The Implications for Business of the Deepening of EU Economic Integration - Essay Example

What have been the implications for business of the deepening of EU economic integration over the last 25 years? Introduction: It was on 1st January 1958 that the Treaty of Rome first laid the foundation for the existence of the modern European Union. To escape the rigours of post war Europe a foundation was laid for a single, common market, with economic considerations the predominant factor. Since then, and especially after the Maastricht Treaty of 1993, the EU, now enlarged to 27 member states from the original six, has striven to become a fully integrated regional and economic marketplace with political ambitions for a peaceable and unified Europe. The aim of the single market is facilitated by a standardized system of laws applicable to all member states with the aim of ensuring the free movement of people, goods, services, and capital. Economic and Monetary Union (EMU) occurred in 1999, and in 2002 sixteen member states adopted a common currency, the Euro, constituting the Eurozone. The political aims are to promote democracy, uphold human rights and civil society, eliminate discrimination, combat poverty and improve health and social conditions in the poorer parts of the world. The EU with 79 trading partners from the Africa-Caribbean-Pacific (ACP) region is a shining example of the implementation of its Millennium Development Goals. The EU Charter of Fundamental Rights is also a step in this direction. The EU has a limited role in foreign policy, with representation on WTO, G8, G20, and at the United Nations. The European Commission has legislative powers enforced through the Court of Justice of the European Union (judicial branch of the EU). One of the most celebrated successes of anti-trust legislation of the EU was the prevention of a merger between GE and Honeywell (U.S. firms). Equally notable is the action taken against Microsoft for unfair practices by the EU Commission which led to it being fined Euros 777 million. The EU abolished customs duties and border controls between and among most member nations via the Schengen Agreement. The European Central Bank oversees an evolving fiscal policy in keeping with the declared aim of facilitating intra-EU and external trade and competition. Under the ECB, the Euro has become the second reserve currency of the world with a quarter of foreign exchanges reserves quoted in Euros. Main concerns of the EU and comparisons During the 1970s and 1980s in an adverse economic environment, the EU was unable to pursue actively its industrial policy of minimum intervention allowing for market oriented competitiveness. Since about 1985 the Single Market has striven to remove trade barriers and eliminate obstacles to the efficient functioning of free market forces and to encourage international trade (Bangemann Memorandum 1990). However, compared with the United States and Japan the EU spends less on research and development, essential to economic growth and job creation. Even by spending a planned 3% of GDP on research by 2010, the EU has been unable to catch up with the R&D leaders. The European Institute of Innovation and Technology expects to be instrumental in closing the gap under the Seventh Framework Programme 2007-2013 (FP7) with a budget of Euros 50.5 billion. Eventually the FP7 will come alongside a Single European Research Area. Celebrating the 50th anniversary of the beginnings of economic and monetary integration of Europe, Michael Deppler (2007), Director of the European arm of the IMF, says that ‘Europe has blossomed into a continent that is widely admired as prosperous, diverse, and caring’. He hails the expansion of the EU to include ‘transition economies of Eastern Europe as ‘remarkable’ and ‘unique’. However, he views with some scepticism that ‘given the rigidities in Europe’s labour markets’ the move towards the single currency was probably a case of ‘putting the cart before the horse’ (op. cit.). Although reform is still needed, he finds measures towards regulating ‘public pensions and health, network industries, and the labour market’ commendable. ‘Perhaps the most graphical illustration of this is the euro area’s outpacing of US business sector employment growth over the decade ending in 2005, by 14% to 12%. In the main, European policy-makers deserve more credit than they have often received from economists’ (op. cit.). Comparisons are often made between the economic progress of the European States with that of the United States. In geographical area the EU is far more compact than the USA but with around double the population of the USA of over 500 million. The population of the EU region is about 7.3% of the total world population but consists of only 3% of the earth’s land surface. 80% of the EU population live in urban areas and the EU boasts of 16 global cities with population over 1 million. Even so, thanks to intensive farming methods, agriculture accounted for 60% of the EC annual budget in the 1990s but has been reduced to about 35% more recently. The revised EU Common Agricultural Policy (CAP) has been instrumental in introducing policies that reduced the ‘wine lakes and butter mountains’ of an earlier period, the result of ongoing minimum price subsidies for farmers. From a low base ‘the overall European economy has grown to the point it rivals that of the United States (Saving, 2005). However, it is generally believed that continental Europe is a high tax region with inflexible labour markets. U.S. norms on tax and employment practices have been seen as the reason for a higher annual GDP growth in the U.S.as against a lower level in Europe. Recent estimates are that compared with the EU average, USA per capita GDP is 35% higher, while Japan’s is 15% higher. ‘America offers a lower tax burden and a more flexible labour market than France or Germany. The United States has fewer regulations governing the hiring and firing of workers and (those) governing the number of hours an employee can work. This increases the value of workers in the eyes of firms and thereby helps keep unemployment low – and production high’ (op. cit.). The US is a more integrated trade area than the EU. The ratio of intra-US States exports to GDP was approximately 70% higher than the ratio of EU15 exports to GDP. Responsiveness to markets There is also a lack of flexibility in product markets. Consumer prices are less flexible in the Eurozone than in the US which is reflected in price rigidities. Surveys suggest that about 80% of the firms within the Eurozone continue to price discriminate. Since 2000, EU has been less active than the US in Asian markets (e.g. China and India) especially in high-tech sectors. The EU innovation environment appears weak, especially in R&D, in science and technology research, and in higher education. The European Research area is fragmented which leads to duplication and wasted effort. The dominance of the US in high-tech areas has been attributed to state support in the early development of such technology. The EU is less successful because markets, for example, for defence equipment is localized in different states within the EU, and there is uncritical and continuing support for weak enterprises and sectors. However, one limitation to standardization and market access is that worldwide markets do not always play by the rules, and there should be an insistence underpinned by mechanisms that ensure international trade rules be applied openly and transparently. Economic and political integration alone does not lead to prosperity unless there is a shift in an attitude away from ‘Fortress Europe’. Saving (2005) gives the example of Singapore which is the ‘freest economy on the planet (even more so than the United States) and its economic growth has been consistently strong’, compared with the Soviet Union, one of the least free economies exhibiting a ‘weak economic growth throughout its history. Yet its member states were linked with a high degree of economic integration’ (op. cit.). The vision of the kind of unified Europe should not be between a highly regulated one as against one that is freer an open to market forces. Most analysts agree that the EU wholesale and retail sector remains heavily regulated. If the EU is to replicate the productivity growth of the US it needs to allow service providers with the freedom to introduce new technologies and business practices. This is even more important with the rapid development of information and communication technology (ICT) worldwide. The service sector has become more and more tradable with the passing years. An EU market for knowledge would benefit from a reliable system of legislation for Intellectual Property Rights (IPR). Such a system should include patent licensing, the prevention of strategic patenting to exclude competition, and coordinating IPR policy with R&D, education, and technical training. It has been observed that new technology innovation is affected by public procurement practices. However, currently only 22% of public procurement is open to competition. The joint purchasing power generated by governments influence innovation in sectors like construction, defence, aerospace, ICT and public services like education and health, although the defence sector is unlikely to be fully open to competition. As implied, public procurement accounts currently for only about one-sixth of the EU GDP, which means that there is plenty of room for future development. The State does usually advance the high start-up costs for technological innovation which the private sector would be reluctant to incur when the returns are uncertain. Analysts recommend and anticipate a more flexible wage and price setting, more integrated and developed financial markets, a single market for increasingly tradable services and consequently a more flexible labour market. One of the disadvantages of a multilingual EU, with 23 official languages, is the difficulty in encouraging the level of mobility of labour such as that between the States in the USA. There are also temporary arrangements among member states restricting free movement of workers. As regards corporate taxation, there are problems where firms have avoided paying tax by relocating at least part of their activities abroad. ‘The proposition made by the European Commission to have a common consolidated corporate tax base for companies doing business in Europe offers substantial benefits, in particular by reducing tax compliance costs associated with the existence of different national taxation systems’ (Ilzkovitz, Dierx, Kovacs & Sousa, 2007). The Lisbon Strategy The earlier emphasis of the Single Market Programme (SMP) had been to remove border controls, to standardize industrial regulations, open up public procurement, liberalize financial markets, harmonize VAT, and thus remove many of the barriers to internal competition. The emphasis has since been to widen the remit culminating in the services directive. In 2003, the Commission took measures to implement the Lisbon Strategy by setting priorities for the next three years. The ten priorities were: Facilitate the free movement of goods (e.g. by improving the implementation of the mutual recognition principle); Integrating service markets; Ensuring high quality network industries; Reducing the impact of tax obstacles; Expanding procurement opportunities; Improving conditions for business (e.g. by adopting a Community patent); Meeting the demographic challenge (by improving the portability of pension rights); Simplifying the regulatory environment; Enforcing the rules; Providing more and better information. (Ilzkovitz, Dierx, Kovacs & Sousa, 2007) Network Industries Something has already been said about procurement opportunities, but from the above list, it is opportune to discus what is meant by network industries. One example is the SmartGrids initiative which aims for a single European energy grid servicing the entire EU area. The present supply model of a small number of large generating plants supplying electricity to large areas is no longer tenable. Energy in the future will be generated locally and fed into ‘intelligrids’ organised locally and surplus sold to other areas. There will be less reliance on environmentally unfriendly and atmosphere polluting traditional power plants. ‘The future grid has been compared to an ‘energy internet’ with ‘user-generated’ electricity feeding into it from every direction’. It would be a ‘two-way electricity grid where homes or businesses can sell their surplus power back to the grid’ (Gardner, 2008). Currently, the EU national grid consists of seven million kilometres of cable, and four million transformers. ‘A major overhaul is needed to interconnect Europe’s national grids. Notwithstanding the creation of a European singe market, power generation remains largely a national concern. Less than five percent of electricity is traded across borders...’ (op. cit.). Targets set by the EU, declared in March 2007are for 20% of energy demand to be met from renewable sources by 2020. ‘For this to happen, the period between 2010 and 2020 need to see substantial structural change ... (op. cit.). These changes are expected to occur at domestic level. A farmer could have a wind turbine or two on his land, or he might generate power from a water mill. He could install solar panels. Any extra energy over and above his needs could be traded on the ‘energy internet’. Other network industries where market liberalization has been at work are in air transport and telecommunication industries. Deepening the internal market incurs short-term adjustment costs for some groups. ‘For example, opening up to competition telecommunication markets will have negative consequences for the incumbents facing a decline in monopoly power while the benefits are shared by all the consumers of telecommunication services’ (Ilzcovitz, Dierx, Kovacs & Sousa, 2007). Full market integration is not envisaged for the immediate future in postal and rail transport services although to a certain extent a well-established network exists. Barriers still persist in most service sectors where cross-border transactions require the presence of the service provider in both countries with uncertainty as to which country rules would apply. ‘This can result in the duplication of regulatory requirements and burdens (national social security schemes for the staff, different administrative and tax procedures etc.)’ (op. cit.)., Regulatory improvements and standardization help in Foreign Direct Investments (FDI) and mergers and acquisitions (M&A) as well. The new Merger Regulations allow for the consideration of efficiency in analysing the viability of mergers. Although the service sector accounts for about 70% of employment and value added within the EU, only 20% of intra-EU trade is in services. Demographic challenge There is also some concern in the EU regarding demographic change in the future. Until the year 2050 fertility rates are said to remain below the natural replacement rate of 2.1 children per household, while life expectancy is said to increase by about a year and a half per decade. From this year (2010) onwards the working age population will begin to shrink in numbers. ‘The Commission projects that the working-age population (15 – 64) will decline by 16% (or 48 million) by 2050 while the elderly population (aged 65 plus) will rise sharply by 77% (or 58 million)’ (Ilzkovitz, Dierx, Kovacs & Sousa, 2007). Net immigration from third countries is about 0.2% of the total EU population and not enough to offset the shrinkage. Increasing the age of retirement is being planned in some countries which could only be described as a palliative. EU expansion Geographical future expansion of the EU is said to prove a costly business. ‘EU subsidies to the Eastern countries will be (stet) $40 billion between 2004 and 2006, a large slice of the $97 billion Brussels budget’ (Dixon, undated). There will be 75 million new EU citizens earning an average income of no more than $450 a month. The most developed new member state, Slovenia, would take at least a decade to catch up with the rest of Europe. Poland, with a population of 39 million is estimated to take 40 years to reach average EU living standards at current rates of growth. Dixon postulates that over the next decade and a half, the EU will make slow but steady progress towards integration. However, he cautions that this would not be achieved without visionary leadership. He questions the current system of the six-monthly rotating leadership as ‘unsustainable, confusing, destabilising ...’ (op. cit.). According to him cultural and linguistic differences are pervasive and deeply divisive in the EU region. Dixon labels the future of Europe as a ‘challenge of tribalism’. EU member states are the birthplace of many of the world’s leading multinational corporations with their global headquarters located in the region. By revenue, Allianz is the world’s largest financial services provider. Airbus produces about half of the world’s jet aircraft, while Air France-KLM is the largest airline in the world in terms of total operating revenue. ArcelorMittal is the largest steel company in the world, and Auheuser-Busch InBer is the largest beer brewer in the world. Meanwhile L’Oreal is the largest beauty and cosmetics firm in the world and Nokia the world’s largest mobile telephone company. One of the world’s largest energy companies is Royal Dutch Shell. There are many other firms which are within the top ten of the world’s largest business corporations. Accounting for 22% of the world’s total economic output, the EU, measured by revenue, has 178 of the top 500 largest corporations in the world within the region. It is the biggest trading partner of the two world class emerging economies of India and China. What next? Before turning to the vexed question of the current economic tribulations of the EU member Greece, it is heartening to note that industrial production in the Eurozone increased by 1.7% in January from the previous month. Greece is now regarded as the ‘sick man of Europe’ having incurred massive debts that it has difficulty paying back. It is likely to drag the whole of the Eurozone down if not attended to. It has already declared cuts of 4.8 million in its current budget. They have occasioned industrial unrest in the country. In 2009 the budget deficit was 12.7%. In 2010 it proposes an 8.7% cut. Greece is accused of providing unreliable statistics about the true state of its deficit and debt flouting EU budget rules. This has occasioned Eurostat, the EU statistics agency being given new and additional auditing powers. It will initiate in future tighter ‘budgeting surveillance measures to prevent concealment of the true state of affairs of a country’s finances. Another proposal against similar future scenarios is the institution of a European Monetary Fund emulating the ubiquitous International Monetary Fund. This paper has ranged over very many issues of concern to the business integration and the deepening of the European Union, but does not claim to be comprehensive in terms of its treatment of all relevant factors. The latest information about the Greek problem is that the rest of the members of the EU have expressed willingness to tackle it by coming up with loan guarantees so that the Euro will not tumble against other world currencies like the US Dollar. The future of the EU might be assured if the intervention works. *** (c.3120 words) Bibliography Deppler, M. (2007) Economic and monetary integration in Europe as seen from the outside. > http://ec.europa.eu/economy_finance/een/006/article_5207_en.htm < Retrieved 11/03/2010. Dixon, P. (undated) The Future of the European Union. > http://www.globalchange.com/futureeurope.htm < Retrieved 13/03/2010. EU Business News (2010) Europe acts to plot Greek clean-up. >http://www.eubusiness.com/news-eu/eurozone-greece.2gx. < Retrieved 13/03/2010. Gardner, P. (2008) The single European grid is coming. >http://www.climatechangecorp.com/content_print.asp?ContentID=5309 < Retrieved 13/03/2010. Ilzkovitz, F., Dierx, A., Kovacs, V., Sousa, N., (2007) Steps towards a deeper economic integration: the Internal Market in the 21st century; A contribution to the single Market Review >http://ec.europa.eu/economy_finance/index_eu_htm < Retrieved 12/-3/2010. Johnson, D. & Turner, C. (2008) European Business Routledge, London. Saving, J.C., (2005) European Economic Integration: A Conflict of Visions. >http://www.dallasfed.org/research/swe/2005/swe0504b.html < Retrieved 11/03/2010. Senior Nello, S. (2008) European Union: Economics, Policies and History, McGraw-Hill, Maidenhead. Read More