GEOG 3762 Geography of Europe

GEOG 3762 Geography of Europe

Week 4 - The European Economy

Fall 2008 Dr. Olaf Kuhlke

Overview

• The European economy at a glance• The primary sector– Origins of European agriculture – European agricultural traditions – The contemporary agricultural economy – The Common Agricultural Policy and its aftermath

Overview

• The European economy at a glance• The secondary sector– Origins of European Industry– Industrial resources in Europe – The EU and industrial policies

Overview

• The European economy at a glance• The tertiary sector– Origins of European monetary policy– European financial integration • The common market • The European Central Bank• The Euro • Impact of the introduction of the Euro on EU national

economies

The European Economy at a glance

How big is the EU economy and what does it look like?• Large market of 500+ million people• Larger total Gross Domestic Product than USA• Similar average purchasing power than USA• Most EU countries have lower per capita GDP than USA• Human Development Index: 15 of top 20 countries are

European, 20 out of top 30 are European • US ranks 12th in HDI list• For the last 30 years, a European country has topped the

annual HDI list for 15 years

The European Economy at a glance

European GDP per capita in 2006

The European Economy at a glance

European GDP (adjusted for purchasing power) per capita in 2006

The European Economy at a glance

HDI in 2006

The European Economy at a glance

How big is the EU economy and what does it look like?

• Small, highly productive, and highly subsidized agricultural sector

• Large, highly varied industrial sector that is also subsidized and protected by tariff barriers

• Large, highly competitive tertiary sector driven by European integration

The European Economy at a glance

The European Economy at a glance

The European Economy at a glance

The European Economy at a glance1 Wal-Mart Stores 378,799 12,7312 Exxon Mobil 372,824 40,6103 Royal Dutch Shell 355,782 31,3314 BP 291,438 20,8455 Toyota Motor 230,201 15,0426 Chevron 210,783 18,6887 ING Group 201,516 12,6498 Total 187,280 18,0429 General Motors 182,347 -38,73210 ConocoPhillips 178,558 11,89111 Daimler 177,167 5,44612 General Electric 176,656 22,20813 Ford Motor 172,468 -2,72314 Fortis 164,877 5,46715 AXA 162,762 7,75516 Sinopec 159,260 4,16617 Citigroup 159,229 3,61718 Volkswagen 149,054 5,63919 Dexia Group 147,648 3,46720 HSBC Holdings 146,500 19,133

The twenty largest corporations in the world

The European Economy at a glance

European Agriculture

What are the characteristics of European agriculture

• Medium size production area• Medium size market• Highly productive and mechanized work force• Highly regulated production and market• Highly trained and paid workforce• Highly protective and subsidized market

European Agricultural TraditionsTranshumance• Traditional agricultural

practice • Highly productive• Grazing• Livestock migration

from summer to winter pastures – Sheep and Cows

The contemporary agricultural economy

• Agricultural Statistics – By Country – By Product – Discussion of Statistics • Discrepancies in holding size • Discrepancies in ag. contribution to GDP

– “Old 15” versus “New 10”• Discrepancies in import/export patterns

The Creation of European Agricultural Policy

Why does the EU need a common agricultural policy?

• Post-WW II: Fear of Shortages• Integration of national policies • Creation of a “fair, transparent and

competitive market” • Protection of European agricultural goods

from outside competition

The Creation of European Agricultural Policy

What issues does this policy encompass? • Economic and ecological sustainability• Food quality and safety– Animal welfare– Control mechanisms

The Creation of European Agricultural Policy

Elements of CAP• Economic and ecological sustainability– Productivism– Price support – Intervention buying– Tariffs on imported goods

The Creation of European Agricultural Policy

Elements of CAP• Problems– Price guarantees hike up market prices of goods– Guaranteed prices for goods encouraged overproduction – Overproduction requires storage and disposal– Tax money is used to support the sale and disposal of

goods!! – Tax money is used to artificially manipulate world markets

and to establish import barriers

The Creation of European Agricultural Policy

New Elements of CAP (2003+ newer) – Post-productivism• Single volume-independent, size-dependent farm subsidy • Subsidies are tied to environmental, food, and safety

standards• Quotas• Gradually reduced intervention prices• Diversification grants • Land diversion• Pluriactivity• Strong support of new member states

The Creation of European Agricultural Policy

New Elements of CAP (2003+ newer) – Problems• Subsidies are not cut, but just shifted in focus • Non-productivity is rewarded • Large farms will receive the largest benefits for not

using their land• Small farmers will receive less for products, and will be

moving further towards poverty • Countries contribute to agricultural subsidies according

to their overall economic status, but receive according to the development of their agricultural sector.

European Industry

Why study European Industry? • Regional differences in industrialization • Historical conflict over key industries • Recent market integration and its effects on

member states • Recent transition of parts of the EU (and

potential future members) to a market economy

Geography of European Industry

How and where did European Industry begin? • Industrial revolution • 1750’s United Kingdom • 1769 steam engine• James Watt • Late 1800’s diffusion• Industrial restructuring

Geography of European IndustryHow is European Industry distributed today? • Regional patterns show – Clustering in “traditional” sites near resources

• Weber’s model of industrial location – Clustering of resources – Strong inequities in resource and industry distribution – Newly emerging production sites in “non-traditional” sites

• Flexible accumulation • Just-in-time production

European Industrial PolicyWhat does the EU do about these geographic patterns

of production? • General Policies • General measures for the internal market • External commercial policy

– Bilateral and multilateral trade agreements with implications for individual industrial sectors

• Social and regional policy • Competition policy

– legal instruments for intervention in market mechanisms – monitoring state aid

• Research and development policy• The strengthening of cooperation among European enterprises

European Industrial PolicyWhat does the EU do about these geographic patterns

of production? • Regional policies• Structural and Cohesion Funds• Cohesion Funds

European Integration Policies• Reality Check: European Integration• European goals for trade (and) integration • European tools for trade (and) integration– Industry-specific tools

• CAP • Industrial policy• EMU and EURO

– Regional tools• Structural Funds • Cohesion Funds • Project examples

Reality Check

Reality of Integration• Often dramatic differences in economic indicators • Significant divide in economic development between

and within EU nation states • Particularly visible differences in economic

development between EU 15 and new Eastern European member states

Reality Check

Reality of Integration• Prior to the EU, a system of national markets,

networks and supply chains existed• The EU integrated these markets significantly• Core/Periphery relations still exist in

European markets

Economic Development Stats

Economic Development Stats

Economic Development Stats

Economic Development Stats

Economic Development Stats

Economic Development Stats

Economic Development Stats

Economic Development Stats

Economic Development Stats

Regional Tools for Trade and Integration

Goals• Reduce the differences in economic development

between “poor” and “wealthy” regions and countries

• Provide matching funds for economic development projects

• Key tool to counteract recession and to stimulate equality across a geographically diverse area

Regional Tools for Trade and Integration

Structural Funds• Four different types of funds

– ERDF = European Regional development fund– ESF = European Social Fund– EAGGF = European Agricultural Guidance and Guarantee Fund– FIFG = Financial Instrument for Fisheries Guidance

• Three different types of objectives and area classifications – Objective 1– Objective 2– Objective 3

• Regions qualify for different pots of money

Regional Tools for Trade and Integration

Structural Funds• Four different types of funds

– ERDF goals– Improve economic prosperity and social inclusion

• High unemployment• High ethnic diversity

– Investing in projects to promote development • Public and Private organizations

– Encourage the diversification of industry into other sectors • Traditional rural regions • Traditional industrial regions • Development of service industry and high tech sector

– Areas lagging behind– Available in Objective 1 and 2 areas

ERDF Project Example

• Birmingham Examples:– Metro System – Convention Center– Parks – Business Corridor Infrastructure

Regional Tools for Trade and Integration

Structural Funds• Four different types of funds

– ESF goals– Funds training, human resources and equal opportunities

schemes • Job-training of the unemployed• Job-placement programs • Programs to encourage women to enter the workforce

– Employability of people in both Objective 1 and 3 areas• Additional training an schooling

– Objective 2 areas: ESF may be used to complement the ERDF activities

ESF Project Example

• ESF Projects of good practice– Unemployment– Youth – Social Exclusion– Equal opportunity– Industrial change

Regional Tools for Trade and Integration

Structural Funds• Four different types of funds

– EAGGF goals– Encourage the restructuring and diversification of rural areas

• Funding supported by CAP goals – Promote economic prosperity and social inclusion

• Reintegration of unemployed farmers • Protection of rural migrant population

– Protecting and maintaining the environment and rural heritage• Local heritage museums• Local history projects • Tourism

– Rural Objective 1 areas

EAGGF Project Examples

Regional Tools for Trade and Integration

Structural Funds• Four different types of funds– FIFG goals– Modernize the structure of the fisheries sector – Encourage diversification of the workforce

• Tourism • Security and rescue• Trade and transport

– Ensure the future of the industry through achieving a balance between fisheries resources and their exploitation • Research facilities • Volunteer program grants

FIFG Project example

• Projects– Scotland

Regional Tools for Trade and Integration

Structural Funds• Three different objectives and areas

– Objective 1: Areas with less than 75% of EU average GDP. Promotes the development and structural adjustment of the EU regions most lagging behind in development

– Objective 2: Supports the economic and social conversion of areas facing structural difficulties. Areas qualify under four strands - industrial, rural, urban and fisheries

– Objective 3: European Social Fund. Develops labor markets and human resources. Directed at long-term unemployed and those facing barriers to finding employment because of their disability, racial origin, or sex.

Structural Fund Objective Areas for the UK

RED + PINK - Obj. 1BLUE - Obj. 2

Regional Tools for Trade and Integration

Cohesion Funds• Why was it set up? • Single European Act 1987• Aimed at countries, not regions • Convergence criteria• Aimed at improving infrastructure • Environment • Transport • Reformulated policy due to Enlargement to EU-25

Regional Tools for Trade and Integration

Cohesion Funds• Who benefits? • Spain • Portugal • Greece• New Member states• Seven year funding periods• Website

Regional Tools for Trade and Integration

Cohesion Funds• What is it exactly? • Member States whose GNP is less than 90% of the Community

average • Economic convergence program • Beneficiary State must limit their deficit (no more than 3% of its

GDP)• The maximum rate of aid granted is between 80% and 85% of

expenditure• Projects are selected and implemented by the country concerned,

which is also responsible for management and financial monitoring.

• Projects are also regularly monitored by the Commission• THE IRISH EXAMPLE

European Finance Why study the European Monetary Union?• New geographic unit of currency use • New global financial force • Challenge to national fiscal policies• Benefits and drawbacks of new system

Legacies of Inflation

Legacies of Inflation

Legacies of Inflation

Legacies of Inflation

Legacies of Inflation

• World War I (1914-18)• German Central Bank• Gold, Currency and Taxes• War financing • Loans

Four-fold increase of currency volumePrice Index increase

Legacies of Inflation

• After World War I (1918-21)• Reparation payments• Currency depreciation• Social democratic government

Increased wagesSocial and educational benefits

Legacies of Inflation

• After World War I (1922-23)• Hyperinflation• Ruhr conflict between Germany and France

Passive resistanceWages could not keep up with inflation Hunger/malnutritionBartering economy

Legacies of Inflation

• After World War I (1923-24)• Rentenmark introduction• 1 RM = 1 trillion Mark• Confidence in currency • Currency backed by property • New Reichsmark introduction 1924

Legacies of Inflation• Young Plan 1928 • Reparation payments until 1988 • Rise of unemployment • Rise of National Socialist Party • 1931 World Economic Crisis• Debt repayment• 1933 Elections: Hitler takes over • 1938 Conference in Munich • 1939 World War II begins

The Historical Geography of the European Monetary Union

The Bretton Woods Agreement• 1944/46• Post-WWII instrument of global economy stabilization • 50 countries tied their currency to the US Dollar, and the

Dollar value was tied to gold prices• “Fixed” exchange rates• Regionalization of money• Transparent, low risk markets• Growth of industrial economies

The Historical Geography of the European Monetary Union

After the Bretton Woods Agreement• 1971• End of BWA• Shift to fluctuating exchange rates • Era of global finance • Global geography of money• Currencies were traded globally• Control issues

The Historical Geography of the European Monetary Union

After the Bretton Woods Agreement• Risk • Instability of financial markets • Growth of multinational banking • Loans • Debt Crisis of early 1980s• National focus on currency stability

The Historical Geography of the European Monetary Union

History of the EURO• Treaty of Rome (1957)

– Common Market • Single European Act (1986)• Treaty on the European

Union – Economic and Monetary

Union (EMU)

Steps of Introduction• Jan. 1999

– Fixing of Exchange rates – Common Monetary Policy

• Jan 2002– Introduction of new coins and

currency • July 2002

– Complete conversion to new currency

History of European Monetary Union Video

Aspects of the European Monetary Union

Benefits of the EURO• Stability

– Economic and cultural bonds• Corporate benefits

– Transaction costs– Efficiency of resource allocation

• Price transparency– Competition

• Consumer benefits – Tourism

• EU aid distribution– Standardized, transparent

distribution of EU resources

Drawbacks of the EURO• Austerity measures

– Curbing debt, inflation and interest rates

– Curbing subsidies • Transformation costs

– Public – Private

• Bureaucracy– Administration of new currency– Short-term lack of transparency