The Economics of European Integration

Theory, Practice, Policy

Willem Molle

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781351891103
• Topic: Business
• Subtopic: Business General
• Index: Business

Through four previous editions The Economics of European Integration by Willem Molle has established itself as a preferred textbook for students of the economics of the EU as well as a reliable reference work for those with a professional interest in the European Union. Carefully revised, this fifth edition takes into account changes in course requirements, new statistical information, and recent policy developments. It includes new material on: - the ongoing integration of the New Member States and the new forms of association with accession countries in Central and Eastern Europe; - the implementation of the Monetary Union and the performance of the euro; - the EU experience as a guide for the economic integration of other regions and for the improvement of world economic governance. Written in a clear style and combining original insights with authoritative analysis, this new edition will further enhance the book's reputation for providing the ideal introduction to the economics of the European Union.

Part 1
General Issues

Chapter 1
Introduction

Objectives

Progressive integration has been one of the most characteristic aspects of economic development in the last decades, worldwide and in Europe, where it has found expression notably in the European Union (EU). The EU has had a direct and profound influence on the economy of member states and third countries.

Much has been written about European economic integration. In the 1950s and 1960s, the discussion on economic integration was concentrated on international economic relations, as witness the specialised books on the subject from that period. In the 1970s and 1980s, the idea of economic integration quickly spread to the economics of the sectors of economic activity (agriculture, energy, manufacturing, services, transport) and to such aspects as market regulation, macro-economic equilibrium, monetary control, regional equilibrium or social welfare. At the end of the 1980s and during the 1990s, the issues of the completion of the internal market and the realisation of monetary integration were central to the discussion on European economic integration. In all fields mentioned, the body of specialised literature has grown very rapidly to become a real avalanche in recent years.

To students of the economic integration process per se this abundant specialist literature is inconvenient. Indeed, as economic integration touches ever more areas of society, more and more people are confronted by the bewildering complexity of the functioning of the EU. The past decades have witnessed the publication of a large number of books that aim to help readers find their way. The present book differentiates itself from these titles in that it aims to:

• place the wide variety of issues in a robust conceptual structure;
• integrate theoretical developments with the results of empirical research and of policy analysis;
• explain the logic of the dynamic processes;
• describe the structural features of the European economy;
• highlight the response of private companies to changes in the regulatory environment;
• depict the ‘historical’ developments so as to give a sound basis for the understanding of the present situation and the likely future development;
• set the European developments in the light of global developments;
• draw lessons from the EU experience for other regional integration schemes and for global institutional developments.

Three fundamental concepts

Integration

The expression ‘economic integration’ covers a variety of notions.¹ It may refer to the absorption of a company in a larger concern. It may also have a spatial aspect, for instance if it refers to the integration of regional economies in a national one. In this book, the expression is always used with respect to international economic relations. The definition of integration that is used here is the gradual elimination of economic frontiers between independent states. As a result the economies of these states end up functioning as one entity.

Economic integration is not an objective in itself, its rationale is to serve higher objectives, both of an economic and of a political nature.²

• Economic welfare. The prosperity of all participating countries is enhanced by overcoming the inefficiencies of nationally segmented economies through specialisation of production and through cooperation in policy making, the two basic elements of economic integration.
• Peace and security. When countries become dependent upon each other as a result of economic integration this reduces the chance of armed conflicts between them.³
• Democracy. If participation in a group that brings benefits through integration is made conditional on the existence of a parliamentary form of democracy, it is less likely that attempts to overthrow this system of government in a member country will stand much chance of success.
• Human rights. In much the same way, the respect for human rights may be safeguarded if this is set as a precondition for participation in a scheme for economic integration.

In this book we will not go further into the last three objectives, which are of a political nature; we will henceforth concentrate on the economic objective.

The term ‘economic integration’ can be interpreted in two senses. In a dynamic sense, it is the process whereby economic frontiers between member states are gradually eliminated (that is to say, whereby national discrimination between integration partners is abolished), with the formerly separate national economic entities gradually merging into a larger whole. In a static sense, it is the situation in which national components of a larger economic zone function together as one entity. The dynamic interpretation is the more usual, and the one to be used in this book. Of course, the static meaning of the expression will apply in full once the integration process has passed through its stages and reached its object.

The attention we give to the dynamics of integration is reflected in each of the following chapters. Indeed, for each of the aspects of integration we will describe how things have evolved over time while the EU passed though different stages of integration.⁴

Economics

As to economics⁵, three elements will recur throughout the book. We will analyse and describe:

• Theoretical principles. We will present a selection of theory most relevant to explaining the dynamics of economic processes associated with the integration of (segments of) the economy.
• Empirical facts. We will describe how the various segments of the European economy have evolved over the past fifty years under conditions of integration, using selected long-term statistical series on the one hand⁶, and using case studies of the behaviour of the business sector on the other.
• Public policy. We will discuss why and how the EU and national governments influence the economic process with policy measures; and what effect these interventions have.

We will not deal with these elements separately. On the contrary, while dealing with different aspects of integration we will combine a brief theoretical treatment with an analytical description and with the relevant elements of policy of the subject at hand.

In all parts of the book we will finally evaluate the results of the integration processes in economic terms. To measure advantages and disadvantages of integration, use will be made of the well-known concepts of welfare economics.

Europe

The word ‘European’ refers in principle to the whole geographical entity of Europe. In practice the European Union will be the focus of major parts of this book. The EU, extended since its foundation from six to nine, then to 10, 12, 15 and 25 member states, and open for further enlargement, forms the core of the European integration process. For reasons of simplicity we will henceforth use the term ‘European Union (EU)’ to indicate for the whole period of analysis and irrespective of the prevailing precise legal situation both the group of member states and the policy system drawn up on the basis of the various treaties.

While describing developments we will as much as possible refer to the whole area of the present EU. However, in many cases it is not feasible to include data for the period that countries were not yet members. The problem pertains mostly for the new member states (NMS). During the 1990s the NMS have gone through a transition from a centrally planned economy to a market economy. So, as for the period up to 1990, comparable data for the NMS are mostly lacking; therefore we have to limit ourselves to the former EU15.

European integration is not an isolated process: it takes place in a world in which national systems become more and more interwoven. Therefore we must keep an eye on external aspects. Speaking of labour market integration, for instance, we will discuss not only internal migration within the EU, but also migration from and to third countries, distinguishing between different groups of countries⁷.

Organisation of the material

Part 1 lays the foundations for the rest of the analysis. First it gives the fundamental concepts that will be used in this book, such as the definition of integration. Next it gives a theoretical treatment of the dynamics of the integration process. Third, it presents an historical overview of the process of integration, which makes it easier to understand the present dynamics. Fourth, it exposes the objective, the institutional set-up and the regulating capacity of the European Union.

Part 2 is devoted entirely to market integration. It starts with separate chapters on goods and services. The next two chapters deal with the liberalisation of the markets for production factors. In each of the chapters on labour and capital, the results of empirical studies are set on a solid theoretical basis and in the framework of the dynamic development of the European policy regimes for both production factors.

Part 3 is devoted to business. The integration of markets of products and of production factors permits entrepreneurs to make their operations more efficient. The way enterprise responds to the opportunities created by integration is analysed for five sectors of economic activity⁸. For each of them we will follow the same process. We describe first the EU regulatory framework. Next we depict the sectors’ development under conditions of integration, referring, wherever useful, to theoretical notions specific to the sector concerned. For each sector we will single out two branches for which detailed case studies will be presented. In these case studies we follow the same logic: description of the evolution of the regulatory framework; sketch of the development of the industry in terms of production, trade, etc; and, finally, the response of companies to their changing environment.

Part 4 deals with policy integration; the objective is to create the conditions for a balanced growth of the EU economy. For the discussion of these policies a division into chapters has been made into the following four objectives:⁹

• efficiency in allocation of resources, requiring mainly micro-economic policy instruments aiming at the efficient use of resources; this function comprises the policies aiming at the competitiveness of European business and the proper functioning of the internal market;
• stability of development, requiring mainly macro-economic and monetary policy instruments to attain such objectives as high growth rates, price stability and full employment;
• cohesion of constituent parts, requiring (redistribution) policies that aim to ensure that different social and regional groups will get a fair share in the benefits of integration should the market mechanisms fail to achieve an equitable outcome;
• external projection: at each stage of integration the union has to define itself vis-à-vis the outside world; its external relations develop from commercial policies in a customs union up to defence in a full union. The EU strives towards a situation in which the values it respects internally are also fostered globally.

The policies designed to realise the first two objectives are essential to gather the full benefit of integration, those for the third are indispensable to gaining and keeping the necessary political support from all participants in an integration scheme and for the fourth to contribute to a better world in which the EU has a stable and secure place.

Part 5 contains an evaluation of the results presented in Parts II to IV. In a first chapter we give the lessons from the EU development for the EU itself. In the following two chapters we draw lessons from the EU experience for the other regional integration schemes and for the design of global integration.

Specification of the readership

The book addresses primarily two group...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Figures
• List of Tables
• Acknowledgements
• List of Abbreviations
• Part 1 General Issues
• Part 2 Common Market
• Part 3 Sectors of Activity
• Part 4 Conditions for Balanced Growth
• Part 5 Conclusions and Lessons
• Bibliography
• Index