Thursday, 7 February 2013

The European Integration Question: Economical or Political?

 Author: Thomas Viegas

With European nations struggling at present with the Sovereign Debt Crisis, which has engulfed the region, intense debate over the progress, desirability and future of both economic and political integration within the single market area has amplified. Originating in the aftermath of the Second World War, the creation of the European Coal and Steel Community (ECSC) in 1951 was declared by Robert Schuman, then French Foreign Minister, to be "a first step in the federation of Europe". Since then the Treaty of Rome, the Single European Act and the Maastricht Treaty have all contributed to furthering of economic and political integration between the nations of Europe. However the extensive economic problems that several countries in the Eurozone now face can only be solved with collective action and further integration. This has led to questioning whether it is possible to do this without deepening political integration within Europe as well. 

Economic integration is defined as “the elimination of economic frontiers between two or more economies’ with a frontier being any ‘differentiation over which actual and potential motilities of goods, services and production factors are relatively low”. Furthermore this type of integration refers to both market and economic policy integration, with the former however remaining the essence of economic integration. The fundamental motives for economic integration between economies are that, in theory, it will lead to increases in overall trade, actual or potential competition and growth rates within the integrated area. Moreover consumers in the area should experience lower prices, greater quality variation and choice as integration forces the allocation of resources to be more efficient.

Political integration has been defined as “the process whereby nations forego the desire and ability to conduct foreign and key domestic policies independently of each other, seeking instead to make joint decisions or to delegate the decision-making process to new central organs”. The keys features of this type of integration are its implications on sharing and delegating amongst member nations, the transfer of national sovereignty to pooled sovereignty and the creation of supranational institutions. Empirical studies have shown the consequences of increased integration include increases innovation and economic growth and the level of competition within both economic and political markets. There has been continual debate over whether political integration is a condition or a process and whether it has an ‘end point’, this is particularly important when considering the long term objectives the European ‘project’.

The current Crisis has exposed severe flaws in the economic integration process between Eurozone members, whilst also showing that political integration affects the optimality of the monetary union. The major flaw is the failure of a federal system in the zone to assist convergence in growth, as funds would be able to be allocated where they were needed in the case of asymmetric shocks (shocks to individual states). The crisis has resulted in the massive divergence of growth between ‘core’ states (Germany, France and Austria) and the ‘periphery’ (Spain, Portugal, Ireland and Greece). The argument for such a system uses the example of the US in which the federal budget redistributes income across regions, thus offsetting parts of the interregional differences in income.  

The cry for common bonds, or ‘Eurobonds’, to be issued has also been mentioned to allow troubled countries to borrow at a lower rate then they currently do from international markets. Not only would this consolidation of national budgets and debt would create a common fiscal authority which would protect member states from the prospect of defaulting, it would also be a very visible and constraining commitment that should ‘convince’ markets of the long term future of the union. In addition  the call for a ‘banking union’ between member states , to guarantee deposits of any individual in the zone, was strengthened when Ireland guaranteed all deposits for customers while others nations did not. In addition the necessity of a distinct eurozone budget has become apparent to allow the union to function much better because it would smooth the impact of asymmetric shocks too.

However these potential economic policies have encountered large political difficulties. The idea of a Federal system within Europe is one with extreme complications. The main one being that the policy would result in national governments surrendering the only available economic instrument left, Fiscal policy. Furthermore it would not only mean substantial changes in individual nation’s constitutions (assuming it would get past a referendum) but it would also have to be sold to the taxpayers of the zone that they would be financially assisting their ‘fellow European citizens’. At present these drawbacks appear unlikely to overcome due to upcoming national elections and the vocalness of citizens in core countries, which have already had to subsidise large bailout packages. The call for ‘Eurobonds’ has been met with strong resistance from nations, especially Germany, who enjoy negative real rates to borrow currently, who feel that this would increase the moral hazard risk. The risk being that, now with implicit insurance, members would issue too much debt.

Discussions over a joint ‘banking union’ have begun between the zone’s finance ministers but have already run into problems. The degree to which the ECB would have supervisory control has caused divisions, with Germany claiming that the supranational body should only monitor the 60 largest banks in the area while France believing  that the  Bank should be responsible for monitoring of all such institutions. The prospect of a distinct eurozone budget looks extremely bleak due to the inability of all EU members to agree on a collective budget for 2014-2020 and agreement looks increasingly unlikely. Moreover the current 2012 budget for the EU totals 0.98% of the regions Gross National Income and an effective budget for the eurozone would need to be considerably larger.

The drive for increased economic and political integration would involve the evolution of supranational institutions in the region. As mentioned before further economic integration would mean further powers being transferred to the European Central Bank, an organisation that was built to be completely independent from national governments. The loss of financial policy, already with the monetary type, to a body that is not accountable does not appear politically desirable. The prospect of the European Commission and Parliament to have greater influence in the management of regional policy is also small. Much debate already ensues over the usefulness of the Common Agricultural Policy (CAP) and with these institutions already heavily involved in competition, trade and industrial policy making; the giving up of more powers to Brussels would question the requirement of national governments.

The process of both economic and political integration between European economies has been largely interdependent and the deepening of the former type requires an increase in the latter. The economic situation that the continent was in after 1945 forced collective political action, which resulted in furthering economic ties between nations to improve prosperity in the region. The continuing removal of economic barriers between European economies led to successful economic growth in the latter half of the twentieth century, thus reinforcing the need for the former to induce the latter. The current Sovereign Debt Crisis however threatens the continuation of both types of integration. It has become obvious that the longevity of the integration process relies on furthering economic ties between economies but whether the political integration process has reached its ‘end point’ remains to be seen.

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