Chapter Eight

Regional Economic Integration

Upon completion of this material, you should be able to:

Describe the levels of regional economic integration. Analyze the advantages and disadvantages of the increasing use of regional trade agreements. Summarize the political structure of the European Union. Evaluate the advantages and disadvantages of the use of the euro by the euro-zone countries.

Regional Economic Integration

Regional economic integration (REI) refers to preferential trading arrangements in which member countries agree to coordinate their trade, fiscal, and/or monetary policies. Agreements seek to eliminate tariff and nontariff barriers to the flow of goods, services, and/or factors of production between member nations.

Reasons for REI

Economic Benefits
Increases world production Stimulates economic growth Provides greater gains than the WTO

Political Benefits
Provides incentives for political cooperation Enhances economic clout

Levels of Economic Integration

Free Trade Area Customs Union Common Market Economic Union Political Union

Levels of Economic Integration

Remove Internal Barriers Free Trade Area Common External Barriers Free Movement of Factors Common Economic Policy Political Integration

Customs Union

Common Market

Economic Union

Political Union

Free Trade Area

Remove Internal Barriers Free Trade Area Common External Barriers Free Movement of Factors Common Economic Policy Political Integration

Customs Union

Common Market

Economic Union

Political Union

Customs Union
Remove Internal Barriers Free Trade Area Common External Barriers Free Movement of Factors Common Economic Policy Political Integration

Customs Union

 

Common Market

Economic Union

Political Union

Common Market
Remove Internal Barriers Free Trade Area Common External Barriers Free Movement of Factors Common Economic Policy Political Integration

Customs Union

Common Market

  

  

Economic Union

Political Union

Economic Union
Remove Internal Barriers Free Trade Area Common External Barriers Free Movement of Factors Common Economic Policy Political Integration

Customs Union

Common Market

Economic Union

         

Political Union

Political Union
Remove Internal Barriers Free Trade Area Common External Barriers Free Movement of Factors Common Economic Policy Political Integration

Customs Union

Common Market

Economic Union

Political Union

             

Forms of Economic Integration

REI and the WTO

GATT s Article 24 allows regional trade arrangements if:
an agreement impacts substantially all sectors of trade among the members and non-members are not exposed to more restrictive trade than before the agreement.

Afta Doha. (2008, September 6). The Economist, 388(8596).

Gordon, B. K. (2008, September 5). Bilateral trade-off. Wall Street Journal Asia, p. 11.

REI: Friend or Foe?

Successful negotiations for regional trade agreements appear to be coming easier than progress with the Doha Round. The participating nations in a regional trade agreement are more likely to be able to reach agreements that remove at least some barriers to trade.

REI: Friend or Foe?

Regional trading blocs are increasing in importance and may pit one bloc against another. Regional trade agreements may be diverting more trade than they are creating. The comprehensive trade packages discussed under the WTO would more efficiently use the world s resources.

The European Union (EU)

The EU is composed of 27 member countries and has approximately 500 million inhabitants. The EU s member states combined represent the world s largest economy by GDP, the seventh largest territory by area and the third largest by population. The EU has 23 official languages and an operating budget of 141 billion.

Evolution of the EU
Year Countries 1957 Belgium, France, Germany, Italy, Luxembourg and the Netherlands 1973 Denmark, Ireland and the United Kingdom 1981 Greece 1986 Portugal and Spain 1995 Austria, Finland and Sweden 2004 Malta, Cyprus, Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Slovenia and Hungary 2007 Bulgaria and Romania

Expansion of the EU
Turkey, Croatia and the Republic of Macedonia are Candidate Countries set to join once conditions are met. Iceland applied to join the EU in July 2009.

Political Structure of the EU

European Commission Council of the European Union European Parliament Court of Justice

European Commission
The Commission represents the interests of the EU as a whole and is the executive arm of the EU.

Structure of the Commission

Commissioners are nominated by their national governments to serve five-year renewable terms and must be approved by the Parliament. There is one Commissioner per member state and each Commissioner has a specific policy area of focus.

Responsibilities of the Commission

Proposes legislation to Parliament and the Council. Manages and implements the EU budget. Represents the EU in external trade and the World Trade Organization. Monitors compliance with EU laws by member nations.

Commission and Competition Policy

The Commission controls market power by regulating anti-competitive practices and abuse of dominant market positions. The Commission has aggressively gone after companies such as Microsoft and Intel. Some contend the Commission s penalties are too large since the Commission acts the prosecutor, judge, and jury.

Council of the European Union

The Council represents the individual member nations and is the main decision-making body of the EU.

Structure of the Council

Consists of ministers from the national governments who serve at the pleasure of their home governments. There is one representative per member state at a Council meeting, but minister attendance is determined by the topic to be discussed. There are nine configurations of the Council, including councils for Economic and Financial Affairs, Agriculture, and Education.

Responsibilities of the Council

The Council shares with Parliament the responsibility for passing EU legislation and for approving the EU budget. Coordinates the broad economic and social policies of the member nations. Signs international agreements between the EU and other countries or international organizations which have been negotiated by the Commission.

European Parliament
The Parliament represents the EU s citizens and is the directly-elected legislative arm of the EU.

Structure of the Parliament

Members are elected every five years by the people of the member nations. The number of seats per nation is based on population.

Responsibilities of the Parliament

Parliament, in consultation with the Council, passes laws presented by the Commission. Parliament approves the Commissioners and has the power to dismiss the Commission. Parliament and Council share joint authority for approving the EU s budget.

Court of Justice
The Court of Justice is the judicial arm of the EU and it is the final arbiter in disputes about EU law.

Court of Justice
The Court ensures EU law is interpreted and applied in the same way in all EU countries. The Court has one judge from each member country, who serve renewable terms of six years. The Court of First Instance addresses cases related to competition law.

The Euro Zone

A subset of 17 nations of the EU use the euro as a common currency.
Estonia began using the euro on January 1, 2011. Most of the newest EU members currently do not yet use the euro. United Kingdom, Denmark, and Sweden are notable exceptions to the use of the euro.

EU countries using the euro: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. EU countries not using the euro: Bulgaria, the Czech Republic, Denmark, Hungary, Latvia, Lithuania, Poland, Romania, Sweden and the United Kingdom.

Benefits of the Euro

Lowers foreign exchange costs. Facilitates price comparisons. Fosters efficiency and cost reductions. Creates a pan-European capital market. Increases the range of investment options for individuals and institutions.

Concerns with the Euro

The European Central Bank (ECB) controls monetary policy for the euro zone. The EU is not an optimal currency area. The EU needs a stronger, centralized political structure.

The Euro Zone

The member countries share a currency and a central bank that sets interest rates, but each country determines its own fiscal policy. Each country is supposed to limit its budget deficit to no more than 3% of the nation s gross domestic product (GDP) and its debt to 60% of GDP.

The Euro in Crisis

In the fall of 2009, the European Commission issued warnings to nine countries for excessive budget deficits. Greece was ordered to cut spending and raise taxes immediately. One of the main criticisms of the common currency is that the EU lacks sufficient power to keep individual countries from spending too much.

EU Budget Deficits

Cohen, A. (2009, November 12). EU offers reprieve on deficits, but gives ultimatum to Greece. Wall Street Journal, p. A18. For WSJ.com subscribers: http://online.wsj.com/article/SB10001424052748703876404575199520197362174.html#project%3DEURODEF0422 %26articleTabs%3Dinteractive

EU Budget Deficits

Forelle, C., & Cohen, A. (2009, October 8). Latvia s woes highlight Europe's fragility. Wall Street Journal, p. A9.

The Euro in Crisis: Greece

Greece has repeatedly violated EU budget policies, and its budget deficit for 2009 was 13% of its gross domestic product. Concerns about high debt levels and the risk of default increased Greece s cost of borrowing. Many feared that the economic woes of Greece would infect markets in the relatively healthy economies of the euro zone.

Greece Debt Rates

Mollenkamp, C., Bryan-Low, C., & Zuckerman, G. (2010, April 8). Investors playing defense heighten Greek debt woes. Wall Street Journal, p. A1.

Lauricella. T. (2010, July 1). Euro trips as zone faces identity crisis. Wall Street Journal, p. C7.

Euro-Zone Contagion
Neither the ECB nor national central banks can bail out countries but individual governments can provide loans. The EU needed to walk a fine line between avoiding financial contagion and letting chronic overspenders escape without consequences. Providing aid was a particularly contentious issue in Germany.

Euro Zone Rescue Plans

EU Emergency Fund
60 billion from the EU budget

Bond Purchasing Plan of the ECB Special-Purpose Vehicle

440 billion raised in the capital markets with guarantees by member nations

For more information see: Forelle, C. (2010, June 8). Euro zone finalizes terms of rescue package. Wall Street Journal, p. A14. For WSJ.com subscribers: http://online.wsj.com/video/am-report-europe-sets-955b-rescue/E6A49369-A63F40AB-8214-8FD7269C2421.html

Forelle, C. (2010, June 8). Euro zone finalizes terms of rescue package. Wall Street Journal, p. A14. For WSJ.com subscribers: http://online.wsj.com/video/am-report-europe-sets-955b-rescue/E6A49369-A63F-40AB-82148FD7269C2421.html

The Euro-Zone Crisis Spreads

Ireland applied for an IMF and EU bailout worth 67.5 billion in November 2010. Portugal applied for a $114 billion bailout in April 2011. By May 2011, it was clear that Greece s initial bailout package needed to be revised but clear divides emerged within the EU on how to address the situation.

A Second Bailout for Greece

On July 21, 2011 euro-zone leaders provisionally agreed to a new $157 billion bailout for Greece. The EU would no longer work to prevent a selective default by Greece. The EU committed to provide credit enhancements to the ECB for it to continue to accept Greek debt.

Proposed Changes to the Rescue Fund

Could lend directly to countries even before they lost access to private funding. Could buy euro-zone bonds on secondary markets. Lowered the interest-rates on bailout loans and extended their maturities.

The ECB Bond-Buying Program

Blackstone, B. (2011, September 10). Banker's exit rattles markets. Wall Street Journal, pp. A1, A6.

Rift over Collateral

Robinson, F. & Walker, M. (2011, August 20). New rift over terms threatens Greece aid. Wall Street Journal, p. A8.

The Future of the Euro Zone

The EU continues to struggle with how it can prevent another crisis. The crisis still threatens Italy, Spain and Belgium. The currency contender countries may be more cautious about their plans to adopt the euro.

Fairclough, G., & Rousek, L. (2010, July 9). Czechs wary of joining troubled euro. Wall Street Journal, p. A11. Please note this figure is somewhat outdated since Estonia joined the euro zone on January 1, 2011.