pollution • winds blow accross borders… • Fair trade (”social dumping”) • Sustainable growth • Pollution is an externality • Without regulation too much pollution is produced • Preserving the environment enables growth in the long run

  7. Sustainable Growth: Internalizing Externalities P SSC S = supply SSC = supply with social cost p2 = price that should be charged S p2 p1 D Q q2 q1

  8. Social Dumping SMCG P = social cost to UK consumers SMCUK MCUK pu Results: - Unfair competition unless social cost is internalized - if social cost of pollution differs between countries, also environmental standards should vary! DUK q1 q2 q3 q4 Q

  9. Challenges with Environmental Policy • What is the social cost of pollution? • Are there differences between the countries? • Maybe the ecosystem is more sensitive in one country than another • How to internalize social cost (=reach p2)? • Emissions trading? • Competitivenes with companies from outside the EU? • Example: trans-atlatic flights

  10. Cost and Benefits of Economic Integration • So far we have considered only integration related to trade (and movement of factors of production) • Consumers benefit in form of lower prices • Costs of CU’s mainly restricted to importing industires • As integration deepens we get more benefits, but also more costs!

  11. Benefits of Monetary Unions

  12. Costs of Monetary Unions

  13. Case of Asymmetric Shock Finland Germany Pf Pg ASf ASg ADg ADf Yg Yf

  14. The Question then Becomes: When do benefits outweigh the costs?

  15. Two options: • Increase benefits • The more EMU members trade with each other, the bigger the benefits • Decrease costs • Synchronization of business cycles • If not possible, other adjustment mechanisms besides monetary policy • Harmonization of institutions and economic structures

  16. Openness

  17. Traditional OCA Theory: Criteria • Question: What determines an OCA? • A country is not necessarily an OCA! • Assumption: Asymmetric shocks cannot be eliminated (Mundell: the world is not one OCA), Other adjustment mechanisms needed if only one monetary policy OCA criteria Mundel 1968:

  18. More Criteria • Price and wageflexibility • Diversity in production and consumption • Shieldsagainstinductryspecificshocks • Financial marketintegration • Highcorrelation of incomeevenwhen business cyclesasynchronous • Fiscalintegration (redistribution of incomebetweencountries!) • Orwell-functioning (!) national fiscalpolicies • Degree of openness • Business cyclesaretransmitted • Higherbenefitsfrom common currency

  19. Quick Group Think • Look at the framework on slide 13 • How can you model each of the OCA criteria mentioned on slide 18 using that framework?

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