European Union economy issues and policies

¶ … country leave the EU or the euro zone?

This policy paper is for the attention of the Prime Minister of the United Kingdom, David Cameron. It explores whether the UK should depart from the European Union amidst the Eurozone crisis.

Position: The UK should leave the European Union. The costs and risks accompanying membership in the EU is simply not worth the benefits for the UK. Contributions to the EU common fund are a significant drain on the UK and are disproportionately spent in areas which are irrelevant to the UK, such as agricultural subsidies. The benefits that the UK seeks from EU membership, regional security and free trade, are now either the norm or can be achieved through alternative means, such as through trade agreements. Neither is EU membership likely to yield greater benefits in the future, as there is little in the EU economic plan to indicate that it will help its members keep pace with emerging global competitors. With its own economic struggles to deal with, the UK can no longer afford to commit such resources and energies to such a fruitless relationship.

Introduction

The European Union represents an unprecedented endeavor in political and economic organization. An economic and political association between 27 different European nations, the existence of the EU is seen by many as evidence that the world may one day move beyond Nationalism and the political strife associated with it.

However, recent economic struggles, resulting in the current Eurozone crisis, have revealed the deep flaws inherent in such a supra-national entity. In fact, it has cast the EU more as an imbalanced association of self-interested and divergent nation-states.

Background

It has been called a supranational political entity, meaning it exercises a layer of governmental authority on top of the national layer in each member country. This supranational authority only attaches to certain governmental functions.

The E.U.'s most established powers at this point are economic, including free trade between its members, free movement between its member's borders, and a common currency shared by 16 of its members.

The common Euro Zone currency and the free movement of its citizens between national borders are perhaps the strongest indicators that the EU is a cohesive political unit.

Key Developments

At the end of World War II, many of the European nations damaged by the war resolved to end the animosity caused by this competition between nations. Recognizing the wisdom of the political maxim, "When goods don't cross borders, armies will," six European nations formed the European Coal and Steel Community in 1951: France, West Germany, Italy, Belgium, Netherlands, and Luxembourg. These countries expanded their cooperation by adding the European Economic Commission and the European Atomic Energy Commission, which were collectively referred to as the European Communities by 1967.

The success of the European Communities attracted interest from other European countries. Membership increased to most encompass most of Western Europe by 1985, culminating in the Shengen Agreement, which laid the foundation for free movement between borders in Europe.

In 1993, these agreements and communities were officially formalized as the European Union.

Perhaps the most significant, and tangible, commitment EU countries have made to the supranational ideal is the establishment of a common currency called the Euro. This is literally putting your money where your mouth is, as people can now feel the legitimacy of the EU when they trade their currency into Euros when visiting a country in the Eurozone. However, 11 of the 27 EU nations have decline to enter the Eurozone currency arrangement, including the U.K., Bulgaria, the Czech Republic, Denmark, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Sweden.

The fence-sitting by important economic powers like the U.K. And Sweden as well as the ineligibility of Lithuania, Romania, and Estonia has highlighted the many political and cultural divisions still in play.

Analysis

Cost of European Union

The EU imposes many large and unfair economic burdens on urbanized countries such as the United Kingdom. One particularly egregious burden is the EU's Common Agricultural Policy (CAP), which sets standard crop prices and provides price support (subsidies) to farmers to resolve any resulting disparities. The CAP's objectives include increasing agricultural production, providing certainty in food supplies, ensuring a high quality of life for farmers, stabilizing markets, and ensuring reasonable prices for consumers.

It was, until recently, operated by a system of subsidies and market intervention. Until the 1990s, the policy accounted for over 60% of the then European Community's annual budget, and still accounts for around 34%.

Although the agricultural industry employs only 5% of EU citizens and generates 1.6% of GDP 45% of EU spending went towards the CAP in 2006.

The UK economy derives little benefit from the CAP's agricultural subsidies because its economy relies on finance, professional services, high-technology manufacturing, and media. Rather, the CAP, developed by Germany and France, benefits states with large agricultural sectors such as France, Spain, and Germany.

The market is not allocating resources effectively in the agricultural industries of the EC because of the current CAP. The attraction of agricultural subsidies results in a decline in agriculture in regions like the UK and overly intensive farming practices in regions such as France. This imbalance and intensification generates pollution, animal diseases and poorer food safety in the European region. The CAP is ill-advised for the EU as well as unfair to the UK.

The current CAP has been held together artificially through powerful political interests long entrenched in the EU. Major beneficiaries such as Germany and France were and still are the most powerful European Union members. Within these countries is the farming lobby which pressures EU representatives to secure the agricultural subsidies permitted under the CAP. Because traditional powers such as Germany and France, through their relative stability, have actually managed to become more influential during the Eurozone crisis, it is unlikely that representatives from those countries will feel compelled to give up profitable policy positions.

The Value of the EU for Promoting Trade

Free Trade Benefits of EU Membership

For developed EU members, the EU provides access to include unexplored, emerging markets provides many important benefits. First, common membership in the EU provides them with equal terms of competition in the enlarged market. Also, it gives them access to a pool of labor as qualified for certain industries but cheaper. Finally, they can sell their own products in the newly accessible emerging markets, which will actually grow as the new members develop their economies under the EU.

EU membership brings capital investment as well as a transfer of skills and technology. Enlargement allows new members access to the more prosperous consumer markets of existing EU countries. In 2007, almost 80% of exports of the new Member States went to the rest of the EU. Old Member States also saw their sales to the new members increase to around 7.5% of their total exports in 2007, from 4 ae % a decade ago.

Although the EU unquestionably provides many free-trade benefits to the U.K., the U.K. has alternative trade options. First, there are other trade agreements such as the WTO and regional free trade agreements such as the FETA which can accomplish similar free trade concessions without committing Britain.

The Effects of the EU on Trade

The EU is not an effective framework for preparing the UK for increasing global competition from Asia and Latin America. The EU has been valuable primarily for countries specializing in manufacturing and other scale-intensive industries.

Since 1979, the UK has moved away from supporting manufacturing and have focused instead on the financial sector. The UK obtains revenue from exporting financial services while recording deficits in finished goods and commodities, including food.

In 2007, the UK had the world's third largest current account deficit, due mainly to a large deficit in manufactured goods. The UK's account deficit is actually exacerbated by membership in the EU and increased access to the UK economy by German and French manufacturers. .

Also, the value of the EU in promoting trade is limited to the EU for the most part. Membership in the EU is essential if a country's economy is heavily reliant on intra-Europe trade, as France's economy is. Even Germany's economy, which produces globally competitive products, derives a significant portion of its trade from within Europe.

The UK economy, because of its focus on finance, is much more globally-oriented than any other EU country. Thus, membership in the EU is not nearly as crucial for the more globally-oriented UK and may even be restrictive in certain regards.

Although departure from the EU could diminish UK access to European financial markets, the UK and its many powerful financial firms are still crucial to the global economy and cannot be excluded without harm to EU markets themselves. The UK's strength in the financial sector does not come from its integration with the European community, although it has been aided by it. Rather, the UK's strength in finance comes from the extensity of the British Commonwealth, giving rise to various financial centers in former British possessions such as Hong Kong, Singapore, the United States, Canada, and Australia.

The UK needs to build good economic relationships with emerging markets even more than with its EU neighbors. China is already highly competitive in manufacturing and is gaining competitiveness in high-technology manufacturing. India is a leader in Information Technology and, being an English speaking country, also has the ability to be globally competitive in Professional Services. Latin American and Southeast Asian economies, such as Brazil or Indonesia, will become increasingly competitive in agriculture and energy. The WTO and various other bilateral free trade agreements are reducing the barriers to these types of goods, making them increasingly attractive to the European consumer.

Considering the competition for European markets, the EU's greatest value and likely greatest priority will be the protection of European markets, not the opening of global markets. The UK, because of its focus on global finance and professional services, has little to gain from the protection of its own market and much more to gain from the opening of non-European markets.

Euro Zone

The current Eurozone crisis demonstrates the untenability of the EU notion of economic and monetary union. The Eurozone's 17 member countries do not have similar monetary policies, making harmonious monetary union very problematic. Germany, for instance, has very strict monetary policies, which is enabled by stable economic growth and low unemployment. In contrast, weaker Eurozone countries such as Greece, Italy, and Spain have stagnated economically for the better part of a decade, producing high unemployment and failing firms. To alleviate these problems, their governments spend on social welfare and economic subsidies.

Germany's departure from the Eurozone would not only benefit Germany, but could benefit the remaining Eurozone members.

The weaker Eurozone countries, such as Spain and Italy, would have the flexibility in monetary policy to correct unique economic issues. Spain and Italy, for instance, both suffer from high labor costs which have hampered their economic growth in the past decade. The lack of economic growth and consequently tax revenue is a major cause of their present fiscal deficits. Without the dominant Germany there to impose strict monetary policies, Eurozone countries could devalue their currencies to promote production and reduce consumption, as China has.

Germany would benefit in the short-term from leaving the Eurozone but would suffer economically in the long-term. In the short-term, Germany's currency would actually be stronger by 2.4% if the Eurozone were to collapse. However, in a more broad and long-term economic context, Germany benefits greatly from the Eurozone because of its role as the EU's biggest exporter. The Eurozone had a positive effect on exports in "scale-intensive" industries such as the chemical, office machinery, and accounting industries in highly industrialized Germany.

Much of the debt that weaker EU countries have accumulated was spent on German goods.

In light of the great economic diversity of the EU, the vision of a centralized economic and monetary union will continue to prove unrealistic. Furthermore, disharmony within the economic union will make it even more difficult to respond to the inevitable threats from emerging global competitors. The EU's current and future competitors, e.g. The U.S., China, India, and Brazil are not unwieldy supra-national governments but national governments and will face the internal struggles which burden the EU.

The EU model of supranational government is not wholly unrealistic. There are many political entities which have similar ultimate goals, such as ASEAN, MERCOSUR, or NAFTA. However, the EU is much more developed as a supranational political entity than either NAFTA or MERCOSUR because it has a standing governmental body and a common currency.

Other multi-national political and economic associations are much more focused and conservative in their approach. NAFTA is the least developed as a political entity and is purely a trade agreement at this point, more of a legal institution than a political organization.