Class 3: Levels of Economic Integration

Level 1: Free Trade

• each country has its own trade policies toward non members

• no quotas, tariffs, subsidies

Level 2: Customs Union

• common external trade policy

• significant administrative system

Level 3: Common Market

• allows production factors to move freely among members

• requires a significant degree of harmony and cooperation on fiscal, monetary, and employment policies

Level 4: Economic Union

• adoption of common currency

• harmonization of tax rates

• common monetary and fiscal policy

Level 5: Political Union

• coordination bureaucracy accountable to all citizens of member nations

• central political system coordinates economic, social. and foreign policy of the member states

EU Customs Union

• number of countries apply a uniform system for handling goods and implement a common set of rules

• no customs duties at the EU Customs Union’s internal borders

An index measures integration

• EURII index: measures regional institutional integration i the EU area

• 1958 - 1993: 'Common Market Era’

• ‘Union Era’

• score of 50 is assigned to each period

Eastern Block Countries Revolutions

• glasnost (transparency): express political dissent and to obtain info

• perestrojka (reconstruction): secret and multi candidate electoral competition for a minor # of state and party assemblies

Transition of Eastern European Countries

• economic transition

• serious difficulties in passing from centrally-planned to free market systems

• no more central planning

• intro of market inst.

• end of full employment and employment for life

• intro of real trade

Different Transitions

• Economic transition (II): two alt approaches to economic transition

• No system yield to magical results (loss of economic weight of CEECs, recession in 1990s, unemployment)

Two alternative approaches to economic transition

• shock therapy: demise of economic inst and replacement by market inst

• gradual and incremental transition: step by step change of inst

Germany reunited

• 1989: Fall of Berlin Wall

• Gorbachev accepted unification for people both in East and West Germany

• Chancellor of West Germany, Kohl, persuased Gorbachev to accept a reunified germany with NATO membership

Germany Reunification

• Problems: Economic transition from a planned economic to a free market economy

• opportunities: large market in east, improvement of infrast.