Routledge Handbook of the Economics of European Integration

Harald Badinger, Volker Nitsch, Harald Badinger, Volker Nitsch

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317751960
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

Routledge Handbook of the Economics of European Integration provides readers with a brief but comprehensive overview of topics related to the process of European integration in the post-World War II period. Its short chapters reflect the most up-to-date and concise research, written by a collective of experts on their own subjects.

The aim of this book is twofold. Firstly, the text illustrates the broad and diverse range of issues associated with European integration, and lastly, the key approaches and findings are summarised. Since institutional integration in Europe is an ongoing process, with possibly frequent and sometimes rapid changes, the chapters are intended to focus on the key features of the economic analyses of these topics.

A wide and diverse set of economic issues is of direct relevance for European integration. These topics cover various fields, ranging from the history of the European Economic and Monetary Union, EU Trade Policy and the stability of international trade, single market issues over fiscal, monetary and other policies, the crisis that faces the Euro area, and institutions such as EU Council of Ministers. Not surprisingly, many of these issues have also been analysed from a European perspective.

This handbook is designed to provide students, researchers, the public and policy makers with ready and accessible knowledge of issues related to European integration and will provide the definitive overview of research in the area.

PART I

History

1

WEST EUROPEAN ECONOMIC INTEGRATION SINCE 1950

Crafts Nicholas

1. Introduction

At the end of the Second World War, it is unlikely that anybody envisaged the extent of European economic integration over the next seventy years. The interwar period was notorious for a backlash against globalization that entailed competitive devaluations, rampant protectionism together with international rivalries that precluded effective economic cooperation. By 2014, the European Union (EU) comprised 28 countries with a combined population of about 500 million people, of which 18 shared a single currency.

This raises a number of obvious questions which this chapter addresses. These include examining the chronology of economic integration and reviewing which countries participated and what the reasons were for their different decisions. Beyond explaining how European economic integration came about, it is also important to explore what were its economic effects both on the growth of international trade and also to evaluate its implications for levels and rates of growth of incomes.

Making such assessments is, of course, difficult. It requires prediction of the counterfactual, i.e., what would have happened in the absence of integration. The economic models and econometric techniques employed to carry out this analysis today are rather different from those which were commonly used at the time. For example, as we shall see, a modern approach to measuring the costs and benefits of EU membership for the United Kingdom is very different from the methods of the 1970s when the economic implications of the UK’s accession to the European Economic Community (EEC) were hotly debated by British economists. The important developments in economics include thinking in terms of endogenous growth and gains from trade that go beyond welfare triangles while better procedures to address issues arising from endogenous variables and greater sophistication in the use of gravity models are notable advances in applied econometrics.

The chapter proceeds as follows. In section 2, a brief history of the contours of post-war European economic integration is provided while section 3 looks at the related issues of the implications for trade costs and trade volumes and the reasons for the evolution of the membership of the EU. Section 4 investigates the effects on income levels and growth rates while in section 5 the history of the debate over the UK membership of the EU is reviewed. Section 6 concludes.

2. Economic integration since 1950

The idea of European integration was, of course, not new at the end of the Second World War. The nineteenth century saw important steps towards reductions of policy barriers to trade with the unification of Germany and Italy and a proliferation of commercial treaties (Pahre, 2008). In the interwar period, in the context of the tensions resulting from the First World War and its peace settlement, there was considerable interest in greater political integration of Europe which had its most notable manifestation in the Briand Plan for a ‘United States of Europe’ put forward by the French government in May 1930 with a view to managing the ‘German problem’ (Weigall and Stirk, 1992) but which was quickly overwhelmed by events.

A successful approach to European economic integration after the Second World War had to return to the question of how to manage the relationship between (West) Germany and the rest of Western Europe to obtain the benefits of economic cooperation and, linked to this, also to find a politically acceptable form of trade liberalization. The approach that developed was pragmatic and recognized the continuing central role of the nation state, regulation of trade in key areas like agriculture and the pursuit of industrial policies (Milward, 1992). The design of the European Coal and Steel Community which became operational in 1952 provided an institutional blueprint which could be adapted for wider use. American support for integration as a bulwark against the spread of communism was made concrete through the provisions of the Marshall Plan (Crafts, 2013).

Against this background, this section provides a brief descriptive outline of the process of post-war European economic integration. As Sapir (2011) has reminded us, this can usefully be approached using the ideas of Balassa (1961). Balassa distinguished between different degrees of increasingly deep economic integration working up from free trade area to customs union, in which there is also pooling of sovereignty in a common external trade policy, to common market, within which factors of production can move freely, to economic union, in which some economic policies are harmonized, to complete economic integration, where there is political union with a supra-national authority. The last might be thought of as a ‘United States of Europe’. A list of key dates is provided in Table 1.1.

The Organization for European Economic Cooperation (OEEC) which was established in April 1948 provided ‘conditional aid’ of about $1.5 billion to back an intra-Western European multilateral payments agreement: in 1950 recipients of aid under the Marshall Plan were required to become members of the European Payments Union (EPU). The EPU was a mechanism that addressed the problem of the absence of multilateral trade settlements in a world of inconvertible currencies and dollar shortage. In such circumstances, the volume of trade between each pair of countries is constrained to the lower of the amount of imports and exports because a surplus with one country cannot be used to offset a deficit with another. The EPU provided a multilateral clearing system supplemented by a credit line for countries temporarily in overall deficit. This was facilitated by the United States through conditional Marshall Aid acting as the main ‘structural creditor’ to address the difficulty that would otherwise have arisen from the prospect that some countries were likely to be persistent debtors.¹

In 1958 the EEC was formed by the original six countries following the signing of the Treaty of Rome in 1957. The signatories pledged to lay the foundations of ‘ever closer union’ among the peoples of Europe and Article 2 committed members to form a customs union, to establish a common market and to harmonize policies. Article 3 spelt out what this would comprise including a common external tariff, a common agricultural policy, the abolition of barriers to trade and of obstacles to freedom of movement of capital and labour, a competition policy regime, and the coordination of policies to avoid balance of payments disequilibria. In contrast, the European Free Trade Association (EFTA) was set up in 1960 with the much more limited aim of establishing a free trade area. The EEC customs union was achieved in 1968 but the common market took much longer and awaited the Single European Act which addressed non-tariff barriers to trade, liberalized trade in services and ended capital controls and was (less than fully) implemented from 1992. The Maastricht Treaty of 1992 was a significant step towards economic union and paved the way to a single currency which further reduced trade costs as well as eliminating exchange rate instability; the euro started in 1999, initially with 11 countries. Complete economic integration is still out of reach.

Table 1.1 A chronology of economic integration of markets

1950	European Payments Union starts
1952	European Coal and Steel Community established
1958	European Economic Community starts with 6 members (Belgium, France, Italy, Luxembourg, Netherlands, West Germany)
1958	European Payments Union discontinued
1960	European Free Trade Association starts with 7 members (Austria, Denmark, Norway, Portugal, Sweden, Switzerland and the UK)
1962	Common Agricultural Policy begins
1968	EEC Customs Union completed and Common External Tariff established
1970	Iceland joins EFTA
1972	EEC-EFTA free trade agreements signed
1973	1st Enlargement: Denmark, Ireland and UK join EEC; Denmark and UK leave EFTA
1981	2nd Enlargement: Greece joins EEC
1986	3rd Enlargement: Portugal and Spain join EEC; Portugal leaves EFTA; Finland joins EFTA
1987	Single European Act comes into effect
1990	German unification: former East German lands join EEC
1991	Liechtenstein joins EFTA
1992	EEC and EFTA establish European Economic Area
1993	Maastricht Treaty establishing European Union comes into effect
1995	4th Enlargement: Austria, Finland and Sweden join EU and leave EFTA
1999	Eurozone established with 11 member countries (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain)
2001	Greece joins Eurozone
2004	5th Enlargement: 10 countries join EU (Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, Slovenia)
2007	6th Enlargement: Bulgaria and Romania join EU
2007	Slovenia joins Eurozone
2008	Cyprus and Malta join Eurozone
2009	Slovakia joins Eurozone
2011	Estonia joins Eurozone
2013	7th Enlargement: Croatia joins EU as 28th member
2014	Latvia joins Eurozone
2015	Lithuania joins Eurozone as 19th member

Over time, the membership of the EEC/EU expanded considerably through successive enlargements while that of EFTA has shrunk with defections to the EEC/EU. In 1973, the UK and two of its close trading partners Denmark and Ireland joined the EU. In the 1980s, the newly democratic Greece, Portugal and Spain acceded and in 1995, following the establishment of the European Single Market, Austria, Finland and Sweden left EFTA to join the EU. In 2004, eight former communist-bloc transition economies joined the EU together with Cyprus and Malta followed by further transition economies’ accessions by Bulgaria and Romania in 2007 and Croatia in 2013 while a number of these new members were admitted into the Eurozone soon after accession. These southern and eastern enlargements of the EU, especially the latter, considerably increased the range of income levels within the EU.

3. Implications for trade

European economic integration has had significant impacts on the extent and direction of international trade. As these implications became apparent, this information influenced non-members’ perceptions of the costs and benefits of membership of EFTA versus the EEC/EU. The integration process involved reductions in trade costs and, of course, this was conducive to increasing the volume of trade. However, regional trade agreements by their very nature discriminate between members and outsiders rather than applying most-favoured-nation principles to trade liberalization. The EEC and EFTA were acceptable under Article XXIV of the GATT but involved both trade creation and trade diversion as barriers to trade were unevenly reduced. In other words, while in most cases economic efficiency was increased through the replacement of higher-cost by lower-cost producers, there would be some instances where the opposite was true. This also implies the possibility that there were external losers as well as internal winners and that the overall economic outcome was a net sum of gains partly offset by losses.

Table 1.2 reports estimates of reductions in trade costs obtained using a gravity model.² Trade costs inferred in this way are a composite of all barriers to trade and therefore include the impact of transport costs as well as policy measures. However, the major influence in these decades, and certainly the major difference between these pairs of countries, accrued from the pace of trade liberalization as the protectionism of the interwar period was reversed. Overall, the picture is one of large reductions in trade costs to levels which were much lower than in 1929. It is also very striking that these reductions start sooner among the original six EEC members, were delayed for UK and Spain, and were quite modest for pairs of...