The Economics of European Integration

Marius Brülhart, 2003-2004, 6 credits

The aim of this course is to equip students with a thorough, unbiased and critical understanding of the economic issues that arise in the context of European integration.

JUMPSTATION:   General Info, Course Content, Term projects, Reading list, Links

General Information

· Language: teaching in English; French and German (with prior notification) can be used for term projects

· Time and Venue: Tuesday 5.15-7 p.m.; BFSH1, room 125

· Contact:

· Assistant: Federica Sbergami (office hours: Tuesday, 3-5 p.m. at office 615, BFSH1; email :

· Assessment:  - essays to be submitted in second semester (40%)

                         - written examination in summer 2004 (60%) [click here for the 2003 summer exam, and here for the solutions]

Course Content

Using analytical tools provided by modern economic theory, this course presents the main historical and institutional features of the European Union. The theoretical analysis requires knowledge of intermediate micro- and macroeconomics. Particular attention will be devoted to policy areas in which EU co-ordination has progressed furthest: trade, factor mobility, monetary integration, agriculture, regional policy and competition policy.


The course will be structured in six Sections. For each Section, links to internet-based resources will be added below as the academic year progresses. Links in italics refer to documents posted on this web site.



I.                  Theoretical Introduction: Regional Integration - A Double-Edged Policy

  • The gains from non-discriminatory trade liberalisation: perfect competition in general equilibrium

  • Potential losses from discriminatory integration: trade creation and trade diversion in partial equilibrium

  • Uneven distribution of gains from non-discriminatory trade liberalisation: the specific-factors model



II.               Descriptive Background


·  Post-War Economic Integration in Western Europe


·  The Decision-Making Institutions of the EU


·  The Budget of the EU



III.            Theory of Product-Market Integration


·  Neoclassical Approach  (graphs)

  • Welfare loss from tariffs in general equilibrium

  • Trade creation and trade diversion in general equilibrium

  • Terms-of-trade effects

  • Empirical evidence


·  “New Trade  Theory”: Increasing Returns and Imperfect Competition


·  “New Economic Geography”: Externalities and Agglomeration Economies


IV.            Theory of Factor-Market Integration


·  Neoclassical Approach

  • Factor mobility and efficiency

  • Factor mobility and distributional effects

  • Factor mobility and tax competition


·  “New” Theories, FDI and the Single Market


·  Empirical Evidence



V.                  Theory of Monetary Integration

                    Maastricht and the road to monetary union: a chronology

                    The Commission's 1998 decision on the first wave of euro-zone members

·  Optimum Currency Areas

  • Mundell's view: exchange rates as absorbers of asymmetric shocks

  • Buiter's critique: exchange rates as sources of asymmetric shocks


·  Monetary Policy in a Currency Union

  • The Barro-Gordon model: monetary union as a way to "import" a stable monetary policy

  • The design of the ECB: too hard-nosed? (click here for lecture slides)


·  Fiscal Policy in a Currency Union

  •  The Excessive Deficit Procedure and the Stability and Growth Pact

                - Treaty Article 104

                - Council Regulation 1467/97 (on the EDP)

                - The Stability and Growth Pact (a good discussion paper by the UK Treasury)

  • The economics of fiscal constraints

                 The Wyploz proposal: Fiscal Policy Committees


·  The UK and the Euro

        Gordon Brown's five tests

        Business-cycle correlations between UK regions and the euro zone



VI.            EU Economic Policies


·  Agriculture


·  Regional Policy


·  External Trade Policy


·  Competition Policy


Term Projects

Term projects are original essays, based on a survey of the relevant literature. Students may choose one of the following topics:


  1. The budgetary implications of Eastern enlargement

  2. Should corporate taxes be harmonised in the EU?

  3. Fighting tax evasion in Europe: information sharing versus withholding taxes

  4. State aids to European companies: too mean or too generous?

  5. Is the European Commission’s policy on mergers too strict?

  6. The Single Market programme: gainers and losers

  7. Has the Single Market been completed?

  8. European integration: a force for convergence or divergence of regional incomes?

  9. Should the Stability and Growth Pact be scrapped?

  10. Could the institutional design of the European Central Bank be improved?

  11. Does the Common Agricultural Policy harm or help developing countries?

  12. An economic defence of the Common Agricultural Policy

  13. Should the EU introduce a CO2 tax?

  14. Should unemployment insurance be centralised in the EU?

  15. How serious are the EU’s “trade wars” with the United States?

  16. The economic case for Turkish membership of the EU

  17. The economic gains and losses to Switzerland arising from non-membership in the EU

  18. EFTA - a failed project?



Essays may be written in English, French or, with prior notification, German by a maximum of two students. Submitted papers should be word processed, printed in 12-point font with 1.5 line spaces, and they should NOT exceed 1500 words (3000 words for jointly written projects).


The deadline for choosing a topic is Tuesday, December 17. By that date, topic choices should be confirmed by email to Federica Sbergami ( The same topic can be chosen by several students (but the same paper may not be co-authored by more than two).


The deadline for submitting the finished paper is Tuesday, April 27. Papers can be handed in after the lecture on that date.


A few points to note:

  • Some of the topics are rather broad. Feel free to focus on a narrower sub-issue that fits within the broader topic.

  • Try as much as possible to combine theoretical and empirical insights.

  • Try as much as possible to base your information on scientific sources (journal articles, academic working papers, textbooks) and on statistical data.

  • Use “academic style”; i.e. give references for all ideas and facts that are not strictly your own, and provide a full bibliography of books, articles and internet resources mentioned in the text. List only those references in the bibliography that explicitly appear in the text.

  • Any passages that are quoted word-by-word should be clearly marked (“”) and their source given. If quotes are not marked as such, this will count as plagiarism. Quotes should not be longer than three consecutive sentences.

  • Use the automatic spell check facility of your word processor.


Reading List


The course does not follow any book strictly. Reading textbooks and primary sources is strongly encouraged, but the core examination material will be that presented during lectures. In addition to the readings listed here, students are encouraged to follow topical EU issues in the press (e.g. The Economist or The Financial Times).


This reading list will be updated during the year and can be accessed on the web page.



Main texts:


·      Hansen, J.D. and Nielsen, J.U. (1997) An Economic Analysis of the EU, 2nd edition, McGraw-Hill.

·      De Grauwe, Paul (2000) The Economics of Monetary Union, 4th edition, Oxford University Press.

·      El-Agraa, Ali M. (2001) The European Union: Economics & Policies, 6th edition, Financial Times - Prentice Hall.

·      Pelkmans, Jacques (2001) European Integration: Methods and Economic Analysis, 2nd edition, Financial Times - Prentice Hall.

·      Brakman, S.; Garretsen, H. and van Marrewijk, C. (2001) An Introduction to Geographical Economics, Cambridge University Press.



Easily readable introductions to the subject:


·      Tsoukalis, Loukas (1997) The New European Economy Revisited, Oxford University Press. (very accessible, non-technical introduction)

·      Bainbridge, Timothy (2000) The Penguin Companion to European Union, 2nd edition, Penguin Books. (all the relevant factual information by keyword)




Targeted reading, by course Section:



Section I: Theoretical Introduction: Regional Integration - A Double-Edged Policy  

·   Hansen and Nielsen (1997) (ch. 1.2 on stages of economic integration; ch.2.3 on customs-union theory)

·   Markusen, J.R.; Melvin, J.R.; Kaempfer, W.H. and Maskus K.E. (1995) International Trade: Theory and Evidence, McGraw-Hill. (ch. 4.1, 4.2 on gains from trade in general equilibrium; ch. 9.2 and 9.3 on distributional effects in a specific-factors model)

·      Krugman, P. and Obstfeld, M. (2000) International Economics: Theory and Policy, 6th edition, Addison-Wesley. (ch. 3 on distributional effects in a specific-factors model)



Section II: Descriptive Background

·      El-Agraa (2001) (ch. 2 and 16)

·      Pelkmans (2001) (ch. 2 and 15)

·      Bainbridge and Teasdale (1996) (see above)



·      Williams, Allan M. (1994) The European Community: The Contradictions of Integration, 2nd edition, Blackwell, 1994. (comprehensive historical background)

·      Molle, Willem (2001) The Economics of European Integration, 4th edition, Ashgate. (ch. 3 and 4, on EU history and institutions)

·      Artis, M.J. and Nixson, F. (2001) The Economics of the European Union: Policy and Analysis, 3rd edition, Oxford University Press. (ch. 1 by S. Bulmer, a concise survey of EU history)

·      Eijffinger, C.W. and De Haan, J. (2000) European Monetary and Fiscal Policy, Oxford University Press. (ch. 5, on the EU budget)

·      Padoa-Schioppa, Tommaso (2000) The Road to Monetary Union in Europe, Oxford University Press. (a detailed account of the genesis of the euro)

·      Apel, Emmanuel (1998) European Monetary Integration 1958-2002, Routledge. (another detailed account of the genesis of the euro)

·      Baldwin, R. and Widgrén, M. (2004) Winners and Losers under Various Dual Majority Rules for the EU Council of Ministers, CEPR Discussion Paper No. 4450. (analysis of voting weights and what they imply for the distribution of power among member states and for the ability of the EU Council to find agreements)

·      Kauppi, H. and Widgrén, M. (2004) What Determines EU Decision Making? Needs, Power or Both?, Economic Policy, vol. 39, pp. 221-266. (analysis of the political and economic factors that shape decisions on the EU's budget).




Section III: Theory of Product-Market Integration

·      Hansen and Nielsen (1997) (ch. 2, 3 and 5; especially ch. 3.2 on international duopoly)

·      Brakman, Garretsen and van Marrewijk (2001) (ch. 3, 4 and 11)

·      Pelkmans (2001) (ch. 6)


·   Markusen, J.R.; Melvin, J.R.; Kaempfer, W.H. and Maskus K.E. (1995) (ch. 15.2: welfare loss of tariffs in general equilibrium; ch. 18.4: customs-union effects in general equilibrium; ch. 11 on monopoly; ch. 12 on scale economies and monopolistic competition)

·      Molle (2001) (ch. 5 and 6 on customs-union theory)

·      Robson, Peter (1998) The Economics of International Integration, 4th edition, Routledge. (ch. 3, on scale economies in customs-union theory)

·      Viner, Jacob (1950) The Customs Union Issue, London: Stevens & Sons. (the seminal work on customs-union theory)

·      Jacquemin, A. and Sapir, A. (1989) The European Internal Market: Trade and Competition, Oxford University Press. (a compilation of some of the leading academic papers on product-market and factor-market integration in the European context)



Section IV: Theory of Factor-Market Integration

·      Hansen and Nielsen (1997) (ch. 3.5, 4; especially ch. 4.6.2 on horizontal FDI)

·      Pelkmans (2001) (ch. 10)

·      El-Agraa (2001) (ch. 7, 21)


·      Robson (1998) (ch. 6 on the theory of common markets)

·      Molle (2001) (ch. 7 and 8 on the theory of common markets)

·      Emerson, M. et al. (1988) The Economics of 1992, Oxford University Press. (the Cecchini Report: official ex-ante evaluation of the Single Market)

·      Jacquemin, A. and Sapir, A. (1989) The European Internal Market: Trade and Competition, Oxford University Press. (a compilation of some of the leading academic papers on product-market and factor-market integration in the European context)



Section V: Theory of Monetary Integration

·      De Grauwe (2000) (ch. 1-4, 7-9)

·      Hansen and Nielsen (1997) (ch. 7, 9)


·      Buti, M. and Sapir, A. (1998) Economic Policy in EMU: A Study by the European Commission Services. Oxford University Press. (especially ch. 7-10 on fiscal policy, ch. 3-6 on monetary policy; )

·      Eijffinger and De Haan (2000) (ch. 2 on the ECB; ch. 4 on fiscal policy in EMU)

·      Gros, D. and Thygesen, N. (1998) European Monetary Integration, 2nd edition, Longman. (ch. 7, 8 on the theory of monetary union)

·      Steinherr, Alfred (1994) 30 Years of European Monetary Integration, Longman. (ch. 1 on the Werner Report; ch. 3 by P. Bofinger, on Europe and optimum currency area theory)

·      Brunila, A.; Buti; M. and Franco, D. (2001) The stability and growth pact: The architecture of fiscal policy in EMU. Palgrave-Macmillan.

·      Wyplosz, Charles (2002) "Fiscal Discipline in EMU: Rules or Institutions?", Mimeo, HEI Geneva.(A proposed alternative to the Growth and Stability Pact)

·     Mundell, Robert (1961) “A Theory of Optimal Currency Areas”, American Economic Review, vol. 51, pp. 657-65; and McKinnon, Ronald (1963) “Optimum Currency Areas”, American Economic Review, vol. 53, pp. 717-25. (the seminal contributions)

·      Buiter, Willem (2000) "Optimal Currency Areas: Why Does the Exchange Rate Regime Matter?", Scottish Journal of Political Economy, vol. 47, pp. 213-250.

·     Barrios, S.; Brülhart, M.; Elliott, R. and Sensier, M. (2003) "A Tale of Two Cycles: Co-Fluctuations Between UK Regions and the Euro Zone", The Manchester School, vol. 71, No. 2, pp. 265-292.





Section VI: EU Economic Policies

·   Pelkmans (2001) (ch. 11, 12, 13 and 15)

·   Hansen and Nielsen (1997) (ch. 5.5, 6.2, 6.3 and 6.5)

·   El-Agraa (2001) (ch. 11, 18 and 22)


·   Molle (2001) (ch. 11, on CAP; ch. 19 on EU trade policy)

·   Artis and Nixson (2001) (ch. 5 by D. Colman on the CAP; ch. 8 by G. Tondl, on regional policy; ch. 6 by S. Martin on competition policy)

·   Sloman, John (1997) Economics, 3rd ed., Prentice Hall. (good chapter on basic features of agricultural markets and CAP)

·   Tokarick, S. (2005) "Who Bears the Cost of Agricultural Support in OECD Countries?", World Economy, 28(4): 573-593.

·   Sala-i-Martin, Xavier X. (1996) "Regional Cohesion: Evidence and Theories of Regional Growth and Convergence", European Economic Review, vol. 40, pp. 1325-1352. (on beta and sigma convergence in Europe)

·   Hall, R.; Smith, A. and Tsoukalis, L. (eds.) (2001) Competitiveness and Cohesion in EU Policies. Oxford University Press. (chapter 1: "Introduction", with M. Dunford; on sigma convergence)

·   Boldrin, M. and Canova, F. (2001) "Inequality and Convergence in Europe's Regions: Reconsidering European Regional Policies", Economic Policy, vol.16, pp. 205-253. (on the effectiveness of EU regional policy)

·   Brülhart, M. and Matthews, A. (2004) "EU External Trade Policy", in Ali M. El-Agraa (ed.) The European Union: Economics & Policies, 7th edition, Pearson Education.