Economic Union Definition
Economic Union is a group of countries coming together to allow the goods and services to move freely in and out of these countries to remove the trade barriers and create better employment of skills and resources. It even allows free movement of production factors such as capital investment and labor and has a common internal and external trading policy.
Objectives of Economic Union
#1 – Increase Efficiency
As the free flow of goods, services, and production factors occur, production costs reduce. This increases the profit margins of the member countries, which leads to greater specialization and better use of resources as each country produces those goods in which it has a comparative advantage and trades all other goods so that more is produced in totality.
#2 – Consumer Satisfaction
When the free flow of goods and services occurs, and the customs duties are removed, the price of imported goods and services reduces. This leads to an increase in consumption because consumers can afford a greater quantity at the given level of income.
#3 – Higher Standards of Living
Due to the free movement of production factors, people are presented with greater employment opportunities leading to higher incomes and better utilization of skills. With higher disposable income, people can afford a better lifestyle.
4.9 (831 ratings) 117 Courses | 25+ Projects | 600+ Hours | Full Lifetime Access | Certificate of Completion
#4 – Increase Competitiveness
When the group of countries comes together to form an economic union, they give one another strength because the cost of production reduces. This makes them more competitive in the world economy and brings them greater profit.
#5 – Strengthening Diplomacy
Due to allegiance between the countries, they gain a stronghold in world diplomacy as the world’s interdependency increases to the union. In contrast, the union in itself is less dependent on the rest of the world.
Economic Union Examples
Before Brexit, the European Union was an Economic union as well as a Monetary Union. There are still a few countries within the union that did not accept the Euro as their currency, including Britain and Switzerland, which still used their own currencies. So they were part of the economic Union but not of the Monetary Union.
Another example could be the Gulf Cooperation Council or the GCC. This comprises several Arab states. This is a political as well as an economic union in the middle-east. Even though one of the objectives was to have a common currency by 2010, Oman and UAE announced their withdrawal from the same in 2006 and 2009, respectively.
The Eurasian Economic Union is also an Economic Union with a free flow of goods and services and common fiscal policies for industry, agriculture, and energy. Even here, the common currency’s goal is not yet met and is one of the future objectives.
- Opportunity for Development: Smaller countries that might not get the necessary resources on their own can do so being part of the Economic Union. For example, companies in a smaller or a weaker country may not gather the required funding from banks when it attempts to generate it on its own credit score. However, a guarantee from a stronger company in the union helps it in doing so, and this allows such companies to utilize its potential to a greater level.
- Speeds up Development: When weaker countries can acquire the resources more quickly, they can speed up their development and become stronger, leading to a betterment in the standard of living of the people of these countries, and this gives strength to the economy of the union as a whole.
- Unstable: As seen in the case of the European Union, after Grexit and Brexit, it is clear that having a common economic policy might become unstable when the debt crisis becomes overwhelming for underperforming countries. The acronym used for some such countries in the European Union is PIIGS, the full-form of Portugal, Italy, Ireland, Greece & Spain. These are considered the weakest economies of the European Union and are therefore considered a burden on the stronger economies.
- Loss of Revenue: When the countries lift the customs and trade restrictions, they lose out on the part of their revenues from taxes. The stronger economies might not be highly impacted by it, but the weaker economies are. At times, the benefits from the union might not be sufficient to cover this loss of revenue. Therefore the countries need to conduct a thorough cost-benefit analysis before becoming a part of the union.
This has been a guide to What is Economic Union & its Definition. Here we discuss the objectives of economic union and examples along with advantages and disadvantages. You can learn more about from the following articles –