An economic union is an agreement between two or more sovereign nations to coordinate trade policies. Progression to a formal economic union typically involves several stages of increasing cooperation between nations. Member states in these various stages commonly share land borders, though there are many exceptions to this. Economic unions increase the efficiency of trade by eliminating trade barriers and cooperating on monetary policy.
The first stage in this process involves establishing free trade agreements (FTAs). FTAs involve eliminating import tariffs, or taxes, between member states to encourage internal trade. Products originating outside of the free trade zone must be identified as such, because each member state may have different tariff policies for foreign goods. Without this identification process, foreign goods will typically enter the free trade zone through the country with the lowest import tariffs. Other than agreeing to identify these foreign products, FTAs place few restrictions on the economic affairs of member states.
Tracking the source of foreign goods can be a costly procedure for members of an FTA because it requires a large amount of documentation. Establishing a common external tariff policy between member states can remedy this problem. This is called a customs union and is the next stage towards full economic integration. Customs unions increase the efficiency of trade, but result in less freedom for member states to form their own foreign trade policies. Since foreign trade is closely related to foreign policy, customs unions typically only form between nations with shared foreign policy objectives.
Further increasing trade efficiency requires eliminating all barriers to the movement of financial capital and labor across the borders between member states. This stage in the process towards economic union generally requires a considerable level of close cooperation between governments. Qualifications and certifications of workers, for example, must be harmonized before cross-border commuting is feasible. Increasing economic interdependence to this level often requires governments to coordinate fiscal and monetary policy as well.
A formal economic union can be established by forming multinational financial institutions like central banks and other bodies to regulate commerce. At this point, a common currency can be adopted to increase efficiency and eliminate uncertainty associated with money exchange rates. Member states will often coordinate the areas of regional development and transportation policy to further harmonize trade and growth. The largest modern example of an economic union is the Eurozone, which was officially formed by eleven European nations on 1 January 1999.
