This module serves as an introduction to global and regional integration. Topics

Question

This module serves as an introduction to global and regional integration. Topics such as the economic benefits of integration, the World Trade Organization, the General Agreement on Tariffs and Trade, trade dispute settlements, the types of economic integration and the European Union are discussed. The discussion on these topics highlights the advantages and disadvantages for each, and the practical effects on politics and economics.

Your topic is to discuss some of the challenges facing the European Union today. Provide specific examples.

Explanation / Answer

Some of the challenges which the European Union is facing today are discussed below:

(a) Unemployment: Unemployment in the EU has reached a critical point. In Spain, unemployment has increased to over 25%, and youth unemployment rates have reached 50%. The recent rise in EU unemployment is primarily due to the prolonged recession.

(b) Prolonged fall in GDP: Weighed down by austerity measures and a weak global economy, the EU economy has fallen back into recession. The concern is that structural problems and the current monetary and fiscal policies will create several years of below trend economic growth.

(c) Competitiveness problem: Countries who face higher labour costs cannot regain competitiveness in the usual way through depreciation. Prices become uncompetitive, leading to lower domestic demand, and high current account deficits. Since 2011, current account deficits have fallen in countries like Ireland and Spain, but it has been at the high cost of reducing domestic demand and rising unemployment. Countries are seeking to regain competitiveness through internal devaluation. But, this is much more damaging to the economy than the traditional approach of depreciating exchange rates.

(d) Too much concern about low inflation: The European Central Bank has been accused of giving too much priority to the goal of low inflation. It is argued they have sought to maintain low inflation at the expense of lower growth. The ECB have rigidly stuck to an inflation target of 2%, despite the rise in unemployment and poor performance of nominal GDP.

(e) Bond yield: Membership of the Euro, has created a tendency for bond yields to rise much more quickly. This increased borrowing costs and also put countries under pressure to pursue austerity measures to reduce budget deficits. However, these austerity measures have been implemented when the economy is already weak, causing a big negative multiplier effect and causing the economic downturn. Countries with their own currency and ability to print money have been able to maintain low bond yields, which reduces borrowing costs and gives them more time to reduce budget deficits.

(f) Stability and growth pact: This is a constraint on expansionary fiscal policy because in theory it limits governments borrowing to 3% of GDP. In a recession a European government is unable to use monetary policy but also they are unable to reflate the economy through higher spending and borrowing.

(g) Inflexible labor markets: This is frequently held up as a constraint on economic growth and a cause of structural unemployment. In particular rigidities in the labour market discourage investment from abroad. For example in France there are laws which makes it difficult to fire workers once they are hired. This discourages firms from expanding and investing.

(h) Demographic changes: Countries like Germany and Italy have a declining birth rate. This means that the population structure is becoming weighted towards those who are over 50. The traditional population pyramid is being inverted. The increased demands placed on benefits and decline in tax revenue is a serious burden for government spending. It is reflected in burgeoning public debt. As of 2006 Italy’s public debt stood at 105%. German and France just below 70% of GDP. Such high levels of debt are argued to cause crowding out of private sector spending.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.