In 1957, six European countries formed the European Economic Community, and in 1993 the European Union came into force, creating a new level of integration among its member nations.

UBC Sauder School of Business’ Keith Head, the HSBC Professor in Asian Commerce and Professor in the Strategy and Business Economics Division, began tracking European integration in 1998, and his latest paper, titled The United States of Europe: A Gravity Model Evaluation of the Four Freedoms, explores how successful the endeavour has been.

For the study, he and co-author Professor Thierry Mayer, from Sciences Po in Paris, measured the movement of goods, people, services and capital — and looked at how everything from cars to pasta can get in the way.

We recently sat down with Professor Head to learn more about this concept, why it is important and what we can learn from it.

What inspired you to look at the idea of a United States of Europe?

There were papers that talked about the European Union as a failure because it didn’t have a federal government like the United States — but there are other ways to think about whether the European Union has been successful. An obvious one is that it was created to prevent wars, and it has been spectacularly successful at that. If you look at how many times the French, the Germans and the English went to war before the European Union was created, it's a pretty sorry affair. Millions of people died because of that.

The idea of unification was also motivated by a long-running desire to create a gigantic market where people would be able to freely buy goods, and workers and capital could move to wherever they were most employable. So we were really interested in whether that part had been achieved.

How did you go about it?

In 1957, six countries — Belgium, France, Italy, Luxembourg, the Netherlands and West Germany — signed the Treaty of Rome, and they expressed their objectives in terms of what they called “the four freedoms”: the movement of people, goods, services and capital. Most of the work in economics has been about movement of goods, because it's where we have the best data, but we felt like it would be a real omission if we didn't also look at what’s happening with people, services and capital, even though they’re more challenging to measure.

We used the latest techniques to measure that rate of progress and present it graphically. In the U.S. they track trucking and trains using something called the Commodity Flow Survey, and it looks at how goods move from state to state. So the idea was to look at the states as if they were countries, and compare them with the European Union to see which is more integrated; then we realized we could apply that to the other freedoms as well. I don't think anybody had ever done that.

What did you find?

We found goods had made a lot of progress, and that the progress has been fairly steady during the entire life of the European Union. There was a big burst of progress when they got rid of their tariffs, but then things slowed because it took a lot of work to integrate trade.

They had to do things like agree on what is the meaning of beer, because in Germany, beer is something that has four ingredients — malt water, barley, and hops. If it has something like rice in it, which Budweiser does, it isn’t beer from their point of view. The Italians have similar views of what pasta is. They said if it's not made with durum semolina, it's not pasta. So you had to sort of get people to agree on basic ideas like that, and that was hard. These are very distinct cultures with distinct heritages.

What got us really excited is when we compared it to the data for the U.S., we found there isn't really any major difference left. In recent data, the importance of borders in Europe isn’t notably larger than the importance of borders in the U.S.

What about prices of those goods?

The European Commission had been upset about the big differences in the prices of cars, and they started keeping track of car price data and publishing it. In the U.S., there's the Consumer Expenditure Survey that tracks what people pay for their cars, and we were able to break that down by state. We show the dispersion in car prices across states wasn't very different from dispersion in car prices across the European Union after Europe integrated. So that was a key piece of evidence that pointed to the success of creating freedom of movement and goods.

You also look at the movement of people, what did you find?

That area didn't show as much progress. In principle, people can go anywhere they want within Europe, but the vast majority stay in the country where they were born. We framed it as a tax, and measured how much loss to your well-being you experience when you cross a border, and in Europe it’s much, much higher. In the early phase of integration, you saw migration from places like Spain and Portugal over to the richer countries, and you still see migration from Eastern Europe into the rest of Europe — that was one of the issues that was important in Brexit. But the old idea that Europeans don't move is basically true in the data.  

How did you measure the movement of capital?

The data isn’t as good on the movement of capital, so we measured it by looking at mergers and acquisitions. From what we could find, national borders in Europe don’t matter any more than state borders in the U.S., so in that category, it looks like mission accomplished: there’s open and free movement.

What are some other reasons why Europe might unite?

When leaders first started the European Union, the fundamental thing was this desire to make war not only unthinkable, but materially impossible. So the industries they focused on were iron and steel, because iron and steel were the backbone of fighting: tanks, rifles, etc. They brought iron and steel under common control, where no country could be self-sufficient in those things. From there, it really wasn't clear what they wanted. In some countries, there was very much a desire to move towards more political unification; in other areas, like the UK, they basically just wanted the economic benefits, not political unification.

So there's always been this tension between people who just want the economic benefits and want their nation to continue more or less independently, and people who believe in the idea of a European army, for example, and a European foreign policy. But agreeing on what the European foreign policy would be has proven notoriously difficult, so they haven't gotten very far.

What are some reasons why they haven’t united?

Initially, the great pitfall that was cited during the Brexit campaign was that you weren't able to control your own borders, and in the U.S., it happens with respect to Mexico. But for Mexico, there's legal and illegal migration; it's certainly not free. Within the European Union, you can go wherever you like. After the Brexit referendum, that issue went off the front burner, and they ended up focusing on a vague idea of sovereignty.

For example, in my mother's village in England, a woman told her "The European regulations tell us that we can't have curved cucumbers." That rule about the curvature of cucumbers is seen as an example of the overreach of these faceless bureaucrats down in Brussels — and [British Prime Minister] Boris Johnson talked about being required to put freezing packages on kippers. But freezing fish before you put it in the mail probably makes sense, and cucumbers can't be excessively curved because of a business regulation designed to fit more cucumbers in a crate. Still, that kind of example was seized upon by people who felt sovereignty was being lost. That’s not hugely prevalent in the rest of Europe, though; it seems to be mainly a phenomenon of the English.

The most interesting recent case was with Covid, when it seemed like the Brits moved very quickly and nimbly to get large amounts of vaccine, and the European Union moved in a slow and bureaucratic way. So many people thought, “Here's an example of how too much political unification can be a bad thing, because it makes it hard for countries to show individual initiative to get things done.” I don't know how it will all shake out, but last winter it seemed like a pretty good argument for why too much integration could have a downside.

How much of a role does language play in keeping countries apart?

When we looked at people's migration, language has a very big role. Language has a role in trade too. But even considering the language issue, there's still a big role for national borders. People in Austria don't just get up and go to Germany.

Why is that?

We could speculate that it has to do with networks of family and friends that people don't want to leave behind, and that networks have a strong national character. If you went around Vancouver and asked “How many people do you know in Ontario?” and then asked, “How many people do you know in Washington State?” generally you'll find that even though Washington State is less than 100 kilometers away, they're going to have much thicker network of friends and family in Ontario, thousands of kilometers away.

The other thing is there are professional rules. So for example, to become a hairdresser in France, you've got to go through a whole rigmarole. It'd be very hard for somebody who didn't go through that whole process to set up shop and become a hairdresser in Paris. Same with lawyers, doctors and other professions. So those professional accreditation systems are a big deal.

Brexit represented the opposite of integration. Is it a sign of things to come?

It doesn't seem like any other exit movements are particularly strong right now. I spent last year in Spain, and the issue there is whether the country itself will hold together — but there's zero interest in Spain leaving the European Union. And in the UK now, the question is whether Scotland, Wales and Northern Ireland will still be part of the UK in the future. So the sub-national exits almost seem more important than the idea of whole countries leaving the European Union. The financial crisis really put that to the test, when the problems with Greece began spilling over to the other countries with big debt problems — Portugal, Italy, and Spain. Many economists even predicted they would give up the Euro, but they all ended up staying on it, which showed the idea of being in Europe, as symbolized by the Euro, was pretty important to people.

Will we ever see a United States of Europe?

To some extent, we already have it. There is the European Parliament. The European Commission makes regulations; my favorite was when they got rid of roaming charges on cell phones. We don't even have that in the United States. But could the European Union look like Canada, where the provinces have a fair bit of power over things, like health and vaccines? It’s all a continuum of what makes a country, and if you think about the independence the provinces have here – it's pretty high. But that's a long way from having only one representative at the UN, like Canada does. I don't think we're ever going to see that.

What should we learn from all of this?

I think that the bottom line is that some people perceive the European Union as a failure, but we think if you judge it through the right lens, it's been very successful — and we think that lens is benchmarking the degree of economic openness.

The second thing is that even in this day and age, when it comes to people moving around Europe, there's still a lot of friction — so even though people complain about people from other places, the actual mobility of people remains quite low, even in a region where people have the legal right to go where they want.

Why is this important to Canadians?

How united we are with the U.S. and how united we are with other provinces is something that's always bothering Canadians. There are a lot of Canadians who would like to be closer to the U.S., and a lot of other Canadians who think that's the last thing we should do – so it's very polarizing.

Our relationships to other provinces are also a little strange. There are still interprovincial barriers to business that economists complain about, and in many respects, we are not an especially integrated country. So I think these issues of how much integration we want should resonate for Canadians, and seeing how Europe has developed a different approach to these problems is fascinating.  

Interview languages: English, Spanish, Portuguese

This article was originally published on UBC Sauder's website on August 31, 2021.