International Economics and European Integration

Full course description

This course constitutes an introduction to one of the main disciplines within economics: international economics, emphasizing its relevance for understanding the European integration process. Many of the topics addressed in your mandatory course “Principles of economics: Governing the European economy” will re-appear, to be discussed in greater detail.

International economics focuses on the fact that economies are typically “open” rather than “closed”:

they engage in transactions across national borders. Typically, this involves the use of different currencies, different legislation, different preferences, cultures, and languages. As a result, international transactions usually involve additional costs that are absent in a closed economy. Integration processes such as the EU can, to a considerable extent, be understood as attempts to reduce or manage such costs.

International economics consists of two subdisciplines: international macroeconomics, and the theory of international trade (translated liberally: “international microeconomics”).

We will start by addressing the basic message of the theory of international trade. It turns out that international trade has potential benefits for both trading parties, but trade barriers (e.g. tariffs or quotas) make it harder to reap these fruits. The European economic integration process is essentially an attempt to progressively eliminate such barriers, but on a discriminatory basis: while the internal trade barriers are reduced, this is not (or at least: not necessarily) true for the barriers vis-à-vis the rest of the world. We will carefully examine the consequences of such preferential liberalization, for goods, capital and labour markets. This will allow us to better understand the development of several important EU policy areas, e.g. the common agricultural policy, competition and state aid policy, and trade policy.

Likewise, we will introduce you to international macroeconomics. Our starting point here is the crucial role of exchange rates: probably the single most important price in an open economy, because they directly influence the prices of goods and services sold and purchased abroad, and the value of countries’ foreign assets and liabilities. Exchange rates are sometimes very volatile, which may lead to currency crises and the ensuing political crises. Policy makers may want to keep exchange rates fixed and predictable; but as we will see, this inevitably comes at the expense of other policy choices. After studying the mechanisms that determine exchange rates, we will discuss policies that can be used to keep them constant, and how they relate to (or conflict with) policies aimed at stabilising output. In particular, we will critically investigate the economics of currency unions like the EMU, and discuss challenges for policy makers, e.g. at the ECB.