The creation of the Single European Market and Economic and Monetary Union (EMU) are likely to change in a profound way the economic landscape of Europe. These processes are effectively taking away from national governments their ability to regulate the economy, both directly – by imposing pan-European regulatory standards, or giving regulatory authority to EC institutions – and indirectly – by allowing greater mobility to factors of production, thereby facilitating regulatory avoidance.
What would be the effects of the single market and EMU? Suppose that non-tariff barriers have persisted until 1992, and will be largely eliminated in 1993 or soon after. Standard international trade models would suggest that the elimination of the last barriers to trade would produce, in every country, greater specialization, by causing the progressive shrinkage and elimination of entire sectors located in individual countries, and – correspondingly – the booming of other sectors. Less standard models, emphasizing external economies and the gains from geographical proximity, would predict that increased international factor mobility would create new pockets of poverty, possibly exacerbate the problems of existing underdeveloped areas, and at the same time bolster richer areas.
These phenomena, coupled with the reduced effectiveness of government policies, will – according to some – signficantly increase the exposure of the standard of living of individuals in every European country to economic disturbances, by decreasing the ability of governments to provide insurance against income fluctuations.