This week’s article focuses on an important lesson to be learnt by policymakers in economic groupings globally – particularly those in the developing world – from the mistakes of the architects and engineers of the European Union.
The economic crisis currently gripping the European Union is an unfortunate incident, one which was totally avoidable and also unnecessary. Its repercussions will have an indelible impact on the global economy and the architecture of future economic integration arrangements.
The concept of regional economic integration as the world knows it today has its genesis in Europe. This follows the establishment of the European Community in 1957 – now called the European Union (EU) – which became the prototype for all future trading blocs. This is illustrated by the fact that several regional economic groupings currently dot the global landscape north and south of the equator, stretching from the Americas in the west to the Asia – Pacific region in the east. Consequently, it can be said that economic integration is a European export.
Countries seek to become economically integrated to derive political and/or economic gains. Theory states that this type of integration is a five step process. Hence, such arrangements may take the shape of one of five forms. The five forms of economic integration are a trading bloc, a free trade, a customs union, a common market and finally an economic union.
The first stage of any regional economic integration process involves the establishment of a trading bloc. All member countries of the trading bloc extend concessions to fellow member countries and in return receive preferential access to the markets of their co -members. The second stage is called a free trade area which is the result of tariffs and quotas being eliminated on all trade. The third stage of this process is called a customs union and it means that the regional grouping has instituted a Common External Tariff which is applicable to all imports from non-member countries. The penultimate stage of this process is referred to a common market. Here, all of the elements of a customs union exist however the difference is that the free movement of the factors of production – capital and labour – along with goods and services is allowed within the regional grouping. The final and highest stage of economic integration is an economic union. This involves all the elements of the preceding stages with two additions namely a common currency and a coordinated economic policy.
The European Union can be considered as a hybrid of the fourth and fifth stages of the economic integration process. It currently has a single currency in the form of the Euro. However, the architects and engineers of this trading bloc did not formulate and implement a coordinated economic policy. This was a recipe for disaster and as former European Commissioner Jacques Delors stated late last year in an interview with the Telegraph it allowed European countries to accumulate unsustainable debts. EU member states pursued varying economic policies and it is now known that the government of Greece over spent and was less than candid about data regarding its economic performance in past years.
A single currency cannot be launched without a coordinated macroeconomic policy. This is akin to constructing a house without a proper foundation and erecting the walls without applying any mortar between the bricks. Such actions will place great pressure on the currency when crises occur leading to economic chaos if the currency collapses. Fortunately in Europe’s case this has not transpired.
In my opinion, this is the most important lesson to be learnt from the European experience by policymakers of other regional economic groupings such as the Caribbean Community and Common Market (CARICOM), the Association of South East Asian Nations (ASEAN) and the Common Market of the South (MERCOSUR) amongst others. They are not as advanced as the European Union is in the integration process and their member states do not yet have common currencies in place. More importantly, these trading blocs are characterized by economic dependence and not economic interdependence like the European Union. This is reflected by some trade data published in the Caribbean Trade and Investment Report of 2005. This statistical data shows that between 2000 – 2004 intra regional trade imports within the European Union on average accounted for over 60% of all imports. Whereas in MERCOSUR and ASEAN on average intra regional imports accounted for 19% and 23% respectively of all imports. Therefore, if the mistakes of Europe are repeated in developing world trading blocs it will be disastrous for their citizens as these countries trade mainly with the developed world.
Former British Prime Minister Sir Winston Churchill once stated “those who fail to learn from history are doomed to repeat it.” It can only be hoped that he is not vindicated by the actions of policy makers within regional economic integration groupings of the developing world. Only time will tell.
