An economic union is the deepest form of economic integration between two or more countries that allows the free movement of capital, labor, and all goods and services. It also involves the harmonization and unification of social, fiscal, and monetary policies as well as labor market, regional development, transportation, and industrial policies. An economic union is also a common market with provisions for the harmonization of certain economic policies, most notably macroeconomic and regulatory policies. Since all countries would essentially share the same economic space, it would be counterproductive to operate divergent policies in those areas. The Latin Monetary Union in the 1800s, the Benelux Custom Union in 1944, and the European Union in 1957 can be given as examples for the existing economic unions. International institutions would be required to regulate economic, political, and social interaction within the union to ensure uniform application of the rules. These laws would still be administered at the national level, but countries would abdicate individual control in this area.
Any established economic union frequently includes the use of a common currency and a unified monetary policy. According to Paul De Grauwe, eliminating the national currencies and moving to a common currency is expected to lead to gains in economic efficiency for two main reasons. One of the reasons is to eliminate transaction costs associated with the exchanging of national money and to allow businesses to choose their locations freely. The other reason, for Ali El-Agra, is to eliminate the risk of uncertain future movements of the exchange rates. Eliminating exchange rate uncertainty improves the functioning of an economic union by allowing trade to follow economically efficient paths without being disproportionately affected by exchange rate considerations.
European Economic Union
Jorgen Hansen stated the ultimate goal for the European Economic Union was to create a European identity based on common values and a common desire to develop a Europe free of wars and to organize economic, political, and social relationships between the European member states and their peoples in a coherent manner. In order to create a dynamic framework for the European economies and to foster economic growth in that zone, a kind of economic interdependency among member states had to be created.
To be able to create the economic interdependence between countries, the first key goal was security. To be able to avoid the excesses of nationalism and of the nation-state system, in particular after two devastating world wars, establishing economic union in Europe was considered the best strategy. To protect countries from each other’s destructive attacks, having similar goals was the best policy for common security. The second key goal was economic. Because of World War I (1914–18), economic depression in the 1930s, and World War II (1939–45), countries adopted protectionist trade policies to protect their economies and to stand on their feet. Nevertheless, after their initial recovery, they later examined the benefits of establishing a single market to minimize the damages of wartime destruction and to keep alive their economic ideology. Therefore, it was commonly believed that building the economic union would benefit all member states in Europe once all trade barriers were lifted gradually. The third and the final goal was political. To protect Europe from the Soviet threat and its political ideology was the main deterministic goal in establishing an economic union.
The first six member states—Belgium, Germany, France, Italy, Luxembourg, and the Netherlands— came together in 1951 with the intent to establish the economic union. Then, in 1973, Denmark, Ireland, and the United Kingdom joined, although not as full members. In 1981 Greece, in 1986 Spain and Portugal, and in 1995 Austria, Finland, and Sweden joined the European Economic Union club. Since then the enlargement has continued and other nations have applied for membership.
The GATT (the General Agreement on Tariffs and Trade), the OEEC (the Organization for European Economic Cooperation), and the EPU (the European Payments Union) were also established to increase trade liberalization and economic integration. The GATT was established in 1947 to reduce tariffs between countries and later in 1995 was transformed into the World Trade Organization (WTO). The OEEC was established in 1948 to coordinate financial assistance to rebuild European countries after World War II. The third organization, EPU, was established in 1950 to secure convertibility of currencies when countries engage in trade. Initializing the Single Market in 1986 was the next step toward influencing the economic structure of the countries involved.
- Ali El-Agra, The European Union: Economics and Politics, 7th ed. (FT Prentice Hall, 2004);
- Paul De Grauwe, Economics of Monetary Union, 5th ed. (Oxford, 2003);
- Daniel S. Hamilton and Joseph P. Quinlan, Globalization and Europe: Prospering in the New Whirled Order (Center for Transatlantic Relations, Johns Hopkins University, 2008);
- Jorgen Hansen, European Integration: An Economic Perspective (Oxford, 2001);
- Wolf Sauter and Harm Schepel, State and Market in European Union Law (Cambridge University Press, 2009);
- Wistrich, After 1992: The United States of Europe (Routledge, 1990).
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