Since the launch of the European integration (EI) process after World War II, European leaders believed that economic integration would lead more or less automatically to an “ever closer union” and finally a kind of political union. The economic success of the European communities in the first decades of European integration indeed made it easy to propagate the success of the so-called “Monnet method” of small, incremental steps focusing on economic integration. The euro crisis and the Brexit have thoroughly challenged this hypothesis.
What are the reasons for this difficult situation? Which role do theories of European integration play in this process? Did they deliver wrong predictions? Were they built on wrong presumptions? Do we have to readjust the theory, for example by defining-or rediscovering-the factors that determine European integration? Is it possible to improve the theoretical framework, in order to overcome Europe’s crisis ? In this book I will try to tackle these questions.
1.1 Economic Vs. Political Theories of European Integration
European integration has always been a complex interplay between economic and political factors. Economic and political theories therefore developed different approaches to explain European integration. Economic theories analyse the role and dynamics of free trade and markets in the integration process, whereas political science theories focus on the role of political actors and social institutions. The different approaches of both fields of theory are partly supplementary, partly contradictory. Difficulties in explaining European integration do often derive from the “contentious” relationship between economic and political theories of integration. Especially in the UK there exists a tendency to understand the European Union (EU) as a free-trade Zone, rather than a political union. It is worth it to take a closer look at both approaches, in order to understand how both factors influence the integration process.
1.1.1 Theories of Economic Integration
Economic theories of European integration argue that the main driver of European integration is economic advantage. Their main argument is that the creation of a huge common market of 510 million (for the EU in 2018) or 320 million (for the euro zone) consumers entails Pareto optimal welfare gains. The basic argument goes back to David Ricardo ’s trade theory. The modern theoretical framework of economic integration was developed by Viner (2014/1950) and Balassa (1962). According to Balassa, economic integration can be achieved by two strategies: a “dirigist” integration is planned and executed by governmental authorities, whereas the “liberalist” approach is based on market mechanisms. The dirigist approach follows a clear institutional pattern, defined by a political ideology and was applied, according to Balassa, by the authorities of Soviet -type economies and Nazi Germany during World War II . Arguably, also the European federalist movement can be assigned to this group. However, in the first half of the twentieth century, according to Balassa, only little attempts were undertaken to create custom unions or other forms of integration, with the exception of Nazi Germany’s Großraumwirtschaft (see Sect. 2.6), which tried to integrate the economies of small European satellite states into the German war economy (Balassa 1962, pp. 6–10).
The liberalist approach was dominant before and after the period of the world wars. It proposes the abolishment of trade and payment impediments and seeks to achieve an ever-greater degree of integration through market mechanisms (Balassa 1962, pp. 6–10). According to Balassa, a liberalist economic integration will take place in seven steps:This step-by-step approach seeks to first integrate the exchange of goods, then services, capital and, finally, labour. With an increasing degree of integration, monetary and fiscal policies should also first be coordinated and then be shared (Balassa 1962, pp. 2–3).
- 1.Preferential trading area
- 2.Free-trade area
- 3.Customs union
- 4.Common market
- 5.Economic union
- 6.Economic and monetary union
- 7.Complete economic integration
To explain the scope of economic integration, Balassa built explicitly on Alfred Marshall ’s concept of external economies (Marshall 1920/1890) that Marshall developed during the second wave of industrialization in the end of the nineteenth century in order to explain the economic developments of that time. External economies are created by “the general development of the industry” (Marshall 1920/1890, pp. 266, IV.IX), meaning the surrounding conditions for companies that influence the production possibilities of all firms but which are not directly influenced by them. Internal economies , in contrast, are those created inside an economic unit (e.g. inside a company) through better organization or a more efficient production procedure. External economies explain the emergence of economic clusters in industrialized countries. The scope of economic integration is to create a larger market, which allows for the realization a higher degree of specialization. As a consequence, a higher level of external economies can be achieved, which increases the welfare of the whole system. Economic integration can lead to more competition and, hence, to technological innovation which can influence other industries positively, creating external economies (Balassa 1962, pp. 159–162). However, a crucial question is which governance these external economies need.
Balassa defined economic integration as a process which “encompasses measures designed to abolish discrimination between economic units belonging to different national states ” or as a state which is characterized “by the absence of various forms of discrimination between national economics” (Balassa 1962, p. 1). However, this economic approach tends to neglect the role of political institutions. In this book, I will try to develop a deeper understanding of economic integration that includes the importance of political institutions. I will therefore not only focus on economic issues and scopes, but try to find an adequate synthesis between economic and political integration.
Even Balassa was not convinced of a pure economic logic, as he pointed out that there existed different political scopes to promote economic integration. The main objectives had been, first, to launch a process of French-German reconciliation and, second, to re-establish Western Europe as a third world power after World War II (Balassa 1962, p. 6). However, Balassa points out that the economics of the liberalist approach deal merely with the economic impact and not with the political scope of integration. Nevertheless, economic theory can, according to Balassa, help to define economic problems which need “political means and political processes” to be solved (Balassa 1962, pp. 6–7). However, liberal economists argue, building on this theoretical framework, that the European Union should mainly be a “loose club” to organize trade and capital liberalization . They predict advantages of a European market and monetary coordination, but they do not see a necessity of labour market integration , accompanied by monetary and fiscal integration . Integration should therefore stop somewhere between level 3 and 4 of Balassa’s hierarchy. This view is dominant in the Anglo-American world, Great Britain especially tried to reduce the role of the European Union to an economic agent .
The European Commission has put much effort into enhancing the economic integration theory and combining it with an economic reasoning for European political integration (for a more detailed overview, see Sect. 8.6). In this view, economic integration has to go hand in hand with political integration. Already in 1969 the Werner Report pointed out that the creation of a common market presupposes the creation of a common currency. Otherwise, externality problems within the market cannot be solved efficiently (European Commission 1970). The argument was later further developed by the Padoa-Schioppa Report (Padoa-Schioppa 1987) and the “One market, one money ” report of the European Commission (1990). However, scholars building on the framework of the Optimum Currency Area Theory (OCA-theory) argue that the euro area does not fulfil the criteria (or at least not all criteria) to create a common currency . Because of insufficient adjustment mechanisms inside the euro area , fiscal transfers and a political union will become inevitable in a currency union. Hence, since the outbreak of the euro crisis many economists have re-emphasized that the creation of a common currency presupposes the creation of a political union.
How do economic and political integration interact? Regarding the introduction of a common currency, two opposing theories were discussed in the 1990s. According to the “Krönungstheorie ” (coronation theory ), the common currency should have been the final step in a long process of economic convergence and harmonization of economic policies. Building on the view of the OCA-theory, these scholars argue that the countries which are to be integrated will first have to converge by trade and market integration, before the conditions of the OCA-theory are fulfilled and monetary integration can proceed. The coronation theory was supported by many German economists, for example the scientific director of the Bundesbank (and later of the ecb), Issing (1996). Supporters of the opposing “Lokomotivtheorie” (“locomotive theory ”) argue that the introduction of the euro can serve as a locomotive which leads European integration towards a political union . A common currency can be introduced, even if the economies of the common currency area have not yet fully converged. The common currency, the advocates of this theory claim, will enforce a harmonization of economic and financial policies.
In Sect. 8.6, we will see that both arguments are important, but entail some serious theoretical flaws. The assumptions of the OCA-theory are, as we will see, not offhandedly applicable to monetary integration in Europe. The coronation theory is therefore only partly applicable to Europe. The locomotive theory has shown its limitations during the euro crisis . The euro crisis has demonstrated that it is important to understand the conditions under which the introduction of a common currency will lead towards more convergence and in the end to a political union . Indeed, Nicholas Kaldor warned already in 1971 that “it is a dangerous error to believe that monetary and economic union can precede a political union” because if the “community control over national budgets generates pressures which lead to a breakdown of the whole system it will prevent the development of a political union, not promote it” (Kaldor 1978, pp. 206–207). It is therefore striking that the Commission did build its economic arguments on OCA-theory (see Sect. 8.6), although economists would agree that the EU does in some important aspects not fulfil its criteria.
Summing up, economic theories of European integration developed a coherent framework that explained successfully how a common European market could be established and which economic advantages it can bring. However, as we will see below, economic theories do still have weaknesses to explain by which political institutions this common market needs to be surrounded in order to be sustainable. Economic theories predi...