Economics of European Integration

Part I: Economics of European Integration


The teacher is Peter Claeys from VUB in Brussels (BE).


Peter Claeys Vrije Universiteit Brussel
Pleinlaan 2
1050 Elsene


Students must have completed the modules in Advanced Macroeconomics, Advanced Microeconomics and Econometrics in the first semester as this module builds on material covered in these modules.

Lecture topics

Week 1: Microeconomic analysis

  • Economic Integration: Definitions and Development in Europe
  • Traditional Theories of Customs Unions
  • New Trade Theories and Market Integration
  • Factor Market Integration
  • Dynamic and Spatial Effects of Economic Integration

Week 2: Macroeconomic analysis

  • International Monetary Arrangements in Europe: An Historical Perspective
  • The Theory of Monetary Unions
  • Monetary Policy in EMU
  • The Government Budget Deficit and Fiscal Policy
  • The EU Sovereign Debt Crisis

Course contents

The course divides into two roughly equal parts. The first looks at the relevant microeconomic analysis for European integration – trade and customs union theory, the integration of factor markets and economic growth – and the second looks at the macroeconomic aspects of integration – macroeconomic interdependencies, the theory of optimum currency areas and monetary and fiscal policy in a monetary union.

Core reading

The following list of textbooks and edited volumes (available in most academic libraries) might be useful as introductory or supplementary material to the journal articles and lecture notes:

  • R. Baldwin & C. Wyplosz (2012), The Economics of European Integration, 4th edition, McGraw-Hill London
  • P. De Grauwe (2012), The Economics of Monetary Union, 9th edition, Oxford University Press Oxford
  • J. Pelkmans (2006), European Integration: Methods and Economic Analysis, 3rd edition, Pearson Education Harlow
  • E.J. Pentecost & A. Van Poeck (eds) (2001), European Monetary Integration: Past, Present and Future, Edward Elgar Cheltenham
  • W.H. Greene, Econometric Analysis, 7th edition, Part V (Chapter 20 to 23)
  • G.S. Maddala, K. Lahiri, Introduction to Econometrics, 4th edition (Chapters 12 to 14)

Learning outcomes

Upon successful completion of the course, students should be able:

  • To apply advanced macro and micro principles to EU economic issues and problems, to identify the key economic issues facing EU market economies and to evaluate different possible policy responses. Students have a general understanding of the EU economy.

(Knowledge and Understanding)

  • To assess the merits of the conduct of economic policy (particularly in the EU), to assess the relevance of economic theory to an appraisal of economic problems and to expound possible solutions in an intelligible way.

(Specific Skills)

  • To understand and to conduct simple mathematical, verbal and diagrammatic arguments in economics. Students have acquired more general transferable skills in analytic reasoning, numeracy and clear and effective communication and they understand the EU-area economy to the extent of being able to assess critically and professionally media comment upon economic policy.

(Key Transferable Skills)


The course consists of 150 spread over one semester. About 30 hours of lectures and workshops are given in a period of ten consecutive days. The remaining 120 hours is meant for private study.


The course is assessed in two parts.

  • The in-class presentations count for 10% of the overall grade.
  • The final examination counts for 90%, and is a written exam of three hours at the end of the term. A specimen examination paper is distributed during the taught part of the module to give a flavour of the style and the level of the questions, but the questions vary from year to year. During the examination, students are expected to use economic analysis to address the specific questions asked. Students who do not do this are unlikely to pass the module.

Part II: Economics of Transition


The teacher is Vilém Semerák from VŠE in Prague (CZ) and the Institute of Economic Studies (FSV, Charles University, CZ).


Vilém Semerák Vysoká škola ekonomická v Praze
W. Churchill square 4
13067 Prague 3
Czech Republic


Students are supposed to have knowledge of Micro- and Macroeconomics at an undergraduate level.

Previous exposure to Game Theory is an advantage but is not strictly required.

Lecture topics

Note: As the time is limited, the lectures will focus on more complicated topics and on the logic of economic models. Students are expected to study additional relevant details independently from the recommended literature.

1. Introduction: Alternative economic system, political constraints to deeper economic/social reforms

  • Alternatives to market economy: History and presence
  • Examples of problems/advantages of the alternative arrangements
  • Behavioral issues: Life in a non-market economy
  • Deep economic reforms & transition to a new model
    • A model of ex ante and ex political constraints
    • Choosing between big bang or gradual reforms: A gametheoretical model

2. Problems of centrally-planned economies, successful and less successful remedies

  • Models based on soft budget constraints and information asymmetries (Kornai)
    • Simple Dewatripoint-Maskin model of soft budget constraints
  • Growth performance of centrally-planned economies
  • Allocative inefficiency of non-market systems

3. Real transition: Selection of strategy (independent study)

  • Role of initial conditions and historical experience
  • Washington Consensus
  • Main features of reforms scenarios of the CEE countries
  • Differences between China (P.R.C.) and the CEE countries

4. Liberalization, deregulation and institutional change

  • Price liberalization: Options and outcomes
    • Chinese dual track approach
    • Lipton & Sachs argument: Welfare effects of price liberalization
  • Institutional reforms: Laws and related institutions

5. Macroeconomic development during transition: Imbalances and recessions

  • Transformation recessions: Main features
  • Theoretical models of transformation recessions
    • Blanchard & Kremer (1997) disorganization model
    • Search friction & specific investment: Roland & Verdier (1999) model
  • Case study: A special case of the GDR
  • Specific growth-related macroeconomic issues:
    • Balassa-Samuelson model and implications for inflation (real appreciation)
    • Resource curse and growth (Russia, Myanmar)

6. Privatization and effects of ownership changes

  • The role of privatization in transition strategy (CEE vs. China)
  • Overview of the methods
    • Auctions: Advantages and problems
    • Unorthodox methods (e.g. Czech or Russian privatization) vs. more traditional approaches (privatization in the GDR)
    • Effects of incomplete or partial privatization (China)
  • Econometric analyses of effects of changes in ownership on performance
    • Sample bias and endogeneity: How to deal with it?

7. Factor markets

  • Labor markets
    • Changes in labor participation rates
    • Structural changes: Education, gender-related changes, main problems
  • Financial markets
    • Banking sector related policies
    • Effects of privatization on financial markets

8. Corruption and unofficial economy

  • Basic terminology: Corruption, unofficial economy, state capture
  • Empirical analysis: Data collection and reliability
  • Unofficial economy in transition

9. Summary and outlook for the future of state-capitalism model

Course contents

The course deals with main economic issues related to transition from systems based on central planning (Soviet bloc and China) to market economy.

Compared to other similar courses, this course:

  1. Is less descriptive and much more analytical. We will use (abstract) economic models and empirical (econometric) evidence wherever appropriate. We will also try to apply experimental approach in order to provide the students with direct experience with asymmetric information markets and soft-budget constraints.
  2. Puts less emphasis on history and simple description of what has happened. We will be exploring the implications of the presented models on countries currently in transition (e.g. Myanmar) and on the analysis of possible future dynamics of state-capitalism-like systems (Chinese economy).

Core reading

1. Main reading

  • Economic models: G. Roland (2000), Transition & Economics: Politics, Markets and Firms, The MIT Press
  • For additional details on policies, historical and social background of transition phenomena: A. Aslund (2012), How Capitalism Was Built, Cambridge University Press, 2nd edition

Usable alternatives to A. Aslund (2012):

  • Aslund (2002), Building Capitalism: The Transformation of the Former Soviet Bloc, Cambridge University Press, ISBN 0 521 80139 7 or 0 521 80525 2D.
  • Gros & A. Steinherr (2004), Economic Transition in Central and Eastern Europe: Planting the Seeds, Cambridge University Press, ISBN 0 521 82638 1 or 0 521 53379 1

2. Basic survey articles

  • A special report – 25 Years of Transition: Post-Communist Europe and the IMF, IMF, October 2014 (available online)
  • B. Hofman & J. Wu (2009), Explaining China’s Development and Reforms. The International Bank for Reconstruction and Development, The World Bank, Working paper No. 50, 2009
  • J. Kornai (2006), The Great Transformation of Central Eastern Europe. Success and Disappointment, Economics of Transition, Vol. 14 (2), 2006, pp. 207-244

3. Papers and articles (required)

  • S. Estrin, J. Hanousek, E. Kocenda & J. Svejnar (2009), Effects of Privatization and Ownership in Transition Economies, World Bank Policy Research Paper 4811
  • J. von Hagen, R.R. Strauch & G. Wolff (2002), East Germany: Transition with Unification, Experiment and Experiences, ZEI Working Paper B19/2002
  • J. Kornai, E. Maskin & G. Roland (2003), Understanding the soft budget constraints, Journal of Economic Literature, Vol 41, No. 4 (Dec. 2003)
  • J. Stiglitz (1999), Whither Reform. Ten Years of Transition, World Bank ABCDE Conference
  • Ericson (1991): The Classical Soviet-Type Economy: Nature of the System and Implications for Reforms
  • M. Tomass (1998), Mafianomics: How Did Mob Entrepreneurs Infiltrate and Dominate Russian Economy?, Journal of Economic Issues, Vol. 32, No. 2 (Jun., 1998), pp. 565-574

Learning outcomes

Upon successful completion of the course, students should be able:

  • To understand the key differences between economic systems of ‘socialist’ economies (and other predominantly non-market economies), market economies and economies with a ‘state-capitalism’-like varieties.
  • To explain the logic of main traps that may cause problems to transition countries (or emerging countries in general) during their attempts to speed up economic growth and modernize their economies.
  • To understand the logic and importance of motivation, information asymmetries and corporate governance, as well as the role of efficient financial markets in a market economy.
  • To explain the meaning of main concepts of economic models relevant for transition economies (and other economies such as China, Brazil, etc): Soft budget constraints, ex ante/ex post political constraints to reforms.
  • To understand the differences between countries of the former Soviet bloc and China, and learn more about Chinese economic reforms and prospects of further development of Chinese economy.


The course consists of 120 hours spread over one semester.

About 20 hours of lectures and workshops are given in a period of one week. The remaining time is required for individual study: 85 hours should be used to analyse transition from multiple perspectives and 15 hours should be used for active preparation of the intensive lectures, including work with sample exercises and models.


1. The assignment counts for 30%

Examples of assignment topics:

  • Input-output analysis
  • Soft budget constraints
  • Disorganization model of transformation recession

Examples of essay topics:

  • Unorthodox methods of privatization: Do they increase or reduce the speed of economic restructuring?
  • Unofficial economy during transition: Why did it not disappear?

2. The written exam counts for 70 %