Common Markets and Monetary Unions
A Common Market
A common market or customs unions is a group of countries between which there is free
trade, and which impose a common external tariff.
- Land: There should be free trade in natural resources.
- Labour: Workers should be free to work in any member country.
- Capital: Capital should flow freely between countries, importantly financial capital.
Stages of Economic Integration
Bela Balassa’s theory of economic integration:
- Start with preferential trade areas where countries agree to reduce tariffs, quotas.
- Develop into a free trade area where tariffs and quotas have been abolished.
Members may set different tariffs with countries outside the free trade area.
- Then develop into a customs union, where there is free trade and a common external
tariff.
- Then integrate into a common market where not only free trade of goods and
services but also in the factor market. Freedom of labour and capital.
- A common market could lead to a economic union where truly common markets are
truly integrated with a single currency.
- There will be complete economic integration associated with a political union
where countries act like a county might in a nation state.
Monetary Unions
A monetary union occurs when two or more countries share the same currency. The
Economic Monetary Union (EMU) of the EU is the best example.
Members of EMU gave control of monetary policy and exchange rate policies to the
European Central Bank (ECB) located in Frankfurt.
It has the following functions:
- Responsible for distributing notes and coins throughout the eurozone.
- It sets interest rates and decisions are made to achieve inflation targets.
- Responsible for maintaining a stable financial system. If banks in the eurozone are in
trouble, it the ECB’s responsibility.
- Manages foreign currency reserves for the members of EMU. It can use these to
intervene in the foreign exchange market to influence the value of the euro.
Advantages of Monetary Union for Eurozone Countries
- Reduced exchange rate costs: No exchange rate fees when making transactions in
other member states.
- Greater price transparency: A single currency makes it easier to compare prices
between different countries and, for consumers, to buy from the cheapest supplier.
Multinational producers are therefore less able to price discriminate.
- Inward investment: Gives countries within the eurozone a competitive advantage
compares to those outside the eurozone. Multinational corporations may have
incentives to settle in eurozone countries as there is free trade.
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