# European Integration and the Euro

Business I · Economic History · https://tryals.app/learn/business-i/european-integration-and-the-euro

## From Coal to Currency

European integration is the most ambitious voluntary pooling of sovereignty in history, driven by the conviction that **economic interdependence makes war unthinkable**.

| Step | Year | What pooled |
| --- | --- | --- |
| **ECSC** | 1951 | Coal and steel |
| **Rome** | 1957 | Customs union |
| **SEA** | 1986 | **Four freedoms** (goods, services, capital, people) |
| **Maastricht** | 1992 | Path to the euro |

**Optimum Currency Area** (OCA) theory states a union works when members have synchronized cycles, labour mobility, and **fiscal transfers**. The eurozone had none robustly, creating an **incomplete currency union**: $\text{Shared currency} - \text{fiscal union} = \text{vulnerability to asymmetric shocks}$.

## The Euro Crisis & Design

The 2010–2012 **euro crisis** exposed the design flaw. Peripheral states could not devalue to regain competitiveness and faced bond panics alone.

**The response:** Draghi's **whatever it takes** (2012), the European Stability Mechanism (ESM), conditional bailouts, and banking union stabilised the system.

> **Common pitfall:** Reading the euro as purely economic. Each step traded sovereignty for interdependence **by design**, woven economies do not go to war.

## Practice questions

8 of this lesson's 14 practice questions, with answers. The full set is in the app.

### 1. Sort each integration step by decade.

**Answer:**

- 1950s: ECSC pools coal and steel, Treaty of Rome creates the EEC
- 1980s-90s: Single European Act completes the internal market
- 2000s-10s: Euro coins and notes enter circulation, Draghi's "whatever it takes" speech

**Why:** Coal and steel in the 1950s, the single market in the 1980s-90s, and the euro and its crisis in the 2000s-10s.

Page: https://tryals.app/practice/business-i/european-integration-and-the-euro/sort-each-integration-step-by-decade

### 2. Match each EU concept to its meaning.

**Answer:**

- Four freedoms → Free movement of goods, services, capital, and people
- Maastricht criteria → Convergence conditions for joining the euro
- ECB → The eurozone's central bank in Frankfurt
- OCA theory → Conditions under which a currency union works

**Why:** Freedoms, entry rules, the monetary authority, and the theory that questions whether the design is sound.

Page: https://tryals.app/practice/business-i/european-integration-and-the-euro/match-each-eu-concept-to-its-meaning

### 3. Greece could not devalue during the euro crisis and had to deflate wages instead. Which design feature made that the only path?

A. EU rules prohibiting member states from defaulting on debt
B. Greece's trade deficit, which made devaluation ineffective
C. A shared currency without shared fiscal capacity
D. The ECB's mandate to maintain a fixed exchange rate against the dollar

**Answer:** C. A shared currency without shared fiscal capacity

**Why:** A devaluation cuts every price relative to abroad at once; doing it wage by wage takes years and mass unemployment to enforce. Mundell's optimum-currency-area criteria, labour mobility and fiscal transfers, name exactly what the euro area lacked, and the crisis was that theory being tested.

Page: https://tryals.app/practice/business-i/european-integration-and-the-euro/greece-could-not-devalue-during-the-euro-crisis-and-had-to-deflate

### 4. Why couldn't Greece devalue its currency during the euro crisis?

A. It had the euro, so no currency to devalue
B. Devaluation only works for large countries
C. The IMF prohibited devaluation
D. Greece's currency was already at its floor

**Answer:** A. It had the euro, so no currency to devalue

**Why:** In the eurozone, there is no national currency to devalue. Adjustment must come through internal devaluation, wage and price cuts, which is slower and more painful.

Page: https://tryals.app/practice/business-i/european-integration-and-the-euro/why-couldnt-greece-devalue-its-currency-during-the-euro-crisis

### 5. Which are OCA criteria for a well-functioning currency union?

A. Synchronised business cycles
B. Fiscal transfers from booming to depressed regions
C. Labour mobility across member states
D. Each member having its own central bank

**Answer:** A. Synchronised business cycles; B. Fiscal transfers from booming to depressed regions; C. Labour mobility across member states

**Why:** Synchronised cycles, mobile labour, and fiscal transfers, the three OCA conditions. Having separate central banks contradicts the point of a currency union.

Page: https://tryals.app/practice/business-i/european-integration-and-the-euro/which-are-oca-criteria-for-a-well-functioning-currency-union

### 6. Order the milestones of European integration.

**Answer:**

1. ECSC created (1951)
2. Treaty of Rome / EEC (1957)
3. Single European Act (1986)
4. Maastricht Treaty / EU created (1992)
5. Euro enters circulation (2002)

**Why:** Coal, customs union, single market, political union treaty, common currency, each step deeper than the last.

Page: https://tryals.app/practice/business-i/european-integration-and-the-euro/order-the-milestones-of-european-integration

### 7. Draghi's "whatever it takes" speech in 2012 committed the ECB to unlimited bond purchases to save the euro, and it calmed markets almost immediately.

**Answer:** True

**Why:** Three words changed the crisis: "whatever it takes." The ECB's commitment to unlimited intervention (the OMT programme) was so credible that it barely had to be used, the announcement itself stabilised bond spreads.

Page: https://tryals.app/practice/business-i/european-integration-and-the-euro/draghis-whatever-it-takes-speech-in-2012-committed-the-ecb-to

### 8. The Maastricht debt criterion is 60% of GDP. If a country's GDP is 300 billion, what is the maximum allowable debt (in billions)?

**Answer:** 180

**Why:** $300 \times 0.60 = 180$ billion. Many eurozone countries exceed this limit, enforcement has been the persistent weak link.

Page: https://tryals.app/practice/business-i/european-integration-and-the-euro/the-maastricht-debt-criterion-is-60-of-gdp-if-a-countrys-gdp-is