Essay on the European Union
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Sample Essay on the European Union
May 1st 2004 will be an historic date for the European Union because ten new Member States will be allowed to join the European Union. These states will be Hungary, Poland, the Czech Republic, the Slovak Republic, Slovenia, Estonia, Latvia, Lithuania, Malta and Cyprus. Bulgaria and Romania are pencilled in for membership in 2007 and Turkey is due to begin negotiations at the end of 2004. This shows the European Union’s commitment to further enlarging itself from the current EU 15 so as to increase the benefits of a larger union; these benefits will be discussed in more detail later in the piece.
After a meeting in Copenhagen in 1993, the European Council laid down a number of political and economic conditions that prospective members must meet in order to gain membership to the EU. These criteria became known as the “Copenhagen Criteria” and include the following points. The countries must have stable institutions guaranteeing democracy, there must be a respect for human rights and minorities, there must be a functioning market economy, they must have the capacity to cope with market forces within the union and finally they must have the ability to take on the obligations of membership including adopting the European Single Currency.
Before discussing the advantages to business of the enlargement and deepening of the European Union, it is necessary to clarify exactly what the two terms mean and the differences between them. Firstly, enlargement is very simply, the introduction of more countries into the European Union. Deepening, on the other hand is a bit more complicated to explain. In a simplified sense, it is where the member states work towards a fully integrated economy (known as a Full Economic Union), which results in a common market and the complete unification of monetary and fiscal policies. Another aspect of a Full Economic Union (FEU) is that member states should harmonise industrial standards and have the same regulations for things, such as which institutions can register as a bank or an insurance company.
There are a number of stages in-between zero integration and full integration that are shown in Appendix 1. The further down the diagram you are, the greater the level of integration until you reach an FEU when it is perceived that the integration is complete. At the moment, most experts believe that the European Union is in-between stages four and five (see Appendix 1) as there is a common market, yet despite the introduction of the single European currency, it does not have complete monetary and fiscal policy unification. The EU has though, agreed on some basic principles regarding the harmonisation of industrial standards and regulations although they have allowed the individual governments the ability to apply these criteria how they wish.
Before commenting on the merits of enlargement and deepening, I shall set out some criteria that I shall use to decide whether these two activities will be beneficial for businesses. The first of these criteria is that demand for their products should increase, if not in the short term then definitely in the long term. A second thing that must be present is that working practices should become more efficient leading to increased long term productivity. The third and final criteria that I shall use is that due to increased confidence, businesses should be able to adopt more long term strategies with a reduced fear of failure.
Due to the removal of tariffs and other trade barriers, such as quotas, cross border trade between EU member states will increase. The addition of more than 100 million people into the EU market will allow businesses to sell to more people than before, thus increasing demand. This increase in demand will be especially apparent because the countries trying to gain membership to the EU have had to undertake economic reforms, which have led to high rates of economic growth, meaning that the people of these countries will demand more imports as they will have more money to spend. Having said that, just because there is a larger market for a business to sell to, it does not mean that there will necessarily be an increased demand for their products, especially if the product that they sell is already available in the new countries. It is also true for companies who are part of the ten prospective member states that their products may not meet the standards that are available in the larger countries in the Union, therefore their product will not sell in these other countries and demand will not increase. The European Union though has realised this and after a meeting of the European Round Table in May 2001 they believed that this gap in standards between certain countries would quickly disappear, as the companies who did not meet the standards would be able to modernise their production procedures due to the sharing of information with other member states.
Due to the increasing prosperity of the proposed member states’ economies, foreign direct investment will increase. This will give the businesses the necessary funds to try to increase their output, so that they can sell to this larger market of people. In the long run, this will give them funding that they can use to embark on large projects that would allow the company to grow further. These extra funds can also be used to modernise production techniques, so that the company can compete with the companies in other countries who offer higher quality products than themselves. However, increased competition is not good for all companies, the decline in companies’ profits in the airline industry is due to not only the September 11th attacks but also due to increased competition. In this case it was Swiss Air who came off very badly because they simply could not cope with having a lower market share and had to rely on the Swiss government paying Ј188 million to keep them in business.
The enlargement of the European Union would “bind post-communist countries into a strong political community of stable democracies and prosperous economies”. This stability will allow businesses to adopt much more long term strategies, especially with regard to investment as the greater the uncertainty there is in the world, the less a business is likely to invest as there is less chance of there being an adequate return on the investment.
Another advantage of enlarging the European Union, is that businesses will be able to have access to a highly skilled workforce since, under the Single European Act 1987, there should be free movement of labour between member states. Therefore if a company in Malta needed workers who were highly skilled at using complex machinery but could not find them in their own country, they could go and look elsewhere in the Union. This could mean that companies who before produced low quality goods in an inefficient manner can now produce these goods to much better standards and in a much quicker time as well. This is also of use to larger companies within existing member states, who can set up low cost manufacturing bases within in the EU as wages in Eastern Europe are far lower than in the current EU member countries.
The deepening of the economy can also be advantageous to businesses. There is evidence that the EU is net trade creating and that it has added about 1% of GDP to EU output. This is due to the lifting of tariffs and other trade barriers and has meant that the less efficient producers have been replaced by more efficient ones as competition increases. This efficiency will be partly because of the need to beat the competition but also due to the creation of a larger market, firms will be able to enjoy economies of scale to a greater degree. This increase in competition is likely to reduce firms’ market share in the short run, however, by concentrating on improving efficiency and promoting R&D and in the long run, firms can uncover the full gains of deeper integration. However, this increased competition will clearly not be good for all businesses. This competition will be bad for companies like Swiss Air, as is discussed earlier in the piece, but will also be bad for smaller public companies, who will face the threat of take-overs as larger firms will be looking to position themselves in the most beneficial market locations.
Appendix 2 shows the results of a study by Allen, Gasiorek and Smith conducted in 1997 on behalf of the European Commission, into the best and worst estimates for 12 of the existing member states of the introduction of the single European market and shows extra consumption as a percentage of initial GDP. This information shows that the greater effects of the deepening of the economy will be for the countries with smaller economies and not for the more developed economies of Germany and the UK who will only receive very modest gains. This increase in consumption in the poorer countries is going to increase the competition as more firms are attracted by this potential demand for their goods. Therefore, the only businesses in existing EU countries that will really benefit from this increase in consumption are those that are currently trading in these prospective member states or who plan to do so in the future.
One advantage of deepening is that it is supposed to stimulate technological advancement, as firms share ideas to help each other. This would help those businesses in the prospective member states to improve their production techniques and increase their productivity as a result. However, in practice this does not really happen, as companies are reluctant to share information with others. This would be especially true in this case, since the firms from different European countries would be in direct competition with each other due to the increase in inter-European trade and would be unlikely to share their secrets with the competition.
One of the Copenhagen Criteria for prospective member countries is that they must join the Single European Currency. This will be good for businesses who already trade in other European countries, but who usually face the risk of currency fluctuations reducing their profits and will allow them to trade with other European countries without this risk, thus boosting cross border trade. However this will have little or no affect to smaller businesses who just trade within their own country, as the exchange rate mechanism never effected them before anyway.
Many commentators believe that deepening and enlargement act in conflict with each other. One of the arguments for this theory is that deepening will be harder as there will be more countries that must decide on the deepening measures, making it less likely that they will come to a decision. This would be especially apparent if the particular measure must be unanimously agreed without anyone vetoing it. The European Union has tried to solve this by insisting that all of the new prospective members must join the Single European Currency and, therefore, hand over control of their monetary policies to the European Central Bank.
It is also true that some of the new members may not be fully prepared for the highest levels of integration. For example, Greece found it very difficult in trying to meet the Maastricht criteria in order to join the EMU. However they did manage to meet the criteria eventually meaning that enlargement may cause the deepening process to move along more slowly rather than not at all.
The more the economy is enlarged, then the more regulations there are. This means that it is becoming ever harder for new members to join the EU, as they have to comply with all the EU laws and directives before joining. However, the fact that it is harder to enter into the Union will be good for the existing countries, since it will mean that only the most appropriate candidates will be able to gain membership. This will also be good since this will put less of a strain on the already stretched EU budget, as the poorer countries will have to become more prosperous before they can join.
One recent example that seems to say that enlargement and deepening can happen at the same time is that Greece, Ireland, Spain and Portugal all joined just as the Single European Market was being introduced 10. Therefore, as they had no problems joining as further deepening was occurring, there is no reason to suggest that when the new member states join the EU, there cannot be further deepening then.
When Greece, Ireland, Portugal and Spain joined the European Union, they received help from the Cohesion Fund, since their GNP was lower than 90% of the EU average. The Union has allocated this fund 18 billion over seven years. However, due to budgetary constraints, the new members will not be joining the Union with the motivation of receiving any large cash handouts. Therefore, this big bang enlargement will not cost the Union as much as the previous ones did, so it does not really matter how many countries join at once.
However, I would have concerns over Poland joining along with the rest of the applicants, due to the high percentage of their workforce in agriculture (27%). Under the current EU budget for agriculture, Poland would gain a large percentage of the budget, leaving some of the existing members states with hardly any of the agricultural budget. I believe that the budget should be changed before Poland are allowed to join, so that the existing member states do not lose out. I would also be concerned by the introduction of Latvia, who have the lowest GDP per head of 18%. This is due to the gap of about 20-30% in price for certain agricultural goods between EU prices and those in Latvia causing the price of those goods to rise. This would stimulate over production of food in Latvia, leading to large food mountains but could also mean that the people of Latvia may not be able to afford food.
In conclusion, whilst it is clear that there will be short term difficulties in the enlargement of the European Union, I believe that the increased trade and competition will mean that the enlargement will be good for businesses, especially those with appropriate strategies to benefit from the enlargement. I also believe that increased enlargement is not in conflict with further deepening mainly due to the fact that Greece, Ireland, Spain and Portugal all joined the Union as it was deepening and had no major problems. However the European Union must address some budgetary concerns before the introduction of Poland and must also be aware of the low GDP per head, coupled with an increase in prices in Latvia before allowing these two countries to join.