Economic Aspects of the European Union

Introduction

The European Union itself is not exclusively accountable for all the economic aspects, which have or possibly could have promoted regional equality or most likely regional inequalities among the member countries. For a long time, the EU Commission together with the Council of Ministers has been aware that the nationwide economies of the member nations were not developed to the same degree, or were not influenced by industrial turn down to the same level. A few states were economically more advanced than the others while underprivileged areas in other member nations differed from the EU economy in general to a large extent. The European Union frequently has had to balance the supposed effects of enlarging the entire membership and the wish to deepen the degrees of political, economic, and social integration. The European Union Commission, Council of Ministers, in addition to the national governments of the member nations, supported the creation of the Structural Funds to lessen the regional economic disparities, which obstructed the efforts towards the regional union. This discussion, therefore, evaluates the economic aspects of the European Union in terms of regional economic disparities, as well as advantages, disadvantages, and peculiarities of the EU membership.

Background Information

According to Judt (2007), there are many economic aspects of the European Union, which have supported the regional unions actively. A few economic aspects have existed after the first years of the European Union while the other elements are more of “current evolvements” (p. 51). The beginning of the European Union dates back to the European Coal and Steel Community that tried and basically succeeded in coordinating coal and steel manufacture within the original six member nations (Judt, 2007). Besides political aims regarding the unification of Western Europe, the economic success of the ECSC was a crucial aspect in the decision to create the European Union in 1958. According to McCormack (2002), the entire project was united with the regional union, as it was planned to help all the member nations to reach “high levels of economic development” (p. 16).

However, while estimating the economic aspects of the European Union membership, there are several issues to be considered: firstly, the economic aspects of the European Union in terms of regional economic disparities; secondly, other economic aspects of the European Union concerning the Single Market; thirdly, a single currency, and CAP payments.

The Economic Influence of the EU Membership

One more comparatively early economic feature of the EU was the Common Agricultural Policy or CAP. Unintentionally, the CAP was accountable for encouraging regional economic equality. Its basic function was to support the agriculture in the European Union’s member states (Nugent, 2004). The CAP has benefited the member nations with enlargement of the agricultural part in the economies, for instance, Spain and France. In addition, it has supported the states with less resourceful farms like Germany. It may rationally be asserted that some nations wished to become the members of the European Union due to the substantial monetary subsidies, which could be obtained via the donations of the CAP (Nugent, 2004). For example, the sponsorship, which Portugal, Greece, Spain, and the Republic of Ireland received from the EU, was a significant aspect in the further economic development of these countries. The successive growth of the EU has made the cost of CAP more of an obstruction than help in terms of efficient regional competition (Sakwa & Stevens, 2006).

There are some economic aspects of the European Union, which have encouraged the regional competition among the member countries deliberately. The Single European Act that paved the way for the Single European Market after 1992 was planned to make economies within the European Union perform as a single market rather than several different national economies (Nugent, 2004). The beginning of the Single European Market supported the regional competition through much better homogeny of services, goods, and marketing throughout the European Union. It was the accomplishment of the long expected customs union that had been considered after the foundation of the European Union. The solitary market presupposed that it abruptly became much simpler to achieve the better degrees of regional competition than ever before (Nugent, 2004). One market was meant to support the economic development; however, it has been not capable of protecting economies of the EU member nations from facing the cycles of high development and declines (Nugent, 2004). It has possibly enabled the organizations to preserve the marketing expenses and trade throughout the entire EU.

The step to the single currency, Euro, has presupposed that the European Central Bank has undertaken the control over financial policy from the regional governments and former central banks that have been eliminated in the states, which have joined the EU (Nugent, 2004). The EU Commission and Council of Ministers had argued that the high level of regional and nationwide economic competition was, in fact, required before the launch of one currency and before the member nations were allowed to join in the program (Nugent, 2004). Obviously, the European Union member nations, which have adopted the common currency, have reached much higher regional competition than those states, which did not adopt it (Nugent, 2004).

In contrast to the aspects, which have promoted regional competition, the EU has not tried to increase the degrees of regional difference deliberately. Instead, the regional difference has commonly been caused by aspects not directly managed by the European Union. To a large extent, any regional disagreement can be traced back to when every member nation joined the European Union. For example, Britain had areas, which were already experiencing a turndown. Britain had less net gains from uniting the EU than other nations like the Republic of Ireland and Spain due the CAP payments, leading to Margaret Thatcher’s obtaining a budget refund (Sakwa & Stevens, 2006).

The enlargement has augmented the regional dissimilarity within the EU. When Greece, Britain, Spain, Ireland, and Portugal joined the EU, the number of areas, which were economically more depressed than the average EU nation increased. This issue would be afterward qualified for help under the criteria of the Structural Funds. The CAP was helpful to all these states except Britain (Sakwa & Stevens, 2006). The fall down of communism in Central and Eastern Europe increased the number of nations searching for their place in the European Union; meanwhile the regional differences increased when these states joined the EU. Regional dissimilarity was augmented as early as in 1990 when German reunification brought the backward economy of the former East Germany into the European Union. According to Nugent (2003), German reunification has turned out to be far more costly than initially planned and to have lessened the economic dynamics, which “West Germany had been renowned for accomplishing” (p. 52). The other former communist nations had to expect for a long time before joining the EU with economic restructuring occurring in advance. The EU enlargement in 2004 and 2007 has definitely increased the regional inequalities within the EU; however, there are plans to lessen them as soon as possible (Judt, 2007).

The Structural Finances in the EU nations have become more well-known since the 1980s, once the downturn and industrial refuse became more noticeable problems within certain areas of the member countries (Nugent, 2004). Structural finances were made accessible to domestic governments to be used in the areas, which were most depressed and unfavorably influenced by the economic turndown. The structural finances were planned to enhance infrastructures in these areas while mitigating the economic turndown in general. In addition to mitigating the economic turndown and social scarcity, structural finances also aimed at decreasing regional difference in the EU. Today, the EU in association with national governments, local businesses, and community groups applying for structural finances (Nugent, 2004). The EU has commonly regarded the influences of structural finances as being favorable in terms of ultimate outcomes. Without the usage of structural finances, infrastructures of some of the most underprivileged areas within the EU would have face underdevelopment at best and obvious decline at worst (Nugent, 2004). Whenever structural funds are well targeted, they certainly prove their own value in mitigating the turndown, scarcity, and regional inequalities (Sakwa & Stevens, 2006). For developing the areas, structural finances have offers for the community groups and local businesses concerning their infrastructure, in addition to the facilities.

The EU membership influences the economy of participant nations in many ways. The most significant effects appear via the Single Market, the program of economic incorporation, through which the “four freedoms” are provided (Thompson & Harari, 2013). However, economic influence of the EU is experienced in other spheres of its policy, as well. The European Union has the exclusive right to negotiate trade and investment treaties with the nations outside the Union. It is the customs union with a single tariff on the imported products. Hence, the membership influences the countries’ trade ties with the non-EU states deeply (Thompson & Harari, 2013). There are additional economic consequences to participation in the EU as the outcome of the nation’s contributions influences the entire EU budget; consumer costs, in turn, are affected by the Common Agricultural Policy and external tariffs on imports (Thompson & Harari, 2013). The membership in the European Union can also affect the decisions made by foreigners concerning whether to invest finances in the participant nation or not (Thompson & Harari, 2013).

The elimination of boundaries in the free movement of products and services has to stimulate trade. In theory, this is valuable for all member states due to the fact that it enables them to specialize in the products and services, for which they are comparatively more resourceful (Thompson & Harari, 2013). Eliminating the boundaries in the trade additionally decreases the competition experienced by the national organizations (Thompson & Harari, 2013). By increasing the size of the market, in which the company may operate, it additionally allows them to create economies of scale. All these aspects serve to lower the prices for buyers and increase general economic wellbeing, although this may cause the disturbance of some fields exposed to foreign competition (Thompson & Harari, 2013).

These advantages emerging from the trade development can be neutralized by the trade distraction from nations outside the European Union (Thompson & Harari, 2013). This happens due to the limitations to trade products and services entering the local market from outside the Single Market (Thompson & Harari, 2013). Some scholars think that the European Union is so protectionist that it rather redirects than develops trade. Nevertheless, these conclusions are commonly based on information from the times when the EU standard tariffs were much higher. They rest on the supposition that, were a member state to leave the European Union, it would have unilaterally eliminated all tariffs on the non-EU imports (Thompson & Harari, 2013).

Effect of the Free Movement of Capital and Labor

Free movement of products and services enables the manufacture of goods and services to work in an environment where the business is comparatively the most proficient (Thompson & Harari, 2013). Likewise, in theory, the free movement of funds and people increases the effectiveness, with which the inputs to manufacture process are allocated, by allowing the investments and labor to flow to where returns are the highest. Hypothetically, this serves to lessen the costs and increase general economic wellbeing (Thompson & Harari, 2013).

In reality, however, free movement of funds and labor presupposes the drain of capital, lack of exchange controls and liberty for businesses to invest and locate wherever they want in the European Union without any discrimination, and, more arguably, the removal of immigration limitations in the EU (Thompson & Harari, 2013). In spite of certain theoretical advantages, there are concerns as the free movement of employees is associated with economic expenses, in the form of reduced salaries and unemployment of the domestic population, and pressure on all public services (Thompson & Harari, 2013).

There are dissimilarities within the EU member nation due to different climate, obtainable resources, cultures, and working models besides the different degrees of economic growth. The alterations in international demand models, and technological achievements together with cheaper imports from states, such as China, increase the industrial turndown in the European Union (Harzing & Ruysseveldt, 2007). The states, which were the most unfavorably influenced, included France, Britain, and Italy. The industrial turndown increased unemployment; moreover, the degrees of social deficiency in the areas worst hit by it, with the attempts of national governments to manage these problems had not been successful (Sakwa & Stevens, 2006).

Sovereignty Connotation of the Single Market

Today, the Single Market is the legislation body created to lessen or remove dissimilarities in the way the markets perform between the member states (Thompson & Harari, 2013). This depends on the standards for products, and EU-wide regulations on the consumer defense, including the health and safety legislation, and competition policy (Thompson & Harari, 2013). The advantages associated with the evolvement of the ‘level playing field’ across the European Union can be counteracted by the loss of particular governments’ ability to establish the principles and issue regulations, which will be responsive to the nationwide priorities and altering conditions. In fact, expenses may increase to the degree that the best policy that a member nation sets would independently differ from what would be jointly determined by all member states (Thompson & Harari, 2013). The separate but related sovereignty ‘cost’ emerges from the governments losing the ‘right’ to regulate and organize their own economies in the exact way they desire. For example, the competition policy of the European Union, on the one hand, protects the state-subsidized companies that obtain an unjust benefit over opponents, which receive no assistance (Thompson & Harari, 2013). However, on the other hand, it restricts the degree, to which governments may support the national sphere or protect the sectors from the negative influences of foreign competition (Thompson & Harari, 2013).

Whilst, in some spheres, the level of artificial dominion and cooperative action can be necessary to support the markets and free trade, other EU rules passed in the name of the Single Market has far more vague relation to its basic aims, namely, the increase of trade and competition (Thompson & Harari, 2013). Just as the limits of the EU proficiency are frequently the subject of dispute, so the purpose and principles of the Single Market are open to discussion. Some have treated the Single Market as the vehicle for social, political, and economic incorporation (Thompson & Harari, 2013). The dissimilarities within the European Union concerning the aims of the single market intensify the sovereignty trade-off, and increase the possibility for inequalities in the EU rule, and the measures that would otherwise have been used at the nationwide degree.

Summary of Other Aspects of the EU Membership

Outside the Single Market, the European Union can perform in a number of policy spheres, which have the direct economic influences (Thompson & Harari, 2013). The Common Agricultural Policy, when joined with the quotas and tariffs on agricultural goods, serves to defend the EU farmers from the foreign competition, however, at the expense of higher consumer prices and financial contribution from the member states. The EU local policy aims at decreasing the economic and social inequalities across the EU, and finally, may follow to the larger markets for the UK exports. However, it entails the net contribution from the richer member states (Thompson & Harari, 2013).

The effects of the manufacturer support under the CAP, and the European Union’s tariffs on products from outside the European Union are to evolve the trade distraction, whereby some imports to the member nations appear not from the less-developed nation, but from the less proficient ones within the Single Market (Thompson & Harari, 2013). The outcome of this, in relation to the position where the domestic markets are entirely open to foreign products and services, may be an increase of prices for buyers (Thompson & Harari, 2013). Lastly, the membership of the EU can support direct foreign investment from the non-EU nations trying to access the Single Market (Thompson & Harari, 2013).

Impact of the EU Membership

It is frequently asserted that being a member of the European Union makes the participating state a far more attractive place for investments; organizations within the EU benefit from unlimited access to the markets of other EU member states through the Single Market. Yet, when appraising the scale of the EU influence on the member state’s inward direct foreign investment (FDI), it is obvious that the outcomes of the withdrawal are extremely complex. The decision to invest money is motivated by a number of aspects: including the reliability of the member state’ legal institutions, the accessibility of certain skills and services (Thompson & Harari, 2013). According to the 2005 Treasury paper, unraveling the stimulus from those arising from the Single Market, and accounting for other aspects, which have led to a cutting in FDI since the EU incorporation, embracing the elimination of capital limitations, and the evolvement of capital-intensive approaches can cause problems (Thompson & Harari, 2013). Appraising the input of such investment in the member state’s productivity is still more challenging.

On the one side, the elimination of obstacles to trade eradicates crucial incentive to establish physically abroad, meaning the Single Market could discourage the exogenous EU investment. On the other side, the participation in the Single Market needs to motivate the exogenous investment in the member nation from outside the EU; by doing so, they can access all other European markets tariff-free.

In the research of 2,272 multinationals, the UN Conference on Trade and Development discovered that the size of the local market was the most significant criterion influencing the location of the FDI for the production and service fields, and the third most crucial criterion for the main field (UNCTAD, 2009). This suggests that the membership in the European Union plays a significant role in influencing the investment decisions.

Conclusion

In conclusion, the European Union has encouraged local equality and regional inequality in terms of the economic aspects. Regional union has been supported unintentionally and intentionally by the CAP, Single Market, and one currency. The CAP, obviously, was not planned to encourage local equality and has only done so unintentionally. The Single Market and one currency were meant to support the local equality while, at the same time, expand the local equality within the member nations, which have joined it. On the contrary, regional inequality has frequently been caused by aspects not directly supervised by the European Union. States, which had joined the European Union at the far later stage increased regional inequality. The industrial turn down, technological shift, and international competition brought about local inequality more than the European Union itself. In fact, the European Union evolved the structural finances to mitigate the most damaging outcomes of regional discrepancy.

To sum up, it seems practical to assert that the membership in the Single Market is one of numerous significant determinants of FDI; outside the European Union, a member state can be able to create a regulatory regime more attractive to the international sponsors. Particularly, the member nation would obtain the competence to discuss the international agreements on direct foreign investment with third states, something that not all member states were able to do.

 

References

Harzing, A. & Ruysseveldt, J. (2007). International human resource management. Thousand Oaks, CA: Sage Publications Ltd.

Judt, T. (2007). Postwar – a history of Europe since 1945. London: Pimlico.

McCormick, J. (2002). Understanding the European Union. London: Palgrave.

Nugent, N. (2004). European Union enlargement. London: Palgrave.

Sakwa, R., & Stevens, A. (2006). Contemporary Europe. London: Palgrave.

 

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