At a lunchtime meeting in Brussels on 12 July, jointly organized by CEPR and the Institut d'Etudes Européennes of the Université Libre de Bruxelles, Giovanni Ravasio spoke on the implications of European economic and monetary union for the future cohesion of the Community. Ravasio is Director General of Economic and Financial Affairs (DG II) at the Commission of the European Communities. The meeting was held to mark the publication of Unity with Diversity in the European Economy: the Community's Southern Frontier, published by Cambridge University Press for the Centre for Economic Policy Research (see box). The volume was based on the proceedings of a conference on `Economic Integration in the Enlarged Economic Community', held in Delphi on 26-7 October 1989, as part of a CEPR research project funded by the Commission of the European Communities, the Secretaría de Estado de Comercio of the Ministerio de Economía y Hacienda (Spain), the Fundacion Banco Exterior de España, the Instituto do Comercio Externo de Portugal, and the German Marshall Fund of the United States.

Ravasio stated that the enthusiasm of the current EC member countries for economic and monetary union (EMU) is surpassed only by that of neighbouring European nations EFTA members, the East European countries and Turkey for increasingly close association with the Community, and indeed full membership in the medium or long term. Further enlargement may follow the end of the cold war, just as the single market programme is receiving renewed impetus from the proposals for EMU, and the role of the Commission in coordinating Western aid to Eastern Europe may therefore provide an example of a benefit to the world as a whole as a result of monetary union within the Community.

Substantial progress has already been made towards the internal cohesion of the Community. In particular, the economies of the less prosperous regions and countries notably Ireland and the three recent entrants: Spain, Greece and Portugal are catching up with the rest of the Community. They have succeeded in improving their competitiveness, promoting their national savings, and attracting private investment from abroad.

Ravasio noted that the overall benefits and costs of EMU and their geographical distribution will be determined by the mobility of firms and labour. According to the traditional theory of international trade, economic integration will lead to the equalization of prices of goods and of factors of production, so that differences may persist between industries, but not between countries. According to this view, different countries' structures of production will diverge as their levels of consumption converge, and the mutual prosperity resulting from the diversity of the member states will form the basis of more advanced forms of integration such as political union.

Others argue that integration will take place at the expense of peripheral regions, since the specialization of production will affect the level and structure of consumption by encouraging emigration from the more backward countries and regions. This will discourage investment and thus prevent them from `catching up' with their neighbours. These negative effects may be ameliorated, however, if the steps towards integration are accompanied by transfers of funds to the backward regions designed to discourage emigration and to attract capital. The Community has responded to the challenges posed by its increased heterogeneity following the accession of Spain, Greece and Portugal by renewing its `structural funds' in 1988 and by doubling the scale of such intervention during the period leading up to the establishment of the single market.

Ravasio noted that the results of the study of the new `peripheral' entrants in Unity with Diversity are also supported by those of a recent Commission study on `Costs and Benefits of EMU', in which the effects of monetary union are explicitly considered. The analysis developed for these countries may be usefully applied to three main peripheral regions: Ireland, southern Italy and now the GDR.

Ravasio noted in conclusion two results of the CEPR study that were of particular interest. First, in a formal model of the predicted `optimistic' and `pessimistic' effects of economic integration, the benefits to be derived from the exploitation of comparative advantage and economies of scale are shown to depend on the initial conditions and also on the national and regional policies pursued, and in particular on the degree of integration attempted. The effects of monetary integration are found to be minor compared with those resulting from economic integration. Second, the results of a study of the hierarchy of national monetary markets and of the multiplier effects of credit restrictions in the core on the solvency of firms on the periphery are consistent with those concerning the investment of new structural funds.