European Union and the Euro Revolution, Volume 283 (Contributions to Economic Analysis)

EUROPEAN UNION AND THE EURO REVOLUTION CONTRIBUTIONS TO ECONOMIC ANALYSIS 283 Honorary Editors: D. W. JORGENSON J. T...

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EUROPEAN UNION AND THE EURO REVOLUTION

CONTRIBUTIONS TO ECONOMIC ANALYSIS 283

Honorary Editors: D. W. JORGENSON J. TINBERGENy

Editors: B. BALTAGI E. SADKA D. WILDASIN

Amsterdam Boston Heidelberg London New York Oxford Paris San Diego San Francisco Singapore Sydney Tokyo

EUROPEAN UNION AND THE EURO REVOLUTION

M. DUTTA Rutgers University, NJ, USA

Amsterdam Boston Heidelberg London New York Oxford Paris San Diego San Francisco Singapore Sydney Tokyo

Elsevier Radarweg 29, PO Box 211, 1000 AE Amsterdam, The Netherlands The Boulevard, Langford Lane, Kidlington, Oxford OX5 1GB, UK First edition 2007 Copyright r 2007 Elsevier B.V. All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone (+44) (0) 1865 843830; fax (+44) (0) 1865 853333; Email: [email protected]. Alternatively you can submit your request online by visiting the Elsevier web site at http://elsevier.com/locate/permissions, and selecting Obtaining permission to use Elsevier material Notice No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use or operation of any methods, products, instructions or ideas contained in the material herein. Because of rapid advances in the medical sciences, in particular, independent verification of diagnoses and drug dosages should be made Library of Congress Cataloging-in-Publication Data A catalog record for this book is available from the Library of Congress British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN-13: 978-0-444-52999-2 ISBN-10: 0-444-52999-3 ISSN: 0573-8555 For information on all Elsevier publications visit our website at books.elsevier.com

Printed and bound in The Netherlands 07 08 09 10 11 10 9 8 7 6 5 4 3 2 1

To Kanak who has been with me all hours for the past fifty-eight years

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Contents Acknowledgments Introduction to the Series

ix xiii

Preface

xv

List of Figures

xix

List of Tables

xxi 1

CHAPTER 1

The European Union

CHAPTER 2

Historical Progression of the European Union

31

CHAPTER 3

The Theory of Supranational Macroeconomics

55

CHAPTER 4

European Central Bank and the Euro: Theory of Optimum Currency Area Revisited

85

CHAPTER 5

A Constitution for Europe

117

CHAPTER 6

The European Union (EU): The Challenges Ahead

139

CHAPTER 7

The EU and USA

163

CHAPTER 8

The EU: A Learning Model

187

Bibliography

227

Subject Index

237


Acknowledgments My sincerest appreciation to Lawrence R. Klein, Benjamin Franklin Professor of Economics (Emeritus) University of Pennsylvania The 1980 Nobel Laureate in Economics who taught economics and econometrics plus values of life to me; Robert J. Alexander, Professor of Economics (Emeritus), Rutgers University, who gave me encouragement and inspiration to accept the challenge and keep the Rutgers’ Scarlet flag flying across both the Atlantic and the Pacific; Dr. Otmar Issing, former Chief Economist and Member of the Executive Board of the European Central Bank (ECB), who in two personal conferences thoroughly convinced me of the forcefulness of his thesis: One money to one Europe; John M. Letiche, Professor of Economics (Emeritus), University of California at Berkeley, Juërgen Schroëder, Professor of Economics, Mannheim University, Mannheim, Germany, and Arthur Grimes, Chairman, Board of Directors, Reserve Bank of New Zealand, formerly Professor of Economics, Victoria University, Wellington, New Zealand, who lent their generous scholastic support to help me conclude this book; Professor M. Fase and Dr. Wim F. V. Vanthoor, former Vice President and Head of Econometric and Special Research, De Netherlandsche Bank, Amsterdam, the Netherlands, and M. Jean-Pierre Patat, former Director General, Des Etudes et des Relations Internationales, Banque de France, Paris, for having me as a Visiting Scholar with their respective Central Banks in 2000 and providing me substantive opportunities for communications with research economists and policy experts at both banks; Professor Dr. Dr. h. c. mult. Hans Tietmeyer, Professor Dr. Dr. h. c. mult. Helmut Schlesinger, Professor Dr. Hermann Remsperger, Dr. Reiner Koenig, Dr. Heinz Herrmann, and Mr. Wolfgang Schill for having me as a Visiting Scholar with Der Deutsche Bundesbank in Frankfurt in 1999 and again in 2000, which gave me opportunities to engage in personal

x

Acknowledgments

conferences with a good number of research economists and administrators of the Bank; Kiyoshi Kojima, Professor of Economics (Emeritus), Hitotsubashi University, Tokyo; Shinichi Ichimura, International Center for Studies of East Asian Development (ICSEAD), Kokura; Hiromitsu Ishi, President (Emeritus), Hitotsubashi University, Tokyo; Yoshinori Shimuzu, Hitotsubashi University, Tokyo; Yoko Sazanami, Professor of Economics (Emeritus), Kieo University, Tokyo; Masumi Kishi, Chuo University, Tokyo; Yasuhiro Maehara, Bank of Japan, Tokyo, Japan; Chang Peikang, Huazhong University of Science & Technology, Wuhan; Zhang Zhongli, Shanghai Academy of Social Sciences, Shanghai; Liu Guoguang, Chinese Academy of Social Sciences, Beijing; Huang Fanzhang, China Reform Forum and former Senior Vice President, PRC State Planning Commission, Beijing; Heping Cao, Peking University, Beijing, China; Duk Chung Kim, President (Emeritus), Ajou University and Formerly Minister for Education, Republic of Korea; Jang-Hee Yoo, EWHA University, Seoul, Korea; Chyau Tuan, The Chinese University of Hong Kong; Linda Y. F. Ng, The Chinese University of Hong Kong, Hong Kong, China; Tzong-shian Yu, President (Emeritus), The Chung-Hua Institution for Economic Research, Taipei, Taiwan; Anwar Nasution, formerly of University of Indonesia and Bank Indonesia, Jakarta, Indonesia; Edita Tan, University of the Philippines, Manila, Philippines; Thienchay Kiranandana, President (Emeritus), Chulalongkorn University, Bangkok; Sumalee Pityanan, Chulalongkorn University, Bangkok; Suthiphand Chirativat, Chulalongkorn University, Bangkok, Thailand, and; R. Radhakrishnan, Director, The Indira Gandhi Institute of Development Research (IGIDR), Mumbai, India for their generous professional cooperation for so many years;

Acknowledgments

xi

Swadesh R. Datta-Gupta, Norman Markowitz, James P. Winder, Terutomo Ozawa, Terence D. Agbeyegbe, James T. H. Tsao, Richard F. Kosobud, H. Peter Gray, Richard Hooley, George Rosen, Steven L. Husted, David J. Green, Robert H. Aten, John Malcolm Dowling, Frank S. T. and Mei-Chu Hsiao, Peter D. Loeb, Kanta Marwah, Michael G. Plummer, Saleem M. Khan, Edna E. Ehrlich, Lee Fazio Fiorino, Wenhui Wei, Ming-Chung Wen, Amiya Sharma, Chien-Chung Nieh, Kiseok Lee, Daniel Tantum, and Mary Merva for their friendship and research collaboration over the years, giving me far more than I could ask for; Donna Ghilino, Dorothy Rinaldi, Paula Seltzer, Janet Goodstein, Debra Holman, and Janet Budge for their loving friendship; David T. Motovidlak and Wade Olsson for all their help every time my computer refused to respond to my commands; Laura F. Liang, who served as the Research Associate for this project with a commitment to total excellence and passionate love to deliver the very best; and Usha Kaul, Ashok Kaul, Kavery and Bhupender Kaul for their love and affection which has kept driving me.

Special thanks to The Fulbright Senior Specialist Program, for designating me a Fulbright Senior Specialist for a five-year tenure, 2002–2007, Washington, DC; Der Deutsche Bundesbank, Frankfurt; Banque de France, Paris; De Netherlandsche Bank, Amsterdam; Bank of Japan, Tokyo; Japan Bank for International Development, Tokyo; Reserve Bank of New Zealand, Wellington, New Zealand; Reserve Bank of Australia, Canberra; Ministry of Finance, Tokyo; Federal Reserve Bank of New York; Federal Reserve Bank of San Francisco; and Federal Reserve Bank of Atlanta, for having me as a Visiting Scholar, and/or for inviting me to give research presentations; Archibald S. Alexander Library, Rutgers – The State University of New Jersey, New Brunswick, NJ, for all their generous help in collecting data and source materials; The University Research Council, Rutgers – The State University of New Jersey, for their financial support to my research over many years, New Brunswick, NJ;

xii

Acknowledgments

The Ford Foundation; The John D. and Catherine T. MacArthur Foundation; Asian Development Bank; The East Asian Development Network of The World Bank; and The United Nations Development Program, for their funding support for the 24 international conferences sponsored by the American Committee on Asian Economic Studies (ACAES) between 1981 and 2002, each of which I had the privilege and honor to co-chair; Elsevier, Amsterdam, The Netherlands, for their publication of this volume, and my very special thanks are due to Vallerie Teng-Broug, Helen Collins, Mark Newson, and Joy Ideler for their splendid cooperation as I worked to complete the manuscript.

Introduction to the Series This series consists of a number of hitherto unpublished studies, which are introduced by the editors in the belief that they represent fresh contributions to economic science. The term ‘economic analysis’ as used in the title of the series has been adopted because it covers both the activities of the theoretical economist and the research worker. Although the analytical method used by the various contributors are not the same, they are nevertheless conditioned by the common origin of their studies, namely theoretical problems encountered in practical research. Since for this reason, business cycle research and national accounting, research work on behalf of economic policy, and problems of planning are the main sources of the subjects dealt with, they necessarily determine the manner of approach adopted by the authors. Their methods tend to be ‘practical’ in the sense of not being too far remote from application to actual economic conditions. In addition, they are quantitative. It is the hope of the editors that the publication of these studies will help to stimulate the exchange of scientific information and to reinforce international cooperation in the field of economics.

The Editors

ICELAND

Member states

Countries expected to join in 2007

FINLAND

NORWAY

Candidate countries

SWEDEN

ESTONIA RUSSIA LATVIA

DENMARK

LITHUANIA

IRELAND

RUSSIA

UNITED KINGDOM

BELARUS NETHERLANDS POLAND

BELGIUM

GERMANY CZECH REPUBLIC

LUXEMBOURG

UKRAINE SLOVAKIA

FRANCE

HUNGARY SLOVENIA

ITALY

Portugal

MOLDOVA

AUSTRIA

SWITZERLAND

CROATIA BOSNIA & HERZEGOVINA

Romania

SERBIA & Bulgaria MONTENEGRO

Spain

ALBANIA

MACEDONIA TURKEY GREECE

MOROCCO

ALGERIA

MALTA TUNISIA

CYPRUS

Preface In 1936, John Maynard Keynes taught us macroeconomics in the context of a sovereign nation-state and the Keynesian Revolution went on to overwhelm the critics. In the post-WWII decades, the concept of supranational macroeconomics became the core theme of the continental economic integration of Europe. The progression of the historic movement toward one European family is an accomplishment of immense magnitude. Students of economics are now aggressively challenged to study the new paradigm of macroeconomics. One common economic unit with its wellspecified micro- and macroeconomic parameters has been mapped onto one common geographic unit, the continent of Europe, a group of sovereign European nation-states voluntarily surrendering their erstwhile sovereignty. The official inauguration of one common money, the euro, managed by one common supranational central bank, the European Central Bank (ECB), on January 1, 1999, has been an epochal event in the eventful history of the European Union (EU) from 1958 through the present. As a student of economics, especially macroeconomics, I made efforts to appreciate the new challenge. In a paper, in the American Economic Review – Papers and Proceedings (1992), I argued that the traditional concept of a sovereign nation-state economy warrants re-examination, and that the concept of supranational macroeconomics merits a welcome review. In the same year, at an international conference at Chulalongkorn University, Thailand, my presentation on the EU received highly critical responses. I may have moved too fast, too soon, but since then, events have progressed positively for the EU. In 1995, I authored another paper pointing out the limitations of sovereign nation-state-based macroeconomics. As of 1999, with the euro and the ECB firmly established, the debate became: one money to one Europe. Immediately, I ventured to join in the debate. That same year, I was received as a Visiting Scholar at Der Deutsche Bundesbank at Frankfurt, Germany. My intensive interaction with economists and policy makers at the Bundesbank gave me a fuller understanding of the economic impact of the euro, adopted by 12 members of the EU (The United Kingdom, Sweden, and Denmark, also members of the EU-15, declined to join the Eurosystem and they continue to remain outside of the Eurozone at the present time). During this visit, I also had an occasion to have a personal conference with Dr. Otmar Issing, Chief

xvi

Preface

Economist and a Member of the Executive Board of the ECB. Indeed, I had the privilege to spend some time with several economists at the ECB. The following year, I was invited to serve as a Visiting Scholar with three European national central banks, De Netherlandsche Bank in Amsterdam, Banque de France in Paris, and Der Deutsche Bundesbank in Frankfurt. During my stay in Frankfurt, I had a second occasion to have another personal conference with Dr. Otmar Issing at the ECB, who forcefully articulated his thesis, one money to one Europe. Later in 2000, I took the case for the Europeanization of Europe to Asia. I served as a Visiting Scholar with Japan’s Ministry of Finance in Tokyo. During this visit, I came to be informed of the frequent subcabinet level meetings of experts from Korea, China, and Japan toward developing a plan for monetary and fiscal policy cooperation. I wondered if it was an embryonic effort toward the Asianization of Asia. During my six-week tenure as a Visiting Scholar, I had the occasion to confer with economists at several other Ministries of the Government of Japan. I also visited several universities and research centers inclusive of Hitotsubashi University, Chuo University, Bank of Japan, Japan Bank for International Development, and the International Center for the Study of East Asian Development (ICSEAD) in Kokura. Presentations and follow-up exchanges with ranking economists and officials at the Reserve Bank of New Zealand, Wellington, New Zealand in 2004 and earlier at the Reserve Bank of Australia, Canberra, Australia enriched my understanding of the potential of Asian regional economic integration. Since then, my research in this area has taken me to give invited presentations at a large number of universities and research institutions in China, Korea, Taiwan, the Philippines, Indonesia, Singapore, Malaysia, Thailand, Viet Nam, Nepal, India, Australia, and New Zealand. Note that I also gave invited seminars at several universities in the USA and Europe. My presentations on the EU at the Federal Reserve Bank of New York in 2000, and earlier at the Federal Reserve Bank of San Francisco and the Federal Reserve Bank of Atlanta drew critical comments as many shared their reservations about the euro and the EU. My presentation in 2002 at the special workshop sponsored by the United Nations International Training and Research (UNITAR) at the United Nations Headquarter in New York City, however, drew a great deal of appreciation. European Union and the Euro Revolution is the output of my research since 1999. I must acknowledge my indebtedness to all my fellow economists at various forums in so many countries across the Atlantic and the Pacific, whose comments and constructive criticisms contributed to my learning. The subject is truly difficult and literature on the subject is quite limited. This book has eight chapters and in what follows a brief description of each chapter is presented:

Preface

xvii

Chapter 1 introduces the 25 member countries of the EU as of 2004. Two more countries are scheduled to join the EU membership in 2007. One European family with all its linguistic, religious, and lifestyle diversities is analyzed. Jean Monnet’s vision of the Europeanization of Europe remains the focus. In 2004, the EU had a population base of 455 million in a land area of 3,852,106 km2 and GDP at US$12.7 trillion, to emerge as a competitive economic unit. Chapter 2 presents the time profile of the historical progression of the EU. A review of the Marshall Plan, the OEEC, the OECD, and NATO in the immediate post-WWII Europe is followed by what I have called the process of deepening and widening. Beginning with the Benelux Customs Union, the movement for European economic integration progresses a` la the ECSC in 1951, the Treaty of Rome, the One Europe Act, the Maastricht Treaty, the Treaty of Amsterdam, and the Treaty of Nice. The chapter adds discussions about one money, the euro, and the ECB, the need for a Constitution for Europe, and the current administrative structure of the EU. Chapter 3 examines the theory of supranational macroeconomics and offers to fill the gap in the literature which has been anchored to traditional nation-state-based macroeconomies. I have argued that the EU model of a supranational macroeconomy can be defined by two parameters: its shares of world output and trade. Individually, none of the EU-25 member economies has a competitive share, given the world market where one economy, the USA, enjoys overwhelmingly dominant shares of economic activities, and by extension, overly influential leadership. However, the EU-25 as an integrated economic unit has to its credit competitive shares of world output and trade. I have argued that the principle of competition will work in the world market and help optimize economic gains for all people in all the continents of the world. Chapter 4 is an extended exposition of the euro and the ECB. A revisit with the theory of optimum currency area is called for. Indeed, a definition of the optimum currency area based on a given currency’s representation of shares of world output and trade is proposed. The euro–dollar exchange rate has become a subject of much attention; the fact that the euro has emerged as a strong currency vis-a`-vis the US dollar is significant and its share as an international reserve currency continues to increase. Chapter 5 deals with the Constitution for Europe. The EU is struggling to establish its political integration. The Constitution has been drafted, and duly signed by the Heads of the EU-25 member countries. The EU protocol warrants that the constitution must be affirmed by all Member States. Indeed, a majority of the Member States representing a majority of the people of the EU has already ratified the Constitution. Without the complete support of all Member States, the EU is challenged in international forums, as it is not recognized as a true political entity, with one government, one flag, and one national anthem. I have argued that the 10

xviii

Preface

new Members who joined the EU in 2004 will make positive contributions in this regard. Chapter 6 sums up the challenges ahead for the EU. True, challenges are welcome as it helps the progressive exploration of new dynamics. The role of the United Kingdom in the EU continues to be an issue. Will the UK, Denmark, and Sweden join the Eurosystem? EU membership to the IMF is a pressing issue even with the ad hoc provision for observer status granted to the ECB. We examine the debate for restructuring the IMF, the IBRD, the IFC, and the IDA as the EU with its competitive shares of contributions is a candidate for international power-sharing. Since the founding of these international institutions, the USA, with its overwhelmingly large contributions, has played the leadership role and consequently exercised its veto power. Chapter 7 deals with the EU and the USA. For the USA, the search is for expanded geographic cooperation a` la APEC, NAFTA, and the FTAA, which will enable the cooperative entity to command a competitively larger share of world output and trade. However, US efforts have been limited to traditional FTAs. The EU model of FTA is innovative and provided for the integration into one economic unit. As such, the EU is now one member of the WTO with one vote. The USA now has a counterpart that challenges its economic superiority. The FTA model proposed by the USA is limited and in the absence of a proper model of integration, results remain sub-optimal. Chapter 8 invites other continents to accept the EU as a learning model. We review the notable preparatory steps in the continents of Asia and Africa. In Asia, the 4 plus 10 model has received much attention. Recently, Asian leadership has called for an Asian-FTA following the EU-FTA model, and also for a single Asian money for optimum monetary policy coordination. Australia–New Zealand has adopted the Closer Economic Relations Act and their FTA is operationally successful. Will they also have a common money? Will they join the Asian Economic Community? Will they elect to join the FTAA, if and when it will be instituted? The Africa Economic Union is officially in progress and its evolution will be carefully observed. I have ventured to suggest that a Middle Eastern Economic Community warrants much consideration. For pragmatic reasons, Middle Eastern economies from Turkey to Afghanistan, albeit they all belong to the continental map of Asia, have not been included in any model of Asian Economic Community. Turkey is of course a candidate country for the EU membership. I have suggested that Mediterranean rim countries of Africa may join the Middle Eastern Economic Community. Several Central Asian countries and Pakistan also may consider becoming members of the Middle Eastern Economic Community. May all my readers forgive me for any and all errors that escaped my careful scrutiny.

List of Figures 3.1: 3.2: 3.3A: 3.3B: 3.4: 3.5: 4.1A: 4.1B: 4.2A: 4.2B: 8.1: 8.2: 8.3: 8.4: 8.5: 8.6: 8.7: 8.8: 8.9: 8.10: 8.11: 8.12: 8.13: 8.14: 8.15: 8.16: 8.17: 8.18:

Share of world GDP Share of world GDP (PPP) Share of EU GDP (PPP), 1975 Share of EU GDP (PPP), 2004 Capital–labor ratios of EU-25 and USA, 2002 Capital–GDP ratios of EU-25 and USA, 2002 Average monthly exchange rates, USD and EUR Average quarterly exchange rates, USD and EUR US/EU-12 GDP ratios by volume index and USD/ euro exchange rates, 1999.1–2003.3 US/EU-12 GDP ratios by price index and USD/euro exchange rates, 1999.1–2003.3 EU share of world GDP EU share of world exports Share of world GDP: Northeast Asia countries (exclude Japan) Share of world export: Northeast Asia countries (exclude Japan) Share of world GDP: Northeast Asia countries (include Japan) Share of world export: Northeast Asia countries (include Japan) Share of world GDP: ASEAN-5 countries Share of world export: ASEAN-5 countries Share of world GDP: Northeast Asia and ASEAN-5 Share of world export: Northeast Asia and ASEAN-5 Share of world GDP: South Asia countries Share of world export: South Asia countries Share of world GDP: 3 Asian regions Share of world export: 3 Asian regions Share of world GDP: 4 groups Share of world export: 4 groups Share of world GDP: 5 groups Share of world export: 5 groups

66 69 72 72 79 81 112 112 113 114 192 193 206 207 207 208 208 209 210 211 212 213 214 215 216 217 218 219


List of Tables Chapter 1 1.1: 1.2: 1.3: 1.4: 1.5: 1.6A: 1.6B: 1.7: 1.8: 1.9: 1.10: Chapter 2 2.1: 2.2: 2.3: 2.4A: 2.4B: 2.5: 2.6: 2.7: 2.8: 2.9:

The EU-25: Membership dates States on the map of Europe, but not yet candidates for EU membership Comparative statistics: EU-25, USA, and Japan (2003) Selected macro statistics, EU-25 Sectoral shares of gross domestic product (GDP)(%), 2005 The European Union in 2004 The European Union in 2004 Religion (% of population) Linguistic diversity of the EU, percentage of population speaking Languages in EU-15, percentage of population (2001) Percentage of population that think children should learn English in addition to their mother language OECD geographic membership distribution The Council of Europe: 46 Member States Key treaties of the EU Chronological list of key dates of the European Union Treaties of Accession The EU administrative structure The European Parliament The weighting of votes in the Council Seat allocation of the Economic and Social Committee and the Committee of Regions The EURATOM Committee membership

2 2 4 5 6 7 8 25 27 28 28 33 35 36 39 41 48 49 51 53 54

xxii

Chapter 3 3.1A: 3.1B: 3.1C: 3.2A: 3.2B: 3.3A: 3.3B: 3.3C:

3.4: 3.5A: 3.5B: 3.6:

3.7A: 3.7B: 3.8:

3.9: 3.10: 3.11A: 3.11B: 3.11C: 3.11D: 3.12: Chapter 4 4.1:

List of Tables

Population, total (in millions) EU member countries: Population, total (in millions) Population based on decennial census, 1960–2000 plus 2004 (in millions) GDP (constant 2000 US$, in billions) EU member countries: GDP (constant 2000 US$, in billions) GDP (PPP) (constant 2000 international $, in billions) EU member countries: GDP (PPP) (constant 2000 international $, in billions) Ranking of the EU-25 member economies based on GDP (PPP) in 2004 (constant 2000 international $, in billions) Intra-EU shares of GDP (PPP) (constant 2000 international $, in billions) Trade in goods and services as a percentage of world trade (constant 2000 US$, in billions) Individual economies of the EU-25: Shares of world trade in 1990 and 2000 (%) Trade in goods and services, EU-12, EU-15, EU-25, and USA as a percentage of world trade (constant 2000 US$, in billions) EU-25: GDP (PPP), percentage of world GDP (constant 2000 international $, in billions) A summary of shares of world GDP GDP (PPP) of EU-12, EU-15, EU-25, USA as a percentage of world GDP (constant 2000 international $, in billions) Capital–labor ratios of EU-25 and USA Capital–GDP ratios of EU-25 and USA EU-15 FDI outflows to AC-10, 1999–2003 (h, in millions) Shares of FDI outward stocks, end-2002 (%) Shares of the AC-10 investment flows from extraEU-25 (%), 2001–2003 Extra-EU FDI inflows, net of reinvested earning by kind of activity (h, in millions) Intra-EU trade flows (h, in millions), 1995–2004 Time limits on currency exchanges with national central banks

61 63 64 65 67 68 70

71 71 73 74

75 76 77

77 78 80 81 81 82 82 82

86

List of Tables

4.2: 4.3: 4.4A: 4.4B: 4.4C: 4.5A: 4.5B: 4.5C: 4.6A: 4.6B: 4.7A: 4.7B: 4.7C: 4.8A:

4.8B:

4.8C: 4.9: 4.10: 4.11: 4.12A: 4.12B: 4.13A: 4.13B: 4.14:

Fixed euro conversion rates The administrative structure of the ECB Shares of ECB capital stock (%) Eurozone national central banks (NCBs) Non-Eurozone NCBs (from May 1, 2004) Harmonized index of consumer prices (HICP) (%) HICP in the Eurozone Weights of the main Eurozone HICP components, 2003 and 2004 Key ECB interest rates EONIA and EURIBOR Money supply Eurozone monetary aggregates Percentage shares of components of M3 at end-2002 (%) Amounts of outstanding debt securities denominated in national currency issued by residents in the Eurozone, the USA, and Japan at end-2002 (% of GDP) Number of domestic and foreign companies listed on stock markets in the Eurozone, the USA, and Japan (end of year) Number of Eurozone monetary financial institutions (end of year) Stock market capitalization in the Eurozone, the USA, and Japan (% of GDP) Key real economic characteristics of the Eurozone, 2004 GDP (PPP), 2004 (%): The Eurozone and USA Share of official foreign exchange holdings in selected currencies (end of year) Percent changes in euro and dollar reserve holdings Average monthly exchange rates: Euro and USD Average quarterly exchange rates: Euro and USD Quarterly USD/Euro exchange rates and US/EU GDP based on volume and price indices

Appendix Chapter 5 5.1: 5.2: 5.3A: 5.3B: 5.4: 5.5:

Adoption of the EU constitution Capital fund of the European Investment Bank Individual rights Citizens’ rights Areas of competence The institutional framework of the EU Government

xxiii

90 90 92 93 94 96 97 97 98 99 100 100 100

101

102 102 102 103 106 108 108 110 111 113 115 121 123 126 127 128 129

xxiv

5.6: 5.7A: 5.7B: 5.7C: Chapter 6 6.1A: 6.1B: 6.2: 6.3: 6.4: 6.5A: 6.5B: 6.5C: 6.6: 6.7: 6.8: 6.9: Chapter 7 7.1A: 7.1B: 7.1C: 7.2A: 7.2B: 7.3A: 7.3B: 7 4A: 7.4B: 7.4C: 7.5A:

List of Tables

Locations of the Government Institutions of the European Union Population of the Member States approval of the Constitution, approved Population of the Member States approval of the Constitution, postponed Population of the Member States approval of the Constitution, rejected Member countries shares of IMF: The EU, USA, and Japan GDP in 2004 (constant 2000 US$, in billions) Quotas of the EU Member States, the USA, and Japan (%) Currency composition of official holdings of foreign currency, end of year (in millions of SDR) Proposal on restructuring the IMF IBRD: Votes and total subscriptions of the EU, the USA, and Japan IFC – Votes and total subscriptions of the EU, the USA, and Japan IDA – Votes and total subscriptions of the EU, the USA, and Japan EU and the WTO membership GDP (PPP) per capita comparison Sectoral shares of GDP (%), 2005 Shares of GDP (PPP), shares of world exports (%), and population APEC members Key economic indicators of APEC members (as of December 6, 2005) APEC organization Key economic indicators of members of the Asian Economic Summit Sectoral shares of GDP of Asian Economic Summit members (%) Key economic indicators of NAFTA members Sectoral shares of GDP of NAFTA members (%) Key economic indicators of FTAA members Sectoral shares of GDP of FTAA members (%) FTAA hemispheric summits and ministerial meetings Key economic indicators of the EU: a comparative profile

129 135 135 136

146 148 149 150 151 152 153 154 157 158 160 161 167 168 169 171 171 172 173 174 175 176 178

List of Tables

7.5B: 7.6: 7.7A: 7.7B: Chapter 8 8.1: 8.2A: 8.2B: 8.3A: 8.3B: 8.3C: 8.4: 8.5A: 8.5B: 8.6A: 8.6B: 8.7A: 8.7B: 8.8A: 8.8B: 8.9A: 8.9B: 8.10A: 8.10B: 8.11A: 8.11B: 8.12: 8.13A: 8.13B:

Sectoral shares of GDP of EU members (%) The EU and FTAA Customs Unions and FTAs in the American hemisphere Free trade agreements in the American hemisphere

Key economic indicators of the Eurozone, the USA, and Japan (1999) Economies on the Continent of Asia Members of the 4+10 model of the Asian Economic Community Sectoral shares of GDP (PPP) (1999) Sectoral shares of GDP of the 3+5 model (2005) Sectoral shares of GDP of the 4+10 model (2005) Sectoral shares of GDP of Asia and EU (1988 and 1997) GDP and trade of Northeast Asia Countries in 1987 and 1997 Share of world GDP and trade of Northeast Asia Countries in 1987 and 1997 (%) GDP and trade of ASEAN members in 1987 and 1997 Share of world GDP and trade of ASEAN members in 1987 and 1997 (%) GDP and trade of South Asia Countries in 1987 and 1997 Share of world GDP and trade of South Asia Countries in 1987 and 1997 (%) GDP and trade of ANZ in 1987 and 1997 Share of world GDP and trade of ANZ in 1987 and 1997 (%) GDP and trade of Asia 3+5 model in 1987 and 1997 Share of world GDP and trade of Asia 3+5 model in 1987 and 1997 (%) GDP and trade of Asia 4+10 model in 1987 and 1997 Share of world GDP and trade of Asia 4+10 model in 1987 and 1997 (%) GDP and trade of EU members in 1987 and 1997 Share of world GDP and trade of EU members in 1987 and 1997 (%) Shares of world GDP (PPP) and trade (%) Key economic indicators of African Union members Sectoral shares of GDP of African Union members

xxv

179 179 181 182

188 194 194 195 195 196 197 198 198 199 199 200 200 201 201 202 202 203 204 205 206 219 220 221

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8.14: 8.15A: 8.15B: 8.15C: 8.15D: 8.16:

List of Tables

The organizational structure of the African Union (AU) Economies of the Middle East Key economic indicators of economies of the Middle East Sectoral shares of GDP of economies of the Middle East (%) Per capita income (PPP) of economies of the Middle East (2005) (US$) Continental economic unions

223 223 224 224 225 225

CHAPTER 1

The European Union 1.1. Knowing the European Union To begin, we must understand Jean Monnet’s vision of the Europeanization of Europe. As early as the 1940s, when Europe still struggled to recover and rebuild from the devastation of World War II, he forcefully argued: ‘‘The countries of Europe are not strong enough individually to be able to guarantee prosperity and social development for their peoples’’ (emphasis added). Indeed, in terms of economic magnitudes, the individual sovereign nation-states of Europe were marginal entities. ‘‘The States of Europe must therefore form a federation or an European entity that would make them into a common economic unit’’ (Monnet, 1978; see also http://www. historiasiglo20.org/europe/monnet.htm). The movement to integrate the continent of Europe into one common economy has been in progress since the 1950s. This one common economy has been instituted onto one common geographic unit, the continent of Europe. Unity based on belonging together to a common geographic unit defies diversities in language, religion, and lifestyle. Not belonging to the map of Europe certainly disqualifies a state from European Union (EU) membership; it follows that the USA, Canada, Australia, and New Zealand all fail to qualify to be a candidate for EU membership and their European heritage has not been a factor. The principle of inclusion enables a state on the map of Europe to join the EU, even if the candidate state is not able or willing to join the membership any sooner (see Tables 1.1 and 1.2). What is now the European Union is a union of the people of Europe, not simply a confederation of European states. Monnet pleaded for the men and women of Europe to recognize that ‘‘beyond their differences and geographical boundaries there lies a common interest.’’ This process has compromised the traditional concept of sovereignty and has required each of the 25 EU Member States to voluntarily surrender its economic sovereignty. They continue to make efforts to become one European political entity (Chapter 5). The concept of divisibility of sovereignty is indeed revolutionary. We must take into consideration that the traditional concept of sovereignty has gone through significant changes in recent times: The Soviet Union has ceased to be one sovereign entity. The Czech Republic and Slovakia had a ‘‘Velvet Divorce.’’ The One Europe Act of 1986 has

2

European Union and the Euro Revolution

Table 1.1.

The EU-25: Membership dates

1958

Belgium France Germany Italy Luxembourg The Netherlands

1973

Denmark Ireland United Kingdom

1981

Greece

1986

Portugal Spain

1995

Austria Finland Sweden

2004

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

Source: http://europa.eu.int/abc/panorama/whatdoes/index_en.htm. See also Dutta (1999) and Schroeder (2000).

Table 1.2.

States on the map of Europe, but not yet candidates for EU membership

Albania Andorra Belarus Bosnia-Herzegovina Iceland Liechtenstein Moldova Monaco Norway Russia San Marino Serbia and Montenegro Switzerland Ukraine Vatican City Source: http://europa.eu.int/abc/governments/index_en.htm.

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3

sustained the EU-paradigm of supranational macroeconomics wherein the 15 Member States made a partial concession of their respective sovereignty (Dutta 1992, 1995a, b, c). In 1957, Belgium, the Netherlands, Luxembourg, Germany, France, and Italy signed a treaty to form the European Coal and Steel Community (ECSC). The six then signed the Treaty of Rome in 1957, and on January 1, 1958, the European Economic Community (EEC) came into being (see Chapter 2). In 1967, the EEC came to be known as the European Community (EC). Necessary administrative organization for executive, legislative, and judicial performances came to function. The EC set up a Council of Ministers and the European Parliament. Initially, members of the European Parliament were selected by national parliaments of Member States. However, since 1979, they have been elected directly by the people for five-year terms. To adjudicate disputes for the proper implementation of the Treaties among the Member States, the Court of Justice became indispensable. Free flow of trade and investment and free movement of labor became the core of microeconomic policy to further the process of European economic integration. The success of the EU Free Trade Area (FTA) led to the search for a Zone of Monetary Stability. We shall review in the next chapter the Snake Agreement, the Exchange Rate Mechanism (ERM), the European System of Central Banks (ESCB), the European Monetary System (EMS), and the European Monetary Union (EMU) as they progressed and evolved since the 1970s. The next big phase came in 1986 when the One Europe Act was adopted. The Maastricht Treaty of 1992 followed and made provisions for a macroeconomic framework with specific and transparent guidelines for the monetary and fiscal policy parameters of the EC. Following this progressive integration, the EC became the EU. EU membership continued to grow through these years, and by 1995 the EU-15 had proven that it was a successful economic compact. As of May 2004, 10 more European states have joined the EU membership. The EU-25 are: Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, the Netherlands, and the United Kingdom. Table 1.1 presents the expansion of EU membership beginning with the original six as of January 1, 1958 to the present 25 as of May 1, 2004. Bulgaria and Romania are acceding countries to be admitted to the EU in 2007. As of the writing of this book, there are three candidate countries, Croatia, the former Yugoslav Republic of Macedonia, and Turkey, still in membership negotiations (http://europa.eu.int/comm/enlargement/index_en.htm). There are still many other countries on the map of Europe that have decided not to apply for EU membership. How about these missing links? (see Table 1.2). With an area of 3,976,372 km2 and a population of 456,953,258 (The World Factbook, 2005), the EU has emerged as an economic entity of great

4


Table 1.3.

Comparative statistics: EU-25, USA, and Japan (2003)

Area (in 000’s km2) Population (in millions) Density (km2) Unemployment rate (standardized) (%) Inflation rate (%)

EU-25

USA

Japan

3,893 454.56 116.8 9.10 2.00

9,631 293.03 30.4 6.00 1.60

378 127.62 337.6 5.30 0.20

Note: Figures for area and population do not match exactly with those in The World Factbook. Source: Delegation of the European Commission to the USA. Eurunion.org.

dimension (Chapter 3). In area, the EU is less than one-half that of the USA. In population, the EU is the third largest following China and India, the US being the fourth most populated. In terms of shares of world gross domestic product (GDP) and trade, the EU and USA are highly competitive. Table 1.3 reports comparative statistics for the EU-25, the USA, and Japan for 2003. Note that the USA and Japan were the first and second largest economy until the EU-25 came with competitive figures. In area, the USA is much larger than the EU-25, and of course Japan. In population, the EU-25 leads both the USA and Japan. The EU-25 scores poorly for its unemployment rate, but the USA and Japan have lower, comparable numbers. The inflation rate in EU-25 at 2 percent was at its targeted rate, while the USA did better and Japan was experiencing slight deflation. Brussels is the capital of the EU. The executive branch is headed by the Chief of Union who works with a Cabinet of 25 members, one from each Member State responsible for one or more policy measures. This President is designated by the 25 member governments, and the President selects the other commission members. The European Parliament then confirms them for five-year tenures. The EU legislative branch consists of (a) the Council of the EU with 321 votes representing the Member States, and (b) the European Parliament with 732 seats elected by the people. The population size of the Member States remains the basis of allocation of votes in the Council and seats in Parliament. The judicial branch is composed of the Court of Justice of the European Commission. A justice is selected from each Member State to serve for a six-year term, but the Court can sit with just 11 members present. The Court ensures that treaties are interpreted and applied properly. Table 1.4 presents selected macroeconomic parameters, specifically the unemployment rate and inflation rate, both estimated in 2005, and the Gini index for the individual members of the EU. Poland has the highest unemployment rate at 18.3 percent, while the Czech Republic, Estonia, France, Germany, Greece, Slovakia, Slovenia, and Spain record figures between 9 percent and 11.6 percent. Other than Estonia, Greece, Hungary, Latvia, and

5

The European Union

Table 1.4.

Selected macro statistics, EU-25

Unemployment rate (%) EU-25 Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta The Netherlands Poland Portugal Slovakia Slovenia Spain Sweden United Kingdom

Inflation rate (%)

Gini index

9.4

2.2

32 (2003)

5.1 7.6 3.5 9.1 5.7 9.2 7.9 10.0 11.6 10.8 7.1 4.2 7.9 8.8 5.3 3.7 7.0 6.7 18.3 7.3 11.5 9.8 10.1 6.0 4.7

2.3 2.7 2.3 2.0 1.9 4.0 1.2 1.9 2.0 3.8 3.7 2.7 1.9 5.9 2.6 2.6 2.8 1.6 2.1 2.4 2.8 2.4 3.4 0.5 2.2

30 (1997) 25 (1996) na 25.4 (1996) 24.7 (1997) 37.2 (2000) 26.9 (2000) 32.7 (1995) 28.3 (2000) 35.1 (2003) 24.4 (1999) 35.9 (1996) 36 (2000) 32 (1999) 31.9 (2000) na na 32.6 (1994) 34.1 (2002) 38.5 (1997) 25.8 (1996) 28.4 (1998) 32.5 (1990) 25 (2000) 36.8 (1999)

Note: All figures for unemployment rate and inflation rate are estimates of 2005, except the figure for unemployment rate of Malta (2003 est.). Source: The World Factbook.

Spain, the inflation rate in the other EU economies remain at or near the 2 percent benchmark, as the EU guideline requires. The EU-25 scores for unemployment rate and inflation rate as estimated in 2003 are 9.4 percent and 2.2 percent, respectively. As a measure of income distribution, the Gini index for EU-25 estimated in 2003 is 32, while estimates of individual member economies at specific years show notable variations. Ten member economies, Estonia, France, Greece, Ireland, Italy, the Netherlands, Poland, Portugal, Spain, and the United Kingdom, score above 32. Note that three, Cyprus, Luxembourg, and Malta, report no estimate. Table 1.5 offers the data on sectoral shares of GDP, which is taken to be a snapshot of the stage of industrialization of a given economy. A mature industrialized economy is expected to have a high share of GDP from the service sector while its shares from the agricultural sector decline and the industrial sector’s share stabilize at a certain point. Productivity increases in the agricultural and industrial sectors contribute to the income increases of

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Table 1.5.

Sectoral shares of gross domestic product (GDP)(%), 2005 Agriculture

Industry

Services

EU-25 (2004)

2.2

27.3

70.5

Austria (2004) Belgium (2004) Cyprus Czech Republic (2004) Denmark Estonia Finland France Germany Greece Hungary Ireland (2002) Italy Latvia Lithuania Luxembourg (2004) Malta (2003) The Netherlands Poland Portugal Slovakia Slovenia Spain Sweden United Kingdom

2.3 1.3 3.8 3.4 2.2 4.1 3.1 2.5 1.1 6.2 3.9 5.0 2.1 4.1 5.7 0.5 3.0 2.1 2.8 5.2 3.6 2.8 3.4 1.8 1.1

30.8 24.7 20.0 39.3 24.0 29.1 30.4 21.4 28.6 22.1 30.9 46.0 28.8 26.0 32.4 16.3 23.0 24.4 31.7 28.9 29.7 36.9 28.7 28.6 26.0

66.9 74.0 76.2 57.3 73.8 66.8 66.5 76.1 70.3 71.7 65.3 49.0 69.1 69.9 62.0 83.1 74.0 73.5 65.5 65.9 66.7 60.3 67.9 69.7 72.9

Source: The World Factbook.

the people of the economy who then demand services such as education, health care, quality environment, music and performing arts, travel and leisure, and so forth. As they earn more income, they demand more of those services, and stimulate many more people to demand such services. Tables 1.6A and 1.6B describe land area, population, GDP, and GDP per capita of the EU-25 and of each individual member country. Per capita income in constant 2000 international dollars of the 25 countries varies between $11,148 for Latvia and $63,598 for Luxembourg, Ireland with $37,073 coming second behind Luxembourg. Germany, with 18.15 percent of the EU-25 population and 21.39 percent of GDP, ranks as the largest unit. France follows next with 13.18 percent of the population and 15.78 percent of GDP, then the UK with 13.05 percent of the population and 16.87 percent of GDP, and Italy with 12.65 percent of the population and 13.18 percent GDP. In 2004, the figures for total land area, population, and GDP for EU-25 respectively are: 3,852,106 km2, 455,297,046, and US$12,690.64 trillion (current US dollar).

7

The European Union

Table 1.6A. Country Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta The Netherlands Poland Portugal Slovak Republic Slovenia Spain Sweden United Kingdom EU-25

The European Union in 2004 2

Land area (km ) 82,730 30,230 9,240 77,280 42,430 42,390 304,590 550,100 348,950 128,900 92,100 68,890 294,110 62,050 62,680 2,586 320 33,880 306,290 91,500 48,800 20,120 499,440 411,620 240,880

Land (%) 2.15 0.78 0.24 2.01 1.10 1.10 7.91 14.28 9.06 3.35 2.39 1.79 7.64 1.61 1.63 0.07 0.01 0.88 7.95 2.38 1.27 0.52 12.97 10.69 6.25

3,852,106

Population (total) 8,115,000 10,405,000 775,627 10,183,340 5,397,249 1,345,000 5,215,000 59,990,540 82,630,660 11,074,760 10,072,000 4,019,000 57,573,180 2,303,000 3,439,000 450,000 401,000 16,250,000 38,160,000 10,436,000 5,390,300 1,995,000 41,286,390 8,985,000 59,405,000

Population (%) 1.78 2.29 0.17 2.24 1.19 0.30 1.15 13.18 18.15 2.43 2.21 0.88 12.65 0.51 0.76 0.10 0.09 3.57 8.38 2.29 1.18 0.44 9.07 1.97 13.05

455,297,046

Source: World Development Indicators (2005).

1.2. Knowing the EU-25 1.2.1. Republic of Austria Located in Central Europe at the crossroads of the Alps, Austria is a rich industrialized country with a well-developed market economy and high standard of living. Austria became a member of the EU in 1995 and of the Eurosystem in 1999. Vienna is the capital city of the Republic. The administrative divisions consist of nine states. The President, elected by direct popular vote for a six-year term is the Chief of State. The Chancellor, chosen by the President from the plurality party in the National Council, is the Head of Government. The Council of Ministers is appointed by the President on the advice of the Chancellor. A bicameral legislative branch consists of (a) the Federal Council of 62 members representing each of the nine constituent administrative units on the basis of population, with each state having a minimum of three members and (b) the National Council of 183

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Table 1.6B. Country

Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta The Netherlands Poland Portugal Slovak Republic Slovenia Spain Sweden United Kingdom EU-25

The European Union in 2004

GDP (current US$)

290.11 349.83 15.42 107.05 243.04 10.81 186.60 2002.58 2714.42 203.40 99.71 183.56 1672.30 13.63 22.26 31.14 5.39 577.26 241.83 168.28 41.09 32.18 991.44 346.40 2140.90

GDP (%)

GDP per capita (PPP) (constant 2000 international $)

2.29 2.76 0.12 0.84 1.92 0.09 1.47 15.78 21.39 1.60 0.79 1.45 13.18 0.11 0.18 0.25 0.04 4.55 1.91 1.33 0.32 0.25 7.81 2.73 16.87

29,778 28,698 21,193 17,937 29,591 12,773 27,594 26,910 26,050 20,318 15,399 37,073 26,063 11,148 12,051 63,598 17,542 29,668 11,921 18,220 13,437 19,251 23,453 27,301 28,545

12,690.64


members elected by direct popular vote for four-year terms. The Supreme Judicial Court heads the judicial branch of the government. The economy’s industrial and agricultural sectors have been modernized. Timber is a key industry, 47 percent of its land area being forestland. Germany is by far the largest trading partner of Austria. As Austria joined the EU membership, a large number of foreign investors came in to take advantage of the free flow of investment in the integrated EU regional economy. The low rate of growth is a challenge for the future. 1.2.2. Kingdom of Belgium Belgium, a state in Western Europe bordering France and the Netherlands, enjoys a waterfront with the North Sea. It is the seat of both the EU and the North Atlantic Treaty Organization (NATO). It joined the Eurosystem in 1999. Brussels is the capital city. With 10 administrative provinces, Belgium has a federal bicameral parliamentary democracy under a constitutional

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9

monarchy. The Monarch is the Chief of State. The Prime Minister, the leader of the majority party or of the majority coalition following legislative elections, is appointed by the Monarch and is the Head of Government. The Senate has 71 members serving for four-year terms, 40 directly elected by popular vote and 31 indirectly elected. The Chamber of Deputies consists of 150 members, directly elected by popular vote on the basis of proportional representation to serve for four-year terms. The Supreme Court of Justice heads the judicial branch. Judges serving for life are appointed for by the Government from a list of candidates submitted by the High Justice Council. With few natural resources, Belgium is a largely trade-dependent economy, importing substantial quantity of raw materials and exporting a large quantity of manufactured products. Some three-quarters of its trade is with the EU countries. 1.2.3. Republic of Cyprus An island economy in the Mediterranean Sea, Cyprus joined the EU on May 1, 2004. However, the Turkish Republic of Northern Cyprus, recognized only by Turkey, remains a special area where EU laws are not enforced. EU laws apply only to the areas under direct control of the Republic of Cyprus. Turkish and Greek Cypriot communities continue to disagree on a single island-wide political establishment. Nicosia is the capital city. Cyprus has six administrative districts. The President is concurrently the Head of State and the Head of Government, and elected by popular vote for a five-year term. The post of the Vice President is reserved for a Turkish Cypriot, but remains vacant. The appointment of the Council of Ministers is to be made jointly by President and Vice President. Turkish Cyprus established its own government in 2005. The legislative branch is unicameral. The House of Representative has 80 seats, 56 assigned to the Greek Cypriots and 24 to the Turkish Cypriots. Only the 56 seats assigned to the Greek Cypriots have been filled up by popular vote, members serving for five-year terms. The judicial branch is led by the Supreme Court, judges being appointed jointly by President and Vice President. Cyprus has a market economy, dominated by the service sector, led by tourism and financial services. The Turkish Cypriot economy, much poorer, and heavily dependent on transfers from the Turkish government, has a per capita income roughly one-third of that of their Greek Cypriot counterparts. Cyprus joined the European ERM (ERM II) in May 2005 and may be able to adopt the euro within two years. 1.2.4. Czech Republic When the Soviet Union collapsed in 1989, Czechoslovakia regained its freedom through a peaceful ‘‘Velvet Revolution’’ and on January 1, 1993, there occurred the ‘‘Velvet Divorce’’ that resulted in the separation of the

10


national components, the Czech Republic and Slovakia. The Czech Republic joined NATO in 1999 and the EU in 2004. Totally landlocked, the Czech Republic is the traditional military gateway between the Northern European plain and the Danube Delta in Central Europe. Prague is the capital city. It has a parliamentary democracy with 13 administrative regions. The President, elected for a five-year term, is the Chief of State and appoints the Prime Minister to be the Head of Government. The legislative branch consists of a bicameral Parliament: (a) the Senate with 81 members, elected by popular vote for six-year terms, and (b) the Chamber of Deputies with 200 members, elected by popular vote for four-year terms. Members of the Supreme Court and the Constitutional Court, appointed by the President for 10-year terms, lead the judicial branch. The economy of the Czech Republic is notably prosperous, leading the former communist states in Central and Eastern Europe. Germany is its primary trading partner. The inflation rate is under control and the current account deficit is beginning to decline. Accession to the EU in 2004 has given a robust boost to its exports to the EU member countries. 1.2.5. Kingdom of Denmark A modern prosperous nation in Northern Europe, which is bounded by the Baltic and North Seas, Denmark joined the NATO in 1949 and the EU (then EEC) in 1973. Denmark is one of the three original EU-15 countries who continue to decline the membership of the Eurosystem, as established on January 1, 1999. Even so, the Danish krone remains pegged to the euro. The Kingdom of Denmark is a constitutional monarchy. Copenhagen is the capital city. Denmark has 16 administrative divisions, 14 counties plus 2 boroughs. Self-governing overseas administrative units of the Faroe Islands and Greenland should also be noted. The Monarch is the Chief of State and appoints the Prime Minister, who serves as the head of the Government. The Cabinet is appointed by the Prime Minister subject to parliamentary approval. The unicameral legislature consists of the People’s House with 179 members, including two from Greenland and two from the Faroe Islands, elected by popular vote for four-year terms. The Supreme Court with judges appointed by the Monarch for life heads the judicial system of the country. High per capita GDP, generous welfare benefits, and a low Gini index point to high living standards unmatched by any other nation. A net exporter of food and energy, Denmark enjoys a healthy trade surplus. 1.2.6. Republic of Estonia Located between Latvia and Russia and sharing the coastline with the Baltic Sea and the Gulf of Finland, Estonia regained its freedom in 1991 with the collapse of the Soviet Union. Estonia joined the EU and NATO in 2004.

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11

The Republic of Estonia is a parliamentary republic with its capital in Tallinn. Estonia has 15 administrative divisions. The President is the Head of State and elected by the Parliament for a five-year term. The Prime Minister is nominated by the President, subject to the approval by the Parliament. The unicameral Parliament has 101 members, elected by popular vote to serve for four-year terms. The National Court, with a Chairman appointed by President for a life term, leads the judicial branch of the government. Estonia has moved to a market economy with closer economic ties to the other EU member countries, reinforcing its ties to major trading partners Finland, Sweden, and Germany. Pegging its currency to the euro has been a helpful economic step for Estonia. With a balanced budget and low public debt, Estonia has a sound economy. However, the Republic has a challenge to face for its high current deficits. 1.2.7. Republic of Finland Between Sweden and Russia, Finland is touched by the Baltic Sea, the Gulf of Finland to the South, and the Arctic Circle to the North. This is a land of over 60,000 lakes. The Republic of Finland has six provinces and its capital city is Helsinki. The President is elected by popular vote to serve for a six-year term as the Chief of State. The Prime Minister is the Head of Government and is appointed by the President from the majority party or the majority coalition in the Parliament, subject to Parliament’s approval. Members of the Cabinet, the Council of State, are appointed by the President, but remaining responsible to Parliament. Finland’s unicameral Parliament consists of 200 members, elected by popular vote on a proportional basis to serve for four-year terms. The Supreme Court, with judges appointed by the President leads the judicial branch. Finland has moved from being a source of raw natural resources to becoming a mature industrialized economy excelling in high-tech exports. Finland now enjoys a per capita income matching that of the leading European economies. It was the only Nordic state to join the Eurosystem on January 1, 1999, the day the system was initiated. Finland remains a trade-dependent economy and trades heavily with its neighbors. 1.2.8. French Republic France is a founding member of the EU, beginning with the ECSC signing in 1957 and joined the Eurosystem in 1999. Located in Western Europe, France has an extensive waterfront with the Bay of Biscay, English Channel, and the Mediterranean Sea. It shares borders with Germany and Spain and on the other side of the Channel is the UK. Paris is France’s capital. Administrative divisions of the French Republic consist of 22 regions including the ‘‘territorial collectivity’’ of

12


Corsica. Several other territorial collectivities and overseas departments around the world also belong to France. The President, elected by popular vote for a four-year term, is the Chief of State. The President appoints the Prime Minister, nominated by the national assembly majority, who serves as the Head of Government. At the suggestion of the Prime Minister, the President appoints the Council of Ministers. The bicameral legislature is composed of the Senate and the National Assembly. The Senate has 321 seats, 296 for metropolitan France, 13 for overseas departments and territories plus 12 for French nationals abroad. Members are indirectly elected by an electoral college to serve for nine-year terms. In 2010, 25 new seats will be added to the Senate for a total of 346. The National Assembly has 577 members, elected by popular vote under a single member majority system, serving five-year terms. The Judiciary consists of (a) the Supreme Court of Appeals, with judges appointed by the President from nominations by the High Council of the Judiciary; (b) the Constitutional Council with nine members, with the President, the President of the National Assembly, and the President of the Senate appointing three each; and (c) the Council of State. France’s capitalist market economy, which has been marked by extensive government ownership, is experiencing privatization of many government-owned and managed industrial enterprises. The high cost of labor and labor-market inflexibilities remain a fact. Economic growth has been slow and unemployment rate has touched the 10 percent rate. France’s national budget deficit has passed the 3 percent limit of the Eurosystem. Based on GDP, France is the second largest economy of the EU. 1.2.9. Federal Republic of Germany Located in Central Europe, Germany has borders with Austria, Belgium, Czech Republic, Denmark, France, Luxembourg, the Netherlands, Poland, and Switzerland. Germany is the EU’s largest economy both by GDP and population. On November 9, 1989, the Berlin Wall was torn down, and in 1990, the post-WWII partitioning of Germany ceased to be a fact. Communistcontrolled East Germany and democratic West Germany were reunited. Since the 1950s, Germany has been a leading actor in the integration of the continental European economy, joining the Eurosystem in January 1999. The Federal Republic of Germany has its capital in the city of Berlin. Sixteen states constitute the country’s administrative divisions. The President, elected for a five-year term by a Federal Convention is the Chief of State. The Federal Convention includes all members of the Federal Assembly and an equal number of delegates elected by the state parliaments. The Chancellor, elected by the absolute majority of the Federal Assembly, is the Head of Government. The Cabinet consists of members appointed by the President on the recommendation of the Chancellor. The Federal Assembly and the

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13

Federal Council are the two chambers of Germany’s bicameral Parliament. The Assembly has 613 members elected by popular vote under a system combining direct and proportional representation, serving for four-year terms. The Council has 69 members where state governments are directly represented, each having three to six votes depending on its population. The Federal Constitutional Court, with half its judges elected by the Assembly and half by the Council, leads the judicial branch. Germany is a mature industrialized economy with its many and varied technologically advanced manufactures. It is the largest economy in the EU and fifth largest in the world. For various reasons, Germany’s economic performance in recent years has been poor. The budgetary cost of unification of East and West Germany has been a critical factor and structural rigidities in the labor market continue to be a subject of debate. Note that Germany’s budget deficit has crossed the EU’s 3 percent limit. Much of the country’s trade is with the EU member countries, USA and China being notable outsiders. 1.2.10. Hellenic Republic Greece has an extensive coastline with the Aegean, Ionian, and Mediterranean Seas. This peninsular economy also has an archipelago of about 2,000 islands and dominates the southern approach to the Turkish Straights. After a brief period of military dictatorship, the Hellenic Republic rejected a monarchy by a referendum on December 8, 1974 and established a parliamentary form of government. With its capital in Athens, Greece has 51 prefectures and one autonomous region as its administrative divisions. The President, elected by the parliament for a five-year term with a two-term limitation, is the Chief of State. The President appoints the leader of the party securing plurality of vote in the election to serve as the Prime Minister and form the government. The Cabinet members are appointed by the President on the recommendation by the Prime Minister. Greece’s unicameral Parliament consists of 300 members, elected by direct popular vote to serve for four-year terms. With judges appointed for life by the President following consultation with a judicial council, the Supreme Judicial Court and the Special Supreme Tribunal head the judicial branch. Greece is a capitalist market economy, however, the public sector accounts for some 40 percent of its GDP. Greece is a relatively poor economy with a per capita GDP at about 70 percent of the leading economies of the Eurosystem. Since 2000, Greece has failed to meet EU criteria of budget deficit limit of 3 percent of GDP. Indeed, Greece with its public debt at 108.9 percent of GDP (2005 est.) lags far behind the EU benchmark of 60 percent for public debt. Its unemployment rate and inflation rate continue to be a challenge. Greece joined the EU in 1981 and became the 12th member of the Eurosystem in 2001.

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1.2.11. Republic of Hungary Located in Central Europe, Hungary offers main land routes between Western Europe and Balkan Peninsula, and between Ukraine and the Mediterranean basin. After prolonged communist control after World War II, in 1956, Hungary withdrew from the Warsaw Pact. In 1990, the country held its first multiparty democratic elections and initiated a free market economy. It became a member of the EU in 2004. The Republic of Hungary has 39 administrative divisions, and the capital city is Budapest. The President, elected by the National Assembly for a five-year term is the Chief of State. The Prime Minister is elected by the National Assembly on the recommendation by the President. Members of the Council of Ministers are elected by the National Assembly on the recommendation of the President. The National Assembly is the unicameral legislature of Hungary. It has 386 members, elected by popular vote under a system of proportional and direct representation to serve for fouryear terms. The judicial branch is led by the Constitutional Court, judges being elected by the National Assembly for nine-year terms. The free market economy of Hungary is making steady progress. More than 80 percent of GDP originates in the private sector. Hungary has been successful in attracting much foreign investment, totaling more than US $23 billion since 1989. Germany is by far the largest economic partner of Hungary. However, per capita income of Hungary remains one-half of that of the four ranking EU economies. Its unsustainable budget and current account deficits have been of much concern. 1.2.12. Ireland Located in the Atlantic Ocean, the farthest western point of the EU region, Ireland has a unique history of its own. Northern Ireland, about one-sixth of the island, continues to be a part of the United Kingdom. Negotiations between the governments of the United Kingdom and Ireland following the now famous Good Friday Agreement in 1998 continue to be in progress. Ireland has 26 administrative units, called counties. More than 40 percent of the population lives within 100 km of Dublin, the capital city. The President is elected by popular vote for a seven-year term to serve as the Chief of State. The Prime Minister is nominated by the House of Representative and appointed by the President. Members of the Cabinet are appointed by the President after being nominated by the Prime Minister and approved by the House of Representatives. Ireland has a bicameral legislature consisting of the Senate and the House of Representatives. The Senate has 60 members, 49 elected by universities and five vocational panels and 11 nominated by the Prime Minister, serving for five-year terms. The House consists of 166 members, elected by popular vote on the basis of proportional representation to serve for five-year terms. The Supreme Court with judges appointed

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by the President on the advice of the Prime Minister and the Cabinet, heads the judicial branch of the government. Ireland is a small island economy, very much dependent on trade. Once an agriculture-dominant economy with the potato being its principal crop, Ireland now is a mature industrialized economy with some 80 percent of its exports coming from this sector. For 1995–2004, Ireland has grown at an average annual rate of growth of 7 percent and its per capita GDP is now 10 percent above that of the EU’s big four and is the second highest next to Luxembourg. Ireland began as one of the four poorer member economies of the EU-15 and has been one of the great successes of the European experiment. Ireland is a member of the Eurosystem while the UK has declined to participate. 1.2.13. Italian Republic A peninsular entity extending far into the central Mediterranean Sea, Italy shares borders with Austria, France, Slovenia, Switzerland, San Marino, and Vatican City. A republic replaced the monarchy in 1946. Italy has been one of the six founding members of the EU, championing the cause of European continental economic integration (see ECSC, 1951; EEC, 1957), joining the Eurosystem in 1999. Italy has 16 regions plus five autonomous regions. Rome is the capital city. The President, elected by an electoral college consisting of both houses of Parliament plus 58 regional representatives, is the Chief of State, serving for a seven-year term. The Prime Minister, appointed by the President, is confirmed by the Parliament to be the Head of Government. Members of the Council of Ministers are nominated by the Prime Minister and approved by the President. A bicameral legislature, the Italian Parliament has two chambers, the Senate and the Chamber of Deputies. The Senate has 315 members, elected by popular votes for five-year terms, 232 of them being elected directly and 83 by regional proportional representation. In addition, the Senate has a small number of senators-for-life, inclusive of former Presidents of the Republic. The Chamber of Deputies consists of 630 members, 475 directly elected and 155 by regional proportional representation, serving for five-year terms. The Constitutional Court, consisting of 15 judges, 5 appointed by the President, 5 by the Parliament, and 5 by the ordinary and administrative Supreme Courts, leads the judicial branch. Italy roughly matches France and the UK in total and per capita income. The Italian economy is lagging and experienced no growth in 2005. The unemployment rate continues to be high and the inter-regional economic gap between the industrial north and the less-developed agricultural south warrants attention. Italy’s budget deficit has been beyond the EU’s 3 percent ceiling. The challenge is overwhelming as Italy has been slow to implement critical reforms to enhance their competitiveness.

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1.2.14. Republic of Latvia In 1991, Latvia became a sovereign nation-state economy after the fall of the USSR. Located in Eastern Europe between Estonia and Lithuania, and Russia to its eastern border, Latvia has a waterfront with the Baltic Sea in the west. The Republic of Latvia adopted a parliamentary democratic form of government. Its administrative units are composed of 26 counties and 7 municipalities. Riga on the Gulf of Riga in the north is the capital city. The President, elected by parliament for a four-year term, is the Chief of State. The Prime Minister, appointed by the President, is the Head of Government. The Council of Ministers is nominated by the Prime Minister subject to the approval by the Parliament. Latvia’s unicameral Parliament has 100 members, elected by direct popular vote, serving for four-year terms. The Judiciary is headed by the Supreme Court with judges’ appointments confirmed by the Parliament. Latvia’s economy gained impetus by reducing its dependence on the Russian market, and shifting its economic partnership to the EU countries. Privatization of state-owned economic enterprises progressed as Latvia moved to be a free market economy. Latvia became a member of the EU in 2004. Earlier in February 1999, Latvia was admitted to the membership of the World Trade Organization (WTO). The twin deficits of current account and government budget are of concern. The Latvian–Russian border treaty of 1997 remains to be signed and ratified. 1.2.15. Republic of Lithuania Lithuania proclaimed its independence from the Soviet Union in 1990 and Moscow accepted the fact in September 1991. Located in Eastern Europe, Lithuania shares borders with Russia, Poland, Latvia, and Belarus, and has a waterfront with the Baltic Sea. The Republic of Lithuania has a unicameral parliamentary democracy. Ten counties constitute its administrative divisions with Vilnius as the capital city. The President, elected by popular vote for a five-year term, is the Chief of State. The Premier, appointed by the President with the approval of the Parliament, is the Head of Government. The President appoints the Council of Ministers, nominated by the Premier. The unicameral Parliament has 141 members, 71 elected directly by popular vote and 70 by proportional representation, serving for four-year terms. The Judiciary consists of the Constitutional Court, the Supreme Court, and the Court of Appeal. Judges for all courts are appointed by the President. The economy of Lithuania has become market-oriented with more than 80 percent of enterprises being privatized. The privatization of the large, state-owned utilities has made significant progress. In May 2004, Lithuania became a member of both the EU and the WTO. Progressive economic integration with the EU partner economies has been a fact. Russia continues

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to be an important trading partner while Germany has become Lithuania’s most engaging economic partner. 1.2.16. Grand Duchy of Luxembourg With a very small area (2,586 km2), Luxembourg is located in Western Europe, landlocked by Belgium, France, and Germany. Luxembourg is one of the six founding members of the EU movement initiated in 1950s and joined the Eurosystem on January 1, 1999. The Grand Duchy of Luxembourg is a constitutional monarchy. The three districts, Diekirch, Grevenmacher, and Luxembourg, constitute the country’s administrative divisions. The Grand Duke is the Chief of State and the office is hereditary. The Duke appoints the leader of the majority or of the majority coalition to the post of Prime Minister, who is the Head of Government. Both the Prime Minister and Deputy Minister are responsible to the Chamber of Deputies. The Prime Minister recommends members of the Council of Ministers to be appointed by the Monarch. The unicameral Chamber of Deputies has 60 members, elected by direct popular vote for five-year terms. It merits attention that universal suffrage in Luxembourg is compulsory. The judicial branch consists of judicial courts and tribunals and judges for all courts being appointed for life by the Duke. Luxembourg’s is a high-income economy, having the highest per capita income not only in the EU, but also in the world. Economic growth has been excellent with low inflation and unemployment rates. The financial sector of Luxembourg with most banks being foreign-owned with extensive international businesses, accounts for about 22 percent of its GDP. Its industrial sector, earlier dominated by steel, has been diversified. Given its small population base, Luxembourg heavily depends on foreign and crossborder workers. 1.2.17. Republic of Malta Formerly a British colony, and then a member of the Commonwealth led by the UK, Malta became independent of the UK on September 21, 1964. After a decade, Malta became a republic. It is an island economy in the Mediterranean Sea south of Italy. With no administrative divisions, the government functions from the capital city of Valletta, while local councils carry out administrative orders. The President, elected by the House of Representative for a five-year term, is the Chief of State. The President appoints the leader of the majority or of majority coalition to serve as the Prime Minister for a five-year term. The President also appoints the Deputy Prime Minister on the advice of the Prime Minister. The Cabinet members are appointed by the President, again on the advice of the Prime Minister. The legislature, consisting of the House of Representatives is unicameral. It usually has 65 members, elected

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by popular vote on the basis of proportional representation, and they serve for five-year terms. The party with the largest popular vote may be assigned additional seats, so that a legislative majority can be ensured. The economy is trade-dependent, exporting manufactures, especially of electronics and textiles. With mild winters and dry summers, Malta is also an attractive tourist destination. Commercial exploitation of the continental shelf between Malta and Tunisia for possible oil exploration has been a subject for negotiation. 1.2.18. Kingdom of the Netherlands The Netherlands shares borders with Belgium and Germany. Its access to the North Sea gives it a vantage waterfront. The Netherlands is one of the six founding members of the ECSC, now the EU, and has been a member of the Eurosystem since its initiation on January 1, 1999. Amsterdam is the capital while The Hague is the seat of government. Twelve provinces constitute the administrative divisions. It also has two dependent areas, Aruba and the Netherlands Antilles. The Kingdom of the Netherlands has a constitutional monarchy. The Monarch is the Chief of State and the office is hereditary. The Monarch appoints the leader of the majority party or of the majority coalition to serve as the Prime Minister. The Monarch also appoints the Deputy Prime Minister and the Council of Ministers on the advice of the Prime Minister. Note that the Netherlands has a Council of State consisting of the Monarch, the heir apparent, and councilors, for consultations with the Cabinet on legislative and administrative policy. The bicameral legislature, States General, has two houses: the First Chamber, with 75 members indirectly elected by the country’s 12 provincial councils for four-year terms; and the Second Chamber, with 150 members directly elected by popular vote to serve four-year terms. The Supreme Court, with justices nominated by the Monarch for a life term, leads the judicial branch. The Netherlands is a rich, free-market, trade-dependent economy. With stable labor/industrial relations, and moderate unemployment and inflation rates, the Netherlands maintains a good current account surplus. It has been very successful in attracting foreign direct investment. Its hightech agricultural sector lends much support to its food-processing industry and also to its exports. Other than the USA and the EU partner countries, China has become an important trading partner of the Netherlands, especially for imports (7.4 percent in 2004). 1.2.19. Republic of Poland Located in Central Europe, east of Germany, Poland’s border countries include Russia and Ukraine. Its coastline with the Baltic Sea is limited. Devastations of the World War II and the post-WWII Soviet occupation

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are of course a part of Poland’s history. In 1990, Poland installed a republic, led by a popularly elected President. Poland joined the EU in 2004. The Republic of Poland has 16 provinces and Warsaw is the capital city. The President, elected for a five-year term, is the Chief of State. The Prime Minister is the Head of Government assisted by a Deputy Prime Minister. Both are appointed by the President and subject to confirmation by the Sejm, the popular house of the bicameral legislature. The Senate has 100 members, elected by a majority vote on a provincial basis, serving for four-year terms. The Sejm has 460 seats elected directly under a complex system of proportional representation. When the two houses meet jointly, albeit on rare occasions, it is called the National Assembly. Two seats in the Sejm are reserved for the ethnic minorities. Supreme Court judges are appointed by the President on the recommendation of the National Council of the Judiciary to serve for indefinite time period. The judges of the Constitutional Tribunal are chosen by the Sejm for nine-year terms and are also part of the Judiciary. The rulings of the Constitutional Tribunal are final. Court decisions can however be appealed to the European Court of Justice in Strasbourg. Poland’s adoption of a policy of economic liberalization can be ranked as a success story, leading the transition economies. Privatization of smalland medium-sized state-owned enterprises has encouraged the growth of private businesses but much remains to be done. The infrastructure warrants further restructuring and reforms in welfare, health care, and education present serious challenges, somewhat alleviated by a grant of about $23.2 billion in EU funds available through 2006. Germany by far has become the largest trading partner but overall, exports to EU partner countries are on the rise. Imports in 2004 include large shares from both Russia (7.3 percent) and China (4.6 percent). 1.2.20. Portuguese Republic Portugal, on the North Atlantic Ocean, west of Spain, enjoys a huge coastline with a temperate maritime climate. A revolution in 1910 deposed the monarchy, but for many years, successive repressive governments followed. In 1974, Portugal was able to introduce democratic reforms and soon gave independence to all its colonies in Africa. Portugal became a member of the EU in 1986 and joined the Eurosystem in 1999. The Portuguese Republic has a parliamentary democracy with 18 districts and two autonomous regions as the administrative divisions. The capital city is Lisbon. The President, elected by popular vote for a five-year term, is the Chief of State and appoints the leader of the majority party or of the majority coalition to serve as the Prime Minister. The Council of Ministers is also appointed by the President on the recommendation of the Prime Minister. There is also a Council of State to serve as a consultative body to the President. The unicameral Assembly of the Republic has 230

20


members, elected by popular vote, serving for four-year terms. The Supreme Court with judges appointed for life by the Conselho Superior da Magistratura leads the Judiciary. A progressive policy of privatization of many state-controlled businesses and liberal economic policies over the years have allowed Portugal to experience economic growth at an average rate above that of the EU for much of the past decade. Its per capita income has risen to two-thirds of that of the big four EU member economies. However, new competition from new EU members from Eastern and Central Europe and from overseas has become a challenge. Portugal must get its action plan in order to keep its budget deficit within the 3 percent of GDP ceiling. 1.2.21. Slovak Republic Landlocked within Central Europe, Slovakia shares borders with Austria, the Czech Republic, Hungary, Poland, and Ukraine. The Slovaks and the Czechs made a Velvet Divorce to form two independent sovereign nationstates on January 1, 1993 and the state of Czechoslovakia ceased to exist as one sovereign nation-state. The Republic has installed a parliamentary democracy with its capital in Bratislava. The President, elected by direct, popular vote for a five-year term, is the Chief of State. The Prime Minister, appointed by the President, is the Head of Government. The legislature is unicameral; the National Council of the Slovak Republic has 150 members, elected on the basis of proportional representation for four-year terms. The Judiciary is led by the Supreme Court with judges elected by the National Council, and the Constitutional Court with judges appointed by the President from a group of nominees approved by the National Council. Transition from the erstwhile communist economic system to free market capitalism has made excellent progress. Foreign investment has poured in and the banking sector is now largely foreign-owned. The rate of growth has been good. However, an unemployment rate of 11.5 percent in 2005 is of concern. Germany is the country’s leading trading partner and the Czech Republic coming second. 1.2.22. Republic of Slovenia Slovenia borders the Adriatic Sea, west of Austria and northeast of Croatia. In 1991, the Slovenes established their independence from Yugoslavia. Historical ties to Western Europe have been helpful for its transformation to a modern state. Slovenia became a member of the EU in 2004. It has instituted a parliamentary democratic republic and its capital is Ljubljana. Currently, 193 municipalities constitute its administrative divisions. The President, elected by popular vote for a five-year term, is the Chief of State. The Prime Minister, appointed by the President to serve as the Head of Government, is the leader of the majority or of the majority coalition in

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the National Assembly. The Council of Ministers is nominated by the Prime Minister, subject to the approval by the National Assembly. The legislature is bicameral with (a) the National Assembly and (b) the National Council. The National Assembly consists of 90 members, 40 directly elected, and 50 elected on a proportional basis, with members serving for four-year terms. The National Council is primarily an advisory board with limited legislative powers with members elected indirectly by an electoral college for five-year terms. The Judiciary consists of (a) the Supreme Court with judges elected by the National Assembly on the recommendation of the Judicial Council and (b) the Constitutional Court with judges elected for nine-year terms by the National Assembly on the nomination by the President. The economy has made good progress. Necessary structural reforms have attracted broad-based foreign participation in Slovenia and helped to lower the unemployment rate. The share of GDP from the agricultural sector estimated at 6 percent in 2005 points to the fact that Slovenia is still a relatively agriculture-dependent economy. To become a member of the Eurosystem, Slovenia is struggling hard to maintain its budget deficits, public debt, and inflation rate within the EU ceilings. Recently, Slovenia has passed the necessary evaluation of eligibility to this end. Germany is the country’s leading trading partner. 1.2.23. Kingdom of Spain Part of the Iberian Peninsula, Spain has a coastline with the Bay of Biscay, Mediterranean Sea, and the North Atlantic Ocean. Spain has a history of its own, remaining neutral during both the World Wars. It suffered a devastating civil war from 1936 to 1939. In 1986, Spain became a member of the EU and joined the Eurosystem in 1999. The Kingdom of Spain is a constitutional monarchy and Madrid is the capital city. The administrative divisions consist of 17 autonomous communities and two autonomous cities. The Monarch is the Chief of State, and the office is hereditary. Following legislative elections, the leader of the majority party or of the majority coalition is designated by the Monarch to serve as both President of the Government and Prime Minister, subject to the approval by the National Assembly. In addition, there is a Council of State to serve as the supreme consultative organ of the government, but its recommendations are not binding. The legislature is bicameral, consisting of the Senate and the Congress of Deputies. The Senate has 259 members, 208 directly elected by popular vote and 51 appointed by the regional legislatures, serving for four-year terms. The Congress of Deputies has 350 members, elected by popular vote on block lists by proportional representation and serve for four-year terms. The judicial branch is led by the Supreme Court. The Spanish economy experienced a boom briefly from 1986 to 1990, averaging an annual rate of growth of 5 percent. Since then it shared the

22


general EU experience of a slowdown. On a per capita basis, Spain has 80 percent of the average income of the four ranking EU members. Unemployment rate at 10.1 percent remains high. France and Germany are Spain’s major trading partners. Territorial disputes with the UK over Gibraltar and with Morocco over the coastal enclaves merit attention. The internal secessionist movement of the Basque Fatherland and Liberty (ETA) may be resolved by the bold initiative of 2006. The recent agreement to this effect is most welcome. 1.2.24. Kingdom of Sweden Home of the Nobel Awards, inclusive of the Nobel Memorial Award for Economics established in 1968, Sweden captures global attention for its contributions to knowledge and global understanding. Sweden has not participated in any war in nearly 200 years. Sweden became a member of the EU in 1995 and elected not to join the Eurosystem in 1999. It shares borders with Norway and Finland, while the Gulf of Bothnia and the Baltic Sea offer an extensive coastline. The Oresund Bridge, which was inaugurated in July 2000, links Sweden and Denmark. This bridge is a symbol of togetherness among the Nordic nations and the rest of Europe. Sweden has a constitutional monarchy. The Monarch is the Head of State and the Prime Minister, elected by the Parliament, is the Head of Government. The Cabinet is appointed by the Prime Minister. The unicameral Parliament has 349 members, elected by popular vote on a proportional basis, serving for four-year terms. The Judiciary is led by the Supreme Court with judges appointed by the Prime Minister and the Cabinet. The 21 counties constitute its administrative divisions and Stockholm is the capital city. Sweden is a rich and mature industrialized economy, successfully combining high-tech capitalism and extensive social welfare benefits. Agriculture accounts for 2 percent of GDP and employment. Privately owned firms produce 90 percent of industrial output, with the engineering industry comprising one-half of output and exports. The Swedish central bank follows a strong antiinflationary policy with a target of 2 percent a year. A budgetary policy committed to fiscal discipline is to be noted. A very large percentage of Sweden’s trade takes place within the EU FTA, Germany being the leading partner. Some significant exports to the USA are also reported. 1.2.25. United Kingdom of Great Britain and Northern Ireland At its zenith, the British Empire covered one-fourth of the earth’s surface and the sun never set in the Empire. After World War II, the Empire slowly liquidated. The United Kingdom successfully restructured its new economy and assumed its due role in the post-WWII world.

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An island in the North Atlantic Ocean, the Kingdom is separated from the rest of the continental Europe by the English Channel. France is on the other side of the Channel, and the underwater Chunnel railroad provides a landmark link between the two countries. Across the Atlantic Ocean, the trans-Atlantic relationship between USA and UK warrants attention. Ireland is another island economy immediately to the west of the UK. The Good Friday Agreement of 1998 between the UK and the Irish Republic will hopefully resolve the territorial dispute of the UK’s sovereignty over onesixth of Northern Ireland. Joining the EU became a topic of much discussion after World War II. Prime Minister Churchill in a speech in 1946 in Switzerland pleaded for European cooperation, but was not certain if the UK would become a member of the continental group (see Bulletin of the European Economic Community, 1965). The British Commonwealth, later the Commonwealth of Nations, failed to be a viable economic option. However, the historical bonds, notably trade relations, with the former colonies became an issue of much debate for the United Kingdom. The UK was totally opposed to the supranational European institutions. The prolonged negotiations to join the EEC, consisting of Germany, France, Italy, Belgium, the Netherlands, and Luxembourg collapsed. The core issue for the UK was to secure exemption from the EEC’s requirement for a common trade policy for the rest of the world. The trade links with the former colonies, now members of the Commonwealth of Nations, proved to be too pressing an issue. Jointly with Sweden, Switzerland, Norway, Denmark, Austria, and Portugal, the UK led the European Free Trade Association (EFTA), but the economic prosperity of the EEC in 1960s became quite persuasive. Finally, the UK became a member of the EU in 1973. However, it declined to join the Eurosystem in 1999. The United Kingdom of Great Britain and Ireland has a constitutional monarchy. Administrative divisions include 47 boroughs, 36 counties, 29 London boroughs, 12 cities and boroughs, 10 districts, 12 cities, and three royal boroughs. In addition, there are numerous dependent areas: Anguilla, Bermuda, the British Indian Ocean Territory, the British Virgin Islands, the Cayman Islands, the Falkland Islands, Gibraltar, Guernsey, Jersey, the Isle of Man, Montserrat, the Pitcairn Islands, Saint Helena and Ascension, South Georgia and the South Sandwich Islands, and the Turks and Caicos Islands. The Monarch is the Chief of State. The Prime Minister is the Head of Government and is usually the leader of the majority party or of the majority coalition in the Parliament. The Cabinet is appointed by the Prime Minister. The legislature is bicameral. The House of Lords consists of some life peers, some hereditary peers, and some clergy. There is no election, but the House of Lords Act of 1999 has made provisions for reform in this regard. The House of Commons has 646 members, elected by popular vote, usually serving five-year terms. In 1999, there were elections for a new Scottish Parliament and a new Welsh Parliament. The representation of Northern Ireland to the British

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Parliament may be substantively resolved by the successful implementation of the Good Friday Agreement. The judicial branch of the government consists of (a) the House of Lords, the highest court of appeal; (b) the Supreme Courts of England, Wales, and Northern Ireland (inclusive of the Courts of Appeal, the High Courts of Justice, and the Crown Courts); and (c) Scotland’s Court of Session and Court of Judiciary. The birthplace of the Industrial Revolution, the UK is a mature industrialized economy and one of the four ranking EU economies. The privatization of government-owned- and managed enterprises has been in progress and the growth of social welfare programs has been contained. Inflation and unemployment rates are low. In 2005, the economic growth rate became as low as 1.8 percent. Much of its trade is within the EU FTA. Germany is the leading partner, but the US is also a significant trading partner. The UK has not joined the Eurosystem, but is a beneficiary of the EU-FTA. The UK continues to have territorial disputes with Spain, Mauritius and Seychelles, Argentina, Chile, Iceland, Denmark, and the Irish Republic. 1.3. Unity in diversity 1.3.1. Religion A commitment to individuality, intellectualism, enlightenment, and renaissance based on science and information technology has progressed to a state of European secularization. The movement to protest against organized religion has witnessed a historical process of revolutionary changes contributing to the overall acceptance of the principle of separation between religion and state. Nevertheless, sporadic cases continue to plague specific situations in Europe. Table 1.7 presents a picture of religious affiliations of the people of Europe. Most of them are Christians, albeit of many different affiliations: Catholics, Protestants, Greek Orthodox, Russian Orthodox, Methodist, Seventh-Day Adventist, Pentecostal, Maronite, Armenian Apostolic, Evangelical Lutheran, Lutheran National Church, Calvinist, Church of Ireland, Dutch Reformed, Eastern Orthodox, and Anglican. They have their intergroup dissents and disputes inclusive of occasional violent interactions. Historians and philosophers have written at length about intrafaith conflicts. The same has been the history of other faiths: Judaism, Islam, and other religions. Based on data available, France, Italy, Luxembourg, and Sweden record some notable Jewish populations. Moslem communities are reported in Austria, Cyprus, France, Denmark, Germany, Italy, and Luxembourg. The UK reports 1 percent Hindus and Sweden records some Buddhists. Two points should be taken note of: first, occasional inter-faith and/or intrafaith conflicts apart, there has in general been a religious peace,

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Table 1.7. Christian Austria (2001) Belgium Cyprus Czech Republic (2001) Denmark Estonia (2000) Finland (2003) France Germany Greece Hungary (2001) Ireland (2002) Italy Latvia Lithuania (2001) Luxembourg (2000) Malta The Netherlands (2002) Poland (2002) Portugal (1995) Slovakia (2001) Slovenia (2002) Spain Sweden United Kingdom (2001)

Religion (% of population) Jewish

Moslem

Others

78.3 4.2 17.5 100 82 18 28.9 71.1 98 2 27.8 72.2 86.4 13.6 85–90 1 5–10 4 68 3.7 28.3 98 1.3 0.7 74.4 25.6 93 7 Predominantly Christian, some Jewish, and a growing Moslem community 100 85 15 100 Some Jewish and Moslem 98 2 51 5.5 43.5 91.4 >94 83.8 61 94 87 71.6

8.6 16.2 36.6 6 Some Jewish, Moslem, and Buddhist 2.7 25.7 2.4

Notes: (1) Christians include Catholics, Protestants, Greek Orthodox, Maronite, Armenian Apostolic, Evangelical Lutheran, Lutheran National Church, Methodist, Seventh-Day Adventist, Pentecostal, Calvinist, Church of Ireland, Russian Orthodox, Dutch Reformed, Eastern Orthodox, and Anglican. (2) Others include unspecified and no affiliation reported. (3) UK population includes 1% Hindus. (4) Year of census are in parentheses. Source: The World Factbook (2006).

allowing people of diverse faiths and affiliations to live in Europe, enjoying their economic prosperity. Second, the category of ‘‘others’’ warrants special mention. Given the global mobility of people, small groups with many different religious affiliations have come to be a part of the European population. In addition, the category of ‘‘others’’ includes ‘‘unspecified.’’ Evidently, an increasingly significant percentage of the people of Europe considers religion a personal matter and elects not to be identified by their respective religious affiliations. This certainly points to interfaith and/or intrafaith religious toleration and an absence of fundamentalism. Religion will not be a factor of disintegrating diversity in the process of European integration.

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1.3.2. Linguistic diversity: EU official languages Multilingualism is the core policy of the EU. The long-term objective for all EU citizens will be to speak two languages in addition to an individual’s mother tongue. The 20 official languages of the EU are: Czech, Danish, Dutch, English, Estonian, Finnish, French, German, Greek, Hungarian, Italian, Latvian, Lithuanian, Maltese, Polish, Portuguese, Slovak, Slovene, Spanish, and Swedish. Irish (Gaelic) will become the 21st official language as of January 1, 2007. Let us begin by greeting the people of the EU in their official languages. Czech Danish Dutch English Estonian Finnish French German Greek Hungarian

Dobre rano God morgen Goedemorgen Good morning Tere hommikust Hyvaä¨ huomenta Bonjour Guten Morgen Kalimera Jo reggelt

Italian Latvian Lithuanian Maltese Polish Portuguese Slovak Slovene Spanish Swedish

Buon giorno Labrit Labas Rytas L-Ghodwa t-tajba Dzie0 n dobry Bom dia Dobre rano Dobro jutro Buenos dı´ as God morgon

Table 1.8 is a presentation of the linguistic diversity of the EU. Based on Eurobarometer surveys in 2001, we note the two points pointing to the EU commitment to an agenda of multiligualism is on a positive trend: (a) the number of EU citizens who know at least one foreign language has increased from 47 percent in 2001 to 56 percent in 2005 and (b) the percentage of Europeans acknowledging usefulness of knowledge of foreign languages have gone up from 72 percent in 2002 to 83 percent in 2005. Many tongues in one European family is the outcome. Table 1.9 lends evidence to the comparative standing of several languages, English leading and German, French, Italian, and Spanish following. There is a strong preference for learning English language (see Table 1.10). English has been adopted as the official language of the European Central Bank (ECB). International trade and commerce in English covers the USA, Canada, Australia, New Zealand, India, and several other South and Southeast Asian countries. It follows that linguistic diversity is not a challenge to the EU-25. If one reviews the functioning of multilingual sovereign nation-states, one must conclude that linguistic diversities enrich a country. Table 1.8 shows that Finland has two official languages, while Spain has four, and Luxembourg enlists three languages. A quick review of other multilingual countries tells us: Canada has two official languages, English and French; New Zealand lists two official languages, English and Maori; and India has 18 official languages, and English continues to be most widely spoken. We suggest that the EU will have no problem with some 20 official languages.

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Table 1.8.

Linguistic diversity of the EU, percentage of population speaking Percent speaking national language(s)

Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg

Malta The Netherlands Poland Portugal Slovakia Slovenia Spain

Sweden United Kingdom

96 Dutch 56, French 38, German 0.4 98 98 97 82 Finnish 94, Swedish 5 93 90 99 100 English 94, Irish 11 95 73 88 Luxembourgish 77, French 6, German 4 97 Maltese, 2 English 96 98 100 88 95 Spanish 89, Catalan 9, Galician 5, Basque 1 95 92

Other EU languages

3 5

Other languages

2 3

2 2 2 1 0.8

1 0.7 2 18 0.4

6 3 0.2 0.8 2 5 1 5 14

3 8 0.7 0.6 0.2 1 27 7 0.8

0.6 3 1 0.6 12 1 1

5 3

— 3 1 0.1 2 5 2

2 5

Note: ‘‘Other EU languages’’ include the EU official languages spoken in a country where there are no state languages. The category ‘‘Other languages’’ includes nonindigenous languages plus regional/minority languages that do not have EU official status. Source: Eurobarometer 243 (February 2006).

1.3.3. Lifestyle diversities in the EU Much has been written about diversities of lifestyle in the EU. How much do they vary from Ireland to Finland, Sweden to Malta? Various drinks in the UK are far too different from those across the English Channel. The culinary arts and fashion styles vary from one Member State of EU to another. However, there does exist one European lifestyle, as one observes carefully. The oneness of the European lifestyle can be appreciated as we

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Table 1.9.

Languages in EU-15, percentage of population (2001)

Language

Mother tongue or conversational ability

Most commonly used

English German French Italian Spanish Dutch Greek Portuguese Swedish Danish Finnish Polish Russian

47 32 28 18 15 7 3 3 3 2 1

51 32 26 16 15

10 7

Source: European Commission, Special Eurobarometer Survey 54.

Table 1.10. Percentage of population that think children should learn English in addition to their mother language EU-25

77

Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Irelanda Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Slovakia Slovenia Spain Sweden United Kingdoma

84 88 98 89 94 94 85 91 89 96 85 84 94 93 59 90 90 90 90 87 96 85 99

Source: Eurobarometer 243, Eurostat. a UK and Ireland are English speaking: Ireland prefers 64% for learning French while UK’s preference is 71% to learn French.

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compare it with the lifestyle in USA or in any other continent. Only in 2005 the EU has agreed to free trade in wines manufactured in USA, where no oak barrels are used. They claim that many of their food products such as cookies, candy, cheese, and chocolate are much too different from the competing US products. They made automobiles far too different. Their fashion products and art works are claimed to be much superior to those of the USA. Note that due to high-tech communication a` la the multiphased media, lifestyle across the globe is getting to be globalized. American fast food chains, Starbucks coffee, and Haagen-Dazs ice cream are ready to welcome a visitor in any country across the continents. Japanese sushi, Indian curry, Chinese eating houses, Korean food chains, and Vietnamese cuisine have become increasingly regular on all continents. We conclude that lifestyle variations in the EU will be a plus, not a negative factor, toward EU’s integration. Indeed, such variations will add to the colorful life experience of European consumers. There are lifestyle diversities in USA where the experience in Boston, MA is quite different from that in Austin, TX. One in Hawaii is far too different from the one in Pennsylvania’s Amish countries. Regional diversities in the lifestyle of the people in China, India, Indonesia, and Australia are very much on record. How about the rich diversities in lifestyles of Scotland, Wales, Northern Ireland, and England in the island country of United Kingdom? 1.4. Two articles of faith We note that the EU has made a commitment to two articles of faith. First, pluralistic democratic form of government based on universal suffrage at age 18 is the core framework of government. Luxembourg has made the suffrage compulsory. The hereditary Monarchies in Belgium, Denmark, Luxembourg, the Netherlands, Spain, Sweden, and the United Kingdom are strictly constitutional. Members of the legislatures are directly elected by popular votes or on a proportional representation basis. When there are bicameral legislatures, members of the popular house are so elected, while those of the upper house may be elected indirectly. In all cases the tenure of membership is defined by law. The rule of law is upheld by proper judicial institutions. Most member countries have written constitutions, a major exception being the UK. However its unwritten constitution, based on statutes, common law, and practice, has experienced historic success. Cyprus, of course, continues to have a constitutional crisis. As per rule of law, the death penalty is forbidden. The EU is also a signatory to the Kyoto environmental protocol pointing to its concern for environmental pollution. Second, the EU economies have a firm commitment to free market capitalism. Private ownership of property and the means of production is the rule. Social welfare programs especially for health care and education plus necessary affirmative action programs to ensure access to the labor market by the minorities in a member country are to be accommodated. Of course,

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there must be provisions for defense, security, law and order, and environmental protection with a commitment to a balanced budget. Deficits and public debts are to be limited by EU guidelines. Commitment to full employment without inflation is the cornerstone of macroeconomic policy parameters, defined by monetary and fiscal policies, transparent and subject to proper judicial review. Economic gains of the member economies must be the goal. The EU with its competitive shares of world output and trade will add to global competitiveness, which will expectedly add to global economic welfare. Individually, no Member State of the EU could accomplish the job, as Monnet taught us.

CHAPTER 2

Historical Progression of the European Union 2.1. European Union: an overview In just a short half century, the European Union (EU) has emerged as a paradigm of supranational, continent-based single economy with microand macroeconomic parameters. The process began soon after World War II. The initial steps that started with the Benelux Customs Union and the European Coal and Steel Community (ECSC) of France and Germany in 1951 soon progressed to the European Economic Community (EEC) in 1957. A unique framework of Free Trade Area (FTA) came into existence. Its success called for the Single Europe Act (SEA) in 1986, followed by the Maastricht Treaty in 1992, whereby one common economy became one single economy. The Amsterdam Treaty and the Treaty of Nice followed. The EU-25 as of 2004 (and soon to be EU-27 in 2007) is the result of enlargement of EU membership and follow-up changes to the Treaties; the federation of the peoples of the continent of Europe has approached a reality. 2.2. The post-WWII Europe The overwhelming challenge of post-WWII Europe was recovering from widespread death and devastation. To meet this challenge, the Organization for European Economic Cooperation (OEEC) was established on April 16, 1948 with its secretariat in Paris. OEEC membership consisting of Austria, Belgium, Denmark, France, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Sweden, Switzerland, Turkey, UK, West Germany, plus several occupation zones and the AngloAmerican Free Territory of Trieste, was strictly limited to European countries and did not include the USA. (Trieste has since been returned to Italian sovereignty.) An executive committee of seven was charged with the administration of the OEEC. The principle of consensus became the rule and all decisions required unanimity. George C. Marshall, the then US Secretary of State, at his now-famous lecture at Harvard University on June 5, 1947, outlined the Marshall Plan for an American aid program for European recovery. Secretary Marshall spoke of the enormity of the crisis relative to ‘‘the rehabilitation of Europe, the physical loss of life, the visible destruction of

32


cities, factories, mines and railroads’’ and ‘‘the dislocation of the entire fabric of European economy.’’ He persuaded America to act and the Marshall Plan was soon approved. For its optimum functioning, the OEEC elected to adopt the following principles:

to to to to to

promote cooperation among the participating countries; develop intra-European trade by reducing tariffs and other barriers; study the feasibility of creating a customs union or a FTA; study the multilateralization of payments; and achieve conditions for better utilization of labor.

The OEEC was charged with the responsibility of developing the European Recovery Program which would administer the US aid under the Marshall Plan and its effective allocation. The equitable distribution of US aid toward proper European economic integration became an issue of debate. In the autumn of 1949, the Americans became increasingly frustrated with the operational aspects of the Marshall Plan. The European Payments Union (EPU) set up under OEEC in September 1950 had made little progress. Efforts to remove inconvertibility of the European currencies and quantity restrictions and to suppress bilateral commercial practices remained unsuccessful. The EPU was dissolved on December 27, 1958 when the currencies became convertible with the US dollar. The crisis took a serious turn in 1952. The OEEC became unable to function properly because the Marshall Plan was unexpectedly ended when American emphasis shifted to mutual security, bringing the continent of Europe under the American-led defense umbrella, the North Atlantic Treaty Organization (NATO). NATO continues to function and its membership as of 2006 includes Belgium, Bulgaria, Canada, the Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Lithuania, Luxembourg, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Turkey, the United Kingdom, and the United States. At a convention of 20 countries on December 14, 1960, the Organization for Economic Cooperation and Development (OECD) with the USA in a leadership position was constituted. In September 1961, the OEEC ceased to exist and the OECD assumed the role of overseeing economic cooperation and development. The OECD continues to function with its head office in Paris. As of 2006, it has become a global forum for 30 countries from North America, Europe, Asia, and Oceania with a broad-based agenda for economic and social development. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Slovakia, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States. With approximately a third of the OECD’s Gross

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Table 2.1.

OECD geographic membership distribution

Europe

North America

Asia

Oceania

23

3

2

2

Note: Turkey is included in Europe, even though most of Turkey is on the continental map of Asia. Source: OECD.

Domestic Product (GDP), the US plays a leading role and Japan with its share of a little more than 10 percent of OECD’s GDP is the next in rank. Table 2.1 presents OECD’s geographic membership distribution. From North America are the USA, Canada, and Mexico. Australia and New Zealand are from Oceania. Other than Norway, Iceland, Switzerland, and Turkey, the remaining 19 European OECD members, Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Poland, Portugal, Slovakia, Spain, Sweden, and the United Kingdom, are concurrently members of the EU. Cyprus, Estonia, Latvia, Lithuania, Malta, and Slovenia are part of the EU-25 but are not part of OECD. In general, OECD membership has been limited to selected richer countries and there is no membership from Africa, South America, or the Middle East. Asian membership is all too limited, Japan being a founding member and Korea being admitted in 1996. Indeed, the OECD is a club of the richer nations of the world. Membership to the EU is of course restricted to the continent of Europe, and it presents a unique economic paradigm of integrating erstwhile sovereign nation-state economies of Europe into one continental economy with emphasis on oneness of Europe (see Chapter 3). The OECD and the EU have been engaged in undertaking active joint research on issues of mutual concern. 2.3. Process of deepening and widening As the post-WWII economic recovery progressed in Europe, the countries in Western Europe faced a new challenge. Individually, as Monnet argued, each European economy was unable to do what was to be done for the optimum economic prosperity of their respective peoples. With a rich endowment of human capital, industrial know-how, and substantive economic cooperation and aid from USA, the reconstruction of the warravaged European economies was soon accomplished. Indeed, this process of deepening the economies based on physical capital per unit of labor became a reality. There was a great need to widen the markets for further growth of each economy. The economies of Europe, relatively labor-scarce and capital-intensive, needed widening of the market to secure the supply

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of more raw materials and labor and also to find new markets for their mass-produced manufactures as the economic system warranted larger scales of production. The pre-WWII model of imperialism was no longer an option. The remote colonies of imperial powers revolted as macroeconomic policies were dictated by the Home government of each imperial power. The Home governments set up the tax policies of their respective colonies and the Central Banks of the imperial countries managed the colonial monetary policies. The colonies recognized that economic gains were not evenly shared by the peoples of the colonies, and the tilt in favor of the people in the home country of an imperial power became notable. The proclamation came loud and clear: No taxation without representation! Soon the cost of maintaining an empire became much too much, and the net gain for the imperial power became questionable. The imperial model collapsed under its own burden. The search for an economic regime to integrate the processes of deepening and widening across the continent of Europe began. It would have to be different from the imperial framework of political supremacy over remote colonies in distant continents. The search for an option followed. Jacob Viner’s (1950) Treatise on Customs Union drew much attention. The customs union, a group of sovereign nation-state economies with a common external tariff and free flow of trade, investment, and labor within the group, became the message. As early as 1921, Belgium and Luxembourg instituted an economic union. Following the London Customs Convention in September 1944, the Benelux Customs Union brought together Belgium, Luxembourg and the Netherlands in a compact in 1948, and free trade among them without any tariffs became operational. Obviously, the unit cost of goods and services in trade, exempt from custom duties, became cheaper and trade grew, contributing to the growth of income of the peoples. The concept of Customs Union survived the economists’ debate of whether it resulted in a net trade gain or just a trade substitution (Abrego et al., 2001, 2005). On February 3, 1958, the Treaty of Benelux Economic Union was signed, and became operative in 1960. The Customs Union and then the Economic Union of the Benelux countries had only a limited effect, simply because the three economies together were of very small dimension in terms of their shares of Europe’s total output and trade. However, their actions led the European integration movement. In 1951, France, Germany, and Italy entered into a cooperative agreement on coal and steel with the Benelux nations. 2.4. Toward the European Union The movement toward EU progressed through successive stages. The Hague Congress, with delegates from 20 European countries, on May 7–11, 1948, proposed a European Assembly. The Council of Europe was set up on January 27–28, 1949 with its head office in Strasbourg, France.


35

The Council of Europe is the oldest political organization of the continent with a continent-wide program anchored to the core values of human rights, parliamentary democracy, and the rule of law. The Committee of Ministers consists of each of the 46 nations’ Foreign Minister or their designated representative and became the Council’s decision-making authority (see Table 2.2). It has granted observer status to the USA, Japan, Mexico, Israel, and Canada. The Council, a pan-European body, must be distinguished from the EU. Turkey earned its place in the Council of Europe, and is a candidate country for EU membership. Geographically, Turkey’s belonging to Europe is marginal but the history of the Ottoman Empire and Turkish rule over much of Europe remains a fact. In modern times, Turkey provides a deep access to the Mediterranean Sea and the Middle East, sharing a common border with Iran, Iraq, and Syria. On May 9, 1950, Robert Schuman, then French Minister for Foreign Affairs, gave a speech on Monnet’s concept of one Europe and urged for broader economic cooperation of France and Germany with their European neighbors. On May 9, 1950, Franco-German joint undertaking for coal and steel production was placed under a common High Authority, a legal entity, functioning with an Assembly, a Council of Ministers, and a

Table 2.2. Albania Andorra Armenia Austria Azerbaijan Belgium Bosnia-Herzegovina Bulgaria Croatia Cyprus Czech Republic Denmark Estonia Finland France Georgia Germany Greece Hungary Iceland Ireland Italy Latvia

The Council of Europe: 46 Member States Liechtenstein Lithuania Luxembourg Malta Moldova Monaco The Netherlands Norway Poland Portugal Romania Russian Federation San Marino Serbia and Montenegroa Slovakia Slovenia Spain Sweden Switzerland The former Yugoslav Republic of Macedonia Turkey Ukraine United Kingdom

Source: http://www.coe.int/T/e/Com/about_coe/. a In May 2006, Montenegro voted to secede from Serbia.

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Court of Justice. A supranational institution with its legislative, executive, and judicial branches came into existence. On April 18, 1951, the ECSC brought together Germany, France, and Italy with the three Benelux countries for cooperation on the two specific commodities and the agreement became operational on July 23, 1952. This became the initiation of the broader economic union of Europe. From the Treaty of ECSC (1951) to the Treaty of Nice (2001), some 16 treaties were enacted to create the EU that exists today (see Table 2.3). On June 1–2, 1955, the Foreign Ministers of the six countries elected to extend the two-commodity-specific agreement to the economy as a whole. On March 25, 1957, at a meeting in Rome, the six countries signed the Treaty of Rome and formally established the EEC and the European Atomic Energy Community (EURATOM). Both bodies became effective on January 1, 1958. The six EEC Member States signed the Merger Treaty that merged the executive bodies of the ECSC, the EEC, and Euratom, and established a single Council and a single Commission in 1967. The EEC was renamed the European Community (EC) in 1967, and then the EC became the EU on November 1, 1993 following the signing of the Treaty on European Union at Maastricht on February 7, 1992. The emphasis on unanimous rule became the key. This principle of consensus is known as the ‘‘Luxembourg compromise’’ of January 29, 1966. At the Hague Summit on December 1–2, 1969, the leadership of the EEC voted to expand European integration. The consensus principle became a more significant factor as EU membership grew beyond a pre-established limit. The 2002 vote for the accession of the AC-10 to the EU became a subject of debate in Ireland. Even with the support of the Government of Ireland, the Irish Parliament voted it down and a referendum was needed to secure Ireland’s approval. The expansion to 25 Member States in May 2004 became a historic accomplishment. The EU’s European Council, meeting at Copenhagen in 2002, affirmed Bulgaria and Romania to join EU membership in 2007. Table 2.3.

Key treaties of the EU

Treaty

Date signed

The Treaty of Rome The Euratom Treaty Act of Accession and Adjustments One Europe Act The Maastricht Treaty The Amsterdam Treaty The Nice Treaty The European Constitution Treaty

1957 1957 1972 1986 1992 1997 2001 2004

Note: For successive Treaties of Accession, see Table 2.4B. Source: Compiled from various EU publications.


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2.5. The Treaty of Rome Germany and France earlier had agreed upon for limited cooperation relative to the two specific commodities, coal and steel, and formed the ECSC. Italy and the three Benelux countries joined soon after. In September 1957, Belgium, France, Germany, Italy, Luxembourg, and the Netherlands, – the six ECSC member countries, signed the Treaty of Rome in Rome. The Treaty became effective on January 1, 1958 and the EEC was instituted. The EEC took over the broader charge of an economic union. Signatories to the Treaty of Rome proclaimed to lay the foundation of ‘‘an ever-closer union of the peoples of Europe.’’ The EEC provided for: (a) intraregional free flow of trade in goods and services without any customs, tariffs, quantitative restrictions, or any and all other measures of restrictions; (b) free flow of investment with coordinated actions for possible balance of payments adjustments; (c) freedom of movement of persons; (d) a common agricultural policy covering agriculture and trade in agricultural products – ‘‘the products of the soil, of stock-farming and of fisheries and products of first-stage processing directly related to these products’’; (e) a common transportation policy; (f) a European Social Fund to improve employment opportunities and standard of living across the Member States; (g) a European Investment Fund to lend funds to correct intraregional structural imbalances; and (h) a common EEC customs, tariff, and commercial policy toward the rest of the world. The EEC made a firm commitment to the principle of competition. The community was not to be an exclusive fortress. Indeed, the EEC would engage in global economic activities with open competition. The Treaty went on to make detailed statements regarding specific subjects. Let us take note of these two: free movement of labor and free trade in services. Subject to limitations justified on grounds of public policy, security, and health, workers could accept employment and reside in a Member State of their choice. Freedom of movement for labor, the Treaty further stated, was to be secured by the end of the 12-year transitional period. Indeed, the agenda was accomplished 18 months sooner. Trade in services included those of (a) industrial and commercial character and (b) activities of craftsmen and professionals. Article 95 of the Treaty dealt with intra-EEC tax policy. A Member State was required not to impose, directly or indirectly, internal taxation of

38


any kind on the products of other Member States in excess of what it imposed on the products of its own. Any taxation on the products of other Member States which might constitute an act of indirect protection for its own products was also prohibited. The Member States were directed to amend their respective laws as necessary for the implementation of the Treaty. The Treaty stipulated that the common market was to be ‘‘progressively established’’ over a period of 12 years, divided into three stages of four years. The EEC’s unique paradigm of FTA was credited with successful economic accomplishments. The first reduction of tariffs on intra-EEC trade of manufactured goods by 10 percent became effective on January 1, 1959. Successive 10 percent tariff reductions followed on June 1, 1960; January 1, 1961; January 1, 1962; July 1, 1962; January 1, 1963; January 1, 1965; January 1, 1966; and July 1, 1967. The process was completed on July 1, 1968, 18 months earlier than the given 12-year period of transition, and became a subject of much attention. Intra-EEC tariffs were totally liquidated. The EEC Common Market, as one integrated economic unit, adopted common customs duties in trade with the rest of the world as of July 1, 1968. The Treaty spelled out the necessary administrative institutions. The executive branch consisted of the Council and the Commission. The European Parliament is the legislative branch, and the Judiciary is led by the Court of Justice. Seats in Parliament are allocated to Member States by population. As of July 17, 1979, members are directly elected by universal suffrage. In addition, an Economic and Social Committee was established to assist the Council and the Commission in an advisory capacity. Recently, the Committee of Regions has been formed (see also Table 2.5). The EEC gave us the basic objectives of the supranational economic model of one common economic unit mapped onto one common geographic region with provisions for an intraregional governmental framework with legislative, executive, and judicial institutions. In Tables 2.4A and 2.4B, we present the historical progress of the EEC, and its eventual transformation to the EU. 2.6. The Acts of Accession and Amendments to the Treaties Three countries, Denmark, Ireland, and the UK, became candidates for admission to the Community in 1969. Hence, the Act of Accession and Amendments to the Treaties contracted earlier by the six original members became a necessity. Indeed, the collective Accession Acts facilitated the expansion of the EEC from six original members to the EU-25 in 2004. The Act of Accession, adopted on January 22, 1972, made the three original treaties, the ECSC Treaty (1951), the Treaty of Rome (1957), and the Euratom Treaty (1957), binding on the new entrants. Under the provisions of the Act of Accession, the new Member States undertook to accept

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Table 2.4A.

Chronological list of key dates of the European Union

Treaty, agreement, or event

Date

European Coal and Steel Community (ECSC) Effective

18 April 1951 23 July 1952

Treaty of Rome Effective

25 March 1957 1 January 1958

European Atomic Energy Community Effective

25 March 1957 1 January 1958

Common Agricultural Policy (CAP) Effective

30 July 1962 1 July 1967

Abolishment of customs and tariffs on industrial goods Effective (18 months ahead of schedule)

31 December 1969 1 July 1968

Merger Treaty Effective

8 April 1965 1 July 1967

SNAKE Agreement Effective until

24 April 1972 1 January 1979

Establishment of European Council procedures

9–10 Dec 1974

European Court of Auditors Effective

22 July 1975 1 June 1977

European Monetary System Effective

6–7 July 1978 13 March 1979

First direct election of European Parliament

7–10 June 1979

ESPIRIT Program

28 February 1984

Single Europe Act Effective

17–28 February 1986 1 July 1987

ERASMUS Program

15 June 1987

European Council on Economic and Monetary Union

9 December 1989

Schengen Agreement abolishes EEC border checks

19 June 1990

East and West Germany reunified Effective

12 September 1990 3 October 1990

EMU Conferences in Rome

14 December 1990

Maastricht Treaty Effective

7 February 1992 1 November 1993

Creation of the Single Market

1 January 1993

Amsterdam Treaty Effective

2 October 1997 1 May 1999

Accession Process for AC-10, Turkey, Bulgaria, and Romania

30 March 1998 (Continued on next page)

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Table 2.4A.

(Continued )

Treaty, agreement, or event

Date

Brussels European Council – 11 members will join Eurosystem Effective

3 May 1998 1 January 1999

Eurosystem under the European Central Bank Transition completed

1 January 1999 1 January 2002

European Charter of Fundamental Rights

3–4 June 1999

Turkey recognized as a candidate country

10–11 December 1999

Greece joins Eurosystem Effective

19–20 June 2000 1 January 2002

Treaty of Nice Effective

26 February 2001 1 February 2003

Laeken European Council calls for European Constitution


End of dual currency circulation in Eurozone

28 February 2002

EU-15 ratifies Kyoto Protocol

31 May 2002

Seville European Council agreement on asylum and immigration policy

21–22 June 2002

EU Draft Constitution completed Treaty on the EU Constitution signed Ratification Deadline Ratification Extension Deadline

10 June 2003 29 October 2004 1 November 2006 Mid-2007

Accession talks with Turkey and Croatia


Source: http://europa.eu.int/abc/12lessons/key_dates_en.htm.

all agreements or conventions concluded by the original Member States. The new Member States also undertook to accept the protocols on the interpretation of the conventions (Article 220 of the EEC Treaty) by the Court of Justice, signed by the six original Member States. The new three were welcome to enter into negotiations with the original six to make necessary adjustments to their respective economic systems. The EEC–FTA, without customs, tariffs, and quantitative restrictions of any and all forms, became the norm for all nine Member States. The period of transition for the new three was to terminate at the end of 1977 as the Act stipulated. Provisions were made to adjust the membership of all legislative, administrative, and judicial institutions: the Assembly, the Council, the Commission, the Court of Justice, the Economic and Social Committee, the ECSC Consultative Committee, and the Scientific and Technical Committee related to the Euratom Treaty. The Act determined the financial contributions the three new Member States were to make. Five joint declarations covering (a) the Court of Justice; (b) the UK’s Base Areas in Cyprus; (c) the fisheries sector;

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Table 2.4B.

Treaties of Accession

Treaty

Date

Accession of Denmark, Ireland, and the UK to EC Effective

1 January 1972 1 January 1973

Accession of Greece to EC Effective

28 May 1979 1 January 1981

Accession of Spain and Portugal to EC Effective

6 December 1985 1 January 1986

Accession of Austria, Finland, and Sweden to EU Effective

24 June 1994 1 January 1995

Accession of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia Effective

23 April 2003 1 May 2004

Accession Treaty of Bulgaria and Romania Effective (following European Council decision)

25 April 2005 1 January 2007

http://europa.eu.int/abc/12lessons/key_dates_en.htm, Source: calendrier/2005/04/25bg-ro/index.html.

http://www.eu2005.lu/en/

(d) development of trade relations with Ceylon (Sri Lanka), India, Malaysia, Pakistan, and Singapore; and (e) the free movement of workers across the member countries also became a part of the protocol. The objective of the Community, now expanded to nine Member States, continued to be ‘‘an ever closer union among the peoples of Europe,’’ on the foundations already laid by the original six. The instruments of the Act were duly signed and sealed in Brussels on January 22, 1972, and became the Treaty of the nine Member States, to be effective on January 1, 1973, provided that instruments of ratification were deposited with the Government of the Italian Republic by December 31, 1972. Accession of other European Member States followed, becoming the EU-15 by 1995 and in 2004, the EU-25 (see Table 1.1). The Act of Accession of 1972 became an important document for progressive expansion of the Community toward one Europe. 2.7. The Euratom Treaty The EEC recognized the fact that conventional sources of energy were limited, and agreed to explore nuclear energy for the industrial development of the Member States as an option. The Treaty made specific provisions for the development of atomic energy with proper safeguards against potential environmental hazards and possible military use of the enriched nuclear weapons. Nuclear energy was to be limited to civilian purposes. No major changes have ever been made to the Euratom Treaty.

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The specific tasks of EURATOM Committee are: to promote research and dissemination of technical information; to establish uniform safety standards to protect the health of workers

and of the general public; to facilitate investment and ensure the establishment of the basic infra-

structure to meet the potential demand of the Member States; to ensure that all users in the EU receive a regular and equitable supply

of ores and nuclear fuels; and to make certain that civil nuclear materials are not diverted to military

purposes. Indeed, the Euratom safeguards are in conformity with the guidelines developed by the International Atomic Energy Agency (IAEA). 2.8. The Single Europe Act The Single Europe Act (SEA), signed in Luxembourg on February 17, 1986 and in The Hague on February 18, 1986, became effective on July 1, 1987. This was the first major revision of the Treaty of Rome and the objective was to add new momentum to European integration. The EEC became the EU, with more intra-EU institutional power. The focus was on a common EU agenda for research and development, an EU-wide environmental policy, and a common foreign policy. The SEA made necessary amendments to the decision-making procedure within the EU Council and added to the powers of the EU Commission and the European Parliament. To facilitate the EU’s economic integration toward establishing a Single Market, ‘‘an area without internal frontiers in which the free movement of goods, persons, services, and capital is ensured,’’ the Council was permitted to take qualified majority decisions, abandoning the principle of consensus because Member States had often failed to be unanimous and delayed decision making. However, unanimity continued to be the rule for decisions relative to taxation, free movement of persons, and the rights and interest of employed persons. The transition of the Common Market to a Single Market as of January 1, 1993 was the end product of the SEA. Successfully establishing an FTA in the 1960s, based on free flow of trade and investment and freedom of movement of labor brought substantive economic prosperity for the households and business units of the Community. This microeconomic framework of the EEC (Dutta, 2005) soon came to face specific challenges: each member country continued to exercise its sovereign right with respect to its independent monetary and fiscal policies; variations in tax systems and budgetary policies distorted optimal resource allocation among the Member States of the Community; fluctuations of exchange rates became a corollary of independent money and monetary policies of each sovereign Member State; free trade and free


43

movement of workers were major issues of concern. However the development of a free flow of modern high-tech and large-scale investments matured over a much longer time period, and these investments became very much exposed to the risk of exchange rate fluctuations. Note that investments across the borders within the EEC became critically important because this would minimize the intracommunity income gaps by taking jobs to the workers. Mass migration of workers was contained. The search for a stable monetary zone followed. Convergence of economic and monetary policies became imperative. The now famous Snake Agreement of 1972 failed to provide intracommunity monetary stability and was replaced by the European Monetary System (EMS) in 1979. The EMS in its varied forms became a learning process for the Committee of Governors of the Central Banks. The Governors of the Central Banks, working under the laws of the central bank of their respective member countries, had to coordinate their monetary policies toward intracommunity exchange rate stabilization, in the context of fiscal policies formulated by the various sovereign member governments. However, they had no institutional mechanism for the joint enforcement of the decisions taken by themselves. The Committee could hardly exercise monetary authority which a common central bank of the EU could develop and administer for the Community. The search for a zone of monetary stability thus progressed to its next stage: in 1989, the European Monetary Union (EMU) was established, and eventually the European Central Bank (ECB) took charge of developing and managing the monetary policy for the Eurozone on January 1, 1999 (see European Commission, 1989). In addition, the EEC came to recognize the need for (a) economic and social cohesion, (b) better intracommunity structural adjustment, (c) research and technological development, and (d) environmental awareness. Amendments to the Euratom Treaty of 1957 became necessary and one common foreign policy for the EU was another issue of concern. 2.9. The Maastricht Treaty The Maastricht Treaty, also called the Treaty of the European Union, was signed on February 7, 1992 and became effective on November 1, 1993. Signatories included Belgium, Denmark, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and the United Kingdom, plus Austria, Finland and Sweden who later joined the group of 15. The Treaty resolved ‘‘to continue the process of creating an ever closer union among the peoples of Europe.’’ The Community came to be named the EU (EU-15). Article B of the Treaty warrants specific mention and we state it below. ‘‘The Union shall set itself the following objectives: - to promote economic and social progress which is balanced and sustainable, in particular through the creation of an area without internal frontiers, through the strengthening of economic and social cohesion and through the establishment of

44

European Union and the Euro Revolution economic and monetary union, ultimately including a single currency in accordance with the provisions of the Treaty; - to assert its identity on the international scene, in particular through the implementation of a common foreign and security policy including the eventual framing of a common defense policy, which might in time lead to a common defense; - to strengthen the protection of the rights and interests of the nationals of its Member States through the introduction of a citizenship of the Union; - to develop close cooperation on justice and home affairs; - to maintain in full the acquis communautaire and build on it with a view to consider, through the procedure referred to in Article N (2), to what extent the policies and forms of cooperation introduced by this Treaty may need to be revised with the aim of ensuring the effectiveness of the mechanisms and the institutions of the Community.’’

The Treaty established a citizenship of the Union whereby a citizen of a Member State automatically became a citizen of the Union with due privileges and responsibilities. Freedom to move and reside in any part of the Union territory was assured to all citizens, subject, however, to directives and regulations, as may be in place for effective administrative reasons. For intra-EU free flow of trade and investment, the harmonization of relevant laws across the Member States became a necessity. The Treaty provided for common rules on competition, taxation, and approximation of laws. The Treaty continued the Community’s institutional structure consisting of (a) a European Parliament, (b) a Council and a Commission, (c) a Court of Justice, and (d) a Court of Auditors. Provisions were made for a European System of Central Banks and an ECB (see Chapter 4). To provide loan capital and issue guarantees for loan issuances for intra-EU structural adjustments across the Member States, a European Investment Bank (EIB) was established, having ‘‘a legal personality,’’ operating on a not-for-profit basis, with membership of all Member States. The Bank would work in cooperation with the European Fund and other community financial institutions. A provision was also made for emergency financial assistance for specific distress situations, ‘‘caused by exceptional occurrences beyond its control.’’ It is to be noted that for economic issues, the EU thus came to assume the responsibility of a central government for all its Member States. To ensure closer coordination of economic policies and sustained convergence of economic performances, Member States became subject to ‘‘multilateral surveillance.’’ The Treaty spelled out the objectives of common foreign and security policy as follows: - ‘‘to safeguard the common values, fundamental interests, and independence of the Union; - to strengthen the security of the Union and its Member States in all ways; - to preserve peace and strengthen international security, in accordance with the principles of the United Nations Charter as well as the principles of the Helsinki Final Act and the objectives of the Paris Charter;


45

- to promote international cooperation; - to develop and consolidate democracy and the rule of law, and respect for human rights and fundamental freedoms’’ (Title V, Article J.1).

In addition, the Treaty made provisions for Social Policy, Education and Vocational Training, Youth, Culture, Public Health, Consumer Protection, Trans-European Networks, Industrial Policy, Economic and Social Cohesion, Research and Technological Development, Environment, and Development Cooperation. The Treaty also made revisions to the ECSC and the EURATOM. The Maastricht Treaty provided specific guidelines for monetary and fiscal policy parameters and warrants special attention. To follow the policy of balancing the budget would, of course, be optimal for a Member State. The EU Council adopted reference points not to be exceeded by Member States, a limit of 3 percent of GDP for the budget deficit and 60 percent of GDP for national debt. In the event that a Member State violated these limits, the Council would make recommendations, but not make the occurrence publicly known. In the absence of proper corrective response from the concerned Member State, the EIB and the EU Parliament would be notified and the recommendations made by the Council would be made public. The maintenance of price stability is the core of the monetary policy and the EU central banking system must adhere to a noninflationary policy. The Treaty (Article 109j) stipulated that the rate of inflation in a Member State could be no more than 1.5 percent above the average of the three best performing Member States in terms of price stability. The quantity of money supply was thus made subject to a reference. The Maastricht Treaty provided for a three-stage move toward a single currency: the liberalization of the movement of capital began on January 1, 1990; convergence of Member States’ economic policies commenced on January 1, 1994; a single currency under one common central bank, the ECB, was inaugurated on January 1, 1999. Admission to the membership of the single-currency group, the Treaty stipulated, was to be subject to a member country’s ability to conform to the stated provisions of fiscal and monetary stability. 2.10. The Treaty of Amsterdam Following 15 months of intensive deliberations at a series of European Council meetings in Florence, Dublin, and Noordwijk from 1996 to 1997, a consensus emerged regarding the necessary revisions to the Maastricht Treaty. The Treaty of Amsterdam was signed by all 15 EU members on October 2, 1997 and became effective on May 1, 1999. Necessary amendments to all earlier treaties of the Union (EU, EC, EEC, ECSC) became a formal part of the Treaty. Commitment to the concept of

46


fundamental social rights as defined in the 1961 European Social Charter and the 1989 Community Charter of the Fundamental Social Rights of Workers also became a part of the Treaty. The focus on an ever closer union of the peoples of Europe was reiterated with an emphasis on transparency so that all EU decisions are made ‘‘as openly as possible and as closely as possible to the citizen’’ (Part 1, Article 1 of the Treaty). The EU Council’s earlier decision for the election of representatives to the European Parliament by direct universal suffrage was appended to the Treaty. The Treaty underscored the need for a common defense toward the implementation of the agenda of a common foreign and security policy for the EU, with the provision that the European Council would define ‘‘the principles of and general guidelines for such a common policy.’’ The role of NATO and its membership for some EU members came to be an important issue in this regard. The Treaty goes on to state that the President of the EU will be in charge of all matters relating to common foreign and security policy and have the full cooperation of all EU Member States. Status of the EU member states serving on the United Nations (UN) Security Council, permanent or otherwise, was taken note of. Does this imply that these members will be allowed to act in that capacity independent of their obligations to the EU? The Amsterdam Treaty sought to restructure the EU so that it could face the challenges relative to (a) rapid changes in the international state of affairs, (b) globalization of the economy, (c) the fight against terrorism, (d) international crime and drug trafficking, and (e) ecological issues. For the protection of freedom of the peoples, the Treaty provided for a common EU citizenship with clarifications of the link between national and European citizenship. The Treaty referred to the effectiveness of intraEU free movement of people when appropriate measures were taken with respect to external border controls, asylum, and immigration. The Amsterdam Treaty endorsed enlargement of the EU, limiting the total to 20 member countries, and stated the specific provision that ‘‘at least one year before the membership of the EU exceeds twenty, a conference of representatives of the governments of the Member States shall be convened in order to carry out a comprehensive review of the provisions of the Treaties on the composition and functioning of the institutions.’’ 2.11. The Treaty of Nice The Treaty of Nice was signed on February 26, 2001. After being ratified by all 15 Member States, it became effective on February 1, 2003. The EU Council meetings in 1999 in Cologne and Helsinki, and an intergovernmental conference and the Fiera Council meeting in 2000, contributed to the Treaty of Nice. As usual, necessary amendments to all prior treaties became a part of the new Treaty. The Treaty of Nice also dealt with the protocol on enlargement of the EU.


47

The Treaty of Nice addressed the four key areas:

size and composition of the Commission; weighting of votes in the Council; extension of qualified majority voting; and enhanced cooperation.

The new weighting of the votes in the EU Council was in favor of the more populous Member States. Consequently, a redistribution of votes among the 25 members came to be in place. The change in the composition of the EU Commission increased the power of the President and redefined the procedure of nomination for the office of the President. For the judiciary, reorganization followed because of a growing number of legal issues that needed to be attended to. Cases were divided between the Court of Justice and the Court of First Instance. A provision was made for the creation of special judicial chambers. The EU Parliament provided for the extension of membership and adjustment of seats to current and future members. Provisions were made for the composition and nomination of a member to the Court of Auditors, the European Economic and Social Committee, and the Committee of Regions. The Treaty of Accession soon followed and was signed in Athens on April 16, 2003, admitting 10 new members to the EU, to be effective on May 1, 2004. With the increase in the membership of the EU, the need for possible action against a Member State in default of its commitment to its obligations of EU membership was noted and a provision was consequently made. On a proposal by the European Parliament, the Commission, or one-third of the Member States, the Council, acting by a four-fifths majority after obtaining the assent of the European Parliament, may determine the case of a serious breach of EU principle by a Member State. Provisions were also made for the Member State in question to present its own defense to the appropriate authority. Under the umbrella program of the EU’s common defense and security policy, the Treaty of Nice provided for the establishment of a Political and Security Committee to monitor the international situation. The High Representative for the common foreign and security policy shall have the responsibility to keep the European Parliament and all members of the Council fully advised on issues of concern. The Treaty of Nice has placed much focus on ‘‘enhanced cooperation’’ among EU Member States, enabling as many of them as possible to take part in a specific program, with the EU Commission extending helpful cooperation. The Treaty also adds stipulations for the work environment, workers’ health and safety, social security and social protection of workers, representation and collective defense of workers and employers, nondiscrimination or any policy of social exclusion, and conditions of employment for third-country nationals legally residing in the EU territory.

48


A shared commitment to peace, stability, and economic prosperity in the continent of Europe remains the core of the EU objectives. To be more specific, they are: to ensure peace and political stability throughout the continent; to secure greater prosperity for Europe’ citizens by extending the Euro-

pean socioeconomic model and the Eurozone, while at the same time protecting the environment; to further democracy through the compliance of the EU’s Charter of Fundamental Rights; to reinforce Europe’s role internationally, particularly in trade matters; and to ensure cultural enrichment.

2.12. The EU government Table 2.5 offers a presentation of institutions related to all three branches of the EU government. Also, special functional institutions are listed. 2.12.1. The European Parliament The European Parliament shall be elected by direct universal suffrage by the citizens of the Union for a five-year term. The number of members of the European Parliament shall not exceed 732 (Table 2.6). Members of Parliament will exercise their legislative duties in individual capacity with no binding commitment to any instructions from any other bodies. The Parliament shall have legislative duties and exercise political supervision over the Commission with authority to pass a motion of censure requiring

Table 2.5.

The EU administrative structure

Legislative

Parliament

Executive

Council Commission

Judiciary

Court of Justice

Special functional institutions

Euratom Committee Court of Auditors Economic and Social Committee European Investment Bank European Monetary Fund Committee of Regions

Source: Treaty of Nice.

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Table 2.6.

The European Parliament

Member States

Seats

Total

Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta The Netherlands Poland Portugal Slovakia Slovenia Spain Sweden United Kingdom

17 22 6 20 13 6 13 72 99 22 20 12 72 8 12 6 5 25 50 22 13 7 50 18 72

682

Bulgaria Romania

17 33

732


the members of the Commission to resign as a body. Parliament will make decisions by a majority vote unless otherwise specified. 2.12.2. The Council The European Council consists of the Heads of State or Government of the Member States. The Council will appoint a President who will be responsible for ensuring ‘‘the coherence of the European Council’s work and raise its profile without jeopardizing the institutional balance within the Union.’’ The European Council consists of the Heads of States or Governments of the Member States of the EU and constitutes its highest executive authority. The functions of the Council are broadly defined; two of note are to formulate recommendations in the field of cooperation, and to periodically inform the Parliament of its activities and answering written or oral questions raised by members of the Parliament. The Council shall vote by a simple majority of weighted votes cast.

50


The Council shall meet in two different, subject-based configurations: the General Affairs Council and the Foreign Affairs Council. The Foreign Affairs Council will be chaired by the Minister for Foreign Affairs. The President of the Council is assigned to chair the General Affairs Council, which is responsible for consistent performance of the EU agenda. As and when the Council deliberates and votes on draft legislation, it is required to meet in public. The proposal to set up a separate Legislative Council was abandoned. The Council has been given well-specified assignments: to provide the Union with the necessary impetus for its development,

defining the general political directions and priorities thereof; to act on issues of ‘‘more constitutional nature,’’ such as the composition

of the European Parliament; and to nominate and appoint the President of the Commission.

The Council does not exercise any legislative function. However, the Council can be called upon to debate a legislative act. The Council of Ministers shall consist of the representatives of the Member States at the ministerial level and adopts all laws, in most cases, jointly with European Parliament. When the recently drafted EU Constitution is adopted, the European Parliament will assume specific legislative authority. The Presidency of the Council of all configurations other than Foreign Affairs, will be held by Member State representatives following the principle of ‘‘equal rotation.’’ However, once the European Constitution has been adopted, the Presidency will be elected by qualified majority for a 30month tenure, renewable only once. The European Council can remove the President for ‘‘serious misconduct’’ or inability to perform the duties of the office. The President may not concurrently hold a national mandate. This will preclude incumbent Heads of Member States and governments from accepting the office. The weighting of votes in the Council, the composition of the Economic and Social Committee, and the composition of the Committee of Regions will follow the weights noted in Table 2.7. Note that to be adopted, Acts of the Council shall require at least 258 votes, cast by a majority of the members, where the Treaty requires them to be adopted on a proposal from the Commission. In other cases, acts of the Council shall require at least 258 votes cast by at least two-thirds of the members to be adopted. The Council, meeting in the composition of Heads of State or Government and acting by a qualified majority, shall nominate the President of the Commission, and the appointment will be subject to the approval of the European Parliament. The Council acting by a qualified majority and with accord with the nominee for President shall propose the list of other candidates for Members of the Commission. The nominees will be in accordance with the proposals of each Member State. The President and other Members of the

51


Table 2.7.

The weighting of votes in the Council

Members of the Council

Weighted votes

Total


10 12 4 12 7 4 7 29 29 12 12 7 29 4 7 4 3 13 27 12 7 4 27 10 29

321

Bulgaria Romania

10 14

345


Commission thus nominated, as a body, shall be subject to the approval by the European Parliament. Following Parliament’s approval, the Council, acting by a qualified majority, shall appoint the President and Members of the Commission. The President will serve as the Chief Executive, allocating portfolios to other members. The President shall appoint a Vice President from among the Commission Members. Members will serve at the pleasure of the President and will resign if so requested by the President. The Council, acting unanimously, may alter the number of its members. Indeed, the plan is to reduce the number of members as of 2014. At that time, the Council will select Commissioners according to a system of rotation between Member States unanimously decided upon. The Council is required to follow the following principles: Member States shall be treated on ‘‘a strictly equal footing;’’ and each successive Commission will reflect ‘‘satisfactorily the demographic

and geographical range of all the Member States.’’

52


2.12.3. The Commission General competence and independence beyond doubt is the basis for the appointment of Commission members. The present Commission includes one national of each of the Member States and is headed by a President. The Commission has a Minister of Foreign Affairs, who assumes the duties of the High Representative for the Common Foreign and Security Policy and the Commissioner for External Affairs, as well as some of the functions in the area of external affairs, currently performed by the Council Presidency, and reports to both the Council and the Commission. 2.12.4. General Secretariat The Council shall be assisted by a General Secretariat, headed by a Secretary General and a Deputy Secretary General, who will be appointed by the Council by a qualified majority. 2.12.5. Judiciary The Judiciary consisting of the Court of Justice, the Court of First Instance, and the Judicial Panel, was further elaborated by the Treaty: The Court of Justice shall consist of one judge from each Member State, chosen from the list of qualified persons ‘‘whose independence is beyond doubt.’’ The Court will be assisted by eight Advocates General. Should the Court so request, the Council, acting unanimously, may increase the number of Advocates General. The Court of First Instance shall comprise of one judge from each Member State, from amongst those qualified persons whose independence is beyond doubt. Both the Court of Justice and The Court of First Instance will appoint a Registrar and lay down their respective rules of governance. The Treaty also states specific guidelines for appointment of judicial panels, should there be an occasion. 2.12.6. Functional institutional bodies The EU shall have the following functional institutional bodies:

The The The The

Court of Auditors EIB Economic and Social Committee European Monetary Fund

All rules or conditions relative to the taxation of current or former Member States shall require unanimity within the Council. The Court of Auditors shall examine the accounts of revenues and expenditures and provide the European Parliament and the Council with a statement of proper accounting. Auditors are appointed for a term of six years, and their appointments are renewable. Auditors will appoint one

53


from among themselves to act as the President of the Court of Auditors for a three-year renewable tenure. The Council, acting by a qualified majority after consulting the European Parliament, shall adopt the list of Auditors, which will be in accordance with the proposals made by each Member State. The Court of Auditors shall draw up its rules of procedure, subject to the approval of the Council acting by a qualified majority. The EIB with the Member States as its constituent members will function as a legal entity. The European Monetary Fund is an organization in which EU Member States deposit reserves dedicated toward stabilizing exchange rates within the EU. 2.12.7. Three special advisory committees The EU has appointed three specific function-oriented advisory committees, as discussed earlier. Following the enlargement of membership of the Table 2.8. Seat allocation of the Economic and Social Committee and the Committee of Regions Member States

Seats

Total


12 12 6 12 9 7 9 24 24 12 12 9 24 7 7 6 5 12 21 12 9 7 21 12 24

317

Bulgaria Romania

12 15

344


54


Table 2.9.

The EURATOM Committee membership

Member States

Number of representatives to be elected

Weights where the Committee is to act by qualified majority

Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg The Netherlands Portugal Spain Sweden United Kingdom

17 22 13 13 72 99 22 12 72 6 25 22 50 18 72

10 12 7 7 29 29 12 7 29 4 13 12 27 10 29


EU to 25 members in May 2004 (expected to become 27 in 2007), the Economic and Social Committee and the Committee of the Regions have been expanded, each with same number of members with limitation at 350 members as shown in Table 2.8. 2.12.8. The EURATOM Committee For the 2004–2009 term beginning January 1, 2004, EURATOM Committee will have membership distributions as seen in Table 2.9. 2.13. On to the European family The political integration of the EU is yet to come. The EU Constitution remains to be adopted (see Chapter 5). The then British Prime Minister, Winston Churchill, in his Zurich University lecture on September 19, 1946, spoke eloquently: ‘‘It is to recreate the European Family y to provide it with a structure under which it can dwell in peace, in safety and in freedom. We must build a kind of United States of Europe.’’ The Prime Minister urged for ‘‘a partnership between Germany and France.’’ This was to be a strategic program to keep Europe from experiencing the horrors of a third world war. However, as economic integration of Europe progressed, the emergence of one single continental economy became a more engaging issue. Indeed, it is what the post-WWII Europe longed for. A theoretical analysis of a supranational macroeconomy remains to be explored.

CHAPTER 3

The Theory of Supranational Macroeconomics 3.1. Macroeconomic theory, theory of growth and business cycles John Maynard Keynes’ (1936) The General Theory of Employment, Interest and Money gave us the macroeconomic theory for an economy of a sovereign nation-state. Concerned students of macroeconomics may study earlier works. Did Karl Marx’s Das Kapital and, the Physiocrats’ A Tableau Economique, offer to teach us some aspects of macroeconomics? One may venture to suggest that The Arthashatra by Kautilya, written in Sanskrit some 2,000 years ago, was an ancient treatise on macroeconomics. The Keynesian Revolution by Lawrence R. Klein (1947) presents a synthetic exposition of Keynes’ General Theory by a simultaneous system of behavioral equations, integrating the real and monetary sectors of the economy with a static production function. Necessary definitional equations complete the system. The system includes a function for the aggregate level of money demand, but assumes that the aggregate stock of money supply was given. Sði; Y Þ ¼ Iði; Y Þ M d ði; Y Þ ¼ M s Q ¼ f ðN; KÞ

where M s is given

where K is given

Y ¼ C þ S ¼ C þ I;

it follows that S ¼ I

where Y is the aggregate level of income; S the aggregate level of savings; I the aggregate level of investment; i the rate of interest; Q the aggregate level of output; K the aggregate stock of (physical) capital; N the aggregate stock of labor; Md the aggregate stock of money demanded; and Ms the aggregate of stock of money supplied, assumed given. The model assumes that government expenditure (G) is determined by nonmarket factors. For simplicity, it is also assumed that the economy is closed, hence variables such as exports (X) and imports (M) are not included in the definitional equation of aggregate level of income (Y). Assuming price stability, or P ¼ 1, and the accounting identity, PQY, we can say QY. The Harrod–Domar model, in its multiplier-accelerator formulation, presented a much referred-to extension of the Keynesian model to its

56


dynamic analysis and we learnt the growth model based on the capital– output and savings–income ratios. The exposition taught us that the aggregate level of income at the current time period is a function of the aggregate level of income of the previous time period factored by the capital–output ratio divided by the capital–output ratio minus the savings–income ratio. The model defines the savings–income ratio and capital–income ratio as follows: S ¼ aY t K ¼ bY t Given the accounting identity Kt–Kt1It, and S ¼ I from the simple model, C+S ¼ C+I ¼ Y, bðY t Y t1 Þ ¼ I t It follows, aY t ¼ bðY t Y t1 Þ or;

aY t bY t ¼ bY t1

or;

Y t ðb aÞ ¼ bY t1

or;

Y t ¼ ðb=b aÞY t1

Klein added the capital–labor ratio, money–output ratio, and income distribution ratio to present a growth model based on a set of five ratios. The exercises in business cycle models have also been familiar (see Kalecki, 1935; Tinbergen, 1939; Kaldor, 1940; Metzler, 1941; Domar, 1946; Samuelson, 1947, 1962; Klein, 1950, 1953, 1962; Goodwin, 1955; Robinson, 1956; Kahn, 1959; Klein et al., 1961; Kaldor and Mirrlees, 1962; Hahn and Mathews, 1964). We have been taught that nation-states are accidents of history. They vary in area, population, and endowment of natural resources, as well as economic dimensions, defined by gross domestic product (GDP) (see also Tinbergen, 1939; Klein, 1950; Klein et al., 1961). The lessons continue to remain limited to a mature industrialized sovereign nation-state economy, often referred to as a viable economy. The individual member economies of the EU-15 in Western and Central Europe have been viable economies, and thus were able to recover from the devastation of World War II relatively quickly. Individually, each of these economies was ready to experiment with macroeconomic model specifications inclusive of growth and cyclical fluctuation patterns. Several of them constructed large-scale econometric models. The dimensions of these economies as defined by their respective shares of world output and trade have not been competitively large and the European Union (EU) member economies were


57

challenged to explore a model that would be economically competitive in the world market. The EU is in the process of evolution. Its economic integration remains to be supported by its political integration. During the transition period, ad hoc arrangements will continue to be critically important. The macroeconomic theory as we have briefly reviewed above will of course be valid for the EU. We proceed to evaluate the theory of competition in the global market and its impact on the emergence of the EU. Indeed, continental regionalization may be the optimum option following the historic collapse of the imperial model. 3.2. Industrialization and internationalization: the imperial model Industrialization and internationalization became an interactive historic process. Let us begin with the simple Cobb–Douglass production function and state that aggregate level of output (Q) is a nonlinear function of the aggregate stock of capital (K ) and aggregate stock of labor (N ). The function is stated as follows: Q ¼ f 1 ðN; KÞ Dividing both sides by K, we obtain, Q=K ¼ f 2 ðN=KÞ Rewriting this, we have a capital–output ratio as a function of the capital– labor ratio K=Q ¼ f 3 ðK=NÞ As industrialization progresses, the production mode of the economy will have more capital (K ) per unit of labor (N ), making each unit of output (Q) more capital-intensive, evident in terms of better product quality as measured by consumer acceptance. As the capital–labor ratio (K/N) increases, marginal physical productivity of labor (MPPn) increases, and so does the wage rate. The economy’s income increases, with consequent increases in savings; the savings–income ratio moves up. Increased savings contribute to increased investment, and then to an increase in the capital stock (K ). Given the definitional relationship, aggregate stock of capital (K ) at the current time period minus aggregate stock of capital (K ) at the previous time period is identically equal to aggregate level of investment (I ) for the current period, K t K t1 I t . The capital-intensive production mode induces large-scale production, which helps minimize the unit cost of production and maximize the profit income. Industrialization initiates a unique process where the economy’s capital –labor ratio, capital–output ratio, and savings–income ratio move up. Given the factors of price stability and optimum income distribution, the economy experiences a high rate of growth. The labor force available in a given

58


economy is limited, as is its endowment of natural resources. To sustain the high rate of growth, the industrialized economy must seek out external markets to serve as additional sources of supply of labor and natural resources. The foreign economies will eventually become an overseas market for the specific economy’s industrial output. This familiar history unfolded as the Industrial Revolution in Europe progressed. Many industrialized European countries were prompted to establish imperial regimes of varying dimensions. We have discussed earlier that the imperial model collapsed under its own weight as the model failed to share its economic prosperity equitably among the peoples of an imperial mother country and those of her colonies. Liquidation of the empires, big or small, became a reality. The imperial model was anchored to the concept of a superpower presiding over one or more colonial economies with authority to take unilateral macroeconomic actions by specified monetary and fiscal legislations. Indeed, imperialism and unilateralism became the modus operandi of any given superpower regime. The colonies successively revolted and their declarations of independence were embodied in the proclamation, ‘‘No taxation without representation!’’ (see Chapter 1). 3.3. The EU: a supranational macroeconomy The EU offers an unprecedented economic structure. Never before had several sovereign nation-state economies as advanced and industrialized as these were voluntarily surrendered their economic sovereignty and become one single integrated continental economy. The EU began with the six economies in Central and Western Europe and progressed to the 15 members in 1995, 25 members in 2004, and is on track to be the EU-27 in 2007. In the process, the concept of traditional sovereignty has been critically revisited. Member economies of the EU have accepted divisibility of their sovereignty, economic and political. Twelve of them have adopted one currency, the euro, under one common central bank, the European Central Bank (ECB). The 10 new members have offered to join the Eurosystem, subject to their ability to meet the necessary conditions outlined in the Maastricht Treaty. Three members, the UK, Denmark, and Sweden, continue to resist acceptance of the common currency. Even so, they have accepted one common membership to the World Trade Organization (WTO) with one single vote. The EU has accepted the condition that no member economy of the EU will be exempt from one common trade policy with respect to the rest of the world. The UK’s insistence for special privileges for their former colonies, now members of the Commonwealth, was met with total rejection. Member States belonging to the continent of Europe as observed on the map of the world constitute the EU, with no members from the continents of Africa, Asia, Americas, and Oceania. Bi-continental Russia is not an EU candidate country, nor are those in the Middle East. In Chapter 1, we have


59

reviewed the diversities of language, religion, and lifestyle of the EU Member States, and have argued that unity based on geography make them members of the EU. Unity in diversity has been the overwhelming cohesive force. We now explore an economic rational for this continental unity. Globalization is of course the order of the present-day economy. Following the roster of the United Nations (UN), the world economy consists of 191 sovereign nation-states. (With the latest admission of Montenegro to the UN membership the total will become 192.) Two parameters are important in this analysis: (a) each individual economy’s share of world’s GDP and (b) each individual economy’s share of world trade. The fact is that exports of an individual economy must be imports of trading partners’ economies. Thus, taking a global aggregate, exports equal imports. It can also be argued that exports of an economy directly relate to its GDP. Consider the US economy, one of the 191, that has to its credit about 20 percent of world GDP; the next largest share, Japan, has some 5 percent of world GDP. The trade shares of these two countries follow a parallel pattern. The remaining individual economies enjoy only marginal shares of world GDP and trade. It is true that newly industrialized economies inclusive of China, India, South Korea, Malaysia, Thailand, Singapore, Brazil, and Russia have made significant gains in their respective shares of world GDP and trade. However, the petroleum-rich economies continue to remain limited from this perspective. Indeed, there are no other individual economies with competitively large shares of world GDP and trade. It follows that one member economy with some 20 percent of world GDP and 15 percent of world trade emerges as the dominant actor in the world economy. In the post-WWII decades, the USA became that one dominant economy and the dollar was king. The rest of the world depended heavily on the USA for food and manufactures, often coming in the form of aid. The USA also became the principal buyer of the output of other economies and the global market soon ceased to be competitive. Indeed, this economic framework became one of monopoly–monopsony. During the Cold War decades, the USA assumed the responsibility of military defense and maintaining economic stability for the economies of the free, noncommunist world. Kindleberger (1985) forcefully argued that the burden for the USA was too much to bear indefinitely. During the post-WWII period, the European Community (EC) became the challenging new economic entity. Individually, each member economy of the EC, enjoyed only marginal shares of world GDP and trade. Even the big four, Germany, France, the UK, and Italy, each had far less than what could be considered competitive shares. By its shares of world output and trade, Japan continued to be the second largest economy, albeit a distant second. However, if the countries of the EC were treated as one common economy, its aggregated shares of world trade and output would have made the Community an effective competitor to the USA, and placed far ahead of Japan.

60


The emergence of the EU has made the world market competitive again. The rationale of supranational macroeconomics must be studied in this context. Given the rich human capital and advanced technological abilities, the economies of Western Europe soon regained their economic vitality, but they realized that their individual noncompetitive shares of world output and trade could not face stiff competition from a single economy with overwhelming shares of world output and trade. Each of these economies would continue to be a price-taker and the superpower economy would dictate the terms of trade. Would the situation ever change over time? Could Germany, France, the UK, or Italy eventually become an effective competitor in the world market against the USA? The facts we present below do not point to that eventuality. The European Coal and Steel Community (ECSC), beginning with six member economies in the 1950s soon became an experiment of great economic success and the process of continental economic integration progressed rapidly. One single integrated continental economy of Europe with its commonly shared intraregional micro- and macroeconomic policies for the 25 Member States is now a fact. One common currency, the euro, under one common central bank, the ECB, for the 12 member economies of the Eurosystem, is a part of this unfolding economic story. The world economy has now become a regime with two leading currencies, the dollar and the euro. If the EU becomes a learning model for the rest of the world, the situation of a truly competitive, multipolar global economy will be a dynamic subject for study for years to come (see Chapter 8). The effective competition between the EU and the USA, who together produce a little more than one-half of world output and whose share of the world trade approaches the 60 percent benchmark, will be beneficial for the microeconomic units in both economies. On both sides of the Atlantic, households will maximize their gains and businesses will maximize their profits. The goods and services each economy will produce will be quality and costcompetitive, and prices will be as they should be in a competitive market. The absence of competition made prices monopolistic, and the price of what others manufactured and sold in the world market became subject to the monopsonistic influence from the one single dominant buyer. Competition will allow people in the world to benefit from goods and services of better quality at competitively lower prices offered by the EU and the USA. 3.4. The EU: population, GDP and trade We begin with an evaluation of the competitive population bases of the EU and the USA. A profile is evident. Table 3.1A presents the population base of each member economy of the EU-25. Decennial population data for 1960 through 2000 plus that of 2004, the latest year of data available, is reviewed. Over the time period, the profile of the population base for the 25 Member States of the EU maintains a consistent pattern. Germany leads

61


Table 3.1A. 1960 Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta The Netherlands Poland Portugal Slovak Republic Slovenia Spain Sweden United Kingdom

Population, total (in millions) 1970

1980

1990

2000

2004

7.05 9.12 0.57 9.55 4.58 1.22 4.43 45.68 72.67 8.33 9.98 2.83 50.20 2.13 2.78 0.32 0.33 11.49 29.56 8.94 3.99 1.58 30.46 7.48 52.37

7.43 9.64 0.62 9.78 4.93 1.37 4.61 50.77 77.72 8.79 10.34 2.95 53.82 2.37 3.14 0.34 0.33 13.04 32.53 9.04 4.53 1.73 33.78 8.04 55.63

7.55 9.85 0.61 10.23 5.12 1.48 4.78 53.88 78.30 9.64 10.71 3.40 56.43 2.54 3.41 0.37 0.36 14.15 35.58 9.77 4.98 1.90 37.39 8.31 56.33

7.73 9.97 0.68 10.36 5.14 1.57 4.99 56.74 79.43 10.16 10.37 3.51 56.72 2.67 3.70 0.38 0.36 14.95 38.12 9.90 5.28 2.00 38.84 8.56 57.56

8.01 10.25 0.76 10.27 5.34 1.37 5.17 58.89 82.21 10.56 10.02 3.81 57.69 2.37 3.51 0.44 0.39 15.92 38.65 10.13 5.39 1.99 40.50 8.87 58.88

8.12 10.41 0.78 10.18 5.40 1.35 5.22 59.99 82.63 11.07 10.07 4.02 57.57 2.30 3.44 0.45 0.40 16.25 38.16 10.44 5.39 2.00 41.29 8.99 59.41

Total EU population % of world % Growth

377.65 12.50

407.25 11.08 7.84

427.08 9.64 4.87

439.67 8.37 2.95

451.40 7.46 2.67

455.30 7.18 0.86

United States % of world % Growth

180.67 5.98

205.05 5.58 13.49

227.23 5.13 10.81

249.44 4.75 9.78

282.22 4.66 13.14

293.51 4.63 4.00


and moves from 72.67 million in 1960 to 82.63 million in 2004. France, the United Kingdom, and Italy come next and record figures from some 50 million each in 1960, approaching 60 million in 2004. Beginning with 30.46 million in 1960, Spain reached 41.29 million in 2004. Of the new 10 joining the EU in 2004, Poland, with her 29.56 million people in 1960 moved up to 38.16 million in 2004, a population base comparable to that of Spain. At the other end, of the EU-15, Luxembourg reports a population base of 0.32 million in 1960 and 0.45 million in 2004. Of the new 10 members of the EU (EU-10, often referred to as AC-10, 10 acceding countries), Malta and Cyprus have a small population, each with less than a million people over the time period.

62


Total EU population, its shares of world population, and its decennial rates of growth are then compared with those of the USA. The EU’s share of world population has systematically declined from 12.50 percent in 1960 to 7.18 percent in 2004. For the same time period, the US share has fallen from 5.98 percent to 4.63 percent. In 2004, the EU-25 with 7.18 percent of the world population has a much higher percentage than the USA with 4.63 percent of the world population. With China and India each having a population greater than 1 billion people, the EU with 455.3 million people in 2004 is now the third largest populous economic unit. The USA with 293.51 million in 2004 is the fourth in rank. The declining decennial rates of growth of population are evident for both the EU and the USA. Comparing rates of birth, death, emigration, and immigration for the EU and the USA, the latter does have an advantage on immigration. Because many member countries of the EU have declining birth rates, several EU countries have recently initiated processes to liberalize their immigration and naturalization laws to promote immigration of the labor force from abroad, especially for those with specific skills. In terms of the population base, the EU-25 is competitively ahead of USA. The population base impacts an economy for both the supply and demand facets as it contributes to labor supply and to the consumption demand for goods and services produced. Given the competitive nature of the industrial know-how and high-tech skill of the labor force in the EU and the USA, the situation merits attention. Insofar as the growth of human capital is concerned, the EU’s emphasis on environment and health care may place the USA at a competitive disadvantage. Table 3.1B presents the population profile of the EU-25, comparing the EU-15 with that of the 10 newly admitted members of the EU. In 2004, the 10 new members added a total of 74.06 million to the total of 381.23 million of the original EU members. In terms of percentage, the original 15 had 83.73 percent and the new 10 contributed 16.27 percent. It is to be noted that for 1960 through 2000, the decennial population shares of the EU-15 and the EU-10 remain stable at 83 percent and 17 percent, respectively. Table 3.1C offers a summary of population sizes of the EU-25 in terms of millions of people. For the time period under review, three of them, Cyprus, Luxembourg, and Malta, each has less than 1 million people; two of them, Estonia and Slovenia, each has less than 2 million people; six of them, Denmark, Finland, Ireland, Latvia, Lithuania, and Slovak Republic, each has some 5 million people; seven of them, Austria, Belgium, Czech Republic, Greece, Hungary, Portugal and Sweden, each with 7–10 million population is the next group; one of the EU-25, the Netherlands has its population varying between 11 and 16 million. Two of them, Poland and Spain rank in the group between 29 and 41 million people. Three of them, France, Italy, and the United Kingdom belong to the group of 45–60 million while Germany with its population varying between 72 and 83 million makes the group of one with the highest ranking.

63


Table 3.1B.

EU member countries: Population, total (in millions) 1960

1970

1980

1990

2000

2004

7.05 9.12 4.58 4.43 45.68 72.67 8.33 2.83 50.20 0.32 11.49 8.94 30.46 7.48 52.37 315.95

7.43 9.64 4.93 4.61 50.77 77.72 8.79 2.95 53.82 0.34 13.04 9.04 33.78 8.04 55.63 340.53

7.55 9.85 5.12 4.78 53.88 78.30 9.64 3.40 56.43 0.37 14.15 9.77 37.39 8.31 56.33 355.27

7.73 9.97 5.14 4.99 56.74 79.43 10.16 3.51 56.72 0.38 14.95 9.90 38.84 8.56 57.56 364.56

8.01 10.25 5.34 5.17 58.89 82.21 10.56 3.81 57.69 0.44 15.92 10.13 40.50 8.87 58.88 376.68

8.12 10.41 5.40 5.22 59.99 82.63 11.07 4.02 57.57 0.45 16.25 10.44 41.29 8.99 59.41 381.23

% of EU-25

83.66

83.62

83.19

82.92

83.45

83.73

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovak Republic Slovenia Total

0.57 9.55 1.22 9.98 2.13 2.78 0.33 29.56 3.99 1.58 61.70

0.62 9.78 1.37 10.34 2.37 3.14 0.33 32.53 4.53 1.73 66.71

0.61 10.23 1.48 10.71 2.54 3.41 0.36 35.58 4.98 1.90 71.81

0.68 10.36 1.57 10.37 2.67 3.70 0.36 38.12 5.28 2.00 75.11

0.76 10.27 1.37 10.02 2.37 3.51 0.39 38.65 5.39 1.99 74.72

0.78 10.18 1.35 10.07 2.30 3.44 0.40 38.16 5.39 2.00 74.06

% of EU-25

16.34

16.38

16.81

17.08

16.55

16.27

Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg The Netherlands Portugal Spain Sweden United Kingdom Total


Table 3.2A reviews comparative GDP positions for the EU and USA. Figures are for 1960, 1970, 1980, 1990, 2000, and 2004. Within the EU, Germany ranks first and is followed by the UK, while France and Italy remain a close third and fourth. For this period, no individual EU member country even approaches the total of the USA. However, the EU-25 does and can easily be seen as a close competitor. Percentages of world GDP for the EU-25 correspond closely to the USA from 1980 onward. For the time period, shares of world GDP for the EU-25 and the USA approximate 25 percent and 30 percent, respectively. We will see that the situation is reversed when we examine GDP shares in terms of purchasing power parity (PPP). Let us note that the decennial rates of growth of GDP have declined over time for both the EU and the USA. In 2004, the rates of growth of

64

Table 3.1C.


Population based on decennial census, 1960–2000 plus 2004 (in millions)

Population

Number of countries

Countries

0.32–0.78 1.22–2.00 2.13–5.40

3 2 6

7.05–11.07

7

11.49–16.25 29.56–41.29 45.68–59.99 72.67–82.63

1 2 3 1

Luxembourg, Malta, and Cyprus Estonia and Slovenia Finland, Ireland, Latvia, Lithuania, Slovak Republic, and Denmark Austria, Belgium, Czech Republic, Greece, Hungary, Portugal, and Sweden The Netherlands Poland and Spain France, Italy, and United Kingdom Germany

Note: Based on Table 3.1A.

GDP of the EU-25, the USA and the world from 2000 at 6.41 percent, 10.58 percent, and 10.56 percent, merit attention. For 1990 and 2000, the decennial rate of growth of USA’s GDP is above the rate of growth of world GDP, while for the EU-25, the figures are lower. It is instructive to note that the GDP bases in the aggregate of the EU-25 and the USA and their respective shares of world GDP have become closely competitive. Figure 3.1 is a graphic presentation of percent of world GDP of the EU-10, EU-15, EU-25, and the USA, for the period 1960–2004. Table 3.2B compares the GDP bases of the original EU-15 and the new AC-10. The new AC-10 adds only marginally to the EU-25 total for the time period under review. In 2004, the original EU-15 contributes 95.49 percent of the total while the new AC-10 adds only 4.51 percent. We have complete data for 1990 and 2000, and the story is the same, the AC-10 would have added just some 5 percent to the total of EU-25 GDP. The new 10 are pre-industrialized economies; their initiative to join the membership of the EU relates to their plans for industrialization. Reviews of GDP in constant US dollars are open to dispute. A comparative evaluation based on GDP in PPP (international billion dollars) in 2000 is in order. Table 3.3A presents the relevant data for all the individual economies of the EU-25. It also compares the total of the EU-25 with the GDP of the USA and their comparative growth rates vis-a`-vis the rate of growth of the world GDP. Evidently, for GDP in PPP, no individual EU-25 economy is anywhere near the USA. For the time period, Germany with its largest individual total varying between $1.2 trillion and $2.2 trillion is far outdistanced by the USA whose totals vary between $4.3 and $10.8 trillion. In 2004, the United Kingdom, France, and Italy with their respective GDPs at $1.7, $1.6, $1.5 (PPP in US$ trillions) come next in that order. It is to be noted that based on PPP dollars, the EU-25 shares of world GDP are larger than

65


Table 3.2A. 1960

GDP (constant 2000 US$, in billions) 1970

1980

1990

2000

2004

Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta The Netherlands Poland Portugal Slovak Republic Slovenia Spain Sweden United Kingdom

52.65 67.96 — — 57.42 — 32.15 357.82 — 25.42 12.97 13.80 295.26 — — 3.88 0.36 102.09 — 19.97 — — 110.86 82.94 544.82

83.41 108.46 — — 88.93 — 51.39 615.09 — 53.00 24.43 20.81 514.42 4.96 — 5.48 0.59 167.27 — 37.01 — — 226.39 130.53 720.80

118.92 151.09 3.33 — 107.58 5.02 73.76 851.84 1,231.47 83.07 38.60 33.06 733.51 8.05 — 7.08 1.60 223.02 — 58.81 — — 323.24 158.42 875.44

150.47 184.36 6.10 54.40 125.72 5.94 99.57 1,087.46 1,545.84 88.95 43.22 47.18 917.51 10.43 15.99 11.48 2.34 278.28 116.36 80.98 19.56 15.99 431.64 196.84 1,135.84

190.41 228.30 9.15 55.71 158.23 5.46 119.91 1,308.40 1,870.28 112.10 46.68 94.75 1,074.76 7.73 11.38 19.60 3.81 370.64 166.55 106.46 20.22 19.07 561.76 239.57 1,439.35

200.23 240.70 10.27 62.61 166.94 6.95 130.93 1,389.20 1,917.76 131.62 53.78 117.03 1,113.69 10.37 15.12 21.57 3.81 377.89 186.40 108.48 24.19 21.69 622.55 259.78 1,574.62

EU-25 % of world GDP % Growth

1,780.36 24.42

2,852.98 23.39 60.25

5,086.89 28.88 78.30

6,672.43 27.90 31.17

8,240.25 26.10 23.50

8,768.18 25.12 6.41

United States % of world GDP % Growth

2,553.59 35.03

3,721.70 30.51 45.74

5,128.00 29.11 37.79

7,055.00 29.50 37.58

9,764.80 30.93 38.41

10,798.08 30.93 10.58

World % Growth

7,290.04

12,197.29 67.31

17,612.94 44.40

23,913.97 35.78

31,573.38 32.03

34,907.66 10.56

Note: Percentage growth is over past period. Source: World Development Indicators (2005).

those of the USA for all time periods. For the specific time intervals, the rates of growth are consistently higher for the USA than the EU by a margin of 3–10 percent. Understandably, the rates of growth of the world GDP are marginally higher than those of both the EU-25 and the USA. Figure 3.2 is a graphical presentation of the share of world GDP in PPP. Figures 3.1 and 3.2 compare shares of world GDP in US dollars and in PPP, respectively, the EU-25 leading the USA.

66


Figure 3.1.

Share of world GDP

40.00% 35.00% 30.00%

Percent

25.00% 20.00% EU-10 15.00%

EU-15 EU-25

10.00%

United States

5.00% 0.00% 1960

1970

1980

1990

2000

2004

Year Note: Based on Table 3.2A

Table 3.3B compares the EU-15 with the EU-10. GDP figures are in PPP 2000 billions of international dollars. In PPP, the new AC-10 adds marginally to the EU-25 total for 1975 and 1980; the contributions moved up from 2.07 percent in 1975 to 9.11 percent in 2004. A trend is in progress as some economies of the AC-10 advance on industrialization. In any case, adjustments of the data for PPP have resulted in a different assessment of comparative growth rates of the EU and the USA. Table 3.3C ranks the member economies of the EU-25 in terms of GDP (PPP in constant 2000 international dollars) of 2004. The figures for 1975, 1980, 1990 and 2000 in Table 3.3A show the same pattern. Indeed, GDP of each economy has increased over the time period. The same is true for the USA. The GDP in PPP 2000 of the USA in 2004 is $10,800. The USA is far ahead of Germany, whose GDP is the largest among the EU-25. Individually, no member economy of the EU-25 can compete with the USA. Table 3.4 compares member economies of the EU-25 in terms of their respective shares of the EU-25 GDP (PPP in constant 2000 international dollars) for 1975, 1990, and 2004. Germany is the largest economy of the EU25 with its share of 20 percent of the total. France and the United Kingdom, each with a share of about 15 percent, compete for the second position, while Italy with its share of 14 percent is a close fourth. Based on available data, as many as eight member economies, Cyprus, Estonia, Latvia, Lithuania, Luxembourg, Malta, the Slovak Republic, and Slovenia, have less than 1 percent share of the EU-25 GDP. Figures 3.3A and 3.3B present comparative

67


Table 3.2B.

EU member countries: GDP (constant 2000 US$, in billions) 1960


1970

1980

1990

2000

2004

52.65 67.96 57.42 32.15 357.82 — 25.42 13.80 295.26 3.88 102.09 19.97 110.86 82.94 544.82

83.41 108.46 88.93 51.39 615.09 — 53.00 20.81 514.42 5.48 167.27 37.01 226.39 130.53 720.80

118.92 151.09 107.58 73.76 851.84 1,231.47 83.07 33.06 733.51 7.08 223.02 58.81 323.24 158.42 875.44

150.47 184.36 125.72 99.57 1,087.46 1,545.84 88.95 47.18 917.51 11.48 278.28 80.98 431.64 196.84 1,135.84

190.41 228.30 158.23 119.91 1,308.40 1,870.28 112.10 94.75 1,074.76 19.60 370.64 106.46 561.76 239.57 1,439.35

200.23 240.70 166.94 130.93 1,389.20 1,917.76 131.62 117.03 1,113.69 21.57 377.89 108.48 622.55 259.78 1,574.62

1,767.02 99.25

2,822.99 98.95

5,030.30 98.89

6,382.11 95.65

7,894.50 95.80

8,372.98 95.49

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovak Republic Slovenia

— — — 12.97 — — 0.36 — — —

— — — 24.43 4.96 — 0.59 — — —

3.33 — 5.02 38.60 8.05 — 1.60 — — —

6.10 54.40 5.94 43.22 10.43 15.99 2.34 116.36 19.56 15.99

9.15 55.71 5.46 46.68 7.73 11.38 3.81 166.55 20.22 19.07

10.27 62.61 6.95 53.78 10.37 15.12 3.81 186.40 24.19 21.69

Total % of EU-25

13.34 0.75

29.98 1.05

56.59 1.11

290.32 4.35

345.75 4.20

395.20 4.51

Total % of EU-25


expositions of the shares of GDP in PPP in 1975 and 2004, respectively for members of the EU-25. Table 3.5A offers an exposition of the EU-25 in terms of their respective trade in goods and services, by value and by their respective shares of the world trade. Data relate to both exports and imports for the two specific years, 1990 and 2000. With shares of world trade for both exports and imports at about 8 percent, Germany ranks first in the EU-25 while France, the United Kingdom, and Italy with their respective shares at some 5 percent follow next. A large number of the EU-25 member economies have less than 1 percent share of world trade. The USA with its shares of world trade at some 14 percent for exports and 14–18 percent for imports is far ahead of any individual member economy of the EU-25.

68


Table 3.3A. GDP (PPP) (constant 2000 international $, in billions) 1975

1980

1990

2000

2004


121.00 161.00 2.94 — 90.30 — 70.30 856.00 1,160.00 113.00 89.10 26.80 793.00 16.20 — 8.28 1.52 242.00 — 79.30 — — 452.00 140.00 877.00

143.00 190.00 5.11 — 103.00 — 81.60 993.00 1,360.00 138.00 106.00 34.90 975.00 19.60 — 8.70 2.70 274.00 — 104.00 — — 501.00 151.00 975.00

180.00 231.00 9.36 — 122.00 14.00 112.00 1,280.00 1,700.00 148.00 122.00 54.00 1,240.00 25.40 42.40 12.50 3.96 348.00 295.00 141.00 57.90 — 668.00 191.00 1,270.00

231.00 281.00 15.20 158.00 153.00 13.40 132.00 1,520.00 2,090.00 190.00 134.00 115.00 1,440.00 18.80 30.70 25.60 7.16 459.00 402.00 187.00 61.00 33.60 874.00 230.00 1,570.00

242.00 299.00 16.40 183.00 160.00 17.20 144.00 1,610.00 2,150.00 225.00 155.00 149.00 1,500.00 25.70 41.40 28.60 7.03 482.00 455.00 190.00 72.40 38.40 968.00 245.00 1,700.00

EU-25 % of world GDP % Growth

5,299.74 26.90

6,165.61 25.80 16.34

8,267.52 24.90 34.09

10,371.46 23.05 25.45

11,104.13 21.44 7.06

United States % of world GDP % Growth

4,290.00 21.78

5,140.00 21.51 19.81

7,090.00 21.36 37.94

9,590.00 21.31 35.26

10,800.00 20.85 12.62

19,700.00

23,900.00 21.32

33,200.00 38.91

45,000.00 35.54

51,800.00 15.11

World % Growth

Note: Percentage growth is over past period. Source: World Development Indicators (2005).

Table 3.5B is quite revealing. As many as 14 EU economies report 1 percent or less of world trade, exports, and imports. Germany, with its shares at about 8 percent over the time period is the highest trading economy of the EU-25. During the same period, the United States reports an annual average of about 15 percent of the world trade. In Table 3.6, we extend the analysis to compare the trade shares of the EU in various groups and the USA. It is instructive to compare these

69


Figure 3.2.

Share of world GDP (PPP)

30.00%

25.00%

Percentage

20.00%

15.00% EU-10 EU-15

10.00%

EU-25 United States

5.00%

0.00% 1975

1980

1990

2000

2004

Year Note: Based on Table 3.3A

findings to those in Tables 3.3C and 3.5B. Member economies of the EU-25 with smaller GDP bases also have smaller trade shares, which is to be expected. The economic integration movement in Europe must be studied in the context of an individual EU member economy’s inability to compete in the world market while the USA is the predominant actor by measures of world output and trade. In Table 3.6, we study Europe in three frameworks of integration. The EU-12 consists of the member economies of the EU who have accepted the common currency and are members of the Eurosystem. The EU-15 consists of the EU-12 plus Denmark, Sweden, and the United Kingdom, who have elected not to accept the common currency. Next, the EU-25 which consists of the EU-15 and the AC-10, the most recent group admitted to EU membership. We have selected trade data for 1990 and 2000, and the pattern appears to be consistent over time. The share of world trade of the EU-12 at 28 percent, the EU-15 at 36 percent, and the EU-25 at 37 percent, are far larger than that of the USA at about 15 percent for the time period. In the absence of integration, none of the individual sovereign nation-state economies of Europe would be able to compete with the USA in the world market. To pursue our research, we return to the GDP of the EU-25 (PPP in constant 2000 international dollars) and we select three specific time periods, 1975, 1990, and 2004 to present percentage of world share in Table 3.7A.

70


Table 3.3B.

EU member countries: GDP (PPP) (constant 2000 international $, in billions) 1975

1980

1990

2000


121.00 161.00 90.30 70.30 856.00 1,160.00 113.00 26.80 793.00 8.28 242.00 79.30 452.00 140.00 877.00

143.00 190.00 103.00 81.60 993.00 1,360.00 138.00 34.90 975.00 8.70 274.00 104.00 501.00 151.00 975.00

180.00 231.00 122.00 112.00 1,280.00 1,700.00 148.00 54.00 1,240.00 12.50 348.00 141.00 668.00 191.00 1,270.00

231.00 281.00 153.00 132.00 1,520.00 2,090.00 190.00 115.00 1,440.00 25.60 459.00 187.00 874.00 230.00 1,570.00

242.00 299.00 160.00 144.00 1,610.00 2,150.00 225.00 149.00 1,500.00 28.60 482.00 190.00 968.00 245.00 1,700.00

Total % of EU-25

5,189.98 97.93

6,032.20 97.84

7,697.50 93.11

9,497.60 91.57

10,092.60 90.89

2.94 — — 89.10 16.20 — 1.52 — — —

5.11 — — 106.00 19.60 — 2.70 — — —

9.36 — 14.00 122.00 25.40 42.40 3.96 295.00 57.90 —

15.20 158.00 13.40 134.00 18.80 30.70 7.16 402.00 61.00 33.60

16.40 183.00 17.20 155.00 25.70 41.40 7.03 455.00 72.40 38.40

109.76 2.07

133.41 2.16

570.02 6.89

873.86 8.43

1,011.53 9.11

Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovak Republic Slovenia Total % of EU-25

2004


Selection of 2004 is for pragmatic consideration, being the most recent year of complete data availability for the EU-25. The years 1975 and 1990 should help present a time profile for our analysis. Two points warrant our immediate attention. First, in terms of shares of world output, individual EU member countries are far too small to face competition with the USA in the world market. Table 3.7B points to the fact that 19 of the 25 member economies have marginal economic dimensions of less than one percent of world GDP for all three time periods. The time profile is clearly demonstrated and we must conclude that given their respective economic structures, their shares of the world output will follow the pattern and that

71


Table 3.3C. Ranking of the EU-25 member economies based on GDP (PPP) in 2004 (constant 2000 international $, in billions) Less than 50 51–200

201–500

Cyprus Estonia Latvia Lithuania Luxembourg Malta Slovenia

Austria Spain Belgium Greece The Netherlands Poland Sweden

Czech Republic Denmark Finland Hungary Ireland Portugal Slovak Republic

501–1,000 1,001–2,000

2000 plus

France Germany Italy United Kingdom

Note: Based on data in Table 3.3A. Data for the Czech Republic, Estonia, Poland, Lithuania, the Slovak Republic, and Slovenia are for limited years.

Table 3.4.

Intra-EU shares of GDP (PPP) (constant 2000 international $, in billions) 1975

% Share

1990

% Share


121.00 161.00 2.94 — 90.30 — 70.30 856.00 1,160.00 113.00 89.10 26.80 793.00 16.20 — 8.28 1.52 242.00 — 79.30 — — 452.00 140.00 877.00

2.28 3.04 0.06 — 1.70 — 1.33 16.15 21.89 2.13 1.68 0.51 14.96 0.31 — 0.16 0.03 4.57 — 1.50 — — 8.53 2.64 16.55

180.00 231.00 9.36 — 122.00 14.00 112.00 1,280.00 1,700.00 148.00 122.00 54.00 1,240.00 25.40 42.40 12.50 3.96 348.00 295.00 141.00 57.90 — 668.00 191.00 1,270.00

2.18 2.79 0.11 — 1.48 0.17 1.35 15.48 20.56 1.79 1.48 0.65 15.00 0.31 0.51 0.15 0.05 4.21 3.57 1.71 0.70 — 8.08 2.31 15.36

EU-25

5,299.74

Note: Based on data from Table 3.3A.

8,267.52

2004 242.00 299.00 16.40 183.00 160.00 17.20 144.00 1,610.00 2,150.00 225.00 155.00 149.00 1,500.00 25.70 41.40 28.60 7.03 482.00 455.00 190.00 72.40 38.40 968.00 245.00 1,700.00 11,104.13

% Share 2.18 2.69 0.15 1.65 1.44 0.15 1.30 14.50 19.36 2.03 1.40 1.34 13.51 0.23 0.37 0.26 0.06 4.34 4.10 1.71 0.65 0.35 8.72 2.21 15.31

72


Figure 3.3A.

Share of EU GDP (PPP), 1975

25.00%

Percent

20.00% 15.00% 10.00% 5.00%

Spain

Sweden

United Kingdom

Sweden

United Kingdom

Slovenia Slovenia

Spain

Slovak Republic Slovak Republic

Poland

Portugal

Malta

Netherlands

Lithuania

Luxembourg

Italy

Latvia

Ireland

Greece

Hungary

France

Germany

Finland

Estonia

Denmark

Cyprus

Czech Republic

Austria

Belgium

0.00%

EU Member Note: Based on Table 3.4

Figure 3.3B.

Share of EU GDP (PPP), 2004

25.00%

Percent

20.00% 15.00% 10.00% 5.00%

Poland

Portugal

Malta

Netherlands

Lithuania

Luxembourg

Latvia

Italy

Ireland

Greece

Hungary

Germany

France

Finland

Estonia

Denmark

Cyprus

Czech Republic

Austria

Belgium

0.00%

EU Member Note: Based on Table 3.4

individually, it would not be possible for any member economy of the EU to be a competitive actor in the world market. But, as an integrated European continental economy, the EU has emerged as a competitor to the USA (see Table 3.8).

73


Table 3.5A.

Trade in goods and services as a percentage of world trade (constant 2000 US$, in billions) Trade in goods and services


Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports

1990

53.20 52.80 123.00 120.00 — — 16.40 15.80 42.40 33.70 — — 21.20 24.50 196.00 205.00 350.00 351.00 13.20 19.20 15.50 13.20 22.80 22.30 175.00 187.00 — — — — 12.10 11.10 — — 130.00 123.00 17.20 12.90 20.30 22.50 — 5.59 10.80 8.75 64.70 76.20 52.10 56.40 225.00 238.00

% Share

1.28 1.25 2.96 2.83 — — 0.40 0.37 1.02 0.79 — — 0.51 0.58 4.72 4.83 8.43 8.28 0.32 0.45 0.37 0.31 0.55 0.53 4.22 4.41 — — — — 0.29 0.26 — — 3.13 2.90 0.41 0.30 0.49 0.53 — 0.13 0.26 0.21 1.56 1.80 1.26 1.33 5.42 5.61

2000

95.70 96.90 195.00 188.00 — — 35.90 37.60 69.80 60.30 4.82 5.03 51.50 40.50 374.00 357.00 632.00 625.00 28.70 38.30 34.50 36.30 92.30 79.90 304.00 293.00 3.27 3.89 5.11 5.83 29.80 25.70 — — 250.00 231.00 46.40 57.30 33.60 45.50 14.30 14.80 10.70 11.40 169.00 182.00 110.00 96.50 404.00 434.00

% Share

1.20 1.22 2.45 2.37 — — 0.45 0.47 0.88 0.76 0.06 0.06 0.65 0.51 4.70 4.50 7.95 7.87 0.36 0.48 0.43 0.46 1.16 1.01 3.82 3.69 0.04 0.05 0.06 0.07 0.37 0.32 — — 3.14 2.91 0.58 0.72 0.42 0.57 0.18 0.19 0.13 0.14 2.13 2.29 1.38 1.22 5.08 5.47

(Continued on next page)

74


Table 3.5A.

United States World

(Continued )

Trade in goods and services

1990

% Share

2000

% Share

Exports Imports Exports Imports

553.00 607.00 4,150.00 4,240.00

13.33 14.32

1,100.00 1,480.00 7,950.00 7,940.00

13.84 18.64


Table 3.5B. Individual economies of the EU-25: Shares of world trade in 1990 and 2000 (%) 0.04–1.16

1.20–3.14

3.69–5.61

7.87–8.43

Czech Republic Denmark Estonia Finland Greece Hungary Ireland Latvia Lithuania Luxembourg Poland Portugal Slovak Republic Slovenia

Austria Belgium The Netherlands Spain Sweden

France Italy United Kingdom

Germany

Note: Based on Table 3.5. No data for Cyprus and Malta. Data for Estonia, Latvia, Lithuania, and Slovak Republic only for the year 2000.

Table 3.8 shows that the EU-25 with its shares of world GDP at 26.90 percent, 24.90 percent, and 21.44 percent vis-a`-vis the USA at 21.78 percent, 21.36 percent, and 20.85 percent in 1975, 1990, and 2004, respectively, has emerged as a competitive actor. In 2004, when the EU-25 became a legal economic entity, their shares of world GDP topped that of the USA. The shares of the EU-15 and of the USA are also effectively competitive. We also compare the shares of the EU-12 with that of the USA, and the level of competition is still noteworthy. The economic integration of the continent of Europe is the core of the supranational macroeconomy of the EU. As many as 11 of the EU-15 had less than 1 percent of world GDP, and consequently marginal shares of world trade. Even of the four larger ones, Germany, France, the UK, and Italy, shares of world GDP and trade were nowhere near and large enough to be competitive with those of the USA. We have shown that for successive decades in the postwar period, the

75


Table 3.6. Trade in goods and services, EU-12, EU-15, EU-25, and USA as a percentage of world trade (constant 2000 US$, in billions)

EU-12 EU-15 EU-25 USA World

Trade in goods and services

1990

% Share

2000

% Share

Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports

1,181.50 1,214.60 1,501.00 1,542.70 1,560.90 1,598.94 553.00 607.00 4,150.00 4,240.00

28.47 28.65 36.17 36.38 37.61 37.71 13.33 14.32

2,255.60 2,202.80 2,839.40 2,793.60 2,994.40 2,965.75 1,100.00 1,480.00 7,950.00 7,940.00

28.37 27.74 35.72 35.18 37.67 37.35 13.84 18.64

Note: EU-12 are Member States of the Eurosystem, EU-15 the Member States from 1995 until the 2004 enlargement, and EU-25 the current Member States of the European Union. Adjustments for intra-EU trade remains to be reported, which may not change the comparative position. Source: World Development Indicators (2005).

situation generally remains the same. One way for these economies of Europe was to integrate and become one single economy. The EU-15, the EU-12 with their euro, and now the EU-25 have competitive shares of world GDP and trade vis-a`-vis the USA. The healthy competition between these two economic units separated by the Atlantic will enrich the global economy. 3.5. The EU-25: an overview of the production map of the EU-25 One common economy of the EU must be based on one common production map. In what follows, we investigate the production map of the EU member economies in terms of the capital–labor ratio and the capital–output ratio for the three selected time periods: 1980, 1990, and 2002. Table 3.9 reports the capital–labor ratios for the 25 member economies of the EU and also of the USA. Of the 25 economies, 22 report consistent increases in the ratio over the time period under review. Greece, the Netherlands, and Hungary show the same pattern between 1980 and 2002, each having a lower ratio in 1990. Italy is an anomaly, showing a persistent decline in the ratio. The capital–labor ratio for the USA moves up from 7,145 in 1980 to 12,568 in 2002. The graphic exposition (Figure 3.4) points to the fact that with the exception of Luxembourg and Ireland, the remaining 23 EU member economies lag behind the USA by measure of capital–labor ratio. However, Ireland’s ratio is close to that of the USA. Italy, Denmark, Austria, Belgium, and the Netherlands can be viewed as the nearest group of economies approximating the ratio of the USA. The next proximate group

76

Table 3.7A.


EU-25: GDP (PPP), percentage of world GDP (constant 2000 international $, in billions) 1975

Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta The Netherlands Poland Portugal Slovak Republic Slovenia Spain Sweden United Kingdom World

121.00 161.00 2.94 — 90.30 — 70.30 856.00 1,160.00 113.00 89.10 26.80 793.00 16.20 — 8.28 1.52 242.00 — 79.30 — — 452.00 140.00 877.00 19,700.00

% Share 0.6142 0.8173 0.0149 — 0.4584 — 0.3569 4.3452 5.8883 0.5736 0.4523 0.1360 4.0254 0.0822 — 0.0420 0.0077 1.2284 — 0.4025 — — 2.2944 0.7107 4.4518

1990 180.00 231.00 9.36 — 122.00 14.00 112.00 1,280.00 1,700.00 148.00 122.00 54.00 1,240.00 25.40 42.40 12.50 3.96 348.00 295.00 141.00 57.90 — 668.00 191.00 1,270.00 33,200.00

% Share 0.5422 0.6958 0.0282 — 0.3675 0.0422 0.3373 3.8554 5.1205 0.4458 0.3675 0.1627 3.7349 0.0765 0.1277 0.0377 0.0119 1.0482 0.8886 0.4247 0.1744 — 2.0120 0.5753 3.8253

2004 242.00 299.00 16.40 183.00 160.00 17.20 144.00 1,610.00 2,150.00 225.00 155.00 149.00 1,500.00 25.70 41.40 28.60 7.03 482.00 455.00 190.00 72.40 38.40 968.00 245.00 1,700.00

% Share 0.4672 0.5772 0.0317 0.3533 0.3089 0.0332 0.2780 3.1081 4.1506 0.4344 0.2992 0.2876 2.8958 0.0496 0.0799 0.0552 0.0136 0.9305 0.8784 0.3668 0.1398 0.0741 1.8687 0.4730 3.2819

51,800.00


consists of France, Finland, Germany, the United Kingdom, Sweden, Spain, Greece, and Portugal. The remote set of economies includes Slovenia, the Czech Republic, Estonia, Hungary, the Slovak Republic, Latvia, Poland, and Lithuania, which are less industrialized and more laborintensive. Intra-EU free flow of investment and free flow of trade will enable the EU to attain competitive economic standing vis-a`-vis the USA. Free movement of labor within the EU member economies will further accentuate the process. Individually, the economies of Europe will never be able to be competitive. In Table 3.10 the capital–output ratios for the EU-25 member economies and the USA for three years in the period 1980–2002 are presented. During this time, the ratios of several economies including Spain and the United Kingdom show an upward turn, while others inclusive of Germany and Italy show a decline. Ireland, the Netherlands, and some others do not report much of a change. The United States is far out. The graphic exposition (Figure 3.5) demonstrates the situation. Italy, Germany, France,

77


Table 3.7B.

A summary of shares of world GDP

o 0.90%

0.93–2.29%

2.89–5.88%

Austria Belgium Cyprus Czech Republic Denmark Estonia Finland Greece Hungary Ireland Latvia Lithuania Luxembourg Malta Poland Portugal Slovak Republic Slovenia Sweden

The Netherlands Spain

France Germany Italy United Kingdom

Note: Compiled from Table 3.7A. Data for Czech Republic, Estonia, Lithuania, Poland, and Slovenia are for selected years.

Table 3.8.

EU-12 EU-15 EU-25 USA World

GDP (PPP) of EU-12, EU-15, EU-25, USA as a percentage of world GDP (constant 2000 international $, in billions)

1975

% Share

1990

% Share

2004

% Share

4,082.68 5,189.98 5,299.74 4,290.00 19,700.00

20.72 26.35 26.90 21.78

6,114.50 7,697.50 8,267.52 7,090.00 33,200.00

18.42 23.19 24.90 21.36

7,987.60 10,092.60 11,104.13 10,800.00 51,800.00

15.42 19.48 21.44 20.85

Note: EU-12 are Member States of the Eurosystem, EU-15 the Member States until the 2004 enlargement, and EU-25 the current Member States of the European Union. Source: World Development Indicators (2005).

Spain, the United Kingdom, Poland, and the Netherlands lead the EU-25. One integrated common economy of the EU with intraregional free flows of investment and trade will remedy the imbalance, and the EU and the USA will be the competitive economic units. Intra-EU free flows of investment and trade have been referred to. They will help progressive economic integration of the European continental economy. Foreign investments will naturally seek profitable investment opportunities in the continental market of Europe. In addition, investment

78


Table 3.9.

Capital–labor ratios of EU-25 and USA 1980

Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta The Netherlands Poland Portugal Slovak Republic Slovenia Spain Sweden United Kingdom United States

8,777 8,518 — — 6,401 — 8,788 7,269 7,733 5,184 1,734 7,275 22,876 3,356 — 9,439 — 9,195 — 3,017 — — 4,900 7,276 4,238 7,145

1990

2002

10,071 9,993 — 2,420 7,462 2,224 10,746 9,352 8,521 4,147 1,626 8,470 15,820 4,606 — 15,506 — 9,115 1,144 4,002 — 2,286 7,025 9,026 6,364 8,571

11,823 11,397 — 3,084 11,963 2,723 9,425 9,851 8,988 6,222 2,654 13,965 12,441 1,869 1,603 22,961 — 10,412 1,675 5,496 2,102 5,119 8,287 8,465 8,754 12,568

Note: K ¼ Gross capital formation, N ¼ Total labor force. No data reported for Cyprus and Malta. Lithuania only reported data for 2002. Source: Based on data from World Development Indicators (2005).

and trade will bring employment to where the people are, and free movement of labor may be less of a contributing factor. How could the rest of the world do without any economic engagement with the EU-25, which produces such a major share of world output? Our immediate focus will be on intra-EU flows of investment and trade, presented in Tables 3.11 and 3.12. Table 3.11A describes the time profile of investment flows from the EU15 to the AC-10 for 1999–2003. The shares of extra-EU-15 varied between 4 percent and 6 percent. Table 3.11B presents the share of outward stocks of foreign direct investment (FDI) to the AC-10 in 2002. In terms of stocks at end-2002, the EU-15 held h120 billion in the AC-10, 6 percent of total extra-EU-15 FDI stocks. One common macroeconomy, with one common currency, will be a strong motivating force for intraregional investment flows. This will also induce the rest of the world to follow with more FDI in the expanded market of the EU-25. The integration of the AC-10 into the EU has successfully invited FDI in this manner, with Poland, the Czech

79


Figure 3.4.

Capital–labor ratios of EU-25 and USA, 2002

25000

20000 15000 10000 5000

Ireland

Luxembourg

Italy

United States

Austria

Denmark

Belgium

France

Netherlands

Finland

Germany

United Kingdom

Spain

Sweden

Greece

Portugal

Slovenia

Estonia

Czech Republic

Hungary

Latvia

Slovak Republic

Poland

Lithuania

0

Source: Data taken from World Development Indicators (2005) Note: Cyprus and Malta did not report data and are not included

Republic, and Hungary, attracting as much as 83 percent of FDI from the rest of the EU. Table 3.11C presents FDI flows to the AC-10 from outside the EU. Table 3.11D relates to FDI inflows from the extra-EU countries to the EU by types of activity. Germany has been the major investor to the acceding countries. At the end of 2002, Germany held 23 percent FDI stocks, followed by France (11 percent), Austria (10 percent), and the Netherlands (9 percent) (see European Union foreign direct investment yearbook, 2005 (EUROSTAT)). The intra-EU investment flows from the 12 members of the Eurosystem will avoid the risk of exchange rate fluctuations once the AC-10 become full fledged members of the euro. It should be noted that between 2001 and 2003, the AC-10 welcomed some h10 billion in foreign investments from outside the EU-25 which included the USA, Canada, Japan, South Korea, Australia, and New Zealand. Table 3.11D presents data on EU FDI inflows from the extra-EU countries. The cumulative total for 1998–2002 amounted to h552 billion. The share of services in extra-EU inflows reached an average of about 82 percent, with the high point in 2002 at a value of h108 billion, some 90 percent of the total inflow. The service sector includes money and banking, other financial services, high-tech communication services, high-tech communications, and tourism. Table 3.12 presents data on intra-EU trade and shows a pattern for 1995–2004. The cross-border intra-EU trade, free from all tariffs and quantitative restrictions in any and all forms, expectedly increases albeit at

80


Table 3.10.

Austria Belgium Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta The Netherlands Poland Portugal Slovak Republic Slovenia Spain Sweden United Kingdom United States

Capital–GDP ratios of EU-25 and USA 1980

1990

2002

1,892,765 2,189,844 — — 828,604 — 1,373,846 10,942,490 18,439,708 2,263,542 2,463,456 942,420 39,776,544 1,511,086 — 74,203 — 3,292,873 — 2,308,297 — — 7,934,348 1,605,104 7,335,284 34,828,168

1,838,089 2,178,851 — 2,514,696 887,217 501,703 1,382,082 12,051,700 17,470,947 1,987,580 1,846,517 824,780 23,861,937 1,718,571 — 85,160 — 3,379,653 7,010,636 2,358,381 — 289,976 9,987,107 1,817,545 9,223,250 38,213,018

1,825,082 2,161,702 — 3,093,914 1,162,103 449,036 1,023,543 11,662,439 15,894,967 2,725,665 2,611,954 854,824 16,608,153 639,081 786,338 93,712 — 3,331,361 7,506,512 2,765,848 1,531,558 514,545 10,410,970 1,482,177 10,306,720 53,465,545

Note: K ¼ Gross capital formation. Source: Based on data from World Development Indicators (2005).

fluctuating rates. All other things being equal, the growth of the overall EU economy will expectedly follow the growth trend. 3.6. Supranational macroeconomics of the EU The emergence of the supranational macroeconomy of the EU-25 has finally become a reality. May this encourage sovereign nation economies of marginal economic dimensions to redefine their established concept of sovereignty? The supranational macroeconomics of the EU-25 has been evaluated first in terms of GDP and trade. GDP is the base for aggregate demand and aggregate supply. With relevant data of the EU-25 trade with the rest of the world, we have examined the demand for EU output of goods and services by the rest of the world, and the EU’s demand for the output produced by the rest of the world. Next, we studied the production map of the EU’s integrated single common European economy, limiting the study to the capital/labor and

81


Figure 3.5.

Capital–GDP ratios of EU-25 and USA, 2002

60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000

Italy

United States

Germany

Spain

France

Poland

United Kingdom

Netherlands

Czech Republic

Greece

Portugal

Hungary

Austria

Belgium

Sweden

Slovak Republic

Denmark

Ireland

Finland

Latvia

Lithuania

Estonia

Slovenia

Luxembourg

0

Source: Data taken from World Development Indicators (2005) Note: Cyprus and Malta did not report data and are not included

Table 3.11A.

EU-15 FDI outflows to AC-10, 1999–2003 (h, in millions)

Extra-EU-15 AC-10 Share of extra-EU-15 (%)

1999

2000

2001

2002

2003

320,307 13,034 4

435,676 20.754 5

304,466 18,969 6

133,453 5,940 4

130,767 5.854 4

Note: The AC-10 are members of the EU-25 as of May 2004. Source: European Union Foreign Direct Investment Yearbook (2005, p. 36).

Table 3.11B.

Shares of FDI outward stocks, end-2002 (%)

Czech Republic Hungary Slovakia Slovenia Poland Cyprus Malta Estonia, Lithuania, and Latvia Total Source: European Union Foreign Direct Investment Yearbook (2005, p. 36).

24 22 6 2 37 4 1 4 100

82


Table 3.11C.

Shares of the AC-10 investment flows from extra-EU-25 (%), 2001–2003

Czech Republic Hungary Cyprus Poland Slovenia Others

23 21 16 15 11 14

Total

100

Source: European Union Foreign Direct Investment Yearbook (2005, p. 52).

Table 3.11D. Extra-EU FDI inflows, net of reinvested earning by kind of activity (h, in millions)

1998 1999 2000 2001 2002 1998–2002

Manufacturing

Services

Other sectors

Total

20,105 23,390 (7,679) 13,280 11,148 60,244

64,655 76,907 109,517 92,549 108,458 452,086

2,223 5,957 32,888 (2,519) 688 39,237

86,983 106,254 134,726 103,310 120,294 551,567

Source: European Union Foreign Direct Investment Yearbook (2005, p. 92).

Table 3.12.

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Intra-EU trade flows (h, in millions), 1995–2004

Exports

% Change

Imports

% Change

1,051,698 1,130,421 1,240,898 1,344,807 1,510,323 1,781,193 1,841,814 1,864,984 1,878,543 2,022,742

7.49 9.77 8.37 12.31 17.93 3.40 1.26 0.73 7.68

995,471 1,064,953 1,161,811 1,268,876 1,438,165 1,696,692 1,737,555 1,750,002 1,781,235 1,941,181

6.98 9.10 9.22 13.34 17.98 2.41 0.72 1.78 8.98

Source: Statistical Yearbook (1958–2004, p. 92) (EUROSTAT).

capital/output ratios. The intra-EU flows of investment and trade have contributed to broaden the EU’s economic base. A positive growth trend stemming from these free flows is evident. The EU-15 countries have been investing in the new 10; it so happens this investment attracted other


83

investments from around the world to the new group of EU members. Based on relevant data on GDP and trade, the overall economic structure of the EU-25 matches that of the USA. The political integration of the EU is yet to come and the EU Constitution remains to be adopted (see Chapter 5). Even so, the progress since the ECSC in 1951 has been spectacular. For the period, intraregional macroeconomic policy based on one common monetary and fiscal policy has not been optimally operational. As the process progresses, the macroeconomic framework of the EU will become more universally appreciated (Dutta, 2001). However, a comprehensive econometric model of the single economy of the EU with dynamic properties remains to be the subject of study.


CHAPTER 4

European Central Bank and the Euro: Theory of Optimum Currency Area Revisited 4.1. One money to one Europe: one USA to one money One common money, the euro, managed by one common central bank, the European Central Bank (ECB), for 12 member economies of the European Union (EU) has been an epochal event in the eventful process of European integration. The ECB, the first-ever supranational central bank, provides the core of EU’s supranational macroeconomics. The headquarters of the ECB is located in Frankfurt, Germany. English has been adopted as its official language. On January 1, 1999, the first stage began with the euro being introduced as an accounting unit, and was uniquely defined in terms of the national currencies of each of the participating member economies and was initially valued at h1.17 ¼ $1.00. More than 300 million people in 12 EU member countries have adopted the euro as their currency. The euro has been accepted internationally as a major currency, and based on its performance for 1999–2004, the ECB has already earned observer status in the International Monetary Fund (IMF). The second stage came on January 1, 2001, when the euro became a medium of exchange. At this point, the euro began circulating along with the national currency of each member economy of the system. Prices of goods and services were quoted in both the euro and the national currency at its fixed rate, and could be paid in either currency. Many men and women of wisdom warned that the dual circulation of the old national currency and the new supranational currency could never work, but to the surprise of many, the system did not provoke any protest movement. The third and final stage came in 2002, when the euro became the exclusive currency of the Eurozone and the national currencies were systematically withdrawn from circulation. Austria, Belgium, Finland, France, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain withdrew their respective national currencies from circulation by February 2002. Germany already completed the withdrawal by December 31, 2001 to lead the process. Acceptance of payments in national currencies ceased to be obligatory, while payments in euro became so. Most national central banks (NCBs) still honor exchanges of national currency to the euro (see Table 4.1).

86

Table 4.1.


Time limits on currency exchanges with national central banks

National central bank

Exchange of banknotes until

Exchange of coins until

Belgium Germany Greece Spain France Ireland Italy Luxembourg The Netherlandsa Austria Portugal Finland

Unlimited Unlimited 01 March 2012 Unlimited 17 February 2012 Unlimited 29 February 2012 Unlimited 01 January 2032 Unlimited 28 February 2022 29 February 2012

31 December 2004 Unlimited 1 March 2004 Unlimited 17 February 2005 Unlimited 29 February 2012 31 December 2004 01 January 2007 Unlimited 31 December 2002 29 February 2012

Source: http://www.ecb.int/bc/exchange/html/index.en.html. De Nederlandsche Bank will not exchange guilders in every case. Guilders obtained from commercial activities after January 27, 2002 will no longer be exchanged. For more information, please see the website of De Nederlandsche Bank.

a

The euro has served as a unit of account, a medium of exchange, and a store of value, not only for all households and businesses in the Eurozone, but also globally, serving all the functions that a legal tender money of a sovereign nation-state economy is expected to do. Indeed, the euro has become a competing international reserve currency, and the euro–dollar exchange rate fluctuations have become a topic for much discussion for all concerned (see Section 4.5). Will one money lead to one Europe? (see Arestis et al., 1999; Issing, 1996, 1998, 1999a, b, 2001, 2002a, b, c, 2004; also Sawyer, 1999; Sleijpen, 1999; Issing et al., 2001). The experience of the USA in this regard has been in the reverse order: one political union led to one money. The Declaration of Independence was approved by the Second Continental Congress on July 4, 1776. The Treaty of Paris followed in 1783, when Great Britain formally acknowledged the independence of the USA. The Constitution was adopted in 1789 and George Washington assumed the office as the first President of the United States of America later that year. A common currency was never introduced because there was a popular distrust of one common currency under one common central bank. Individual states had their own banks who independently issued currencies and did their profitable businesses. It was not until 1791 when the Continental Congress chartered the first Bank of the United States which was expected to be modeled after the Bank of England. The charter lapsed in 1811 and a permanent NCB for the US was yet to be established. In 1816, the second Bank of the United States was chartered by the Congress and the charter was due to expire in 1836. The issue became highly political and President Jackson successfully blocked efforts to re-charter the national bank, leaving the market free and open to banks in various states. A state of economic panic followed because there

European Central Bank and the Euro

87

was no lender of the last resort. The National Bank Act of 1863, amended in 1864, proved to be another feeble attempt. From the 1870s through the 1890s, the USA experienced national challenges when the two rival groups fought for the gold and silver currencies. Conflicts between the gold- and silver-producing regions remain a part of history. Could a bimetallic currency regime be adopted and maintained successfully? By 1912, the original 13 colonies expanded to a country of 48 states, but still had no common currency under a common central bank. The absence of one common currency managed by an NCB for the United States of America continued to be a serious economic issue of concern. Finally, the system collapsed under the strain of over-speculation in money management by various state banks. The Banking Crisis of 1907 and consequent damages in the financial market became a national crisis. The National Commission on Money did a study in 1911, and its report was published the year after, and it recommended the establishment of a central bank fully in the private sector (see Walton and Rockoff, 2002). Critics pressed for a central bank with statutory power to manage the monetary policy of the United States of America. The issue became too pressing and finally Congress moved to pass the Federal Reserve Bank Act in 1913, creating the Federal Reserve System (FRS). The US dollar, managed by one central bank, the FRS, with 12 regional Federal Reserve Banks, was ultimately instituted 124 years after the political union of the USA became institutionalized in 1789. The New Deal’s banking legislation, specifically the Banking Act of 1933, reinforced the leadership role of the FRS for managing national monetary policy (see Current et al., 1983). The EU has drawn on 124 years of American experience and took steps to introduce one money with one central bank at the soonest possible opportunity. On January 1, 1999, 11 Member States of the EU-15 voluntarily surrendered their respective monetary sovereignty and adopted the euro as their common currency, managed by the ECB. Greece’s membership to become the 12th member of the ECB was approved in 2000 and Greece joined the Eurosystem on January 1, 2001. The EU-12 became the regime of one common money, the euro. True, the EU continues to struggle for a single political identity. The US experience has been costly as one examines the dire consequences of the monetary crises of the pre-Fed years. One money has given the EU a degree of economic integration, ensuring free movement of capital within the Eurozone without exposure to the risks of exchange rate fluctuations. Standardization of the money market of the Eurozone, hitherto under diverse banking laws under different NCBs, working under laws enacted by their respective national governments, has been an accomplishment. The competitive strength of the euro in the world markets has made this young currency an international reserve currency competing with the US dollar, the British pound sterling, and the Japanese yen. Will one money, the euro, be a positive contribution to the EU’s political integration?

88


4.2. The European Central Bank As early as 1962, the European Commission made its first proposal for economic and monetary union. In May 1964, a Committee of Governors of the central banks of the Member States of the European Economic Community (EEC) was formed to institutionalize cooperation among the EEC central banks. The 1970 Werner Report proposed an agenda for an economic and monetary union by 1980 (Werner Report, 1970). In April 1972, the SNAKE system for progressive convergence of the margins of fluctuations of exchange rates among the currencies of EEC Member States was established. To support the SNAKE system, the European Monetary Cooperation Fund (EMCF) was set up in April 1973. The system did not work, and in March 1979, the European Monetary System (EMS) was created. These early efforts for economic and monetary cooperation among independent sovereign Member States of the EEC proved to be of limited consequence. The Single European Act of 1986 became the answer: One Europe will have one money. In June 1988, the European Council approved of the appointment of a committee for the progressive realization of an Economic and Monetary Union (EMU). The Committee, chaired by Jacques Delors, the then President of the European Commission, consisted of the governors of the central banks of the then European Community (EC) Member States, the General Manager of the Bank for International Settlements (BIS), the President of the Banco Exterior de Espana, and Niels Thygesen, a professor of economics from Denmark. The Delors Report proposed a threephase process to achieve economic and monetary union. The first phase of EMU began on July 1, 1990, when all restrictions on the movement of capital between Member States were abolished. In December 1990, an intergovernmental conference to prepare for phases two and three of EMU were launched. The second phase of EMU began on January 1, 1994, when the European Monetary Institute (EMI) was established. The EMI was a step-in transition and had no responsibility to manage the monetary policy of the EU. The two specific tasks for the EMI were to strengthen cooperation among the central banks of the Member States, and to make preparatory arrangements to set up the European System of Central Banks (ESCB) for the creation of a single currency at the third phase. The EMI provided a forum for debates and dialogues. The third and final phase of EMU came in December 1995 when the European Council voted to name the single currency the euro, and for it to be initiated on January 1, 1999. The EMI also continued further preparatory work for the new exchange rate mechanism (Study Group of EMU, 1973; Coppel et al., 2000). In June 1997, the European Council adopted the Stability and Growth Pact that ensured fiscal discipline in support of the common monetary policy based on the euro. The Council of Finance Ministers of the 12 countries of the Eurozone (ECO-FIN) assumed the operational responsibility of working


89

with the ECB to this end. On May 2, 1998, the Council of the EU, in the composition of the Heads of State or Government of the 11 euro members, unanimously voted to approve of the euro, to be managed by one common central bank, the ECB. They also came to an understanding for the appointment of members to the Executive Board of the ECB, consisting of the President, the Vice President, and four other members. Their appointment came into effect on June 1, 1998 along with the formal institutionalization of the ECB. The ECB became operational on January 1, 1999. All Member States of the Eurosystem had to fulfill the convergence criteria as per the Maastricht Treaty which stated numerical benchmarks for the rate of inflation, budget deficit, and national debt (see Chapters 2 and 3). The ECB assumed the responsibility of managing the monetary policy of the Eurozone. The quantity of money to be supplied and the core rates of interest to be charged became the ECB’s assignment, in the context of fiscal discipline as per the compact of growth with stability. Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain were the 11 original signatories. Following a decision by the European Council on June 19, 2000, Greece became a member of the ECB on January 1, 2001. The inauguration of the ECB on January 1, 1999, the first-ever supranational central bank, became a new milestone in the process of European integration. The EMU began with the coordination of exchange rates among the national currencies of the Eurozone. The period of dual currencies circulation ended in February 2002. The ECB irrevocably fixed exchange rates by defining the value of each currency in terms of the euro (see Table 4.2). 4.2.1. The administrative structure Table 4.3 describes the ECB’s administrative structure consisting of the Executive Board, the Governing Council, and the General Council. 4.2.2. The Executive Board and the Governing Council The Executive Board consists of the President, the Vice President, and four other Members appointed by common accord of the Heads of State or Government of the Member States of the Eurozone. The Board is responsible for the current business of the ECB, insofar as implementation of the monetary policy is concerned. As such, they also assume specific powers delegated to it by the Governing Council. The Governing Council, consisting of the six members of the Executive Board and the 12 Governors of the NCBs of the 12 Member States, has a twofold task: to formulate the monetary policy of the Eurozone, and to specify guidelines and necessary instructions for their implementation. Each member of the Governing Council has one vote, and the President of

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Table 4.2.

Fixed euro conversion rates

Currency

Units of national currency for 1 Euro

Belgian franc Deutsche mark Spanish peseta French franc Greek drachma Irish pound Italian lira Luxembourg franc Dutch guilder Austrian schilling Portuguese escudo Finnish markka

40.3399 1.95583 166.386 6.55957 340.75 0.787564 1936.27 40.3399 2.20371 13.7603 200.482 5.94573

Source: http://www.ecb.int/bc/intro/html/index.en.html#fix.

Table 4.3.

The administrative structure of the ECB

I

Executive Board

President, Vice President, and four other members

II

Governing Council

President, Vice President, and four other members Governors of the 12 NCBs

III

General Council

President, Vice President, and four other members Governors of all EU NCBs

Source: ECB (2004).

the ECB exercises the tie-breaking vote, if needed. Each member casts his/ her vote independent of the interests of his/her country. With the expansion of the EU from 15 to 25 members in 2004, 10 new members will join the Eurosystem as per terms of accession. The voting rights of the members of the Governing Council will follow a new format. The six members of the Executive Board will continue to enjoy their voting rights as before. The voting rights of the NCB Governors will begin to rotate once the number of Eurozone countries exceeds 15; votes will be limited to 12 countries at a time. However, participation of all 25 NCB Governors in all Governing Council meetings has been a stipulation. 4.2.3. The General Council The General Council consists of the 18 members of the Governing Council plus the 13 Governors of the NCBs not yet part of the Eurozone as of May 1, 2004. The 13 are: the three members of the EU-15, Denmark, Sweden, and the UK; and the 10 new members admitted to the EU in 2004 who are in the process of evaluation of the convergence criteria. Since its accession, Slovenia has become eligible to adopt the euro and its membership to the


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Eurosystem is expected to follow on January 1, 2007. Since the 13 have not yet adopted the euro as their currency, the General Council has no privileges to the formulation of monetary policy of the Eurozone. The General Council is a consultative body with no voting rights. It traces its origin to the EMI. However, the 13 must share specific responsibilities regarding the policy of price stability, and necessary preparation for irrevocably fixing exchange rates of the national currencies to the euro. Indeed, each of these 13 NCBs has already been assigned their respective share of capital stock contributions to be made to the ECB (see Tables 4.4A and 4.4B). The ECB is responsible for processing the applications of the 10 new members of the EU for their membership of the Eurozone. Even the three out-members, as members of the EU Free Trade Area, belonging to one common membership of the WTO with one vote, are required to relate their respective national monetary policies to that of the Eurozone. Whether the three out-members will adopt the euro remains an open issue (see Chapter 6). The General Council provides a forum for exchange of views regarding the ECB’s monetary policy. For this broader agenda, the ECB collects relevant statistical information from all countries of the EU-25. Having a comprehensive database alone can optimize the process of information-sharing. 4.2.4. Two issues of concern: the administrative structure of the ECB The establishment of the ECB as the historic supranational central bank of the EU warranted careful resolution of fundamental issues relative to central banking. The equality of each member country and the synthetic integration of their banking laws, formulated historically by their respective governments, had to be addressed. One way to accomplish this objective was to invite all the Governors of the NCBs to serve as ex-officio members of the Governing Council. They could help convergence of banking laws of the member countries. Each Governor, with one vote, assured equality of member countries, large or small. As they voted in the meetings of the Governing Council, they were instructed to act on their independent judgment of the merit of the issue under consideration, without seeking or taking any instruction ‘‘from Community institutions or bodies, from any government of a Member State or from any other body.’’ It was also necessary to ensure that a comprehensive view of the monetary policy of the Eurozone was taken. The six members of the Executive Board, the President, the Vice President, and the four other members, jointly appointed by all member governments, are entrusted with this assignment. 4.2.5. Independence of the ECB The independence of a central bank is a critically important issue. Its authority to manage the monetary policy of an economy must be free from

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Table 4.4A. Shares of ECB capital stock (%) National Central Bank

Nationale Bank van Belgie¨/Banque Nationale de Belgique (Belgium) Deutsche Bundesbank (Germany) Bank of Greece (Greece) Banco de Espanã (Spain) Banque de France (France) Central Bank and Financial Services Authority of Ireland (Ireland) Banca d’Italia (Italy) Banque centrale du Luxembourg (Luxembourg) De Nederlandsche Bank (Netherlands) Oesterreichische Nationalbank (Austria) Banco de Portugal (Portugal) Suomen Pankki (Finland) Eurozone Cˇeska´ na´rodnı´ banka (Czech Republic) Danmarks Nationalbank (Denmark) Eesti Pank (Estonia) Central Bank of Cyprus (Cyprus) Latvijas Banka (Latvia) Lietuvos bankas (Lithuania) Magyar Nemzeti Bank (Hungary) Central Bank of Malta (Malta) Narodowy Bank Polski (Poland) Banka Slovenije (Slovenia) Na´rodna´ banka Slovenska (Slovakia) Sveriges Riksbank (Sweden) Bank of England (United Kingdom) Non-Eurozone

EU-25

June 1, 1998–Dec 31, 2003

January 1, 2004–April 30, 2004

May 1, 2004 onward

2.8658

2.8297

2.5502

24.4935 2.0564 8.8935 16.8337 0.8496

23.4040 2.1614 8.7801 16.5175 1.0254

21.1364 1.8974 7.7758 14.8712 0.9219

14.8950 0.1492

14.5726 0.1798

13.0516 0.1568

4.2780 2.3594 1.9232 1.3970

4.4323 2.3019 2.0129 1.4298

3.9955 2.0800 1.7653 1.2887

80.9943

79.6384

71.4908

1.6709

1.7216

2.6537 14.6811 19.0057

2.6636 15.9764 20.3616

100

100

1.4584 1.5663 0.1784 0.1300 0.2978 0.4425 1.3884 0.0647 5.1380 0.3345 0.7147 2.4133 14.3822 28.5092

100

Source: ECB, see also Scheller (2004, pp. 114–116).

partisan political interferences of governments in power. The fiscal policy of an economy in a pluralistic democratic form of government is managed by the executive branch, subject of course, to the approval of the legislative branch. The optimal coordination of the monetary and fiscal policies is an issue, and it can be successfully done if and only if the monetary authority of the central bank is not compromised by political influence trading. One way to ensure this has been to make the tenure of the Central Bank Heads fixed. For the ECB, the six members of the Executive Board have a fixed tenure

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Table 4.4B. Eurozone national central banks (NCBs) NCB Nationale Bank van Belgie¨/Banque Nationale de Belgique Deutsche Bundesbank Bank of Greece Banco de Espanã Banque de France Central Bank and Financial Services Authority of Ireland Banca d’Italia Banque centrale du Luxembourg De Nederlandsche Bank Oesterreichische Nationalbank Banco de Portugal Suomen Pankki-Finlands Ban Total

Capital key (%)

Paid-up capital (h)

2.5502

141,910,195.14

21.1364 1.8974 7.7758 14.8712 0.9219

1,176,170,750.76 105,584,034.30 432,697,551.32 827,533,093.09 51,300,685.79

13.0516 0.1568 3.9955 2.08 1.7653 1.2887

726,278,371.47 8,725,401.38 222,336,359.77 115,745,120.34 98,233,106.22 71,711,892.59

71.4908

3,978,226,562.17

Source: http://www.ecb.int/ecb/orga/capital/html/index.en.html.

of seven years, with no provision for re-appointment. This precludes any possibility of the six members to be tempted to trade a favor with one or another member government(s) to win a possible re-appointment. No provision for their removal by impeachment should also to be noted. Independent decision making by the members of the Executive Board is the objective. In addition, a provision has been made to prohibit any central bank funding by the public sector. The ECB has its own budget and its share capital is subscribed and paid up by the NCBs of the Eurozone, ensuring no financial interlinking with the budget and finances of the EU-25 administration. We have also noted that members of the Governing Council are required to exercise their voting privileges at Council meetings with total commitment to independent evaluation of the merit of the issue under review. 4.2.6. Capital stock of the ECB Based on population and gross domestic product (GDP) of the Member States, their respective capital shares to the ECB have been determined. NCBs of the EU Member States are constituent members of the ECB and each is required to contribute a share capital (see Table 4.4A). The shares were first calculated in 1998, pending the formal inauguration of the ECB on January 1, 1999. Following expanded membership of the EU, they were adjusted on January 1, 2004, and again on May 1, 2004. The shares of Eurozone NCBs have decreased over this period. The 12 members of the

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Table 4.4C.

Non-Eurozone NCBs (from May 1, 2004)

NCB

Capital key (%)

Paid-up capital (h)

Danmarks Nationalbank Sveriges Riksbank Bank of England

1.5663 2.4133 14.3822

6,101,159.01 9,400,451.41 56,022,530.23

Subtotal initial non-Eurozone NCBs

18.3618

71,524,140.65

Cˇeska´ na´rodnı´ banka Eesti Pank Central Bank of Cyprus Latvijas Banka Lietuvos bankas Magyar Nemzeti Bank Central Bank of Malta Narodowy Bank Polski Banka Slovenije Na´rodna´ banka Slovenska Subtotal new non-Eurozone NCBs

1.4584 0.1784 0.13 0.2978 0.4425 1.3884 0.0647 5.138 0.3345 0.7147 10.1474

5,680,859.54 694,915.90 506,384.90 1,160,010.95 1,723,656.30 5,408,190.75 252,023.87 20,013,889.41 1,302,967.30 2,783,948.38 39,526,847.30

Total

28.5092

111,050,987.95

Source: http://www.ecb.int/ecb/orga/capital/html/index.en.html.

Eurozone have fully paid up their subscriptions and the total amounts to h3,978,226,562 (Table 4.4B). As of May 1, 2004, the total capital shares contributed is h5,564,669,247. It should be noted that the three out-members of the Eurozone, Denmark, Sweden, and the United Kingdom, have been assigned ECB shares to the amount of h71,524,141, and the new members have contributed h39,526,847 (Table 4.4C). Noneuro countries are not partners to the ECB’s profit or loss. 4.2.7. The ECB’s functions The basic tasks of the ECB are: to define and implement the monetary policy of the system; to manage foreign exchange rates; to hold and manage the official foreign reserves of the Member States;

and to promote smooth operation of payment systems.

The Maastricht Treaty provided specific criteria relative to price stability, public finances relative to budget deficit and national debt as percentages of GDP, exchange rate stability, long-term interest rates, and central bank independence. The euro has not merely survived; today, it is a stable currency based on competitive economic benchmarks of shares of world output and trade (see Chapter 3, also Section 4.5). To formulate the monetary policy with one common currency, for the 12 member countries


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with their respective sovereign national governments independently managing their fiscal policies was indeed a challenging task. The transmission of monetary policy became a concern, as member economies could be struck by asymmetric shocks. Price stability naturally became the prime concern of the ECB. Indeed, price stability enhances the potential of economic growth, and thus contributes to the agenda of full employment and full capacity utilization. Price stability ensures transparency of relative prices and helps optimal allocation of limited resources. The absence of inflation normalizes the rate of interest and should enable an economy to experience a robust savingsinvestment behavioral pattern. The construction of a comprehensive price index acceptable to the euro community, and to the world at large, became the immediate task. The result is the Harmonized Index of Consumer Prices (HICP). Short-term price fluctuations can hardly be controlled; long term-price control will, of course, be exposed to too much uncertainty. For pragmatic consideration, the focus came to be on medium-term price stability. The ECB follows a two-pillar framework combining its economic analysis with its monetary analysis. Economic analysis covers the real situations in the market as the supply–demand blades of a pair of scissors operate. The monetary analysis involves the critical decisions for the central bank in an economy to anticipate market behavior, and act either to encourage the market’s rational behavior, or to restrain its irrational exuberance. To make it transparent, a numerical benchmark was essential and a 2 percent upper bound for inflation became the guideline. A zero rate of inflation can be left for abstract theoretical expositions. How could a deflationary price policy ever be helpful to the Eurozone? For several Member States, deviations from the 2 percent guideline have been accommodated as long as concerned Member States agreed to make necessary corrections. Table 4.5A shows that the Eurozone in general has approximated its inflation target in 2004 and 2005; the same is true for the remaining 13 noneuro economies of the EU-25. This was made possible by economic integration with free flow of trade and investment and free movement of labor. Selected countries, Greece and Finland in the Eurozone, and Sweden, Latvia, and Hungary in the non-Eurozone, point to the varying degrees of inflationary pressures for 2004 and 2005. The ECB has a firm commitment to price stability. Following the recent increase in the oil prices, inflationary pressure has become a global concern. On June 8, 2006, the ECB raised its key interest rate by 25 basis points to 2.75 percent. Analysts suggest that oil prices will continue to add pressure to prices and inflation, and speculate that the ECB may continue to raise its key rate by another 25 basis points to 3 percent by September 2006. Table 4.5B presents an annual average of the HICP for 2001–2005 at 2.2 percent, and the annual HICP for 2002–2005 closely approximates the

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Table 4.5A.

Harmonized index of consumer prices (HICP) (%) 2004

2005

Belgium Germany Greece Spain France Ireland Italy Luxembourg The Netherlands Austria Portugal Finland

1.9 1.8 3.0 3.1 2.3 2.3 2.3 3.2 1.4 2.0 2.5 0.1

2.5 1.9 3.5 3.4 1.9 2.2 2.2 3.8 1.5 2.1 2.1 0.8

Eurozone

2.1

2.2

Czech Republic Denmark Estonia Cyprus Latvia Lithuania Hungary Malta Poland Slovenia Slovakia Sweden United Kingdom

2.6 0.9 3.0 1.9 6.2 1.2 6.8 2.7 3.6 3.6 7.5 1.0 1.3

1.6 1.7 4.1 2.0 6.9 2.7 3.5 2.5 2.2 2.5 2.8 0.8 2.1

EU

2.1

2.2

Source: Eurostat.

target rate of 2 percent. Table 4.5C states the weights used for the HICP index in 2003 and 2004 for goods and services. The weights for 2003 were 59 percent and 41 percent, respectively. Decomposition of goods into four categories and services into five, advise readers more about the methodology used in the construction of the HICP. The weights, as expected, vary over time. In 2004, weights for goods and services were 58.7 percent and 41.3 percent, respectively. Transparency makes the acceptance of the HICP both in the EU and in the rest of the world effective. Tables 4.6A and 4.6B review the interest rate structure of the ECB for the stated time period. Table 4.6A provides the interest rates for (a) deposit facility, (b) main refinancing rate, fixed as well as variable with minimum bid, and (c) marginal lending facility. Deposit facility enables counterparties to make overnight deposits with an NCB at the pre-specified interest rate. The main refinancing rate relates to the rate of interest for regular

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Table 4.5B.

HICP in the Eurozone %

2002 2003 2004 2005

2.3 2.1 2.1 2.2

Annual average 1991–1995 1996–2000 2001–2005

3.2 1.6 2.2

Source: Eutrostat.

Table 4.5C.

Weights of the main Eurozone HICP components, 2003 and 2004

Component

2003

2004

Goods Unprocessed food Processed food Nonenergy industrial goods Energy Services Housing services Transport Communication Recreation and personal services Miscellaneous

59.1 7.6 11.7 31.6 8.2 40.9 10.4 6.3 2.9 14.9 6.4

58.7 7.7 11.8 31.0 8.1 41.3 10.4 6.4 2.9 15.0 6.6

Source: Eurostat.

open market operations, executed by the Eurosystem, by a weekly standard tender which normally has a maturity of one week. Main refinancing operations are the most significant open market operations and enables counterparties to bid for money at the fixed rate. Executed at the initiative of the ECB, they play an important role regarding money supply and management of the liquidity situation in the money market. Counterparties to the Eurosystem’s monetary policy operations are required to satisfy specific eligibility criteria relative to minimum reserve and their financial standing. At the end of 2003, there were 6,776 credit institutions in the system; only 2,243 fulfilled the eligibility criteria for participating in open market operations. Marginal lending facility and deposit facility covered many others. Marginal lending facility is a standing facility of the Eurosystem, enabling counterparties to receive overnight credit from an NCB at the pre-specified rate.

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Table 4.6A. Deposit facility

Key ECB interest rates Main refinancing rate Fixed

1999 January 01 January 04 January 22 April 09 November 05 2000 February 04 March 17 April 28 June 09 June 28 September 01 October 06 2001 May 11 August 31 September 18 November 09 2002 December 06 2003 March 07 June 06 2005 December 06 2006 March 08 June 15

Variable

Marginal lending facility Minimum bid

2.00 2.75 2.00 1.50 2.00

3.00 3.00 3.00 2.50 3.00

4.50 3.25 4.50 3.50 4.00

2.25 2.50 2.75 3.25 3.25 3.50 3.75

3.25 3.50 3.75 4.25 4.25 4.50 4.75

4.25 4.50 4.75 5.25 5.25 5.50 5.75

3.50 3.25 2.75 2.25

4.50 4.25 3.75 3.25

5.50 5.25 4.75 4.25

1.75

2.75

3.75

1.50 1.00

2.50 2.00

3.50 3.00

1.25

2.25

3.25

1.50 1.75

2.50 2.75

3.50 3.75

Source: http://www.ecb.int/stats/monetary/rates/html/index.en.html.

From June 9, 2000 through August 31, 2001, the interest rate on deposit facility moved above 3 percent, then, until December 6, 2005, the rate came down below 2 percent. The ECB has since begun raising rates in response to the US FED’s efforts to raise interest rates. The interest rates for the main refinancing and marginal lending facility follow a similar pattern. Table 4.6B presents data on interest rates for EONIA and EURIBOR. EONIA is the overnight interest rate prevailing in the euro inter-bank overnight market. The index is calculated as a weighted average of the interest rates on unsecured overnight interbank lending transactions in euros, as reported by a panel of contributing banks. EURIBOR is the rate of interest at which a prime bank lends euros to another prime bank, and the index is computed daily for inter-bank deposits with different

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Table 4.6B.

EONIA and EURIBOR

EONIA

2003 2004 2005 Monthly 2005.1 2005.2 2005.3 2005.4 2005.5 2005.6 2005.7 2005.8 2005.9 2005.1 2005.11 2005.12 2006.1

EURIBOR (1 year)

(1 month)

2.32 2.05 2.09

2.34 2.27 2.33

2.35 2.08 2.14

2.08 2.06 2.06 2.08 2.07 2.06 2.07 2.06 2.09 2.07 2.09 2.28 2.33

2.31 2.31 2.33 2.27 2.19 2.10 2.17 2.22 2.22 2.41 2.68 2.78 2.83

2.11 2.10 2.10 2.10 2.10 2.10 2.11 2.11 2.12 2.12 2.22 2.41 2.39

Source: The monetary policy of the ECB (2004). Note: Third and sixth month EURIBOR not reported.

maturities of up to 12 months. We present EURIBOR for both one year and one month. UNIBOR and EONIA follow the parallel time path. The Governing Council of the ECB sets the key interest rates of the EU discussed above to indicate the direction of the monetary policy of the ECB. Some Eurozone countries inclusive of Cyprus, the Czech Republic, Hungary, Lithuania, Poland, Slovenia, and Slovakia use Repo instruments for refinancing operations at the Repo rate (see the Appendix). 4.2.8. ECB’s money supply Tables 4.7A–4.7C relate to the ECB’s money supply. Table 4.7A presents the money supply, M1, M2, and M3, for 2003–2005 and the rate of growth of money supply for each category. To be effective, increases in money supply of each category must correspond to the economic conditions in the real market. The ECB has the responsibility of managing the money supply for the Eurosystem, given the well-specified guideline for price stability. Table 4.7B explains the system’s monetary aggregates, M1, M2, and M3. M1 is the narrowest monetary aggregate, comprising currency in circulation plus overnight deposits held with monetary financial institutions (MFIs) and central government at the post office or treasury. M2 is an intermediate aggregate that includes M1, deposits with a maximum maturity of two years, and deposits redeemable at notice up to three months. M3 is the broadest monetary aggregate with seven components: currency

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Table 4.7A.

Amount (h, in billions) 2003 2004 2005 Rate of growth (%) 2003 December 2004 December 2005 December

Money supply

M1

M2

M3

2680.60 2912.70 3417.10

5233.90 5573.60 6065.60

6141.10 6534.20 7056.80

10.60 9.00 11.30

7.60 6.70 8.40

7.10 6.60 7.30

Source: ECB.

Table 4.7B.

Eurozone monetary aggregates

Liability

M1

M2

M3

Currency in circulation Overnight deposits Deposit with an agreed maturity up to 2 years Deposits redeemable at notice up to 3 months Repurchase agreements Money market funds shares/units Debt securities issued with a maturity up to 2 years

Source: ECB.

Table 4.7C.

Percentage shares of components of M3 at end-2002 (%)

Currency in circulation Overnight deposits Deposit with an agreed maturity up to 2 years Deposits redeemable at notice up to 3 months Repurchase agreements Money market funds shares/units Debt securities issued with a maturity up to 2 years Total

6 36 19 25 4 8 2 100

Source: ECB.

in circulation, overnight deposits, deposits with an agreed maturity up to two years, deposits redeemable at notice up to three months, repurchase agreements, money market funds shares/units, and debt securities with a maturity up to two years. Table 4.7C offers a percentage distribution of M3 in terms of the seven above components at the end of 2002. To promote a benchmark, the ECB has adopted a reference value set at 4.5 percent for M3 and has not changed it since 1998. The annual rate of


101

M3 growth is considered compatible with the policy of price stability over the medium term. The rate of growth of real GDP must be a key component to take into consideration. The Governing Council of the ECB monitors the operation of the reference value and is responsible for necessary action, as and when necessary. The ECB, as the supranational central bank of the Eurozone, is required to present its Annual Report on its activities of the previous and current year to the European Parliament, the EU Council, the European Commission, and the European Council. The European Parliament may hold a general debate on the Annual Report of the ECB. In addition, protocol further requires that the ECB may be required to make necessary presentations to specific groups in legislative and executive branches of the regional administration, who share the responsibility for the supervision of monetary policy. 4.3. The Eurozone, the USA and Japan: money market structures and stock market capitalization Given the fact that the euro is a baby currency of just a few years, a comparison of the money market structure of the Eurozone with those of the USA and Japan, the first and the second largest economies in the preeuro global market, is quite revealing. Table 4.8A shows that, as percentages of GDP at end-2002, Japan leads for the total debt securities issued, and also for debt securities issued in national currency by the general government. The USA follows for the total but leads in debt securities issued in national currency by corporations, financial as well as nonfinancial. The Eurozone comes last overall, but leads Japan for debts issued in national currency by financial corporations and the USA for debt issued by the general government. The comparison at one time point limits the robustness of the findings. The specific point to note is the viability of the Eurozone as it competes with the two leading currency regimes of the world. Table 4.8A. Amounts of outstanding debt securities denominated in national currency issued by residents in the Eurozone, the USA, and Japan at end-2002 (% of GDP) Total

Eurozone USA Japan

105.4 153.7 160.1

Issued by corporations Financial

Nonfinancial

44.7 88.1 27.5

6.6 22.8 17.9

Source: ECB and Bank for International Settlements.

Issued by general government

54.1 42.8 114.8

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Table 4.8B. Number of domestic and foreign companies listed on stock markets in the Eurozone, the USA, and Japan (end of year)

Eurozone USA Japan

1990

1995

2000

2002

4,276 6,765 1,752

5,106 8,160 1,791

5,516 7,851 2,096

6,271 6,586 2,153

Source: ECB.

Table 4.8C.

Number of Eurozone monetary financial institutions (end of year)

Credit institutions Money market funds Central banks and other institutions All MFIs

2000

2002

7,464 1,604 20 9,088

6,906 1,620 18 8,544

Source: ECB.

Table 4.9.

1990 1995 1998 2000 2001 2002

Stock market capitalization in the Eurozone, the USA, and Japan (% of GDP) Eurozone

USA

Japan

21 28 76 87 72 47

53 92 141 153 136 104

90 73 54 67 56 58

Source: World Federation of Exchanges.

Table 4.8B demonstrates that the Eurozone has a comparatively large financial market. All three markets also show a positive growth trend. Table 4.8C is a simple exposition of the financial monetary institutions in the Eurozone. Table 4.9 is an evaluation of the relative position of the three currency regimes for 1990–2002 in terms of stock market capitalization as percentages of GDP. The USA continues to be in the lead, but the Eurozone has emerged as a competitor to Japan. 4.4. The economic structure: the Eurozone, the USA, and Japan Table 4.10 presents statistics relative to the economic structure of the EU-12 and offers a comparison with the USA and Japan. As of 2004, the Eurozone

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Table 4.10.

Key real economy characteristics of the Eurozone, 2004

Populationa GDP (share of world GDP)b GDP per capitab Sectors of productionc Agriculture, fishing, and forestry Industry (including constructions) Services (including nonmarket services) Unemployment rate (share of labor force) Labor force participation rate Employment rated General government Surplus (+) or deficit () Gross debte Exports of goodsg Exports of goods and servicesg Imports of goodsg Imports of goods and servicesg Exports (share of world exportsh Current account balanceg

Unit

Eurozone

USA

Japan

Millions % h thousands

309.7 15.3 24.4

294.0 20.9 34.7

127.6 6.9 25.9

% of GDP % of GDP % of GDP % % %

2.2 27.1 70.8 8.8 69.2 62.8

0.8 20.0 79.5 5.5 75.4 71.2

1.2 29.2 69.6 4.7 72.0 68.4

% % % % % %

2.7 70.6 14.8 19.5 13.5 17.8 31.1 0.6

4.4 48.7 6.9 9.8 12.6 15.0 10.4 5.7

7.0 149.2f 11.5 13.6 8.7 11.6 5.7 3.7

of of of of of of

GDP GDP GDP GDP GDP GDP

% of GDP

Source: Eurostat, IMF, European Commission, OECD, Reuters, ECB, national data, and ECB calculations. a Eurozone: annual average; United States: mid-year; Japan: October 1. b Data for United States and Japan converted into euro at OECD purchasing power Parities (PPPs). c Based on real value added. d As a ratio of the number of persons to the working age population (those aged between 15 and 64). e For Eurozone: gross government debt as defined in Council Regulation (EC) No. 3605/93. f 2003 figures. g Balance of payments data, only extra-Eurozone trade flows for the Eurozone. h IMF World Economic Outlook; the world export share of the Eurozone includes intra-area trade, which represents roughly 50% of the Eurozone’s total exports.

has a population base larger than that of the USA and of Japan. In terms of shares of world GDP, the EU-12 has emerged as a competitively large market vis-a`-vis USA. Japan, formerly the second largest economy, is now a distant third. The economic structure is generally defined by sectoral shares of GDP and the pattern is evident: the agricultural sector makes a marginal contribution to GDP, the industrial sector’s contributions to GDP vary between 20 percent and 30 percent, and the service sector is dominant. This is what we have learned to be the ideal structure of mature industrialized economies. The labor market profiles of the Eurozone, USA, and Japan are generally competitive. The unemployment rate in the Eurozone is higher with a relatively lower labor force participation rate. With the labor force participation rate at 75.4 percent and the employment rate at 71.2 percent, the

104


USA leads both the Eurozone and Japan. Much has been written about the ‘‘structural rigidities’’ in the labor market in the Eurozone. Differences in the education and social systems, and demands for leisure, a shorter work week, and early retirement in the Eurozone have become subjects of study. In 2004, data on the government account in terms of budget deficit and national debt reveal that the Eurozone and the USA remain comparable while Japan is at a competitive disadvantage The Eurozone is in the process of enlargement. Consequently, its population base and economic activity parameters will be larger. The international economic order will experience a structural change. 4.5. Euro–dollar currency regimes: the theory of optimum currency area revisited With the euro introduced at an exchange rate of h1.00 ¼ $1.17 on January 1, 1999, the euro had a 17 percent premium over the dollar. Soon the new currency depreciated, hitting a low of h1 ¼ $0.8252 on October 26, 2000 and continued to fluctuate below the US dollar until July 15, 2002. The lack of confidence in the euro, representing one integrated economy of the 12 erstwhile sovereign nation-state economies, was understandable. However, the euro soon earned global confidence, and reached its high point at h1 ¼ $1.3633 on December 28, 2004. The annual averages for 2004 and 2005 were h1 ¼ $1.24 and h1 ¼ $1.37, respectively. The dollar remains weak against the euro, continuing to be several base points higher than the initial exchange rate of $1.17. Much has been written for these euro–dollar exchange rate fluctuations. One can argue that these fluctuations are market-determined and not exposed to extraeconomic factors (Dutta, 2005). Ranking economists have joined the debate and they argue that the depreciation of the dollar will help correct the imbalance in the US current account. Other things being equal, following the neoclassical theory of international trade, based on one or another form of the theory of comparative advantage, will eventually contribute to this desired outcome. However, other things are seldom equal. One important factor warrants careful attention. Of the 191 sovereign nation-state economies who are members of the United Nations, one economy is too dominant in terms of its shares of world output and trade and the international market ceases to be competitive (see Chapter 3). Given the fact that overwhelmingly large number of sovereign nation-state economies of the world have only marginal shares of world output and trade to their respective accounts, and that a small number of countries command a disproportionately larger share of world output and trade, the world market is tilted against the majority of the member economies. They become price-takers with no ability to be competitive actors in the world market (Dutta, 1962, 1965, 1976; Linnemann, 1966).


105

One may consider yet another interesting aspect relative to the imbalance in the US current account. Will domestic dollar consumers in the USA cut down their consumption of European imports as they become increasingly more expensive? So far, American consumers have not been so responsive to the market. Demand for imports has a complex value of superiority, real or assumed, and price-inelasticity of imports remain to be carefully considered. Of course, in the long run, the theory is expected to prevail. Economists are familiar with the statement that in the long run, we all are dead. The presence of the twin deficits, the current account deficit and the budget deficit, certainly adds to the complexity of the current economic situation of the USA and the value of its dollar. The huge budget deficit and the growing national debt, much of which is owned by foreigners, certainly limit the potential of optimum operational success of exchange rate fluctuations. The situation is further aggravated by the fact that much of the US budget deficit and national debt can be attributed to our military efforts around the world. Protection against terrorism has become an issue of much concern since the tragic events of September 11, 2001. If the deficit was incurred to further augment the productivity of the US economy, it would have a different impact and confidence in the US economy and its dollar would have remained unshaken. Given the economic relationship between USA and East Asian countries, Asian Central Banks will continue to hold, but limit acquisitions of new dollar reserves until the euro market fully emerges. However, I argue that the dollar has not lost its muscle (Norris, 2005). Indeed, the dollar does have its muscle, defined in terms of its shares of world output and trade. Now a competing currency, the euro, with a relatively stronger muscle, as defined by its shares of world output and trade in recent years, offers a challenge. It is instructive to note that in 2004, based on relevant data in constant 2000 US dollar, the US share of world output at 30.93 percent compares with the EU-25 share of 25.12 percent. However, based on GDP in PPP (2000 international dollar), in the same year, 2004, the EU-25 share at 21.44 percent compares with the USA’s share at 20.85 percent (see Tables 3.2A and 3.3A). Obviously, the USA and the EU-25 have highly competitive shares of world output. The latest figures for trade are far more revealing. In 2000, the US share of world imports was 18.64 percent while the EU-25 share was 37.35 percent. For world exports, the US share was 13.84 percent compared with the EU25 share of 37.67 percent (see Table 3.6). However, the trade data warrants adjustment for intra-EU trade, thought it does not change the comparative economic positions. As we proceed to limit the comparison of the dollar and euro currency regimes based on the members of the Eurozone, we may review the economic magnitude of the EU-12. Based on GDP in PPP data of 2004, it is noted that individual member countries have marginal shares of world GDP, and together, the EU-12 represents some 72 percent of the GDP of

106


Table 4.11.

Austria Belgium Finland France Germany Greece Ireland Italy Luxembourg The Netherlands Portugal Spain USA

GDP (PPP), 2004 (%): The Eurozone and USA Share of world

Share of EU-25

0.47 0.58 0.28 3.11 4.15 0.43 0.29 2.90 0.06 0.93 0.37 1.87 20.85

2.18 2.69 1.30 14.50 19.36 2.03 1.34 13.51 0.26 4.34 1.71 8.72

Note: Based on Tables 3.4 and 3.7A.

the EU-25 (Table 4.11). As per the terms of accession, the new 10 members, admitted to the EU in 2004, as well as the two candidate countries expected to join in 2007, are applicants for membership to the Eurozone. Denmark, Sweden, and the UK, will expectedly come to reexamine their respective positions of declining to adopt the euro in light of the expansion of the EU and the euro. Comparisons between the euro and dollar’s economic positions, will then be truly useful. Our process of learning what we have not yet learned must continue to progress. However, the real challenge will be to unlearn a great deal of the preconceived values we began with in the pre-EU world order. I have argued that the absence of a well-structured intraregional macroeconomic core will not help an individual sovereign nation-state-based economy to optimize the economic gains for its micro-actors, households and business units, since most of these individual economies are limited by marginal values of the two parameters, its shares of world GDP and trade. Its competitive functioning as an open economy thus faces a serious bottleneck. I have further argued that an intraregional macroeconomic core within a global macroeconomic system is in order (see Chapter 8, also Dutta, 2000a, b, 2002a, b, c, 2005). We also need to take note of two important factors contributing to the structural changes in the global market. The first factor occurred on August 15, 1971, when the fixed gold value of the dollar at US$ 35 per ounce of pure gold was discontinued. Charles Kindleberger (1985) made an eloquent exposition in his address to the American Economic Association when he stated that it was too much for the dollar to bear the burden of military and economic security of the free world for an indefinite period. Some wrongly argued that it would be an occasion to the return to the gold standard. What we got was the Group of 5, now Group of 8, which elects


107

to expand itself as needed to discuss economic cooperation among the select group of economies. The second factor to note is the fact that the traditional concept of sovereignty, both political and economic, has radically changed (Dutta, 1995a, b, c). The Soviet Union has collapsed and the sovereign nations in Western Europe have progressed to map out one economy on to one geography to expand the EU. The concept of continental or hemispheric economic regionalization may be the substantive basis for globalization, anchored in the concepts of free flow of trade, free flow of investment, and free movement of labor. Ideally, each continental regional group will have competitive shares of world output and trade to be competitive actors in the global market. To appreciate the emerging new paradigm of the international economic framework in the post-Cold War world, it is helpful to revisit the theory of Optimum Currency Areas (see De Grauwe, 1997). Robert Mundell taught us the theory of optimum currency area in his seminal work in 1961 (Mundell, 1961, 1970, 1999, 2003). Of course, until 1971, the US dollar was the only global currency and it still remains the most valued international reserve currency. The concept of an optimum currency area can help explain the new continental economic regionalism. Okita (1989) sought to explain policy approaches in the framework of economic regional communities in the context of global economic cooperation, and thus posed the question if we will have one world or several. The EU is an integrated continental economic unit with competitive shares of world output and trade. The euro has become a competitive currency and it will become stronger when the 10 new members meet convergence criteria to join and the three out-members can no longer resist its lure. Even limiting our discussion to the EU-12 of the Eurozone, it is clear that the euro and dollar have become two highly competitive currencies. Since we have shown that a currency’s competitive strength depends on the volume of goods and services its economy produces and its share of world trade, let us define the optimality of a currency by its competitive shares of world output and trade, and not by its geographical area or the size of its population (see also Hesse, 1993; Letiche, 1993, 2000; Issing, 1996, 1999a, b, 2001, 2002a, b, c; Temperton, 1998; Obstfeld, 1999; Welsh, 1999; Vanthoor, 1998, 1999, 2002; Dutta, 2004). Let us turn to the subject of euro–dollar exchange rate fluctuations. Table 4.12A presents share of official foreign exchange holdings for selected years since the introduction of the euro in 1999 as an international currency. For all countries, the US dollar and the Japanese yen have lost some ground, but the British pound sterling improved its share of official world currency reserves. For developing countries, we see a parallel movement in reserve holdings, but for industrialized countries, all three currencies have lost some market shares. The key point, however, is that for all categories, the euro has been steadily gaining ground. For all countries, the

108


Table 4.12A.

Share of official foreign exchange holdings in selected currencies (end of year)

Currency

1999

2000

2001

2002

2003

2004

All countries US dollar Japanese yen Pound sterling Euro

71.0 6.4 2.9 17.9

70.5 6.3 2.8 18.8

70.7 5.2 2.7 19.8

66.5 4.5 2.9 24.2

65.8 4.1 2.6 25.3

65.9 3.9 3.3 24.9

Industrialized countries US dollar Japanese yen Pound Sterling Euro

73.5 6.7 2.2 16.1

72.5 6.5 2.0 17.1

72.7 5.6 1.9 18.0

68.9 4.4 2.1 22.4

70.5 3.8 1.5 22.1

71.5 3.6 1.9 20.9

Developing countries US dollar Japanese yen Pound sterling Euro

68.2 6.0 3.7 19.9

68.2 6.0 3.6 20.6

68.6 4.9 3.6 21.8

64.0 4.7 3.8 26.1

60.7 4.4 3.9 28.9

59.9 4.3 4.8 29.2

Source: IMF Annual Report (2005).

Table 4.12B.

Percent changes in euro and dollar reserve holdings

All countries Industrialized countries Developing countries

US dollar

Euro

7.18 2.72 12.17

39.11 29.81 46.73

Note: Based on data from Table 4.12A.

dollar’s share of international foreign exchange holdings have declined from the high of 71.0 percent in 1999 to 65.8 percent in 2003. For the euro, its share has moved up from the low of 17.9 percent in 1999 to a high of 25.3 percent in 2003. Given its shares of world output and trade, the euro is a serious challenge to the dollar’s role in the global economy. Table 4.12B makes this point quite explicit. The Japanese and British economies do not have competitive shares of world output and trade and their currencies, the yen and the pound sterling, are not competitive vis-a`-vis the US dollar and the euro. Several factors warrant careful review. While the euro is the official currency of 12 members of EU-15, UK, Denmark, and Sweden continue to remain the three out-members, and persist in using their respective national currencies. As full members of the EU, they enjoy advantages of free flow of trade, free flow of investment, and free movement of labor in the integrated EU market. This cannot continue indefinitely; sooner or later the


109

three will have to opt for the euro or leave the EU. We have reasons to believe that they will elect to join the Eurosystem. In the WTO, the EU is already recognized as a single member represented by one representative with one vote. One can also argue that the pound, krone, and krona are sheltered currencies and are not truly free-floating currencies in the global market. A suggestion to stabilize euro–dollar exchange rate involves immediately granting the ECB full membership to the IMF. However, the principle of competition between the euro and the dollar economic regimes alone will optimize global economic gains, while a plan to establish a euro–dollar hegemony will be counterproductive. The concept of an ‘‘Anglo-Saxon’’ currency will provoke a new currency debate, based on race and caste, hardly an optimal option. In the financial markets, references to a dollar market consisting of the American, Australian, and New Zealand dollars are already in existence (Grimes et al., 2000). The Japanese yen will have a different framework until an Asian economic community is formally instituted. The new 10 members of EU will have to go through a process to become full members of the Eurozone. As of May 16, 2006, Slovenia has fulfilled the convergence criteria to join the Eurosystem. The 10 have a deep interest in joining the Eurozone since that will promote the free flow of investment from the rest of the EU since such investments will be free from barriers and exchange rate fluctuations. The rest of the EU will also be a market for their products and the unrestricted intra-EU trade will facilitate the process. The Europeanization of Europe will be an economic reality. Once the process is completed, the EU with its commanding shares of world output and trade will be a great challenge to the US dollar. The rest of the world will have to be engaged in economic activities, trade as well investment, with both the EU and US, and they will need to hold both currencies as their respective official reserve shares. It seems likely that the share of official reserves held in dollars will continue to decline, while the share invested in the euro will continue to increase. Furthermore, the ECB is not yet a member of the IMF. Notwithstanding its present ‘‘observer status,’’ the ECB will not be a member until the EU becomes a true political entity with one flag, one constitution, and one Chief Executive. The EU is currently engaged in adopting a constitution and the process will ensure the EU’s political integration (see Chapter 5). Let us note that a great deal of functional integration for common environment, public health, terrorism and security, and competitive market cooperation has already been accomplished. The EU has appointed an Executive Head, established a European Parliament and Judiciary, but the core issue is whether the government of each member country will completely surrender its respective executive, legislative, and judicial powers to the EU Government. For the ECB, the voluntary surrender of the monetary sovereignty of 12 Member States under a pact of growth with stability is to be taken note of. They adopted the pragmatic design of divisibility of sovereignty so that fiscal

110


Table 4.13A.

Average monthly exchange rates: Euro and USD

Date

USD to EUR

EUR to USD

Date

USD to EUR

EUR to USD

Jan 1999 Feb 1999 Mar 1999 Apr 1999 May 1999 Jun 1999 Jul 1999 Aug 1999 Sep 1999 Oct 1999 Nov 1999 Dec 1999 Jan 2000 Feb 2000 Mar 2000 Apr 2000 May 2000 Jun 2000 Jul 2000 Aug 2000 Sep 2000 Oct 2000 Nov 2000 Dec 2000 Jan 2001 Feb 2001 Mar 2001 Apr 2001 May 2001 Jun 2001 Jul 2001 Aug 2001 Sep 2001 Oct 2001 Nov 2001 Dec 2001 Jan 2002 Feb 2002 Mar 2002 Apr 2002 May 2002 Jun 2002 Jul 2002 Aug 2002 Sep 2002

0.8626 0.8935 0.9197 0.9334 0.9417 0.9625 0.9666 0.9425 0.9535 0.9340 0.9681 0.9894 0.9879 1.0164 1.0355 1.0568 1.1011 1.0534 1.0636 1.1044 1.1469 1.1699 1.1712 1.1115 1.0647 1.0843 1.0990 1.1207 1.1411 1.1716 1.1623 1.1103 1.0964 1.1041 1.1255 1.1213 1.1310 1.1493 1.1421 1.1290 1.0910 1.0478 1.0075 1.0226 1.0207

1.1599 1.1198 1.0879 1.0719 1.0625 1.0395 1.0354 1.0615 1.0494 1.0713 1.0336 1.0113 1.0131 0.9844 0.9663 0.9470 0.9089 0.9499 0.9408 0.9060 0.8727 0.8561 0.8546 0.9007 0.9400 0.9229 0.9109 0.8929 0.8771 0.8540 0.8610 0.9013 0.9126 0.9062 0.8891 0.8922 0.8847 0.8705 0.8759 0.8862 0.9171 0.9552 0.9931 0.9784 0.9801

Oct 2002 Nov 2002 Dec 2002 Jan 2003 Feb 2003 Mar 2003 Apr 2003 May 2003 Jun 2003 Jul 2003 Aug 2003 Sep 2003 Oct 2003 Nov 2003 Dec 2003 Jan 2004 Feb 2004 Mar 2004 Apr 2004 May 2004 Jun 2004 Jul 2004 Aug 2004 Sep 2004 Oct 2004 Nov 2004 Dec 2004 Jan 2005 Feb 2005 Mar 2005 Apr 2005 May 2005 Jun 2005 Jul 2005 Aug 2005 Sep 2005 Oct 2005 Nov 2005 Dec 2005 Jan 2006 Feb 2006 Mar 2006 Apr 2006 May 2006 Jun 2006

1.0197 0.9981 0.9808 0.9420 0.9279 0.9274 0.9212 0.8658 0.8569 0.8787 0.8968 0.8893 0.8546 0.8541 0.8137 0.7940 0.7927 0.8154 0.8327 0.8335 0.8233 0.8149 0.8199 0.8194 0.7997 0.7692 0.7466 0.7603 0.7690 0.7575 0.7727 0.7878 0.8219 0.8306 0.8135 0.8150 0.8310 0.8483 0.8438 0.8273 0.8368 0.8320 0.8169 0.7836 0.7893

0.9812 1.0023 1.0202 1.0621 1.0780 1.0788 1.0862 1.1559 1.1677 1.1387 1.1159 1.1253 1.1706 1.1716 1.2296 1.2601 1.2621 1.2269 1.2015 1.2003 1.2151 1.2278 1.2201 1.2208 1.2511 1.3006 1.3399 1.3160 1.3009 1.3207 1.2945 1.2699 1.2171 1.2044 1.2297 1.2276 1.2037 1.1793 1.1856 1.2093 1.1955 1.2023 1.2247 1.2766 1.2674

Source: OANDA.

111


Table 4.13B. Date 1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001 2001 2002 2002 2002 2002 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Average quarterly exchange rates: Euro and USD USD to EUR

EUR to USD

0.8919 0.9458 0.9542 0.9638 1.0132 1.0707 1.1045 1.1506 1.0826 1.1444 1.1233 1.1168 1.1405 1.0893 1.0169 0.9996 0.9326 0.8811 0.8882 0.8407 0.8009 0.8298 0.8180 0.7719 0.7623 0.7941 0.8197 0.8410 0.8319 0.7965

1.1226 1.0395 1.0494 1.0113 0.9663 0.9499 0.8727 0.9007 0.9109 0.8540 0.9126 0.8922 0.8759 0.9552 0.9801 1.0202 1.0788 1.1677 1.1253 1.2296 1.2269 1.2151 1.2208 1.2972 1.3124 1.2606 1.2205 1.1897 1.2026 1.2565

Source: OANDA.

policies could be effectively tailored to the ECB’s monetary policy. The successful results of this experience can be a learning model for the voluntary surrender of political sovereignty by the EU member countries to facilitate the progress to political integration. Once the process has been completed, the ECB will be a powerful member of the IMF and the World Bank with full voting rights (see Chapter 6). We have analyzed the euro–dollar exchange rates in Table 4.13A (monthly) and Table 4.13B (quarterly). Figures 4.1A and 4.1B are graphic expositions of the corresponding data. It is evident that the euro and the dollar are two competing currencies. As we have discussed before, following the initial period, the euro experienced a significant period of depreciation. The turning point came in November 2002. The period of the euro gaining confidence in the world market continues. However, the US dollar has resisted its downward pressure. It is my hypothesis that based on

2003 Q4 2004 Q1 2004 Q2 2004 Q3 2004 Q4

2005 Q4 2006 Q1 2006 Q2

USD to EUR EUR to USD

2005 Q3

USD to EUR

2005 Q2

EUR to USD

2005 Q1


2003 Q3

Average monthly exchange rates, USD and EUR

2003 Q2

Figure 4.1A.

2003 Q1

1.6000

2002 Q4

Time

2002 Q3

1.4000

2002 Q2

1.2000

2002 Q1

1.0000

2001 Q4

0.8000

2001 Q3

Note: Based on Table 4.13A

2001 Q2

Time

Note: Based on Table 4.13B

2001 Q1

0.6000

2000 Q4

Average quarterly exchange rates, USD and EUR

2000 Q3

0.4000

2000 Q2

Jan-99 Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03 Jul-03 Oct-03 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06

0.2000

0.0000

Figure 4.1B.

1.4

1.2

2000 Q1

Exchange Rate 1

1999 Q4

0.8

1999 Q3

0.6

1999 Q2

0.4

0.2

0 1999 Q1

112

Exchange Rate

113


Table 4.14.

Quarterly USD/Euro exchange rates and US/EU GDP based on volume and price indices

Quarter

USD to euro exchange rate

USA/EU GDP ratio based on volume index

USA/EU GDP ratio based on price index

1999.1 1999.2 1999.3 1999.4 2000.1 2000.2 2000.3 2000.4 2001.1 2001.2 2001.3 2001.4 2002.1 2002.2 2002.3 2002.4 2003.1 2003.2 2003.3

0.8919 0.9458 0.9542 0.9638 1.0132 1.0707 1.1045 1.1506 1.0826 1.1444 1.1233 1.1168 1.1405 1.0893 1.0169 0.9996 0.9326 0.8811 0.8882

1.0691 1.0705 1.0706 1.0779 1.0691 1.0764 1.0708 1.0695 1.0613 1.0586 1.0534 1.0594 1.0678 1.0674 1.0741 1.0766 1.0817 1.0937 1.1087

0.9925 0.9944 0.9972 1.0009 1.0047 1.0084 1.0102 1.0092 1.0073 1.0073 1.0063 1.0054 1.0045 1.0036 1.0036 1.0035 1.0053 1.0026 1.0009

Source: Quarterly National Accounts, OECD (2003, No. 4); OANDA, see also Dutta (2005).

Figure 4.2A.

US/EU-12 GDP ratios by volume index and USD/euro exchange rates, 1999.1–2003.3

1.4 1.2 1.0 0.8 0.6 0.4 0.2

Note: Based on Table 4.14

2003.3

2003.2

2003.1

2002.4

2002.3

2002.2

2002.1

2001.4

2001.3

2001.2

2001.1

2000.4

2000.3

2000.2

2000.1

1999.4

1999.3

1999.2

USA/EU-12 GDP Ratio Based on Volume Index USD to Euro Exchange Rate

1999.1

0.0

114


Figure 4.2B.

US/EU-12 GDP ratios by price index and USD/euro exchange rates, 1999.1–2003.3

1.4 1.2 1 0.8 0.6 0.4 0.2 USA/EU-12 GDP Ratio Based on Price Index USD to Euro Exchange Rate

2003.3

2003.2

2003.1

2002.4

2002.3

2002.2

2002.1

2001.4

2001.3

2001.2

2001.1

2000.4

2000.3

2000.2

2000.1

1999.4

1999.3

1999.2

1999.1

0

Note: Based on Table 4.14

shares of world GDP and trade, these two currencies are now the two optimum currencies. Indeed, the theory of optimum currency area warrants a definition. In Table 4.14, we further analyze the competitive position of the two currencies in terms of their relative GDP ratios based on both volume and price indices. Figures 4.2A and 4.2B offer an exposition in support of my hypothesis.

4.6. Revisiting the theory of optimum currency area We have reviewed the standing of the ECB as the central bank of the Eurozone and the emergence of the euro since 1999 as a competitive global currency. Politics is not just the art of the possible, but as Jean Monnet taught us, it is also the art of making possible tomorrow what cannot yet be done today (Monnet, 1978; see also Hesse, 1993; Letiche, 1993, 2000; Issing, 1996, 1999a, b, 2001, 2002a, b, c; Temperton, 1998; Obstfeld, 1999; Welsh, 1999; Vanthoor, 1998, 1999, 2002; Dutta, 2004).

Appendix Official refinancing operation rates

Official deposit rates

Other official rates

Eurozone DK SE UK ISL NO CH BG CY CZ EE HU LT LV MT PL RO SI SK

Marginal lending facility Certificates of deposits Lending Repo Overnight loans discount rates Overnight lending Advances on pawn — Marginal lending Lombard — Overnight collateralized loan Overnight loans Lombard Standby (collateralized loan) Lombard Discount Lombard Discount

Main refinancing operations — Repo — Repo yield — — — Repo Repo – 2 weeks — Repo – 1 day — Refinancing Central intervention Repo Lombard Representative interest rate NBS repo

— Discount Discount/reference — — — — Basic interest rate Reverse repo –– — Reference rate – 2 weeks Liquidity loans Repo loans – 7 days Discount Discount — –– —

TR US JP

Advance Fed funds Discount

Repo or intervention rate — —

Deposit facility Deposit Deposit — — Sight deposit — — Overnight deposit Discount — Deposit – 1 day — Deposit Overnight deposit Deposit Deposit Overnight deposit Overnight sterilization repo rate — — —


Official lending rates

Discount Discount —

Source: http://europa.eu.int/estatref/info/sdds/en/exint/centrt_sm.htm. 115


CHAPTER 5

A Constitution for Europe 5.1. One Europe, one government, one constitution The Treaty drafting the Constitution for Europe was signed in Rome on October 29, 2004. The Constitution provides for a federal form of government. Signatories to the Treaty included all Heads of State or Government of the 25 Member States of the European Union (EU). As per the EU principle of consensus, it requires unanimous approval by all Member States for the Constitution to be effective. The EU is one integrated economy with one common membership to the World Trade Organization (WTO) with one vote. Citizens of the EU enjoy freedom of movement and may elect to reside in the geographical territory of any country of the EU. Twelve Member States of the EU have adopted one common currency, the euro, under one European Central Bank (ECB). The ECB has earned observer status at the International Monetary Fund (IMF) and the euro has become an international reserve currency competing with the US dollar. With the third largest population base of the world, the EU commands competitive shares of world output and trade (see Chapters 2 and 4). The EU has set up a well-structured intra-EU administrative system with executive, legislative, and judicial branches. The EU Council assembles with the presence of the Heads of States or Government, Monarchs, Presidents, Chancellors, and Prime Ministers of the Member States. The EU Council is a forum for these 25 Heads of State, each representing a country with its own national flag and constitution. There is no single executive head to represent the entire EU. The EU has also constituted several special committees with specific assignments. All EU provisions are agreed upon by Treaties and Agreements (see Chapter 2). The pressing need for one constitution and one flag for the EU is becoming urgent. Toward meeting circumstantial needs, ad hoc arrangements for functional integration have been in progress. There has been a prolonged debate in this regard, but indeed, one Europe as one political entity is to be the order of the day.

5.1.1. A confederation or a federation? Will Europe become a federation of states or a confederation of states? Indeed, the debate goes back to April 18, 1951, when the European Coal

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and Steel Community (ECSC) was established in Paris. The ECSC Treaty provided for a High Authority with supranational powers, and Robert Schuman, the French Minister for Foreign Affairs from 1948 to 1953, stated that this was just the first step toward a broader agenda establishing ‘‘a wider and deeper community between countries long opposed to one another by bloody conflicts.’’ The ECSC, he continued, would build ‘‘the first concrete foundation of a European federation y’’ (see Pryce, 1973). In his Memoirs of the years 1945–1953, the German Chancellor Konrad Adenauer writes, ‘‘this Plan was to be the beginning of a federal structure of Europe’’ (see Bainbridge and Teasdale, 1995). However, in 1962, the French President Charles de Gaulle characterized the concept of a united Europe ‘‘a myth.’’ He saw it as l’Europe des Etats, a coalition, rather a confederation, of European states and closed the subject to further discussion. On July 3–4, 1964, French and German leaders met to consider the possible reopening of the debate for a political union of Europe. Economic integration of the EU continued to make rapid progress and the case for the political integration progressively became pressing issues. We have stated earlier that economic integration led the EU leadership to search for ‘‘a zone of monetary stability’’ (Chapter 2). The risk of exposure to intraEU exchange rate fluctuations, and the domination of the US and its dollar in the global market became subjects of discussion. A Swiss commentary on one common European currency in a French newspaper drew much attention (see Vanthoor, 1998, 1999, 2002). The Italian Foreign Minister, Aldo Moro, wrote in November 1969 that ‘‘economic construction’’ in Europe must be followed by ‘‘political construction’’ and invited the EU leadership to take the necessary actions (Bulletin of the European Communities, 1969). In 1970, the French President Georges Pompidou talked of European political union in the context of a European confederation. The plans for the European Monetary Union which would facilitate the intra-EU free flow of investments without the risks of exchange rate fluctuations were being prepared. One money managed by one central bank became the focal point as the transfer of sovereign monetary powers of the Member States to a central monetary institution, a supranational central bank, would certainly constitute a partial political union. We have discussed earlier the concept of divisibility of sovereign authority as 12 Member States voluntarily surrendered their respective monetary sovereignty to join the Eurosystem (see Chapter 4). In 1971, Pompidou argued for a confederation of European states with a government whose decision would apply to all Member States since the ad hoc institutional arrangements of the EU were not permanent solutions. The Dutch Secretary of Foreign Affairs Hans de Koster pointed out that the concept of confederation could at best be an intermediate stage. Ultimately, he argued, that a federation of European states was needed. A federation with proper institutional provisions would optimize the


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economic and political gains for all the people of the continent of the EC. Finally, the European federation became the agenda. A federation or a confederation was the debate when the United States of America drafted its Constitution during the years 1776–1787. Should the national government remain ‘‘a relatively weak and unimportant force,’’ each state remaining ‘‘virtually a sovereign nation?’’ In November 1777, the drafting committee came out with its proposal for the Articles of Confederation, which would limit the power of the national government to the conduct of war and peace, management of foreign policy and preparation of the national budget inclusive of appropriations, debt, and issuance of money. It could not regulate trade, draft troops, or levy taxes directly. The President of the United States would not be a strong executive authority and was to act as the presiding officer at the sessions of the Congress. Congress itself was to overview the execution of the laws it enacted, and for this it would appoint an executive committee consisting of 13 members, one from each of the 13 constituent colonies. Provisions for the appointment of ad hoc functional committees were also proposed. Nine of the 13 states, a two-thirds majority, were to approve any important measure before Congress could vote on it. For the ratification and any amendment to the Articles of Confederation, all 13 state legislatures would have to approve. By its ratification in 1781, the Articles provided for each state retaining its sovereignty, freedom, and independence. Each state would be represented in the Congress by no less than two and no more than seven members, each state having one vote. Based on the value of their respective land, each state was to contribute revenue to the ‘‘Common Treasury’’ of the national government. By the late 1780s, critics of the Articles of Confederation forcefully argued that if adopted, it would expose America to instability with an unstable national government. They were able to convince the American people to consider a federation with a written constitution upheld by three branches of government, executive, legislative, and judicial. These branches were equal but independent and provided a system of checks and balances to ensure the individual citizen’s right to freedom. The Constitution went into effect in 1789 and the United States of America became a federation of 13 states, becoming 50 states today. The US Constitution has proved to be an enduring document capable of accommodating successive amendments (see Current et al., 1983). The Treaty drafting the Constitution for Europe, signed in Rome on October 29, 2004, provides for a federal form of government subject to the approval of all 25 Member States of the EU (see The Constitution for Europe, 2005). Fifteen Member States, Austria, Belgium, Cyprus, Estonia, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, Slovakia, Slovenia, and Spain, have approved of the EU Constitution so far. Following the negative referendum in France and the Netherlands in 2005, the EU Constitution is said to be ‘‘on ice.’’ It suggests that the document is in abeyance. As many as eight Member

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States, the Czech Republic, Denmark, Finland, Ireland, Poland, Portugal, Sweden, and the UK, have elected to postpone the decision (see Table 5.1). It is interesting to recall that the USA adopted its Constitution in 1789 by a majority vote because the unanimous decision required to pass the Articles was unrealistic. If the EU adopted the majority rule, the EU Constitution, approved by 15 of the 25 Member States, would have already been adopted. 5.2. The EU Constitution The draft Constitution as approved by a Treaty, signed in Rome on October 29, 2004, begins with due recognition of the work accomplished by the series of Treaties and Agreements establishing the EU (see Chapter 2). Proud of their respective national identities and history, the Constitution notes in its preamble that the peoples of Europe are resolved to forge ‘‘a closer unity and a common European identity.’’ The EU is a unique paradigm of ‘‘unity in diversity,’’ which will remain the motto of the EU. The individual’s ‘inviolable and inalienable rights’’ for freedom, democracy, equality, the rule of law, and respect for human rights are proclaimed to be the core message of the Constitution (see Chapter 1). In what follows, I refer to a select group of issues discussed and defined by the EU Constitution. 5.2.1. Economic growth and price stability The objectives with a specific reference to economics cover balanced economic growth with price stability, a highly competitive social market economy aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment. Europe’s priority for environmental quality merits special attention (see Chapter 1). The euro will be the currency of the Union, the Constitution states. Indeed, the currency which was inaugurated on January 1, 1999 has become the common currency of 12 Member States and has proved its competitive economic strength (see Chapter 4). It should be noted that the economic agenda places its focus on balanced growth and price stability, a combination of fiscal and monetary policy of the Union. The policy of balanced growth and price stability will accommodate the policy of full employment. The Constitution states that cooperation between the Union and Member States will help maintain a high rate of employment, but it should be noted that a high rate of capacity underutilization will compromise the rate of growth. Member States shall conduct and coordinate their economic policies toward achieving the common economic policy of the Union. On the recommendation of the European Commission, the European Council shall develop an integrated economic plan for the Members States. The Council shall monitor economic developments in the Member States, thus ensuring ‘‘a closer cooperation of the economic policies and sustained convergence of the economic performances of the Member States.’’

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Table 5.1.

Adoption of the EU constitution

Member state

Procedure

Date scheduled

Austria

Parliamentary

Belgium

Parliamentary

Cyprus

Parliamentary

Czech Republic

Referendum

Denmark

Referendum

Estonia

Parliamentary

Finland

Parliamentary

France

Referendum

Germany

Parliamentary

Greece

Parliamentary

Hungary

Parliamentary

Ireland

Parliamentary+referendum

Italy

Parliamentary

Latvia

Parliamentary

Lithuania

Parliamentary

Luxembourg

Parliamentary+consultative

Approval by the Nationalrat 11 May 2005 Approval by Bundesrat 25 May 2005 Approval by the Senate 28 April 2005 Approval by the Chamber 19 May 2005 Approval by the House 30 June 2005 Referendum postponed to end of 2006–beginning of 2007 Referendum postponed (no new date has been set) Approval by Parliament 9 May 2006 Presentation of a report to the Parliament by the Government 25 November 2005. Referendum 29 May 2005 negative (No: 54.68%; turn out: 69.34%) Approval by Bundestag 12 May 2005 Adoption by Bundesrat 27 May 2005 Approval by Parliament 19 April 2005 Approval by Parliament 20 December 2004 Referendum postponed (no date has been set) Approval by the Chamber 25 January 2005 Approval by the Senate 6 April 2005 Approval by the Chamber 2 June 2005 Approval by Parliament 11 November 2004 Approval by the Chamber (first reading) on 28 June 2005. Positive Referendum 10 July 2005 (Yes: 56.52%, No: 43.48%) Final approval by the Chamber 25 October 2005 (57 votes in favor, 1 against) Approval by Parliament 6 July 2005 Referendum 1 June 2005 negative (No: 61.6%, turn out: 62.8%)

Referendum

Malta

Parliamentary

The Netherlands

Parliamentary+consultative referendum

(Continued on next page)

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Table 5.1.

(Continued )

Member state

Procedure

Date scheduled

Poland

No decision so far

Portugal

Referendum

Slovakia

Parliamentary

Slovenia

Parliamentary

Spain

Parliamentary+consultative referendum

Sweden

Parliamentary

United Kingdom

Parliamentary+referendum

Ratification postponed (no date has been set) Referendum postponed (no date has been set) Approval by Parliament 11 May 2005 Approval by Parliament 1 February 2005 Referendum 20 February 2005 (Yes: 76.7%, turnout: 42.3%) Approval of the Congress 28 April 2005 Approval of the Senate 18 May 2005 Ratification postponed (no date has been set) Parliamentary ratification process suspended 6 June 2005

Note: Status as of May 10, 2006. Estonia is the first Member State to approve the Constitution after the rejection by the French and the Dutch in May–June 2005. Source: http://europa.eu.int/constitution/ratification_en.htm.

5.2.2. Energy policy The EU Constitution states provisions for its energy policy with a firm commitment to the protection of environmental quality. The agenda is to ensure the proper functioning of the energy market and the security of the energy supply. Energy efficiency, energy conservation, and the development of renewable sources of energy will be the guideline. The Committee of Regions and the Economic and Social Committee will have the specific responsibility. A reference to the Euratom Treaty should be noted (see Chapter 2).

5.2.3. European Investment Bank The European Investment Bank (EIB), a special institution with the 25 EU Member States as its constituent members, will be responsible for the balanced and steady development of the internal market. The bank will have access to the capital market and will have its own capital resources as established (see Table 5.2). Working as a non-for-profit organization, the Investment Bank will grant loans and give guarantees toward the financing of special projects for developing less-developed regions in the EU, for modernizing and/or developing projects of a specific size or nature requiring a volume of funds which could not be otherwise raised, and for regional projects of common interest to several Member States which could not be

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Table 5.2.

Capital fund of the European Investment Bank

Member state

Capital fund in h

Germany France Italy United Kingdom Spain Belgium The Netherlands Sweden Denmark Austria Poland Finland Greece Portugal Czech Republic Hungary Ireland Slovakia Slovenia Lithuania Luxembourg Cyprus Latvia Estonia Malta

26,649,532,500 26,649,532,500 26,649,532,500 26,649,532,500 15,989,719,500 7,387,065,000 7,387,065,000 4,900,585,500 3,740,283,000 3,666,973,500 3,411,263,500 2,106,816,000 2,003,725,500 1,291,287,000 1,258,785,500 1,190,868,500 935,070,000 428,490,500 397,815,000 249,617,500 187,015,500 183,382,000 152,335,000 117,640,000 69,804,000

Source: Treaty establishing a Constitution for Europe, p. 255.

financed by the Member States themselves. The capital of the Bank has been determined to be h163,653,737,000 (see Table 5.2). The EIB is a core financial institution of the Union. The EU-15 began with the European Fund which operated on a strictly commercial basis for lending funds to concerned Member States for necessary structural adjustments. The richer Member States contributed capital to the European Fund and the relatively poorer Member States borrowed from it. Upon successful completion of a project, loans were repaid with due service charges. The income gaps among the Member States came to be minimized. The EU Member States remain donor countries and the Fund helps direct these funds to investment projects which will minimize intra-EU income gaps. The EIB will continue this mission. The class distinction between the richer and poorer Member States will expectedly cease to be as pronounced. As a donor group, the EU will continue to play a positive role at the World Bank in helping the economic development of poorer nations. The Member States shall be liable only up to the amount of their respective shares of the capital subscribed. Acting unanimously, the Board

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of Governors of the EIB shall fix the percentage to be paid up, as and when an increase of the subscribed capital is necessary. On average, 5 percent of the subscribed capital shall be paid in by Member States (see Table 5.2). The EIB shall be directed and managed by a Board of Governors, a Board of Directors, and a Management Committee. The Board of Governors consists of Ministers designated by the Member States; it is responsible for formulating the general directives for the Bank’s credit policy, and also for the overall supervision regarding implementation of the directives. The Board of Governors will also appoint the Board of Directors, consisting of 26 members and 16 alternates for a five-year term. The European Commission and the Member States shall each nominate one Director. The nomination of alternate members for appointment by the Board of Governors shall follow the procedure laid down in the Constitution: Germany, France, Italy, and the United Kingdom, will each nominate two alternates, one each by the common accord of (a) Spain and Portugal; (b) Belgium, Luxembourg, and the Netherlands; (c) Denmark, Greece, and Ireland; and (d) Austria, Finland, and Sweden. Three alternates will be nominated by the common accord of the Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia, and Slovakia. Finally, one alternate director shall be nominated by the European Commission. The appointment of directors and alternates shall be renewable. The Board of Directors shall select six nonvoting experts, three as members, and three as alternates. A broad criteria of independence and competence for these appointments are noted. For lack of competence, a director may be compulsorily retired by the Board of Governors acting on a qualified majority. Following the policy guideline of the Board of Governors, the Board of Directors shall run the EIB’s administration. Decisions of the Board of Directors shall ordinarily be taken by at least one-third of the members entitled to vote, and represent at least 50 percent of the subscribed capital. A qualified majority shall require 18 votes and the representation of 68 percent of the subscribed capital. The Management Committee shall consist of a President and eight Vice Presidents, appointed by the Board of Governors for a period of six years on the advice of the Board of Directors. Their appointments shall be renewable. On a proposal by the Board of Directors acting by a qualified majority, the Board of Governors, acting by a qualified majority, may compulsorily retire a member of the Management Committee. Acting under the supervision of the President and the Board of Directors, the Management Committee shall be responsible for the current business of the Bank, raising loans in the capital market and granting finances to qualified projects in the Member States. The Bank shall deal with each Member State through the authority designated by that State. The Bank shall cooperate with all international organizations working in related fields.


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5.2.4. Citizenship and the individual rights Every national of a Member State shall likewise be a citizen of the EU. Fundamental rights guaranteed by the European Convention for the Protection of Human Rights and Fundamental Freedoms will be the Union’s obligation. In addition to the right to move and reside freely in the territory of the Members States, a citizen will have the right to vote and seek election to the European Parliament and to the municipal boards in the Member States of their residence under the same conditions as nationals of the Member State. In recognition of the fact that the EU is a multilingual entity (see Chapter 1), the Constitution provides for a citizen the right to petition the European Parliament, the European Ombudsman, or any advisory body of the Union in any of the official languages and also to obtain a reply in the same language. 5.2.5. The Ombudsman The Office of Ombudsman, as provided in the Constitution, warrants special mention. The European Parliament shall elect a European Ombudsman, after each election of Parliament, for the duration of its term of office. The appointment to the office is renewable. For complaints against possible cases of maladministration in the activities of the EU governmental institutions, bodies, offices, or agencies, except the Court of Justice, any citizen of the Union and a natural or legal entity will have access to the Ombudsman to lodge a complaint. The party lodging such a complaint shall have the right to be advised of the findings. The Ombudsman may independently initiate inquiries into specific cases, and the findings shall be made available to the appropriate authorities, with a copy of the report provided to the European Parliament. During his/her tenure of office, the Ombudsman shall not be engaged in any other occupation, gainful or not. For an act of serious misconduct, the Ombudsman can be relieved by the Court of Justice at the request of the European Parliament. 5.2.6. Human dignity of a person Human dignity is inviolable. The dignity of a person constitutes the real basis of fundamental rights. The 1948 Universal Declaration of Human Rights states so in its preamble: ‘‘recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world.’’ Every individual has the right to life which makes the death penalty or execution an act of violation of the Constitution. The death penalty continues to be administered in the United States of America (see Chapter 1). In terms of Article III-257, the EU shall constitute an area of freedom, security, and justice with due respect for fundamental rights and the

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different legal systems and traditions of the Member States. The Union shall ensure internal border controls for persons and shall frame a common policy on asylum, immigration, and external border control, with fairness to third-country nationals inclusive of ‘‘stateless persons.’’ The EU shall make efforts to ensure a high level of security through effective measures. To prevent and combat crime, racism, and xenophobia. The European Parliament shall ensure proper legislative actions and the European Council shall appoint a Standing Committee to do what is required in this regard. The enumeration of the specific rights by the Constitution is summed up in Tables 5.3A and 5.3B. A note on the right to good government is very instructive. Let it be a franchise for good citizenship and good government. This right includes: (a) the right of every person to be heard before any individual measure would affect him/her adversely is taken; (b) the right of every person to have access to his or her file, while respecting the legitimate interests of confidentiality and of professional and business secrecy; and (c) the obligation of the administration to give reasons for its decisions. A further note on the updating of the wording of the right to marry and begin a family is in order. The new wording includes accommodation of national legislations to recognize arrangements other than a marriage for starting a family. Table 5.3A. A B C D E F G H I J K L M N O P Q

Individual rights

Right to life Right to the integrity of the person Right not to be subjected to torture or degrading treatment Right not to be held as a slave or in servitude, not to perform forced or compulsory labor, not to be part of human trafficking Right to liberty and security Right to respect for individual’s private and family life Right to the protection of personal data Right to marry and to found a family Right to freedom of thought, conscience, and freedom Right to freedom of expression Right to freedom of assembly and to freedom of associations at all levels Right to freedom of the arts and sciences, academic freedom to be respected Right to education Right to engage in work and to pursue a freely chosen/accepted occupation Right to conduct a business in accordance with the Union law and national laws Right to property Right to asylum, as per rules of the Geneva Convention of July 28, 1951 and the Protocol of January 31, 1967, and in accordance with the Constitution.

Source: Treaty establishing a Constitution for Europe.


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Table 5.3B. Citizens’ rights A B C D E F G H

Right Right Right Right Right Right Right Right

to to to of to to to to

vote and be a candidate for election to the European Parliament vote and be a candidate for municipal elections of Member States good administration access to documents petition to the European Ombudsman petition to the European Parliament move and reside freely within the territory of the Member States diplomatic and consular protection


5.2.7. One nation, one flag, one anthem The national flag of the EU will be, ‘‘a circle of twelve golden stars on a blue background.’’ The national anthem of the Union shall be based on the ‘Ode to Joy’ from the Ninth Symphony by Ludwig van Beethoven. Europe Day shall be celebrated on May 9 each year. 5.2.8. The European Union and the Member States The cooperation between the Union and the Member States is the basic platform for a federated form of the EU government. Member States shall facilitate the achievement of the Union’s tasks and refrain from taking any measure which could jeopardize the Union’s objectives. The Constitution and laws adopted by the Union shall have ‘‘primacy over the law of the Member States’’ (Table 5.4). The Constitution enumerates areas of competence for the EU and areas for competence to be shared with the Member States, as well as areas for concurrent competence. In addition, a provision is made for a flexibility clause to meet challenging situations, a significantly necessary provision for a federal constitution. 5.2.9. Institutional framework of the EU Government The institutional framework of the government of the EU is specified in the Constitution. Table 5.5 presents the summary (see Chapter 2, and Chapter 4 for the ECB). In addition, the Constitution stipulates provisions for the appointment of specialized courts. It is instructive to note that the protocol of the Constitution enumerates specific locations of the institutions of the EU Government. With the European Parliament in Strasbourg and the ECB in Frankfurt, most other institutions are located in Brussels or Luxembourg. However, the General Secretariat of the Parliament are located in both cities. These two cities have become the hub of the EU Government. The European Parliament shall have its seat in Strasbourg where the 12 monthly sessions, including the budget session, will be held. Additional

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Table 5.4.

Areas of competence

Exclusive competence of the Union A Customs Union B Competition rules for the internal market C Monetary policy D Conservation of marine biological resources under the common fisheries policy E Common commercial policy F International agreement regarding a common foreign policy and defense Shared competence with Member States A B C D E F G H I J K

Internal market Social policy as specified Cohesion: economic, social, and territorial Agriculture and fisheries, excepting marine biological resources Environment Consumer protection Transport Trans-European networks Energy Areas of freedom, security, and justice Common safety concern regarding public health

Areas of supporting, coordinating, or complimentary action A B C D E F G

Protection and improvement of human health Industry Culture Tourism Education, youth, sport, and vocational training Civil protection Administrative cooperation

Source: Treaty establishing a Constitution for Europe. Note: Shared competence with Member States include special provisions for (a) Research, Technological Development and Space and (b) Development Cooperation and Humanitarian Aid, enabling Member States to exercise their parts of the related job.

sessions of Parliament and Parliamentary Committee meetings are held in Brussels. The General Secretariat of the Parliament and its departments shall operate out of Luxembourg. The European Council shall have its seat in Brussels, but during the months of April, June, and October, the Council shall hold its meetings in Luxembourg. The Commission shall have its seat in Brussels, while specific departments shall be located in Luxembourg. The Court of Justice of the EU, the EIB, and the Court of Auditors shall have their seats in Luxembourg. The ECB will continue to have its seat in Frankfurt. Both the Committee of Regions and the Economic and Social Committee shall have seats in Brussels. Europol, with its very special mission has its seat at The Hague (see Table 5.6).

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Table 5.5. The The The The The

The institutional framework of the EU Government

European Parliament European Council Council of Ministers European Commission Court of Justice

The General Court The Court of Auditors The Committee of Regions Economic and Social Committee

Maximum allowable number of members: 750 Heads of State or Government of the Member States One from each Member State at the ministerial level One national from each Member State One judge from each Member State to be assisted by Advocates-General One judge from each Member State One national of each Member State Maximum allowable number of members: 350 Maximum allowable number of members: 350


Table 5.6.

Locations of the Government Institutions of the European Union

Institution

Locations

The European Parliament The European Council The European Commission The Court of Justice The European Central Bank The Court of Auditors The Committee of the Regions The Economic and Social Committee The European Investment Bank Europol The General Secretariat of the Parliament

Strasbourg Brussels Brussels Luxembourg Frankfurt Luxembourg Brussels Brussels Luxembourg The Hague Luxembourg/Brussels


5.2.10. Enhanced cooperation The continental geography of Europe, with all its manifold diversities, is the core of unity in diversity of one Europe. The Constitution for Europe has its due focus on the concept of enhanced cooperation, social, economic, and political. The Constitution provides for a federation of Member States, a United States of Europe. The European Council will be the forum for deliberations with the participation of all members of the Council. Voting rights are limited to members of the Council representing the Member States participating in enhanced cooperation. Unanimity shall be constituted only by their votes. A qualified majority is usually defined as at least 55 percent of the Council members representing the participating Member States, comprising at least 65 percent of the population of these states, but shall differ in specific cases.

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Compliance with the Constitution and the law of the Union shall be binding on any proposal for enhanced cooperation. Shared respect for the Union’s overall objective will unite the Member States participating in an enhanced cooperation program with other nonparticipating Member States. Areas of exclusive competence for the Union government (see Table 5.4) and the common foreign and security policy shall remain beyond the domain for enhanced cooperation. In all other areas, a proposal for enhanced cooperation with due specification of the scope and objectives shall be presented to the European Commission. The Commission shall review if the proposal would be consistent with general policies of the Union. The Commission may then submit it to the European Council. If a proposal is declined, the concerned Member States will be advised accordingly. If the Commission makes a proposal and the consent of the European Parliament is given, the Council will make the proper authorization. For this, the Council shall act unanimously. The proposal shall be reviewed by the Union’s Minister for Foreign Affairs to ensure it is not in violation of the Union’s common foreign and security policy. The Commission shall have the authority to evaluate the progress of a program for enhanced cooperation and make necessary recommendations to the participating Member States. Any Member State willing to participate in a program for enhanced cooperation in progress shall notify its intentions to the Council, the Union Minister for Foreign Affairs, and the Commission. The Commission shall respond within four months from the date of the receipt of the notification. The cases for enhanced cooperation in one or another proposed area among the concerned Member States point to the emerging needs as the number of Member States continues to grow. The intimate locational proximity of the original six members of the EEC in the 1950s and 1960s gave it a different framework than the more region-specific concerns now required for the provisions for enhanced cooperation. Expectedly, over time, these issues will help the process of Europeanization of the continent of Europe. Thus, the programs for enhanced cooperation shall serve as crucial steps toward continental integration, political, economic, and social. 5.3. Functional integration As the process of European integration progresses, issues of common concern have presented themselves for appropriate action by the EU. Let us refer to them as programs for functional integration. 5.3.1. Intra-EU free flow of trade Trade became the immediate issue following the Treaty of Rome, whereby a unique paradigm of a Free Trade Area (FTA) emerged and the free flow of trade with no cross-border restrictions of any sort added to the volume of


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trade and optimized economic gains for all the participating economies. The simple model of mutual accreditation and standardization of goods in trade solved a problem which could have otherwise been overwhelming. The appointment of a new bureaucracy at the EU level would certainly not be cost effective; indeed the EU is simplifying trade matters by increasingly dealing with the world in a single voice. We have discussed before (see Chapters 2 and 3) that the EU-15 is one integrated trade unit with one membership of the WTO with one vote. As such, the EU will act as one trading unit with respect to the rest of the world. As per terms of accession, the incoming new EU members will join this WTO membership and act as one.

5.3.2. Euro and the European Central Bank A second key fact of integration came on January 1, 1999 when the ECB was instituted with the euro as the common money of the Eurosystem nations. At present, 12 Member States have adopted the euro (see Chapter 4). The EU Constitution states that the euro shall be the currency of the EU. The 10 new members of the EU, as they acceded to the Union, became candidates to join the Eurosystem in 2004. Obviously, this shall facilitate the intra-Eurozone free flow of capital.

5.3.3. Free movement of labor The free movement of labor was a part of the original economic integration compact a` la the Treaty of Rome and the policy continued to operate as EU membership expanded. Normalization of the working environment to protect workers’ health and safety became an issue. The anticipated mass migration of labor from poorer member economies to richer member economies failed to materialize. Investment and jobs moved to Member States where labor was underemployed and wage rates were relatively lower. The economic gains, profit incomes for the rich investing nations and wage/salary incomes from employment in the poorer ones all increased, a shared prosperity for all in the Union. Necessary adjustments of labor laws across the Member States followed as a model of functional integration of the intra-EU labor market and interim administrative structures have been in place (see Chapter 3). The Constitution for Europe, as and when adopted, will make necessary provisions for the Union Government to do its job to harmonize the EU labor market. This will require standardization relating to wages and benefits, especially health and pension benefits, work schedule and retirement guidelines, work force participation, unionization and nondiscrimination for age, religion, sex and sexual orientation. Respect for each Member State’s historic values and time-honored practices shall, of course, be a constitutional provision.

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5.3.4. Environment Environment has been a pressing issue for the EU. With a much larger population base living on a much smaller geographic area vis-a`-vis the USA (Chapter 3), the population density of the EU is a critical factor. As industrialization had a longer history in Europe, the consequent industrial pollution adds more to Europe’s concern for the environment. The devastations of two World Wars certainly aggravated the situation. The EU shall provide for the necessary coordination to protect and improve the quality of its environment and has been a signatory to the Kyoto Protocol. Each Member State has its own environmental program headed by an Environmental Commissioner or a designated ranking officer. Because of the pressing nature of these issues, transcontinental coordination can hardly wait until the adoption of the Constitution. An interim arrangement is in place. The coordination of the activities of the environmental officials of the Member States shall be assumed by an Environmental Commissioner for the EU, to be chosen by the Member States on a rotational basis. 5.3.5. Immigration and naturalization laws Each Member State of course has its designated official for immigration and naturalization. Several of the EU Member States had an imperial heritage with colonies on other continents. As the imperial regimes came to their end, special immigration provisions were often made for the peoples of the former colonies. With provisions for free intra-EU movement of labor, these immigrants will have the same freedom of movement if they become citizens of their respective adopted homeland. Third-country nationals legally working in the EU Member States are also an issue which warrants intra-EU attention. Several Member States are now making necessary amendments to their respective immigration laws to facilitate immigration of labor with desirable skills such as medicine, health care, engineering, and IT. Foreign investors with high-value investments, in some cases, may receive special immigration privileges. Immigration laws also need to accommodate those who seek asylum for political, religious, or any other acceptable reasons. In these regards, the immigration and naturalization laws of the EU are modeled upon those of the USA, famously known to be a nation of immigrants. Pending the adoption of the Constitution for Europe, an interim arrangement for intra-EU coordination of laws in this regard by a designated EU official has become a necessity. 5.3.6. Transportation and networks Intra-EU coordination of transportation by land, water, and air is very much another pressing issue as cross-border restrictions have ceased to exist. The free flow of trade and free movement of people, with a right to


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accept employment and reside in any Member State of the Union, call for standardization of the laws and rules in regard to transportation. Pending the adoption of the Constitution for Europe, interim arrangements have been made. In regard to high-tech information processing, transcontinental networks also warrants an interim intra-EU management. 5.3.7. The principle of competition and antitrust activity The EU has adopted the principle of competition as its rule for the internal market. Each Member State had its related administrative provision, but now intra-EU coordination has been effectively put in place. The EU, with its continental market, has become an economy of a competitively large dimension by its shares of world output and trade (see Chapter 3), attracting foreign corporations with high-value investments. Will they be allowed to command unduly large market shares, contributing to a market structure of duopoly/oligopoly, and thus to compromise the competition principle? Recently, several cases of prosecution against some American corporate giants inclusive of Microsoft, Coca-Cola, GE and Honeywell, and Intel, before the designated court of law in the EU have been widely reported. For this, the EU could hardly wait for the adoption of the Constitution. 5.3.8. Terrorism and protection Wars in Afghanistan and Iraq, following the destruction of the World Trade Center in New York City on September 11, 2001, have spawned more violent acts of terrorism that have become a global concern. The incidents in Madrid and London are now well documented. EU authorities must act to deal with the challenges of terrorism and must assume its responsibility for the safety and protection of the peoples in all Member States. Each Member State has its own police and intelligence services under its appropriate Ministry, but again, urgent measures for intra-EU administrative cooperation have been called for. The USA has recently designated a new post to the Cabinet, the Secretary for Homeland Security. How can the EU do without their own Homeland Security Chief with the responsibility to coordinate all necessary steps for the EU-wide protection against terrorism? 5.3.9. Foreign policy With a commitment to a common foreign policy, by common accord of the Member States, the EU has designated a Foreign Policy Coordinator with the authority to represent the concerns and interests of the EU in foreign affairs as the Foreign Minister of the EU. Each Member State will maintain its independent Minister for Foreign Affairs until the Constitution for Europe is adopted. The EU will then have one government with one Head,

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and the rest of the world will only accept the EU Foreign Minister as the official spokesperson for the EU. Only then will the EU Foreign Minister be accredited to represent the EU at the United Nations (UN). In the meantime, the foreign ministers of individual Member States will continue to perform their responsibilities. In the Security Council of the UN, France and the United Kingdom are the two permanent members from the EU and their Foreign Ministers continue to occupy their respective seats at its meetings. However, it is important to note that the incumbent Foreign Policy Coordinator of the EU has been well received in specific cases of international conflict resolution including the dialogue with Iran relative to the nuclear crisis and the Israeli–Palestinian conflict. 5.3.10. Defense and security Common defense and security is a necessary corollary. Member States of the EU no longer have national borders. Together, the EU has a territorial border with its neighboring sovereign nation-states: Russia and several other states in the east, countries of the continent of Africa to the South, Turkey and others in Asia and Middle East, and the USA, west across the Atlantic Ocean. Again by common accord, the EU has a designated Chief for Defense and Security. However, until the Constitution provides for one EU with one Head, the EU designee will continue to have a limited audience and the defense ministers of the EU Member States will be called upon for relevant duties. The rest of the world will limit their contact with the EU Coordinator for Defense and Security. 5.4. Majority of the states and majority of the people As the membership of the EU progressed to 25 in 2004, soon to be 27 in 2007, and with many others at the state of candidacy, the EU’s principle of consensus became a problem. The EU rule was to have unanimous approval of any decision. This gave any one single Member State veto power. As in the UN with 191 sovereign nation members, only the five permanent members of the Security Council enjoy veto powers. Any one of the five can veto a decision and stop the UN from taking a contemplated action. The proposed Constitution for the federation of the European States shall deny that veto power to a single Member State so that rule by the majority can sustain the stable functioning of the EU. Following negative votes in French and Dutch referendum, the Constitution for Europe is said to be on the ice. As we have noted earlier, it has been approved by a majority of the Member States. An analysis of the population in Table 5.7A shows that it has received the approval of Member States representing the majority of the people, 52.11 percent to be precise (see also Tables 5.7B and 5.7C).

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Table: 5.7A.

Population of the Member States approval of the Constitution, approved Status

Austria Belgium Cyprus Estonia Germany Greece Hungary Italy Latvia Lithuania Luxembourg Malta Slovak Republic Slovenia Spain

Approved Approved Approved Approved Approved Approved Approved Approved Approved Approved Approved Approved Approved Approved Approved

Total % of EU population

2004 population in millions 8.120 10.410 0.780 1.350 82.630 11.070 10.070 57.570 2.300 3.440 0.450 0.400 5.390 2.000 41.290 237.270 52.110

Note: Based on Tables 3.1A and 5.1.

Table 5.7B.

Population of the Member States approval of the Constitution, postponed Status

Czech Republic Denmark Finland Ireland Poland Portugal Sweden United Kingdom

Postponed Postponed Postponed Postponed Postponed Postponed Postponed Postponed

Total % of EU population

2004 population in millions 10.180 5.400 5.220 4.020 38.160 10.440 8.990 59.410 141.820 31.150


The federation of the United States of America experienced a Civil War in which the country suffered the greatest loss of life from war in its history. The North and the South of the country have, however, remained united. Over the years since the Civil War, many challenges had to be overcome before the 48 US states emerged as the leader of the post-WWII world with the world’s largest economy. Recently, Alaska and Hawaii

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Table 5.7C. Population of the Member States approval of the Constitution, rejected

France The Netherlands Total % of EU population

Status

2004 population in millions

Rejected Rejected

59.99 16.25 76.24 16.75


joined the membership of the federation and the USA now has 50 states. Indeed, the USA had to resolve many more problems before it became a one person, one vote democracy on August 6, 1965, when the Voting Rights Act was signed into law by President Lyndon B. Johnson. Nothing points to the apprehension that the EU will experience a civil war before the Constitution for the federation of the European states will have been finally adopted. Democratic institutions based on the principle of one person, one vote have been a part of the institutional framework of the EU. True, the Europeans have had their share of wars and bloody conflicts, but the unity in diversity must be the motto for the present and for the future. Functional integrations, as stated above, have lent much support to the foundation of the EU. The cordial and cooperative way these integrations have worked must indicate that for the people of Europe there is a natural commitment to one united European family, bonded together by the fact of their belonging to the continent of Europe. The economic integration of sovereign nation-state economies in Europe has progressed to an amazing extent. There is no such precedent in the history of mankind (see Chapter 3). To sustain the spectacular economic gains, the EU is ready for its political integration. Individual Member States of Europe could never accomplish what they together have been able to do. One Europe, one economy, and one political entity, has emerged as a competitive actor in the world (see Chapter 3). A retreat will be self-destructive. One pragmatic option will be for the Member States to go ahead anyway with the establishment of the one government of the EU, with one national flag and one national anthem, while the Constitution is in limbo. That was the case for the 12 Member States who elected to go ahead with the ECB and euro. Could the 15 who ratified the Constitution go ahead with setting a federal government? That solution will not be optimum for a broader political integration. Though the Treaty on October 29, 2004 in Rome, ‘‘Establishing a Constitution of Europe’’ was signed by all 25 Member States at the meeting of the European Council in its configuration of Heads of States or Government, the time has come for further deliberations. The next best pragmatic solution for the European leadership is


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to extend the date for the adoption of the Constitution, which they have already done, providing a new deadline of 2008. It is critical for researchers to underscore the fundamental points of contention. Following the Constitution for Europe, let us focus on the following points: The Constitution for Europe shall provide for the institutional framework of the EU federal government which will ensure majority rule of the people and of the Member States. Equality of the Member States shall make sure that smaller Member States can share power with the larger ones, who will have much larger population bases and larger dimensions of economic activities, on the basis of equality. Of course, democracy based on the cardinal principle of one person, one vote, based on universal sufferage, shall not be compromised. The Members States with larger population bases will not be limited in power-sharing. They are represented in the European Parliament, where the weighting of votes is based on population. The principle of decision making by a majority of the Member States and a majority of the people will give the federation of the European states, the EU, a strong and effective central government. Alternatively, a weak government, based on confrontation and suboptimal cooperation among the Member States, will make the Union indecisive and ineffective, and which will fail to deliver what it has promised to the people of Europe. The rule of governance in a federation of states where legislative decisions are taken by the majority of the States and the majority of the people will be an achievement. The United States of America presents a model where the legislature consists of the two chambers: the Senate is based on equality of states whereby each state, large or small, in terms of population, has two members, and the House of Representatives is based on population where one person has one vote. Members of both Chambers are expected to cast votes independently. The President of the United States is the Head of the executive branch, elected directly by popular vote, subject to the approval by the Electoral College. In the 2000 presidential elections, there was a compromising situation for the Electoral College, and the election was finally decided by a 5–4 majority vote of the US Supreme Court. The EU may consider adopting a parallel model without the complex provision of the electoral college. The Office of the Court of Justice in the Constitution for Europe has been well defined and can perform due arbitration as and when necessary. The Judiciary of the Union has its authority well defined by the Constitution. Transparency shall be the core guideline for the administration of justice. The Court of Justice of the Union shall be the supreme judicial authority and shall have the authority for due interpretation of the Constitution and EU laws. Each nominee for the Court shall take an oath

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before the Court of Justice, sitting in open court, to perform his/her duties ‘‘impartially and conscientiously.’’ Judges may not concurrently hold any political or administrative office or engage in any other occupation gainful or not, unless otherwise permitted by the European Council. The Court of Justice shall remain in permanent session. Of the 25 judges, one from each Member State, every three years, 13 and 12 judges shall be replaced alternately. The Constitution provides specific provisions for the removal of a judge due to incompetence or the failure to discharge his/her normal duties. Critics of the EU who have retained their faith in the historical sovereign rights of nation-states may have their reservations. Should the EU be able to compete concurrently with the USA and with China? (see Garten, 2004). Should the EU movement collapse, they will be vindicated. But we have argued that the concept of traditional sovereignty is a part of history, and a new paradigm of continental economic and political integration has begun. Europe has advanced too far for any possible disintegration and will be the learning model for other continents. The American Hemispheric Economic Cooperation and the Asian Continental Economic Union, with Asian Money and China sharing the leadership position are now subjects of intense study (see Chapter 8). The decision to extend the date for the ratification of the Constitution for Europe until 2008 is expected to be consequential. As per the Terms of Accession, the new 10 Member States who have been admitted to EU membership in May 2004, have also committed themselves to join the Eurosystem. Slovenia, has already been cleared of the eligibility verification process and will be welcomed to the Eurozone on January 1, 2007. It is expected that the necessary evaluation process for the remaining nine will be completed by the end of 2006. The Eurozone with the participation of 22 Member States out of the 25, will certainly contribute a strong momentum to the movement for the political integration of Europe. A celebration for the approval of the Constitution for Europe will be in order. One money to one Europe, a prophetic statement made years ago will finally come true in 2008 (Issing, 1999a, b).

CHAPTER 6

The European Union (EU): The Challenges Ahead 6.1. Challenges are welcome Confronted with challenges, resolute actions follow and revolutionary changes occur. Challenges contribute to creativity and dynamism, and should be welcomed. The sovereign nation-states of the continent of Europe agreed to mutual cooperation and elected to have a common integrated continental economy following the challenges of tragic experiences resulting from years of bloody conflicts and confrontations. With an area of about 4 million square kilometers and a population of some 457 million, the European Union (EU) is now the third most populous economy with competitive shares of world output and trade. Even so, many new challenges are waiting to be resolved. As many as 15 sovereign nation-states on the map of Europe, including Belarus, Moldova, and Ukraine in the east, Norway in the North, Iceland in the Atlantic, Serbia and Montenegro in the Southeast, Liechtenstein, Monaco, and Switzerland at the center of the continent, and San Marino within Italy have not yet joined the EU membership. Many of these countries have made ad hoc arrangements with the EU for specific issues. Recently, by a referendum based on universal franchise, Montenegro became an independent, sovereign state and has promptly been admitted to be the 192nd member of the United Nations (UN). Montenegro is very much a candidate for the EU membership. Will these other states continue to be the missing links on the map of Europe? (see Chapter 1). Russia and Turkey are countries that straddle two continents and constitute very special cases. Russia has vast areas in both the European and Asian continents. One option for Russia will be to opt for the membership of the EU with consequent economic and political integration. Alternatively, Russia may elect to join the much anticipated Asian Economic Community, as and when it is instituted. Russia’s progressively increasing economic cooperation with the EU countries and the Asian nations of China, India, Japan, and Korea must be noted. Given the relatively large endowment of natural resources inclusive of petroleum and natural gas, and a vast geographical area, Russia may elect to remain an independent economy by itself.

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Turkey is a different case. Geographically, it is marginally in Europe; the vast majority of its territory is on the map of Asia. As we have discussed earlier, Turkey has had an important role in the history of Europe, and is now a candidate for EU membership. The issue for consideration is whether the EU will go beyond the map of Europe. The high level of economic integration of the Member States of the EU has been reviewed earlier (see Chapters 3 and 4). The political integration of the EU-25 is in progress. A majority of the 25 Member States, 14 of the 25, and representing a majority of its population, 52-plus percent, have approved the Constitution for Europe (see Chapter 5). The political integration of the EU-25 will not be functionally effective until the Constitution is adopted by all 25 Member States. The principle of unanimity continues to be a binding guideline for the EU. In the absence of political integration of the EU-25, two points warrant urgent attention. Will the macroeconomic framework of the EU-25 be able to function optimally? Of course, interim provisions are already in place. Secondly, the international standing of the EU continues to remain exposed to serious limitations, notwithstanding current provisions for recognition by the World Trade Organization (WTO) and the International Monetary Fund (IMF) (see Chapters 3 and 4). The gradual enlargement of the EU from 6 to 27 in 2007, and more in the years ahead poses a challenge of its own. Adding more Member States adds more to the diversities of the EU in language, religion, lifestyle, and levels of economic development. The economies of the new 10 are less industrialized and more agriculture dominant. The EU represents a community of values: liberty, democracy, human rights, fundamental freedoms, and the rule of law. These values are formally embodied in the Constitution for Europe which remains to be adopted (see Chapter 5). The EU has a commitment to a comprehensive agenda of economic growth, social cohesion, and protection of environmental quality. As the number of Member States grow, the EU must face the challenge of ensuring that incoming countries share the value system and commit to a balanced development agenda. The EU’s respect for the dignity of life and consequent abolition of death penalty will be binding for all incoming members. The evidence so far has been encouragingly positive. There is a shared commitment on the part of old 15 and the new 10 to enrich the EU in the process of its enlargement.

6.2. One European economy and one Europe The Progress of one common European economy with well-defined microand macroeconomic parameters and the movement for the adoption of the Constitution for Europe toward the EU’s political integration have already been discussed earlier (see Chapters 3–5).


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Intra-EU microeconomic cooperation based on unrestricted cross-border trade, investment, and movement of labor successfully overcame the challenge of the absence of a zone of monetary stability. One money, the euro, managed by one supranational central bank, the European Central Bank (ECB), came to be in place on January 1, 1999. Supranational monetary policy could be optimally functional only with proper fiscal policy cooperation as assured by the Council of Finance Ministers of the 12 participating member economies of the Eurosystem (ECO-FIN). The records point to the fact that the numerical guidelines established by the Maastricht Treaty of 1992 and adopted by the ECB have been violated by several member countries. Germany and France were both taken to Europe’s highest judiciary for exceeding debt limits. Italy also had a default problem. The ECB did not adopt a policy of penal enforcement of the guidelines. A policy of accommodation in each case became the final outcome, following the involved Member States’ agreement to correct the situation. Critics argue that the ECB really did not have the authority to take necessary disciplinary actions. Dealing with the 12 Finance Ministers of 12 sovereign member countries as the ECB did, its authority to formulate and administer supranational monetary policy lacked the mandatory power base. In a sovereign nation-state economy, the national central bank (NCB) chief and the national finance minister engage in both formal and informal contacts and communications to ensure coordination of monetary and fiscal policies for the growth of the individual economy with price stability. In general, the agenda also includes the objective of full employment with no inflation. The head of an NCB facilitates the process of coordination by making periodic appearances before the legislature of the country. Indeed, testimonies before the legislature, open to public, provide opportunities for extensive dialogues and discussions toward further strengthening the process. The ECB Chairman has a challenging assignment: to deal with the 12 Finance Ministers. This is a task all too complicated, and thus the result is at times suboptimal. With the adoption of the Constitution for Europe, one central government of the EU-25 will have one finance minister, who will be the one person to interact with the ECB President for the coordination of the fiscal and monetary policies of the Eurosystem. The case for optimum cooperation between the two cannot be taken for granted. The central bank of a sovereign nation-state economy and its ministry of finance may at times elect to follow policies which are not complimentary. Let us review the present situation in the USA. Following the US Constitution, both the Chairman of the FED and the Treasury Secretary are appointed by the President of the United States of America, subject to the approval of the US Senate. For the present Bush Administration, both belong to the same political party as the President, and both command professional respect and endorsement. The Chairman of the Federal Reserve System and the Secretary of the Treasury have failed to

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cooperate substantively. Consequently, the coordination of the country’s monetary and fiscal policies has ceased to be optimal. These two individuals can have one-to-one contacts and communications and their testimonies before the US Congress should have produced the balanced coordination necessary between the country’s monetary and fiscal policies. In 2006, the US national debt is projected to approach as high as 80 percent of its gross domestic product (GDP). The deficit will continue to increase, given the international commitments of the USA, and the administration’s unwavering commitment to its supply-side macroeconomic policyoriented tax cuts. Threats of inflation have been noted. With its commitment to economic growth with no inflation, or price stability, over the past two years, the FED has raised the key interest rates 17 consecutive times, 25 basis points each time in its efforts to contain inflationary pressures. As of June 29, 2006, the federal fund rate (the overnight interbank lending rate) was raised to 5.25 percent and the discount rate (FED lending to the banks) to 6.25 percent. The monetary policy of price stability may accommodate the fiscal policy of a government by adding to the budget deficit and national debt if it is directed to the development of the economy’s labor and capital resource base, contributing to economy’s productivity. If monetary policy is unilaterally anchored to price stability, it will be in conflict with the fiscal policy. At present, the fact that the ECB deals with 12 finance ministers may not be the critical issue, and one wonders if the adverse comments on the performance of the ECB in this regard have been overstated. The monetary policy of the supranational ECB, working with 12 independent member governments, will have to incorporate specific foreign and domestic policies of these national member governments. The ECB’s monetary policy, with a pronounced priority for price stability, may not be uniformly compatible with the specific fiscal policy of the central government of the EU as and when one will be instituted. Member countries in violation of the numerical guidelines may have their respective fiscal policies targeted to a growth-cum-employment policy. The coordination of monetary and fiscal policies of an economy warrants further independent analysis. 6.3. The United Kingdom and the EU For the United Kingdom, the record of its membership of the EU has a history of its own (see Chapters 1 and 3). Their initial reservations to join EU membership soon became a part of EU history. The UK is observed to be on the map of Europe and its joining the EU became a fact in 1973. Their participation in the Exchange Rate Mechanism ended and they elected not to join the Eurosystem in 1999. They have decided to postpone the referendum for the approval of the Constitution for Europe’s political integration. It has also been pointed out that the UK has a special diplomatic plus intelligence-sharing relationship with the USA, as has been evident during the Iraq War. A careful exposition is in order.


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The UK’s strong economic ties with its former colonies led to its efforts to constitute the Commonwealth of Nations. This global organization based on the togetherness of the English-speaking peoples was an early attempt for a UK-led free trade area (FTA). In 1960, the UK took initiative to form the European Free Trade Area (EFTA), as opposed to joining the European Economic Community’s (EEC’s) FTA. The UK did apply to join the EEC in 1961, but French opposition blocked the UK’s membership. In 1967, the UK reapplied and was blocked again by France. In 1969, the European Council and the European Commission reassessed their position about the UK. The Accession Treaty of the UK was signed in 1972, effective on January 1, 1973, some 15 years after the original compact of the six European nations came into existence. The UK declined to adopt the euro in 1999, and argued for a careful evaluation of a five-point platform before a referendum to joining the Eurosystem would be held. The five tests are for convergence, flexibility, investment, financial services, and employment and growth. As of 2003, only the test for benefits to financial services was met, and the UK continues to use the pound sterling with the Bank of England as its NCB. The UK reaps the benefits of the FTA of the EU without complete commitment. They have also successfully argued for preferential tax treatment from the EU. Fluctuations of the exchange rates of the euro and the pound sterling have been subject of much critical review. The UK, as a full member of the EU and a full participant in the EU’s FTA, has a large share of intra-EU trade. Appreciation of the pound sterling vis-a`-vis the euro, will have an adverse impact on its trade with the Eurozone. Persistence of the appreciation of the pound sterling may encourage the migration of investments, and by extension employment. The potential relocation of investments in the economies of the Eurozone is a major concern. For foreign investors from the USA, Japan, and other oil-rich countries that elected to locate their investments in the United Kingdom based on their historic relationships with the Bank of England and the pound sterling, economic gains from unrestricted free trade with the EU member countries, became a point for consideration. Now that they are familiar with the euro and the ECB, they may move some investments to the Eurozone which will be free from the risk of exchange rate fluctuations. This will cause much unemployment in the UK. As you would expect a depreciation of the pound sterling will have the reverse consequences. In any event, the British government has proclaimed its pro-European policy, with a commitment to join the Eurosystem as and when the situation will justify it. The imperial heritage of the UK has made the pound sterling an international reserve currency. Many independent countries, including former British colonies, continue to have good trade relations with the UK and naturally, they find it convenient to hold some of their foreign exchange reserves in pound sterling. Since its introduction, the euro has

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greatly out-competed the pound sterling as an international reserve currency (see Table 4.12A). Belonging to the map of Europe remains the key factor for the UK. Its official position is that it is a committed member of the EU and will join the Eurosystem at the appropriate time. The Chunnel Tunnel linking the UK to continental Europe is a notable landmark. I have argued that when the membership of the Eurosystem reaches 22, the current 12 and the new 10, the movement for the complete political and monetary integration of the EU will gather a new momentum (see Chapter 5). As a signatory to the 2004 Treaty establishing a Constitution for Europe, the UK pledged to consider its approval. Pending further review, the UK has decided to postpone the referendum and suspended Parliamentary ratification. For Denmark and Sweden, the other out-members of the Eurosystem, the issue of exchange rate fluctuations of their respective national currencies visa`-vis the euro has not been of much concern. Following their historical tradepaths, their respective currencies became effectively tied to the euro through the German deutschmark, whose euro value has been invariably fixed since 1999. The trade of the two countries relate mostly to the Eurozone. 6.4. The EU and the IMF The ECB earned its observer status at the IMF on December 21, 1998. In 1944, at Bretton Woods in New Hampshire, a conference was convened under US leadership. Forty-five nations from all the continents participated at the conference. Open economic policy became the theme of the conference and it advocated the free flow of trade and investment among the nations of the world to add to the economic prosperity of all nations. Two institutions were established, the IMF and the World Bank (WB), each with a membership of 29 members in 1945. The IMF was to coordinate exchange rates among the currencies of the member countries. Based on its share of world output and trade, the US dollar was the lead currency, and each currency was defined by its dollar value. Each member nation was given the authority to change this rate unilaterally within a specified margin. Furthermore, each member nation was allowed to apply to the IMF Board for a second variation, again within a prespecified margin. For any further variations, the IMF Board would have the authority to review the situation and take appropriate actions. Provisions were also made for liquidity, should a member nation be exposed to a temporary crisis. This built-in flexibility certainly facilitated acceptance of the provisions by the member nations. The IMF must face the issue of the 12 member countries of the Eurosystem. As of 2002, the 12 national currencies on the IMF books have ceased to be in existence and have been replaced with the euro. The euro has become a strong and competitive currency, an international reserve currency recognized by the IMF. The IMF should not continue to manage


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the exchange rates of the 12 nonexistent currencies vis-a`-vis other currencies of the 184 members (as of 2006). The issue with the IMF is thus all too critical and urgent. A judicious allocation of the institution’s administrative resources is the immediate issue. The IMF Charter must be revised to clarify the relationship between the Eurozone and the IMF. Each member nation in the IMF, led by the principals of its NCB and the ministry of finance of its national government constitutes one delegation with one vote, weighted for its voting shares (see Table 6.1A). The Eurosystem, led by the supranational ECB, is not joined by one finance minister. Indeed, the 12 Member States continue to have sovereign national governments, each with its independent finance minister. To allow the IMF to invite the ECB Chairman, joined by the 12 finance ministers of the 12 Member States of the Eurosystem, with the entire delegation having one vote, duly weighted, would technically be a violation of the IMF Charter. Only a sovereign nation-state economy may be a member of the organization. Hence, the ad hoc solution has been to give the ECB an observer status. Each Member State of the Eurosystem will continue to have its official delegation to the IMF, led by the heads of its national bank and its national finance ministry. The ECB’s Office of the Observer coordinates the delegation’s activities without an independent voting right of its own. However, the heads of the 12 NCBs are ex-officio members of the Governing Board of the ECB, chaired by the President of the ECB. Thus, the Office of the Observer at the IMF, under the leadership of the ECB President, will have substantive coordinating powers as and when an issue is up for vote at the IMF.

6.5. The International Monetary Fund A serious challenge for the EU is to gain its share of power in the affairs of governance of the post-WWII international institutions. We begin with the membership of the EU at the IMF. At the Bretton Woods conference in 1944, each member country’s share of world GDP became the principal criteria for the allocation of shares. Based on GDP, the USA was the largest economy and Japan the second largest. The USA had Special Drawing Rights (SDR) holdings and voting rights at about 17 percent, making it the most dominant member of the IMF, and also enjoying veto power in its decision making. Japan, the second largest economy, was a distant second with its shares at about 6 percent, and adopted a policy of following US leadership. Together, the two commanded about a quarter of the SDR and voting rights. The European economies were in the process of postwar economic recovery but even after recovery, individually, each of them had only marginal shares of world GDP (see Chapter 3). Other participating countries from Asia, Africa, and South America had even smaller GDP bases. Table 6.1A presents the holdings of SDR and voting numbers of the EU, USA, and Japan in the IMF.

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Table 6.1A.


Member countries shares of IMF: The EU, USA, and Japan

Member country

Quota (millions of SDRs)

% of total

Votes (numbera)

% of total

Austria Belgium Finland France Germany Greece Ireland Italy Luxemburg The Netherlands Portugal Spain

1872.3 4605.2 1263.8 10738.5 13008.2 823.0 838.4 7055.5 279.1 5162.4 867.4 3048.9

0.88 2.16 0.59 5.03 6.09 0.39 0.39 3.31 0.13 2.42 0.41 1.43

18,973 46,302 12,888 107,635 130,332 8,480 8,634 70,805 3,041 51,874 8,924 30,739

0.87 2.13 0.59 4.95 5.99 0.39 0.4 3.25 0.14 2.38 0.41 1.41

Eurozone

49562.7

23.23

498,627

22.91

Denmark Sweden United Kingdom Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

1642.8 2395.5 10738.5 139.6 819.3 65.2 1038.4 126.8 144.2 102.0 1369.0 357.5 231.7

0.77 1.12 5.03 0.07 0.38 0.03 0.49 0.06 0.07 0.05 0.64 0.17 0.11

16,678 24,205 107,635 1,646 8,443 902 10,634 1,518 1,692 1,270 13,940 3,825 2,567

0.77 1.11 4.95 0.08 0.39 0.04 0.49 0.07 0.08 0.06 0.64 0.18 0.12

Non-Eurozone EU-25 total

19170.5 68733.2

8.99 32.22

194955.0 693582.0

8.98 31.89

USA Japan

37149.3 13312.8

17.38 6.24

371,743 133,378

17.08 6.13

Source: IMF, www.imf.org/external/np/sec/memdir/members.htm. a Voting power varies on certain matters pertaining to the General Department with use of the Fund’s resources in that Department.

The membership of the IMF has increased from 29 in 1945 to 184 at the present time, and all 184 member countries are participants in SDR. The GDP of the member countries, based on their respective outputs of goods and services and adjusted for population, relates to its SDR allocations and consequently to its voting rights in the IMF governance. The EU-25, as one integrated economy, has aggregate percentages of SDR and of voting shares much larger than those of the USA and Japan, but must overcome the challenge of political integration before the EU has the leadership position in the IMF. The USA, with its share of SDR at 17.40 percent and


147

its voting rights at 17.08 percent, continues to lead the IMF. Japan, with its SDR share of 6.24 percent and its share of voting right of 6.13 percent, is the second ranking member. If the Member States of the EU are taken individually in the IMF, we observe that Germany, the largest economy of the EU has 6.09 percent of SDR shares and 5.99 percent share of voting rights, just behind Japan. France and the UK share the same ranking while Italy follows closely. Shares of SDR and voting rights of Belgium, the Netherlands, Spain, and Sweden vary between 1 percent and 3 percent. For the remaining 17 Member States of the EU, the individual shares of SDR and voting rights are less than 1 percent. The subtotal of the Eurozone’s SDR shares at 23.23 percent and voting rights at 22.91 percent are competitively large, ranking the EU-12 far ahead of Japan. It also challenges the leadership position of the USA (see Table 6.1A). Pending political integration, the EU-25 cannot earn its highest rank and voting powers in the IMF so long as the current IMF Charter remains binding. The challenge of managing the interim system is real. The Eurozone has achieved its monetary integration and must play its constructive role for the management of exchange rates at the IMF. The ECB’s Observer Status is a positive step in this regard. In Table 6.1B we present a simple GDP-based comparison of IMF funding. In 2000, an outside committee, the Cooper Committee, chaired by Richard Cooper, made some further calculations. The two variables for the Committee’s calculation were (a) GDP and (b) the variability of current receipts and net long-term capital flows, with the coefficient on the former twice that of the latter. The former is the economy’s potential ability to contribute to the IMF, while the latter relates to the potential need to borrow. Given our immediate task to evaluate the EU’s competitive standing in the IMF, we have not referred to the Cooper Calculations (see also Truman, 2006). In Table 6.2, we refer to some specific calculations (see Truman, 2006). Our objective is limited to a comparison of the EU, the USA, and Japan, based on their relative abilities to contribute to the Fund (see Table 6.1B). It is to be further noted that our comparison is limited to the richer countries of the world, whose potential ability to borrow from the Fund is not an issue of concern. To restate, our task is to compare the competitive GDP base of the EU and its new role in the governance of the IMF and also in other post-WWII international institutions. Table 6.2 relates to a comparison of the current data with a focus on the EU and its competitive position vis-a`-vis the USA and Japan. For a more comprehensive review, data are also presented for the Eurozone. Table 6.3 demonstrates that over a short period of time from 1999 to 2004, based on year-end values (in millions of SDR) of the currency composition of the IMF’s official holdings of foreign exchange, the euro has become very much competitive, especially vis-a`-vis the pound sterling and the yen. For 1999–2004, the growth rate for the euro was 125 percent, while that of the pound sterling was much lower at 83 percent. The yen actually

148


Table 6.1B.

GDP in 2004 (constant 2000 US$, in billions) GDP

% of world

Austria Belgium Finland France Germany Greece Ireland Italy Luxembourg The Netherlands Portugal Spain

200.00 241.00 131.00 1,390.00 1,920.00 132.00 117.00 1,110.00 21.60 378.00 108.00 623.00

0.5731 0.6905 0.3754 3.9828 5.5014 0.3782 0.3352 3.1805 0.0619 1.0831 0.3095 1.7851

Eurozone

6,371.60

18.2567

Denmark Sweden United Kingdom Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovak Republic Slovenia

167.00 260.00 1,570.00 10.30 62.60 6.95 53.80 10.40 15.10 3.81 186.00 24.20 21.70

0.4785 0.7450 4.4986 0.0295 0.1794 0.0199 0.1542 0.0298 0.0433 0.0109 0.5330 0.0693 0.0622

Non-Eurozone EU-25

2,391.86 8,763.46

6.8535 25.1102

United States Japan World

10,800.00 4,932.89 34,900.00

30.9456 14.1343

Note: Percentages are calculated. Source: World Development Indicators (2005).

records a negative rate of growth for the same time period. In terms of percentage growth, the euro is a serious challenge also to the dollar whose growth rate is just 50 percent. 6.5.1. Restructuring of the IMF The Bretton Woods organizations were established in an institutionalized effort by wealthier countries to reach out to poorer ones, and the goal was to make the world a better place for all the people of the world. With the rise of communism, these efforts became conditional, and the IMF was

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Table 6.2.

Quotas of the EU Member States, the USA, and Japan (%) Current

Austria Belgium Finland France Germany Greece Ireland Italy Luxembourg The Netherlands Portugal Spain Eurozone Denmark Sweden United Kingdom Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

Calculated

0.88 2.16 0.59 5.03 6.09 0.39 0.39 3.30 0.13 2.42 0.41 1.43

1.09 1.99 0.55 4.37 7.02 0.41 1.67 3.42 1.78 2.81 0.50 2.04

23.22

27.65

0.77 1.12 5.03 0.07 0.38 0.03 0.49 0.06 0.07 0.05 0.64 0.17 0.11

1.04 1.23 5.72 na 0.45 na 0.40 na na na 0.64 0.18 na

Non-Eurozone EU-25

8.99 32.21

9.66 37.31

USA Japan

17.38 6.23

17.80 7.27

Note: The calculated quota of a member is based on the results of five formulas: one traditional Breton Woods formula and four others. The final number is the higher of the Bretton Woods calculation and the average of the lowest two of the remaining four calculations after adjustment. Calculated data are based on 1990–2002 data (IMF, 2004). Source: IMF (2004), see Table 6.1A for current shares. See also Edwin, M.T. ‘‘Rearranging IMF chairs and shares: The sine qua non of IMF reform.’’ In Truman E.M., (eds), Reforming the IMF for the 21st Century. Washington, DC: Institute for International Education.

unable to do what it promised to do. The rich became richer, the poor became poorer. It is instructive to note that currently, 60 member countries have over 90 percent of shares (current 91.53 percent and calculated 95.49 percent), and the remaining 124 member countries have the rest (8.47 percent current and 4.51 percent calculated) (see the note of Table 6.2 for the method of calculation).

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Table 6.3.


Currency composition of official holdings of foreign currency, end of year (in millions of SDR)

1999 2000 2001 2002 2003 2004 % Change over period

US dollar

Euro

Pound sterling

Japanese yen

711,606 802,249 853,761 844,975 940,876 1,069,200

179,924 213,949 239,703 307,215 361,995 404,086

29,013 31,531 32,708 37,036 37,526 53,092

63,966 71,399 63,186 57,552 58,961 63,896

50.25

124.59

82.99

0.11

Source: IMF Annual Report (2005).

Restructuring of the IMF has become a critically important subject of study. In September 2005, the Institute for International Economics sponsored a special conference on Reforming the IMF for the 21st Century, and special report #19 is the scholastic output (see Truman, 2006). The issue of restructuring the Bretton Woods institutions, the IMF and the WB, received a great deal of attention following the debate, Stiglitz initiated with forceful articulation(see Stiglitz, 2001). The broader issue of discontent between the rich and the poor countries warrants urgent remedial measures (Chapter 8). Our task will be limited to evaluating the emerging situation relative to the eventful process of the Europeanization of Europe and the USA and its relevance toward a plan to restructure the IMF. In Table 6.4 we present a recent proposal to the IMF. As we review the new allocations of the quota, both the one-step approach and the two-step approach are designed to accomplish the same target. The EU and the USA will have power balanced between them so that both will have equal shares of SDRs and votes. The intermediate step in the two-step approach is a pragmatic consideration. The debate remains open. A reduction of the total of the collective EU shares in the one-step and two-step approaches is open to negotiations where extra-economic considerations shall come to prevail. The USA was the single-most dominant member country, contributing hugely to the SDR capital holding of the IMF in the pre-EU period, and as such, easily exercised veto power in the organization’s decisionmaking process. Can the IMF become a power-sharing institution under which the EU and the USA can share the veto power and the leadership role? This will be a step forward. More inputs will come to the decisionmaking process and the IMF will become a more proactive organization that should benefit the rest of the members of the IMF. The wisdom of two groups of scholars will certainly be a larger pool of knowledge for the Board of Governors of the IMF to draw upon. The world community at large will expectedly be better off. I venture to add that this sharing of veto power in the decision-making process of the IMF will encourage sovereign nation-state economies in other continents to accept the EU paradigm as a

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Table 6.4.

Proposal on restructuring the IMF

Starting quota SDR (billions) One-step approach The EU The USA The rest of the IMF Total membership Two-step approach The EU The USA The rest of the IMF Total membership The EU The USA The rest of the IMF Total membership

New quota Share (%)

SDR (billions)

Share (%)

68.7 37.1 107.6 213.4

32 17 50 99

68.7 68.7 244.4 381.8

18 18 64 100

68.7 37.1 107.6 213.4

32 17 50 99

68.7 57.6 193.9 320.2

21 18 61 100

68.7 57.6 193.9 320.2

21 18 61 100

86.5 86.5 307.4 480.4

18 18 64 100

Note: SDR – special drawing rights. Source: IMF International Financial Statistics, see also Truman (2006).

learning model. Each continental regional economic entity will eventually command competitive shares of world GDP and correspondingly have competitive quotas of SDR and voting shares to have an active involvement in decision making. Restructuring will be the beginning of the end of veto power by any one individual super-economy. In the pre-EU regime, individual European economies, each with its smaller GDP base, had to accept the veto power of the USA. Now, the EU has a chance to make their views equally powerful and will hopefully make the best decision to make this a reality. It is important to note that the EU is still in the process of further expansion. Two more Member States are expected to join the EU in 2007 and reviews of several other candidates are in progress. Reforming the IMF for the 21st century must be addressed in this context. Given the progressive internationalization of the financial markets, a` la cutting-edge communication technology, the emerging framework of powersharing in the IMF will add to the stability of national and regional economies. The pursuit of stability-oriented objectives by the euro and the dollar currency regimes, and the collaborative efforts of the ECB and the FED, within their respective delegations to the IMF, will be a positive factor. 6.6. The EU and the World Bank We begin our discussions with the International Bank for Reconstruction and Development (IBRD), the principal program of the WB. In Table 6.5A, we compare the relative positions of the EU, the USA, and Japan. We also

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Table 6.5A.


IBRD: Votes and total subscriptions of the EU, the USA, and Japan Total subscriptions 1944 (US$, millions)


% of total

Voting rights Number of votes

1,106.30 2,898.30 856.00 6,939.70 7,239.90 168.40 527.10 4,479.50 165.20 3,550.30 546.00 2,799.70

0.70 1.84 0.54 4.41 4.60 0.11 0.34 2.85 0.11 2.26 0.35 1.78

31,276.40

19.89

1,345.10 1,497.40 6,939.70 146.10 630.80 92.30 805.00 138.40 150.70 107.40 1,090.80 321.60 126.10

0.86 0.95 4.41 0.09 0.40 0.06 0.51 0.09 0.10 0.07 0.69 0.20 0.08

Non-Eurozone

13,391.40

8.51

137,164.00

8.47

EU-25 USA Japan

44,667.80 26,496.90 12,700.00

28.40 16.85 8.08

452,928.00 265,219 127,250

27.98 16.39 7.86

Eurozone Denmark Sweden United Kingdom Cyprus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia Slovenia

11,313 29,233 8,810 69,647 72,649 1,934 5,521 45,045 1,902 35,753 5,710 28,247

% of total

315,764.00 13,701 15,224 69,647 1,711 6,558 1,173 8,300 1,634 1,757 1,324 11,158 3,466 1,511

0.70 1.81 0.54 4.30 4.49 0.12 0.34 2.78 0.12 2.21 0.35 1.75 19.51 0.85 0.94 4.30 0.11 0.41 0.07 0.51 0.10 0.11 0.08 0.69 0.21 0.09

Source: The World Bank.

show that the Eurozone, which has achieved a higher level of integration, has a share large enough to be competitive. The earlier rankings of the USA and Japan as the first and second largest economies of the world face a challenge and a restructuring of the administration of the IBRD is in order. We present the data for the International Finance Corporation (IFC) in Table 6.5B, and for the International Development Association (IDA) in Table 6.5C. As of June 19, 2006, the USA, with its subscription share of 16.85 percent and its voting right of 16.39 percent of the total, enjoys a commanding position in the IBRD. For the IFC, the USA with its

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Table 6.5B. IFC – Votes and total subscriptions of the EU, the USA, and Japan Total subscriptions (US$, 000’s)

% of total

Voting rights Number of votes

% of total


19,741 50,610 15,697 121,015 128,908 6,898 1,290 81,342 2,139 56,131 8,324 37,026

0.84 2.14 0.66 5.12 5.45 0.29 0.05 3.44 0.09 2.37 0.35 1.57

19,991 50,860 15,947 121,265 129,158 7,148 1,540 81,592 2,389 56,381 8,574 37,276

0.83 2.11 0.66 5.04 5.36 0.30 0.06 3.39 0.10 2.34 0.36 1.55

Eurozone

529,121

22.37

532,121

22.10


18,554 26,876 121,015 2,139 8,913 1,434 10,932 2,150 2,341 1,615 7,236 4,457 1,585

0.78 1.14 5.12 0.09 0.38 0.06 0.46 0.09 0.10 0.07 0.31 0.19 0.07

18,804 27,126 121,265 2,389 9,163 1,684 11,182 2,400 2,591 1,865 7,486 4,707 1,835

0.78 1.13 5.04 0.10 0.38 0.07 0.46 0.10 0.11 0.08 0.31 0.21 0.08

Non-Eurozone

209,247

8.86

212,497

8.85

EU-25 USA Japan

738,368 569,379 141,174

31.23 24.09 5.97

744,618 569,629 141,424

30.95 23.65 5.87


subscriptions at 24.09 percent and voting right of 23.65 percent of the total is the leader. The same is true for the IDA, where the USA enjoys a voting right of 13.39 percent of the total. Japan as the second largest economy had its subscription at 8.08 percent of the total funds of the IBRD and voting rights of 7.86 percent. For the IFC, Japan’s subscription is at 5.97 percent of the total with its voting right at 5.87 percent. For the IDA, Japan’s 10.36 percent of the voting rights is the second largest of the total. Together, the USA and Japan contribute some 25 percent of the total fund and enjoy a corresponding share of the voting rights in the IBRD. For the IFC, the two contribute 30.06 percent of subscriptions and their voting rights total 29.52

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Table 6.5C. IDA – Votes and total subscriptions of the EU, the USA, and Japan Voting rights Number of votes

% of total


172,388 442,902 94,474 654,788 1,043,130 39,635 44,943 426,350 36,541 330,811 42,015 113,072

1.10 2.82 0.60 4.17 6.64 0.25 0.29 2.71 0.23 2.11 0.27 0.72

Eurozone

3,441,049

21.91

158,811 304,604 794,820 42,204 72,449 — 109,301 36,322 — — 344,305 46,958 34,947

1.01 1.94 5.06 0.27 0.46 — 0.70 0.23 — — 2.19 0.30 0.22

Non-Eurozone

1,944,721

12.38

EU-25 USA Japan

5,385,770 2,102,894 1,626,574

34.29 13.39 10.36



percent. The voting rights of the two in the IDA are 23.75 percent of the total. Without the presence of the EU as a political entity, the leadership of the USA remains beyond question and that of Japan follows. Germany, France, United Kingdom, and Italy trail behind, while the rest of the participating countries make limited contributions and share limited voting powers. The post-EU regime presents a picture of different competitive ranking. The Eurozone alone outranks both the USA and Japan. The total of the 25 member subscriptions and the total of their voting rights have given the EU a commanding position in the WB institutions – IBRD, IFC, and IDA.


155

Structural issues regarding changes between Member States of the EU will be the responsibility of the European Investment Bank (see Chapter 4). Since the founding of the WB, the USA has made the largest contributions to the Bank, and consequently controlled the administration of the Bank. Thus far, the President of the WB has been an American appointed by the President of the USA. It is now the turn of the EU to take a leading role and appoint the President of the WB to offer leadership in all aspects. The USA, as the second ranking member, will of course share power, but will there be an effort to make the EU and the USA equals in sharing the power of managing the WB with equal subscriptions and voting rights? I have argued against a shared hegemony of the two systems, the USA and the EU, and the two currency regimes, the euro and the dollar. Unilateralism of one or of the two is equally unacceptable and irrelevant. Competition between the EU and the USA, with their competitive shares of world economic activity, will be welcome. Not only will it optimize the economic gains of the peoples of Europe and the USA, but also for all the peoples of the rest of the world (Dutta, 2000a, b, 2002a, b, c; see also Chapters 3, 4, and 8). The EU has made a commitment to work with the WB as its strategic partner toward achieving Millennium Development Goals (MDGs) by 2015. The MDGs are a set of eight targets addressing poverty reduction, universal primary education, gender equality, child mortality, maternal health, HIV/AIDS and other communicable diseases, and environmental sustainability. This global agenda is of course commendable and the USA and other richer member countries of the WB must share the commitment. The challenge, however, is to restructure the Bretton Woods organizations, the IMF and the WB, to achieve their optimum administrative efficiency. 6.7. The EU and the World Trade Organization The EU is a leading member of the WTO, with all its Member States represented by one representative with one vote. Saudi Arabia has been admitted to the WTO as its 149th member. Russia was expected to become the 150th member of the WTO, but was blocked by the United States in July 2006. The Fourth Ministerial Conference in Doha, Qatar in November 2001 made a set of declarations, the Doha Declaration. It includes issues relative to agriculture and subsidies, textiles and clothing, technical barriers to trade and trade-related investment measures, and rules of origin. The Doha Declaration remains to be acted upon and the EU is expected to play a key leadership role. The WTO is facing a division on the specific issues of agriculture and farm subsidies. The mature industrialized economies continue to offer subsidies to their farmers and the farmers in less industrialized and preindustrialized poorer member countries remain unable to compete in the world market. The goal is to eliminate restrictions and

156


distortions in world agricultural markets because agriculture continues to be a major economic activity in the vast of majority of the economies of the world. The mature industrialized economies each have their pet issues including market-access for nonagricultural products. Trade-related aspects of intellectual property rights (TRIP) and environment are also issues of their prime concern. Based on its share of world economic activities, the EU is the leading member of the WTO and must accept the challenge to ensure the success of the Doha Declaration. The EU is particularly concerned about environmental issues and has taken measures to slow and reverse the process of global warming. They have also begun putting pressure on the biggest polluter, the US, to follow suit. This is the big story of An Inconvenient Truth. The industrial revolutions in China and India are following their natural course, adding to the wealth of the world at the expense of the global environment. Industrialized nations cannot begin to criticize the newly industrialized nations before they have fulfilled their own obligations to the worlds’ environment. Happily, the EU has signed the Kyoto Protocol. Perhaps the WTO should make its membership contingent upon accepting the Kyoto Protocol. TRIP is an independent legal issue that should be subject to an international legal code binding upon all member countries of the WTO. Provisions for severe punitive measures will be welcome. If a member country fails to cooperate in this regard, its membership should be terminated. I venture to suggest that there must be an innovative way to tackle the agricultural issues threatening to divide the WTO community. The EU, as the new leader of the WB, may institute a special fund to end subsidies in any form in any country by 2020. Farmers in poorer countries may receive from the Fund equal subsidies for the transitional period. The objective should be to achieve fair market prices of agricultural products from all producing countries. If industrialized nations fail to help the industrialization of the poorer nations by reducing their dependence on the agricultural sector, the wave of illegal migration and widespread protest movements against globalization will not cease. Based on its share of the world trade, the EU is the largest trading economy of the new world (see Chapter 3) and it must accept the challenge to help promote free trade among the 149 WTO member countries. Currently on the roster of the UN, there are 192 sovereign nation-states. The membership of the remaining 43 UN members will truly make the WTO an organization for world trade. If peoples of these 43 countries remain outside the WTO and denied the consequent opportunities of free global trade, the WTO as a whole will remain deprived of the potential economic gains of the free trade which would follow. Given the growing economic resource base of Russia, its accession to the WTO, currently blocked by the USA, may be an issue for the EU to promote. The proposed FTA between the EU and Russia will certainly be a benefit in this regard.


Table 6.6.

157

EU and the WTO membership Membership date


January 1, 1995 January 1, 1995 July 30, 1995 January 1, 1995 January 1, 1995 November 13, 1999 January 1, 1995 January 1, 1995 January 1, 1995 January 1, 1995 January 1, 1995 January 1, 1995 January 1, 1995 February 10, 1999 May 31, 2001 January 1, 1995 January 1, 1995 January 1, 1995 July 1, 1995 January 1, 1995 January 1, 1995 July 30, 1995 January 1, 1995 January 1, 1995 January 1, 1995

Bulgaria Romania

December 1, 1996 January 1, 1995

Source: WTO.

Table 6.6 shows that all Member States of the EU-25, and Bulgaria and Romania, scheduled for accession in 2007, are members of the WTO. Twenty of the 27 became members of the WTO on January 1, 1995. 6.8. Normalization of the intra-EU income gaps The challenge to normalize income gaps among the Member States of the EU merits a critical review. The persistence of income gaps among the Member States would only fuel the debate if the regional economic integration in the EU was of any merit, or there would be no reason for poorer Member States to accept what they would designate as the framework of neoimperialism. Belonging together must be anchored to the concept of shared prosperity to prevent these Member States from exercising their rights to protest against economic exploitation by the richer ones. The second core issue relates to a simple mathematical formula. For laggards to catch up with leaders there must be a period of accelerated growth of their

158


respective economies. Given the right to free movement within the Union, the people in poorer states may move to richer states to find employment. Alternatively, the system may provide for investments by richer states in poorer states so that jobs may be created where the people reside. On the other side of the dispute, people in richer states are concerned to have their jobs taken away by those foreign workers moving to their state or seeing a boom in those economies at the expense of theirs. It will require a significant effort to prove and to assure them that the economic progress of their poorer neighbors will add to their own economic prosperity in the long run. Overall, it is a win-win game to be learnt with patience. Based on the relative levels of industrialization and economic affluence, Greece, Ireland, Spain, and Portugal were found to be lagging. The European Fund, heavily supported by with contributions from the richer Member States, undertook the responsibility to make structural adjustments in all disadvantaged Member economies. The Fund works on a commercial basis, granting loans and collecting repayments with service charges. Table 6.7 reports the progress of the four less affluent economies in 1987, Ireland, Greece, Portugal, and Spain vis-a`-vis Germany, the largest member economy of the Union, and their relative standings in 1987, 1998, and 2004. These years were selected because 1987 is the period immediately following the One Europe Act of 1986, when the economic integration of the EU-15 came to have its parameters more well defined, 1998 being right before the formalization of the Eurosystem, and 2004 being the latest year for which relevant data is available. Ireland began with a base score of 64 in 1987 and moved up to 100 in 1998 and on to 142 in 2004. Based on per capita income, Ireland is now the second richest economy of the Union, next to Luxembourg, as stated earlier. For Portugal, the base in 1987 was 62, progressing to 70 in 1998, and remaining unchanged by 2004. Spain with its score at 78 in 1987, moved up to 83 in 1998, and to 90 in 2004. Greece had a score of 72 in 1987, but experienced a decline in 1998 to 66, but has since recovered and continued to grow, reaching 78 in 2004. These four economies are booming and they have ceased to be relatively lowwage, preindustrialized economies. Table 6.7.

Germany Ireland Portugal Spain Greece

GDP (PPP) per capita comparison 1987

1998

2004

100 64 62 78 72

100 100 70 83 66

100 142 70 90 78

Source: Calculated based on World Development Indicators. See also Schroeder (2000) and Dutta (2002).


159

The issue of intra-EU income gaps will be one of concern as the EU membership expands. In 2004, the AC-10 was admitted to EU membership to become part of the EU-25. They are less industrialized and the normalization of intra-EU per capita income must be an objective. Even before joining, the expectation of their accession caused investments to flow from richer Member States to the AC-10. The AC-10, as per the Agreement of Accession, elected to join the Eurozone to facilitate investment flows from richer Eurozone Member States. As the process made the AC-10 move ahead, extra-EU investment flows also came to explore investment opportunities in these economies, adding to their growth at an accelerated rate. The mass migration of the people from the new 10 seeking employment in the richer countries is not an optimum option. The EU can draw upon its past experience and create jobs where more labor is relatively abundant, and consequently at a relatively low wage rate. In Table 6.8, based on sectoral shares of GDP in 2005 (unless otherwise noted), the EU-10 is evidently more agriculture-dominant. The membership of the EU will further accelerate industrialization of these economies. The table also shows that the EU-15 and the EU-10 share competitive levels of industrialization. As we compare the EU-25 with the USA, the EU as a whole must become less agriculturally dependent and increase their shares of the service sector. 6.9. The EU and the world beyond The EU is on its way to outrank the USA and Japan, formerly the largest and the second largest economies of the world. The challenge for the EU is to share its economic leadership to globalize economic prosperity with all the peoples of the world. Making necessary adjustments for the other mature industrialized economies and the newly industrialized economies of Asia, a disproportionate majority of the 6 billion people of the world remain denied of the living standard they deserve. Much to the surprise of many, China’s industrial revolution has been accomplished. The same is true for India’s great leap forward in high-tech industrialization. Brazil in South America has earned its place on the economic map of the world. Oilrich countries of the Middle East present an exclusive economic map of their own. Russia, rich in huge reserves of natural gas and petroleum, has emerged as an economic power, earning its seat at G-8 meetings, and recently making its currency, Rouble, fully convertible. Table 6.9 reports the relevant data for the EU and the USA. The EU must accept the responsibility of the economic leadership of the world and develop a plan to take the necessary actions. Dealing with China and India, each with over 1 billion people, will certainly be a very special assignment. Asian economies based on the 4+10 model (Chapter 8) have made robust announcements for Asian Economic Cooperation with one common Asian money. As the Europeanization of Europe is becoming a reality, the

160


Table 6.8.

Sectoral shares of GDP (%), 2005 Agriculture

Industry

Services

EU-25 (2004) USA

2.2 1.0

27.3 20.7

70.5 78.3

Austria (2004) Belgium (2004) Denmark Finland France Germany Greece Ireland (2002) Italy Luxembourg (2004) The Netherlands Portugal Spain Sweden United Kingdom

2.3 1.3 2.2 3.1 2.5 1.1 6.2 5.0 2.1 0.5 2.1 5.2 3.4 1.8 1.1

30.8 24.7 24.0 30.4 21.4 28.6 22.1 46.0 28.8 16.3 24.4 28.9 28.7 28.6 26.0

66.9 74.0 73.8 66.5 76.1 70.3 71.7 49.0 69.1 83.1 73.5 65.9 67.9 69.7 72.9

EU-15

2.7

27.3

70.0

Cyprus Czech Republic (2004) Estonia Hungary Latvia Lithuania Malta (2003) Poland Slovakia Slovenia

3.8 3.4 4.1 3.9 4.1 5.7 3.0 2.8 3.6 2.8

20.0 39.3 29.1 30.9 26.0 32.4 23.0 31.7 29.7 36.9

76.2 57.3 66.8 65.3 69.9 62.0 74.0 65.5 66.7 60.3

EU-10

3.7

29.9

66.4

Source: The World Factbook.

Asianization of Asia cannot remain far behind. Africa is Europe’s immediate neighbor and the Organization for the African States has now become the African Union (AU). If even a small percentage of the revenues earned on the mineral resources exploited from the continent of Africa were shared with its native population, the economy of the continent would have been far different. The imperial model devastated the society and peoples of Africa. The EU is currently engaged in a dialogue with its African neighbors regarding the critical subject of illegal immigration. If there should be jobs in the EU to be filled up by these immigrants, the issuance of immigration papers for the guest workers will be an option. If not, the EU, with the resources at its command, can help to further develop an investment


Table 6.9.

USA EU

161

Shares of GDP (PPP), shares of world exports (%), and population

GDP (PPP) (%) 2004

World exports (%) 2000

Population (in millions) 2004

20.85 21.44

13.84 37.67

293.51 455.30

Source: Complied from Tables 3.1, 3.3A, and 3.5.

program in the African economies where they are waiting, hungry for employment. The AU seems to be ready to learn from the economic model of the European continental regionalism (see Chapter 8). Russia is Europe’s other immediate neighbor. Decades of Cold War hostility are now left behind, and in 2006, Russia was invited to host the G-8 meeting at St. Petersburg. The USA, Canada, Japan, the United Kingdom, France, Germany, and Italy joined Russia at the two-day summit in July 2006. Instead of an agenda for an in-depth discussion of economic cooperation with Russia, the summit was caught up in the conflicts in the Middle East. 6.10. The EU and the challenge of leadership The EU, the integrated economy of the continent of Europe, has emerged as the largest economic entity in the world. The dimension of its economic activities, as measured by the EU’s shares of world output and trade, is immensely large and outranks the USA, previously the largest economy since World War II. The USA continues to command competitive shares of world output and trade, and will continue to offer effective competition. The EU must accept the challenge of this economic leadership. To sustain its competitive ability, the EU must initiate competitive programs, especially for the progressive enrichment of human capital. The USA became a victim of its self-confidence when much to the surprise of many, the findings of a Blue Ribbon Presidential Commission in 1985 reported that the per capita productivity of the USA was behind that of the United Kingdom, France, and West Germany in Europe, and South Korea and Japan in Asia (Report of the President’s Commission on Industrial Productivity, 1985, p. 28). Aggressive efforts based on monetary and fiscal policies since then have been in place. Recent studies have reported significant productivity gains in the American economy. One wonders if American consumers continue to prefer imported automobiles, steel, camera, and photographic materials. The EU has a lesson to learn. The American experience may be attributed to the historical fact that until the emergence of the EU-regime, the USA, with its overwhelmingly large shares of world output and trade,

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functioned in the world market without any notable competition. Japan, the second largest economy at the time, was a remote second. Germany, France, the United Kingdom, and Italy followed. Other countries had rather marginal shares, many with less than 1 percent shares of world output and trade, and the Communist economies were completely outside the competitive market economic system. In the post-EU global economic order, the EU and the USA will be vigilant competitors. In addition, the erstwhile Communist economies have joined the new order as Socialist market economies, and evolved to be potential competitors. The competition between the EU and the USA will be the key factor, assuring effective functioning of the free market with optimum resource allocation and price competitiveness. The competition in the world market may collapse if the USA and the EU agree to act as equals and jointly share veto powers in all international economic forums. That will compromise the optimization of economic gains for all the peoples of the world. For the present, there is much competition between the EU and the USA. The world will benefit from a much better extra-wide-body super-jet as the American Boeing and the European Airbus compete. Competition between the EU and the USA to capture shares of the world market for their manufactured products have contributed to quality and cost-competitive products, goods, and services in trade, benefiting the consumers in all countries. Indeed, the EU has adopted the principle of competition as one of its tenets and has made adequate provisions for the enforcement of the competition principle. We have discussed earlier that several business corporations from the USA have been prosecuted in the court of law. The implementation process must be transparent and fully open to judicial review. The euro, the currency of the Eurosystem, in a short period of seven years, has become a competitive international currency vis-a`-vis the US dollar (see Chapter 4). At the ongoing Doha Round, the EU and the USA have joined forces to engage in a diplomatic dialogue with developing economies in support of their respective programs for farm subsidies. However, they are in competition with each other and cannot agree on how best to do it. A competitive world market is in order. The proposal for an Asian continental economic union with one common Asian money is on the table. The African Economic Union is expected to follow. The EU has led the continental economic integration movement. Will the Free Trade Area of the Americas (FTAA) become a base for an American Hemispheric Economic Union? The EU has a responsibility to offer constructive leadership to other continents. The possibility of a trans-Atlantic economic integration of the EU and the USA establishing a new order of unilateralism of the alliance will evoke protests and disapproval of the rest of the world.

CHAPTER 7

The EU and USA 7.1. Participation and cooperation Allied forces commanded by the American Five Star General Eisenhower won the War in Europe on May 8, 1945, and Western Europe was liberated. Immediately thereafter, in 1947, President Truman signed the Marshall Plan to make funds available for the economic reconstruction of war-ravaged Europe. Much to the applause of thousands of Europeans, President Kennedy stood at the high podium facing the Berlin Wall and proclaimed, ‘‘I am a Berliner.’’ President Reagan called for the end of the Cold War and the Berlin Wall came down in 1989. During the conflicts in Southeastern Europe in the 1990s, President Clinton led the war under NATO command, with full support of European allies, and stopped the massacre of innocent peoples in the region. Since World War II, the core of America’s European policy has been one of participation and cooperation. Soon after World War II, on April 16, 1948, the Organization for European Economic Cooperation (OEEC) was founded, with its membership limited to the European countries. The USA could not be a member of the OEEC even though all of the organization’s operations depended on the funds from the Marshall Plan. America asked for participation; the Organization for Economic Cooperation and Development (OECD) with American membership was formed in September 1961 to take over the assignment of economic reconstruction in Europe with US input, and the OEEC ceased to exist. In 1949, American concern for the security of Europe resulted in the establishment of the North Atlantic Treaty Organization (NATO), headed by an American General. The Soviet hegemony in Eastern Europe was a serious security problem and the challenges of the Cold War were to be met. The OECD and NATO became the two post-WWII institutions with provisions for American participation and cooperation with Europe, the OECD for European economic reconstruction and development, and NATO to protect democracy in North America and Europe (see Chapter 2). The economic reconstruction of Europe came to be successfully accomplished, but the economies of Western Europe began to recognize that individually, each was an economy of limited dimensions, given their population bases, geographical areas, and shares of national output and trade

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with the rest of the world. This spurred the movement for economic integration, which progressed at an unprecedented pace. The formation of the Customs Union (CU) of the Benelux countries was quickly followed by the European Coal and Steel Community (ECSC) of 1951, progressing to the European Economic Community (EEC) in 1957, the European Community (EC) in 1967, and finally to the European Union (EU) in 1992. The EEC began with six-member economies effective on January 1, 1958, and in 2004, 25 countries constituted the EU, with two more members to be admitted by 2007. The candidacy of several other countries continues to be under review. On January 1, 1999, 12 Member States of the EU achieved an economic integration at a much higher level than ever before as they adopted one common money, the euro, under a common central bank, the European Central Bank (ECB). The process of political integration is still in progress, but a majority of the Member States have already approved of the Constitution for one European government. The EU is a continent-based institution of the Europeans, by the Europeans, and for the Europeans. Their belonging to the map of Europe is a fact and their commitment to the trans-Atlantic alliance is not disputed. The Atlantic is a great divide between Europe and the USA, and the friendly trans-Atlantic relationship must be viewed in that context. The principle of participation and cooperation must be a shared commitment to a broad-based agenda of values. Unilateral action by either side will compromise the goal of trans-Atlantic cooperation, and must be ruled out. NATO continues to be the defense umbrella under American command. The EU no longer needs financial support for their sustained economic progress, allowing the OECD to broaden its membership beyond Europe and North America. However, this expanded membership includes no country from Africa and Latin America, and its Asian membership continues to be limited to Japan and the Republic of Korea. May the EU and the USA, joined by other richer countries of the world, consider devoting OECD resources to the economic reconstruction and development of poorer countries (see Chapters 3–5). 7.1.1. The USA and regions of economic cooperation As the continental economic integration of European countries continued to gather momentum, the USA moved to explore various economic options for itself. However, its efforts fell far short of what was happening in Western Europe. The EU became one common continental union based in its unique framework of a Free Trade Area (FTA) (see Chapters 3 and 4). The USA has also worked with what I have called the traditional framework of FTA, FTA in name only, and truly based on strategic considerations. This agenda precluded any scheme for a comprehensive regional economic integration. In 1985, the USA–Israel FTA was established, not based on geographical contiguity, but on a shared commitment to values.

The EU and USA

165

The Australia–US FTA (AUSFTA) that became effective on January 1, 2005, is the latest in this category. In the absence of any historical precedent, the emergence of the EU where erstwhile sovereign nation-states compromised their traditional right to sovereignty and voluntarily became members of the EU, there may be a great deal of misconception. As the EEC became functionally operational, the United Kingdom led a counter-movement by joining a few European neighbors and forming the European Free Trade Area (EFTA). The UK’s participation in the EFTA presented a problem for their EC membership until 1973 when the UK became a member of the EU. The EFTA failed (see Chapters 2 and 6). For the USA, there seems to have been a total inability to evaluate the continental integration movement in Europe. Outside of academia, ‘‘One Europe’’ was not thought to be an event of any potential. Uncertain of its position regarding the EU, the USA lackadaisically explored three options for economic regional cooperation. 7.1.2. Asia-Pacific economic cooperation As the events in Western Europe continued to gather momentum, two sets of events came to influence American policy toward regionalization attempts, which I have called pull and push factors (Dutta, 1999). In the 1970s, the newly industrializing economies of Asia, the Republic of Korea, Chinese Taipei (Taiwan), Hong Kong (now returned to Chinese sovereignty), and Singapore, soon joined by Thailand and Malaysia, brought an economic awareness of Asia beyond Japan. Asian countries in general were only known for their history, philosophy, exotic culinary arts, and mysticism. On September 5, 1983, the New York Times published a feature story on the passing of an economic ‘‘milestone’’ in 1982, when the United States, for the first time in its history, did more trade on trans-Pacific routes than on trans-Atlantic routes (Silk, 1983). Indeed, in 1981, US trade with Europe was US$ 115.1 billion, while the total with Asia-Pacific came to be $131.4 billion. Just the previous year, US trade with Europe still had an edge over trade with Asia-Pacific at US$ 119.0 billion–US$ 117.4 billion. This historic event launched a new trend of a US trade deficit with Asia. In 1982, the gap was US$ 14 billion, further widening to US$ 28 and US$ 39 billion in 1983 and 1984, respectively. The Asia-Pacific trade total included the two-way US trade with all countries from Afghanistan to Papua New Guinea plus the island economies of the Oceania. The European total included the two-way US trade with all countries in Western Europe and Eastern Europe including the USSR (Dutta, 1987; Klein, 1987; Linder, 1987; see also Dutta, 1985). There was profit to be made by trade and investment in the Asian economies beyond Japan. Some economists conveyed their concern for the export-led growth of Asia’s newly industrializing economies. They became industrialized mostly at the expense of American consumers, the critics

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argued. Lawrence Klein made an articulate exposition to elucidate the point that export-led growth could not sustain itself indefinitely and that Asia’s growth was the result of the import–export-led growth model (Klein, 1990). For the industrialization of their respective preindustrial economies dependent on traditional agricultural activities, Asian countries had to import capital goods and equipment from the mature industrialized countries. They could only pay for these imports by way of exporting a significant part of their newly manufactured products to the world market and earn export revenues in convertible currencies. Some of these Asian countries borrowed from investment banking institutions in the USA and other richer countries, while others took advantage of joint ventures or foreign direct investment (FDI), with 100 percent foreign ownership. Economic gains from Asian investments became the pull factor (Fry, 1996). The push factor came from events across the Atlantic. There was no clear understanding of the emerging process of the European economic integration. There was a sense of apprehension that trade with the European markets would become limited for non-European trade partners. Debates and discussions by economists and business leaders in Japan and Canada became pronounced. They became concerned that their market shares in Europe would be reduced. Australia and New Zealand soon voiced their concerns. The fact that these two isolated South Pacific industrialized economies, with a huge endowment of natural resources, and small population, did not belong to the map of Europe was made clear to them. These two former colonies had maintained substantive economic ties with the UK, but were summarily left out when in 1973 the UK became a member of the EC. The FTA of the EU required unrestricted intra-EU trade with common trade restrictions against the rest of the world and the UK was required to impose trade restrictions on its trade with Australia and New Zealand. Japan, Canada, Australia, and New Zealand then persuaded the USA to consider a regional cooperation of their own in response, and the five became the proponents of the Asia-Pacific Economic Cooperation (APEC). With its huge population base and a very large share of world economic activity, APEC would be a market big enough to compete with the European continental economy (Bergsten, 1995). On November 6–7, 1989, Indonesia, the Republic of Korea, Malaysia, Singapore, Thailand, the Philippines, and Brunei Darussalam, joined the USA, Canada, Japan, Australia, and New Zealand at a conference in Canberra, Australia and formally constituted APEC with its secretariat in Singapore. In 1991, the People’s Republic of China, Hong Kong, and Chinese Taipei joined the APEC membership, followed by Mexico and Papua New Guinea in 1993. Chile joined in 1994, and in 1998 Peru, Russia, and Vietnam became APEC members. All told, APEC currently has 21 members on the two shores of the Pacific (Table 7.1A). The one exclusive criteria of APEC membership is that each member country must be touched by the waters of the Pacific Ocean. This precludes India, other South Asian countries, and

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The EU and USA

Table 7.1A.

APEC members

APEC members

Date of joining

Continent

Australia Brunei Darussalam Canada Chile People’s Republic of China Hong Kong, China Indonesia Japan Republic of Korea Malaysia Mexico New Zealand Papua New Guinea Peru Philippines Russia Singapore Thailand Chinese Taipei United States Vietnam

6–7 Nov 1989 6–7 Nov 1989 6–7 Nov 1989 11–12 Nov 1994 12–14 Nov 1991 12–14 Nov 1991 6–7 Nov 1989 6–7 Nov 1989 6–7 Nov 1989 6–7 Nov 1989 17–19 Nov 1993 6–7 Nov 1989 17–19 Nov 1993 14–15 Nov 1998 6–7 Nov 1989 14–15 Nov 1998 6–7 Nov 1989 6–7 Nov 1989 12–14 Nov 1991 6–7 Nov 1989 14–15 Nov 1998

Oceania Asia Americas Americas Asia Asia Asia Asia Asia Asia Americas Oceania Oceania Americas Asia Asia Asia Asia Asia Americas Asia

Source: APEC, http://www.apec.org/content/apec/member_economies.html.

several in Southeast Asia from APEC membership, but this is a weak delineation of APEC’s geographical boundaries. In the case of the EU, the criterion for membership is belonging to the map of Europe as observed on the map of the world. The map of the European continent is well defined and offers a definitive geographical identity, while the Pacific Ocean is far too vast. Just as the Atlantic Ocean is a divide between Europe and the Americas, so must the Pacific Ocean be a divide between Asia and the Americas. APEC member countries on the American shore of the Pacific do not share a sense of geographic bond with their fellow APEC member countries on the Asian shore of the Pacific, and having the largest body of water between the two continents will make it all the more difficult to do so. With an area of 62,298 thousand km2, a population base of 2.6 billion people, GDP of over US$ 24 trillion, an average per capita GDP of US$ 9,330, exports of over US$ 4 trillion, and imports of US$ 4.3 trillion, APEC is a huge market area with enormous potential (Table 7.1B). It continues to function and has been responsible for publishing a series of working papers, authored by its various working groups (see Table 7.1C). The annual APEC Summit meetings are held in a member country on rotation, and are attended by the 21 Heads of States/Governments. The Summit has become a colorful global media event, especially when the leaders in attendance appear in the national costume of the host country of the year.

168

Table 7.1B.

Key economic indicators of APEC members (as of December 6, 2005)

Member country

Area (000’s km2)

Population (in millions)

GDP US$ billion

GDP per capita US$

Australia Brunei Darussalam Canada Chile China Hong Kong, China Indonesia Japan Korea Malaysia Mexico New Zealand Papua New Guinea Peru Philippines Russia Singapore Thailand Chinese Taipei United States Vietnam

7,692 6 9,971 757 9,561 1 1,905 378 99 330 1,958 271 463 1,285 300 17,075 1 513 36 9,364 332

20.2 0.4 32.0 15.4 1,299.8 6.9 223.8 127.3 48.2 25.5 105.0 4.1 5.9 27.5 86.2 144.0 4.2 64.6 22.5 293.0 82.6

692.4 5.7 1,084.1 105.8 1,851.2 174.0 280.9 4,694.3 819.2 129.4 734.9 108.7 3.5 78.2 95.6 719.2 116.3 178.1 335.2 12,365.9 51.0

33,629 15,764 33,648 6,807 1,416 25,006 1,237 36,841 16,897 4,989 6,920 26,373 585 2,798 1,088 5,015 27,180 2,736 14,857 41,815 610

86,551 4,713 315,858 32,548 593,647 265,763 71,585 566,191 253,845 125,857 177,095 20,334 4,321 12,111 39,588 171,431 179,755 97,098 174,350 818,775 26,061

103,863 1,638 271,869 24,769 560,811 273,361 46,525 455,661 224,463 105,297 171,714 21,716 1,463 8,872 40,297 86,593 163,982 95,197 168,715 1,469,704 32,734

APEC total

62,298

2,639.1

24,623.6

9,330

4,037,477

4,329,244

3,852

455.3

12,690.6

27,873

3,228,550

3,096,680

Imports US$ millions

Source: APEC, Economic Fact Sheets, http://www.dfat.gov.au/geo/fs, The APEC Region Trade and Investment 2005. EU data from Tables 1.6A and 1.6B, EU exports and imports for 2002, World Development Indicators (2005).


EU

Exports US$ millions

The EU and USA

Table 7.1C.

169

APEC organization

Summit of Heads of State/Government Foreign Ministers’ Meetings Sectoral Ministerial Meeting Education Energy Environmental Sustainable Development Finance Health Human Resource Development Mining Ocean-related Regional Science & Technology Co-Op Small & Medium Enterprise Telecommunications Information Trade Transportation Women’s Affairs Tourism Working Groups Agricultural Technical Cooperation Energy Fisheries Human Resource Development Industrial Science & Technology Marine Resources Conservation Small & Medium Enterprises Telecommunications & Information Tourism Trade Promotion Transportation Secretariat at Singapore APEC Business Advisory Council Eminent Persons Groupa Source: APEC, see also Dutta (1999). a Eminent Persons Group was constituted by one eminent person from each member country, assigned to develop the institutional framework of APEC and has since been dissolved.

APEC has failed to deliver what it promised to the peoples of its 21 member countries. Officially, the APEC Free Trade Area is expected to be operational in 2010, but the 1994 Summit adopting a 10–20 formula has effectively shelved the issue of implementation for the future. The plan provided that, beginning in 2000, the industrialized member countries including the USA, Canada, Japan, Australia, and New Zealand are to establish an FTA in 10 years, while the rest will have 20 years. With no concrete agenda planned for the present, the failure to deliver any result became a source of disappointment for many APEC enthusiasts. Talks for intra-APEC free flow of investment and free movement of labor are considered premature. On the European continent, an FTA with free flow of

170


trade, free flow of investment, and free movement of labor became an accomplishment for the EEC much sooner than the transition period of 12 years agreed upon (see Chapter 2). Two further items, I have argued, point to the inadequacy of APEC. First, the APEC failed to anticipate the Asian financial crisis in 1998. The IMF and the World Bank (WB) produced copious postcrisis studies and took specific measures to correct the imbalance, rather too little, too late. Second, the APEC summits in recent years, under American leadership, devoted a major portion of its deliberations to terrorism and security, with little focus on APEC. True economic cooperation, exposed to terrorism and consequent insecurity, is a nonsequitur, but the scheduled discussion on economic cooperation should not have been put aside. Disappointment for the Asian countries became manifest and the Asian APEC member countries began to hold their own Asian Economic Summits beginning in 1998. Three from Northeast Asia, China, Korea, and Japan, and five members from Southeast Asia, Thailand, Indonesia, Malaysia, Philippines, and Singapore (these five are the original members of the Association of Southeast Asian Nations, or ASEAN, formed in 1965), came together to review the issues relative to their economic cooperation. This is now known as the 3+5 model, for economic dialogue and possible action from the perspective of Asia. At the 2003 Asian Economic Summit in Jakarta, five new members of ASEAN, Myanmar, Cambodia, Laos, Vietnam, and Brunei Darussalam, and India from South Asia were invited to participate in talks, enlarging the 3+5 model of Asian Economic Cooperation to the 4+10 model. At the recent Asian Economic Summit in Kuala Lumpur, Malaysia, leaders called for Asian economic cooperation and an Asian Free Trade Area (FTA) following the EU model. At the Asian Development Bank annual economic conference in Hyderabad, India, in 2006, the leaders of China, Korea, and Japan made a joint statement that Asian economic cooperation needs to be based on one common Asian Money. Expectedly, the host country recorded its support. In what other circumstance could the three Asian leaders use a platform in India to make such an announcement? Currently, there is no action plan for the set up of the APEC-FTA to be functional by 2020, or to seek to be one member in the WTO with one vote, as has been the case for the EU-FTA. The procedure of mutual accreditation and standardization of goods in trade adopted by the EU-FTA could hardly work for the FTA of the APEC at this stage, and a Working Group of APEC has been assigned to work on this specific issue. Even if the APEC-FTA comes online, a policy of mutual accreditation is not likely to work. Given the divergent levels of industrial development among the APEC member economies, an agreement on quality control measures is not likely to be achieved (Tables 7.2A, 7.2B, and 7.3A). Free flow of investment and free movement of labor, accomplished in Europe remain as

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The EU and USA

Table 7.2A.

Key economic indicators of members of the Asian Economic Summit

Member country

Area (000’s km2)

Population GDP (PPP) GDP US$ Exports (in millions) US$ billion billion US$ billion

Imports US$ billion

China Japan Korea India

9,597 378 98 3,288

1,314.0 127.5 48.8 1,095.4

8,859.0 4,018.0 965.3 3,611.0

2,225.0 4,664.0 801.2 719.8

752.2 550.5 288.2 76.2

631.8 451.1 256.0 113.1

Singapore Malaysia Philippines Thailand Indonesia Myanmar Laos Cambodia Vietnama Brunei Darussalam

1 330 300 514 1,919 679 237 181 330 6

4.5 24.4 89.5 64.6 245.5 47.4 6.4 13.9 84.4 0.4

124.3 290.2 451.3 560.7 865.6 78.7 12.1 30.7 232.2 6.8

110.6 122.0 91.4 183.9 270.0 7.5 2.5 4.7 43.8 –

204.8 147.1 41.3 105.8 83.6 3.1 0.4 2.7 32.2 4.5

188.3 118.7 42.7 107.0 62.0 3.5 0.5 3.5 36.9 1.6

17,842

3,166.7

20,106.0

9,246.4

2,292.6

2,016.7

Total 4+10

Note: Export data (fob) while import data (cif). For China, Japan, Korea, India, Malaysia, and the Philippines, imports (fob). Source: The World Factbook (July 20, 2006). a GDP data for Vietnam is from 2003.

Table 7.2B.

Sectoral shares of GDP of Asian Economic Summit members (%)

Country

Agriculture

Industry

Services

China Japan Korea India Singapore Malaysia Philippines Thailand Indonesia Myanmar Laos Cambodia Vietnam Brunei Darussalam

12.5 4.6 3.3 18.6 Negligible 8.4 14.4 9.9 13.4 56.4 45.5 35.0 20.9 3.6

47.3 27.8 40.3 27.6 33.9 48.0 32.6 44.1 45.8 8.2 28.7 30.0 41.0 56.1

40.3 67.7 56.3 53.8 66.1 43.6 53.0 46.0 40.8 35.3 25.8 35.0 38.1 40.3

Source: The World Factbook (July 20, 2006).

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Table 7.3A. Member country

Area (000’s km2)

Canada USA Mexico Total

Key economic indicators of NAFTA members


GDP US$ billion

GDP (PPP) US$ billion

Exports US$ billion

Imports US$ billion

9,985 9,631 1,973

33.1 298.4 107.5

1,114.0 12,360.0 1,067.0

1,035.0 12,490.0 693.0

364.8 927.5 213.7

317.7 1,727.0 223.7

21,589

439.0

14,541.0

14,218.0

1,506.0

2,268.4


issues to be discussed in the foreseeable future in the context of APEC. One wonders if the APEC initiative has been reduced to an empty exercise, but we still must wait until 2020 for an appropriate evaluation of the APEC. 7.1.3. The North American Free Trade Area The North American Free Trade Area (NAFTA) including Canada, the USA, and Mexico, was signed in 1992 and became effective in 1994. Before signing NAFTA, the USA and Canada concluded the Canada–USA FTA (CUS-FTA), which came into force on January 1, 1989. Canada is the largest trading partner of the USA, and as much as 70 percent of Canadian trade is with the USA. Thus, the CUS-FTA came to be considered a natural cross-border economic cooperation. The welfare effects of the free trade agreements among regional economies were expected to be positive because neighbors are natural trading partners (Krugman, 1991; Summers, 1991). However, though the two neighboring countries shared a common geography in continental North America with comparable levels of economic development and had their respective dollars in a free float in the market, the CUS-FTA missed the opportunity to pursue unrestricted free trade, free flow of investment, and free movement of labor to effectively compete with the EU-FTA. Notwithstanding the opposition from many concerned groups, NAFTA stands on its own economic merit and was supported by the US Congress and President. The present discussion will thus be limited to its relevance in the context of the EU-FTA and its ability to provide a competitive economic regime vis-a`-vis the EU. NAFTA is what we have called a strategic FTA. It does not promise a North American economic integration with unrestricted intra-NAFTA trade and investment flows and free movement of labor. The NAFTA has no plan to apply for one membership of the WTO with one vote. There is no suggestion for one money, though the US dollar is and probably will continue to be the anchor currency. The USA and Canada have been in several trade disputes and they are contesting parties in the courts of law. The illegal immigration of millions of laborers from Mexico remains a

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The EU and USA

Table 7.3B.

Sectoral shares of GDP of NAFTA members (%)

Member country

Agriculture

Industry

Service

Canada USA Mexico

2.2 1.0 3.8

29.4 20.4 25.9

68.4 78.7 70.2


point of hot debate in the United States. One view is that several million of may be allowed to earn the citizenship of the United States and they should be beneficiaries of work permits for the interim period. Let us note that all factories in the USA did not move to Mexico. Illegal immigration from Mexico is a fact determined by market conditions relative to labor demand in the USA and labor supply in Mexico. The issue has to be dealt with independent of the NAFTA, which offers no provision for the intraNAFTA free movement of labor. Much has been reported on the issue of trade creation and trade diversion under NAFTA (Krueger, 1999; Burfisher et al., 1999; Salazar-Xirinachs, 2002) and the findings point to no trade diversion impact. Simply put, there is no way to compare the NAFTA-FTA with the EU-FTA at this time. The magnitude of the NAFTA economy is also not substantively competitive with that of the EU. However, it will strengthen the relative competitive positions of North America and Europe (Table 7.3A). Canada and Mexico add 140 million people to the USA’s total of 298 million. As for GDP (PPP), the US total of US$ 12 trillion will be augmented by US$ 2 trillion. The totals of exports and imports for NAFTA are US$ 1.5 trillion and US$ 2.3 trillion, respectively, not counting for intra-NAFTA trade. We have compared the relative position of the USA and the EU (Chapters 3 and 4). Based on sectoral shares of GDP (Table 7.3B), the levels of industrialization of the three economies point to the compatibility of their closer economic integration. One wonders why it did not happen. Let us further note that with the enlargement of the EU by 10 economies of Eastern Europe to the EU membership in 2004, the compatibility of the levels of industrialization may warrant more liberal interpretation. I have argued that geographic unity is the core factor, and the commitment of the member economies in the region must be unqualified. Sovereign nationstate economies, as we have been rightly taught, are ‘‘accidents of history.’’ 7.1.4. Free trade area of the Americas The USA hosted a conference of the 34 democratic economic regimes from the American hemisphere in Miami, Florida in December, 1994. The 34 Heads of States/Governments resolved to institute the FTA of the Americas (FTAA) by 2005, and the Miami Summit’s Declaration of Principles and Plan for Action became the core documents. Though the FTAA failed

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to materialize by 2005, this was an elegant effort to compete with the magnitude of the EU’s economic dimension. All countries in the American hemisphere except Cuba attended the conference. Table 7.4A presents the key economic indicators of the 34 participating countries with a population base of 875.8 million and total GDP (PPP) at US billion $17,898.6 plus their hemispheric totals of trade figures (exports as well as imports). Table 7.4B relates to the data of sectoral shares of GDP, a profile of industrialization of these countries. Table 7.4A.

Key economic indicators of FTAA members

Member country

Population (millions)


Antigua and Barbuda Argentina Bahamas Barbados Belize Bolivia Brazil Canada Chile Colombia Costa Rica Dominica Dominican Republic Ecuador El Salvador Grenada Guatemala Guyana Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru St. Vincent and the Grenadines St. Lucia St. Kitts and Nevis Suriname Trinidad and Tobago Uruguay USA Venezuela

0.1 39.9 0.3 0.3 0.3 9.0 188.1 33.1 16.1 43.6 4.1 0.1 9.2 13.6 6.8 0.0 12.3 0.8 8.3 7.3 2.8 107.5 5.6 3.2 6.5 28.3 0.1 0.0 0.0 0.0 1.1 3.4 298.4 25.7

0.8 518.1 6.1 4.8 1.8 26.0 1,556.0 1,114.0 187.1 337.5 44.7 0.4 63.7 30.7 31.2 0.0 56.9 3.6 14.2 20.6 12.2 1,067.0 16.1 22.8 29.1 164.5 0.3 0.9 0.3 2.8 18.0 33.0 12,360.0 153.7

0.2 40.0 0.5 0.2 0.4 2.4 115.1 364.8 38.0 19.3 7.0 0.1 5.8 9.2 3.6 0.0 3.9 0.6 0.4 1.7 1.6 213.7 1.6 7.5 3.1 16.0 0.0 0.1 0.1 0.9 9.2 3.6 927.5 52.7

0.7 28.8 1.8 1.5 0.6 1.9 78.0 317.7 30.1 18.0 9.7 0.2 9.8 8.4 6.7 0.0 7.7 0.7 1.5 4.2 4.1 223.7 2.9 8.7 3.8 12.2 0.2 0.4 0.4 0.8 6.0 3.5 1,727.0 24.6

Total

875.8

17,898.6

1,850.7

2,546.3


Exports US$ billion

Imports US$ billion

175

The EU and USA

Table 7.4B.

Sectoral shares of GDP of FTAA members (%)

Member country

Agriculture

Industry

Service

Antigua and Barbuda Argentina Bahamas Barbados Belizea Bolivia Brazil Canada Chile Colombia Costa Rica Dominica Dominican Republic Ecuador El Salvador Grenada Guatemala Guyana Haiti Honduras Jamaica Mexico Nicaragua Panama Paraguay Peru St. Vincent and the Grenadines St. Lucia St. Kitts and Nevis Suriname Trinidad and Tobago Uruguay USA Venezuela

3.9 9.5 3.0 6.0 14.2 12.8 8.4 2.2 6.0 12.5 8.8 18.0 11.2 7.0 9.9 7.7 22.7 37.0 28.0 13.9 4.9 3.8 16.5 6.8 22.4 8.0 10.0 7.0 3.5 13.0 0.7 9.3 1.0 4.0

19.2 35.8 7.0 16.0 15.2 35.2 40.0 29.4 49.3 34.2 29.9 24.0 30.6 31.2 30.2 23.9 18.8 20.3 20.0 31.2 33.7 25.9 27.5 15.6 20.7 27.0 26.0 20.0 25.8 22.0 57.0 31.1 20.4 41.9

76.8 54.7 90.0 78.0 61.2 52.0 51.6 68.4 44.7 53.3 61.4 58.0 58.2 61.8 59.9 68.4 58.5 42.7 52.0 54.9 61.5 70.2 56.0 77.6 56.9 65.0 64.0 73.0 70.7 65.0 42.3 59.6 78.7 54.1

Source: The World Factbook (July 20, 2006). Total does not add up to 100.

a

During the 1994–1998 period of preparation, the 34 Ministers for Trade, set up 12 working groups to examine trade-related issues of concern and made their findings available to the public. Four ministerial meetings took place during this period. At the fourth meeting in San Jose, Costa Rica, the Ministers agreed upon the general principles and objectives of the FTAA to be considered by the Heads of States and Governments. The Second Hemispheric Summit took place in April 1998 in Santiago, Chile where issues for further deliberation were identified for follow-up ministerial meetings. Following two more ministerial meetings, the third Hemispheric Summit was held in Quebec City, Canada on April 20–22, 2001.

176


Table 7.4C.

FTAA hemispheric summits and ministerial meetings

Summits of Heads of State/Government The First Hemispheric Summit, The Second Hemispheric Summit The Third Hemispheric Summit Special Summit The Fourth Hemispheric Summit Ministerial Meetings The First Ministerial Meeting The Second Ministerial Meeting The Third Ministerial Meeting The Fourth Ministerial Meeting The Fifth Ministerial Meeting The Sixth Ministerial Meeting The Seventh Ministerial Meeting The Eighth Ministerial Meeting

Date

Location

December 1994 April 1998 April 2001 2004 November 2005

Miami, USA Santiago, Chile Quebec City, Canada Monterrey, Mexico Mar del Plata, Argentina

June 1995 March 1996 May 1997 March 1998 November 1999 April 2001 November 2002 November 2003

Denver, USA Cartagena, Colombia Belo Horizonte, Brazil San Jose, Costa Rica. Toronto, Canada Buenos Aires, Argentina Quito, Ecuador Miami, USA

Source: http://www.ftaa-alca.org/alca_e.asp.

The commitment to institute FTAA by January 2005 remains to be fulfilled. The Trade Negotiations Committee (TNC), with the support of the Consultative Group of Smaller Economies (CGSE), worked on the special needs of the less developed and smaller economies in the hemisphere. The seventh and eighth ministerial meetings further pursued the deliberations for the Hemispheric Cooperation Program (HCP). The Chairmanship of the entire process, the site of the negotiations, as well as the Chairs and Vice Chairs of the various negotiating groups and other committees and groups, rotates among the member countries. The ninth ministerial meeting scheduled in Brazil for 2004 did not meet (Table 7.4C). For the discussion in the context of the EU, the immediate concern is to determine if the FTAA will be a strategic FTA or an integrated economy with unrestricted intra-FTAA free trade, free flow of investment, and free movement of labor, possibly with one hemispheric money managed by one hemispheric central bank. American Presidents of both political parties have lent strong endorsement to the concept of hemispheric economic cooperation as they personally represented the USA at the Summit Meetings. An American Hemispheric Economic cooperation remains to be distinguished from the concept of economic union, a` la the EU. If there has been marginal progress for the FTAA, the growing political alienation between the USA and several Latin American countries does not point to a promising immediate future. The leading industrialized countries in the hemisphere must be ready to face the issues relative to normalization of intra-FTAA income gaps, equality of Member States large and small, and an administrative

framework for decision making with majority of Member States and majority of the people, or with unanimity,

The EU and USA

177

unity in diversity – linguistic, religious, cultural, lifestyle divergences, common citizenship, common defense and security plan, common money and a common central bank, membership in international institutions, especially IMF, WB, and WTO, and membership to the G8 Summit, following Russian participation as of 1997. As of 1991, Russia was invited to attend the G7 meetings as a guest member and we learnt about the ‘‘G7 plus 1’’ group. In 1997, Russia became full member and the G8 became the forum. The EU and the USA may develop a collaborative, constructive approach at the G8 meetings. Any attempt to question the democratic standing of any Member States will be unhelpful if the goal is to obtain Russian cooperation and participation. One view is that the USA is the predominant economy in the Americas. By itself, the USA has a competitive share of world economic activity, as defined by its shares of world output and trade. The situation will be different once the Constitution for Europe is adopted and the EU becomes one political entity, with due claim to its share of control of the post-WWII international institutions. Will there be an occasion to move the headquarters of the WB, the IMF, and the United Nations to a location in the EU territory? Should the Constitution for Europe be adopted by the new target date of 2008 (see Chapter 5), the issue of the Americanization of America will be in the forefront. For now, research establishments studying the manifold implications of the American hemispheric economic integration must continue to function with necessary funding. The American Hemispheric Economic Union, once it becomes a reality, will be an economic unit with 875 million people, adding over 500 million people to the American population and it will be very much competitive with the population base of the EU. In terms of GDP, the hemispheric total will add some 5 trillion dollars to the total of the USA, no small amount. The hemispheric population base and GDP aggregate will be competitively large vis-a`-vis the EU. Indeed, the American Hemispheric Economic Union will come to lead the EU. In Tables 7.5A and 7.5B, a profile of the EU is presented for comparison with the FTAA (see Tables 7.4A and 7.4B). Table 7.6 presents a summary of this comparison. The USA, as the overwhelmingly dominant economy of the hemisphere, must assume its burden of leadership. There will be an opportunity to learn from the EU experience. The American Hemispheric Economic Cooperation will empower the peoples of the poorer member countries to promote a faster rate of growth of the poorer economies for an interim period. One sure way not to have a huge influx of illegal immigrants from the poorer neighboring countries will be for the USA and other richer countries to take their investments to where the labor supply is more

178


Austria Belgium Cyprusa Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta The Netherlands Poland Portugal Slovakia Slovenia Spain Sweden United Kingdom Total


Key economic indicators of the EU: a comparative profile Population (in millions)


Exports US$ billion

Imports US$ billion

8.2 10.4 0.8 10.2 5.5 1.3 5.2 60.9 82.4 10.7 10.0 4.1 58.1 2.3 3.6 0.5 0.4 16.5 38.5 10.6 5.4 2.0 40.4 9.0 60.6

257.6 325.0 16.8 199.4 188.1 22.3 161.5 1,816.0 2,504.0 236.8 162.6 164.6 1,698.0 30.3 49.2 30.7 7.9 499.8 514.0 204.4 87.3 43.4 1,029.0 268.0 1,830.0

122.5 269.6 1.2 78.4 85.0 7.4 67.9 443.4 1,016.0 18.5 61.8 102.0 371.9 5.7 11.0 13.4 2.7 365.1 92.7 38.8 32.4 18.5 193.3 126.6 327.7

118.8 264.5 5.6 76.6 74.7 9.2 56.5 473.3 801.0 48.2 64.8 65.5 369.2 8.6 13.3 18.7 3.9 326.6 95.7 60.4 34.5 19.6 271.8 104.4 483.7

457.6

12,346.7

3,873.5

3,869.1

Note: Exports and imports fob. Source: The World Factbook (July 20, 2006). a Figures relate to the Republic of Cyprus only.

abundant. If the intra-FTAA investment flows will have to be free from the risk of exchange rate fluctuations, one money managed by one Hemispheric Central Bank will be an issue for consideration. The EU will serve as a learning model. Can one American Hemispheric Economy with one money lead to the American hemispheric political integration? Without a sincere attempt to make the FTAA workable, rich countries in the hemisphere cannot continue to enjoy their economic affluence when their immediate neighbors are so poor. The core issue is economics, but there are many social ramifications. The construction of walls all around the borders of a country to stem illegal immigration will take that country into a state of splendid isolation. In turn, poorer economies will have an alternative option to seek investments from the EU, Japan, and other newly industrialized Asian economies, including China and India. The Organization of American States (OAS), an intrahemispheric political

179

The EU and USA

Table 7.5B. Sectoral shares of GDP of EU members (%) Member country

Agriculture

Industry

Service

Austria Belgium Cyprusa Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta The Netherlands Poland Portugal Slovakia Slovenia Spain Sweden United Kingdom

1.8 1.0 3.7 3.4 1.8 4.0 2.8 2.2 0.9 5.4 3.7 5.0 2.1 4.0 5.5 1.0 3.0 2.1 5.0 5.3 3.5 2.8 4.0 1.1 0.5

30.4 24.0 19.8 39.3 24.6 29.4 29.5 21.4 29.6 21.3 31.2 46.0 29.1 26.1 32.5 13.0 23.0 24.4 31.1 27.4 29.4 36.9 29.5 28.2 23.7

67.8 74.9 76.5 57.3 73.5 66.6 67.6 76.4 69.5 73.3 65.1 49.0 68.8 69.9 62.0 86.0 74.0 73.6 64.0 67.3 67.2 60.3 66.5 70.7 75.8

Source: The World Factbook (July 20, 2006). a Exports and imports job.

Table 7.6.

EU FTAA

The EU and FTAA



Exports US$ billion

Imports US$ billion

457.6 875.8

12,346.7 17,898.6

3,873.5 1,850.7

3,869.1 2,546.3

Note: Based on Tables 7.4A and 7.5A.

cooperation platform, cannot be sustained without a solid economic content. With massive inflows of FDI from the USA, poorer countries in the American hemisphere have the potential to grow at a hefty rate of 8 percent to 10 percent as China has done for the past 25 years. Poor neighbors will also be a potential market for the industrial products made in the USA. The newly manufactured products from the investment from their richer neighbors will be quality and cost effective and their exports back to the richer investing countries will favorably impact their domestic price level and thus ease growth without the inflation pressure. The investments

180


in poorer neighboring countries in the hemisphere will generate profit and increasing corporate tax revenue on repatriated profits will effectively reduce the budget deficit. Any consequent increase of the national debt will cease to be spectacular. The rich nations of the Hemisphere have a choice of their own. Is the inter-American Bank for Development optimally structured? The European Investment Bank offers a model. The NATO led by the USA will have to find a place for the southern neighbors in the American hemisphere, who belong to the South Atlantic. 7.2. FTAA on ice The FTAA is on ice, as is the Constitution for Europe. Following the adoption of the Constitution for Europe, the EU will become one sovereign nation-state with one national government. This may further prompt the FTAA to become a preparatory step toward the establishment of the American Hemispheric Economic Union. Meanwhile, a proliferation of agreements for CU and Free Trade Areas (FTA) in various regions of the world has been in progress. In Tables 7.7A and 7.7B, four CU and nine FTAs in the American hemisphere are listed. Many more agreements for regional trade preferences or free trade areas have been reported. Negotiations between Mercosur and the Andean Community in 2005 resulted in an agreement to end all import tariffs in 15 years and will constitute the largest FTA in the Southern hemisphere. The case has also been made for the Latin American Free Trade Area. However, all these efforts resemble strategic regional agreements for trade preferences. They are indeed far from the model of the FTA of the EU with a total commitment for economic integration. Reportedly, for 1990 and 1999, intra-MERCOSUR imports increased at an annual rate of growth of 15 percent, intra-Andean imports grew at an annual rate of 15 percent, intra-regional imports of CACM grew at an annual rate of 16 percent, intra-CARICOM imports grew at an annual rate of 10.4 percent, and intra-NAFTA imports grew at an annual rate of 10.1 percent (Inter-American Development Bank, 2000). 7.3. The continent of Europe and the American hemisphere I have reviewed three specific programs for regional economic cooperation led by the United States of America in the post-EU global regime. To reiterate, they are: the APEC of 1989, the NAFTA of 1992, and the Free Trade Area of the Americas (FTAA) of 1994. Others have argued that these efforts came independent of the continental integration activities in Europe. Let it be noted that all three programs were initiated after 1986 when the One Europe Act was signed by all 15 members of the EU. In particular, NAFTA and the FTAA appear to be direct responses to the

181

The EU and USA

Table 7.7A. Customs Unions and FTAs in the American hemisphere Customs Unions

Current members

Signed

Effective

Mercado Comuń Centroamericano (MCCA)

Guatemala

1960

1961

Honduras El Salvador Nicaragua Costa Rica Andean Community (CAN)

Bolivia Columbia Ecuador Peru Venezuela

1969

1969

Caribbean Community (CARICOM)

Antigua and Barbuda

1973

1973

1991

1994

Bahamas Barbados Belize Dominica Grenada Guyana Haiti Jamaica Montserrat St. Lucia St. Kitts and Nevis St. Vincent and the Grenadines Suriname Trinidad and Tobago CARICOM Associate Members

Anguilla Bermuda British Virgin Islands Cayman Islands Turks and Caicos Islands

Mercado Comuń del Sur (MERCOSUR)

Argentina Brazil Paraguay Uruguay

Source: Salazar-Xirinachs (2002), MERCOSUR, CARICOM, CAN, http://www.britannica.com.

1992 Maastricht Treaty, which defined the macroeconomic agenda of the EU (see Chapters 2–4). In 2004, EU membership expanded to 25 nations, and as per the terms of accession, the new 10 member countries, the AC-10, have elected to accept and abide by all the prior agreements. One Europe is

182


Table 7.7B.

Free trade agreements in the American hemisphere

FTAs

Current members

Canada–USA

Canada USA Canada

North American Free Trade Agreement (NAFTA)

Mexico/Chile FTA Costa Rica–Mexico Free Trade Agreement (CRIMEX FTA) Mexico/Colombia/ Venezuela FTA (G3)

Mexico–Bolivia FTA Canada–Chile Free Trade Agreement (CCFTA) Mexico–Nicaragua FTA Mexico–Northern Triangle

Signed

Effective 1989

1992

1994

USA Mexico Mexico Chile Costa Rica

1994

1995

Mexico Columbia

1994

1995

1994

1995

1996

1997

1997

1998

2000

2001

Mexico Venezuela Mexico Bolivia Canada Chile Mexico Nicaragua Guatemala Honduras El Salvador Mexico

1992

Source: Salazar-Xirinachs (2002), MERCOSUR, CARICOM, CAN, http://www.investinmexico.com.mx/pied/cds/pied_bancomext/why_mexico/trade_filename.htm.

the commitment of the EU. For the USA, participation in APEC, NAFTA, and the FTAA were different strategic responses of the US to the progressing EU movement. The competitive shares of economic activities, as defined by shares of worlds’ output and trade, became the concern. The US leadership in the world economy came to be challenged, albeit a friendly challenge. The USA adopted the EU paradigm of a supranational economy by inviting neighboring economies to form a regional group. The APEC program, based on the concept of a trans-Pacific neighborhood, was not well defined. NAFTA was not strong enough as a regional grouping because the combined economic activity base of the USA, Canada, and Mexico, are not competitively large enough. The FTAA, based on hemispheric togetherness, will provide a substantial economic edge for the Americas. However, the leadership on this shore of the Atlantic has failed to appreciate that the EU was a program to establish a supranational

The EU and USA

183

economy with articulate specification of micro and macroeconomic parameters, effectively coordinated by an EU administration with its legislative, executive, and judicial branches in an optimal order, pending the political integration of the EU. On the American shore of the Atlantic, a FTA has been the extent of regionalization goals. I have argued that the revolutionary FTA of the EEC was anchored to the concept of one common economic unit based on one common geographic unit, the continent of Europe. On the other hand, the traditional FTA adopted by the USA limits its activities to trade preferences within the region. It does not require a common trade policy for the rest of the world, nor does it seek to consolidate its members into one economic or political entity. NAFTA could have been the first step for Canada, the USA, and Mexico to have an FTA with unrestricted cross-border free trade, free flow of investment, and free movement of labor with an interim administrative infrastructure similar to the EU. The expansion of the EU to include lessindustrialized countries in Eastern and Southeastern Europe also reflects the situation in the American hemisphere, where the 33 countries in the South are less industrialized (see Table 7.4B). Given the commitment and the role of the leading economies in the hemisphere, integration with the less-industrialized countries of the South is an obvious challenge that can be overcome by comprehensive cooperation and the lessons of the EU experience. 7.4. OECD and NATO Both the OECD and NATO, the two post-WWII institutions, continue to maintain US leadership for economic reconstruction and military defense of the continent of Europe. They have completed their respective objectives and it is time for change. The EU is now ready to assume its own economic and defense responsibilities and the USA must accommodate the reality of post-Cold War Europe. The OECD is known to be a club of the rich nations of the world. Even with the membership of OECD enlarged, the poorer countries of the world remain excluded from its membership. We have noted that not a single OECD member is from the continents of Africa or South America. Most of its members are from Europe, many of whom have become members of the EU. I have argued that if the agenda of the OECD is to promote economic development, it should invite those poorer countries to join its membership. Alternatively, the OECD may consider merging itself with the WB, specifically with its program for International Development Assistance. Of course, the OECD can and must continue to function as an international think tank, studying economic cooperation and development. NATO, as we have discussed earlier, is the post-WWII defense umbrella under American Command. By definition, the umbrella covers countries across the North Atlantic, but the EU is ready for its own common

184


European defense and security. And because defense and foreign policies go hand in hand, the EU is also ready for its one common foreign policy. However, the political integration of the EU must wait for the adoption of the Constitution for Europe by all its member countries. Even so, the Foreign Policy Chief of the EU has been frequently called upon to play critical roles, especially in the post-Iraq War Middle East, where the USA has restricted its contact with Iran, Syria, and the Hamas Government of Palestine. Additionally, NATO will not be a sufficient defense umbrella for the American hemisphere. Since the EU is able and willing to pay for its defense, let them have their own defense umbrella. Let the USA lead an American Hemispheric Defense Organization (AHDO). Global defense will have to remain a joint responsibility of both Europe and the Americas, supported by the rest of the world. A cost–benefit analysis of NATO is in order. In the recent wars in Afghanistan and Iraq, NATO had no role to play; the USA led the two wars alone. In August 2006, NATO assumed a limited role in the war in Afghanistan under Canadian–EU command, while the USA continued to carry out its independent military role in the same country. The divisibility of NATO command will be yet another novel experience. Since its founding, NATO has always been under the American command, but the new provisions will eventually lead to two independent defense umbrellas, one under American command and another under EU–Canadian joint command. Indeed, the EU has proposed a common defense and security policy under its independent command. Some have argued that both OECD and NATO have become platforms for influence-peddling. As and when candidate countries become members of the EU, they are also invited to join NATO membership that will assure them of defense under the American Command. This will undermine the EU policy for one common defense and security for the continent of Europe as the trans-Atlantic defense alliance has a history of its own. The EU–USA relationship is already strained by war in Iraq and will be further challenged unless the agenda of NATO is redefined. For the OECD, it is not necessary to provide economic assistance to the EU members in Eastern Europe since the European Investment Bank plays this role. A failure to redirect the OECD agenda to the economic development of the world at large will also challenge the relationship between the EU and the USA. The role of the OECD should be independent of intercontinental politics. 7.5. Lessons to learn The post-WWII regime has come to an end. The Cold War has been over for 15 years. The EU has become an innovative model of continental economic and political regionalization, whereby one continent with one common family of Europeans has become one country. The industrialization of Asian economies has prompted actions for regionalization. The

The EU and USA

185

African Economic Union (AEU) is being led by a preparatory committee headed by the major African countries. The success of the EU experiment will provide a learning model for Asia and Africa (see Chapter 8). For the USA, the lesson to learn is to accept the EU as a viable economic entity and a strong competitor in the world market. Any efforts to challenge the EU will be counterproductive and will be seen as an exercise in resisting fundamental changes in the world, political, economic, and social. Though American leadership was the only option after WWII and during the Cold War, it will be helpful to recall the warnings that the USA could not support the military and economic stability of the anticommunist, free world indefinitely (Kindleberger, 1985). Truly, the cost became overwhelming. Unilateralism in any form is a symbol of imperialism: one superpower controlling the economic and political destiny of the rest of the democratic, free-market world on its own terms. The EU has become a competitive world power and warrants recognition. Based on the specific criteria of economic activities as we have stated earlier, the EU has the largest shares of world output and trade. However, until there is formal political integration, there is a legal case for denying due recognition to the EU. The policy of minimizing the EU on a technicality is unwelcome. Sooner or later, the USA must accept the fact that the EU is the effective continental government of Europe and share power with it. The ongoing efforts for power-sharing at the International Monetary Fund and the WB (see Chapter 6) should extend to all international institutions. Following the Iraq War, recently aggravated by the limited invasion of Lebanon, the leadership position of the USA in the Middle East continues to be under scrutiny. Given the proximity of the region to the continent of Europe, the EU will expectedly have a greater motivation for peace when engaged in communications and negotiations with the political leaders of the region. Indeed, the vast area from Turkey to Pakistan inclusive of Morocco, Algeria, Libya, Egypt, Palestine, Jordan, Saudi Arabia, Kuwait, Oman, Qatar, and Iran, have expressed their disapproval of America’s ‘‘cowboy diplomacy’’ (Allen and Ratnesar, July 17, 2006). Even the Prime Minister of Iraq, an allied government of the USA, failed to approve the policy and lent only qualified support. The Iraq War has been a costly lesson for the USA. The EU as a whole refused to endorse the Iraq War, though some European countries lent limited support. The USA alone has paid the brunt of the cost, both in terms of money and lives of men and women in arms. This is an occasion for the EU leadership to play a positive role in the Middle East. The USA has challenged the democratic institutions of the Russian government and blocked its membership to the WTO at the G-8 Summit in St. Petersburg in July 2006. In response, Russia has criticized the recent lapses in American democracy. The tense relationship between the USA and Russia will have an adverse economic impact on both nations. The EU

186


is considering an agreement with Russia, its immediate neighbor with a rich endowment of natural resources, to institute a FTA. Since discussions between the USA and Russia can be expected to only deliver suboptimal results, the EU is engaged in a more constructive communication for economic cooperation with Russia. At the WTO, there is a lack of substantive cooperation. The USA and the EU ought to take a constructive, collaborative approach to coordinate their farm subsidy policies. The Doha Round of trade negotiations at the WTO should be rescued by focusing on the long-term economic benefits of free trade and not be hampered by immediate political considerations. Given its own continental framework, the EU is expected to welcome the American Hemispheric Economic Union. Mutual recognition and cooperation will add to the economic gains of all the peoples of the two continents. We must wait and watch as and when the new policy will be put in place. The sooner this happens, the better the outcome. The EU and the American Hemispheric Economic Union will have 25 percent of world population and some 60 percent of the world’s total economic activities and will be an enormously substantive resource base to help the economic development of the rest of the world. Economic reconstruction efforts around the world must not be conditional and politically manipulative. For the continents of Africa and Asia, a robust joint effort will be welcome. The EU has an economic interest in Asian countries, and expectedly it will have much reservation if the USA leads an effort to assert economic influence in Asia a` la APEC. Indeed, the EU has expanded its economic cooperation with major Asian economies, including Japan, South Korea, China, and India. The USA has responded in capturing its share of the large Asian market. The continent of Africa is in Europe’s immediate vicinity and the EU has already begun to formulate a proactive African economic development policy. The USA also has its responsibility for the continent of Africa and should step up its efforts. A competitive EU–USA initiative is very much in order to establish the basic infrastructure that will permit accelerated economic growth in Africa. However, the erstwhile policy of the imperial superpower domination of dividing areas of influence in the two continents between the EU and the USA will be counterproductive and a new policy of constructive engagement is called for. Both Africa and Asia are eager to learn from the EU model of continental economic integration with intraregional micro and macroeconomic policy guidelines. Each continental economy with its competitive shares of world output and trade and endowment of natural resources will be able to be a competitive actor in the world market (see Chapter 8).

CHAPTER 8

The EU: A Learning Model 8.1. Continental regionalization and globalization One world at one step will be too big a step. For one in Luxembourg it will be relatively more convenient to locate Latvia on the map of Europe; to search for Laos in Asia will be too much of a task. A man or a woman in Nepal will easily guess Mongolia is somewhere in the continent of Asia; he or she will have great difficulty to figure out where Martinique is in South America. A citizen of Chad will have less of a problem to locate Burkina Faso on the map of Africa, but will struggle hard to find Brunei Darussalam in Asia. The message is simple and straightforward. The map of the continent is easily accessible. The map of the world is much too large and unfamiliar. Hence, the European Union (EU) covering the continent of Europe and its progress over the past half century toward successfully developing a framework of continental regionalization has become very much a learning model. The appreciation of the EU warrants a comprehensive understanding of the core of the European economic union based on the shared belonging of the people of Europe to one common geographic unit. Independent of linguistic, religious, and lifestyle diversities, they are members of one common family of Europeans. Historical experiences of war and destruction helped foster the new awareness of oneness and unity. The issue is one of learning from this experience. The rest of the world must learn from the EU experience and hopefully avoid wars and destruction among countries in a given continent. Cross-border conflicts of violence, often reinforced by economic or political sanctions, have been the tragic history in most continents. Indeed, continental regionalization will minimize the chances of intercontinental conflicts, because each continent will enjoy competitive equality in terms of core strength based on economic activities. A global order of peace will expectedly follow. To ensure the cooperation and participation of the Member States of a continental union, and of their population, a democratic administration will be a necessary condition. The majority of the people and a majority of the Member States in a given continental union must cast their votes for the government of the union. Thus, the values of peace and democracy will be the foundation of the new intercontinental world order.

188


Today, Europe is far beyond a Customs Union (CU) or a traditional Free Trade Area (FTA). The EU-FTA ensures a free flow of trade of all goods and services amongst all EU member economies, with no trade barriers or restrictions of any kind among them, and enforces a common set of restrictions vis-a`-vis the rest of the world without any exceptions. The EU-FTA is one of the members of the World Trade Organization (WTO) with one vote. Goods and services traded in the EU are standardized by mutual accreditation by member countries. Unrestricted crossborder trade flows minimize the cost of traded goods and permit them to be sold at a lower price. Intra-EU trade increases and adds to the profit of businesses and gains to consumers in terms of quality and price competitive goods and services. The economic prosperity can gather more momentum as free flows of investment are immune from the risk of exchange rate fluctuations as and when more Member States adopt the common currency of the Eurozone. Free movement of labor within the EU has not caused any problem and no mass migration from one member country with relatively low income to another with relatively high income has taken place. Indeed, free flows of investments have helped to create jobs where the people, unemployed or under-employed, reside. The growth in employment and income in the EU economy attracts more inflows of investments from other savings-rich foreign countries. It is to be noted that the intraEU income gaps have become more normalized. We have demonstrated that given time, individual member economies would not gain competitive shares of world output and trade. The EU paradigm offers a unique lesson to learn: competitive shares of world output and trade can be acquired by integrating economies belonging to the continental geography. At present, the EU commands the largest shares of world output and trade, outranking the USA, and pushing Japan to a remote third position (see Chapters 3 and 4). Table 8.1 presents population, comparative trade figures, and shares of world GDP for the Eurozone, the USA, and Japan. Based on the data (Table 8.1), one can conclude that the Eurozone of the 12 in-members of the EU has a competitively large share of world trade Table 8.1.

Key economic indicators of the Eurozone, the USA, and Japan (1999)

Population (millions) (2000) Shares of world GDP (PPP) (%) Shares of world exports Exports of goods and services (% of GDP) Imports of goods and services (% of GDP)

Eurozone

USA

Japan

302 16.2 18.9 16.9 15.9

272 21.9 15.2 10.3 13.2

127 7.6 9.1 10.7 9.1

Note: World exports are net of intra-Eurozone trade flows. Trade data are in 1995 US$. Source: Issing (2001, p. 3).


189

as well as larger shares of exports and imports of goods and services as percentages of GDP. Both the USA and Japan lag behind. The Eurozone also commands a competitive share of world GDP (PPP) with a substantively larger population base. For the EU-25, the shares of world GDP are much larger, and its population base is the third largest in the world, behind only China and India. With competitive shares of world output and trade, the EU and the USA can compete more effectively in the world market, with the competitive presence of the two leading actors in the market. The importance of a competitive open market has been the primary lesson in economics. To the extent world competition will be more effectively operational, it will help the process of optimization of economic gains for all microeconomic actors, households, and business units, belonging to all the economies of the world. As per the Treaties of Accession, the new 10 members of the EU, the AC-10, admitted to the EU membership in 2004, have accepted all provisions of the EU-FTA. The same is true for the two candidate states, Romania and Bulgaria, who are scheduled to join the EU in 2007. Indeed, the terms of accession will be the same for all candidate countries under review for EU membership in future. Will the American Hemispheric Economic Union also be able to successfully address these crucial issues? Traditional FTAs are limited to regional trade preferences, with no plan for regional integration. Strategic and extra-economic considerations often dictate the formation of such FTAs. The recent USA–Australia FTA may be a case in point. However, the novelty of the EU-FTA has made its appeal to other continents. Since the Asian financial crisis in 1998–1999, there have been talks about an Asian Money, call it the AM$, and frequent subcabinet level conferences of Japan, Korea, and China plus Singapore, Malaysia, Thailand, Indonesia, and the Philippines, known as the 3+5 model, have been held. In 2003, India joined the group, and we now have the 4 (the 3 and India) plus 10 (the original five of Association of South East Asian Nations (ASEAN) and Myanmar, Cambodia, Laos, Vietnam, and Brunei Darussalam) model. Recently in 2006, the case for the Asian Money has been made by three leaders of Asian economies, China, Japan, and Korea. Should there be an Asian continental economy with one common money, it will be yet another competitive economic regime based on its shares of world output and trade. The distinguished scholar-politician, Saburo Okita, taught us about the ‘‘several worlds,’’ as we have stated earlier. I have argued that the optimum currency areas warrant a definition by their respective shares of world output and trade (see Monnet, 1978; Dutta, 1992, 1996a, 1999, 2000a, b, 2002a, b, c, 2004; Issing, 1996, 2001; Klein, 1994, 1998; Krugman, 1994; Letiche, 1997; Mazzucelli, 1997; Schroeder, 2000; Yoo, 1996). Much has been written about the gravity model. Some scholars argue that the core of the gravity model depends on extra-economic factors such as

190


language, religion, lifestyle, and culture to hold an economic grouping together, whereas many economists have sought to relate the gravity model to geographical distance between two market points and the associated cost of transportation. To define distances between any two points proved to be a challenging problem as modes of transportation, waterways, railroad, road transportation, airways, bridges, and tunnels, progressively underwent revolutionary changes. The internet is but the latest to challenge the old-fashioned gravity model. Let us recall that in respective imperial models, physical distances between London and Sydney, Paris and Hanoi, The Hague and Jakarta, were politically the shortest. Indeed, the cost-effectiveness of transport between any two distant points was secured by the imposition of monetary and fiscal policy parameters by the respective home governments. The imperial models proved to be ineffective as and when satellite economies or colonies revolted. I have argued that the macroeconomic core is the core of successful economic regionalization, given the concept of a map of the worldview of a region within the context of globalization (Dutta, 1996b, 2000a, b 2002a, b, c, 2004; Lau and Kim, 1994). The successful accelerated rate of industrialization for certain East Asian economies beyond Japan and the normalization of the economic relationship with the People’s Republic of China (PRC) has created a strong pull factor which combined with the push factor of forceful European economic regionalization to motivate 21 sovereign nation-state economies on the two shores of the Pacific Ocean, to constitute the Asia-Pacific Economic Cooperation (APEC) (see Dutta, 1999). Their belonging to a map of the worldview of a region was defined by an ocean (see Chapter 7). Just as the Atlantic Ocean serves to separate the Americas from Europe, so should the Pacific Ocean separate the Americas from Asia. The two continents simply do not belong together because they are not observed to be so on the map of the world and this certainly can define the limited delivery of the APEC. Students of economics who share commitment to the paradigm of globalism and regionalism note with much care that the American Hemispheric Economic Union must be a subject of more intensive study (see Chapter 7). The Organization for African States recently has discussed the feasibility to ‘‘reinvent’’ itself as the African Economic Union following the model of the EU (Onishi (2001)). Recently, the case for an Australian–New Zealand economic integration with one common currency, possibly managed by one intraregional common central bank, has been investigated (Grimes et al., 2000). 8.2. The Asian Economic Union: the case for an intraregional approach: specification of the model The challenges for progressive industrialization of Asian economies after the financial crisis have drawn international attention. Any newly


191

industrialized/industrializing individual economy in Asia, even given its economic magnitude, defined by its shares of world output and trade, could hardly be expected to cope with the situation alone. For the US, the challenge of the financial meltdown of 1987–1988 was no less overwhelming. Given its very large economic base, with shares of world GDP at roughly 20 percent and its share of world trade at some 15 percent, the institution of a special restitution fund finally became a more viable solution as the program struggled to redefine itself over the years. The two parameters to note for any economy are (a) its share of world GDP (GDPi/GDPw) and (b) its share of world exports (Xi/Xw). Let us consider a simple model: country Alpha’s exports (Xa) are functionally dependent on the level of world GDP (GDPw), the price level at home in country Alpha (Pa), the price level in the world market (Pw), and the level of export in the world market (Xw). Similarly, country Alpha’s imports (Ma) will be functionally dependent on the level of GDP in country Alpha (GDPa), the level of exports of country Alpha (Xa), the price level in the home market of country Alpha (Pa) and the price level in the world market (Pw) (Dutta, 1998). We rewrite the two equations, X a ¼ f 1 ðGDPw ; X w ; Pa ; Pw Þ

ð1Þ

M a ¼ f 2 ðGDPa ; X a ; Pa ; Pw Þ

ð2Þ

In equilibrium, and taking Pa/Pw on the left-hand side, the Pa/Pw will be functionally dependent on Pa =Pw ¼ f 3 ðGDPw ; X w ; GDPa ; X a Þ

ð3Þ

It follows that if the two variables, GDPa and Xa were competitive shares of GDPw and Xw, respectively, country Alpha would have a competitive advantage. The relative stability of the home and world price ratio would be a comfortable base for a stable exchange rate for its currency. Foreign investors, exporting capital goods to this economy and/or importing manufactured products from economy Alpha would comfortably have less exposure to exchange rate fluctuation risks. 8.3. Asian Economic Community A brief review of the lessons to learn from the EU is in the following order: 1. The map of Asia is as real as the map of Europe. Pan-Asian culture and civilization is as real as the concept of pan-European culture and civilization; the message is clearly unity in diversity. The grim history of intraregional hostilities and wars in Europe and Asia cannot be allowed to stand in the way of continental economic unity. 2. Given time, an individual country cannot command a large enough share of world output and trade, when there is one economy with a

192


dominant share of world output and trade. One innovative option for Europe was to form the EU to compete with the USA (see Chapters 3 and 4) (see Figures 8.1 and 8.2). 3. Any effort toward Asian Economic Community (AEC) must be based on a comprehensive intraregional micro- and macroeconomic agenda. The potentials of an FTA are well known, but cannot be functionally operational without the free flow of investment and some form of free movement of labor. This intra-Asian microeconomic structure must be supported by an intra-Asian macroeconomic framework. A replication of the EU model is not a necessary condition, but as it has evolved over 50 years, the EU presents a comprehensive learning model for Asia as they plan for the Asian continental economic regionalization. 4. The membership of the AEC must be anchored to the principle of inclusion. In Europe, the initiative came in 1958 from six European states. Over time, its membership grew to 15 sovereign nation economies, and in 2004 the EU has 25 Member States. In Asia, three East Asian economies, Japan, Korea, and China, plus the original five members of the ASEAN, Singapore, Malaysia, Thailand, Indonesia, and the Philippines, appear to have begun to study a 3+5 intraregional economic integration model. As of 2003, five other ASEAN members, Myanmar, Laos, Cambodia, Vietnam, and Brunei Darussalam, plus India from South Asia, have been invited to join the AEC. Thus, the 3+5 model has been expanded to become the 4+10 model (see Table 8.2B). Other countries on the map of Asia will also be eligible to apply for its

Figure 8.1.

EU Share of world GDP

40 35

25 20 15 10 5 0 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Percent

30

Year Austria Estonia Hungary Luxembourg Slovak Republic Historic EU

Belgium Finland Ireland Malta Slovenia Eurozone (12)

Cyprus France Italy Netherlands Spain EU25

Czech Republic Germany Latvia Poland Sweden United States

Note: Based on World Development Indicators (2005)

Denmark Greece Lithuania Portugal United Kingdom

193


Figure 8.2.

EU share of world exports

45 40 35

Percent

30 25 20 15 10

0

1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

5

Year Austria Estonia Hungary Luxembourg Slovak Republic Historic EU

Belgium Finland Ireland Malta Slovenia Eurozone (12)

Cyprus France Italy Netherlands Spain EU25

Czech Republic Germany Latvia Poland Sweden United States

Denmark Greece Lithuania Portugal United Kingdom

Note: Based on World Development Indicators (2005)

membership as and when they will be ready. Perhaps in time, Australia and New Zealand in the South Pacific will elect to join the AEC. 5. Uniformity of the level of industrialization of prospective member economies of the AEC, even of the 3+5 group has been an issue of concern. Beyond Japan, most of these economies have been traditional, agriculture-dominant economies and may not be ready for a jump to intraregional economic integration. Critics argue that conformity of economic structures is necessary. Uniformity relative to the level of industrialization of the EU’s member economies has not been subject of much research. However, the original 15 members of the EU achieved a level of industrialization though 11 of them were known to be ahead of four others. With the admission of 10 new, less-industrialized members in 2004 from Eastern Europe, the situation has become different. We shall return to explore the issue further. Table 8.2A covers the continental map of Asia with 42 sovereign nationstates. Cyprus has become a member of the EU and Turkey is now a candidate country. Hong Kong and Macao returned to Chinese sovereignty and have been integrated into the PRC as special units of administration. Bahrain, Cyprus, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, Syria, Turkey, the United Arab Emirates, and Yemen constitute the Middle East, a special region commanding much of the world’s attention. The region is endowed with enormous reserve of petroleum, a precious commodity of high global demand.

194


Table 8.2A. Afghanistan Bahrain Bangladesh Bhutan Brunei Darussalam Myanmar Cambodia Cyprus Korean Republic Hong Kong (China) India

Economies on the Continent of Asia

Indonesia Iran Iraq Israel Japan Jordan Kuwait Laos Lebanon Macao (China) Malaysia

Maldives Mongolia Nepal Oman Pakistan Palestine Philippines Qatar Saudi Arabia Singapore Sri Lanka

Syria Thailand Turkey United Arab Emirates Yemen Viet Nam Taipei (China) North Korea People’s Republic of China

Note: Sixteen economies are considered to be a separate geographic grouping known as the Middle East (see Table 8.15A). Cyprus and Turkey are part of the Middle East, but Cyprus has been admitted to the EU and Turkey is a candidate country. Source: The World Factbook (July 20, 2006).

Table 8.2B. Members of the 4+10 model of the Asian Economic Community Four Japan Korea China India

Ten Singapore Malaysia Thailand Indonesia Philippines

Myanmar Laos Cambodia Brunei Darussalam Viet Nam

Source: Dutta (2004), see also Chapter 7.

However, the ongoing conflict in the Middle East makes one wonder if there can ever be a Middle Eastern region with an agenda for economic and political integration. I have suggested earlier that the recent Middle Eastern policy of the USA may encourage a regional compact of the countries from Turkey to Pakistan plus others in the Northern rim of Africa from Egypt to Morocco (see Chapter 7). Nonetheless, there has been an initiative with the AEC to form an effective regional grouping (Table 8.2B), which will be our focus. Much has been written about whether the level of industrialization in Asian economies will warrant continental integration following the EU model (Dutta and Tantum, 1988). The familiar argument has been that the AEC would be unsuccessful given the level of industrialization of the participating economies. They say that Europe is too different and Asia cannot do what has been done in Europe. The focus on sectoral shares of GDP of the member countries became the center of debate. Critics were anxious to contain the spread of the EU movement to other continents or the

195


Table 8.3A.

Sectoral shares of GDP (PPP) (1999) Eurozone

Agriculture Industry Services

2.8 28.5 68.7

Total

100

USA

Japan

1.6 27.3 71.1

1.8 36.4 61.9

100

100

Source: Issing (2001).

Table 8.3B.

Sectoral shares of GDP of the 3+5 model (2005)

Member country

Agriculture

Industry

Service

Japan Korea China a Taiwan

1.7 3.3 12.5 2.4

25.8 40.3 47.3 34.6

72.5 56.3 40.3 63.0

Thailand Singapore Malaysia Indonesia Philippines

9.9 — 8.4 13.4 14.4

44.1 33.9 48.0 45.8 32.6

46.0 66.1 43.6 40.8 53.0

Source: The World Factbook (July 20, 2006). a Asian Development Bank: Asian Development Outlook, 2001, p. 213.

theory of comparative advantage based on trade among many countries would no longer hold. Based on the sectoral shares of GDP (PPP) in 1999, Issing (2001) presents a comparative profile of the Eurozone, the USA, and Japan (see Table 8.3A). Table 8.3B presents the profile of industrialization for the select economies of Northeast and Southeast Asia. Table 8.3C follows with the data on sectoral shares of GDP of the member countries of the AEC. We can see that Japan is a mature industrialized economy. Korea, Taiwan, and Singapore have approached the high bar set by Japan. Thailand and Malaysia present a progressive record, and Indonesia and the Philippines have records of a similar trend. Brunei Darussalam has a unique profile of its own. India and China with their huge economic dimensions have earned a special ranking. Myanmar, Laos, Cambodia, and Vietnam lag behind. The overall picture of the region appears encouraging, more so, when one compares the relative position of the AEC with the EU in 2004. I argue that the core issue is geographic unity and the commitment of member countries to make the regional compact work. For the AEC, led by Japan, a major economy, joined by Korea, an economy of great industrial

196


Table 8.3C.

Sectoral shares of GDP of the 4+10 model (2005)

Member country

Agriculture

Industry

Service

Japan Korea China India

1.7 3.3 12.5 18.6

25.8 40.3 47.3 27.6

72.5 56.3 40.3 53.8

Singapore Thailand Malaysia Indonesia Philippines Myanmar Laos Cambodia Vietnam Brunei Darussalam

— 9.9 8.4 13.4 14.4 56.4 45.5 35.0 20.9 3.6

33.9 44.1 48.0 45.8 32.6 8.2 28.7 30.0 41.0 56.1

66.1 46.0 43.6 40.8 53.0 35.3 25.8 35.0 38.1 40.3

Note: 2004 estimate for Brunei. Source: The World Factbook (July 20, 2006).

accomplishment, and China and India with the enormity of their respective economic bases, an economic regionalization plan will be a success, earning the group competitive shares of world output and trade. The comparative study of a select group of Asian economies and the 15 EU economies for 1988 and 1997 shows that the trend of industrialization is evident (Table 8.4). The selection of the years of 1988 and 1997 for a comparison should be instructive. Industrialization of Asian economies has progressed through the 1970s and 1980s. In Europe, the EU-12 signed One Europe Agreement in 1986, followed by their adoption of the Maastricht Treaty in 1992 where the EU’s macroeconomic guidelines came to be defined. For all nine Asian economies, shares of GDP from the agricultural sector have decreased over the time period. They are no longer agriculturedominant, traditional economies and they have proved much to the surprise of many that industrialization in Asia can progress beyond Japan. Their respective shares of GDP from the industry and service sectors have either increased or stabilized. For Hong Kong and Singapore, the service sector continues to be very dominant. For the same period, Ireland, Portugal, Spain, and Greece record much dependence on their respective agricultural sectors. Of course, these economies have now experienced great changes in terms of industrialization (see Chapters 3 and 4). The economic integration under the EU paradigm has been a positive factor. All four have also become members of the Eurozone. These ‘‘lagging’’ economies are now booming and Ireland is the great success of the EU experiment. In Tables 8.5A–8.10B, we present GDP and volume of trade as well as the share of world income and trade for certain groups of Asian Pacific

197


Table 8.4. Region

Sectoral shares of GDP of Asia and EU (1988 and 1997)

Country name

Agriculture

Industry

Service

1988

1997

1988

1997

1988

1997

Asia

Indonesia Malaysia Philippines Singapore Thailand China Hong Kong, China Japan Taipei, China Korea

22.48 19.32 22.96 0.39 16.18 25.66 0.32 2.67 5.04 10.10

16.09 11.15 18.69 0.15 9.73 19.09 0.12 1.74 2.55 5.35

37.27 35.51 35.16 38.07 34.58 44.13 27.64 40.73 44.84 43.13

44.33 44.64 32.21 34.53 41.30 49.99 14.71 37.18 35.32 43.08

40.25 45.17 41.88 61.53 49.24 30.21 72.04 56.61 50.13 46.78

39.58 44.21 49.10 65.32 48.97 30.93 85.17 61.07 62.14 51.57

EU

Finland Sweden Denmark The Netherlands Belgium Luxembourg France Germany Italy Spain Portugal Greece Ireland Austria United Kingdom

6.53 3.24 4.35 3.92 1.88 1.93 3.34 na 3.61 5.30 5.85 13.06 9.76 3.13 1.78

na na na na 1.13 0.80 2.25 1.09 2.63 na na na na na na

37.10 34.79 27.96 28.65 30.27 na 29.80 na 34.02 35.07 38.69 22.56 na 32.52 37.03

na na na na 27.62 na 26.21 na 30.50 na na na na na na

56.37 61.98 67.68 67.43 67.85 98.69 66.87 na 62.38 59.63 55.47 64.38 60.66 64.35 61.19

61.69 na na na 71.54 104.00 71.53 44.19 66.37 25.06 na na na 68.07 66.67

Note: In 1997, Luxembourg’s share of service sector of GDP was more than 100%. Source: Asian Development Bank: Asian Development Outlook (2001).

countries. Trade analysis in these tables includes both exports and imports. Our presentations cover data for 1987 and 1997, so that we have an overview of the time profile of change over the decade. For the convenience of comparison, the figures and shares are also presented for the Eurozone, the EU-15, and the USA. Tables 8.11A and 8.11B present the related data for the same time period for the countries that comprise the EU-15. Generally, the relative shares of the individual regions designated in the study have not varied very much over the time period. However, it is to be noted that the AEC, beginning with the 3+5 model, has a competitive share of world output and trade. It is instructive to note that GDP (PPP) of 10 of the 15 EU countries, Austria, Belgium, Denmark, Finland, Greece, Ireland, Luxembourg, the Netherlands, Portugal, and Sweden, as late as 1997, remain less than 1 percent of world GDP. The United States maintained a share of 21 percent for this time. Following economic integration, the EU shares come to be

198


Table 8.5A. GDP and trade of Northeast Asia Countries in 1987 and 1997 GDP 1987

Exports 1997

1987

Imports 1997

1987

1997

China Hong Kong, China Taipei, China Korea, Rep. Japan

1,247.26 77.79 148.40 280.49 1,971.91

3,880.21 153.22 291.40 703.96 3,199.26

46.53 76.43 71.41 67.36 316.41

190.82 230.66 141.26 203.76 572.10

49.06 69.23 50.54 52.31 220.38

160.65 238.86 136.81 183.54 457.62

Total

3,725.85

8,228.05

578.14

1,338.60

441.52

1,177.48

4,071.31 5,502.77 5,006.72 23,492.08

6,160.93 7,853.50 8,149.82 38,800.99

1,327.20 1,824.19 400.50 3,919.67

2,362.63 2,940.57 1,064.95 7,485.47

1,286.14 1,778.64 572.73 4,032.52

2,169.05 2,734.35 1,200.38 7,346.28

Eurozone EU-15 USA World total

Note: (1) GDP is PPP-adjusted international $, billions. (2) Exports and imports are in 1995 constant US$, billions, at market price. (3) Exports are not adjusted for intra-EU trade. Source: World Bank 2001 Yearbook.

Table 8.5B.

Share of world GDP and trade of Northeast Asia Countries in 1987 and 1997 (%) Share of world GDP Share of world exports Share of world imports 1987

1997

1987

1997

1987

1997

5.31 0.33 0.63 1.19 8.39

10.00 0.39 0.75 1.81 8.25

1.19 1.95 1.82 1.72 8.07

2.55 3.08 1.89 2.72 7.64

1.22 1.72 1.25 1.30 5.47

2.19 3.25 1.86 2.50 6.23

Total

15.86

21.21

14.75

17.88

10.95

16.03

Eurozone EU-15 USA

17.33 23.42 21.31

15.88 20.24 21.00

33.86 46.54 10.22

31.56 39.28 14.23

31.89 44.11 14.20

29.53 37.22 16.34

China Hong Kong, China Taipei, China Korea, Rep. Japan

Source: Based on Table 8.5A.

over 20 percent in the same period. The net result is that the economic units separated by the Atlantic, the EU, and the USA, have become competitive actors in the world market. The trade share of the EU is much larger than that of the US; the data reported in the table is not adjusted for intra-EU trade; however, trade data so adjusted that is recently published have shown its shares to be large enough to ensure effective competition (see Table 8.1, also Chapter 7).

199


Table 8.6A.

GDP and trade of ASEAN members in 1987 and 1997

GDP

Exports

1987

1997

Imports

1987

1997

1987

1997

Indonesia Malaysia Philippines Singapore Thailand

270.64 63.39 165.92 28.14 143.09

644.82 185.76 276.50 77.95 390.37

28.29 26.40 13.39 38.18 20.55

62.06 94.11 36.57 122.66 73.50

28.79 19.09 13.58 43.34 20.25

75.16 95.62 43.75 129.93 72.02

Total

671.18

1,575.40

126.81

388.90

125.05

416.48

4,071.31 5,502.77 5,006.72 23,492.08

6,160.93 7,853.50 8,149.82 38,800.99

1,327.20 1,824.19 400.50 3,919.67

2,362.63 2,940.57 1,064.95 7,485.47

1,286.14 1,778.64 572.73 4,032.52

2,169.05 2,734.35 1,200.38 7,346.28


Notes: (1) GDP is PPP-adjusted international $, billions. (2) Exports and imports are in 1995 constant US$, billions, at market price. (3) Exports are not adjusted for intra-EU trade. Source: World Bank 2001 Yearbook.

Table 8.6B.

Share of world GDP and trade of ASEAN members in 1987 and 1997 (%)

Share of world GDP

Share of world exports

Share of world imports

1987

1997

1987

1997

1987

1997


1.15 0.27 0.71 0.12 0.61

1.66 0.48 0.71 0.20 1.01

0.72 0.67 0.34 0.97 0.52

0.83 1.26 0.49 1.64 0.98

0.71 0.47 0.34 1.07 0.50

1.02 1.30 0.60 1.77 0.98

Total

2.86

4.06

3.24

5.20

3.10

5.67

17.33 23.42 21.31

15.88 20.24 21.00

33.86 46.54 10.22

31.56 39.28 14.23

31.89 44.11 14.20

29.53 37.22 16.34

Eurozone EU-15 USA


Tables 8.5A and 8.5B deal with the relevant data for the Northeast Asian economies of China, Hong Kong, Taipei, Korea, and Japan. In 1997, the five Northeast Asian economies have a share of 21 percent of the world GDP, matching the shares of the USA and the EU. For trade, the group is closely competitive with the USA, but behind the EU and the Eurozone.

200


Table 8.7A.

GDP and trade of South Asia Countries in 1987 and 1997 GDP

Exports

1987 Bangladesh India Nepal Pakistan Sri Lanka Total Eurozone EU-15 USA World total

1997

Imports

1987

1997

1987

1997

94.67 904.62 13.34 114.35 28.67

170.82 1,962.31 27.27 229.05 56.31

1.38 15.70 0.34 5.76 2.49

5.21 45.10 1.28 9.30 5.29

2.62 27.40 0.60 9.91 3.70

7.26 63.04 1.83 14.12 6.70

1,155.65

2,445.76

25.67

66.18

44.23

92.95

4,071.31 5,502.77 5,006.72 23,492.08

6,160.93 7,853.50 8,149.82 38,800.99

1,327.20 1,824.19 400.50 3,919.67

2,362.63 2,940.57 1,064.95 7,485.47

1,286.14 1,778.64 572.73 4,032.52

2,169.05 2,734.35 1,200.38 7,346.28


Table 8.7B. Share of world GDP and trade of South Asia Countries in 1987 and 1997 (%) Share of world GDP



1987

1997

1987

1997

1987

1997

Bangladesh India Nepal Pakistan Sri Lanka

0.40 3.85 0.06 0.49 0.12

0.44 5.06 0.07 0.59 0.15

0.04 0.40 0.01 0.15 0.06

0.07 0.60 0.02 0.12 0.07

0.06 0.68 0.01 0.25 0.09

0.10 0.86 0.02 0.19 0.09

Total

4.92

6.30

0.65

0.88

1.10

1.27

17.33 23.42 21.31

15.88 20.24 21.00

33.86 46.54 10.22

31.56 39.28 14.23

31.89 44.11 14.20

29.53 37.22 16.34

Eurozone EU-15 USA


Tables 8.6A and 8.6B cover the ASEAN-5. Tables 8.7A and 8.7B present the related data for South Asian economies. Tables 8.8A and 8.8B present the data for Australia and New Zealand. It is evident that in 1997, the shares of world GDP and world trade for the select group of Northeast Asia (Tables 8.5A and 8.5B) and Southeast Asia (Tables 8.6A and 8.6B) add up to 25.27 percent of world GDP, 23.08 percent of world exports, and 21.70 percent of world imports. It follows that the AEC will thus be able to

201


Table 8.8A.

GDP and trade of ANZ in 1987 and 1997

GDP

Exports

1987

1997

Imports

1987

1997

1987

1997

Australia New Zealand

251.35 45.65

425.30 68.69

41.72 12.68

83.92 19.19

39.49 11.15

93.00 19.24

Total

297.00

493.99

54.40

103.11

50.64

112.24

4,071.31 5,502.77 5,006.72 23,492.08

6,160.93 7,853.50 8,149.82 38,800.99

1,327.20 1,824.19 400.50 3,919.67

2,362.63 2,940.57 1,064.95 7,485.47

1,286.14 1,778.64 572.73 4,032.52

2,169.05 2,734.35 1,200.38 7,346.28


Notes: (1) GDP is PPP-adjusted International $, billions. (2) Exports and imports are in 1995 constant US$, billions, at market price. (3) Exports are not adjusted for intra-EU trade. Source: World Bank 2001 Yearbook.

Table 8.8B. Share of world GDP and trade of ANZ in 1987 and 1997 (%) Share of world GDP



1987

1997

1987

1997

1987

1997

Australia New Zealand

1.07 0.19

1.10 0.18

1.06 0.32

1.12 0.26

0.98 0.28

1.27 0.26

Total

1.26

1.27

1.39

1.38

1.26

1.53

17.33 23.42 21.31

15.88 20.24 21.00

33.86 46.54 10.22

31.56 39.28 14.23

31.89 44.11 14.20

29.53 37.22 16.34

Eurozone EU-15 USA


add to the level of effective competition in the world market. The principle of inclusion will progressively lead to the admission of economies of South Asia and the South Pacific to the AEC. The learning model will be the EU as it moves on to the Europeanization of Europe with most of the European economies in one continental unit. We move from the decade-based analyses presented in Tables 8.5A–8.10B to an extended analysis based on annual data over a quarter of a century from 1975 to 1999, and our objective is to capture any substantive variation in the relative shares of world output and trade for the individual sovereign nation economies, the subgroups they belong to, the aggregation of the subgroups, and its relevance for the Eurozone and the USA. The graphic presentations refer to the two parameters, shares of world output and trade.

202


Table 8.9A. GDP and trade of Asia 3+5 model in 1987 and 1997 GDP

Exports

1987 China Korea, Rep. Japan


1987

1997

1987

1997

1,247.26 280.49 1,971.91

3,880.21 703.96 3,199.26

46.53 67.36 316.41

190.82 203.76 572.10

49.06 52.31 220.38

160.65 183.54 457.62

270.64 63.39 165.92 28.14 143.09

644.82 185.76 276.50 77.95 390.37

28.29 26.40 13.39 38.18 20.55

62.06 94.11 36.57 122.66 73.50

28.79 19.09 13.58 43.34 20.25

75.16 95.62 43.75 129.93 72.02

4,170.84

9,358.83

557.11

1,355.58

446.80

1,218.29

4,071.31 5,502.77 5,006.72 23,492.08

6,160.93 7,853.50 8,149.82 38,800.99

1,327.20 1,824.19 400.50 3,919.67

2,362.63 2,940.57 1,064.95 7,485.47

1,286.14 1,778.64 572.73 4,032.52

2,169.05 2,734.35 1,200.38 7,346.28

Indonesia Malaysia Philippines Singapore Thailand Total

1997

Imports


Table 8.9B.

Share of world GDP and trade of Asia 3+5 model in 1987 and 1997 (%) Share of world GDP



1987

1997

1987

1997

1987

1997

China Korea, Rep. Japan

5.31 1.19 8.39

10.00 1.81 8.25

1.19 1.72 8.07

2.55 2.72 7.64

1.22 1.30 5.47

2.19 2.50 6.23


1.15 0.27 0.71 0.12 0.61

1.66 0.48 0.71 0.20 1.01

0.72 0.67 0.34 0.97 0.52

0.83 1.26 0.49 1.64 0.98

0.71 0.47 0.34 1.07 0.50

1.02 1.30 0.60 1.77 0.98

Total

17.75

24.12

14.21

18.11

11.08

16.58

Eurozone EU-15 USA

17.33 23.42 21.31

15.88 20.24 21.00

33.86 46.54 10.22

31.56 39.28 14.23

31.89 44.11 14.20

29.53 37.22 16.34


203


Table 8.10A. GDP and trade of Asia 4+10 model in 1987 and 1997 GDP 1987 China India Korea, Rep. Japan Indonesia Malaysia Philippines Singapore Thailand Myanmar Laos Cambodia Vietnam Brunei Darussalam Total Eurozone EU-15 USA World total

Exports 1997

1987

Imports 1997

1987

1997

1,247.26 904.62 280.49 1,971.91

3,880.21 1,962.31 703.96 3,199.26

46.53 15.70 67.36 316.41

190.82 45.10 203.76 572.10

49.06 27.40 52.31 220.38

160.65 63.04 183.54 457.62

270.64 63.39 165.92 28.14 143.09 — — — — —

644.82 185.76 276.50 77.95 390.37 — — — — —

28.29 26.40 13.39 38.18 20.55 — — — — —

62.06 94.11 36.57 122.66 73.50 — — — — —

28.79 19.09 13.58 43.34 20.25 — — — — —

75.16 95.62 43.75 129.93 72.02 — — — — —

5,075.46

11,321.14

572.81

1,400.68

474.20

1,281.33

4,071.31 5,502.77 5,006.72 23,492.08

6,160.93 7,853.50 8,149.82 38,800.99

1,327.20 1,824.19 400.50 3,919.67

2,362.63 2,940.57 1,064.95 7,485.47

1,286.14 1,778.64 572.73 4,032.52

2,169.05 2,734.35 1,200.38 7,346.28


We begin in Figures 8.3 and 8.4 with Northeast Asia exclusive of Japan, which covers China, Hong Kong, the Republic of Korea, and Taipei. Figures 8.5 and 8.6 relate to Northeast Asia inclusive of Japan. Figures 8.7 and 8.8 present ASEAN-5 of Indonesia, Malaysia, the Philippines, Singapore, and Thailand. Figures 8.9 and 8.10 show Northeast Asia with and without Japan, and ASEAN-5. In Figures 8.11 and 8.12, South Asia is presented which covers Bangladesh, India, Nepal, Pakistan, and Sri Lanka. Figures 8.13 and 8.14 compare the three Asian groupings of Northeast, ASEAN-5, and South Asia. In Figures 8.15 and 8.16, Northeast and Southeast Asia are related to the Eurozone and the USA. Figures 8.17 and 8.18 present a comparison for all the regions, Northeast, ASEAN-5, South Asia, the Eurozone, and the USA. The annual data based on these graphic presentations show a pattern for sufficient regional shares of world output and export in support of regional economic integration. The conclusion for economic integration in Asia can be supported by the empirical evidence, based on the two parameters, its share of world output and trade vis-a`-vis the respective shares of

204

Table 8.10B.


Share of world GDP and trade of Asia 4+10 model in 1987 and 1997 (%) Share of world GDP Share of world exports Share of world imports 1987

1997

1987

1997

1987

1997

China India Korea, Rep. Japan

5.31 3.85 1.19 8.39

10.00 5.06 1.81 8.25

1.19 0.40 1.72 8.07

2.55 0.60 2.72 7.64

1.22 0.68 1.30 5.47

2.19 0.86 2.50 6.23

Indonesia Malaysia Philippines Singapore Thailand Myanmar Laos Cambodia Vietnam Brunei Darussalam

1.15 0.27 0.71 0.12 0.61 — — — — —

1.66 0.48 0.71 0.20 1.01 — — — — —

0.72 0.67 0.34 0.97 0.52 — — — — —

0.83 1.26 0.49 1.64 0.98 — — — — —

0.71 0.47 0.34 1.07 0.50 — — — — —

1.02 1.30 0.60 1.77 0.98 — — — — —

Total

21.60

29.18

14.61

18.71

11.76

17.44

Eurozone EU-15 USA

17.33 23.42 21.31

15.88 20.24 21.00

33.86 46.54 10.22

31.56 39.28 14.23

31.89 44.11 14.20

29.53 37.22 16.34


the EU and the USA. Indeed, each individual Asian economy, inclusive of China and India, together having one-third of the world’s population, has marginal shares of world GDP and of world exports. For years, Japan has enjoyed the second largest ranking, next to USA, in terms of shares of world output and trade. An Asian regional economic integration will be positive for the paradigm of globalism. The 3+5 model is a promising first step (see also Kojima, 2000; Letiche, 2000), which has now expanded to the 4+10 model. A more comprehensive Asian model inclusive of the three regional subgroups, Northeast, Southeast, and South, is also discussed (see Table 8.12). 8.4. The African Economic Union Africa is not a ‘‘lost’’ or a ‘‘forgotten’’ continent. The people of Africa must assume the responsibility of earning a place for Africa on the map of the world (see Tables 8.13A and 8.13B). The New Partnership for Africa’s Development (NEPAD) is a step in this direction based on five initiatives: Peace, Security, Democracy, and Political Governance, Economic and Corporate Governance,

205


Table 8.11A.

GDP and trade of EU members in 1987 and 1997

GDP 1987 Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg The Netherlands Portugal Spain Sweden United Kingdom EU-15 USA World total

Exports 1997

1987

Imports 1997

1987

1997

122.93 165.16 — 75.04 855.32 — 99.73 34.20 847.05 5.75 218.97 90.19 410.98 135.99 832.98

189.38 245.65 132.01 107.87 1,260.55 1,858.89 149.76 78.15 1,234.40 15.33 350.71 149.85 653.25 187.75 1,239.96

56.65 126.66 45.47 30.69 215.74 — 15.27 21.30 170.77 12.42 155.86 19.56 73.26 66.31 223.39

104.61 209.20 69.26 57.81 404.39 701.48 23.14 66.95 317.79 22.28 271.58 37.64 167.73 113.83 372.88

57.17 118.56 41.08 29.28 224.18 — 18.18 21.56 168.89 12.22 149.98 20.25 67.40 62.86 228.58

105.99 194.74 63.13 44.58 356.38 652.80 34.34 56.72 276.69 19.32 242.99 45.24 162.31 93.05 386.06

3,894.29 5,006.72 23,492.08

7,853.51 8,149.82 38,800.99

1,233.35 400.50 3,919.67

2,940.57 1,064.95 7,485.47

1,220.19 572.73 4,032.52

2,734.34 1,200.38 7,346.28

Notes: (1) GDP is PPP-adjusted international $, billions. (2) Exports and imports are in 1995 constant US$, billions, at market price. (3) Exports are not adjusted for intro-EU trade. Source: World Bank 2001 Yearbook.

Capital Flows, Market Access, and Human Resources.

In July 2002, 53 Heads of State representing 53 of Africa’s nation-states met in Durban, South Africa to establish the African Union (AU) to replace the 39-year-old Organization for African Unity (OAU). The OAU was established on May 25, 1963 in Addis Ababa, Ethiopia, with 32 participating African governments. This was the beginning of the African continental integration movement. However, it focused more on political cooperation without substantive emphasis on economic alliance. It failed to sustain itself and in 1999, an assembly of the Heads of State and Government recognized the limitations of the OAU and made necessary initiatives to promote continental economic integration. To quote Kenichi Ohmae (1993): ‘‘The nation state has become an unnatural, even dysfunctional, unit for organizing human activity and managing economic endeavor in a borderless world. It overlooks the true linkages and synergies that exist among often disparate populations by combining important measures of human activity at the wrong level of analysis y region states are natural economic zones y’’

206


Table 8.11B.

Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg The Netherlands Portugal Spain Sweden United Kingdom EU-15 USA

Share of world GDP and trade of EU members in 1987 and 1997 (%) Share of world GDP



1987

1987

1997

1987

1997

1.40 2.79 0.93 0.77 5.40 9.37 0.31 0.89 4.25 0.30 3.63 0.50 2.24 1.52 4.98

1.42 2.94 1.02 0.73 5.56 0.45 0.53 4.19 0.30 3.72 0.50 1.67 1.56 5.67

1.44 2.65 0.86 0.61 4.85 8.89 0.47 0.77 3.77 0.26 3.31 0.62 2.21 1.27 5.26

39.28 14.23

30.26 14.20

37.22 16.34

1997

0.52 0.70 – 0.32 3.64 – 0.42 0.15 3.61 0.02 0.93 0.38 1.75 0.58 3.55

0.49 0.63 0.34 0.28 3.25 4.79 0.39 0.20 3.18 0.04 0.90 0.39 1.68 0.48 3.20

16.58 21.31

20.24 21.00

1.45 3.23 1.16 0.78 5.50 – 0.39 0.54 4.36 0.32 3.98 0.50 1.87 1.69 5.70 31.47 10.22

–


Figure 8.3. Share of world GDP: Northeast Asia countries (exclude Japan) 14% 12%

Percent

10% 8%

China Hong Kong, China Korea, Rep. Taipei, China Northeast Asia Total (Exclude Japan)

6% 4% 2%

19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99

0%

Year Notes: (1) GDP is PPP-adjusted international billion $ (2) Export and import are in 1995 constant billion $ US at market price Source: World Bank 2001 Yearbook


207

Figure 8.4. Share of world export: Northeast Asia countries (exclude Japan) 12% China Hong Kong, China Korea, Rep. Taipei, China Northeast Asia Total (Exclude Japan)

10%

Percent

8% 6% 4% 2%

19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99

0%

Year Notes: (1) GDP is PPP-adjusted international billion $ (2) Export and import are in 1995 constant billion $ US at market price Source: World Bank 2001 Yearbook

Figure 8.5.

Share of world GDP: Northeast Asia countries (include Japan) 25%

Percent

20% 15% 10% 5%

19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99

0% Year China Hong Kong, China Japan

Korea, Rep. Taipei,China Northeast Asia Total (Include Japan)

Notes: (1) GDP is PPP-adjusted international billion $ (2) Export and import are in 1995 constant billion $ US at market price Source: World Bank 2001 Yearbook

208


Figure 8.6. Share of world export: Northeast Asia countries (include Japan) 20% China Hong Kong, China Japan Korea, Rep. Taipei, China Northeast Asia Total (include Japan)

18% 16%

Percent

14% 12% 10% 8% 6% 4% 2% 0%

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year Notes: (1) GDP is PPP-adjusted international billion $. (2) Export and import are in 1995 constant billion $ US at market price Source: World Bank 2001 Yearbook

Figure 8.7.

Share of world GDP: ASEAN-5 countries

5% 4% 4%

Percent

3% 3% 2% 2% 1% 1% 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99

0% Year

Indonesia Malaysia Philippines

Singapore Thailand Southeast Asia Total

Notes: (1) GDP is PPP-adjusted international billion $. (2) Export and import are in 1995 constant billion $ US at market price Source: World Bank 2001 Yearbook

209


Figure 8.8.

Share of world export: ASEAN-5 countries

6% 5%

Percent

4% 3% 2% 1%

97 19 99

95

19

93

19

91

19

89

19

87

19

85

19

83

19

81

19

79

19

77

19

19

19

75

0% Year

Indonesia Malaysia Philippines

Singapore Thailand Southeast Asia Total


The major step to economic regionalization came with the institution of the AU at the Durban conference. The AU is modeled on the EU and will have an African Parliament and an African Government with a standing army to settle intra-Africa regional disputes. The AU plans to have a central bank so that monetary policy may be coordinated to facilitate continental economic cooperation and capital flows for investment and industrialization. President Thabo Mbeki of South Africa was the first chairman of the AU. He wanted all to know that ‘‘through our actions, let us proclaim to the world that this is a continent of democracy, a continent of good government where the people participate and the rule of law is upheld.’’ The world eagerly waits for the AU to deliver what it has promised to the peoples of Africa. Africa must win the war on poverty. It is instructive to note that the continental economic integration movement in Africa progressed at the same time regionalization was gathering momentum in Europe. With a total surface area of 30.31 million square kilometers, Africa is the second largest continent, next to Asia. As early as 1970, South Africa joined its immediate neighbors Botswana, Swaziland, and Lesotho, forming the Southern African Customs Union (SACU), and Namibia later joined the group. Let us recall that CUs became a mode of economic integration in the 1940s in Western Europe. Soon came the Southern

210


Figure 8.9.

Share of world GDP: Northeast Asia and ASEAN-5

25%

Percent

20%

15%

10%

5%

19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99

0%

Year Northeast Asia Total (Exclude Japan)

Japan

Southeast Asia Total

Northeast Asia Total (Include Japan)


African Development Conference (SADC), which brought together the Member States of the SACU and Angola, Mozambique, Zimbabwe, Zambia, and Malawi. The Treaty of Enhanced East African Cooperation (TEEAC) ensuring ‘‘free flow of goods and people’’ among Kenya, Uganda, and Tanzania, is now a part of the record. Somalia, Ethiopia, and The Sudan were joined by Djibouti and Eritrea to constitute the regional compact referred to as the Horn of Africa. The Economic Community of Central African States (ECCAS) includes Member States of Rwanda, Burundi, Cameroon, the Central African Republic, Chad, Equatorial Guinea, Congo, Gabon, and the Democratic Republic of Congo. The Economic Community of West African States (ECOWAS), the East African Community (EAC), the Common Market for Eastern and Central Africa (COMSEA), the Central African Customs Union (UDEAC), the West African Customs Union (UDEAO) also became steps in the process. Five Mediterranean countries in the northern rim of Africa, Morocco, Algeria, Tunisia, Libya, and Egypt have historical ties and are geographically contiguous to Middle East and will have a choice to be Member

211


Figure 8.10.

Share of world export: Northeast Asia and ASEAN-5

20% 18% 16%

Percent

14% 12% 10% 8% 6% 4% 2%

99

97

19

95

19

93

19

91

19

89

19

87

19

85

19

83

19

81

19

79

19

77

19

19

19

75

0% Year Northeast Asia Total (Include Japan)

Japan

Southeast AsiaTotal

Northeast Asia Total (Exclude Japan)


States of the AU or of the Middle East, a geographical compact which could also have competitive shares of world output and trade. The subregional economic cooperation efforts in Africa, as noted above, failed to produce robust results. Feature stories on the African continent continued to be dominated by incidents of political instability, corrupt military dictatorship, genocide, mass migration of refugees, and natural calamities including flood, drought, famine, and epidemics. However, it remains to be appreciated that the political and professional leadership of Africa have heard the people and sought to do their best to respond to the eventful changes for the welfare of the peoples of the continent. The EU is now a learning model for the AU to fully develop its own potential. The AU administration has set up executive, legislative, and judicial branches. The Assembly and the Executive Council of Ministers perform executive functions, while the Parliament and the Court of Justice have their legislative and judicial assignments, respectively. In addition, the AU has several Directorates, an Office of the Legal Counsel, and the Secretariat (see Table 8.14).

212


Figure 8.11.

Share of world GDP: South Asia countries

8% 7%

Percent

6% 5% 4% 3% 2% 1% 19 99

19 97

19 95

19 93

19 91

19 89

19 87

19 85

19 83

19 81

19 79

19 77

19 75

0% Year

Bangladesh

Pakistan

India

Sri Lanka

Nepal

South Asia Total


8.5. The Middle East The 16 countries of the Middle East (Table 8.15A) belong to the map of Asia. For reasons of pragmatic considerations they have been placed in their own special regional group, the Middle East. The region has an area of 6 million square kilometers, and a population base of 259.91 million. The region’s GDP (PPP), exports, and imports amount to US$ 2,114.36 billion, US$ 528.42 billion, and US$ 380.27 billion, respectively (Table 8.15B). Sectoral shares of GDP point to the economic structures of the member countries (Table 8.15C), and there is a pattern of uniformity. Let us note that the per capita income of the member economies of the Middle East makes the region a competitive market (Table 8.15D). One needs to explore, based on the region’s shares of world output and trade, if the Middle East will be a viable economic region in the world market. Pakistan and several other Central Asian countries, geographically contiguous to the Middle East, may consider joining this regional compact. I have argued that the five countries in the Northern Rim of the Continent of Africa, Morocco, Algeria, Tunisia, Libya, and Egypt, may prefer this region’s membership to that of the AU. The geographical contiguity is the core issue.

213


Figure 8.12.

Share of world export: South Asia countries

1.0% 0.9% 0.8%

Percent

0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99

0.0%

Year

Bangladesh

Pakistan

India

Sri Lanka

Nepal

South Asia Total


The Middle East, in its larger context, will clearly have competitive shares of world output and trade. Under specific circumstances, the Middle East has earned its geographical identification. Its inclusion in the AEC has not been a subject of any study. The five states of the Northern Rim of Africa have a history of collaboration with the Middle Eastern countries. Two queries warrant immediate responses: 1. A Middle Eastern economic region will be one based on religion, an Islamic Region. This will not be the case and findings will point out the truth in this. While a vast majority of the people in the Middle East subscribe to the religion of Islam, there are many who represent Christianity, Judaism, Hinduism, Buddhism, Zoroastrianism, and other religious affiliations. The Mesopotamian civilization in the valleys of the Euphrates and the Tigris in Iraq has a history of its own; the Buddhist Statue in Afghanistan has been a subject of much reference. The Middle East will be predominantly Islamic as much as the EU is predominantly Christian, each region with a scattered presence of every other religion. The Islamic countries of Indonesia and Malaysia will remain members of the AEC as they are. Australia and New Zealand were denied

214


Figure 8.13.

Share of world GDP: 3 Asian regions

25%

Percent

20%

15%

10%

5%

99

97

19

95

19

93

19

91

19

89

19

87

19

85

19

83

19

81

19

79

19

77

19

19

19

75

0%

Year Northeast Asia Total (Exclude Japan)

South Asia Total




membership of the EU because their physical location was clearly outside the map of Europe; the fact that the majority of the peoples in these two South Pacific countries are Christian has been no point for consideration. Of course, international religious conferences for each religion for intra- and intergroup dialogues of philosophy and ethics will continue to take place. A successful Middle East regional economic compact will be multireligious, multilingual, and multicultural. 2. The role of Israel as a member of the Middle Eastern regional economic/ political union will be overemphasized. Here again is a lesson to learn from the EU; Europe’s long history of wars and violent conflicts among the member nations of the EU has not proven to be a disintegrating factor. Israel has much to offer with its resource base in human capital and high-tech industrial capabilities. Alternatively, Israel will remain a missing link until the peoples of Israel make a decision of their own. There are many missing links on the map of Europe inclusive of Norway, Switzerland, Monaco, and Vatican City, who have yet to apply for EU membership (see Chapter 1). The principle of inclusion, not

215


Figure 8.14.

Share of world export: 3 Asian region

20% 18% 16%

Percent

14% 12% 10% 8% 6% 4% 2% 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99

0% Year Northeast Asia Total (Exclude Japan)

South Asia Total




exclusion, will be the norm. As such, a country belonging to the region’s map will have the right to apply for membership as and when it elects to do so. The admission of new members will of course be subject to their willingness to accept all outstanding contractual obligations and their ability to pay the established membership dues.

8.6. Asia and Africa Based on data below (Table 8.16), the AEC’s 4+10 model will fit neatly into the scheme of competitive shares of world output and trade. The AU has a different case. Africa is not nearly as densely populated as Asia and the AU does not yet have competitive shares of world output and trade. However, Africa has a competitively large endowment of natural resources; each individual Member State has limited domestic savings for necessary investment to explore and market its natural resources. The need for foreign investments is now the mode of operation. Overseas corporate

216


Figure 8.15.

Share of world GDP: 4 groups

25%

Percent

20%

15%

10%

5%

97

95

93

91

89

99 19

19

19

19

19

85

87

19

19

81

83

19

19

77

79

19

19

19

19

75

0% Year Northeast Asia Total (Exclude Japan) Southeast Asia Total

United States Northeast Asia Total (Include Japan)

Eurozone


giants have done the exploration and eventually became the dominant forces in many countries. The consequent inadequacies are on record and the riches of the continent have failed to benefit her peoples. Once the AU evolves into a strong continental compact, a strong leadership will follow. Overseas investments from savings-rich mature industrialized countries will flow into Africa ensuring economic gains for the peoples of Africa and profits for foreign investors. Table 8.16 presents the comparative database, – area, population, GDP (PPP), exports and imports – for the five regional groups: the African union (AU), the Asian Economic Community of the 4+10 model (AEC 4+10), the European Union (EU), the United States of America (USA), the Free Trade Area of the Americas (FTAA) plus the world total. 8.7. The protest movement: Antiglobalism The challenges of the new millennium will, of course, be real. We must continue to learn, but the real challenge will be to unlearn a great deal of what we

217


Figure 8.16.

Share of world export: 4 groups

40% 35% 30%

Percent

25% 20% 15% 10% 5%

77

19

79

19

81

19

83

19

85

19

Northeast Asia Total (Exclude Japan) Southeast Asia Total Eurozone

87 89 991 993 995 997 1 1 1 19 19 1 Year

19

75

19

99

0%

South Asia Total Northeast Asia Total (Include Japan)


had learned in the past. I have argued that in the absence of a well-structured intraregional macroeconomic core, an individual sovereign nation-state economy cannot optimize economic gains for its micro-actors, households as well as business units, since most of these individual economies are limited by marginal values of two parameters: its shares of world GDP and world trade. Its competitive functioning as an open economy will face a serious bottleneck. The macroeconomic core relates to a complimentary system of monetary and fiscal agenda. Exclusively focusing on a monetary agenda may be self-defeating since the absence of fiscal discipline will be counterproductive. I have further argued that an intraregional macroeconomic core within a global macroeconomic system is in order. The proposal for a global convention of the Heads of the Central Banks of the world is receiving serious consideration. May the World Bank (WB) and the International Monetry Fund (IMF) be merged and restructured into a new institution to serve as a World Central Bank. In 2000, George Soros authored a monograph advocating the establishment of such an

218


Figure 8.17.

Share of world GDP: 5 groups

25%

Percent

20% 15% 10% 5%

19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99

0% Year Northeast Asia Total (Exclude Japan)

Eurozone



South Asia Total

United States


institution (Soros, 1998, 2000). Without restructuring, if the 182-member IMF is reconstituted as the new WB, it will continue to suffer from its present limitations and be unable to take prompt, preemptive decisions and actions as and when necessary. Economic regionalization in its many and varied forms within the global order has indeed been a part of our economic history. The imperial order became outdated and was replaced by the post-WWII order of globalization, based on the concept of one world, and reinforced by international financial institutions, the IMF and the WB. This system has struggled to do its job, until disintegration came following the end of the fixed gold value of the US dollar in 1971. The world witnessed the polarization of national economies into the rich nations of the North and the poor nations of the South. The richer countries continue to become richer while the poorer ones get poorer. An overwhelmingly large number of poor nations face a very limited number of rich nations. The protest movement against globalism has a message. A global economic order continues to elude us. A map of the worldview of a region has become the new focus of economic regionalization. The EU illustrates this, developing its own independent supranational macroeconomic framework and allowing each

219


Figure 8.18.

Share of world export: 5 groups

40% 35%

Percent

30% 25% 20% 15% 10% 5% 19 75 19 77 19 79 19 81 19 83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99

0% Year

Northeast Asia Total (Exclude Japan) Southeast Asia Total South Asia Total

Eurozone United States Northeast Asia Total (Include Japan)


Table 8.12.

Shares of world GDP (PPP) and trade (%)

GDP

Exports

Imports

1987

1997

1987

1997

1987

1997

Asia 3+5 Asia 4+10 Asiaa Asia+ANZ

17.75 21.60 23.64 24.90

24.12 29.18 31.57 32.84

14.21 14.61 18.64 20.03

18.11 18.71 23.96 25.34

11.08 11.76 15.15 16.40

16.58 17.44 22.96 24.49

Eurozone EU-15 USA

17.33 23.42 21.31

15.88 20.24 21.00

33.86 46.54 10.22

31.56 39.28 14.23

31.89 44.11 14.20

29.53 37.22 16.34

Notes: (1) ANZ ¼ Australia and New Zealand. (2) Asia 4+105 countries did not report. Source: Based on Tables 8.5A–8.10B. a Asia ¼ Northeast Asia-5+Southeast Asia-5+South Asia-5 (Tables 8.5–8.7).

Member State to maintain its own economic core. Special provisions have been made for the EU for its membership to international bodies (see Chapters 3 and 4). The challenge of the new millennium may be to convince all traditional sovereign nation-state economies to voluntarily

220


Table 8.13A. Key economic indicators of African Union members Member country

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Dem. Republic of Congo Ivory Coast Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea-Bissau Kenya Lesotho Liberia Libya Madagascar Malawi Mali Mauritania Mauritius Mozambique Namibia Niger Nigeria Rwanda Republique Araba Sahraouie Democratique (Western Sahara) Sao Tome/Principe Senegal Seychelles Sierra Leone Somalia



Exports US$ billion

Imports US$ billion

32.93 12.13 7.86 1.64 13.90 8.09 17.34 0.42 4.30

233.20 45.90 8.60 17.20 17.00 5.70 40.80 3.00 4.80

49.59 26.80 0.83 3.68 0.40 0.05 3.24 0.07 0.13

22.53 8.17 1.04 3.37 0.99 0.20 2.51 0.50 0.20

9.94 0.69 3.70 62.66

14.80 0.44 4.63 40.67

3.02 0.03 2.21 1.11

0.75 0.12 0.81 1.32

17.65 0.49 78.89 0.54 4.79 74.78 1.42 1.64 22.41 9.69 1.44 34.71 2.02 3.04 5.90 18.60 13.01 11.72 3.18 1.24 19.69 2.04 12.53 131.86 8.65 0.27

28.52 0.62 303.50 25.69 4.47 62.88 9.54 3.02 54.45 18.99 1.19 37.15 5.12 2.78 65.79 16.36 7.52 13.56 6.89 16.09 26.03 14.23 11.28 174.10 12.65 na

6.49 0.25 14.33 6.73 0.03 0.61 5.81 0.14 2.91 0.61 0.12 3.17 0.60 0.91 30.79 0.95 0.36 0.32 0.78 1.95 1.69 2.04 0.22 52.16 0.10 na

4.76 0.99 24.10 1.86 0.68 2.72 1.53 0.18 4.27 0.68 0.18 5.13 1.17 4.84 10.82 1.40 0.65 1.86 1.12 2.51 2.04 2.35 0.59 25.95 0.24 na

0.19 11.99 0.08 6.01 8.86

0.21 20.53 0.63 4.92 4.81

0.01 0.04 1.53 2.41 0.31 0.46 0.19 0.53 0.24 0.58 (Continued on next page)

221



South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe Total


(Continued )


Exports US$ billion

Imports US$ billion

44.19 41.24 1.14 37.45 5.55 10.18 28.20 11.50 12.24

533.20 85.65 5.66 27.07 8.97 83.54 48.73 10.59 28.37

50.91 6.99 1.99 1.58 0.77 10.30 0.77 1.95 1.64

52.97 5.03 2.15 2.39 1.05 12.86 1.61 1.93 2.06

876.62

2,222.04

304.41

231.20

Notes: (1) Exports and imports – fob. (2) Republique Araba Sahraouie Democratique is a member of the AU, but is recognized as a Non-Self-Governing Territory by the UN. (3) Morocco is the one state in the continent, not yet a member of the AU. Source: The World Factbook (July 20, 2006).

Table 8.13B.

Sectoral shares of GDP of African Union members

Member country

Agriculture

Industry

Service

Algeria Angola Benin Botswana Burkina Faso Burundi Cameroon Cape Verde Central African Republic Chad Comoros Congo Dem. Republic of Congo Ivory Coast Djibouti Egypt Equatorial Guinea Eritrea Ethiopia Gabon Gambia Ghana Guinea Guinea-Bissau Kenya Lesotho Liberia

10.1 9.6 1.6 2.4 32.2 46.3 44.8 12.1 55.0 33.5 40.0 6.2 55.0 27.9 3.5 14.9 3.0 10.2 47.5 6.1 30.8 36.6 23.7 62.0 16.3 16.3 76.9

60.0 65.8 13.8 46.9 19.6 20.3 17.0 21.9 20.0 25.9 4.0 57.0 11.0 17.1 15.8 35.7 90.6 25.4 9.9 59.2 14.2 24.6 36.2 12.0 18.8 44.3 5.4

29.8 24.6 54.6 50.7 48.2 33.4 38.2 66.0 25.0 40.6 56.0 36.9 34.0 55.0 80.7 49.3 6.2 64.3 42.6 34.8 54.9 38.7 40.1 26.0 65.1 39.4 17.7 (Continued on next page)

222


Table 8.13B.

(Continued )

Member country

Agriculture

Industry

Service

Libya Madagascar Malawi Mali Mauritania Mauritius Mozambique Namibia Niger Nigeria Rwanda Republique Araba Sahraouie Democratique (Western Sahara) Sao Tome/ Principe Senegal Seychelles Sierra Leone Somalia South Africa Sudan Swaziland Tanzania Togo Tunisia Uganda Zambia Zimbabwe

7.6 27.6 34.2 45.0 25.0 5.9 26.2 9.7 39.0 26.9 40.1 na

49.9 16.5 15.8 17.0 29.0 29.8 34.8 31.5 17.0 48.7 22.9 na

42.5 55.9 49.9 38.0 46.0 64.3 39.0 58.8 44.0 24.4 37.0 40.0

16.7 17.2 3.2 49.0 65.0 2.5 38.7 11.9 43.2 39.5 13.2 31.1 22.0 17.9

14.8 20.9 30.4 31.0 10.0 30.3 20.3 51.5 17.2 20.4 31.8 22.2 29.0 24.3

68.4 61.9 66.5 21.0 25.0 67.1 41.0 36.6 39.6 40.1 55.0 46.9 48.9 57.9

Note: Republique Araba Sahraouie Democratique is a member of the AU, but is recognized as a Non-Self-Governing Territory by the UN. Source: The World Factbook (July 20, 2006).

compromise their sovereign authority, and accept a new international economic order. Each continental economic region with its integrated micro- and macroeconomic parameters will command competitive shares of world output and trade. Each continental regional union will contribute competitive shares to the capital funds of each of the global organizations and play its competitive role for the management in each case. Let all sovereign nation-state-based individual economies welcome this new international economic order. This will also make the globalization model effective. We have already seen their challenge to the order of globalization played out on the streets of Seattle, Ontario, Washington, Rome, Paris, London, and Geneva. Returning to Table 8.1, the Eurozone, the USA, and Japan have 700 million people in 2000, commanding about one-half of world output and trade. The Eurozone membership is limited to 12 nation-state economies.


Table 8.14.

223

The organizational structure of the African Union (AU)

Organ

Composition

Assembly Executive Council of Ministers The Permanent Representative Committee (PRC)a Pan-African Parliament The African Court of Justice Directorates

Heads of States of all Member States Foreign Ministers or ranking designees Permanent representatives of the Union and other Plenipotentiaries of Member States Five Parliamentarians from each Member State Eleven judges chosen by the Assembly Peace and security Political affairs Infrastructure and energy Social affairs Human resources, science, and technology Trade and industry Rural economy and agriculture Economic affairsb Conferences and events Women, gender, and development Programming, budgeting, finance, and accounting Administration and human resource development Office of the Legal Counsel Chairperson Deputy Chairperson One commissioner each for 8 of the directoratesc African Central Bank African Monetary Fund African Investment Bank

The Commission

Financial Institutions

Note: The Commission is indeed the secretariat of the AU and is located in African Union Headquarters, Roosevelt Street, W21K19, Addis Ababa, Ethiopia. Source: http://www.africa-union.org/root/au/AUC/Departments/Departments.htm. http://www.africa-union.org/home/Welcome.htm. http://www.dfa.gov.za/au.nepad/au_nutshell.htm. http://www.africa-union.org/root/au/AUC/AUCleaders/aucleaders.htm a The Permanent Representative Committee serves as the Advisory Council to the Executive Council. The PRC meets at least once a month and make decisions by a two-thirds majority. b The economic affairs directorate looks after economic integration, monetary affairs, investment, and development. c The Commission has commissioners responsible for the following directorates: peace and security, political affairs, infrastructure and energy, social affairs, human resources and science and technology, trade and industry, rural economy and agriculture, and economic affairs.

Table 8.15A. Economies of the Middle East Bahrain Cyprus Iran Iraq Israel Jordan Kuwait Lebanon

Oman Palestine Qatar Saudi Arabia Syria Turkey United Arab Emirates Yemen


224

Table 8.15B.


Key economic indicators of economies of the Middle East

Country

Area (000’s km2)

Bahrain Cyprusa Iran Iraq Israel Jordan Kuwait Lebanon Oman Palestine Qatar Saudi Arabia Syria Turkey United Arab Emirates Yemen

0.67 9.25 1,648.00 437.07 20.77 92.30 17.82 10.40 212.47 na 11.44 1,960.58 185.18 780.58 82.88 527.97

Total

5,997.38

Population (in millions) 0.70 0.78 68.69 26.78 6.40 5.91 2.42 3.87 3.10 na 0.89 27.02 18.88 70.41 2.60 21.46 259.91


Exports US$ billion

Imports US$ billion

15.83 16.78 561.60 94.10 154.50 26.80 44.77 23.69 39.65 na 23.64 338.00 72.33 572.00 111.30 19.37

11.17 1.24 55.42 17.78 40.14 4.23 44.43 1.78 19.01 na 24.90 165.00 6.34 27.49 103.10 6.39

7.83 5.55 42.50 19.57 43.19 8.68 12.23 8.86 8.71 na 6.71 44.93 5.97 101.20 60.15 4.19

2,114.36

528.42

380.27

Source: The World Factbook (July 20, 2006). Includes North Cyprus (Greek). The GDP (PPP) of North Cyprus is US$7,135 billion. Exports and imports are fob.

a

Table 8.15C.

Sectoral shares of GDP of economies of the Middle East (%)

Bahrain Cyprus Iran Iraq Israel Jordan Kuwait Lebanon Oman Palestine Qatar Saudi Arabia Syria Turkey United Arab Emirates Yemen

Agriculture

Industry

Service

0.5 3.7 11.6 7.3 2.6 3.3 0.4 12.0 2.7 na 0.2 3.3 24.9 11.7 4.0 13.5

38.7 19.8 42.4 66.6 31.7 28.7 47.9 21.0 39.0 na 80.1 61.3 23.0 29.8 58.5 47.2

60.8 76.5 46.0 26.1 65.7 68.0 51.6 67.0 58.3 na 19.7 35.4 51.9 58.5 37.5 39.3

Source: World Development Indicators (2001) and Asian Development Bank Key Indicators (2001).

225


Table 8.15D. Per capita income (PPP) of economies of the Middle East (2005) (US$) Bahrain Cyprus Iran Iraq Israel Jordan Kuwait Lebanon

23,000 21,500 83,000 3,400 24,600 4,700 19,200 6,200

Oman Palestine Qatar Saudi Arabia Syria Turkey United Arab Emirates Yemen

13,200 na 27,400 12,800 3,900 8,200 43,400 900


Table 8.16.

Continental economic unions

Economic Region

Area (in millions km2)



Exports US$ billion

Imports US$ billion

AU AEC (4+10) EU USA FTAA World

30.31 17.84 3.98 9.63 39.94 510.07

876.62 3,166.74 456.95 298.44 875.84 6,525.17

2,222.04 9,246.36 13,310.00 12,490.00 17,898.59 43,070.00

304.41 2,292.63 1,318.00 927.50 1,850.66 10,330.00

231.20 2,016.70 1,402.00 1,727.00 2,546.33 10,300.00

Notes: (1) EU trade figures are adjusted for intra-EU trade. (2) AU area includes the entire continent of Africa, inclusive of Morocco. Source: The World Factbook (Aug 8, 2006).

Thus, the 14 economies enjoy a commanding position. The remaining 170plus nation-state economies with 5 billion-plus people have much less to share with. Individually, none can be a competitive actor in the world market. Globalization will be made real when peoples and governments welcome the EU/euro model and promote regional economic unions, each with its competitive shares of world output and trade, contributing to economic gains of all the peoples in all the continents (see Monnet, 1978; Dutta, 1992, 1999, 2000a, b; Issing, 1996, 2000, 2001; Harberger, 1996; Kiyoshi, 2000; Letiche, 1997, 1998; Lloyd, 1996; Maehara, 1998; Mazzucelli, 1997; Petri, 1993; Schroeder, 2000; Yamazawa, 1994).


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Silk, L. (1983). The New York Times, September 5. Sleijpen, O. (1999). Does European Monetary Union Require a Fiscal Union? Soros, G. (1998). The Crisis of Global Capitalism: Open Society Endangered. Soros, G. (2000). From Global Capitalism to Global Democracy. Stiglitz, J. (2001). Globalization and Its Discontents. : W. W. Norton & Company. Study Group of EMU (1973). European Economic Integration and Monetary Unification. Brussels: EMU. Summers, L. (1991). ‘‘Regionalism and the World Trading System’’ Policy Implications of Trade and Currency Zones, Federal Reserve Bank of Kansas City. Temperton, P. (1998). The Euro. UK: Wiley. Tinbergen, J. (1939). Statistical Testing of Business Cycle Theories. Geneva: League of Nations. Truman, E. M. (2006). Rearranging IMF Chairs and Shares: The Sine Qua Non of IMF Reform. In Truman, E. M. (ed.), Reforming the IMF for the 21st Century. . Washington, DC: Institute for International Education. Vanthoor, W. F. V. (1998). EMU: A Story of Success if the Rules of the Game are Followed. Journal of Asian Economics, 9(2), 193–206. Vanthoor, W. F. V. (1999). A Chronological History of the European Union 1946– 1998. Cheltenham, UK: Edward Elgar Publishing Ltd. Vanthoor, W. F. V. (2002). European Monetary Union Since 1848: A Political and Historical Analysis. Cheltanham, UK: Edward Elgar. Viner, J. (1950). The Customs Union Issue. Walton, G. M., & Rockoff, H. (2002). History of the American Economy, 9th edition. Australia: South-Western College Pub. Welsh, M. (1999). Europe United?. UK: St. Martin Press. Werner Report. (1970). Report to the Council and the Commission on the Realization by Stages of Economic and Monetary Union in the Community. Supplement to Bulletin of the European Communities, 11. Yamazawa, I. (1994). Asia-Pacific Economic Community: New Paradigm and Challenges. Journal of Asian Economics, 5(3), 301–312. Yoo, J. H. (1996). Asia’s Economic Growth in the Next Decade: Opportunities and Constraints. Journal of Asian Economics, 7(3), 393–406.

Relevant websites African Union, http://www.africa-union.org/home/Welcome.htm. APEC, http://www.apec.org/webapps/fta_rta_information.html. Australia Department of Foreign Affairs and Trade, http://www.dfa.gov.za/ au.nepad/au_nutshell.htm. http://www.dfat.gov.au/trade/negotiations/us.html.

234


Banka Slovenije, http://www.bsi.si/en/economic-and-monetary-union.asp? MapaId=694. BBC, http://nerws.bbc.co.uk/2/hi/business/3111101.stm. Bilaterals.org, http://www.bilaterals.org. Caribbean Community, http://www.caricom.org/jsp/community/member _states.jsp?menu=community. Comunidad Andina, http://www.comunidadandina.org/endex.htm. Egypt State Information Service, http://www.sis.gov.eg/public/africamag/ issue12/html/study12.htm. Encyclopaedia Britannica, http://www.britannica.com. Europa, Gateway to the European Union, http://europa.eu/constitution/ referendum_en.htm. http://europa.eu.int/scadplus/printversion.lvb/e50017.htm. http://europa.eu.int/abc/12lessons/key_dates_en.htm. http://europs.eu.int/scadplus/glossary/treaties_en.htm. European Central Bank, http://www.ecb.int/bc/exchange/html/index. en.html. http://www.ecb.int/stats/exchange/eurofxref/html/index.en.html. http://www.ecb.int/ecb/orga/capital/html/index.en.html. European Navigator, http://www.ena.lu/mce.cfm. http://userpage.chemie.fu-berlin.de/adressen/eu.html. European Parliament, http://www.europarl.europa.eu/factsheets/6_3_ 1_en.htm. Government of Ireland, http://www.irlgov.ie/ecbi-euro/ccp.htm. Government of Mexico/Bancomext, http://www.investinmexico.com.mx/ pied/cds/pied_bancomext/why_mexico/trade_filename.htm. HM Treasury, http://www.hm-treasury.gov.uk./documents/international_ issues/the_euro/assessment/report/euro_assess03_repindex.cfm. International Monetary Fund, http://www.imf.org/external/pubs/ft/exrp/ what.htm#origins. http://www.imf.org/external/np/sec/memdir/members.htm. Mercosur, http://www.mercosur.int. National Bureau of Economic Research, http://www.nber.org/papers/ w8169. North Atlantic Treaty Organization, http://www.nato.int/structur/ countries.htm. United States Embassy, http://usa.usembassy.de/etexts/2plusfour8994e. htm. United States Environmental Protection Agency, http://iaspub.epa.gov/trs/ trs_proc_qry.navigate_term?p_term_id=28026&p_term_cd=TERMDIS United Nations Online Network in Public Administration and Finance, http://unpan1.un.org/intradoc/groups/public/documents/CAFRAD/ UNPAN002810.pdf. United States Tax Code, http://www.law.cornell.edu/uscode/html/uscode31/ usc_sec_31_00005103——000-.html.

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United States Treasury, http://www.ustreas.gov/education/faq/currency/ legal-tender.html#q. University of Oklahoma, http://www.law.ou.edu/ushistory/paris.shtml. Visa, http://www.corporate.visa.com/md/nr/press31.jsp. http://web.worldbank.org/WEBSITE/EXTERNAL/ World Bank, EXTRABOUTUS/O. World Trade Organization, http://www.wto.org/english/thewto_e/whatis_e/ tif_e/org6_e.htm. http://www.polsci.ucsb.edu/faculty/cohen/inpress/bretton.html.


Subject Index AC-10 36, 39, 61, 64, 66, 69, 78, 79, 81, 82, 159, 189 African Economic Union (AEU) 204–212 African Union (AU) 160, 205, 209, 211, 215, 216, 220–223 American Hemispheric Economic Cooperation/Union 138, 162, 176, 177, 180, 186, 189, 190 antiglobalism 216–225 articles of confederation 119 articles of faith 29–30 Asia and Africa 215–216 Asia Pacific Economic Cooperation (APEC) 165–172, 190 3+5 model 170 4+10 model 170 Asian free trade area 169, 170 Asian Development Bank (ADB) 170 Asian Economic Cooperation (AEC) 159, 170, 192–195, 197, 200, 201, 213, 215, 216 Asian money 138, 159, 162, 170, 189 Association of South East Asian Nations (ASEAN) 170, 189, 192, 199, 200, 203, 208, 209

Benelux Customs Union 31, 34 Bretton Woods International Monetary Fund (IMF) 145–151 Restructuring 148–151 World Bank (WB) 151–155 International Bank for Reconstruction and Development (IBRD) 151–155 International Development Association (IDA) 151–155

International Finance Corporation (IFC) 151–155

candidate countries 3, 35, 40, 58, 106, 184, 189, 193 common market 38, 42 confederation 117–120 continental regionalization 57, 187–190 Council of Europe 34, 35 cowboy diplomacy 185 Customs Union (CU) 32, 34, 128, 164, 181, 188

deepening and widening 33–34 dual currency circulation 40

economic integration 15, 16, 32, 42, 54, 57, 60, 69, 74, 77, 87, 95, 118, 131, 136, 140, 157, 158, 162, 164, 166, 173, 180, 186, 196, 197, 203 enhanced cooperation 47, 129–130 EU-10 61, 62, 64, 66, 159, 160 EU-12 69, 74, 75, 77, 87, 102, 103, 105, 107, 113, 147, 196 EU-15 3, 10, 15, 28, 40, 41, 43, 56, 61, 62, 64, 66, 69, 74, 75, 77, 78, 81, 82, 87, 90, 108, 123, 131, 158–160, 197–206, 219 EU-25 2–24, 26, 31, 33, 38, 41, 60, 62–67, 69, 71, 74–80, 82, 93, 95, 105, 106, 140, 141, 146, 147, 159, 189 EU flag 109, 117, 127, 136 Euro–dollar currency regime 104–114 Europe day 127

238

Subject Index

European Central Bank (ECB) capital stock 93–94 executive board 89–90 general council 90–91 governing council 89–90 European Charter of Fundamental Rights 40, 48, 125 European Coal and Steel Community (ECSC) 3, 11, 18, 31, 36–40, 45, 60, 83, 118, 164 European Community (EC) 3, 36, 41, 45, 59, 88, 164–166 European continental economy 33, 54, 58, 60, 72, 77, 139, 166 European Council of Finance Ministers (ECO-FIN) 88, 141 European Economic Community (EEC) 3, 10, 23, 31, 36–38, 40–43, 45, 88, 130, 143, 164, 165, 170, 183 European family 54 European Free Trade Area (EFTA) 23, 143, 165 European Government Committee of Regions 53 Court of Justice 52 Euratom Committee 54 European Commission 52 European Council 49–51 European Court of Auditors 52–53 European Economic and Social Committee 52–53 European Investment Bank 52–53, 122–124 European Monetary Fund 52–53 European Parliament 48–49 European Monetary Cooperation Fund (EMCF) 88 European Monetary Institute (EMI) 88, 91 European Monetary System (EMS) 3, 39, 43, 88 European Monetary Union (EMU) 3, 39, 43, 89, 118 European Payments Union (EPU) 32 European System of Central Banks (ESCB) 3, 44, 88 European Union (EU) 1–30, 31–54 Europeanization of Europe 1, 109, 150, 159, 201

Eurosystem 7, 8, 10–13, 15, 17–19, 21–24, 40, 58, 60, 69, 79, 87, 89–91, 97, 99, 109, 118, 131, 138, 141–145, 158, 162 Eurozone 40, 43, 48, 85–97, 99–104, 106, 109, 114, 138, 143–149, 152–155, 188, 189, 195–204, 222 exchange rate 42, 43, 53, 88, 89, 91, 94, 104, 109–114, 144, 145, 147 Exchange Rate Mechanism (ERM) 3, 9, 88, 142

Federal Reserve System (FRS/FED) 87, 98, 141, 142, 151 federation 117–120 foreign direct investment 18, 78, 79, 81, 82, 166, 179 framework of integration 69 Free Trade Area (FTA) 3, 31, 91, 130, 164 Free Trade Area of the Americas (FTAA) 162, 173–180, 216 functional integration 130–134

G-8 159, 161, 185 globalization 187–190 gravity model 189, 190 growth with stability 89, 109

Harmonized Index of Consumer Prices (HICP) 95–97

imperial model 57–58 import–export-led growth model 166 interest rates 94, 96, 98, 99, 142 International Atomic Energy Agency (IAEA) 42 international currency reserves 107–108, 150 Iraq War 142, 184, 185

Jean Monnet 1, 114

Kyoto Protocol 29, 40, 132, 156

Subject Index

learning model 187–225 level of industrialization 193, 194 Luxembourg compromise 36

macroeconomic theory 55–57 Marshall Plan 31, 32, 163 mature industrialized economy 5, 11, 13, 15, 22, 24, 195 Mercosur 180, 181 Middle East 212–215 millennium development goals 155 money supply (M1, M2, M3) 99–101 mutual accreditation and standardization 131, 170

New Partnership for Africa’s Development (NEPAD) 204 normalized income gap 157–159 North American Free Trade Area (NAFTA) 172–173 North Atlantic Treaty Organization (NATO) 8, 10, 32, 46, 163, 164, 180, 183–184 northern rim of Africa 194, 210, 212, 213

observer status 35, 85, 109, 117, 144, 145, 147 ombudsman 125 on ice 119, 180 one common money 85, 87, 164 optimum currency area 85–115 Organization for African Unity (OAU) 205 Organization for Economic Cooperation and Development (OECD) 32, 33, 163, 164, 183–184 Organization for European Economic Cooperation (OEEC) 31, 32, 163 Organization of American States (OAS) 178 out-members 91, 94, 107, 108, 144

political integration 55, 57, 83, 87, 109, 111, 118, 136, 138, 140, 141, 146, 147, 164, 183–185, 194

239

post-WWII model the North and the South 218 pound sterling and euro 87, 113, 143, 147 price stability 45, 55, 57, 91, 94, 95, 99, 101, 120–122, 142 principle of competition 37, 109, 133, 162 principle of inclusion 1, 192, 201, 214 production map of the EU-25 75–80 progressive integration 3, 16, 77 pull factor 165, 166, 190 push factor 165, 166, 190

Russia 2, 10, 11, 16, 18, 19, 58, 59, 134, 155, 156, 159, 161, 166–168, 177, 185, 186

Snake agreement 3, 39, 43, 88 sovereign nation-state 1, 16, 20, 26, 33, 34, 55, 56, 58, 59, 69, 86, 104, 106, 134, 136, 139, 141, 145, 150, 156, 165, 180, 190, 217, 219, 222 sovereignty 1, 3, 23, 31, 58, 80, 87, 107, 109, 111, 118, 119, 138, 165, 195 special drawing rights (SDRs) 145–147, 150, 151 supranational mcroeconomy 58–60

third-country nationals 47, 126, 132 Treaties Acts (Treaties) of Accession and Amendments 38–41 Amsterdam Treaty 45–46 Euratom Treaty 41–42 European Constitution Treaty (Constitution for Europe) 36, 117–138 Maastricht Treaty 43–45 Nice Treaty 46–48 One Europe Act 42–43 Single Europe Act 42–43 Treaty of Rome 37–38 Treaty of Benelux Economic Union 34 Turkey 3, 9, 31–33, 35, 39, 40, 134, 139, 140, 193, 194, 223–225

240

Subject Index

UK membership to EU 142–144 unilateralism 58, 155, 162, 185 United Nations (UN) 44, 46, 59, 104, 134, 139, 156, 177 United Nations Security Council 46, 134 unity in diversity 24–29 EU official languages 26–27 lifestyle diversities 27–29 religion 24–25

Universal Declaration of Human Rights 125 universal suffrage 17, 29, 38, 46, 48

World Trade Organization (WTO) 16, 58, 91, 109, 117, 131, 140, 155–157, 170, 172, 177, 185, 186, 188 Doha Declaration 155, 156

Contents Acknowledgments Introduction to the Series

ix xiii

Preface

xv

List of Figures

xix

List of Tables

xxi 1

CHAPTER 1

The European Union

CHAPTER 2


31

CHAPTER 3


55

CHAPTER 4

European Central Bank and the Euro: Theory of Optimum Currency Area Revisited

85

CHAPTER 5


117

CHAPTER 6


139

CHAPTER 7

The EU and USA

163

CHAPTER 8


187

Bibliography

227

Subject Index

237


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Fighting Corruption in the Public Sector, Volume 284 (Contributions to Economic Analysis) (Contributions to Economic Analysis) (Contributions to Economic Analysis)

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Explaining Growth in the Middle East, Volume 278 (Contributions to Economic Analysis) (Contributions to Economic Analysis)

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The Single Server Queue (Contributions to Economic Analysis)

Legitimacy and the European Union

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The European Union Decides

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European Union: The Basics

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European Economic and Political Issues, Volume 9

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Slovenia: from Yugoslavia to the European Union

An Historical Introduction to the European Union

The Binding of Nations: From European Union to World Union

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European Union and East Asia: An Economic Relationship

European Union and the Euro Revolution, Volume 283 (Contributions to Economic Analysis)

Designing the New European Union, Volume 279 (Contributions to Economic Analysis) (Contributions to Economic Analysis) (Contributions to Economic Analysis)

Fighting Corruption in the Public Sector, Volume 284 (Contributions to Economic Analysis) (Contributions to Economic Analysis) (Contributions to Economic Analysis)

Cognitive Economics: New Trends, Volume 280 (Contributions to Economic Analysis) (Contributions to Economic Analysis) (Contributions to Economic Analysis)

Tourism, Trade and National Welfare, Volume 265 (Contributions to Economic Analysis) (Contributions to Economic Analysis)

Explaining Growth in the Middle East, Volume 278 (Contributions to Economic Analysis) (Contributions to Economic Analysis)

New Directions in Macromodelling, Volume 269 (Contributions to Economic Analysis) (Contributions to Economic Analysis)

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Urban Dynamics and Growth: Advances in Urban Economics, Volume 266 (Contributions to Economic Analysis) (Contributions to Economic Analysis)

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International Trade and Economic Law and the European Union

The Single Server Queue (Contributions to Economic Analysis)

Legitimacy and the European Union

Evolutionary Economic Geography: Location of production and the European Union

The European Union Decides

The European Union Decides

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An Historical Introduction to the European Union

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