Economic Interdependence between European countries

Why is economic interdependence necessary?

When we talk about economic interdependence between countries the first and foremost factor that comes to mind is the exchange of goods and services then the flow of labour, capital, technology, and finally the flow of funds. Helpman (2011) describes the economic fortunes of a country being intertwined “…via trade, foreign direct investment, and financial capital flows”. Helpman also talks about how the global crises of 2008 illustrated the importance of this interdependency between countries when it caused the volume of international trade to fall by almost a quarter which then adversely influenced even the countries with a sound financial system. Coming to the first aspect of the exchange for goods and services (trade); it is indeed, essential to trade in order to derive maximum benefit from the efficient use of scarce resources available and as economic development and progression takes place resultantly because of globalisation, international trade is becoming increasingly popular particularly when it comes to European countries. Piggott and Cook (2006) talk about the need for international trade quite comprehensively: “exports and imports can smooth demand fluctuations in the domestic economy, and growth via exports could increase competition at home. Therefore basically trade allows firms to escape the confines of the domestic market, so reducing costs, improving quality and hopefully leading to higher sales and profits”. Furthermore, this leads to the countries’ then helping even their businesses or organisations obtain a competitive advantage through specialisation and giving them access to international markets which in turn helps boost the economy even more.

Europe’s global economic position

Most of the countries in Europe have a significantly high GDP per capita and are considered to have extremely developed economies when it comes to the Global market; examples of which include Germany, France, Netherlands, and so on. In fact, the International monetary fund in its latest report in 2018 places most of the European countries in the advanced economies’ category whether it is in final domestic demand, stock building, or foreign balance. It is especially impressive that most of these countries progressed themselves post communism particularly with European countries like Hungary and Latvia undergoing financial crises as Grzegorz Ekiert (2012) puts it “…these countries’ political and economic achievements have been in stark contrast to the failures seen in other post-communist states.”

The most important role in economic development however, has to be
acknowledged as well which is the economic interdependence between these European
countries.

Economic interdependence and its importance

“Economic interdependence is occurring due to specialization of
countries, as they are dependent on others in the purchase of products which
are not manufactured nationwide.” (Surugiu, 2015)

It should be of a common understanding that progress cannot be achieved
by being alone or confining to a limited way of approaching desired economic
objectives and it proves to be true in the global economy as well. As more
countries pool in their share of different scarce resources and bring about
extra demand as well from their economies they do in fact help in reducing the
wastage of resources. Needless to say, this really does synchronise with
efficiently allocating these available resources too. When we talk about globalisation
and economic interdependence the most critical element to have are good
international relationships between countries due to the aforementioned fact
that it is not only international trade that influences the countries’
economies but also other economic factors such as the flow of labour, easing of
trade regulations or even financial tie-ups. These relationships are usually
quite diplomatic and do involve a collaboration from both sides, it could even
be argued that this relationship in itself is an exchange in order to achieve
mutually favourable growth thus, these can also be the difference between
maintaining peace and economic well-being. Paul Wilkinson(2007) talks about how
paramount these can be in his book “…some of the
major problems and challenges of international relations reveals that we live in
a very dangerous world, and that many of the most serious threats to our peace,
security, and economic and social well-being are the result of human actions.”

How and why European countries are economically interdependent

Being geographically close such as the countries within Europe gives
them an advantage to not only make trading easier and quicker but it also
provides them with a strategic advantage of achieving their political missions
and their businesses with a competitive edge in the international markets. When
countries do intend to come together in order to achieve economic progression
they usually end up forming an alliance/trading bloc or in Europe’s case most
prominently a regional trading bloc (European Union) which overtime proved to
be of immense significance to their  economic
and political environment. This proved to be extremely pertinent in making sure
that the countries involved not only maintained peace and excellent diplomatic
ties but also that they assisted each other’s economies with regards to growth
and exchanging of resources allowing them to specialise more distinctively and
get an even higher trade advantage. This enabled the member countries to
contribute to the union financially and in return the union invested in its
members’ economies accordingly. As stated by European Commission (2018) the EU
adopted budget aims to invest (in its member countries) about EUR 160, 113.52M
in several areas including sustainable growth, competitiveness for growth and
security amongst others. The European Union could arguably be one of the most
powerful economic integrations. Over the years, it has not only helped its members
in areas like capital accumulation, and technical progress but it has also
maintained common and standardised policies for trade and as attested by
European commission(2018) itself the EU making one of its main aims to become
economically interdependent and avoid any future conflicts between its members.
Consequently, countries such as Germany, Spain and France who were at war for
centuries have now ensured that they now work in harmony to attain mutual
benefit (Mankiw, 2016, p.528). Some other examples of European economic
integrations include the European Economic Area (EEA) with around 32 members,
European Union Customs Union (EUCU) with 28 of the EU and 3 non-EU members
(Turkey, Andorra, and San Marino), and European Free Trade Association (EFTA)
with currently 4 members. The most compelling benefit however, is provided by
there being a single currencies’ adoption by the European Union members which
brings with it the convenience of eliminating transaction costs, reduction in
price discrimination and the stability of the foreign exchange rate (Mankiw et al, 2016, pp.531).

Threats economic interdependence presents

While recognising the pivotal aspects of European countries having to be
economically reliant on each other we must also look at the limitations it
brings with it. Some of these limitations include a 5% decrease in intra EU
trading during 2000-2014, Europe’s internal crises in 2015 which was triggered
by the euro crises a few years prior, not giving the countries involved to make
independent political decisions without undermining their relationships with a
majority of their trading partners, and it taking just one opposing country to
threaten a powerful alliance like EU as Greece tried to in 2015 against EU
sanctions placed on Russia (The German Marshall Fund of the United States,
2016).

This can also cause a free rider problem as well which Mankiw, Et al (2016) explains by giving the
example of the Greek recession where the government borrowed more than they
could pay back and eventually the EU had to bail them out. Most impactful
though, are the difficulties that arise because of there being a single
currency (Euro) adoption within the selected EU countries; these are including
but not limited to fiscal federalism (Mankiw et al, 2016) describes it as the fiscal policy in the currency
union working like that of a single economy, they also give up their right to
have an individualistic monetary policy, and finally the macroeconomic
adjustment generating from the external value of their currencies also known as
automatic stabilisers (Investopedia, 2018).

In conclusion, it can be said as Monnet (1978) suggests; the process of economic integration in Europe has always been
incremental in nature, and often ‘forged in crises’. The main aims of these
integrations also keep changing with respect to the challenges the economic
environment brings with it and that being said, as long as these aims are met
and all countries feel like they are benefiting mutually they will always
understand that there are more pros than cons of economic interdependence for
them, if not then they can always choose to leave like the UK did with the EU
in June 2016. It goes without saying that trading blocs are an integral part of
economic integration and political reasoning might also be a huge element in
deriving its existence. However, as long as the collective European economies
continue to prosper by depending on each other economically and the
consequences of abandoning this interdependence do not surpass the benefits of
remaining it would not make any sense for a country to be an independent
economy.

Reference List:

European Free Trade
Association (2018) About EFTA: The
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European Commission (2018) The EU
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European Commission (2018) Taxation
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Helpman, Elhanan. (2011), Understanding
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https://www.imf.org/en/Publications/WEO/Issues/2018/03/20/world-economic-outlook-april-2018#Statistical%20Appendix
[Accessed 20 April 2018]

Investopedia (2018) Automatic
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[Accessed 21 April 2018]

Mankiw, G. Taylor, M. Ashwin, A. (2016), Business Economics: The Global Economy, 2^nd
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Monnet, J (1978), Memoirs,
London.

Piggott, Judith. Mark, Cook. (2006), International
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Surugiu, M. and Surugiu, C.
(2015) International Trade,
Globalization and Economic Interdependence between European Countries:
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The German Marshall Fund of The United States (2016) Policy Brief: How Economic Dependence Could
Undermine Europe’s Foreign Policy Coherence. Available from: http://www.gmfus.org/publications/how-economic-dependence-could-undermine-europes-foreign-policy-coherence
[Accessed 21 April 2018]

The Icelandic Directorate of Immigration (2018), Home: EEA Member Countries. Available
from: https://utl.is/index.php/en/eea-member-countries
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Wilkinson, Paul. (2007), International
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