Since the formation of General Agreement on Trade and Tariff and subsequently the formation of World Trade Organisation (WTO), rich countries across the world have been propagating for free trade of goods and flow of capital. Neo liberal economists have been arguing that free trade maximises the welfare of all countries. Baptised by this theory political leaders of developed and developing countries have been pushing each other to open up each other’s boundary to allow free flow of goods, services and capital and labour.
Due to failure in establishing free trade across the globe a large number of countries have been stressing on forming the regional trading blocs such as European Union (EU). However, the referendum of the UK to exit the EU has now given a strong jolt to the propagators of neo-liberalism. The Brexit is now sending the message loud and clear that when the self interest (in terms of employment, economic sovereignty) is affected no country (however rich may be) is ready to accommodate other’s interest.
Many economic pundits are now predicting that Brexit verdict is opening up the Pandora’s Box. In near future we are going to witness many more economic shocks. In this article I provide an overview of the formation of EU, its expansion, the current crisis and its implications for the world.
The genesis of the present form of EU can be traced back to the aftermath of World War II. EU was set up with the aim of ending the frequent and bloody wars between neighbours. Six European countries namely Belgium, France, Germany, Italy, Luxembourg and the Netherlands formed in 1951 the European Coal and Steel Community to unite European countries economically and politically in order to secure lasting peace. The first steps were to foster economic cooperation: the idea being that countries that trade with one another become economically interdependent and so more likely to avoid conflict. In 1957, the Treaty of Rome paved the path for the formation of the European Economic Community (EEC), or ‘Common Market’ in 1958.
During the second phase of expansion the United Kingdom joined the European Union along with Denmark, Ireland, on 1 January 1973 raising the number of Member States to nine. With the collapse of communism across central and eastern Europe, Europeans become closer neighbours. With the signing of Treaty on European Union on 7th February 1992 the name of European Economic Community (EEC) was replaced with European Union. It set clear rules for the future single currency as well as for foreign and security policy and closer cooperation in justice and home affairs. In 1993 the Single Market was completed with the ‘four freedoms’ of: movement of goods, services, people and money.
Since then, a huge single market has been created and continues to develop towards its full potential. Out of the around 50 European countries now 28 countries have already joined the unique economic and political union EU. What began as a purely economic union has evolved into an organization spanning policy areas, from climate, environment and health to external relations and security, justice and migration.
In order to minimise the transaction costs of trade between member countries due to currency exchange member countries agreed to accept a common currency Euro. Physical euro coins and banknotes entered into circulation on 1 January 2002, making it the day-to-day operating currency of its original members. However, all members of EU could not get the common currency. 19 of the 28 member states of the European Union namely Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain have accepted the common currency Euro. Now euro is the second largest reserve currency as well as the second most traded currency in the world after the United States dollar.
In 2014 the EU accounted for around 15 % of the world’s trade in goods and had the second largest share of global exports and imports of goods. So far as the trade within the EU is concerned traditionally the EU Member States as a whole have traded goods more with other Member States than with countries outside the EU. In 2013, with the exception of three Member States (Greece, Malta and the United Kingdom), the greater proportion of a Member States’s total trade in goods was with partners within the EU-28. UK exports around 57% of goods to non EU countries and around 43% to EU countries.
Germany was the largest Member State in relation to intra EU-28 trade in 2015, contributing 22.6 % of the EU-28’s dispatches of goods to other Member States and also just over one fifth (20.9 %) of the EU-28’s arrivals of goods from other Member States. So far as intra EU trade balance is concerned, Sixteen out of 28 Member States have negative trade in goods balances – i.e. they import more goods by value from EU partners than they export to other EU Member States. The largest negative intra-EU trade in goods balances are recorded for France (just under EUR 89 billion) and the United Kingdom (nearly EUR 79 billion).
Between 2002 and 2013 most Member States of EU have continued to be either net importers of goods (for example France and the United Kingdom) or net exporters of goods (for example Germany and the Czech Republic). However the extent of the positive or negative balance has changed for many Member States. For example France continues to be a net importer of goods from other Member States, but the negative goods balance has increased from just over EUR 10 billion to just under EUR 89 billion. At the same time, although Germany continues to be a net exporter of goods, its positive balance has decreased from over EUR 73 billion to under EUR 45 billion.
Therefore, when we look at the trade of the UK with EU overall it seems to have gained less than other member countries such as Germany which is a net exporter to EU member countries and compared to rest of the world it exports more commodities to the EU member countries.
The formation of EU not only allowed free flow of goods across EU but also free flow of labour. People from poorer regions of EU took advantage of this rule and moved to the land of opportunity i.e. the UK. In 2015, an estimated 2,70,000 citizens from other EU countries immigrated to the UK, whereas only 85,000 emigrated abroad. So EU ‘net migration’ to UK was around 185,000. That’s roughly the highest recorded level. Immigration of such a huge population to the UK puts enormous pressure on the government exchequer for providing them the social security and free health and education facilities. Immigrants also compete with the locals to get the jobs in the UK. This creates frustration among the local people of the UK.
The financial crisis of 2008 has affected the member countries at various intensity. Therefore, each country needs to respond differently to mitigate the negative effects of the crisis. However, there are no longer national monetary and exchange rate policies to respond to country specific shocks. Similarly, as per Article 126 of the Treaty on the Functioning of the European Union under the provisions of excessive deficit procedure member States shall avoid excessive government deficits. This impinges into the fiscal autonomy of sovereign states.
From the Brexit one point is definitely clear. Developed countries accept the neoliberalism till it benefits from trade of goods and services and inflow of profits from investment abroad and refuse to open their labour market for international competition. This is probably just the beginning. Let’s wait and watch the U turn of many other champions of neoliberalism in future.
Amarendra Das 