The economics of the European Union from the efficiency and fairness viewpoints

The aim of this chapter is to examine the reason why the idea of the EU was created from the purely economic viewpoint, and show the reason why Brexit occurred. So far, the EU has adopted the integration of markets. It has the second stage of the integration of defense. This strategy is named the EU process. Theoretically, there exists another strategy, named the reversed-EU process, which starts with the integration of defense, proceeding to the integration of markets. In order to achieve the intended aim, we compare the two processes, by constructing a three-country economic model with public good. We have the following result. On the one hand, for the EU process, the efficiency probability that each integration is consecutively Pareto improving is 100% and the fairness probability that by each integration the Gini coefficient consecutively declines is almost 100%. Meanwhile, for the reversed-EU process, the efficiency and the fairness probabilities are less than 50% each. This result constitutes the purely economic reason why the idea of the EU process was created. It is shown that the above result requires the identity assumption of the three countries’ economic structure, which is the reason why Brexit occurred.