European Union's Impact on the World Economy and Trade

Introduction

In today's increasingly globalized world, the efforts of one region often have a direct effect on the entire globe. With the establishment of the European Union in 1993, the ripples from this political, social, and economic conglomeration were felt around the world. Ushered in by the Maastricht Treaty, the now 27-nation-strong European Union has had considerable impact on the world economy, especially the economies of developing countries. To better understand this impact, this paper begins with an overview and brief history of the European Union. This is followed by a discussion of global trade, foreign direct investment, and the effects of the European Union on the global economy. Lastly, a discussion concerning the European Union's effects on developing countries' economies is provided, as this is an area of considerable impact for the conglomeration of nations.

Overview and History of the European Union

The European Union is a group of 27 nations, including Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom ("European Union," 2009). These nations have formed an economic union that incorporates a common market with free movement of services, goods, people, and capital. In addition, the European Union has adopted a common external economic policy to coincide with several internal policies. This union of nations has also adopted a common currency, the Euro, through the formation of the European Monetary Union, now also referred to as the Eurozone. There are intense production linkages and trade relations among the members of the European Union (Nienhaus, 2002).

The European Union was formed by the Maastricht Treaty, which entered into force on November 1, 1993 ("European Union," 2009). Formally known as the Treaty on European Union, this international agreement was approved by the heads of government of the European Community nations in Maastricht, Netherlands, in December 1991. It was ratified by all European Community nations and signed on February 7, 1992 ("Maastricht Treaty," 2009).

The treaty established a European Union with citizenship granted to every person who was a citizen of a member state. Citizenship in the European Union allows people to vote and run for office in local and European Parliament elections in whichever EU nation they reside, regardless of their nationality ("Maastricht Treaty," 2009). Of course, nationalism still affects the continued development of the European Union.

Darby (2009) notes the objections of French political leaders to the prospective Turkish membership in the European Union. The two countries' cultural differences are a source of much of the objection. One of France's objections, Darby observes, is "the uncertain role of a predominantly Islamic society within a European political and economic bloc" (p. 205). Although political differences are understandable in today's climate — where the Western world is still undertaking military actions in Islamic nations — it is the economic differences that perhaps give France the strongest reservations about admitting Turkey.

Darby (2009) cites a Business Week article noting that Turkey is a country with an average working week of 45 hours, considerably longer than that found in France. The French labor market has been globally recognized as having high indirect costs, long paid holidays, and shortened working weeks. Although French President Sarkozy vowed to address this uncompetitive reputation, France's economic growth over the preceding decade was unimpressive. In contrast, Turkey's automotive sector and manufacturing base expanded significantly. While it might be economically advantageous for the European Union as a whole to welcome Turkey, specific national concerns — such as those present in France — could prevent that decision from being made. Thus, although the European Union has fostered a more cohesive multinational identity, nationalism clearly remains influential among member states and still affects their policy decisions.

The Maastricht Treaty not only paved the way for the development of a single European currency — the Euro — and enhanced economic integration among member states, but also resulted in a unified foreign and security policy for all member nations. Advanced cooperation in areas such as immigration, asylum, and judicial affairs has also been an aim of the European Union ("European Union," 2009). However, the impact of the EU's establishment on the global economy has been among the most significant results of the treaty.

Global Trade, Foreign Direct Investment, and EU Effects on the Global Economy

With the development of the European Union, a global Triad was formed. The Triad of the United States, Japan, and the European Union, according to Nienhaus (2002), dominates global trade and foreign direct investment. When examining global trade and the effects of the European Union, it is important to distinguish between intra-EU trade and extra-EU trade.

Nienhaus (2002) notes that the European Union can technically be considered a single market since the mid-1990s. There are very few trade barriers in place for commerce among EU members, including the technical, legal, and fiscal barriers normally associated with transnational trade. With the removal of these barriers, there are virtually no fundamental differences between sales to a domestic customer and sales to a customer in any other EU country.

This single-market phenomenon has been enhanced with the creation of the European Monetary Union and its single currency — the Euro. Monetary risks and uncertainties due to exchange rates have been eliminated. As Hunter and Ryan (2009) note, with the inception of the Euro, borrowing costs have been lowered and restrictions on trade and tourism have been eased. The Euro has also boosted economic growth and strengthened the European community, but one of its primary effects has been on the growth of foreign direct investment.

Because of this ease of trade and reduced risk, a large portion of the transnational trade conducted by EU members occurs intra-EU (Nienhaus, 2002). While this makes the European Union less susceptible to negative effects originating in other countries (Schuller & Lidbom, 2009), it has also increased competitiveness globally. Countries outside the EU wishing to trade with member nations face heightened competition due to the lower barriers to entry enjoyed by EU-based organizations and reduced transactional risk. Beyond its borders, the EU conglomeration has also had a notable effect on global trade.

Most significantly, the external aspects of trade with other countries are specified by the European Union itself. Member states are not permitted to determine their own external trade policies, relinquishing control of international trade negotiations to the EU (Nienhaus, 2002). Given the size of the EU economy, this further amplifies the bloc's effects as a single economic entity.

When measuring extra-EU exports relative to GDP, Nienhaus (2002) concludes that the EU economy is just as open as that of the United States and considerably more open than Japan's. Moreover, although the EU's GDP is smaller than that of the United States, the EU's share of world exports — excluding intra-EU trade — is higher than that of either the United States or Japan. Foreign direct investment has been dramatically affected by the EU's position as a single entity as well.

Over the last two decades, the growth of foreign direct investment has been phenomenal, resulting in an increased number, size, and importance of transnational corporations. The European Union has had a significant effect on this growth. According to Nienhaus (2002), in 1998 the EU was the world's most important outward investor, with $386 billion in foreign direct investment outflows registered that year — a 77% increase from the previous year. Leading the EU in foreign direct investment outflows were the United Kingdom, Germany, France, and the Netherlands.

In addition to these large outflows, the EU receives substantially lower foreign direct investment inflows than it sends out. Nienhaus (2002) notes that from 1997 to 1998, the discrepancy between inflows and outflows nearly doubled. In 1997, the EU had $92 billion more in foreign direct investment outflows than inflows; the following year, that gap widened to $156 billion. To further illustrate the significance of this difference: even as the largest net outward investor, the EU was simultaneously the single most important foreign direct investment recipient in 1998, receiving $230 billion in investment from other countries — more than was invested in the United States.

Since its inception, the European Union has advanced policies that are less preferential and more "balanced" with regard to trade relations. These policies favor the promotion of economic development through foreign direct investment and private initiatives. This development approach mirrors the Bretton Woods institutions' "Washington consensus," developed in the latter half of the 1980s following "several severe balance of payments crises of developing countries" (Nienhaus, 2002, p. 55). The EU does not favor indiscriminate opening of markets; rather, it seeks more liberal trade arrangements bilaterally with developing countries. This policy has been repeatedly criticized by the International Monetary Fund, the World Trade Organization, and the World Bank.

The basic philosophy behind this position is that market forces are better able to foster economic development than state intervention. If a developing country has prices that reflect the relative scarcity of goods and services and indicate comparative advantages, that country will be able to attract foreign investment — investment that will result in a transfer of both capital and technology. As Nienhaus (2002) notes, however, certain preconditions must be met.

The macroeconomic environment, according to the EU's framework, must be stable and predictable: inflation should be low, budget deficits limited, and real exchange rates stable. Additional preconditions include the removal of price-distorting subsidies and regulations, a business climate conducive to both domestic and foreign private enterprise, reforms of commercial and tax laws, and the privatization and liberalization of the developing country's financial system. If these preconditions are met, external trade liberalization would set effective prices and ensure that scarce resources — especially capital — are allocated efficiently. When inflows of foreign direct investment are added to the equation, the result should be enhanced production possibilities and exploitation of comparative advantages. As such, the EU has had a significant effect on the economies of developing countries.

Conclusion

The increased globalization that has occurred over the last two decades has forever changed the way economies work. No longer are nations able to fully protect themselves from the economic effects of other nations. This is especially true for large economic forces such as the European Union. Since 1993, the original 15-member conglomerate has grown to 27 countries, expanding from Western Europe further south and east. This powerful economic bloc has had a significant effect on the world's economy.

When considering global trade, the EU is one of a Triad of economic powers alongside the United States and Japan. The EU ranks among the globe's top exporters, even when intra-EU trade is excluded. In terms of foreign direct investment, the EU is equally prominent — its outflow of foreign direct investment far surpasses its inflow of investment from other countries. These two factors have had a significant effect on the world economy by increasing competition and concentrating considerable economic power in the EU. However, it is developing nations that have been most affected.

Twenty percent of the EU's outward foreign direct investment has flowed to developing nations, with China, Brazil, Mexico, and Singapore receiving the largest shares. Not all developing nations have been positively affected, however. Former European colonies — ACP countries — have lost some of their competitive advantage due to new agreements the EU has made with other developing countries. Moreover, the EU's significant economic power does not translate into full control over all aspects of the global economy, as demonstrated by the substantial trade deficit the EU carries with China, driven in part by the inflexibility of the Chinese yuan. One thing is certain: as the European Union continues to expand, it will increase its economic weight and deepen its effect on the world economy.

References

Darby, J. (2009). French antipathy to Turkey's EU candidacy. Journal of Multilingual & Multicultural Development, 30(3). Retrieved December 8, 2009, from Academic Search Complete database.

European Union. (2009). In Encyclopaedia Britannica. Retrieved December 8, 2009, from Encyclopaedia Britannica Online: http://www.search.eb.com.ezproxy.apollolibrary.com/eb/article-9033265

Hunter, R., & Ryan, L. (2009). Poland, the European Union, and the Euro. Global Economy Journal, 9(2). Retrieved December 8, 2009, from Business Source Complete database.

Maastricht Treaty. (2009). In Encyclopaedia Britannica. Retrieved December 8, 2009, from Encyclopaedia Britannica Online: http://www.search.eb.com.ezproxy.apollolibrary.com/eb/article-9001460

Makin, A. (2008). The inflexible yuan and global imbalances. Global Economy, 8(3). Retrieved December 8, 2009, from Business Source Complete database.

Nienhaus, V. (2002). The European Union in the world economy and implications of EU policies for globalisation efforts of developing countries. Humanomics, 18(1). Retrieved December 7, 2009, from Emerald database.

Schuller, B., & Lidbom, M. (2009). Competitiveness of nations in the global economy: Is Europe internationally competitive? Economics & Management. Retrieved December 8, 2009, from Business Source Complete database.