Political Economy of the European Union - Case Study Example

POLITICAL ECONOMY OF THE EUROPEAN UNION The European Union (EU) is a political and economic union of 27 member states, situated principally in Europe. It was founded as a result of the Treaty of Maastricht in 1993 based on the fundamentals of the pre-existing European Economic Community. With approximately a population of 500 million citizens, the EU collectively generates an approximated 30% share of the global nominal gross domestic product with US$16.8 trillion in 2007. The EU has formulated a “single market” by means of a standardized system of laws applicable in all member states, assuring the ‘freedom of movement of people, goods, services and capital’. It preserves a common trade policy, agricultural and fisheries policies, and a regional development policy. Fifteen member states have implemented a common currency, the euro. It has build up a role in foreign policy, and represents its members in the World Trade Organization, at G8 summits and at the United Nations. Twenty-one EU nations are part of NATO. It has also taken up a responsibility in justice and home affairs, which includes the elimination of passport control between many member nations under the Schengen Agreement. (Alan, 2007) The EU functions through a hybrid mechanism of intergovernmentalism and supranationalism. In particular areas it relies on agreement among the member states. However, it also possesses supranational bodies, thus is competent to make judgments without agreement between each and every national governments. Among the prominent institutions and bodies of the EU are the European Commission, the European Parliament, the Council of the European Union, the European Council, the European Court of Justice, and the European Central Bank. In every five years, the Parliament is elected by the EU citizens. Origins of the EU go back to the formation of the European Coal and Steel Community, formed among six countries in 1951 and the Treaty of Rome in 1957. Thereafter the EU has expanded in size via accession of new associate states, and in authority by adding new policy areas to its remit. (Richard, 2006) Subsequent to the Second World War, efforts made towards European integration were viewed as a get away approach from the intense forms of nationalism, which had ravaged the continent. The formation of the European Coal and Steel Community was among one such attempt to bring together Europeans. While having the unassuming aim of federal control of the formerly national coal and steel industries of its member nations, it was stated to be "a first step in the federation of Europe". The founding members of the Community were Belgium, France, Italy, Luxembourg, the Netherlands and West Germany. Thereafter the history of Europe saw the establishment of European Economic Community (EEC) ascertaining a customs union and the European Atomic Energy Community (Euratom) for cooperation in developing nuclear energy. In 1967, the Merger Treaty provided for the amalgamation of these communities collectively referred to as European Communities, which popularly were termed as European Community. (Ben, 2000) In 1973 incorporation of Denmark, Ireland and the United Kingdom enlarged the communities. In 1979, the first autonomous elections to the European Parliament were held. The 80s saw the incorporation of Greece, Spain and Portugal. In 1990, the previous East Germany embodied the Community under newly united Germany. The European Union was officially instituted when the Maastricht Treaty was enacted upon on 1 November 1993. Presently, the European Union comprises 27 independent sovereign nations known as member states: 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. (Alan, 2007) The EU is habitually portrayed as being separated into three divisions of responsibility, called pillars. The original European Community principles form the first pillar, while the second being Common Foreign and Security Policy. The third pillar initially comprised of Justice and Home Affairs. However, due to changes brought in by the Amsterdam and Nice treaties, it at present only consists of Police and Judicial Co-operation in Criminal Matters. In broader terms, the second and third pillars may be depicted as the intergovernmental pillars, the reason being that the supranational institutions of the Commission, Parliament and the Court of Justice play a limited or practically no role at all, while the intergovernmental Council of Ministers and the European Council take the initiative. Primary activities of the EU are the prerogative of the first, Community pillar. This is typically of economic nature and the supranational institutions have more authority. (Simon, 2005) Since its establishment, the EU has ascertained a single economic market spread through the provinces, which fall under the jurisdiction of its members. At present, the 15 members of the eurozone use a single currency. Considered to be a single economy, the EU generated an approximated nominal gross domestic product (GDP) of USD16,830 billion in 2006 that accounted for 31% of the entire global economic output, making it the leading economy in the world in terms of nominal GDP and the second largest trade bloc financial system in the world by PPP valuation of GDP. It is the leading exporter of goods, the second largest importer, and the principal trading collaborator to a number of large nations such as India, and China. (Alan, 2007) Two of the major objectives, which led to the formation of the European Economic Community, were the instantiation of a common market, which came to be known as the single market, and a customs union among the participating nations. The single market engages in the free movement of goods, capital, people and services within the EU, and the customs union recognizes the purpose of a common external tariff on all goods inflowing the market. After the commodities enter into the market, they cannot be subjugated to customs duties, discriminatory taxes or import quotas, as they pass through within the EU territory. The non-EU member states of Iceland, Norway, Liechtenstein and Switzerland take part in the single market but not in the customs union. Free circulation of capital is proposed to endorse movement of investments such as property procurement and purchase of shares among countries. (Desmond, 2006) The free movement of people allows citizens to move freely between member nations to reside, work, study or retire in a different country. This necessarily meant the easing of administrative rules and regulations and acknowledgment of professional credentials of other states. Conventionally the economically energetic were allowed a much greater degree of liberty than others were. The introduction of Community Citizenship to the EU in 1993 made it possible to allow the privilege to the non-economically active as well. The free movement of services permits self-employed personnel to travel into any member states to offer services on a provisional or permanent basis. Services generate between sixty to seventy percent of GDP, although statute law is not as formulated as in other sectors. This has been dealt with by the Directive on services in the internal market. This was recently passed and aims at liberalizing the section of the market. (Richard, 2006) The monetary union in Europe came in the form a single currency embraced by the members named Euro. The provisions in the 1992 Maastricht Treaty on European Union, which was used to invoke an economic and monetary union, founded the euro. To partake in the new currency, a member states had to meet certain standards such as a budget dearth below three per cent of its GDP, a debt ratio under sixty per cent of GDP, low inflation, and interest rates nearing the EU average. In the Maastricht Treaty, the United Kingdom and Denmark were exempted from monetary union, which resulted in the creation of the euro. Economists playing a major role in its introduction include Robert Mundell, Wim Duisenberg, Robert Tollison, Neil Dowling, Fred Arditti and Tommaso Padoa-Schioppa. (Alan, 2007) Owing to different national norms for rounding and significant digits, all transitions between the national currencies were achieved using the process of triangulation via the euro. The Council of the European Union, based on market rates as on 31 December 1998, such that one ECU (European Currency Unit) would equal one euro, decided the rates. The currency was launched in its non-physical form (travelers' cheques, electronic transfers, banking, etc.) at midnight on 1 January 1999, when the nationalized currencies of entering countries (the Eurozone) ceased to exist autonomously with their exchange rates being engaged at fixed rates against each other. The physical currencies (notes and coins), however, were used as legal tender until new notes and coins were presented on 1 January 2002. The transformation period during which the previous currencies' notes and coins were exchanged for those of the euro went on for two months, until 28 February 2002. (Desmond, 2006) The euro at present is the authorized currency of fifteen member states of the European Union (EU). The states are collectively known as the Eurozone. As recorded in December 2006 circulation of euro was above €610 billion, which is equivalent to US$802 billion with respect to the exchange rates at the time. The euro boasts about maximum combined value of cash in circulation in the world, having exceeded the U.S. dollar (USD). According to official estimates of 2008 GDP and purchasing power parity among the various currencies, the Eurozone stands as the second largest economy in the world. The euro is handled and administered by the Frankfurt-based European Central Bank (ECB) along with the Eurosystem that comprises of the central banks of the euro zone countries. As an autonomous central bank, the ECB has singular authority to lay down monetary policy. The Eurosystem is involved in the printing, minting and distribution of the physical currency amongst member states, and oversees functioning of the Eurozone payment mechanisms. (Richard, 2006) The European Monetary Union (EMU) is significant in projecting a furthered dynamic European identity. Thus, it is of much importance to analyze it about its influence on the international economic structure. The economic span of the EU includes over 300 million people and generates a gross domestic product (GDP) larger than the United States’. The EU is the world's largest trading cohort, but nearly two-thirds of international dealings entail the U.S. dollar. The EMU has its effects on these relationships. Due to a number of factors, the progress of the EMU connotes a depletion of the supremacy of the U.S. dollar in international economy. By supplanting 11 European currencies, the euro assumes importance as an international reserve currency. More notably, the lack of transaction costs, exchange rate risks, and interest rate spread across the EU enhances the progress of a truly incorporated financial market. (Alan, 2007) Non-EU nations are influenced by the euro, right away by means of international trade relations. Collateral effects are even more reflective and widespread with euro serving as a vehicle currency (facilitating financial dealings) in foreign exchange markets, and as an invoicing currency in global trade, with an increased importance in role it plays in capital markets. The induction of euro into international market changes trade and investment relationship. (Simon, 2005) Global economic arena shapes into a tri-polar international financial environment dominated by the U.S. dollar, the European euro, and, to a certain degree, the Japanese yen. The rising of the euro as a major currency makes it more complicated for the United States to guide large external shortages financed by the issue of dollars, due to decreased demand for them. Conversely, the EMU is faced with an easier task to run external deficits without a depreciating currency. Along similar lines, the United States and the EU require cooperative initiatives between the Federal Reserve and the European Central Bank in fiscal policy. (Ben, 2000) The forthcoming of the euro, as the currency of the EU, is of historical importance for both European eco-political amalgamation and for the global economic arena. The EMU is metamorphosing the sphere of business, commerce, and finance. With economic and political integration of Europe thus expanded, its research with a supranational union has shifted into a new phase. U.S.-European relations are undergoing a period of elementary modification. In the international economic scenario, the uprising of the European Monetary Union (EMU) has generated circumstances for a truly supranational European identity and, eventually, a change in the economic balance of forces between the European Union (EU) and the United States. (Desmond, 2006) Bibliography: Richard Baldwin & Charles Wyplosz, The Economics of European Integration 2nd edition, (London: McGraw Hill, 2006). Desmond Dinan (ed.) Origins and Evolution of the European Union (Oxford: Oxford University Press, 2006). Simon Hix, The Political System of the European Union, 2nd edition (Basingstoke: Palgrave Macmillan, 2005). Ben Rosamond, Theories of European Integration (Basingstoke: Palgrave Macmillan, 2000). Alan Cafruny & Magnus Ryner, Europe at Bay: In the Shadow of US Hegemony (Boulder Colo.: Lynne Rienner, 2007). Read More