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The Present State of Integration Theory

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  • Fritz Breuss

    (WIFO)

Abstract

As in other areas, theoretical and empirical analysis stimulate each other also concerning issues of economic integration. With integration becoming "deeper", tasks are getting more complicated not only for institutions governing and administrating the newly established integration areas, but also for economic theory which is to identify and explain its manifold effects. Shortly after World War II, the theory of the customs union marked the beginning of explanatory approaches towards regional integration agreements (customs unions, free trade zones). Over the years, the theory has been elaborated and is mainly concerned at present with the issue of why free trade blocks are being established in the face of world-wide trade liberalization efforts undertaken by GATT/WTO, as well as with the effects of an integration area's enlargement on particular countries within the area, on the one hand, and on the new members, on the other (issues of enlargement). A second stream of integration theory has been developed since the early 1980s, designed to cope with the complex effects of the EU Single Market and taking into account the findings of the "new" theory of foreign trade (imperfect competition and monopolization, economies of scale, product diversification). The evolution of the EU from a customs union over the Single Market to the Economic and Monetary Union calls for further theoretical foundation. Thus, the theory of "optimal currency areas" is supposed to clarify the issue of which countries may qualify for accession to a monetary union. The very progress of integration within the EU brings new questions to the forefront. Will the completion of Monetary Union and the eastern enlargement give rise to a multi-speed Europe? Tentative answers may be provided by new approaches of the "geography and trade" theory which themselves are based on recent findings of foreign trade theory applied to "regional" aspects under the circumstances of the Single Market. Trade liberalization, both within Europe and world-wide within the framework of GATT/WTO, is a necessary precondition for the globalization of economic activities. This poses new challenges for economic theory. Promising approaches may again be offered in part by the new "geography and trade" theory. The article tries to give an overview of the history of integration theory in the light of the new challenges posed by ever closer European integration. Wherever possible, reference is made to empirical evidence in discussing the different empirical concepts.

Suggested Citation

  • Fritz Breuss, 1996. "The Present State of Integration Theory," WIFO Monatsberichte (monthly reports), WIFO, vol. 69(8), pages 525-544, August.
  • Handle: RePEc:wfo:monber:y:1996:i:8:p:525-544
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