15 April 2015

Vox EU: Europe’s challenging economic integration - Insights from a new index

Despite a significant progress over the past decade, European integration still needs improvement in some areas. This column presents a long-term narrative of European integration by using a recently published European index of regional institutional integration.

Column authored by Ettore Dorrucci, Demosthenes Ioannou, Francesco Paolo Mongelli and Alessio Terzi.

The index maps developments in European integration from 1958 to early 2015 on the basis of a new monthly dataset. The evidence shows that successful integration could be achieved with reforms that are inclusive, widely explained, understood, and accepted.

The process of European integration has brought about the largest and most open common market in the world, the euro, and the banking union. As further steps are being discussed – especially following the Four Presidents’ Report of December 2012 (Van Rompuy 2012) – it is useful to take a long view.

Our recent work provides insight into this historical view by updating the European index of regional institutional integration (Dorrucci et al. 2015). The index maps developments in European integration from 1958 to early 2015 on the basis of a new monthly dataset. It shows where progress was made, but also flags where efforts are still indispensable.

Europe’s economic integration narrative

From the Treaties of Rome (January 1958) to the Maastricht Treaty (November 1993), Europe moved gradually but unambiguously towards closer economic integration – i.e. an ‘internal market’. Inherent to the pursuit of the internal market was a need for intra-area exchange rate stability. When the externally arranged Bretton Woods exchange rate system broke down, it was replaced by European arrangements (the ‘snake’, and then the EMS). Given the difficulties, the idea of a single currency, first explored by the Werner Report of 1970, was abandoned.

Yet, in the late 1980s and early 1990s, when regional integration made important strides, this idea re-emerged. The single monetary policy was considered as a logical complement to the need for stable exchange rates and the new regime of free capital movement that were implied by the internal market. The favourable political momentum came with Germany’s Wiedervereinigung.

In the eyes of many, from an economic perspective the launch of the euro and the Eurozone was just – very reductively – a sort of ‘cherry on the internal market pie’. Also for that reason, diverse recommendations on more compelling economic and fiscal union, contained in the Delors Report of 1989, were watered down in the less ambitious compromise signed in Maastricht in 1992.

Measuring European integration

The narrative sketched above is captured in Figure 1, which presents a quantitative index of the path of EMU-relevant institutional integration in Europe since the late 1950s (see Dorrucci et al. 2015, including for the methodology). Our novel monthly dataset is articulated along two overarching periods of institutional integration:   

• The ‘Common Market Era’, from 1958 until 1993; and 
• The ‘Union Era’ thereafter.  

A maximum score of 50 is assigned to each of these periods, with the index starting at 0 on 1 January 1958 (when the Treaty of Rome entered into force) and then making progress up to the current cumulated value of slightly above 76 as of 1 January 2015. The gap between 100 – i.e., the maximum total score that would be assigned in the index if all objectives of the Common Market and Union Eras were fully accomplished – and the current total score gives an indication of the distance still to be covered until a ‘new perceived steady state’ is achieved in the process of integration.

Figure 1. European Index of Regional Institutional Integration (THE INDEX) Concerning the Common Market era, the index draws on the traditional classification of regional economic integration by recognising five ‘stages’ of integration (Balassa 1961), as shown in Figure 1:

• A free trade area and customs union (stages 1 and 2)
• The gradual build-up of the European internal market (stage 3)
• Some degree of coordination of, for instance, exchange rate policies (stage 4)
• A number of institutions, laws, and decision-making processes which can be defined – though to different degrees – as supranational in nature (stage 5)

Full article at Vox EU

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