United States of Europe vs United States of America

Keith Head and Thierry Mayer in the new edition of Journal of Economic Perspectives analyse whether United States of Europe is getting any closer to United States of America. They compare progress across four freedoms: goods, services, persons, and capital. There has been progress in goods, services and capital. Persons is where there are issues:

In terms of formal institutions, the European Union is not on the verge of becoming a “United States of Europe.” But on multiple fronts, EU economic integration now matches or even beats the equivalent measure for the 50 American states. This is remarkable. The United States has more than 230 years as a federal state with a constitutional prohibition on barriers to interstate commerce.

Of course, all comparisons with the United States require caution since the last two additions for the United States occurred in 1959, whereas 22 countries have joined the European Union since that year, with the most recent entrant (Croatia) joining in 2013. Perhaps the most useful comparison across the US states is with the EU15, which includes the entry of some lower-income states but has had constant membership since 1995. The border tax equivalents implied by flows of goods and merger and acquisition transactions within the EU15 have reached the levels estimated for US states. When measuring integration as convergence in price levels the EU15 is quite similar to the American states. Focusing on a product for which we have detailed and comparable measures across all countries—compact, massmarket cars—we confirm the finding for the aggregate price index: the American states and the EU15 are again very similar.

Regarding what may be the most politically sensitive of the four movements, migration, our estimates suggest that barriers remain considerably higher in Europe. Despite the absence of formal restrictions on movement, Europeans act as if their human capital is very heavily taxed by moving countries. This lack of mobility across European borders likely reflects a variety of labor market frictions and cultural differences. On the other hand, the incentives to move have fallen substantially within the EU6, with dispersion in real incomes now essentially the same as that in core eastern states of the United States. Real income variation is three times as high in the European Union as a whole, but enlargement has been followed by a trend towards equalization, so there is little reason to think the EU28 has reached a steady state in terms of income disparities across its members.

 

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