[MUSIC] Why would countries embark on an economic integration project like the one of the European Union? Well, the theory we laid out here and in the Globalization course shows us that when countries trade together, everybody gains. Real incomes rise, national welfare rises. When capital flows freely everybody gains, because the country that receives it has more capital available, the country that sends it gets higher returns on its capital. When people cross borders, when there's migration, everybody gains. And so we put these pieces together and we find that it would make sense, especially in a world like the post-World War II world, for a group of countries to embark on a project of economic integration to try to capture all of these gains from what they call the four freedoms, the free movement of goods, services, capital, and labor. And Europe, after World War II, had experienced tremendous destruction. And many Europeans visionaries, looking at themselves and looking at their history and the fact that they were the sources of much of the culture and institutions of the western world, said, why do we have to be such a violent place? Why can't we find some way to stop these constant wars, which you can see on this graph how much of the violence of the 20th century came from Europe. Why can't we stop this process and find a way to live peacefully with one another? The solution that the European visionaries came up with was to think of economic integration as a vehicle towards peace. In a sense a Trojan horse, right, from the old Greek story. You build the horse, which is economic integration, but in the belly of the horse is political union. And the hope is you can get the horse through the gates and eventually Europeans can start to live together in peace and even maybe as a single political unit. Now, the way you integrate economically, there are actually four forms of doing it. One, the simplest, is something called a free trade area, where you just allow free trade among yourselves, the members, nothing else. The second is something called the customs union, where you have free trade among yourselves. But you have a common external tariff so that you have the same trade policy with all outsiders. The third is to have a common market, where there's actually free movement of capital and labor, as well as goods and services. And the fourth is to have a full economic and monetary union, where you not only have free trade and a common external tariff, free movement of labor and of capital, but you also start to integrate your fiscal and your monetary policies. And often you have a single currency. Now, countries can choose any place along that continuum, in order to integrate themselves, in order to go deeper towards free trade and free movement of factors. But Europe was always quite ambitious about it. So when they started out their first experiment was what they called the European Coal and Steel Community. It had six members and they integrated those industries which were sort of the commanding heights of the economy at that time. That started in 1952 and when it went well they said, let's go further. Let's have a customs union. And let's integrate all of our industries and have a common external tariff. And those same six countries, which were Germany, France, Italy, Belgium, The Netherlands, and Luxembourg, formed a customs union that they called the Common Market, starting in 1958. Then they continued to get deeper, more integrated. They moved towards a common market in 1993, which they called the European Union, where they've had free movement of capital and labor. And in the period between 1999 and 2002 they launched their single currently, the euro. Now also, along that process, they removed border controls for people. This was the Schengen agreement, which was in 1985, and 26 states agreed to. So you can see there has been a process of what they called deepening in Europe, going from their first step of union and getting deeper and deeper, and more and more integrated. But while they were in the process of deepening, the European countries also wanted to widen. They wanted to spread the benefits of the prosperity they were gaining from trade and free movement of labour and capital, to other countries. And they also wanted to pull in countries that were somewhat unstable, coming out of dictatorships or coming out of communism, and help them to become stable, growing parts of this ever greater European community. So they had seven what they call enlargements, starting with the original six countries. They then expanded what is today the EU, to the UK, Denmark, and Ireland in 1973. In 1981 Greece joined. In 1986 Spain and Portugal joined. And in 1990, it wasn't an official enlargement, but West Germany absorbed East Germany, so this added many millions of new members to the European Union. And then in 1995 Austria, Finland, and Sweden joined the European Union, so expanding it up to the north. In 2004 there was a very large enlargement which included many of the countries that had been in the Soviet block, east European countries. So some of them joined in 2004, another group in 2007. And finally, Croatia in 2013. By 2025 the European Union hopes to bring in more states, Baltic states, to complete this process of geographically incorporating into Europe most of the countries that are on the continent. [MUSIC]
