The Cost of Non Europe

The Cost of Non Europe


by Gianmarco Ottaviano, Achille and Giulia Boroli Chair in European Studies

The European Union is the child of war and mother of peace. It is the product of a revolutionary vision of international relations which has no precedent in world history: following centuries of conflict and war, faced with the ruins of the Second World War and later of communist regimes, a growing number of democracies spontaneously decided to break with the past. They put the Continent's peace, unity and prosperity ahead of national egoism, by hampering the expansionist aims of stronger countries and relieving the reflexive distrust felt by smaller countries. The cornerstone of the European project is the idea that peace and prosperity go hand in hand with the removal of trade barriers between countries: peace generates prosperity and prosperity maintains peace.

But is it true that trade defuses conflict? In general, the nature of the relationship between openness in international trade and military confrontation is not so clear. The reason is the existence of two countervailing effects. On the one hand, the probability of military conflict is low among countries that trade a lot among themselves for a simple question of mutual interdependence. On the other hand, countries that are very open to international trade typically have many trading partners and this reduces the negative economic consequences of waging war on an individual trading partner. In other words, "commercial monogamy" discourages bilateral conflict, while "commercial polygamy" makes it less penalizing. However, the former generates fewer benefits from the trade than the latter.
For this reason the European Union has institutionalized "commercial polygamy" through a framework in which all member countries are ready to collectively sanction the nationalist deviations of any member country.

Although in general it is difficult to conclude that international trade acts as an antidote to war, in the specific case of Europe it is undeniable that the creation of a free trade area between the countries of the Old Continent has coincided with a prolonged period of peace and unprecedented prosperity. Despite this, a quarter of a century after the creation of the Single Market (started in 1987 and ended in 1993), we live for the first time in a historical moment when, given the rise of nationalist forces which favor a return to national sovereignty, the fragmentation of European markets along national boundaries is no longer a zero-probability scenario.

What would be the economic damage of a return to non-Europe? Answering such a question is not easy, because it depends on the specific disintegration scenario that one considers and the type of effects, static (on production efficiency) or dynamic (on economic growth) that one seeks to highlight. Since the dynamic effects are much stronger but also harder to measure, an optimistic analysis of the economic consequences of non-Europe can limit itself to considering the static effects only. This approach offers the possibility of identifying a lower threshold value for the costs that a fragmentation of the European Common Market would bring.

That quantification exercise requires the definition of plausible Common Market breakdown scenarios and the use of mathematical models to simulate the economic consequences of the various scenarios identified. The most plausible scenario in the event of a breakdown of the single market is a return to the situation of the early 1980s, in which trade between the member countries of the European Economic Community (EEC) was regulated by a regional free trade agreement. From this point of view, the difference between the EEC (which appeared in embryonic form in 1957) and the EU (started in 1993) is fundamental when it comes to economic integration. Broadly speaking, a free trade agreement eliminates all duties and quantitative restrictions which would otherwise hinder international trade in goods and services between participating countries.
The EU adds many other features to being simply a free-trade area. Indeed, the EU is also a customs union, that is, a union where member countries, in addition to removing obstacles to the internal movement of goods and services, also commit themselves to a single trade policy towards the rest of the world: not only internal duties are abolished, but external duties are the same for everyone. Therefore, no EU country can conduct independent trade negotiations with non-EU countries. Furthermore, within the EU Single Market, free circulation does not only concern goods and services, but also flows of capital and people. These fourfold free movement translates into the four pillars of the Single Market that all member states have pledged to respect under penalty of exclusion from the Union.

Going back to non-Europe, the scenario of a return to a EEC past would mean shifting from a unified free market to a ​​free regional trade area. The resulting reduction in per capita income for member countries would be significant, on average about -6.5% across the EU. Faced with such a price, before deciding to give in to sovereign temptations and leave the European Union, countries should first ask themselves what problems need to be solved and whether an exit from the EU would help solve them. Likewise, countries should also consider the advantages, monetary and non-monetary, that EU membership ensures in a world where the economic, social, cultural and military weight of the great powers of the Old Continent is declining. Britain’s travails with Brexit are a striking example of what it means to decide to leave the European Union without pondering these questions first.

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