Emissions Targets Would Damage the EU’s Macroeconomic Performance

Discuss the Extent to Which the EU's CO2 Emissions Targets Would Damage the EU's Macroeconomic Performance. The European Union's macroeconomic policy targets are low, stable inflation (target 2%), sustainable economic growth, low unemployment and a balanced a balance of payments. 

Whether the emissions targets have any impact or not depends on whether the targets are realistically achievable, the level of punishment for not meeting them and the level of incentive for meeting them. If the targets are mostly unachievable then more firms will be punished. This may come in the form of fines. Incentives for reaching targets may include subsidies for research and development or tax breaks.

If the targets are not enforced, or if the punishments for not meeting them are not particularly significant (fines should cost more than the cost to meet the targets), then very little will happen. Manufacturers will continue as they are, with little change to existing methods.

If the fines are significant, enforced and the targets are out of reach for many manufacturers there can potentially be many negative effects for the macroeconomic performance of the EU. If the money saved from not having to pay fines and/or deal with increased taxes is greater than the common external tariff then Car manufacturers may move out of the EU to countries such as America where there is less pressure to reduce pollution. 

Around 2% of all people within the EU have jobs either in or attached to the Car manufacturing industry. The industry also accounts for 7.5% of the EU's manufacturing sector. Across the EU unemployment would rise considerably and the economy would slow down. 2% of the all the people in the car manufacturing industry adds to 1,100,000 workers. Government revenue would fall across the EU and AD would fall across the EU. This would have a negative multiplier effect. Both consumer spending and government spending are parts of AD. If AD falls then unemployment and economic growth could fall further. Inflationary pressures may not be reduced as a fall in AD could allow due to the fact that LRAS falls from LRAS1 LRAS2 as output falls.

If car manufacturers left the EU prices for cars would rise as more would have been imported and would have faced the common external tariff. This would create inflationary pressures. The balance of payments position of the EU would suffer greatly. 30% of the world's car production takes place in the EU. This figure would be reduced and the EU would no longer be close to self-sufficiency in terms of car production.

Some EU countries would suffer more than others. In the Czech Republic, GDP is low in comparison to many EU countries and unemployment (in certain areas) is very high. Areas of low unemployment would become areas of high unemployment. 16.3% of the Czech Republic's GDP comes from the car manufacturing sector. The industry also accounted for 19.7% of export revenue in 2005. Part of the EU's aims is economic growth and to raise the economic strength of new entrants to levels closer to that of the EU15. If car manufacturers left the EU this aim would face a major set-back.

However, not all car manufacturers would leave the EU. Firstly, the EU recognises the problems that would be caused if many car manufacturers left the EU. They would try to prevent this from happening. They may reduce the punishments or create different targets for different firms which find it difficult to reduce emissions. Also, many firms are close to the target or have reached it.

The target of 140g/km has already been reached by fiat. Citroen, Renault, Seat, Ford, Skoda and Peugeot were within 12g/km of the target by 2005. It may be possible for those firms to reach the targets or be extremely close by 2008. This is extremely important for the Czech Republic as Skoda, Citroen and Peugeot all have factories in the Czech Republic. This would reduce the impact of firms moving away from the EU, although the Czech Republic would still be faced with the leaving of Hyundai and Toyota, two manufacturers much further away from the targets.

Manufacturers may also not leave because of the costs involved. It would cost a lot to pay redundancy payments, to set up new factories in another country and to train new workers. They would also have to find a country which is suitable, with cheap labour and little regulation in terms of CO2 emissions. They would need to make sure that the costs of leaving did not outweigh the fines/taxes of remaining in the EU and the common external tariff.

Overall, the effects of car manufacturers leaving could be huge. There could be a big rise in unemployment as well as a large fall in economic growth. Inflation could rise and the balance of payments position would worsen considerably. The effects would be felt even more in Eastern European countries where the industry and its suppliers are more concentrated. However, the EU realises this and would not do anything that would risk a considerable portion of the car manufacturers leaving the EU.

The costs of leaving the EU and the CET would deter some manufacturers from leaving. All of this depends on whether the punishments for not meeting the targets are strictly enforced or not. If the incentives for meeting the targets are introduced then the additional research and development that this would allow would create more jobs, and if anything improve the EU's economic performance.