What Is Economic Integration?
Economic integration is an arrangement among nations that typically includes the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies. Economic integration aims to reduce costs for both consumers and producers and to increase trade between the countries involved in the agreement.
Economic integration is sometimes referred to as regional integration as it often occurs among neighboring nations.
Economic Integration Explained
When regional economies agree on integration, trade barriers fall and economic and political coordination increases.
Specialists in this area define seven stages of economic integration: a preferential trading area, a free trade area, a customs union, a common market, an economic union, an economic and monetary union, and complete economic integration. The final stage represents a total harmonization of fiscal policy and a complete monetary union.
Key Takeaways
- Economic integration, or regional integration, is an agreement among nations to reduce or eliminate trade barriers and agree on fiscal policies.
- The European Union, for example, represents a complete economic integration.
- Strict nationalists may oppose economic integration due to concerns over a loss of sovereignty.
Advantages of Economic Integration
The advantages of economic integration fall into three categories: trade creation, employment opportunities, and consensus and cooperation.
More specifically, economic integration typically leads to a reduction in the cost of trade, improved availability of goods and services and a wider selection of them, and gains in efficiency that lead to greater purchasing power.
Economic integration can reduce the costs of trade, improve the availability of goods and services, and increase consumer purchasing power in member nations.
Employment opportunities tend to improve because trade liberalization leads to market expansion, technology sharing, and cross-border investment.
Political cooperation among countries also can improve because of stronger economic ties, which provide an incentive to resolve conflicts peacefully and lead to greater stability.
The Costs of Economic Integration
Despite the benefits, economic integration has costs. These fall into three categories:
- Diversion of trade. That is, trade can be diverted from nonmembers to members, even if it is economically detrimental for the member state.
- Erosion of national sovereignty. Members of economic unions typically are required to adhere to rules on trade, monetary policy, and fiscal policies established by an unelected external policymaking body.
- Employment shifts and reductions. Economic integration can cause companies to move their production operations to areas within the economic union that have cheaper labor prices. Conversely, employees may move to areas with better wages and employment opportunities.
Because economists and policymakers believe economic integration leads to significant benefits, many institutions attempt to measure the degree of economic integration across countries and regions. The methodology for measuring economic integration typically involves multiple economic indicators including trade in goods and services, cross-border capital flows, labor migration, and others. Assessing economic integration also includes measures of institutional conformity, such as membership in trade unions and the strength of institutions that protect consumer and investor rights.
Real-World Example of Economic Integration
The European Union (EU) was created in 1993 and included 27 member states in 2022. Since 1999, 19 of those nations have adopted the euro as a shared currency. According to data from The World Bank, the EU accounted for roughly 18% of the world's gross domestic product in 2020.
The United Kingdom voted in 2016 to leave the EU. In January 2020 British lawmakers and the European Parliament voted to accept the United Kingdom's withdrawal. The UK officially split from the EU on January 1, 2021.
Glossary of summaries
DEMOCRATIC DEFICIT
‘Democratic deficit’ is a term used to denote a situation where institutions and their decision-making procedures may suffer from a lack of democracy and accountability. In the case of the European Union (EU), it refers to a perceived lack of accessibility or lack of representation of the ordinary citizen with respect to the EU institutions – a sense of there being a gap between the powers of those institutions and a perceived inability of citizens to influence those institutions’ decisions.
The issue of democratic legitimacy has been a sensitive one at each stage of the European integration process. It was addressed in the Maastricht, Amsterdam and Nice Treaties, which progressively gave more powers to the directly elected European Parliament and extended the areas in which it has joint decision-making powers with the Council of the European Union. As a result, the Parliament has evolved from a consultative assembly to a co-legislator.
Several changes introduced by the Treaty of Lisbon, which has applied since 1 December 2009, served to address concerns of a democratic deficit in the EU. The treaty strengthened the Parliament’s powers in the following three areas.
- Financial. The Parliament plays a key role in approving all categories of EU annual budget expenditures.
- Legislative. The co-decision procedure became the ordinary legislative procedure and applies to almost all areas where the Council decides by qualified majority vote.
- Nomination. The Parliament elects the President of the European Commission on the basis of a candidate proposed by the European Council taking into account the results of the Parliament elections. The Commission as a body is subject to the consent of the Parliament before being appointed by the European Council.
With the principle of subsidiarity in mind, the Treaty of Lisbon also introduced ways to encourage national parliaments to participate in EU policy formulation, giving them the opportunity to scrutinise the Commission’s legislative proposals (known as the subsidiarity scrutiny mechanism).
The Treaty of Lisbon also establishes a citizens’ initiative right, where citizens can ask the Commission to propose legislation in any field in which it has the power to act. To launch a European citizens’ initiative, a group of organisers must be set up, comprising at least seven EU citizens from seven different EU Member States. Once an initiative has reached 1 million signatures and the prescribed minimum thresholds in seven Member States, the Commission will decide what action to take.
The institutions’ decision-making processes are sometimes criticised for their lack of transparency, in particular in the context of trilogues between the Council, the Commission and the Parliament. Today, the institutions publish the final compromise text that is adopted as a result of interinstitutional negotiations. In addition, the formal rules of procedure relating to the negotiation process have been improved.
Members of the Council meet in public sessions when discussing or voting on proposals for legislative acts. The first deliberation on important non-legislative proposals is also public and the Council also regularly holds public debates on key issues affecting the interests of the EU and its citizens.
The Conference on the Future of Europe, which formally concluded on 9 May 2022 (Europe Day), was a bottom-up, grassroots exercise, which has allowed citizens to have a say on what they expect from the EU and have a greater role in shaping its future. The conference was a joint undertaking of the Parliament, the Council and the Commission, acting as equal partners together with the Member States. A key component of the conference was the creation of citizen panels at the EU level and in several Member States, which held debates and events designed to feed into the conference plenary with recommendations for the EU institutions. The conference results are presented in a report which puts forward 49 proposals on the future of Europe, covering several topics including European democracy. The EU institutions are due to provide their feedback regarding these proposals at a feedback event in autumn 2022.
SEE ALSO
- Citizens’ initiative
- Civil society organisation
- Council of the European Union
- EU governance
- European Commission
- European Council
- European Parliament
- European Union
- European Union institutions
- Legislative acts
- Member States
- National parliaments and EU decision-making
- Non-legislative acts
- Ordinary legislative procedure (Codecision)
- President of the European Commission
- Subsidiarity
- Transparency (access to documents)
- Transparency of Council proceedings
- The Amsterdam Treaty (summary)
- The Treaty of Lisbon (summary)
- Treaty of Maastricht on European Union (summary)
- Treaty of Nice (summary).
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