European Business Environment

Introduction

This paper discusses the validity of the statement: The European Union does not represent a true union between its members. There are six levels of economic integration: preferential trading area, free trade area, customs union, common market, economic and monetary union, and complete economic/political integration (Alva and Behar, 2008). These categorisations imply that increased trade leads to an increased economic integration and that, as nations become more intertwined economically, they will necessitate the need for some level of political integration (Alva and Behar, 2008). The European Community (EC) was founded in 1957 with six member states by the signing of the Treaty of Rome under the name of European Economic Community (EEC). It became the EC in 1992 under the Maastricht Treaty and is the first of the three pillars of the European Union (EU). Today, the EC is the principal component of the EU. In this paper, this term ‘the EU’ is used to refer to this union, including those periods when it was known as the European Economic Community (EEC) and then later known as the European Communities.

Over the last twenty years the European financial landscape has been radically transformed, with the establishment of Economic and Monetary Union (EMU) having a large role in accelerating the pace of this transformation. A significant change has been the continued process by which the European financial markets have integrated, which has been a basic component of the wider process of economic and political integration in Europe. Financial integration has been one of the items at the top of the European political agenda, with the eventual objective (set at the Lisbon European Council in March 2000) of transforming the EU into the most competitive and dynamic economy globally by 2010 (Gjersem, 2003). The extent of progress in EU financial integration is undeniable. With the introduction of the euro, several EU financial sectors have become very integrated. But this integration has not spread to all areas and is largely the outcome of monetary integration (Frangakis, 2004), suggesting the persistence of significant gaps in the integration process (Walken and Raes, 2005). Indeed, the extent of the capital market integration between EU countries lies somewhere between the international capital markets and national ones, indicating that liberalisation is still not complete and that deep integration of financial markets is still not a reality in some aspects of the financial markets (Gjersem, 2003). Therefore, even though there is no single measuring stick that allows us to judge exactly the extent of integration, there seems to be clear indication that financial markets within the EU still have a distance to go before national demarcation lines will actually disappear and financial market integration is acceptable (Gjersem, 2003).

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The EU has periodically added new members expanding the number of member states several times throughout its history and promising of continuing this trend in the future. Indeed, when Romania and Bulgaria joined the Union in 2007 the EU expanded toward South-Eastern Europe and naturally other countries in this area hope to become members of the EU. Three countries currently have candidate status (Croatia, Macedonia, and Turkey) and other four countries are participating to varying degrees in the Stabilisation and Association Process (Albania, Bosnia and Herzegovina, Serbia, and Montenegro).[1] The EU is now a 27-member state with the biggest single market in the world. As the EU continues to enlarge, there has been discussion as to whether the EU should prioritise ‘widening,’ which would mean expanding the Union to the east, or ‘deepening,’ which means that the focus would be on greater economic and political integration building on the accomplishments of the Maastricht Treaty (Kubicek, 2005).

This paper argues that, in the early days of the EEC, internal cohesion of the member states, based on fundamental cultural, economic, ideological, and political similarities, took precedence over any pressure to enlarge. However, it might be said now that enlargement may have taken precedence over internal cohesion. In explaining the reasons for this change, this paper is organised as follows. The first main section provides an overview of the Union’s history from the EEC to the current EU. The second main section discusses the initial reasons for integration followed by the reasons for subsequent enlargement. The third main section explains the reasons for this change in focus from economic, ideological, and political integration to enlargement and discuses whether they are mutually exclusive. The paper concludes with a brief summary.

Background to the EEC/EU

The EEC evolved from the European Coal and Steel Community (ECSC) in 1958 and was established between Italy, Luxembourg, the Netherlands, Belgium, France, and West Germany, often called the ‘Common Market.’ Under the EEC, attempts were made to achieve harmonisation and the EEC had as its ultimate objective the economic union of its member nations, eventually culminating in a political union. According to Haas (1961), the process of attaining the terminal condition of a political community among nation states is called integration. Integration is thus the process in which political actors in different nation states transfer their political activities to a new, expanded centre, whose institutions have authority over the original national states (Haas, 1961).

In 1956, the United Kingdom (UK) proposed a Europe-wide free-trade area that would incorporate the Common Market, and again attempted to become a member of the EEC in 1963 and 1967, but these proposals was vetoed by France (Baldwin, 1994). Thereafter, the UK and Sweden formed in 1960 the European Free Trade Association (EFTA) and other European countries that did not belong to the Common Market (see Figure 1) eventually joined. Later the EFTA and the EEC made arrangements to ensure uniformity between the two groupings and by 1995 all of the EFTA members had become members of the EU except four (see Figure 2). The EU has continued to expand. In 2004, ten additional states joined the Union, the largest expansion in its history – Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. Bulgaria and Romania are the latest additions, joining the Union in 2007.

Currently, the EU covers over 4 million km?, with France as the largest country with a population of 62 million. And while the EU is less than half as big as the United States, its population of 491 million is more than 50% as large as the American population. Since the accession of the new member states in 2004, the EU’s GDP is now slightly larger than that of the US, with its GDP estimated in 2009 at US$14.5 trillion. Figure 3 (below) shows the relative size of the various economies making up the EU-27. The German economy is largest, with 19.4 % of EU’s GDP in 2008, followed by France (15.2%), the UK (14.1%), Italy (12.3%), and Spain (8.5%).

Figure 3: Percentage of GDP accounted for by each country in the EU

The Rationale for Integration

According to Leonard (2005), France’s foreign minister, Aristide Briand, was the first leading politician to suggest a European Union and this took place at the end of the 1920s. However, real European integration was driven by (1) geopolitical factors affecting Europe after the second World War, (2) unrelenting pressure from the USA during the Cold War, and then (3) European policymakers’ mercantilistic aspirations in the 1960s and 1980s (Evenett, 2004). According to Baldwin (2003, p. 6), “[t]he key question in the mid-1940s was, ‘How can Europe avoid another war?’” As a solution, the Europeans chose to “eliminate destructive nationalism by binding European nation-states into an economic and political union” (Baldwin, 2003, p. 6). This is exemplified by the Schuman Declaration (9th May, 1950):

The coming together of the nations of Europe requires the elimination of the age-old opposition of France and Germany… The solidarity in production thus established will make it plain that any war between France and Germany becomes not merely unthinkable, but materially impossible…

European integration was thus the foundation of the post-WWII architecture in Western Europe. Thus, in the first instance, Europe’s motives were peace and stability and, secondly, a safeguard against communist Russia. According to Baldwin (2003, p. 7),

…it is clear that EFTA and the EU especially have indeed promoted peace and understanding in Europe. With their economies so thoroughly entwined, a war among Western European nations has been unthinkable for decades.

In Bilefsky (2006), Jules Deelders, described as one of the Netherland’s leading poets, argues that a shared attitude and culture are important. And it apparent that the initial formation of the EEC (and the EFTA and then the EU) was done among nation-states that were very well aligned in cultural, economic, ideological, and political terms. The initial grouping, the Six, were close geographically, as well as economically, ideologically, and politically and this was very important and was the main reason that the UK’s petition to join this group was rebuffed twice, since it was not very close to these nations in the terms that they (particularly France) thought was important. However, the EEC eventually took other Western, and eventually Eastern, European nation-states onboard and, according to Baldwin et al. (1997, p. 128), “Eastern enlargement of the EU is a central pillar in Europe’s post-Cold War architecture.”

It is key to understand that each enlargement is different from earlier enlargements and the last enlargement of the EU into Eastern Europe is an unprecedented case. These countries were qualitatively different from the previous member states, with primary mention being generally made of the economic differences – the most recent member countries are much poorer than the previous member countries (Kubicek, 2005; Lejour et al., 2007). Additionally, these countries are politically and ideologically different, being mostly former Soviet States or otherwise proponents of Socialism/Communism, unlike the democracies of Western Europe.

A number of other countries are seeking to join the EU, including Albania, Croatia, Macedonia, Serbia and Montenegro, Turkey, and Ukraine and some argue that these countries are even further from being ‘European’ (Choudhury and Naidu, 2009). For example, Kubicek (2005) argues that “[m]any of Turkey’s supposed shortcomings are well-known: it is too big, too poor, too agricultural, too authoritarian, and, perhaps above all, too Muslim” (p. 1). Kubicek (2005, p. 1-2) further notes that “Turkish membership, unlike membership for the Poles, Czechs, Latvians, etc., will compel Europeans to ask a fundamental question: what is Europe?” Overall, Turkey’s entry into the EU would transform the Union in fundamental ways (Kubicek, 2005, p. 2): geographically – “its inclusion in the EU would mean that the EU would now border Iran [and] Syria;” culturally – “expansion to Turkey would be the first time the EU would cross the traditional border of ‘Christendom;’” and politically – “what does inclusion of Turkey say about Europe’s identity and values and how would Turkish membership jive with the goal of fostering an ‘ever closer union?’”

The Rationale for Enlargement

There are four explanations put forward for European enlargement (Evernson, 2004). The first is called ‘technocratic entrepreneurship.’ Moravcsik (1998, p. 4) explains this explanation thus: [2]

[European] integration has been driven primarily…by a technocratic process that reflects the imperatives of modern economic planning, the unintended consequences of previous decisions, and the entrepreneurship of disinterested supranational experts.

The second explanation is put forward by many proponents supporting EU expansion – trade expansion. Additionally, the rapid rates of growth achieved by the member countries of the EEC and EFTA in the 1960s created a belief that economic integration is a key factor in terms of the level and growth of economic activity (Brada and Mendez, 1988). Almost from its start as the EEC, the EU has led to the hope, if not the expectation, that it would lead to dynamic gains from trade, possibly including a sustained rise in the growth rates of the member states (Dearoff and Stern, 2002). Overall, Moravcsik (1998) argues that the leading (Western) states have for fifty years behaved logically in using the EU to promote their economic interests. However, according to Baldwin et al. (1997, p. 128) intra-regional and extra-regional “geopolitical considerations constitute the engine driving enlargement.” For example, the 2004 expansion of the EU assures good neighbourly relations and security in a region that has been a source of volatility and an area of constant aggression for a long time the past and this type external stability is decisive in states such that Slovakia that have many internal issues (Abraham, 2003).

The third explanation is the most developed economic theory as to why regional agreements enlarge over time and that is the explanation called ‘domino regionalism,’ which was originally presented by Baldwin (1994, 2003). Baldwin (1994, 2003) argues that the achievement of the Single Market programme of reforms in Europe, supported by the fall of the Soviet Union, was the trigger for negotiations about enlargement with the outstanding members of the EFTA agreement and the previously communist states of Eastern Europe. Overall, the latest entrants to the EU expect increased political stability and the Union expects enlargement to contribute to a more stable Europe. Plus, regional integration may stimulate growth in the region as the foundation of the EEC and the former enlargements have proven. According to Baldwin et al. (1997, p. 125) “[t]he bottom line is unambiguous and strongly positive: enlargement is a very good deal for both the EU incumbents and the new members.”

Discussion

The initial rationale for European integration is still the rationale for current expansion: geopolitical and economic considerations – in general, a move towards a political community and complete economic integration. However, while in the beginning, internal cohesion took precedence over the pressure to enlarge (as evidenced by earlier rebuffs to interested countries); this is no longer the case. After the recent addition of 12 countries to the Union, many Europeans are protesting that the EU is growing too far and too fast. And at a time when people seem to be increasingly dubious about European identity, the EU may be suffering from ‘enlargement fatigue’ (Kubicek, 2005, p. 1). Indeed, the enlargement has become a priority for the Union for several reasons, three of which are highlighted here.

First, as mentioned several times, European stability has been a driving factor for integration and with the recent upheavals in Eastern Europe, their integration into the rest of Europe seems the only way forward in terms of European stability. The majority of Europeans seem to have embraced the EU’s growth eastward in 2004 for a range of reasons, but maybe primarily reasons because it reinforced the idea of the fall of the Soviet communist regime. The EU commissioner in charge of expansion, Olli Rehn, is quoted by Bilefsky (2006) as saying “It would be utterly irresponsible to wobble in our commitments and disrupt a valuable process which is helping to build stable and effective partners in the most unstable parts of Europe.”

Second, as previously outlined, regional economic integration is hard for individual countries to resist because countries find that they have to react to increasing liberalisation by becoming a member of the existing group or by creating a counterbalancing group (Baldwin, 2003). The third reason is related to the second and has to do with the stability of multiple arrangements within a single area. That is, it is not likely that each country in Europe will be able to choose its own type of regionalism. Therefore, it is most likely that, ultimately, ‘gravitational forces’ will draw all of the main countries in the region into a single agreement (Baldwin, 2003). However, this does not mean that everything will go as planned. For example, member-states’ implementation of the EU directives to implement the EU financial services regulatory framework has tended to take a long time and it was argued that “the harmonisation of regulation, while substantial on paper, was not as effective in practice” (Danthine et al., 1999, p. 45). More significantly, several legislative areas ended unresolved in political deadlock (Hertig and Lee, 2003). Therefore, even though internationalisation, disintermediation, and globalisation of financial services continued, financial markets in the EU remained very much fragmented at the end of the 20th century (Frangakis, 2004).

Has enlargement taken precedence over internal cohesionThis is an important question if we think that a ‘true union’ between EU members rests on cohesiveness. Kubicek (2005) argues that such a question assumes that cohesion and enlargement are mutually exclusive. European integration was meant to be “open to all countries willing to take part” (Schuman Declaration, 9th May, 1950) and Kubicek (2005, p. 1) is firm in his belief that the EU has done both. In addition to the addition of 12 new members, the EU

…adopted a draft European Constitution, which promises to forge a tighter political union among its members as well as a stronger European identity. Geographically, politically, and culturally, one can thus speak of a ‘New Europe,’ one with a broader mission that covers over twice the number of countries that originally signed the Maastricht Treaty just over a decade ago.

Conclusion

What is now known as the EU came from integration efforts that start in the 1950s with the hopes of great economic and politic benefits being gained by those involved (Haas, 1961). This was initially shared among countries that were very similar culturally, ideologically, politically, and economically. But The EU, however, looks nothing like the EEC and contains many diverse countries. And thus the EU’s goal is now to “form an ever closer union among the peoples of Europe” (Baldwin, 2003, p. 7). According to Baldwin (2003, p.7), “the intensity of regional trade has produced a continuous exchange of ideas and exposure to cultures … has fostered mutual understanding.” It can be concluded that, for economic and geopolitical reasons, enlargement is now a priority and may have even taken precedence over internal cohesion of the member states, based on fundamental economic, ideological, and political similarities. It may thus be concluded that the EU does not represent a true union between its members. However, ‘widening’ and ‘deepening’ are not mutually exclusive and seem to be necessary to really strengthen the EU as an economic and political power.

Word count: 2997 words

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[1] This is a legal framework for the relations between the EU and potential members in the period before possible accession (Lejour et al., 2007).

[2] This is not the explanation that Moravcsik (1998) proposes; he argues that integration was spurred by the core economic interests of Britain, France, and Germany.

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