An idea to recover the EU's economy.

1. Re-Union
The story is simple but the age is as much complicated as much developed it is. This tale is a tale of some island’s union which they have made a
great progress in political and economic relationships between each other, said in other words they are trying to act as one. Their union is
unique of its kind. This union has make big steps forward to a greater future where we can highlight the FTA (Free Trade Agreement), it worth’s
to mention that there are affords to bring this agreement in a world level.
So let we focus a little bit what this agreement is and its effects in countries economic profiles. The aim of this treat is to provide removal of any
barriers, taxes, tariffs, quotas or any other governmental restrictions on international trade which would allow the involved countries to more
easily exchange particular commodities.
For the most part free trade is considered a good thing because the lack of trade barriers makes exportations easy and relatively inexpensive. In
one hand countries can focus its resources more efficiently and achieve a higher real income. In the other hand despite the overall benefit of
free trade to a nation’s economy, there can be some significant disadvantages to the establishment of free trade agreement. So let we take
them one by one advantages and disadvantages of FTA in nation’s economy:
1. Advantages
i. Increased production
Free trade increases the size of a firm’s market, resulting in lower average costs and increased productivity, ultimately leading to production.
ii. Production efficiencies
Free trade improves the efficiency of resource allocation. The more efficient use of resources leads to higher productivity of goods.
iii. Variety of goods
Consumers with FTA they would have the chance of choosing between plenty products.
iv. Benefits to consumers
With the move of the tariff levels now the products will be cheaper for consumers to buy.

2. v. Employment
Employment will increase in exporting countries, as much they export as much jobs will be created.
vi. Economic growth
The countries involved in free trade agreement rising their export is related to jobs that will be created, with this new created jobs in economy
the unemployment will be decreased which occurs to rising living standards, increasing real incomes and higher rates of economic growth.
vii. Foreign exchange gains
When involved countries exports it receives foreign currency from the countries that buy the goods.
2. Disadvantages
Although FTA has benefits, there are a number of arguments which oppose free trade. These include:
i. Competitive environment
Obviously with no short-term protection policies by governments, domestic companies will be unable to competitive large and multinational
companies due to lack of capital. Even the grant programs offered by EU to SME’s didn’t have too much positive effect on SME because of
overdue bureaucracies and not established human capital in this firms.
ii. Expense
Even though free trade is primarily meant to lower costs on items, it can actually end up being quite expensive. There are complicated rules and
contract conditions that go into the making of free trade agreements to protect the interests of the countries involved. As such, there is usually
the need to establish several committees. For example, the NAFTA agreement involved a contract that was more than 1,000 pages long and
more than 25 committees. In essence, free trade can be resource intensive, requiring multiple agreements, ways of enforcing rules and
compliance among the partner countries.
iii. Depend on global market (link effect)
Free trade can also increase domestic economic instability as the local markets become depend on global imports. It basically decrease the self-
sufficiency of a nation, so crisis in one our partner trade country can affect the economy in home (other) country. E.g. Recession in country “A”

3. leads to decreased demand for “B” country’s exports, leading to falling export incomes, lower GDP, lower incomes, lower domestic demand and
rising unemployment.
iv. Unemployment
With FTA moving the barriers of trade, the will of investor to invest in other countries will be decreased, domestic investors being unable to
competitive large multinational companies which leads to rising unemployment.
The best example of this it will be EU, European Union is one of the firsts who applied the free trade agreement with the countries that join in.
Not as it is spoken joining EU it will bring drastic economic changes but indeed nothing to be felt. In essence inside EU are created two poles
“sellers and buyers”.
It worth’s to have a look on unemployment rate and import/ export relation of some countries after they join EU:
Exports of goods (billion $) Imports of goods (billion $) Unemployment %
2009 2010 2011 2009 2010 2011 2009 2010 2011
Austria 1995 131,4 144.9 … 136.4 150.6 … 4.8 4.4 4.1
Belgium 1952 370 411,1 477,9 351,8 390,1 465,2 7,9 8,3 7,2
Estonia 2004 10,4 12,8 18,2 11,4 13,2 18,8 13,8 16,9 12,5
Finland 1995 62,9 70,1 78,8 60,9 68,8 83,8 8,2 8,4 7,4
France 1952 464,1 511,7 581,5 540,5 599,2 700,9 7,8 9,8 9,7
Hungary 2004 82,6 94,7 111,1 77,3 87,4 101,5 10 11,2 10,9
Ireland 1973 116,9 118,3 129,3 62,6 60,5 67,1 11,9 13,7 14,4
Italy 1952 406,7 446,8 523,2 414,7 486,6 557,5 7,8 8,4 8,4
Luxemburg 1952 13,9 16,3 13,7 20,4 26,0 24,0 4,6 4,8 5,1
Poland 2004 136,6 157,1 183,3 147,1 171,4 203 8,2 9,7 9,7
Portugal 1986 43,4 48,8 58,9 69,9 75,2 80,3 9,6 11,0 12,9
Slovakia 2004 55,6 64 78,5 55,2 64,4 76,7 12,1 14,5 13,6
Slovania 2004 22,3 24,2 28,5 23,8 26,4 30,8 5,9 7,3 8,2
Spain 1986 223,1 247,6 ---- 287,5 318,2 ---- 18,0 20,1 21,6
EU entryCountry

4. As it is shown above the free trade apply hasn’t been so effective in economic heeling of these countries, we still aware an unemployment rise
year by year. According to export-import relation most of the countries which are involved in free trade hasn’t been so successful in managing
the balance between imports and exports so the rise of exports it didn’t help the countries to heel unemployment, the inverse we may see in
Austria but according to IMF statistical data base in 2012 unemployment has been rise to 4.33% from 4.20% in 2011 even with an increase of
exports by 0.447%.
v. Sending backwards to Mercantilism
Mercantilism is a national economic policy that aims that a nation benefits by accumulating monetary reserves through a positive balance of
trade, for sure not all the countries can achieve a positive trade balance due to many reasons (e.g.: lack of capital).
vi. Using cheap labor
Large multination companies it will want to produce their goods in countries which can provide cheap labor therefore it will affect the home
country on unemployment. A rise in unemployment will lead to a reduce on purchasing power which it means a decrease on demand which it
will be follow with an decrease in supply and this decrease in offer leads to re-unemployment increase till the government will interfere in
market with:
 Decrease in taxes --- which it will reduce the government revenues but it will be an increase on purchasing power so the firms will
increase the offer in this context demand and supply has become equal which it means a rise in consume tax revenues for the
government. The main problem it may come from the decrease of government revenues which it will lead to a decrease in public
expenditures follow with a decrease in investments. Even using debt as a tool to finance the public expenditures it will help to keep
economy in feet but what if this public expenditures doesn’t come back as we planned we will go back to tax rise because of debt
burden rise which it needs to be paid back. All this means we were played by circle going from A-Z and from Z-A.
 Decrease in public expenditures --- as it was explained above.
vii. Losses on tax contributions
Removing the costume tariffs and making more easy exports and imports which mutually it will decrease the will to invest in other countries
which it will fulfill the markets with plenty different products. Here is the problem that it comes out in losses of tax contributions in countries

5. where products are sold. E.g.: a) - If one product is sold in the same market that is produced, the effects on economy and government revenues
as below:
 Tax corporation
 VAT
 Profit tax
 Income tax ( tax taken from employees )
 10% of profit kept inside the economy where is invested by foreign investor
 Inflow (foreign exchange )
 Decrease in unemployment
 Link effect inside the market (using the resources of the market where product is produced it will help to create domestic capital etc.)
b) -The inverse it will happen if the products will be imported:
 VAT
 Profit tax
 Income tax
 Low decrease on unemployment
 Outflow
As we see in example (b) the government revenues and the effects in economy are lower than example (a), let we analyze example (b) more
carefully:
VAT – this tax will be appeared to consumers by firms which use the price mechanism, after all the real payers of this tax are only buyers
(consumer) so for firms is like a way out of being tax contributor.
Low decrease on unemployment – importer firms because of a no necessity they will just only use distribution department so it will not be a
great help on unemployment heeling and this firms do imports of plenty products not only one of them which it means they use the same labor
force for distribution.

6. Outflow – Capital outflow is a term that is used to describe the flow of domestic assets out of a nation and into other countries or it describes
the flow of capital that is gained from (a) nation to (b) nation homeland.
Looking carefully on FTA we realize this agreement isn’t the option for developing countries, in essence this countries are facing lot of problems
as: government expenditures rising and can’t be covered by government revenues so governments they look as the best option foreign or
domestic debt which it needs to be paid back and the ways which will be followed are raising taxes or using emission. The first one would have
affect’s on economy as decreasing the invests because the firms if they pay more taxes the will of investing will become low or this increase in
taxes would decrease the demand of goods, as much the income of consumers gets low as much they will avoid spending their part of income on
goods which in long term means a decrease in governments revenue (VTA), transferring capital out of state and unemployment rise. And
secondly using the emission as the best option to pay debt will rise the inflation which it decreases currency’s value and related to this the prices
will increase and people will avoid consuming goods so firms will decrease the production to balance demand with supply which it rises
unemployment and it brings low income into governments crate. As we see the FTA is the best option for advanced economies not developing
countries which are still in transaction. Let we have a look on some EU countries profile stats to have quite idea about the real problems which
lot of countries are coming across with:

7. Source: IMF, OECD
(Source: OECD)
Country General Government Income
%GDP
General Government Expenditure
%GDP
Unemployment
%
2009 2010 2011 2009 2010 2011 2009 2010 2011
72,2 100
44,5
54,8
12,5 56,9 94,9 86,9
123
86,3 91,7 126,3
26,3 76,2
62,7
97,5
47,1
48,4 66,8
48
88,8
69,1 99,8
41
51,2
12,4 51,4 91 77,4
99,5
85,8 71,2 127,7
26,1 71,9
58,4
93,3
40,4
44,3 62,7
51,1
79,5
72,8 102,4
0
61,8
0 0 0 0
133,6
0 0 0
30,2 82,7
0
96,8
0
56,3 75,1
0
104,9
General Government Debt (% of GDP)
2010 2009 2011

8. According to classic
school government
should avoid or in only
needed circumstances
should apply in money
borrowing from funds,
banks, governments etc.
But nowadays the limit
(norm) of debt has been
accepted 60% of GDP as
we see in graphic above
in most of EU countries
general government debt
has been risen year by
year and mostly of this
countries has excess the
debt allowance (allowed
norm of debt, Maastricht
criteria) this may be a
following of non-
sufficiency of government
general revenue (income)
to compare the government expenditures. Some countries as Czech Rep., Estonia, Finland, Luxemburg, Slovak Rep. and Sweden has achieve to
control the debt allowance and staying under the debt norm. Let we turn back to debt rising and effects of it into economic predicament to included
countries, the main problem of debt is paying it back and the paying back it has to be in three ways (a) tax rising (b) emission (c) a cut in
government expenditures as we see in table below lot of countries has risen the taxes which it brought a rise in tax burden in OECDi countries by
0.5% which it changes country by country and following the reform with cut in government expenditures.
Of course it worth’s to mention the unemployment as it was spoken above unemployment has been cramp for governments with its trends up and
down without nip or injection to heel it. Applying those fiscal policies it will not heel the actual financial predicament, just only make it worse as we
know government is the biggest consumer or in other words it may be expressed better as column of the house, if this column goes down all of
Austria 48.5 48.1 48 52.6 52.6 50.6 4.8 4.4 4.1
Belgium 48.1 48.6 49.4 53.7 52.5 53.3 7.9 8.3 7.2
Czech Rep 39.1 39.3 40.3 44.9 44.1 43.4 6.7 7.3 6.7
Denmark 55.2 55.1 56.1 58 57.8 58 6 7.5 7.6
Estonia 43.5 40.8 39.3 45.5 40.6 38.2 13.8 16.9 12.5
Finland 53.4 53 53.9 56.1 55.8 54.8 8.2 8.4 7.8
France 49.2 49.5 50.8 56.8 56.6 56 9.5 9.8 9.7
Germany 44.9 43.3 44.3 48.1 47.5 45.3 7.8 7.1 5.9
Greece 38.2 39.7 40.9 53.8 50.2 50.1 9.5 12.6 17.7
Hungary 46.9 45.2 53 51.4 49.5 48.8 10 11.2 10.9
Ireland 34.8 35.6 35.7 48.8 66.8 48.6 11.9 13.7 14.4
Italy 46.5 46 46.1 51.9 50.5 49.9 7.8 8.4 8.4
Luxemburg 42.7 42.7 43.7 43.5 42.6 44.3 4.6 4.8 5.1
Netherlands 46.3 45.6 46.4 51.3 49.9 50.4 4.5 4.5 5.3
Poland 37.2 37.5 38.5 44.5 45.4 43.6 8.2 9.7 9.7
Portugal 39.6 41.4 44.7 49.8 51.3 48.9 9.6 11 12.9
Slovak Rep 33.5 32.4 33.4 41.5 40 38.2 12.1 14.5 13.6
Slovenia 42.9 44 43.8 48.9 50 50.2 5.9 7.3 8.2
Spain 35.1 36.4 35.5 46.3 45.7 44.1 18 20.1 21.6
Sweden 54 52.4 51.5 54.9 52.5 51.3 8.3 8.4 7.5
U.K 39.9 40.1 40.5 51.2 50.3 48.7 7.6 7.8 8

9. house it will follow it. As much strong it is the column as much strong (healthy) it
will be the house (economy) with all of those problems governments are facing,
lack of options to heel the financial predicament and FTA not being the best
option for all countries except the advanced ones. So in name of heeling the
actual financial predicament and making stronger this column for a healthy
economy what if we choose:
Setting limits for imports and exports!!
With FTA moving the custom tariffs and make products move free around world
but still this doesn’t make it the solution of all financial predicaments of
countries. Also the lack of option to heel the economies and getting the
economies out from this cramp of solutions maybe we have the only one
solution to apply closing the borders for this category of products as Food,
Beverages and Tobacco production. These goods are low cost produced and it
can be produced in every country. For sure we can’t produce every kind of these
products in every country for so many reasons so first of all we have to create economic areas to produce this kind of products but before let we
focus in imports and exports of OECD countries.
Indicator 3: Trade balance of goods (in USD, by SITC)
SITC 12: Tobacco and tobacco manufactures
Time 2007 2008 2009
Country
Austria 66475508 28495530 -135608384
Belgium -123310689 -71513764 -72387789
Czech Republic -95684466 212779457 133366919
Denmark 83059592 157753080 170087765
Estonia -53996005 -25553080 -27097087
Finland -170416984 -240408003 -141511220
France -1834266190 -1551110200 -1525731511
Germany 2186448000 2783152000 2211122245

10. According to the data stats of OECD expressed in the tables below, most of
countries are having year trade balance closed with a trade deficit on this kind of
products. Most of these countries didn’t achieve to manage the resource
allocation even these products are low cost and producible in every country.
The FTA some countries it has convert them in producers and most of them
buyers. So closing boundaries for this category of good it will help in heeling the
financial predicament and also unemployment issue that lot of countries are
facing. With all the problems that we explained from the beginning of this
journey with Re-Union, which wants to introduce with a solution which can help
on economic heeling. First of all we have to go back to explain the economic
areas which are separated in groups as below:
These groups are created only for European continent and all
the countries which are not involved in groups above they
will act as one economic area. To create these groups we
were based on countries population where as minimum
norm for every economic area is defined at least 15 million
also politic relations between countries inside the same
group was the primary priority. With this arrangement it is
aimed to relief economies form the actual cramp and making FTA acceptable in every countries economy. Applying Re-Union for this kind of
categories as is mentioned above it may be a forth option for the governments to stay on their feet’s. As it is mentioned the problems that
governments are facing are multiplying by every day’s that passes and real challenge for them is finding a solution, a solution for recovery but of
course we can’t raise the taxes every time we want or we can’t go to emission and obviously general government debt is getting bigger year by
year. So as the only solution for the moment let we close all imports & exports for Food, Beverages & Tobacco goods, which are low cost to be
produced and producible in every economic area. So let we see advantages of Re-Union in economic areas:
Greece 38649651 118592223 -130633382
Hungary -137925000 -152062000 ..
Iceland -19735298 -21658839 -17826141
Ireland -2569150 -10245678 -27890072
Luxembourg -79961676 -76880194 -60099930
Netherlands 3463720652 2920713880 ..
Norway -101994131 -150223726 -139454788
Poland 333393464 651236700 ..
Portugal 356856758 447816377 432745992
Slovak Republic -209211536 .. ..
Slovenia -76975565 -104719223 -99025390
Spain -1622170544 -1797213072 ..
Sweden -124608315 -115673113 -100652492
Switzerland 245635478 363611777 298561268
Turkey 341673428 312855902 357022092
United Kingdom -89184030 123268236 -78786642
Group 1 Group 2 Group 3 Group 4 Group 5 Group6
Slovenia Estonia Belgium Norway Switzerland Czech Rep.
Croatia Latvia Netherlands Sweden Austria Slovakia
Bosnia & He Lithuania Luxemburg Finland Hungary Ukraine
Montenegro Belarus Denmark
Albania Group 7 Group 8 Group 9 Group 10
Kosovo Serbia Greece Spain Ireland
Macedonia Romania Bulgaria Portugal Iceland
Moldavia Cyprus U.K
Malta

11. Advantages:
Applying Re-Union for sure it will be an option on economic heeling and real help to recovery the economies as below:
1. Decrease in unemployment
With the new invests that will be conducted inside the economic area it will help to reduce unemployment.
2. Tax contribution
General government incomes (revenues)will increase due to invests that have been conducted in economy of country as corporate tax, income
tax (from employees & employers) etc. which it will help government to manage debt services, debt payments and government expenditures.
3. Link effect inside economy
Investors to produce their product they may need row material so for this categories of goods row materials can be founded in every economic
areas, buying them inside the market would be help to increase domestic capital which it can be used back as an investment in economy and
also being another plus for decrease on unemployment & increase tax contributions.
4. Competition
It will help to create a market based on competition inside economic area.
5. Increase in GDP
Because of invests made inside the economy area the GDP for countries it will be increase the inverse it would happen with FTA which decreases
the will of investors to invest and just being an approve of idiom “Big fish eats the small fish” .
6. Foreign currency exchange
Involved countries in foreign invests it will receive hard foreign currency from here it is invest, also in the country where is invested it will be
entry of foreign currency.
7. National Income goes up

12. With invests new job opportunities will be created, with created new jobs for many people means a rise in income which it will help in raising NI
(national Income). This raise will leads consumers to consume more which it helps in raising the demand so with this raise in demand the firms
will go to a raise in offer and new jobs will be created, more taxes being paid etc.
8. Economic growth
The increase in the market value of the goods and services produced by an economy over time.
After a compare of advantages and disadvantages of FTA in conclusion of our journey we realized that FTA it’s not an option for developing
countries either non-developed countries, for sure an option for developed countries. Also we highlight the economic problems that
governments are facing and lack of solutions in their hands. Of course it was brought a new idea as an option for an economic heeling the Re-
Union which of course it may have disadvantages for firms (companies, corporates) but in theory stands healthy but in way to avoid
disadvantages of Re-Union for firms it is suggested to apply stimulating policies as below:
 AVT 8-10% for 3 years
 Machineries that will be used by firms AVT 0%
 50% off of sale tax for 3 years
 Minimizing the red tapes
 Construction materials that will be used for building the factories with 50% AVT off
 1 year import permit allowance for firms for a market recognition
Prepared by: ERGYS NEZIRI
Finance Department 9 Eylul University
ergysneziri@gmail.com
i
http://www.oecd.org/newsroom/tax-burdens-on-labour-income-in-oecd-countries-continue-to-rise.htm