Summary Introduction to the Economics of European Integration by Richard
Baldwin, and Charles Wyplosz
Chapter 1
European integration has always been driven by political factors. In the early
days, the political factors included a desire to prevent another war between
France and Germany, to lock a revitalized and rearmed Germany into a European
superstructure, to prevent the spread of communism to West Europe, and to
guard against military threats from the USSR. In more recent decades, the main
push came from a desire to share the fruit of integration with the newly
democratic nations in Central and Eastern Europe.
While the push factors were always political, the means were always economic.
Starting with the European Coal and Steel Community and the European
Economic Community, Europe’s founders believed that tighter economic
integration would set off a snowball effect that would bring Europeans ever closer
as people and nations. They believed that economic integration would foster
political integration, and political integration would solve Europe’s problems. To a
remarkable extent, this worked. Europeans may joke about national peculiarities,
but the idea that French and Germany would slaughter each other in the 21st
century as they did in the 20th century is now unimaginable.
There have been 3 really big increases in European economic integration:
The first was the formation of the customs union from 1958 to 1968. This
eliminated tariffs and quotas on intra-EU trade in goods.
The second was the Single Market Programme, implemented between
1986 and 1992, which eliminated many non-tariff barriers, harmonized
regulations and liberalized the movement of labour and capital within the
EU.
The third was the Economic and Monetary Union, which introduced a single
currency for many EU members.
Each of these three big steps was accompanied by significant increases in
political integration in the sense that EU members pooled increasingly large
shares of their national sovereignty over the relevant economic policies. They
also set up the institutions, rules and practices necessary to implement the
deeper integration.
Each of these steps towards deeper integration – but especially the customs
union and the Single Market Programme – engendered discriminatory effects that
triggered reactions in non-member nations. Just as the knocking down of one
domino triggers a chain reaction that leads to the fall of all dominos, the
discriminatory effect of EU integration created a powerful gravitational force that
has progressively drawn in all but the most reluctant European nations. This is
why the EU expanded geographically as it deepened economically. Brexit,
however, changed this.
The last decade has complicated this historical narrative of an ever wider and
ever deeper Europe. Parties calling for the break-up of the EU have won large
vote shares and are participating in governing coalitions of some member states.
The most extreme version of Euroscepticism so far has been Britain’s vote to exit
the EU.
,Chapter 3 – Decision making
3.1 TASK ALLOCATION AND SUBSIDIARITY: EU PRACTICE AND PRINCIPLES
4 levels of government for EU members: local, provincial, national and EU
Task allocation = competences
Exclusive competences: areas in which the EU alone has decision-
making powers
Shared competences: shared responsibility between EU and member
states, 2 types:
o Members cannot pass legislation in areas where the EU has already
done so.
, o Existence of EU legislation does not hinder members’ rights to make
policy in the same area.
Supporting competence: the EU can pass laws that support action by
members
National competences: tasks whereby national or subnational
governments alone decide
Task allocation in EU is guided by subsidiarity principle (Maastricht Treaty)
Decisions should be made as close to the people as possible
EU should not take action unless doing so is more effective than action
taken at national, regional, or local level
Subsidiarity has 2 goals:
To allow the EU to act if a problem cannot be adequately addressed by
national policies alone
To guard national sovereignty in those areas that cannot be dealt with
more effectively at the EU level
3.2 UNDERSTANDING TASK ALLOCATION: THE THEORY OF FISCAL FEDERALISM
There are 5 considerations when thinking about appropriate allocation of policy-
making tasks:
1. Diversity and local information advantages: when people have very
different preferences, centralized decision-making creates inefficiencies.
2. Scale economies: the advantage of local decision-making in terms of
information efficiency. One-size-fits-all policies arise from scale economies.
3. Spillovers: external economic side-effect. Multi-region effects (national
defence presence of army deters foreign invasion for country as whole,
so all nations citizens benefit from army).
4. Democracy as a control mechanism: since politicians must win the
approval of citizens on a regular basis, they are reluctant to misuse their
decision-making power.
5. Jurisdictional competition: decentralized decision-making. Voters can
influence the sort of government they live under in 2 main ways: voice
(speaking up, and ballot box) and exit (leave jurisdiction that imposed the
policy).
Decentralization tends to improve government as it allows regions to compete
with one another in providing the best value-for-money in local services. Local
government competition improves quality and reduces prices.
3.3 E CONOMIC VIEW OF DECISION-MAKING
The EU Council adopts policies by the Qualified Majority Voting (QMV): double
majority, at least 55% of member states who represent at lest 65% of the EU
citizens.
Measured using ‘passage probability’: the likelihood that a randomly selected
issue would win a yes vote in the council. The enlargement has continually
lowered the EUs passage probability, the 2004 enlargement lowered it the most.
Voting reforms established the Lisbon Treaty helped restore efficiency.
3.4 THE DISTRIBUTION OF POWER AMONG EU MEMBERS
Power is the ability to influence EU decisions by being in a position to make or
break a winning coalition in the Council.
Normalized Banzhaf Index (NBI): measures the probability that a given nation
will find itself in a position whereby it can break a winning coalition.
3.5 LEGITIMACY IN EU DECISION MAKING
, To check whether the allocation of votes in the EU Council lines up with the 2
notions of legitimacy. If the EU is viewed as a union-of-people, a natural yardstick
is equal power per member state. Under the principle of equal power per EU
citizen, the mathematics of voting tells us that this requires that the council’s
votes per country rise with the square root of the country’s population. The
benchmark of equal power per EU member state requires an equal number of
votes per nation.
Chapter 4 – Essential microeconomic tools and tariff
analysis
All firms are assumed to be perfectly competitive with each firm so small that
it believes that its choice of output has no impact on market prices. And the
average cost per unit will fall as a firm produces more units scale economy.
4.1 SUPPLY AND DEMAND DIAGRAMS
Marginal: one more unit. Marginal utility: money-value of consuming one more
unit of a good.
The marginal utility curve allows us to work out how much the consumer would
buy at any given price.
Marginal cost: the extra cost involved in making one more unit of the good.
We assume that firms are operating at a point where the marginal cost is upward
sloping; that the cost of producing an extra unit rises as the total number of units
produced rises.
Using this curve we can determine the firm’s supply behaviour. Firms want to
maximize profit, and will supply goods up to the point where the marginal cost
just equals the price.
Under perfect competition, the price facing producers reflects the marginal
production cost (cost of producing one more unit than the firm produces in
equilibrium).
The curves can be used to show how consumers and firms are affected by
changes in the price consumer and producer surplus. Consumers buy up to
the point where their marginal utility just equals the price. For all other units
bought, the marginal utility exceeds the price consumers surplus (consumers
get more utility than they pay for).
A price rise increases producer surplus and decreases consumer surplus. A price
drop does the opposite.
4.2 INTRODUCTION TO OPEN-ECONOMY SUPPLY AND DEMAND ANALYSIS
Workhorse diagram: the open-economy supply and demand diagram
Import demand curve
1. The import price will fix the domestic price.
2. Consumption demand would be C’ and domestic production would be Z’.
As C’ exceeds Z’, consumers buy more than domestic firms are willing to
produce at P’. The excess demand is met by imports. That is to say,
imports are the difference between C’ and Z’ (in symbols, M’ = C’ – Z’).
Baldwin, and Charles Wyplosz
Chapter 1
European integration has always been driven by political factors. In the early
days, the political factors included a desire to prevent another war between
France and Germany, to lock a revitalized and rearmed Germany into a European
superstructure, to prevent the spread of communism to West Europe, and to
guard against military threats from the USSR. In more recent decades, the main
push came from a desire to share the fruit of integration with the newly
democratic nations in Central and Eastern Europe.
While the push factors were always political, the means were always economic.
Starting with the European Coal and Steel Community and the European
Economic Community, Europe’s founders believed that tighter economic
integration would set off a snowball effect that would bring Europeans ever closer
as people and nations. They believed that economic integration would foster
political integration, and political integration would solve Europe’s problems. To a
remarkable extent, this worked. Europeans may joke about national peculiarities,
but the idea that French and Germany would slaughter each other in the 21st
century as they did in the 20th century is now unimaginable.
There have been 3 really big increases in European economic integration:
The first was the formation of the customs union from 1958 to 1968. This
eliminated tariffs and quotas on intra-EU trade in goods.
The second was the Single Market Programme, implemented between
1986 and 1992, which eliminated many non-tariff barriers, harmonized
regulations and liberalized the movement of labour and capital within the
EU.
The third was the Economic and Monetary Union, which introduced a single
currency for many EU members.
Each of these three big steps was accompanied by significant increases in
political integration in the sense that EU members pooled increasingly large
shares of their national sovereignty over the relevant economic policies. They
also set up the institutions, rules and practices necessary to implement the
deeper integration.
Each of these steps towards deeper integration – but especially the customs
union and the Single Market Programme – engendered discriminatory effects that
triggered reactions in non-member nations. Just as the knocking down of one
domino triggers a chain reaction that leads to the fall of all dominos, the
discriminatory effect of EU integration created a powerful gravitational force that
has progressively drawn in all but the most reluctant European nations. This is
why the EU expanded geographically as it deepened economically. Brexit,
however, changed this.
The last decade has complicated this historical narrative of an ever wider and
ever deeper Europe. Parties calling for the break-up of the EU have won large
vote shares and are participating in governing coalitions of some member states.
The most extreme version of Euroscepticism so far has been Britain’s vote to exit
the EU.
,Chapter 3 – Decision making
3.1 TASK ALLOCATION AND SUBSIDIARITY: EU PRACTICE AND PRINCIPLES
4 levels of government for EU members: local, provincial, national and EU
Task allocation = competences
Exclusive competences: areas in which the EU alone has decision-
making powers
Shared competences: shared responsibility between EU and member
states, 2 types:
o Members cannot pass legislation in areas where the EU has already
done so.
, o Existence of EU legislation does not hinder members’ rights to make
policy in the same area.
Supporting competence: the EU can pass laws that support action by
members
National competences: tasks whereby national or subnational
governments alone decide
Task allocation in EU is guided by subsidiarity principle (Maastricht Treaty)
Decisions should be made as close to the people as possible
EU should not take action unless doing so is more effective than action
taken at national, regional, or local level
Subsidiarity has 2 goals:
To allow the EU to act if a problem cannot be adequately addressed by
national policies alone
To guard national sovereignty in those areas that cannot be dealt with
more effectively at the EU level
3.2 UNDERSTANDING TASK ALLOCATION: THE THEORY OF FISCAL FEDERALISM
There are 5 considerations when thinking about appropriate allocation of policy-
making tasks:
1. Diversity and local information advantages: when people have very
different preferences, centralized decision-making creates inefficiencies.
2. Scale economies: the advantage of local decision-making in terms of
information efficiency. One-size-fits-all policies arise from scale economies.
3. Spillovers: external economic side-effect. Multi-region effects (national
defence presence of army deters foreign invasion for country as whole,
so all nations citizens benefit from army).
4. Democracy as a control mechanism: since politicians must win the
approval of citizens on a regular basis, they are reluctant to misuse their
decision-making power.
5. Jurisdictional competition: decentralized decision-making. Voters can
influence the sort of government they live under in 2 main ways: voice
(speaking up, and ballot box) and exit (leave jurisdiction that imposed the
policy).
Decentralization tends to improve government as it allows regions to compete
with one another in providing the best value-for-money in local services. Local
government competition improves quality and reduces prices.
3.3 E CONOMIC VIEW OF DECISION-MAKING
The EU Council adopts policies by the Qualified Majority Voting (QMV): double
majority, at least 55% of member states who represent at lest 65% of the EU
citizens.
Measured using ‘passage probability’: the likelihood that a randomly selected
issue would win a yes vote in the council. The enlargement has continually
lowered the EUs passage probability, the 2004 enlargement lowered it the most.
Voting reforms established the Lisbon Treaty helped restore efficiency.
3.4 THE DISTRIBUTION OF POWER AMONG EU MEMBERS
Power is the ability to influence EU decisions by being in a position to make or
break a winning coalition in the Council.
Normalized Banzhaf Index (NBI): measures the probability that a given nation
will find itself in a position whereby it can break a winning coalition.
3.5 LEGITIMACY IN EU DECISION MAKING
, To check whether the allocation of votes in the EU Council lines up with the 2
notions of legitimacy. If the EU is viewed as a union-of-people, a natural yardstick
is equal power per member state. Under the principle of equal power per EU
citizen, the mathematics of voting tells us that this requires that the council’s
votes per country rise with the square root of the country’s population. The
benchmark of equal power per EU member state requires an equal number of
votes per nation.
Chapter 4 – Essential microeconomic tools and tariff
analysis
All firms are assumed to be perfectly competitive with each firm so small that
it believes that its choice of output has no impact on market prices. And the
average cost per unit will fall as a firm produces more units scale economy.
4.1 SUPPLY AND DEMAND DIAGRAMS
Marginal: one more unit. Marginal utility: money-value of consuming one more
unit of a good.
The marginal utility curve allows us to work out how much the consumer would
buy at any given price.
Marginal cost: the extra cost involved in making one more unit of the good.
We assume that firms are operating at a point where the marginal cost is upward
sloping; that the cost of producing an extra unit rises as the total number of units
produced rises.
Using this curve we can determine the firm’s supply behaviour. Firms want to
maximize profit, and will supply goods up to the point where the marginal cost
just equals the price.
Under perfect competition, the price facing producers reflects the marginal
production cost (cost of producing one more unit than the firm produces in
equilibrium).
The curves can be used to show how consumers and firms are affected by
changes in the price consumer and producer surplus. Consumers buy up to
the point where their marginal utility just equals the price. For all other units
bought, the marginal utility exceeds the price consumers surplus (consumers
get more utility than they pay for).
A price rise increases producer surplus and decreases consumer surplus. A price
drop does the opposite.
4.2 INTRODUCTION TO OPEN-ECONOMY SUPPLY AND DEMAND ANALYSIS
Workhorse diagram: the open-economy supply and demand diagram
Import demand curve
1. The import price will fix the domestic price.
2. Consumption demand would be C’ and domestic production would be Z’.
As C’ exceeds Z’, consumers buy more than domestic firms are willing to
produce at P’. The excess demand is met by imports. That is to say,
imports are the difference between C’ and Z’ (in symbols, M’ = C’ – Z’).
