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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.”
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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.
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European Free Trade Association (2018) About EFTA: The European Free Trade Association Available from: http://www.efta.int/about-efta/european-free-trade-association [Accessed 21 April 2018]
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European Commission (2018) The EU in brief: From Economic to Political Union Available from: https://europa.eu/european-union/about-eu/eu-in-brief_en [Accessed 21 April 2018]
European Commission (2018) Taxation and Customs Union: Customs Union Available from: https://ec.europa.eu/taxation_customs/business/calculation-customs-duties/rules-origin/customs-unions_en [Accessed 21 April 2018]
Helpman, Elhanan. (2011), Understanding Global Trade, Harvard University Press Available from: ProQuest EBook Central, http://ebookcentral.proquest.com/lib/lsbuuk/detail.action?docID=3300975.
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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 [Accessed 21 April 2018]
Wilkinson, Paul. (2007), International Relations: A Very Short Introduction, Oxford: Oxford University Press.
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