Macroeconomic Linkages in the European Union

Abstract

The European Union (EU) constitutes a particular and novel economic framework. More than half of her member countries form a monetary union, whereas the rest keep their national monetary policies. Regarding the external sector, the EU economies exhibit a high degree of openness and the European block plays a prominent role in international trade. In this chapter we will analyse the macroeconomic implications of these features, paying special attention to the linkages between domestic and external performance.

In particular, under a theoretical approach, the relationship between the EU and the rest of the world can be explained by means of a two-country model. But, when considering the composition of the EU (i.e., Eurozone and non-Eurozone), relationships turn to be more complex and the model becomes a three-country one. In other words, we could say that macroeconomic linkages between the EU and the rest of the world can be described by a nested model in which the EU makes up a block versus the rest of the world, but also a two country model by herself.

As far as we know there are no macroeconomic models describing such situation, in spite of being the current economic framework of one of the major economies worldwide. For that reason, the aim of this chapter would be to analyse the performance of the EU in the light of macroeconomic modelling.

Keywords: European Union, eurozone, macroeconomic linkages, monetary union

JEL Classification: E60, F33, F41