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Alexandre Neves

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Alexandre Neves - Capgemini Financial Services

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BREXIT - EU, a multi-level integrated area.

15 November 2017  |  3186 views  |  0

For a better formatted text, visit my LinkedIn page: European Union, a multi-level integrated area.

Thank you very much for reading this article. Happy to receive your comments / feedback and suggestions.

Kind regards,

Alexandre Neves

 

On 23 June 2016, UK has expressed the democratic will of leaving European Union. The key issue that lead to this monumental decision is that UK citizens want to take back control of the country - control of laws and regulations, control of borders, and control of trade agreements with non-EU countries. This exercise is devoted to understand European Union economic and political integration, and to give some clarity on the trade-offs that UK will face in the design of the future relationship with EU.

I confess that is assessment makes me feel slightly uncomfortable. I was born in the early eighties; since I remember my existence I live in the European Union. Portugal joined the European Economic Community in 1986. I've travelled over the majority of Europe with the same facility that I travel in my home country. Additionally, I've worked in France, Ireland, Portugal, Spain and Netherlands; I’ve moved to United Kingdom two years ago. I feel like a fish that has been asked to describe ‘water’, fishes are not aware of the existence of water nor the properties of water because water is the only environment that fishes know.

fishes are not aware of the existence of water nor the properties of water because water is the only environment that fishes know.

In this article I want to explain what the ‘Single Market’ is. I want to look at the history of the European Union, and give a high-level overview of the political and economic integration. Under the subject of the ‘Single Market’ I want to uncover topics that were brought on the Brexit negotiation process such as Customs Unions and Free Trade Area. These concepts seem very basic, but most of us do not know what they really mean.

European Union - Economic and Political Integration

Europe was completely destroyed for the second time in less than half a century. A second world war had brought massive destruction to Germany, France, United Kingdom, and other European countries. Relationship between allies and Germany were in a bitter state, however European leaders had understood the mistakes of the First World War, namely the humiliating conditions of the Treaty of Versailles. Winston Churchill identified the root cause of European problems, uncontrolled nationalism. The solution, according to Churchill would be to “recreate the European Family” and “provide it with a structure under which it can dwell in peace, in safety and in freedom”. He went even further, proposing to the European countries the creation of a sovereign European superstrate, under which the European countries would be organized as a federation of states.

"We must build a kind of United States of Europe" Winston Churchill

Europe hasn’t become the United States of Europe yet, but Europe’s economic, political and societal fabric is much more integrated now than it was in the wake of the World War II. The process started when France and Germany buried their war quarrels and united in the Steel and Coal production, founding the European Coal and Steel Community. The process has been long, but the direction has been consistent, the closer and closer integration between European countries. The following figure highlights the key events of the European Union.

Figure 1 - The Path to Economic and Political Integration

 

Multi-level of Economic and Political Integration

History has shown us that European Union is an evolving organization: European Union as we know today was not born overnight, it went through several steps of integration. Some people in senior positions European Union argue that the final destination of this journey is the creation supranational and sovereign United States of Europe.

In European Union history lie the clues of the future relationship between UK and EU. There are two relationship models that have been implemented and tested several times across European Union history. The two models are Free Trade Area and Customs Union. On a side note, these two models existed in the very early days of European Union (see Figure 1 - The Path to Economic and Political Integration); they were competing models of European integration.

Free Trade Area

United Kingdom joined a Free Trade Area in 1960. Currently the most notable member of European Free Trade Area is Switzerland. Switzerland if part of European Free Trade Area. while is not member of the ‘Single Market’.

In a nutshell, a Free Trade Area is an agreement between two countries, or between a country and an economic bloc with the objective of fostering the economic exchanges between them. This can be achieved by eliminating tariffs, taxes or quotas on goods and services from one country entering in another. The key benefit for UK being member of European Free Trade Area is that would be able to sign trade deals with other countries – namely the Commonwealth.

The pain points of this solution is that a Free Trade Area is a complex negotiation and can take several years to sign. Additionally no existing Free Trade Agreement (Canada and Switzerland) come close to the ambitions of UK in relation to the Financial Services, namely access to the Financial Services ‘Single Market’ (i.e. passporting). Finally, this solution would raise a border between Northern Ireland and Republic of Ireland, which is a blocking issue for the European Union.

Customs Union

European Customs Union was created one year after the European Economic Community was born. United Kingdom was not a founding member of the European Customs Union. The main reason is that joining a Customs Union would deprive the UK of the freedom to negotiate an external tariff with the Commonwealth.

Customs Union has also the objective to stimulate the economic exchange between countries. This is achieved by creating a homogeneous economic area vis-à-vis the outside world. Customs Union achieves its objectives with the following three key principles:

  • abolition of customs tariffs and taxes between Member States;
  • abolition of quantitative restrictions between Member States;
  • establishment of a common customs tariff vis-à-vis third countries.

The key benefit of this solution is that no border would be needed between the Northern Ireland and the Republic of Ireland. The pain points of this solution is that UK would not gain control over the negotiation of free trade agreements with the external world – European Union is the sole responsible to negotiate with countries outside of the European Customs Union. Another key issue for the UK is that the European Customs Union does not cover the Services sector, which mean that UK would lose access to the Financial Services ‘Single Market’.

‘Single Market’

European Union has the following definition for the ‘Single Market’:

"The Single Market refers to the EU as one territory without any internal borders or other regulatory obstacles to the free movement of goods and services. A functioning Single Market stimulates competition and trade, improves efficiency, raises quality, and helps cut prices.”

European Union’s ‘Single Market’ is the most advanced economic and political co-operation agreement between sovereign nations. ‘Single Market’ not also eliminates tariffs, quotas, and taxes on trade but also includes free movement of goods, services, capital and people.

From an economic point of view, the key benefit of the ‘Single Market’ is the reduction of the "non-tariff barriers", which refer to barriers of free trade such as different standards, regulations, etc… OECD points that the "non-tariff barriers" are becoming more and more important as the tariffs are already relatively low on the G20 members (at least on industrial goods). On the services sector the non-tariff barriers are particularly relevant. 

We can look at the ‘Single Market’ as a Free Trade Area and Customs Union enhanced with Political and Judicial power. European Parliament acts as the Legislative branch, the European Commission acts as the Executive branch, and the European Court of Justice acts as the Judicial branch. Those three organizations are responsible for designing and enforcing the level playing field across all European Union countries.

Figure 2 - Multi-level of Economic and Political Integration

 

Conclusion

Now that we understand where we come from – UK and EU, we understand the path of integration among European countries we are in a better position to understand what might be the future relationship between UK and EU. Free Trade Area and Customs Union are two building blocks of European Union. The future relationship between UK and EU can be either one or a combination of elements of both. 

To craft a relationship beneficial to all, UK needs to understand what are the trade-offs associated with each relationship model in key areas such as borders, control over immigration, flexibility to sign free trade areas with Commonwealth, access to ‘Single Market’, defence, science, climate change and foreign policy.

 

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