A theory of economic unions

Abstract

After decades of successful growth, economic unions have recently become the focus of heightened political controversy. To understand why, we develop a theoretical model of the effects on trade, income distribution and welfare of economic unions that differ in size and scope. Our model shows that political support for international unions can grow with their breadth and depth provided member countries are sufficiently similar. However, dif- ferences in economic size and factor endowments can trigger disagreement over the value of unions. Our model is consistent with some salient features of the process of European integration and statistical evidence from survey data.

We acknowledge financial support from the Centre de Recerca en Economia Internacional (CREI), through the European Research Council (ERC), under the European Union’s Horizon 2020 Programme, Grant Agreements 693512 (“Globalization, Economic Policy and Political Structure”) and 714905 (“Citizens, Institutions and Globalization”), the Spanish Ministry of Economy and Competitiveness (grants RYC-2013-13838 and SEV-2015-0563), the Generalitat de Catalunya through the CERCA program, and the Leverhulme Trust through a 2019 Research Fellowship.