• The European Single Market
  • what difference did it make?
• Economic and Monetary Union (EMU)
  • why did it happen?
  • What difference will it make?
• Reform in Eastern Europe
  • how are these countries faring in their transition from central planning to market economies?

• Established under the Single European Act of 1987
• with December 1992 as the target date for completion
  • which was met

• Abolition of remaining foreign exchange controls on capital flows
• removal of non-tariff barriers within the EU
• elimination of bias in public sector provisioning
• removal of frontier controls
  • with some provisos
• progress towards harmonization of tax rates

• Improved resource allocation
  • removal of non-tariff barriers allows more exploitation of comparative advantage
• Scale economies
  • larger potential market increases the scope for economies of scale
• Intensified competition
  • may stimulate greater cost efficiency
• Factor mobility
  • enables greater efficiency through mobility of labour and capital

• A monetary union has
  • permanently fixed exchange rates within the union
  • an integrated financial market
  • a single central bank setting the single interest rate for the union.
• The Maastricht Treaty set criteria for EMU entry
  • to define ‘convergence’
• The single currency area began in January 1999 with 11 member countries.

• Inflation rate
  • no more than 1.5% above the average of the inflation rate of the lowest 3 countries in the EMS
• Long-term interest rate
  • no more than 2% above the average of the lowest 3 EMS countries
• Exchange rate
  • in the narrow band of ERM for 2 years
• Budget deficit
  • no larger than 3% of GDP
• National debt
  • no greater than 60% of GDP

• Optimal currency area
  • a group of countries better off with a common currency than keeping separate national currencies
• 3 key attributes (Mundell)
  • countries that trade a lot with each other
  • countries with similar economic and industrial structures
  • flexibility in labour markets

• Europe is ‘quite’ but not very closely integrated
• Some countries are more closely integrated than others
• but the act of joining may itself feed the process of integration

Eastern Europe:
some key issues