The European Community after 1992

Economic analysis, it would seem, has never been critical in accomplishing progress in economic integration in the framework of the European Community. This proposition can be exemplified when considering four major initiatives in European economic integration.

Tariffs and quantitative restrictions on trade among the members of the European Economic Community (EEC) have been eliminated almost totally. It is expected that by 1992 the following, remaining barriers to internal trade will also be removed:

The completion of the European Internal Market not only opens up the prospect of reaping the static, once-and-for-all efficiency gains promised by international trade theory. It also provides the opportunity to increase the growth rates of the GDPs of West European economies, to create new jobs and to reduce unemployment for perhaps more than a decade. These positive consequences can take place if the completion of the internal market makes it possible, by removing frontiers, to break up a welter of national regulations, to strengthen competition in the markets, including labour markets, to remove entry barriers to markets, to lead to competition between Member States in lowering marginal tax rates and to weaken state-owned monopolies.

An economy with the domestic institutional and organizational structure of state socialism has characteristics that are inconsistent with integration within the framework of Western international market transactions. For the socialist economies, the Council of Mutual Economic Assistance (CMEA) provided the mechanism for international trade; there was no socialist analogue to international capital market transactions, although trade imbalances and acknowledgement of international indebtedness could arise. The CMEA, which was founded in 1949, was an Eastern European counter to the Marshall Plan, but was based on self-help and “mutual assistance”.¹ Subsequently the CMEA came to be the Eastern European counter to the West European “Common Market”.

Agricultural trade issues have rarely been more visible. At the Economic Summit in Houston, in July 1990, the leaders of the seven largest democracies, along with the EC Commission, took time out from such weighty matters as aid to the Soviet economy and protection of the environment to discuss agricultural trade. At the heart of the problem was a difference of opinion between the United States and the Community on the way to improve the agricultural trading system. The debate doubtless will continue right through the GATT Uruguay Round of trade negotiations. But even if a firm agreement emerges from the GATT talks, issues in agricultural trade will be contentious for many years to come.

“Do you advocate free trade, or at least is there a strong presumption in its favor?

Do you advocate the free international movement of portfolio capital?

… of corporate capital in foreign direct investment?

… free migration of students and professional labor?

… immigration of relatives of persons permanently resident in this country?

… free migration for all?”

Political interest in the creation of a European Monetary Union has grown rapidly over the last several years. By the traditional economic criteria of the theory of optimum currency areas such a movement does not appear well founded (see, for example, Thygesen, 1987 and Wihlborg and Willett, 1991).¹ While increasing economic and financial integration strengthen the case for a union, factor mobility is still far less than would be required for an optimum currency area. Given the broader political considerations motivating much of the push for monetary union, economic analysis seems unlikely to slow this movement significantly. It may still play a useful role in evaluating the advantages and disadvantages of alternative transitional stategies for the movement toward full monetary union; however, such economic analysis must go beyond the traditional optimal policy approach and focus upon the interactions of economic considerations and political incentives within a broader political economy framework.

An optimum currency area (OCA) is an economic unit composed of regions affected symmetrically by disturbances and between which labour and other factors of production flow freely (Mundell, 1961). Insofar as regions within the OCA experience the same shocks, there is no obvious advantage to altering relative prices between them. Insofar as localized concentrations of unemployment nonetheless remain, the free mobility of labour from high- to low-unemployment regions can eliminate the problem. It is hence optimal to dispense with one of the principal instruments — changes in the exchange rate — traditionally used to effect relative price adjustments, and to reap the benefits, in terms of convenience and efficiency, of a common currency.

The repercussions of EC92 on members, and especially on non-members, and the adequate reaction of neutrals have been discussed widely and will continue to be discussed in parliaments, in governments, in newspapers and by economists. Nevertheless, the results are poor. This is due to three uncomfortable facts. The lack of agreement on political goals within the Community, the heterogeneity of the neutrals and the limited concern of economic theory with the effects of deepening integration, as opposed to the reduction of tariffs.

In an age often dominated by statistics it is perhaps fitting that the fate of nations can be characterized increasingly as a regression toward the mean. In Western Europe, economic integration has brought many long-established adversaries to an ever-closer European community; Australia and New Zealand have established closer economic ties; and Canada and the United States have a new Free Trade Agreement. In Eastern Europe, however, economic distintegration has characterized not only the individual socialist economies, but also the ties which have bound different groups to a particular national identity. From the Soviet “Union” to Yugoslavia and Czechoslovakia, there are pressures tending to a fragment the existing nation and its alliances. In Canada, too, there is a sense of impending separation; Quebec is at risk of leaving the other provinces.

Assessing the impact of the projected “single market” for the European Community in “EC92” on the economic situation and performance of the less developed countries (LDCs) considered as a group is the task of this paper. Logically, this requires first that one estimates the nature and magnitude of the formation of the single market on Europe itself, and then attempts to trace the channels through which these effects, whatever they are, might be transmitted to the LDCs. To specify the likely response of the LDCs to these exogenous shocks one also, of course, needs some hypothesis about their structure and behavioural characteristics. Needless to say, a comprehensive study on these lines to do full justice to the task would take a whole research institute quite some time to deliver: all that can be attempted here is to offer some tentative suggestions toward an appropriate conceptual framework for such a study.

Evidently there is no single Pacific view of EC92; each trading nation of the region has its own view. Such views reflect primarily the national perceptions of the effects of EC92 on the nations’ own economies, and secondarily the effects on the global trading and geopolitical situation. These views are changing in all countries over time as they are modified by events in the Soviet Union and East Europe, the Uruguay Round and elsewhere in the world economy. The formation of EC92 largely reflected the European perception that their competitiveness in the world economy had declined. EC92 is in turn a major perturbation of the conditions under which all commodities and factors may be traded in the world economy, and it will induce policy reactions in these countries; it should not be viewed as an isolated and exogenous event.

Europe at the moment is very much at centre stage. The build-up leading to the fully-fledged formation of the European Common Market in 1992 is fundamental to the political and economic events which are changing the face of Europe, but the reforms in the Soviet Union and Eastern Europe as well as the reunification of West and East Germany are also an integral part of the entire process of change.

The policies of EC92 convey to outsiders two contradictory messages. One is that the single market will increase aggregate demand and create greater imports from outside, while the other is that possibly strengthened protectionism will exclude outsiders and divert imports from them to member suppliers. The Japanese government has been expressing concern over the latter possibility on various occasions and has been warning against any move toward strengthened restriction. However, with a careful overview of recent Japan-EC economic relations, one can easily see that Japanese multinational corporations (MNCs) have already participated in the moves toward EC92, and it would not benefit the interests of the Community to sever this coexistence. Japanese MNCs view the problem less pessimistically than is implied their government’s expressed concerns.

The European situation following the end of the Second World War created frameworks completely different from those prevailing earlier for the social and economic development of Hungary. The most important elements of change were the high degree of isolation from the historically evolved European system of cooperation, the autarchic development pattern first in national and later in East European frameworks, the creation of the institutional system and management techniques of the one-party system and central planning and, finally, the socialization of property relations. The radical changes were supposed to be legitimized in practice by the accelerated pace of qualitative growth and by the expansion of the network of social services.

Taking the three major OECD markets as a whole, the trade data for the period 1980–8 reveal several key features. In the first place, a small number of “traditional” products, particularly textiles, clothing and footwear, remain extremely important in developing countries’ export trade. This reinforces the widely held belief that it is these basic industries which provide the levers for industrialization. Even relatively more advanced developing countries remain large exporters of these basic manufactures. This is one important reason why current negotiations on the Multifibre Agreement are of vital significance for developing countries.

In 1965, the compatibility of the European Common Market for manufactured goods with the multilateral trading system was confirmed by the consolidation of the Common External Tariff (CET) and its reduction during the Dillon and Kennedy Rounds of multilateral trade negotiations. Jaquemin and Sapir (1989) have concluded that the subsequent rapid expansion of intra-EC trade resulted mainly from trade creation, and that trade diversion was relatively unimportant. In contrast, the Common Agricultural Policy (CAP) produced predominantly trade diversion, and has continued to do so ever since.

The momentous changes taking place in Europe are bound to have serious implications for developing countries. The European Economic Community (EEC) has been enlarged by its new Southern member countries and a single market will be created by 1992. Simultaneously, the Community and the European Free Trade Area (EFTA) are moving closer to each other to form a wider “European Economic Space” to ensure closer trade and investment interdependence. In parallel, the radical transformation of Eastern Europe may entail the gradual reintegration of these economies into the mainstream of European economic development. There is also uncertainty over the external trade policy of the Community after 1992.