Economic Integration, the process through which countries of the EC grow closer together, has been a central aim of the EC since the signing of the Treaty of Rome in 1957. This agreed to set up a basic common market in goods, services, capital and labour. Balsa (in Tsoukalis, 1993 p77) lists 5 stages of economic integration. Starting with no integration, they progress through to an Economic Union. A Free Trade Area is the least integrated, simply allowing tariff free trade amongst members. A Customs Union adds a common external tariff, removing the need for extra forms at internal borders to determine country of origin. A Common Market moves the integration process a step further, to include free movement of factors of production. Finally, full integration as in an Economic Union also includes "unification of monetary, fiscal and other policies"(Tsoukalis, 1993 p77). Under the Treaty of Rome, the EC aimed to achieve a Common Market within 12 years. It also entered some areas of Economic Union, with agricultural policy. Countries that entered the EC after the initial signing were given a fixed amount of time to achieve integration of current policy. For instance, Britain was given 3 years, Spain and Portugal six. This was in part evidence that the community was now more deeply integrated, and evidence that it was becoming harder to integrate. The argument for further integration has always remained the same: It makes cross border trade both easier and cheaper. This leads to greater specialisation and therefore greater output. It also leads to larger economies of scale and possibly lower prices. The Checcini report (in Wise et al, 1993 p101) said that the 1992 reforms could lead to a 7% increase in GDP, 5m new jobs and no inflation. Although there have been upsets, the EC continues to strive for more economic integration with varying degrees of success.
The integration of the regional markets in the EC into a single market has been one of the principle strands of economic integration so far. This would lead the community to a Common Market, or single European Economic Area (McDonald et al, 1992 p16). The original intention of the EC was to create a common market by 1969. In practise, they had only managed to achieve a Customs Union by 1968. The EC had integrated, but it had failed to integrate as fully as they had agreed to. This must not be dismissed as total failure though. Countries that joined at later dates managed to get all current legislation in place by or near the target date. Even a Customs Union had never before been achieved on such a scale.
Despite the success in creating a Customs Union, McDonald (1992) points out that growth towards a Common Market was, at the very least, supposed to be continuous. By 1985, one of the commissions white papers found "a long list of physical, technical and fiscal barriers" still in place. Physical Barriers include customs officers, technical barriers include safety standards and fiscal barriers taxation differences. All of these had to be addressed if the community was to implement a Common Market. This led the Single European Act to require that an "area without frontiers in which the free movement of goods, persons, services and capital is ensured" (McDonald et al., 1992 p18) by the end of 1992.
1992 was one of the most talked about pieces of recent legislation. As Swan (1990, p152) shows, pre 1992 there were considerable obstacles to the movement of capital and labour. There can be no doubt that the 1992 reforms have, to an extent been successful. Labour is free to move to live anywhere within the EC and capital has been freed up substantially. Unfortunately to achieve the integration, the EC has had to sacrifice some of its most prised policies (such as the ERM) along the way. Although a case of successful integration, its economic effects appear to have been disastrous. Europe spent 1993 in recession, and exchange rates have been more volatile. Although there have been problems associated with the internal market, the Economist (1994, p8) cites that Spanish lorry drivers crossing internal frontiers have been able to dispense with 70 forms. This must represent massive savings in wasted man hours, and lead to more inter block trade.
1992 has been unable to remove all the problems in the current system. Differing standards remain and governments still prefer to buy from their own nations' companies. The reforms appear to have fallen well short of expectations. The Economist (1994, p10) recognises that this is in part due to the problems of exploiting the larger market that still remain. Legal systems and languages are still very different. Transport networks are not yet designed to serve intra-country trade.
To pass the 1992 bill, several assurances for certain industries were built into it. There was no free market in insurance until this year and liberalisation of telecommunications need not occur until 2003 in poor countries. Of the 282 pieces of legislation that Lord Cockfield identified that needed to be passed, 60 remain unlegislated in any country (Economist 1994 p10). Only just over 100 have been implemented in every country and of the remaining pieces, the vast majority have only been passed by Britain and Denmark. France and Greece have passed notably fewer. It is perhaps a paradox that the EC's greatest advocates are it's slowest legislators.
To integrate further to an Economic Union, the EC also needs to consider Monetary Union. Attempts to achieve this have existed since 1969, when EMU was included in the Hague summit agreement. The led to the Werner report stating that "EMU was to be achieved in three stages within an overall period of 10 years" (Tsoukalis, 1993 p179). This attempt relied on the fixed exchange rate system created by the Bretton Woods agreement. When this vanished, so did EMU. A further attempt at EC integration had failed.
It did not take long for the European Commission to decide that wide fluctuations in currencies were "incompatible with CAP and a Common Market" (Dyker, 1992 p138). This led to the creation of the "Snake in the tunnel", system with regularly changing fixed bands. Despite repeated commitment to EMU, by 1976 Sterling, the Punt and the Krone had all left the system. The departure of the French Franc brought about its end.
By the end of the 1970's, when monetary integration was supposed to have occurred by, volatility was the norm with European currencies. In a vain hope of trying to attain monetary integration, countries resorted to exchange rate controls. This was completely contrary to the planned liberalisation of exchange rates. Economic integration policy had failed. EMU was "the biggest non-event of the 1970's" (Tsoukalis 1993, p182).
The next attempt at integration was via the ERM, part of the EMS which also included the ECU and specialist short term finance. The ERM worked on a system of fixed bands in which currencies would trade. These bands were supposed to be changeable, but by 1989 it was clear that currencies preferred not to revalue or to devalue. The system had become fixed. This is not necessarily a criticism, since it was intended to move to fixed rates eventually. It would appear though that with the removal of barriers to the movement of capital, the system was at its weakest when it was needed most by a currency. This led to its virtual collapse only being avoided by widening the bands to 15% (from 2.25%). Again a piece of integration legislation appears to have failed.
Despite this, McDonald et al (1992, p43) point out that the system was not a total failure. There was a significant convergence of interest and inflation rates. This led to greater predictability of exchange rates. Although lost to an extent with wider bands, Europe's inflation rates are still much closer together and at the lower end of the spectrum.
The virtual collapse of the ERM did not cause plans for EMU to disappear. Under the Delors plan and the Maastricht treaty, EMU must start sometime between 1997 and the end of 1999. Only Luxembourg currently meets all convergence criteria. When originally set, these were thought to be easily obtainable but now look increasingly hard. Despite this the Commission still plans to implement EMU by 1999. If it happens this century, it is most likely to happen in 1999. The Economist (1994, p16) also suggests a "2 speed Europe" will develop. This will speed integration for some, but could well slow down the overall process quite considerably. One further barrier to EMU is the existence of sufficient notes. If it is to take place by 1999 in every country, then all the central banks will have to start manufacturing notes this year. Not even their design has been agreed upon. Britain also has an opt out, further proof that integration is not automatically thought to be a success.
A full Economic Union also requires the implementation of other policies, such as agricultural policy and competition policy. The EC has always engaged in these but with varying degrees of success. It is this area where much future integration will come.
Agricultural policy is one of the few areas that the EC has managed to centralise very effectively. Much of the pricing for the Common Agricultural Policy is now carried out in Brussels. Prices and export guarantees are all centrally controlled. In 1987 the Commission cited (in McDonald et al, 1992 p158) that the CAP had led to both improved efficiency and security of supply. This was supposed to be due to the integration that had occurred. It seems doubtful that it would not have occurred without it and the system looks much harder to reform now that it is so centralised. This perhaps represents one of the problems with the Economic Integration that has so far taken place; it was not designed with reform in mind.
The EC has also made attempts to integrate competition policy. This has been done in much the same way as the US, with all states in control, unless it is an interstate company. Under the Treaty of Rome restrictive practices were banned. Mergers of companies with a combined turnover of ECU5 Bn were to be looked at. In Practise the EC has stopped very few mergers and this result appears to conflict with the policy. The EC has also found that it cannot stop subsidies to companies such as Air France (Economist, 1994 p12) that are being put out of business by other EC firms. It would appear that competition policy has either not integrated well, or not integrated sufficiently.
The EC was set up in 1957 with the intention of ever closer integration. Indeed under the terms of GATT, this is the only way it is legal. The original Treaty of Rome hoped to implement a Common Market in twelve years. The Hague agreement extended this to Monetary Union by 1979. Neither of these goals was achieved. Indeed the EC has failed to complete most the integration goals by the given deadlines. Even the Single European Act has not had all its legislation passed by governments yet, nearly 2 years after the Single Market was hailed as a big success.
But it is wrong to consider that the EC has not had any successful integration. The Community has managed to achieve a Customs Union, and then a Common Market, albeit nearly 25 years after the first deadline. Inflation and interest rates are now much more converged than at the end of the 1970's and look likely to stay that way. It is perhaps more correct to consider that the EC has set itself unreasonable deadlines. The EC has integrated and now has the highest total GDP of any Economic Area. The total spending power of its consumers is higher than anywhere else in the world. It is now hard to believe that these same countries were at war with each other 50 years ago. The EC has simply failed to live up to its own high hopes of rapid economic integration.
Dyker, D (1992), The European Economy. Longman
Economist, The (1994), Survey of the European Union. October 22-28
McDonald, F, Dearden, S European Economic Integration. Longman
Swann, D (1992), The Economics of the Common Market. Penguin.
Tsoukalis, L (1993), The New European Economy: The Politics and
Economics of integration. Oxford University Press.
Wise, M, Gibb R (1991) Single Market to Social Europe: The European
Community in the 1990's. Longman
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