Economic Integration

  1. European Union
The Roman world

Arena, Paris

Rotunda of Galerius, Thessaloniki (Galerius was the Caesar of Illyria, formerly known as Yugoslavia, and married the daughter of Diocletian.)

European Community's homepage is Europa.

Many settlements originated in Europe as Roman garrisons. For example, Londinium was established as a settlement by the Romans after the invasion (AD 47 under Emperor Claudius) Julius Caesar had found no gold or silver in his failed invasions of Britain in 55 and 54 BC.

After the Gallic wars (Battle of Alesia) ended in 52 BC, Romans built roads to Lutetia (Paris). Literally, "All roads lead to Rome." (50,000 miles of stone-paved roads)

Greece was conquered by the Romans in 146 BC, but the Greek culture and its language dominated the Mediterranean world. In the early stage of development, military conquests resulted in economic integration, i.e., a large free trade area. Some tariffs existed; vicesima (1/20 = 5%), was borrowed from Greece. Today, such military conquests would be disastrous.

Per capita incomes of the regions not conquered by the Romans (e.g., Russia, Arabia) are much lower than others. In Russia, Prince Vladimir of Kiev was baptized in 988. Around 860 AD, two brothers, Cyril and Methodius, were sent to the Slavs as missionaries. Subsequently, their disciples developed the Cyrillic alphabet.

How large is the EU?

In 2005, 10 countries of Central and Eastern Europe joined.

EU 27 has a population of 477 million people and its territory stretches from Crete to the arctic circle. (USMCA has a population of 470 million in 2013.) UK = 67 million

GDP of EU is about €18.8 trillion (2018), slightly less than US ($18 trillion), due to the falling euro in recent years. Per capita GDP of EU and the US are about $39,000 and $70,000 in 2021)

Future: Eventually, the EU could grow to include some Muslim countries such as Turkey.

Croatia joined EU on July 1, 2013. Population = 4 million.

Brexit: UK decided to exit from EU in a referendum in June 2016. As a result, the British Pound fell to the lowest level in 31 years.



 World War II timeline

The Allies divided up Berlin and Germany in June 1945 before Japan surrendered.

Winston Churchill

"We must build a kind of United States of Europe. In this way only will hundreds of millions of toilers be able to regain the simple joys and hopes which make life worth living." (September 19, 1946), University of Zurich

This spot where Churchill's speech was delivered (University of Zurich)

 Marshall Plan (1945-51). Goals: (i) rebuild Europe, (ii) remove trade barriers.

Parade honoring the Marshall Plan's millionth ton of food for Greece ©

Life in Germany after WW2

WWII may have been inevitable. The German people had to pay 130 billion gold marks (US $33 billion) but printed Reichmarks, as they were forced to make raparation payments, which caused the hyperinflation between Jan 1921 and November 1923. (RM/$ = 65 marks rose to 1 trillion marks.)

Postwar European economic cooperation began with the establishment of the OEEC (Organization for European Economic Cooperation) in 1948 to allocate the Marshall Plan aid (named after George Marshall who was the Secretary of State, US). Initially, the MP was $13.5 billion, most of which was a grant. It was largely replaced by the Mutual Security Act (1951-1961) with annual authorizations = $7.5 billion = 5% of GDP.

Extra aids outside MP: Later Asian countries received $5.9 billion. Total grant to the world rose to $44 billion (1945-1953). This should be recorded to our credit indicating US willingness to help other nations.

With OEEC, quotas and payments restrictions were dismantled among member countries.

The MP (a) allowed Europeans to purchase capital goods and raw materials to start industries, (b) helped Europeans to acquire more reserves ($ and Gold), (c) mandated free trade throughout Europe. This helped the transformation of ECSC into a free trade area.

 ECSC, 1952

The Treaty of Paris established the ECSC (European Coal and Steel Community) in 1952 which created a common market for coal, steel and iron ore, covering France, Italy, West Germany, Belgium, Netherlands, Luxembourg.

EEC and Euratom, 1957 The Treaty of Rome (1957) establishing the EEC was signed by the same countries and ratified. The treaty set the time table for a progressive development of a customs union. Also a separate Euratom treaty was signed to create European Atomic Energy Community.
EFTA, 1960

EFTA (European Free Trade Association) was formed in 1960 by UK, the three Scandinavian countries (Norway, Sweden and Denmark), Switzerland, Austria and Portugal.

map of Europe, courtesy of
Nations Online

European Community, 1967   Fusion of the three communities (EEC, Euratom, ECSC) into a single European Community was established in 1967.
   Great Britain, Denmark and Ireland entered in 1973, Greece (1981), Spain and Portugal (1986).
European Union, 1992   signed the Treaty on European Union (1992). a.k.a. Maastricht Treaty. Common Foreign and Security Policy (CFSP) and Justice and Home Affairs were included. Together with the European Community, they form three pillars of EU.
  Austria, Finland and Sweden joined the European Union (1995). Norway declined.
euro, 2002  On January 1, 2002, euro is circulated in 11 countries.
 Eastern and Central Europe  On May 1, 2004, 10 additional members join the EU (The Czech Republic, Estonia, Latvia, Lithuania, Cyprus, Malta, Hungary, Poland, Slovania and Slovakia

On January 1, 2007, Bulgaria and Romania joined the union.

On July 1, 2013, Croatia became the 28th member. (pop = 4.4 million)

Two major reasons for Brexit, June 2016: Unemployment rate is higher in Southern Europe (20%), reduced Sovereignty, Immigrants.

 Reaction to the impasse of WTO

Doha round failed in November 2011. Dispute settlement mechanism is well established. Doha Round is a failure. US has not been a leader. Developing countries should play a leading role in the fugure. (Bhagwati)

The focus is now on regional agreements. Biden is becoming a nationalist, promoting Trump's America First policy.

Financial crisis in Greece, followed by similar debt problems in other European countries (PIIGS).

Transatlantic Trade and Investment Partnership (TTIP, under negotiation) also known as Transatlantic Free Trade Area (TAFTA), exchange of trade and investment may amount to $.5 trillion (EU→ US and US → EU). Under negotiation.
Trans-Pacific Partnership (9 countries), a companion agreement. (US declined).


  2. Methods of Economic Integration

 1. Military Conquest


Medallion of Alexander the Great

(i) Alexander the Great started the first European integration. As a result, the Mediterranean world was integrated to form a single economic area, and the Greek become the universal language adopted by traders.

Military conquests unwittingly resulted in free trade.

Economic integration does not occur until transportation and communication systems are well developed. In the East, at the end of the Warring States period (475 - 221 BC), Qin united these kingdoms, but the Qin Empire lasted only 15 years (221-206 BC). The Han Chinese established the Han Empire in 206 BC.

In the West, King Philip II of Macedonia began to conquer the neighboring city states, uniting Greece in 358 BC. Alexander the Great finished the work, conquering most states in the Mediterranean world before his death in 323 BC. However, because of his premature death, actual integration of the Meditrannean world had to wait until the Romans reconquered it. The Romans built roads and knew how to govern the people, but the Europeans spoke Greek throughout the Roman Empire.

(ii) Romans also followed the same tactic.

(iii) In the 20th century, Benito Mussolini tried in vain to create a new empire in Europe.

(e.g., Mare Nostra = Our Sea = Mediterranean Sea)

(Imperial War Museum, London)

Similarly, Japan made a similar attempt in Asia in the 1940s.

Japanese propaganda leaflet during WWII

Hitler's idea of integration


Imperial War Museum, London

German hyperinflation: 64RM/$ in January 1921 → 4.2 trillion ReichMark/$ in November 1923 (Prices doubled each month). A German worker used a wheelbarrow to cart off billions of marks. He was robbed; the thieves stole the wheelbarrow but left the piles of cash.

Frank Haushofer (1869 - 1946) advances the theory of geopolitics, "Lebensraum," (living space) that a race has the right to conquer neighboring regions. (H thought this justified Germany's invasion of Russia.)

In the election campaign in 1933, Hitler promised to banish unemployment in four years. The number of unemployed was cut from 6 million at the beginning of 1933 (when Hitler took power) to 1 million by 1936. This was accomplished by public works (autobahnen: highways) and rearmament.

2. Free Trade Agreement


(i) In the 21st century, military conquests are no longer feasible, due to the presence of the Nuclear Club.

(ii) FTAs are the only means to achieve economic integration in the modern world.

Gradually, countries become more interconnected through free trade, eventually becoming an economic union.

Examples: NAFTA, European Union.


  3. Stages of International Economic Integration (Choi)
Autarky: before integration
(0) Preferential Trade Agreements  lower tariffs on trade among member countries. e.g. British Commonwealth established tariff preference scheme in 1932.

First Stage:

Free Trade Agreement

FTA (Free Trade Area): is a group of countries without any trade restrictions within the area, but each member country retains its own tariff and quota system on trade with third countries (EFTA).

Industrial FTA: EFTA (exclude agriculture)

Full FTA  

Problem: Nonmembers take advantage of different trade policies among members. Member countries with lower tariffs get more trade.

Second Stage:

Customs Union

CU = FTA + common tariffs and quotas.

CU (Customs Union) is created when a group of countries removes all restrictions on mutual trade and also adopt a common system of tariffs and quotas with respect to trade with third countries (EEC became one in 1968).  

FTA →CU: maybe slow but inevitable (otherwise, nonmembers take advantage of differing tarffs among member countries)

Problem: Member countries with low wages or taxes attract more foreign direct investment (FDI).

Third Stage:

Common Market

Common Market: A CU becomes a common market with the removal of all restrictions on the movement of factors.

CM = CU + free factor mobility.

(EEC became a common market in 1992).

CU →Common Market (slow. Common heritage, language and culture will expedite this process.)

FPE also facilitates the formation of a common market. This transition to a common market is desirable in order to prevent nonmember countries from taking advantage of different wages and taxes. Nonmember countries invest in the countries where taxes and wages are lowest. E.g., Japan builds TV factories in Mexico, rather than in the US.

Problem: (1) More difficult to achieve than previous forms of integration. Common languages, culture and business practices facilitate the formation of a common market.

(2) Income Tax Rates still differ. Countries with lower income tax rate get more FDI.
Russia's tax rate = 13% (must stay there 183 days each year), France's income tax rate = 75% for income above 1M euro. (some moved to Belgium, UK. Scrapped later)
Putin gives Depardieu Russian Passport.

Morality of CM may decline. Legal contracts are more frequently broken. European civilization is based on private ownership and contracts.


3' Monetary Union: adopts a single currency together with a single central bank.  

Fourth Stage:

Economic Union

supernational authorities coordinate economic policies.

Economic Union = CM + a single currency, a central bank, a unified fiscal authority (it should impose limits on sovereign debts. Philip IV, the Iron King, found it easier to persecute Knights Templar than to pay the debt, October 13, 1307 AD)

E.g., US, Belgium + Luxembourg, 1921.

CM → Economic Union (relatively easy, because of economic gains from a single currency)

Problem: There should be a sovereign debt limit on each nationial government. When several countries fail to pay back their debts in full (e.g., Greece, Italy, Spain and Portugal), this situation jeopardizes the regional currency (i.e., euro in the EU).

political union

(A Single constitution. No diplomatic rights for individual states.)

 Remark At any point in these stages, an FTA or a CU could expand its membership. It remains to be seen if two FTAs or CUs will form one large group. If the current trend continues, the world will consist of several large FTAs or CUs. Given enough time, however, they might further integrate to form larger FTAs or CUs, until they include all countries.


  4. Institutions of EU
 US vs EU

US government consists of three branches: (trias politica) legistilative, executive and judicial branches. In principle, they share equal power and provide checks and balance.

In contrast, the EU has four branches. The legislative and executive powers are split among three branches of the EU, excluding the European Court. As more members join, institutions of the European Court will inevitably evolve.

Western Europe learned democracy from the Greeks. Pericles established democracy in Athens (died in 429 BC), but Amerian women gained the voting right only in the 1920s.

The governing institutions were modeled after the Roman model.

 European Union

1. European Commission

2. Council of Ministers

3. European Parliament

4. Court of Justice

The idea of trias politica (Charles Montesquieu, 1748, a French judge) comes from Roman laws and the British constitutional system (monarch, parliaments, courts). The tripartite system (consuls, senate, and assemblies) has evolved from the Roman system.



  5. European Commission
EU commission, Brussell ©

President of EU: Ursula von der Leyen

The Commission has the executive power of the EU, subject to change. (= President + 1/2 congress in the US), but the Council appoints commissioners (Treaty of Lisbon 2009, which modifies the Maastricht Treaty, 1992)

 Organization of Commission

Number of members = Initially, 20. As EU expands, the number of commissioners increased, especially due to accession of 10 central and easter Europen countries.

Rule (2000): Each nation should have a commissioner until the 27th member joins, in which case there will be fewer commissionsers than member states.

Today, there are 27 Commissioners plus the President (28 in total).
Each member specializes in some areas (e.g., energy, employment, agriculture, etc.)

F, G, I, Sp = 2, others = 1 at first. Now at most one in each country. (The majority of the British would rejoin the EU)

terms = 5 years
its staff = 15,000
Must be independent of their national governments.

It now has a President. Other Commissioners act like the Secretaries in the US. Each commissoner specializes in one area (e.g., agriculture and reral development)

Some suggest the name should be changed to European Government. The council appoints Commissioners.


must reach all of the citizens of the union in their own languages.

1/5 of the work is in the translation and interpretation services.


The function of the European Commission roughly corresponds to one half of US Congress.

The Commission's Role

It initiates proposals for legislation--3 objectives European interest = what is best for the Union as a whole, rather than for individual sectors or countries.

Consultation = consult as widely as is necessary

Subsidiarity = the Union takes action only if it becomes more effective than if left to individual member states.

  Guardian of the Treaty of Rome

(i) ensures that Union legislation is correctly applied by member states.

(ii) The commission can fine individuals, firms, and organizations for infringing the Treaty law. One group of firms was fined ECU 248 million.

Manager and Negotiator of Union policies
(i) manages EC's finances and budgets (about €140 billion in 2010)

(ii) negotiate trade and cooperation agreements with other countries or group of countries.


The full Commission has to be approved by the European Parliament. The Commission represents EC, not member countries. Commission reports to Parliament annually.

It is not clear who makes the executive decisions.

Needs to be restructured into upper and lower houses in lieu of Senate and the House of Representatives.


The Organization should be simple. (Form follows function.)

Simplicity determines the function of the organization.

If a mistake occurs, it is not clear who is resonsible, or how to correct it. 

  6. Council of Ministers = "Council" ≠ European Council
"Council" (consilium)

Europa building, European Council ©

(Not Council of Ministers): European Council comprises heads of states + own President + President of the European Commission. "Council of Europe" is not an EU body.

European Council has quarterly meetings. No legislative power. Advisory role.

EU institutions


Each minister represents his/her own national government (28 ministers).

In this sense, United Nations, as currently organized, is like EU's council of ministers.

(In the future, if it is to be properly run, United Nations could be supported by a World Court and World Parliament. Without these two organizations, there are no checks and balance in the United Nations.)  

Presidency: from July 1, 1995, rotates every six months in a sequence (not alphabetically). arrange and preside over all meetings.


Loosely speaking, the Council has the legislative power. (It is neither the Senate nor the House of Representatives.)

Council makes final decisions, but can do so only on proposals made by the Commission. Positive decisions require double majority of states and population

Negative decisions are made by at least three member states representing 35%, plus another state.

Three pillars were abolished.

 Pillar One Pillar One covers a wide range of Community's economic policies (such as agriculture, transport, environment, energy, R&D) which begin with a Commission proposal.
Countries votes current votes
G, F, I, UK 10 29
Spain 10 27
Poland   27
Romania   14
Netherlands   13
Greece, Belgium, Portugal, Czech, Hungary   12
Austria, Sweden 5 10
Bulgaria   10
Ireland, Denmark, Finland 3 7
Slovakia, Croatia, Lithuania   7
Luxembourg 2 4
Estonia, Cyprus, Latvia, Slovenia   4
Malta   3
Total 87 352

Messy voting (evolutionary): Currently, double majority voting rule (states and populations) must be satisfied from 2014 (Treaty of Lisbon), replaced qualified majority voting:

A blocking minority requires at least 4 countries representing >35% of the population.

For other decisions, either 72% or 21 member states must approve.

Pillar Two Common Foreign and Security Policy:
Pillar Three - Justice and Home Affairs:
 Legislation Community law may take the following forms:
  • regulations: are directly applied without the need for national measures.
  • directives: bind member states as to the objectives, but permit national authorities to choose the form and the means.
  • decisions: binding upon those to whom these are addressed, including all member states or individuals.
  • recommendations and opinions: nonbinding.

The Unanimity rule was revised (Lisbon treaty, 2007).

Unanimity rule: each nation has veto power . In case a country invades another, there is no way to punish the rogue country. No sanctions can be imposed. This was replaced by Qualified Majority rule.

(i) majority of countries: 55%, or 72% if acting on a proposal not originating from the Commission or the High Representative,

(ii) majority of population: 65%.

high representative of the Union for Foreign Affairs and Security Policy (comparable to US secretary of state)


  7. European Parliament

European Parliament, Brussels ©

Current MEPs(Members of the European Parliament) = 766 seats elected every 5 years.

Germany = 99, .... Luxembourg = 6.

Meeting places = meeting alternates in three cities (Strassbourg, Luxembourg, Brussels)

Turnout in 2009 was about 43%.

 Legislative Power

Originally, the Treaty of Rome of 1957 gave the Parliament only a consulting role. But its role has gradually expanded. Today the legislative power is equally shared by the Council and the Parliament.

consultation procedure: requires an opinion from the Parliament before a proposal can be adopted.

cooperation procedure: allows Parliament to improve a proposed legislation by amendment. A Rejection requires an absolute majority of the entire membership.

co-decision procedure: shares decision making power equally between the Parliament and the Council. (There are 20 standing committes.)

Budgetary power

The European Parliament approvess the Union's budget each year. It sometimes rejects a budget, when its wishes are not adequately respected. It also monitors spending.

draws members from individual countries.

  Parliament has the right to remove the Commission, (which requires 2/3 majority).

  8. European Court of Justice
European Court of Justice (ECJ)

European Court of Justice, Luxemburg ©

It started as a court for ECSC (in 1952).
the Highest court of EU regarding Union law, not national laws.

consists of 28 judges and 9 advocates general, who are appointed by member states.

term = 6 years

Advocates General provide the judges with impartial opinion on assigned cases.

They are independent of member states.

Grand Chamber of 15 judges (very rare now),

or Chamber of 3 or 5 judges, depending on cases.

   The judges elect the President of the Court (3 years).

The law correctly interprets Treaties of the European Union (Maastricht treaty). Court of Justice worked alone until 1988, now focuses on the task of interpreting Community law.

e.g., Union law supersedes national laws. (e.g., Van Gend en Loos case)

Court of First Instance (with 28 judges)

aka General Court

Created in 1988.  Its work is limited to the competition rules and to hearing cases against the community institutions. It also has its President.


direct actions are brought by the Commission, other Community institutions or by a member state. Cases brought by individuals or companies challenging the legality of a Community act are taken to the Court of First Instance.

preliminary rulings by courts in the member states. Court of Justice is not a court of appeal. National courts decide the case while observing the principles of Community law.

After the hearing, the advocate general delivers an independent opinion in open court. But it is not binding, and is not always followed by the Court.

The judges arrive at their view in closed discussion, and then delivers their judgment in open court.

The Court has the sole power to decide whether the actions of the Commissions and Council are constitutional. The court's judgments are binding throughout the community upon all individuals, business firms, national governments and other Community institutions.

For more information, see Europa document on Institutions of the European Union.This page provides direct links to various institutions of the European Union.

   Effects of Economic Integration