Chapter 14
The European Union: Many Markets
into One
◼ Outline
Introduction: The European Union
The Size of the European Market
The European Union and Its Predecessors
The Treaty of Rome
Institutional Structure
EU Institutions and Finance
Deepening and Widening the Community in the 1970s and 1980s
Before the Euro
The Second Wave of Deepening: The Single European Act
Case Study: The Schengen Agreement
The Delors Report
Forecasts of the Gains from the Single European Act
Problems in the Implementation of the SEA
The Effects of Restructuring
Harmonization of Technical Standards
Value-Added Taxes
Public Procurement
Case Study: The Erasmus Program and Higher Education
The Third Wave of Deepening: The Maastricht Treaty
Monetary Union and the Euro
Costs and Benefits of Monetary Union
The Political Economy of the Euro
Case Study: The Financial Crisis of 2007–2009 and the Euro
Widening the Union
New Members
Case Study: Spain’s Switch from Emigration to Immigration
The Demographic Challenge of the Future
Chapter 14 The European Union: Many Markets into One 91
◼ Learning Objectives
After studying this chapter, students will be able to:
14.1 Describe the major institutions and treaty agreements of the EU.
14.2 Distinguish EU widening from EU deepening.
14.3 Give the economic rationale for each of the three waves of deepening of
the EU.
14.4 Explain the obstacles to regional integration agreements.
14.5 State two theories as to why the single currency moved forward so quickly.
14.6 Analyze the EU’s single currency program within the theoretical framework
of an optimal currency area.
◼ What Students Should Know After Reading Chapter 14
The goal of the European Union is peaceful political, social, and economic integration. The chapter
introduction highlights the progress that has been made, and points out that this is the oldest, largest,
and most ambitious integration agreement in the world. While the text recognizes that the name used
for the participating countries has changed through various stages of the agreement, in the chapter the
name European Community (EC) is used for events prior to 1993 and European Union (EU) for events
since 1993.
The focus of the chapter is on the EU’s institutional structure and the history of its widening and
deepening. The stages of deepening of the EU are broken into four steps: the Treaty of Rome, which
established a free trade area in the six original members, the European Monetary System (1979), the
Single European Act (1993), which created a common market, and the Treaty on European Union
(or Maastricht Treaty), which created an economic union. The customs union stage was reached
during the 1970s.
92 Gerber • International Economics, Seventh Edition
◼ Assignment Ideas
1. Depending on when you cover this chapter in your course, you might want to start with some basic
trivia. Some faculty cover this chapter right after Chapter 2 (as a sort of case study on regional trade
arrangements). Pop quizzes on the names of countries, euro-area members, or other basic facts about
Europe help reinforce students’ geographical knowledge.
2. A writing assignment could have students look at the economic situation of any of the recent EU
members or countries seeking to join the EU. What are the costs and benefits to each nation of
joining the EU? What are the costs and benefits to the EU of adding this nation? I would especially
ask students to look at issues related to bringing national policies into line with EU policies. Or, you
◼ Answers to End-of–Chapter Questions
1. What were the three main stages of deepening that occurred in the European Community after the
passage of the Treaty of Rome?
Answer: The three main stages of deepening in the EC were (1) the creation of the European
Monetary System in 1979, (2) passage and implementation of the Single European Act in
2. What are the three main institutions of the European Union, and what are their responsibilities?
Answer: The three main institutions are (1) the European Commission, (2) the Council of the
Chapter 14 The European Union: Many Markets into One 93
3. The Single European Act is a case in which it was difficult to create an agreement, despite of the fact
that there was near unanimity in support for an agreement. If everyone wanted the agreement, why
was it hard to negotiate?
Answer: It was hard to reach an agreement because a number of deep integration issues were
involved. Issues touching on national policy and reflecting deep differences in history,
philosophy, and policy were involved. Some of the most difficult areas involved
harmonization or mutual recognition of differing national standards for products, safety
4. How did the European Union expect to create gains from trade with the implementation of the Single
European Act?
Answer: The EU expected the gains from trade to show up in several ways. First, it expected the
reduction in border barriers would speed the movement of goods and services and reduce
5. A sudden sharp increase in the demand for the German mark almost destroyed the Exchange Rate
Mechanism in 1992. Explain how a rise in the demand for a currency can jeopardize a target zone or
exchange rate band.
Answer: The demand for the mark in 1992 increased its value. An increase in the value of the mark
is equivalent to a decrease in the value of the other currencies. With a target zone exchange
rate, currencies are required to remain within a given range of each other’s value. The fall
in value suffered by the French franc and other currencies pushed them out of the range of
94 Gerber • International Economics, Seventh Edition
6. Discuss the pros and cons of the single currency.
Answer: The pros are that it reduces transaction costs of doing business in the single currency
countries. No costs are paid to change money, to hedge in forward markets, or to have
7. What problems arose from the admission of twelve new members between 2004 and 2007?
Answer: Problems include the following. (1) Agriculture and agricultural policies. Several of the
new EU countries have large agricultural sectors that are problematic given the EU’s
Common Agricultural Policy. (2) Migration is a potentially a problem, especially as more
8. How does the European Union compare and contrast to the NAFTA region in size, institutional
structure, and depth of integration?
Answer: In terms of population, the EU is larger than the NAFTA market. The NAFTA market is
larger in terms of total GDP. NAFTA is only a free trade area and does not have the
overlying political institutional structure that the EU has. Each nation in NAFTA