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Economic integration involves the coordination of the economic and trade policies of many countries resulting into one trading bloc. Economic integration entails the setting of common trade tariffs and allowing free movement of human resources and capital across the borders of countries.
It also involves the coordination of fiscal and monetary policies between countries. The European Union (EU) is an economic union, where there is free movement of goods and services among member states, common external tariffs, free movement of labor and capital and a common currency among member states.
The EU economic integration has been a source of macro-economic benefits to the member states. However, economic integration also brings challenges among them lose of sovereignty of countries and low influence of small economies in the formulation of trade policies. Furthermore, the integration has the risk of developing protectionist trade barriers against countries outside of the economic union.
The European Union is an economic union made up of twenty-seven European countries. The integration came into existence after the World War II when the major governments of Europe set to unify their coal and steel industries. This culminated into the signing of the Rome treaty in 1957 that gave birth to the current European Union. The European Union has established a common customs union among member states.
In this arrangement, trade tariffs among member states are eliminated and a common external tariff on imports from the other countries put in place. The customs union agrees on the tariff rates of different imports from the other countries that are applied by all the member states. The European customs union has led to improved economic development in the region and established closer political and cultural ties among the member states.
The European Union common market facilitates the movement of goods and services, sets common external tariffs among the members and allows free movement of capital and labor across the borders of member countries.
Because of the common market, the citizens of any member country in the European Union can work and invest in any country within the EU without any restriction. The European Union has an established monetary union where countries forming the EU have a common currency, the Euro. The central monetary authority of the European Union determines a common monetary policy for the entire EU member states.
The signing of the European common currency treaty in 1991 led to the implementation of a single EU currency unit, the Euro. The creation of the European Union’s monetary authority reinforced the integration effects as it led to reduction in trade barriers through the elimination of the costs of exchange rate transactions. It also promoted clear comparisons of prices of commodities among the countries.
Benefits of Economic Integration
The economic integration of the European countries into the European Union contributed to the expansion of trade in the region (Baldwin and Wyplosz 2004, 45). The removal of trade barriers has led to the establishment of the European single market with a population of over 500 million people.
The large population provides a market for companies from the member has led to the establishment of the European single market with a population of over 500 million people. The large population provides a market for international companies from the member states to expand their growth.
The single market provides immense opportunities to businesses and the EU citizens alike with 2.15% of the GDP of EU countries coming from the trade in the single market. The single market has led to creation of jobs with more than six million jobs created in the last decade. This has also led to decline in the unemployment rates among the EU member states.
The member states of the European Union also benefit from the single monetary unit. The single currency (the Euro) promotes trade because it is easier to notice price alterations. In addition, the single currency ensures that prices of commodities are set at equal value in the different countries of the European Union.
The single currency leads to reduction in transaction costs as the exporters and consumers do not incur transaction costs associated with many currencies. The inter-currency conversion charges, costs associated with management of many currencies and cross-border banking charges are avoided with a common currency.
In addition, the single European monetary unit facilitates the removal of exchange rate related risks allowing companies to be competitive. Formerly, hedging was the only way of reducing risks associated with currency exchange. This meant that exporters could not avoid exchange rate risks especially when using currencies not intensively traded. However, with the single monetary unit, exporters have long-term protection against fluctuations in exchange rates.
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The elimination of the many national currencies of the EU member states and the adoption of the Euro increased market transparency. The prices of products in the member states are directly comparable because of the single monetary unit (Neal and Berbezat 1998, 123). This has enhanced cross-border competition and increased trade flow across the EU trading block.
The increased price transparency encourages availability of trade information across the borders and ensures better allocation of capital and resources among the states. The removal of trade barriers to products produced within the EU member states promotes competition characterized by introduction of new brands of products into the various national markets.
The increase in cross-border price transparency, intra-brand competition is increased as price discrimination strategies are avoided. In addition, the transparency in prices provides a more effective way of comparing mergers and acquisitions of international companies. It also facilitates effective comparisons of balance sheets and operating capital of companies before acquisitions can occur.
The Launch of the Lisbon strategy in 2000 aimed at stimulating economic growth and creating more jobs for EU citizens. The policies adopted allow resource mobility across the borders. The increased labor mobility led to overturning of the employment imbalances across countries and increased the availability of labor to high-employment
Effects on Industrial Development
The long-term implications of EU integration involve the increase in the number of firms entering the market (Artis and Nixon 200, 115). The integration also encourages competition between industries across the borders of EU member states. The integration has also affected the location of industries.
Firms expand activities to exploit new markets beyond their home markets and acquire new resources. The EU integration also has an impact on industrial specialization. The decline in the cross-border transactions has allowed inter-industry specialization among the member states. The product market integration can also stimulate innovation and knowledge transfer among the member states.
Problems associated with EU Integration
When states choose to join the EU, they risk losing their national sovereignty. The EU member states agree to obey all the regulations and policies of the integration and by signing this agreement, states risk their sovereignty. According to Dyker the legal system of the EU does not recognize the sovereignty of the member states (2010, 54).
Instead, the states are subjected to control by the regulations of the EU. The European Court of Justice disciplines member states who contravene any of the agreed trade policies. Thus, the national sovereignty of member states is gradually reduced as they are forced to follow the EU law.
The EU integration affects industrial specialization as the integration encourages harmonization of income levels and resource distribution among the member states. The reduction in exchange rate of currencies results to a decline in uncertainty in cross-border transactions.
This encourages intra-trade industrial development that results in a decline in industrial specialization. The EU integration is disadvantageous to small states, which lack much influence to the formulation of policies as compared to large nations (Bindi 2010, 95). Small states have less influence on security issues as the larger nations dominate
The EU integration has led to the creation of a large market, which has helped promote the economic status of the region. The creation of a common market promotes expansion of trade and allows companies to trade in the international market. The monetary union has promoted inter-border transactions that have contributed immensely to the expansion of trade between the states.
In addition, the integration has encouraged environmental protection and stability in the region. However, the integration has disadvantages among them, lose of sovereignty of countries and low influence by small states to policy making. It suffices to say that the European Union membership has many advantages to the member states as opposed to the risks.
Artis, Michael J, and Nixon, Frederick J. The Economics of the European Union: Policy and Analysis. London: Oxford University Press, 2001.
Baldwin, Richard M, and Wyplosz, Charles L. The Economics of European Integration. New York: McGraw Hill publishers, 2004.
Bindi, Federiga H. The Foreign Policy of the European Union: Assessing Europe’s Role in the World. USA
Brookings Institution Press, 2010.
Dyker, David A. The European Economy. New York: Pearson Education, 1999.
Neal, Larry H, and Berbezat, Daniel S. Economics of European Union and Economies of Europe. London: Oxford University Press, 1998.