European Union

21st November 2021 0 By indiafreenotes

The European Union (EU) is a group of 27 countries that operates as a cohesive economic and political block. Nineteen of the countries use the euro as their official currency.

The EU grew out of a desire to form a single European political entity to end the centuries of warfare among European countries that culminated with World War II and decimated much of the continent. The European Single Market was established by 12 countries in 1993 to ensure the so-called four freedoms: the movement of goods, services, people, and money.

The EU’s gross domestic product (GDP) totaled $15.6 trillion (nominal) in 2019, which was $5.8 trillion less than the United States’ $21.4 trillion GDP, according to figures available from the World Bank.

Economic unions combine all aspects of the common market and also coordinate economic policy. Member countries then form joint economic institutions for this purpose. An example is the formation of the economic union of the European Union.

Then, if the member countries agree to adopt a single currency, we will call it the monetary union. The Eurozone is an example, where it consists of EU members adopting the Euro as their currency.

The Maastricht Treaty

The Maastricht Treaty (formally known as the Treaty on European Union), which was signed on February 7, 1992, created the European Union. The treaty met with substantial resistance in some countries. In Denmark, for example, voters who were worried about infringements upon their country’s sovereignty defeated a referendum on the original treaty in June 1992, though a revised treaty was approved the following May. Voters in France narrowly approved the treaty in September, and in July 1993 British Prime Minister John Major was forced to call a vote of confidence in order to secure its passage. An amended version of the treaty officially took effect on November 1, 1993.

Advantages of trading blocks

  • Larger market. Companies can increase their sales to other member countries without worrying about protection. The broader market allows them to take advantage of economies of scale.
  • Lower prices and more varied products. Tariff elimination leads to lower prices for consumers in member countries. Free flow also increases access to a wider variety of goods.
  • Boost direct investments. Under common market and union economies, capital is free to flow, encouraging companies to increase investment and create jobs in some member countries.
  • Encourage specialization. Increased trade allows for increased specialization, whereby member countries develop the most efficient industries.
  • Decrease monopoly power as competition increases. Goods and services flow freely and create greater choices for consumers. It increases competition in the market and forces firms to increase innovation and efficiency to stay competitive.
  • Access to cheaper and more abundant capital. Under an economic union, companies can take advantage of member countries that have more developed financial markets.
  • Positive effect on knowledge abundance and technology transfer. In a common market or economic union, capital and professional laborers move freely between members, allowing for a positive effect on knowledge and technology.
  • Better quality intermediate inputs. This is because production factors can freely enter and exit member countries, such as in common markets and economic unions.
  • Increase economic power. It gives members a stronger bargaining position on trade policies and agreements because they form a united front. For example, in a palm oil dispute, the European Union has stronger negotiating power as a buyer because many countries are united to fight Indonesia.
  • Minimize the potential for conflict among members. Members who were previously competing can adopt mutual policies that are favourable to them.
  • Offers new opportunities for trade and investment. Member countries benefit from inward investment and increase trade opportunities.
  • Growth in member countries also tends to extend to other members. Economic expansion in one member country increases demand in other members.

Disadvantages of trading blocks

  • Joining a customs union may lead to increased import tariffs which leads to trade diversion. For example, when the UK joined the EEC customs union, it required higher import tariffs on imports from former Commonwealth countries. This led to switch in demand towards higher-cost European countries and caused loss of business for Commonwealth countries
  • Increased interdependence on economic performance in other countries in trading block. If Eurozone goes into recession, it will affect all countries in the Eurozone. However, this is almost inevitable even if countries are not formally in a trading block due to a close relationship between trade cycles in different countries.
  • Loss of sovereignty and independence. A trading block needs to make decisions for the whole area. This may go counter to the particular wishes of a country.
  • Increased influence of multinationals. In a bilateral deal between the US and South-East Asian trading block. Free trade may come at the price of allowing free movement of capital. This can have benefits in terms of inward investment. But, can also have costs for higher-cost domestic producers. Free trade can lead to structural unemployment as resources shift from uncompetitive industries to newer industries.