Economic Integration Stages and Models

Stages of Economic Integration

• Free trade area (FTA): reduces tariffs to zero between members.
• Customs union: reduces tariffs to zero between members and establishes a common external tariff.
• Single market: establishes a free flow of factors of production (labor and capital, as well as goods and services).
• Economic (and monetary) union: involves an agreement to harmonize economic policies.
• Political union: involves a common government.

Economic Integration: Basic Models

• Common Government: Full free movement (including people); harmonized tax rates; common monetary/fiscal policy; free movement of goods, services, capital, and labor; common external tariff; removal of tariffs between members.
• Political Union: Economic Union; Single Market; Customs Union; Free Trade Area.

The Single Market

• Treaty of Rome (1957): "ever closer union" among the peoples of Europe; aimed to establish a customs union, leading to a single market.

• Single European Act (1986): sought to establish a single market by 1992, encompassing four freedoms (free circulation of goods, services, labor, and capital).

• Delors Commission (1985): examined costs and benefits of an EU common market.

• Cecchini report (1988): "The Cost of Non-Europe", examined costs and benefits of an EU common market.

• Negative integration measures: eradicate all physical, fiscal and technical barriers to trade.

• Positive integration measures: common standards (basic social, environmental, etc. rights and standards) to create a level playing field for economic factors.

Cassis de Dijon

• 1979 European Court of Justice ruling: Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein (Cassis de Dijon).
• Landmark case for the European Single Market.
• Mutual recognition principle: an economic product sold in one member state should not be prohibited from sale anywhere in the EU, with exceptions for public health and safety.

Key Rulings for EU Law

• Van Gend en Loos (1963): vital importance to the development of EU law; principle of direct effect—EU law enforceable in national courts.
• Costa v ENEL (1964): crucial in EU law development; principle of primacy—EU law prevails over member state law in conflicts.

The Eurosystem

• Fixed exchange rate system until 1973 under the Bretton Woods system.
• Snake inside the tunnel: each EC currency pegged against the other and the USD.
• Snake outside the tunnel: USD is out of the picture, only pegged against each other.
• Fluctuation rate +/-2.25.
• European Currency Unit as a banking currency.

Three Stages to the EMU

• 1990-1993: free movement of capital among member states; closer cooperation of economic and central bank policies.
• 1994-1998: compliance with Maastricht convergence criteria.
• Since 1999: European Central Bank (ECB) established; exchange rates fixed; introduction of a single currency.

Maastricht Convergence Criteria

• Measured: Inflation, Budget deficit, Public debt, Interest rate, Exchange rate stability.
• How measured: Consumer price inflation rate, budget deficit as % of GDP, public debt as % of GDP, long term interest rate, deviation from a central rate.
• Convergence criteria: not more than 1.5 percentage points above the rate of the three best performing member states, reference value: not more than 3%, not more than 60%.
• Participation in ERM II for at least 2 years without serious tensions.

Stability and Growth Pact (1997)

• Aims to ensure member states maintain budgetary discipline.
• Medium-term budgetary objective: positions close to balance or surplus.
• Excessive deficit procedure (EDP): financial penalties for excessive deficits.
• Concerns include fear of high public debt, especially German fear of a weak currency. Fear of ECB having to purchase govt debt, no bailout clause.

Theory: Optimum Currency Area (OCA)

• OCA: economically closely linked by trade, goods, services, and factor mobility (capital, labor)—increases intra-EU trade.
• Countries should only adopt a single currency when mechanisms are in place to deal with transfer payments if one part is affected.
• OCA requires: high factor mobility and similar economic structure; fiscal federalism, ability to transfer resources.

EU's Economic Leverages

• Regulatory powers: market integration, setting common standards for health, environment, and workers' rights; ensuring a level playing field between producers.
• Redistributive powers: agricultural funds, cohesion funds, structural funds.
• Expenditure powers: own budget from VAT, agricultural levies, customs duties, and Gross National Product.

Eurozone Crisis

• Greece's financial crisis followed by other member states from 2009 onward.
• New institutions: European Financial Stability Facility (EFSF), European Stability Mechanism (ESM).
• Changes to Stability and Growth Pact: enhanced role for the European Commission to supervise governments, strengthened focus on deficits and debt.
• Banking Union: strengthened regulation and centralised supervision of banks in the Eurozone via the ECB.

Corona Rescue Package (Next Generation EU)

• Europe must come out of the crisis stronger.
• Stimulus package for the European economy.
• No member states should be facing the crisis alone.
• New solidarity mechanism and joint indebtedness on global financial markets.
• European Union will go into depth in global markets with joint bonds by the Commission, the ECB, and EIB.
• 750 billion euro in stimulus, including loans and grants.
• Spending plans controlled by the European Commission.

The Next Turn in the Single Market (European Green Deal)

• Digitalisation of the single market to retain global competitiveness.
• Corona impact: rescue funds for digital, innovative, and green businesses.
• European Green Deal (2019): merging climate targets into single market.
• 2050 target: first climate-neutral/net-zero emission continent, using regulatory tools and financial instruments (incentives or taxation) to achieve it.
• Update by 2030 target: to raise greenhouse gas emission reduction targets to 55% by 2030 and 90% by 2040, compared to 1990 levels.