Global economics

www.euruni.edu

BCO221 GLOBAL ECONOMICS

Prof. Dr. Nelson H. S. Ferreira [email protected] orcid.org/0000-0003-2637-3211

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Unit 6 - Economic Integration I: The European Union and the Euro-Zone

uStages of economic integration uThe European Union as the highest level of economic integration uFeatures of the European Union uThe eurozone and euro crisis uThe theory of optimum currency area by Robert Mundell

European Union Integration

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Economic Integration

“The removal of any kind of restriction to the free mobility of goods, services and production factors (capital and labor) between two or more countries”.

u Integration: a process with multiple meanings 1. For people (proximity, mobility, culture)

2. For companies (markets, currency)

3. For governments (cooperation, federalism)

Source: http://www.europarl.europa.eu/factsheets/en/sheet/38/free-movement-of-goods

Types of economic integration

Regional vs. Multilateral Trade Liberalization: u Multilateral Trade Liberalization: GATT

(General Agreement on Tariffs and Trade) and WTO

u Regional Trade Liberalization: different models u FREE TRADE AREA: removal of tariffs and

quotas (NAFTA). u CUSTOMS UNION: Common external tariff

(EEC, 1968). u COMMON MARKET: Free movement of

factors (L,K,Tech) (EU 1993). u ECONOMIC AND MONETARY UNION:

Common monetary policy and co-ordination of economic policies (EMU, 1999).

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Source: https://www.thebalance.com/gatt-purpose-history-pros-cons-3305578

Types of economic integration in Regional Markets

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uSource: Czinkota and Ronkainen, 2007

Levels of Economic Integration

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uSource: https://transportgeography.org/?page_id=4082

Economic integration can be classified in five additive levels, each present in the

global landscape

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Free trade u “Tariffs (a tax imposed on imported goods) between member countries are significantly reduced, some abolished altogether. Each member country keeps its own tariffs in regard to third countries. The general goal of free trade agreements is to develop economies of scale and comparative advantages, which promotes economic efficiency.”

Source: https://transportgeography.org/?page_id=4082

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Custom union

u “Sets common external tariffs among member countries, implying that the same tariffs are applied to third countries; a common trade regime is achieved. Custom unions are particularly useful to level the competitive playing field and address the problem of re-exports (using preferential tariffs in one country to enter another country).”

Source: https://transportgeography.org/?page_id=4082

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Common market

u “Services and capital are free to move within member countries, expanding scale economies and comparative advantages. However, each national market has its own regulations such as product standards.”

Source: https://transportgeography.org/?page_id=4082

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Economic union

(single market)

u “All tariffs are removed for trade between member countries, creating an uniform (single) market. There is also free movements of labor, enabling workers in a member country is able to move and work in another member country. Monetary and fiscal policies between member countries are harmonized, which implies a level of political integration. A further step concerns a monetary union where a common currency is used, such as with the European Union (Euro).”

Source: https://transportgeography.org/?page_id=4082

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Political union

u “Represents the potentially most advanced form of integration with a common government and were the sovereignty of member country is significantly reduced. Only found within nation states, such as federations where there is a central government and regions having a level of autonomy.”

Source: https://transportgeography.org/?page_id=4082

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“As the level of economic integration increases, so does complexity. This involves a set of numerous regulations, enforcement and arbitration mechanisms. Complexity comes at a cost that may undermine the competitiveness of the areas under economic integration since it allows for less flexibility for national policies. A devolution of the economic integration could occur if the complexity and restrictions it creates is no longer judged to be acceptable by its members.”

Source: https://transportgeography.org/?page_id=4082

Types of economic integration

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Unlike in a free trade area, in

a customs union:

Countries have a common

external tariff

Countries don’t have a

common external tariff

Countries have a common currency

Have a look on European Union history, goals and integration process in:

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Source: https://europa.eu/european-union/about-eu/eu-in-brief_en

The European Union 17

• It is neither a federal state nor an international organization. It is a supranational entity.

“The EU is a strange political entity in the International environment”

• USA $19.4 trillion • EU $17.3 trillion • China $12.2 trillion • Japan $ 4.9 trillion

In 2017 it was the world’s second economic player (total GDP) (World Bank):

The European

Union

u The EU currently has 28 member states u It has a complex political architecture:

u an executive or governing arm, the Commission,

u an institution representing the interests of Member States’ Governments, the Council,

u a legislative institution elected by the population every 5 years, the Parliament

u 19 countries out of 28 have adopted a common currency, the Euro.

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The European Union

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Source: https://www.bbc.com/news/world-middle-east-24367705

The European Union

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Source: IMF. Data are from 2013. The income per capita is calculated in PPP terms, that is, taking differences in price levels into account)

Population Area (sq. km)

GDP per capita*

European Union

507,416,000 4,381,376 34,060 $

U.S.A. 319,305,000 9,826,675 53,001 $

China 1,367,250,000 9,596,961 6,959 $

Russia 146,300,000 17,098,242 14,591 $

Large differences in income per capita across EU countries

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Country Rank GDPpc 2016 (USD) Luxembourg 1 103,198 Ireland 4 62,562

Denmark 8 53,743 Sweden 11 51,164 Netherlands 13 45,282 Austria 14 44,498 Finland 15 43,169 Germany 17 41,902 Belgium 18 41,283 United Kingdom 19 40,095 France 22 38,127 Italy 25 30,507 Spain 27 26,608 Cyprus 28 23,351 Malta 30 25,214 Slovenia 34 21,320 Portugal 36 20,831 Czech Republic 37 18,286 Greece 38 17,900 Estonia 39 17,632 Slovakia 40 16,498 Croatia 44 12,095 Lithuania 49 14,890 Latvia 51 14,060 Hungary 54 12,778 Poland 56 12,315 Romania 63 9,465 Bulgaria 75 7,368

Source: https://ec.europa.eu/eurostat/statistics- explained/index.php/GDP_per_capita,_consumption_per _capita_and_price_level_indices

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Sources: https://ec.europa.eu/eurostat/statistics-explained/index.php/Unemployment_statistics

European Economic Integration

u Why did European integration begin in the 1950s?

1. The ‘Iron Curtain’ (Winston Churchill, 1946, Fulton, USA)

2. French-German cooperation for economic reconstruction (Robert Schuman, 1950)

3. Integration as opposed to conflict

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Some history of European integration 24

1951

Treaty of Paris established the European Coal and Steel Community

1957

Treaty of Rome → 6 countries found the European Economic Community (EEC) and EURATOM

1968

Internal trade barriers successfully eliminated (Customs Union)

1992

Treaty on European Union (Maastricht) → schedule is established for forming the Economic and Monetary Union

Some history of European integration (cont.)

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European Single Market comes into force

1993

Monetary Union comes into force on January 1

1999

Euro notes and coins are introduced

2002

Treaty of Lisbon comes into force, changes the functioning to adapt it to a Union of 28 (less unanimity required to take decisions…)

2009

The UK will leave the EU

2020

Some history of European integration

In general, European integration has deepened in periods of economic expansion. Vice versa, in periods of crisis it has stopped.

1. Eurosclerosis; second half of the ‘80s and early ‘90s: stagnation in the european integration process: eurosclerosis and europessimism.

2. Great Recession and Euro crisis, 2008-today: fears of Euro breakdown, tensions among member states.

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27Free mobility of Labor and Capital in the EU

The EU is a single market, therefore: • Trade of goods and services is free of any barrier

• Workers can move freely across the Union to seek for jobs

• Financial capital can move freely with no limitations

• Firms can establish a branch in any EU country

28Free mobility of Labor and Capital in the EU

u This is ensured by the Treaties of the European Union, however some times there are tensions. u Free mobility of labor: some countries (UK especially) fear

that other EU citizens move there only to enjoy their social services.

u Free trade: countries have adopted along the years measures that favored national producers, then declared illegal by the EU Commission.

Monetary integration:

the Euro

u Modern EU integration reached its peak with the creation of the Euro

u Currently 19 countries use it (plus some non-EU: Montenegro, Kosovo as a facto currency)

u Adoption of the Euro is subject to a number of requisites…

u ...And it implied giving up independent monetary policy to a new institution, the European Central Bank

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The theory of optimum currency area by Robert Mundell

u “Optimal currency area theory states that regions that share certain traits should also share a currency. Multiple countries, parts of multiple countries, or regions within a country may be suited to having their own currency.

u The theory posits that implementing currencies by geographic and geopolitical region, instead of by country, leads to greater economic efficiency.

u An optimal currency area must meet four criteria to qualify, and some economists suggest a fifth.”

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Source: https://www.investopedia.com/terms/o/optimum-currency-area-theory.asp

The theory states that there are four criteria for an optimum currency area:

u “A large, available, and integrated labor market which allows workers to move freely throughout the area and smooth out unemployment in any single zone.

u The flexibility of pricing and wages, along with the mobility of capital, to eliminate regional trade imbalances.

u A centralized budget or control to redistribute wealth to parts of the area which suffer due to labor and capital mobility. This is a politically difficult one, as wealthy parts of the region may not wish to distribute their surpluses to those that are lacking.

u The participating regions have similar business cycles and timing for economic data to avoid a shock in any one area.”

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Source: https://www.investopedia.com/terms/o/optimum-currency-area-theory.asp

Monetary integration: the Euro

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Source: http://gonzoecon.com/tag/european-monetary- union/?print=print-search

Monetary integration: the Euro 33

The ECB is now also the single supervisor of European Banks, and its action during the 2011-2013 crisis was crucial to avoid the break-up of the Euro The ECB had to react rapidly and strongly while national governments were slow or fighting with each other on how to reform the EU

Countries in the Euro are still too different from each other: single monetary policy is complicated

Challenges for the EU in the near future

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“Brexit”: after the referendum in june

2016, the UK is expected to leave the

EU by 2021.

The “refugee crisis” is demonstrating that the

EU has no common strategy to handle

migrations and international crises.

Wave of anti-eu nationalist movements

in some countries proposing break-up of

the union (france, finland, greece, denmark, italy)

Democratic reform of the EU: it is perceived as a “bureaucratic institution” with no democratic base, because the EU

parliament still does not have much power.