- Case of Europe
The European integration by forming one unified union of Europe, which is now called the European Union (EU), exists due to various reasons. At the beginning of the establishment, the political intention was strong although the economic situation was also the key factor of motivating the EU integration. At that time, there are mainly two aims. Firstly, these European countries repented for their intense nationalism which resulted in the catastrophe of wars against each other. Secondly, protecting each European country from the oppression of the USSR without merely relying on the US backup was a priority for Europe. Then, these Europeans decided to form a unified economic and political alliance.
By contrast, the motivation based on economics has become much stronger and a more significant factor of demanding the European integration. Of course, the EU still regards highly of their political interest of maintaining a peaceful union with a stronger unified voice, rather than each relatively small country, in the game of foreign diplomacy. It is just a case that the world market situation creates the incentive for the European integration by means of their economic interest.
The reckless attempt of introducing the European Monetary Union (EMU) with a unified currency called Euro (The region of these EMU members where the Euro is used is called the Eurozone) is a symbolic movement of the European economic integration. Joining the EMU means replacing a central bank (The body controlling the national monetary policy and its money supply(supplying a national currency)) of all the EMU member countries with a central bank and its monetary policy of the whole union. So, the monetary policy is now controlled by one central bank which is independent from each nation state of the EMU members.
It has been a huge concern about the fiscal instability which can be caused by lack of the flexible macroeconomic control over each single. This concern has become true in real, and some countries like Greece and Ireland are suffering notoriously. However, despite this concern about the perpetuated fiscal instability, the Eurozone still stays and the monetary union seems to be invincible.
By means of the econometric research, the business cycles (Represented by the price inflation rate), except for Ireland, are harmonised. Although Greek cycles is more volatile, Greek economy is highly correlated with the entire European economy so Greece gains more benefit than cost of keeping her EMU membership. The harmonised business cycle implies the high degree of economic integration with the rest, and they had better share the common currency when their economy is integrated. On the top of this harmony, their inflation rate seems to have been converging into their referenced target rate 2%, and this referenced inflation rate induces the GDP growth owing to the econometric estimation.
Appendix: The European Monetary Union is inevitable, but has to be fundamentally revised
In terms of the benefit from the monetary integration, they eliminate the menu cost caused by the (nominal) exchange rate fluctuation so the benefit is significantly high when the high cross-border frequency is high. Moreover, when the monetary union is unified, the national bonds of these monetary union member nations can secure their national bonds' credibility in the international financial market because of the huge economies of scale backs up the credibility. All in all, when their economy is synchronised with each other like this chart demonstrates, they are still benefited from the monetary integration.
By means of the future prediction, despite the pessimism of the nationalistic Eurosceptics, the EMU not only sustain its existence and benefit but also expands by inviting more members and then growing its economies of scale. The new entrants from the central European countries are achieving the balanced fiscal policy and the notable economic growth recently after passing the test of joining the EMU such as the fiscal stability and the political consensus with the EU.
As a matter of fact, the trade frequency of the international trade within the EU is higher than the inter-states trade within the U.S.A. (Ref. Economics of Monetary Union So, the benefit from the monetary union by means of the trade is higher for the EU than the USA. The monetary union among the states of the U.S.A is stable due to both the strong federal government intervention into the harmonisation and the flexible labour mobility across states.
The high labour mobility is important to offer the supply-side flexibility to harmonise the business cycles. When the labourers can find a better opportunity in their neighbouring region, they can have a better potential to secure their employment. For example, an economically booming region may have an average wage increase due to the need of more labour force and calming down the overheat meanwhile an economically stagnating region may have an average wage decline to repress the rising unemployment rate and the shrinking overall economy.
The following econometric analysis, based on the EU market, indicates the change in the average wage rate of a particular region is positively correlated with the employment in the surrounding region. The average wage increase implies either rise in the labour demand or falling of the labour supply, or both which implies the lack of, and then the need of, the more labour force. By contrast, the average wage decline implies either fall in the labour demand or excess of the labour supply, or both which implies the higher unemployment. This analysis also indicates that the percentage of the shared language spoken by the citizens in these sample region is a key factor aiding the flexible labour mobility.
Appendix: Econometric Analysis of Employment Rate based on New Economic Geography theory
As more Europeans are educated to speak English and become keen to learn more than one language, this flexible labour mobility will eventually become higher than now. So, the benefit from the common market and monetary union will become further more beneficial for them.
In order to ensure the stability of the EMU, they definitely need to then have the unified fiscal policy which is harmonised with the monetary policy. Even with the already harmonised business cycles, it is not enough to only have a monetary policy so it requires the fiscal policy to absorb the systemic shock in the macroeconomic situation. The unified fiscal policy conducting the taxation and the subsidies is effective to help reducing the volatility of the cycles disturbing the harmony. Even though volatility seems to be temporary, the market chaos, like shown in Greece and Ireland, tend to be troublesome due to the panic caused by the instability.
Nevertheless, there are still active reactions against the European fiscal integration by mass. The reason why the EU is pending the full-integration process, which consequently compromises in this unstable situation, is due to the dilemma between the centralisation for the material prosperity and the anti-centralisation for the happiness derived from majorities' political preference.
According to the econometric research based on the happy planet index, people tend to be significantly happier when they are allowed to represent their opinions influence in their politics more directly. By contrast, the centralisation of politics which restricts their direct representation reduces their happiness. At the same time, they also expect the economic development which provides them with a material well-being which requires the centralisation as their economies of scale expands. Therefore, they eventually need to trade off between their psychological/spiritual well-beings provided by the degree of decentralisation and the material well-beings provided by the degree of centralisation as shown in the graph below;
Appendix: Dilemma between Democracy and Technolocracy
The EU's compromised decision causing the economic and political instability which EU citizens are suffering from is caused by this dilemma between the centralisation needed for the economic stability and preventing the furthermore centralisation for their psychological/spiritual happiness.
They might become happy to allow the federalisation of the EU by replacing their own nation state's government with the one unified federal government after realising this is an inevitably necessary path for the EU for stability and furthermore development. They also might just be happy with maintaining the current political structure of the EU even though they have to voluntarily cope with harmonising their business cycles together by repressing their expenditure for controlling inflation and encouraging a more flexible labour and capital mobility across the EU member states. The choice for relinquishing the EU and the EMU is unrealistic because their trade tie together is already strong and their regret about the past nationalism having caused the dreadful wars.
This European integration is an interesting experiment of establishing a transnational political structure overwhelming the traditional nation-states. So, it is natural to have a speculation about whether or not there will be another new resemblance to the European integration in another part of the world. As long as the current economic globalisation prevails and expands by its nature, the possibility is considered to be high. Nonetheless, their integration is more challenging and less dynamic than the European counterpart for the time beings.
In Latin America, these nation-states have already formed the economic alliance called El mercado comun del sur (The common market of the south). Their trade agreement at the microeconomics level such as trading goods and services and legislative matters such as taxation and regulation. Hy contrast, their macroeconomic integration is very less likely to happen due to their overall volume of the inter Latin American trades and the substantially unstable monetary system resulting in the significantly high price inflation all the time.
In Africa, some countries have already established the common monetary policy, and encourage their economic and political unification. However, both their economy and their political function are too immature to expect their economic growths and their political stability without the support from outside Africa. As their aggregate volume of economic activity is low, their volume of the inter-African trades is substantially low. In addition, their strong preference over decentralised organisational structures discourages the growth of their economies of scale. Therefore, they are still less likely to take an advantage of the shared macroeconomic policy for the time being.
Although both Latin American and African nation-states are still not capable to create their own transnational economic and political integration, they are becoming more dependent and involved in the economic globalisation and their international trades with the outside their region will be growing. So, their economic activity is tied up with their global trading partners and more individuals from there will travel around the world, and then their nationalism will be gradually discouraged. But, their nation-state government will still exist for the following purpose.
As their business cycle is harmonised with neither their neighbouring nation-states nor their distant trading partners, the asymmetric shock of their business cycle, shown in the graph below, is more likely to offer.
At the same time, in order to reduce the menu cost caused by the exchange rate fluctuation, the business cycle needs to be harmonised as much as possible. When these developing countries have a frequent international trade with developed countries, the business cycle of these developing countries tends to be exaggerated way faster than their developed trade partner. So, they eventually need their own independent macroeconomic authorities, the central bank and the government, in order to independently control the cycle with their own discrete measure. Therefore, their nation-state government is still required to exist just to mitigate this asymmetry.
The most interesting area of dispute is the East Asia. In particular, the international trade frequency among the South East Asian countries is significantly higher than both the international trade within the EU and the interstate trade in the USA. Their trade frequency in both their real market (goods & services) and the capital market (finance) is considerably high. Furthermore, their labour mobility rate is high and this is encouraged by the fact that more Asians than now speak English their businesses together in both their business activities and their personal relationships.
By means of the dilemma about the centralisation, Asians seems to be more flexible than Europeans to admit the centralisation due to their traditional characteristics of being loyal to their rational authority. In another word, Asians tend to prefer the centralised policy more than Europeans so the centralised economic policy beyond their national borders will be achievable.
Appendix: Dilemma between Democracy and Technolocracy
By means of the perspectives based on economics, it seems to be possible that the South East Asians establish the common economic union similar to the EU. But, unlike the EU, these nations have their own distinct ethnic demography and political past which is a considerable barrier for them to form the economic and political union. On the other hand, as the world becomes furthermore globalised, the need of the integration may emerge regardless of their cultural and political conflict. As Asians are pragmatic about their business relationships, the possibility of establishing the integrated economy governed by a unified transnational rational authority might become in real.
Japan and China are less likely to join any economic and political union because of their already big and independent size and their own unique cultural independence. There is an optimum size of the integration of market and politics by means of the population and the production capacity. Furthermore, the unique characteristics of their culture and ethnic backgrounds cause the conflict with the others when they are fiscally and politically integrated. These two nations will keep being influential in the global market and politics owing to their economic power and their political influences, and inevitably globalise themselves furthermore in order to prop up the strong demand for their exporting products which sustain their own well-beings.
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