Introduction:



European Union: The Emerging International Superpower

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By Arihant Jain and Russell Kizor

Ethics of Development in a Global Environment

Professor Bruce Lusignan

December 5th, 2003

Introduction

The path to European economic union has been a tumultuous one, leading to the historically unprecedented creation of a common European currency on January 1, 1999. The Commission of European Communities drafted its first plan for such a union in 1962, the idea gained momentum in the late 1970s and the early 1990s still saw the European Community struggling to establish the groundwork for economic unification through a common currency. Regardless, the monetary unification of the European Union (EU) was, and continues to be, viewed as a bold move with several possible benefits as well as downfalls. This ambitious plan will change the global economic landscape forever one way or the other, but many believe this to be a big gamble at best.

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Euro Currency

The European Countries had several important reasons for implementing monetary union. Firstly, the elimination of exchange rate fluctuations between EU countries would remove uncertainties in cross-border transactions by fixing the nominal rate of exchange across countries. Also, this would eliminate the threat of speculative attacks on individual currencies. Secondly, monetary union also eradicated the transaction costs associated with exchanging currencies. This is important in view of large movements of goods and capital across borders, paving the way for better trade unification. Thirdly, there was the potential of the Euro’s rise to international currency status. Given the better exchange rate that the Euro enjoys over the US Dollar today, one can see the gaining importance of the Euro as the stable international currency of trade.

On the other hand, the member countries had to surrender their control over national monetary policy over the European Central Bank (ECB). Thus, individual countries were only left with fiscal policy as the only stabilizing tool with which they could combat unpredictable and asymmetric exogenous economic shocks. However, one of the four pre-conditions defined by the Maastricht Treaty for EU admittance was to limit the debt and deficits of a county in terms of a percentage of the member country’s GDP (The others were stable exchange rate and required levels of inflation and interest rates). Hence, governments were limited in their ability to use deficits to finance economic downturns, effectively tying the hands of fiscal policy in terms of government spending.

The disadvantages of monetary unification were clear, but it was up to the individual members to realize the potential advantages. One of the most important of these advantages was perhaps the irreversibility of a common currency. The implied commitment to one Europe and one money would force the national governments to think in terms of the bigger picture. The policymakers would have to ignore their differences and develop growth strategies that would transcend their own economies towards the growth of the EU as a whole.

The monetary unification of the EU and its implications had tremendous potential in terms of economic and political gains. The economic unification of Europe would increase its global influence and make it an important player in setting global policies. As Cohen states in his “The Political Economy of Currency Regions”,

[monetary supremacy] confers substantial political benefits on the hegemon. At home, the country should be better insulated from outside influence or coercion in formulating and implementing policy. Abroad, it should be better able to pursue foreign objectives without constraint as well as to exercise a degree of influence or coercion over others. The expansion of its currency’s authoritative domain, in principle, translates directly into effective political power.[1]

In this paper we argue that due to the accelerating path towards European unification, we believe that in the near future the EU will be able to economically and politically challenge the United States’ current global position as sole superpower.

Economic and Trade Implications of European Unification

The adoption of a common currency for multiple countries in Europe is an unprecedented historical event and an economic experiment. Currently, no one can precisely predict the economic and political outcomes of the formation of the European Union. However, using modern economic analysis, we can examine the benefits and costs of the EU in order to roughly forecast the net gains or losses for the countries involved.

There exist several incentives for European countries to join the EU and adopt Euro as common currency. The most obvious benefit is that the citizens of participating countries are no longer obligated to convert their currencies from one to another within the European borders. For large countries, this tends not to be such a problem, but for smaller countries such as many of those in Europe who tend to conduct frequent cross-border business, this tends to become problematic. A 1990 study by Emerson et al estimated that conversion costs accounted for 0.4% of GDP for the current fifteen countries in the EU.[2] This figure may seem negligible, but when one considers that in sum, this is a shocking $334 billion US per year, it seems much more significant. So then, the eradication of conversion costs clearly lowers barriers to trade and leads to greater economic efficiency.

Another barrier to trade is the uncertainty associated with foreign exchange markets. For example, when businesses sell products to countries with different currencies, they usually write contracts in terms of the buyers’ currencies. If the contract states that the vendor does not receive his compensation for the products for six months, and the buyer’s currency decreases in value over that time period, then the vendor receives less money for the products than he or she had previously expected. Some economists would argue that this loss of efficiency is not significant due to the existence of forward markets that work to reduce foreign exchange risk. This is somewhat true. However, the insurance that a forward market affords is only available at a cost or transaction fee; else the forward markets would not exist. Hence, the adoption of the Euro would help to reduce this inefficiency as well.

The final and most significant incentive for European countries to join the EU is the ability for a country’s constituents to freely work and start a business in any one the countries in the EU. According to The Economist, constituents are given “a ‘single passport’, issued by any one of the member countries, [which] allows a financial firm to operate anywhere in the EU as long as it is registered in one of the countries.”[3] There are two primary benefits to this flexibility. First, this implies that capital is potentially perfectly mobile within the EU, meaning that firms can place their factories wherever is most profitable instead of just within the confines of their own countries. There are vast cost advantages to this system. For instance, if a firm manufactures a product that does not require much human capital, or college graduates, the firm can build its factory in a country where there are more laborers searching for work in such a factory.

Obviously, it can be difficult for firms to rapidly relocate their factories, so the effects of this first benefit take place over several years. However, the second benefit of this system is that labor has the potential to be perfectly mobile as well, which could have profoundly positive effects on the EU as whole quickly. So, in addition to a firm’s ability to position its factories anywhere, laborers can also seek out the firms for which they wish to work; and conversely, firms can seek laborers anywhere in the EU. This will undoubtedly lead to less structural unemployment, the unemployment of those whose skills did not meet those of their job functions, throughout the EU, and thus, to more efficient work outcomes. Additionally, this will lead to greater economic specialization in production. That is, a good match between worker and firm will be more easily attainable, thereby increasing efficiency of both workers and firms.

As we have seen, the benefits from being a member of the European Union are multiple. But what are the major drawbacks? There is one significant cost to joining the EU: the loss of national monetary policy, a key tool that central banks employ in order to fine-tune an individual country’s financial system. The European Central Bank (ECB) now assumes control over monetary policy for all EU nations after joining the EU. According to Article 105 of the Maastricht Treaty, “the primary objective of the ECB shall be to maintain price stability”; the needs of individual countries were secondary to this larger goal, such that “without prejudice to the objective of price stability, the ECB shall support the general economic policies in the Community.”[4]

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European Central Bank

Clearly, this could prove harmful to a member country of the EU if it required the use of monetary policy, but the remainder of the EU did not. However, this downside is somewhat dampened due to the free capital and labor markets discussed earlier. If one country was not well economically, the citizens of that country could easily relocate themselves and their businesses, and enjoy the prosperity of the other member countries. Thus, even in a national economic downturn, unemployment could remain much lower than it was before a member country joins the EU.

Now we understand that the economic benefits of joining the EU probably outweigh the drawbacks for most European countries. Now, how will the EU as a whole compare economically to the United States? Let us take a glance at the EU GDP and its populations.

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As we can see, the fifteen countries currently in the EU produced $8.357 trillion from a population of 373.9 people as opposed to the US 1998 GDP of $8.79 trillion and its population of 290 million.[5] And when we consider that the GDP of the joining twelve nations which is expected to take place by 2007 (ten in 2004 and two in 2007), the EU will have a GDP of $8.70 trillion and a population of 480 million. Obviously, the economics of the EU are comparable to those of the US. We should not ignore the growth rate of both entities, and while the growth rate of the US is higher than that of the EU, we might expect this to change. This may occur because after labor and capital markets become more mobile, the economic specialization discussed earlier will occur, and we can expect the productivity of those 480 million people to rise, and thus raise the growth rate of the EU in excess of that of the US.

This will lead to the EU actually having more economic power than the US, and could have interesting economic effects on the whole globe. For example, if the EU is more economically powerful, or even as powerful, as the US, we could expect the EU to challenge the US in its economic decisions instead of giving in to its demands. This seems like another benefit of joining the EU. When all the countries join together, they must no longer do as the US would like because they, together as the EU, have just as much power to influence decisions as the US.

There are not many easily perceivable examples of this expected phenomenon as it is currently just occurring. However, there is one instance that stands out as a clear example. In March 2002, the Bush administration employed the use of tariffs on steel imports in order to protect national steel producers that are unable to meet the low costs of their international counterparts. The World Trade Organization (WTO) deemed these tariffs as illegal, but Bush decided to leave them in place without any regard for the WTO. However, when the European Union gave the US a mid-December deadline to drop the steel tariffs or face retaliatory export tariffs of over $2 billion, President Bush decided to back down and drop the steel tariffs on December 4, 2003. “The president said his decision was based on his ‘strong belief’ that America was ‘better off with a world that trades freely and a world that trades fairly’”.[6]

Evidently, though, this was not the case. If President Bush had really thought that America was ‘better off’ with free trade, he never would have implemented the tariffs in the first place, and needless to say, would have removed them when the WTO deemed them illegal. Obviously, it was the $2 billion tariffs from the EU that convinced Mr. Bush to remove his internationally harmful tariffs. Before the EU was in existence, one member country alone probably would have been unable to credibly pressure the US into such an action due to its much smaller size and dependence on the US economy. We will probably see more examples like this one in the future. Thus, due to the formation of the EU, European countries are able to economically challenge the US when it does international damage. In other words, the US is no longer the world’s economic monopoly – the EU is now giving the US significant competition in its status as the world’s sole superpower.

The European Heritage of War

It is hard to ignore the fact that politics was the substantial motivation behind the formation of the EU. Although a lot of the tangible impact was and will be felt on economic grounds, the foundation for the EU lies in the post- World War political relationships that existed between the European countries. For example, commitment to the economic union was used to secure peace between France and Germany and smooth over international tensions in the wake of World War II.[7] The bloody past of Europe’s involvement in the two world wars serve as a constant reminder of the evils of war and provide the motivation for an integrated Europe far removed from the possibilities of intra-European conflict. Europe has created for itself a common currency, a flag, a newspaper (the European), TV station, a European Champions League for soccer, film festival, parliament, court and law; and a ‘Eurovision’ music festival. These are a result of a new level and intensity of integration that has been a reaction to the destruction and deaths of the first and second world wars. The wars were followed by the secular division into East and West Europe during the Cold War. Now, instead of the earlier Americanization vs. the Sovietization of Europe, the Europeans want their own continental identity. This “Europeanization” is spurred on by the post World War II triangulation of the continent – where the United States and the Soviet Union had picked over the post-war European corpse to influence its resurrection. However, now Europe is without any immanent invaders, no colonies, no occupiers and no superpower alignments. The stage is set for its resignification. There has been more progress on European security and defense issues since 1998 than in the past 50 years. This is no accident. Powerful historical forces are at work that appear to have already had a transformational effect on policy formation and policy preferences of governments which, for decades, had remained entrenched in sovereign national dug-outs. The end of the World Wars, the end of the Cold War, the wars of Yugoslav succession and the advent of globalization are some of the factors that have made important contributions towards the precipitation of a new European policy outlook on security issues. The accelerated and intensified progress of European integration is concomitant to the need for the EU to become a political player commensurate with its economic and commercial clout.

The European Parliament

The EU Parliament is the assembly of the representatives of the 374 million Union citizens. Since 1979 they have been elected by direct universal voting every five years. At the moment, the EU Parliament has a total of 626 members distributed between Member States according to the sizes of their populations. After enlargement, with the addition of 10 countries, the number of members of the EU Parliament will increase to 732.[8]

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European Union Parliament

Currently, the EU Parliament considers the EU Commission's proposals and is associated with the Council in the law-making process, in some cases as co-legislator. Under this procedure it can amend laws by an absolute majority of its members (314/626) and veto decisions. It also shares budgetary authority with the Council, supervises the European Commission and has political supervision over all the EU institutions. However, there is a trend towards granting increasing powers to the European Parliament as the EU moves towards more pervasive consolidation. Many observers have expressed skepticism about granting more power to the European Parliament. The skeptics believe that Members of the European Parliament (MEPs) do not vote in a disciplined way and that they vote more often with their country group than with their European Party. Using a unique database consisting of all roll call votes by each individual MEP between 1989 and 1999 (over 6000 votes by over 1000 different MEPs), Noury et all show that the skeptics are wrong[9]. The data shows clearly that MEPs vote more along party lines than along country lines. Party cohesion is comparable to that of the US Congress and is increasing over time whereas country cohesion is low and declining. In short, politics in the European Parliament generally follows the traditional left-right divide that one finds in all European nations. These findings are valid across issues, even on issues like the structural and cohesion funds where one would expect country rather than party cohesion. In votes where the EP has the most power, MEPs participate more and are more party-cohesive. This study goes to show the effective voting patterns in the European Parliament and its close resemblance to most democratic parliaments in its functioning.

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“The Union's aim is to promote peace, its values, and the well-being of its peoples”

– Constitution Article 3(i)

Foreign policy and Defense Aspirations

Due to its experimental nature, the EU is a system in constant transformation and thus it is hard to understand the characteristics of EU political integration. The political dynamism is largely because the very fabric of the EU rests upon a form of coexistence with established polities in the member states and with the constant mire of international relations coupled with what we now call globalization. A crucial element of the EU’s evolution is the creation of a common foreign and security policy (CFSP). However, a defense dimension is being added through the implementation of a common European security and defense policy (CESDP; launched in 2000) and a European Rapid Reaction Force (ERRF). The creation of a Rapid Reaction Force was finally agreed by the EU’s defense ministers in February 2000, who re-affirmed their commitment to the formation of a 60,000-strong force by 2003. This Rapid Reaction Force is intended to work alongside NATO as a complimentary force. Its strongest supporter is France who has been pushing for an independent European Army. Other Member States worry about upsetting the Americans through a possible split of the NATO alliance.[10] Western Europe and the United States have held a close alliance since the end of World War II and have often coordinated military operations under the NATO framework. Now, however, many Europeans in positions of responsibility feel that their economic interests and foreign policy objectives are at variance with those of the United States. This is especially true in regard to policies concerning many parts of the world, including Eastern Europe, Africa, the Middle East and even Latin America. The French and German governments feel particularly strongly about developing and maintaining an independent military capability that can operate without US cooperation or consent. The Germans have also suggested that the EU's nuclear capabilities should also be "integrated within the European defense system". At present, Britain and France are the only EU countries with a nuclear deterrent.[11]

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European Rapid Reaction Force

Europe’s desire for a continental strike force antedates its present rift with the United States. It can be traced back to Europe’s shame in being unable to prevent the bloody disintegration of Yugoslavia in the 1990s. But the notion of a European army can be seen as inevitable with the European unification gathering strength and focus steadily. As the EU increasingly plays a pivotal role in setting and enforcing the trade, societal and environmental policies for the Continent, it would be outlandish if it failed to move towards a common defense policy- and inevitably a common defense force as well. If Europe wants any say in the nascent new world order, it needs to be able to substantiate the values it upholds. There is certainly a perverse irony in Europe needing to develop an armed force to project its pacifistic values. However, an armed force that is controlled by democratic nations and employed only in instances of genuine threats will definitely be a welcome addition to the forces pursuing peace in his world. More importantly, it is almost necessary to create a democratic alternative to the military monopoly of the United States. This is especially true since the Bush administration does not seem to be successful in using their forces for intrusive inspections of rogue states or for nation-building.

Implications and Reverberations of the War on Iraq

In light of the recent invasion in Iraq by the United States, we are witnessing one of the most serious European-US political divide on global issues since the end of the Second World War. Not only has it sparked off EU initiatives to develop its own foreign policy with the backing of a ‘Euro-army,’ but has also taken its toll on transatlantic trade with the expected economic spill-over. The war on Iraq has caused a significant strain in transatlantic political relations because it seems to be the final straw in continuous differences in EU-US policy outlooks. The war comes right after the Bush administrations unilateral withdrawal from the Kyoto Protocol on Global Warming, the ABM Treaty, and the International Criminal Court. Essentially, it has caused the exposure of profound differences with Europe over threat assessments regarding weapons of mass destruction; the proper way to handle "rogue" nations such as Iraq and Iran which act contrary to international norms; the role of multilateral institutions such as the United Nations; and the use of military force.

The American business community should be as worried as their European counterparts about the potential damage to transatlantic trade relations. The economies of the US and Europe are not only interdependent but also well-integrated. Through their respective affiliates, US and European companies each employ over one million workers in the other's market. The US has over a $1000bn annual trade and investment relationship with Europe. Over 60% of US exports to Europe are from US parent companies to their European affiliates.[12] On the US side, the huge subsidy-laden farm bill and the imposition of tariffs on European steel products still hang as impediments to improved trade relations. The Bush administration has to determine how it will tackle a politically charged WTO case to void the EU moratorium on Genetically Modified Organisms (GMOs). On competition policy, the European Commission takes a more suspicious view of mergers, as shown by the denial of the US-government approved GE-Honeywell deal, looking more at the impact on competitors, while the US focuses on efficiencies to consumers. Such ideological differences in EU-US economic outlook is the basis of current and future transatlantic trade rifts.

Conclusion

We have now seen how the European Union has and will continue to challenge the United States both politically and economically. This is a fortunate result for the remainder world’s nations because the US has waged its monopolistic power in order to better its own interests instead of interdependently considering the interests of others. Political and economic examples of this abound such as when the US breaks international treaties and invades Iraq, or when the US breaks international law according to the World Trade Organization.

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Map of European Union

Now that the EU is firmly positioned and growing in power, the US will no longer be able to commit such acts that are in the interests of the US but harmful to the remainder of the international community.

Now we must question how the EU’s newly acquired power will cause it to act in the future. Currently, the EU just challenges the US in its internationally harmful decision-making. But one may wonder if after the EU has surpassed the US in its political and economic authority, it will begin to make decisions solely in its own interest like the US has in the past. While it is currently impossible to predict the outcome of the EU’s growing power and how it will be waged, two factors lead us to believe that the EU will act internationally more responsibly than the US. First, the US is only one nation, so it employs its power for in order to promote national interests when making decisions. The EU, on the other hand, is comprised of multiple nations, each with a different set of national interests. Therefore, when the EU begins to set global policy, it will already have at least twenty-seven nations attempting to create that policy, which will lead to more internationally-based decisions. This will reduce the risk that the EU will break international laws when setting policy. Secondly, while the EU may grow stronger than the US, the US will probably continue to be a worldwide presence, and thus, will keep the EU’s power in check.

It is now clear that the EU will become a globally powerful institution and the international implications will be positive overall. It is a comforting thought that global policies in the future will not be solely determined by one nation, especially one that is motivated by selfish gains. After perceiving the wrongdoings that has been unleashed under the Bush administration, we, as members of the world community, can all be extremely gratified to know that there is hope in the future of global policy making in light of the emerging European Union.

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[1] Richard Portes and Hélène Rey. “The Emergence of the Euro as an International Currency”. National Bureau of Economic Research, Working Paper 6424, Feb. 1998, 5.

[2] Eichengreen, 1327.

[3] The Economist, Nov 19, 1998: “Europe’s American Dream”.

[4] Charles Bean. “Monetary Policy Under EMU”. Oxford Review of Economic Policy, Vol. 14, No. 3, 1998, 43.

[5] The Economist, Oct. 21st 1999: “Wider, Still, and Why”.

[6] The Economist, December 6th 2003: “Rolled Over”.

[7] Helm and Smith. “Economic Integration and the Role of the European Community”. Oxford Review of Economic Policy. (Vol. 5, No. 2, Summer 1989) 1.

[8]

[9] Noury, Abdul G.; Roland, Gerard, Economic Policy: A European Forum, October 2002,

v. 0, iss. 35, pp. 279-312

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[11]

[12] Eizenstat, Stuart E .The Economic Effects Of US Foreign Policy. Financial Times Business Edtion, The Banker, June 1, 2003

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