Brussels

1
Brussels

• The advantages of EU enlargement for member
  countries and the need for increased
  competitiveness and the sustainability of the
  Euro Zone

2
Introduction

• Lets look at certain areas, which I feel are
  likely to appear in the Examination
• Competiveness
• The Euro
• Sustainability of both the Euro and the European
  Experiment

3
Competitiveness

• Will EU remain competitive? BRIC Indonesia, a
  revived USA, emerging Russia, growth in other
  regions
• What will it need to do to remain competitive
  efficiencies and productivity will be central to
  this

4
Sustainability

• Well, once 16 countries have changed currency and
  27 have altered laws to meet the 100,000 pages of
  Acqui its not easy to escape.
• We need to think (a) what will be needed to keep
  this experiment alive and (b) what would
  replace it if it died
• Who will be first to break the 2 of GDP
  stimulus?
• The EU can afford to finance Latvia, Hungary etc
  as they seek to stabilise their economies
• Prisoners Dilemma how do we agree a
  co-ordinated strategy and protect national
  interests?
• Can US fiscal needs be squared with EU
  regulations wish by time of G20 meeting in early
  April.
• Lets start to look at the EU in a little more
  detail

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Being inside the Single Market

• Free movement of product, people and capital
  (soon services) with no artificial barriers to
  trade BUT protected where necessary from outside
  competition by Common External tariff
• Benefits arising from free trade within the
  Single Market -
• Opportunity to exploit their various comparative
  advantages in many industries as possible and
  increase exports to richer nations as a source
  of further economic development
• - Enlargement will eventually create a Single
  Market of over 500 million consumers, with
  relatively similar tastes in consumer durables

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Other advantages of being inside the EMU

• Most accession countries will be to net
  recipients of income from EU programmesa. Common
  Agricultural Policy- though only 25 of current
  subsidies paid to the older member states.
• b. Social Cohesion and Regional Funds to bring
  them to 75 of NNI figures of all membersc. To
  the receipts of receipt of EU funds one needs to
  add various macroeconomic advantages
• Potential macroeconomic advantage
• a. Reduced exchange rate volatility if accession
  countries join the ERM many countries are keen
  to join the Euro to reduce exchange rate risk and
  benefit from lower interest rates.
• b. Monetary policy coordination with the European
  Central Bank- Lower inflation will help bring
  down long term interest rates (this is good for
  investment)

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Other advantages of joining EMU as the EU aims
for enlargement

• The main aims of joining the EU for the accession
  countries are toa. Increase economic integration
  with Western Europeb. Provide a catalyst to long
  term economic growthc. Raise relative living
  standards closer to the EU average-via Regional
  and Cohesion Funds-look at evolution of EU and
  the ideas of the founding fathers.

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Growth and Stability Pact some problems?

• DEFICIT FORECASTS 2009
• Ireland 9.5
• Spain 5.8
• Latvia 5
• France 4.4
• Greece 3.7
• Normally 3 of GDP, 60 of GDP, inflation,
  exchange rate movement,, central bank, interest
  rate convergence Convergence Criteria

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IMF forecasts
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Being inside the single market

• Competitive pressures of being within the Single
  Market- Increasing competition should act to
  boost productivity under-performing businesses
  not meeting consumer needs and wants will lose
  market share. This has raised the fear of
  increased unemployment in once communist states
  BUT it appears to be a cost worth payingGlobal
  Presence the EU will have a more influential
  voice e.g. P5

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Other benefits

• Dynamic efficiency gains e.g. arising from higher
  investment and a higher rate of innovation
• Technology transfer as companies from old
  Europe transfer capacity to the new economies
  e.g. car manufacture
• Skills and Knowledge transfer use of EU funds
  to develop education, training and ways of adding
  value within their boundaries

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Other advantages

• Free movement of capital opportunities from
  foreign direct investment (FDI)- large inflows
  of foreign direct investment into accession
  countries (previous EU enlargement has seen a
  boost to FDI flows)
• Most accession countries have significantly lower
  unit labour costs and very low land costs which
  will be a spur to inward investment
• Ease of transfer of goods to other richer EU
  members e.g. Austria and Germany
• Integrated transport and energy distribution
  networks

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Other capital advantages

• Technology transfers and investment in training
  and skills from FDI flows will have a positive
  effect on productive capacity / long run
  aggregate supply
• - Western investment will boost productivity and
  thereby improve unit labour costs /
  competitiveness might this have a negative
  impact on us?

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The ideal model?

• A virtuous circle of investment?1. Higher
  output, productivity and employment2. Increases
  incomes, spending and saving3. Raises profits
  and spurs further investment
• If this is the case then the older members will
  have export potential increased

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But are there potential disadvantages?

• Adverse political and economic cycle in the EU
• Fear of "overstretching" the Union
• Uneven public support in the current EU members
• Insufficient communication
• The Turkish question though quietly Turkey has
  now become a principal negotiator in The Middle
  East
• Migration brain and skills drain?
• The Legacy of the Soviet Economy

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Can the older members gain?

• Export Potential commercial opportunities from
  enlarging the Internal Market
• a) Classic trade creation effects of increasing
  the size of a customs unionb) Accession
  countries are small but have grown more quickly
  than the old EU(15) in recent years and have much
  faster growth potential (higher trend growth
  rates)
• The long run economic potential of the accession
  counties is much greater than their current
  size!c) If living standards increase export
  potential for consumer goods industries is
  huged) Much recent FDI into accession countries
  has concentrated on retailing, banks and hotels!
  These are our strong areas.

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The older members

• Exploitation of economies of scale from supplying
  to a larger market
• a) Gains in productive efficiency / increasing
  returns to scaleb) Exploitation of principle of
  large minimum efficient scale in many industries
• Foreign Investment and Incomes and Profits
• a) FDI into accession countries will provide a
  net flow of interest profits and dividends -
  boosting a countrys GNP and supporting the
  balance of paymentsb) FDI flows likely to
  supplement rather than reduce domestic capital
  spendingc) FDI will speed up the transformation
  of accession countries   

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Advantages to older members

• a) Potential cost savings when importing raw
  materials and components from accession countries
  (improving the terms of trade for developed EU
  countries)
• A more diverse European labour market
• a) Opportunities for British and other EU
  businesses to import lower cost skilled labour in
  areas where there are severe labour shortages
• b) Migration of labour from accession countries
  may help to offset longer-term effects of ageing
  populations / slow growth of population of
  working age
• c) Increased opportunities for EU people to
  travel, live and work in Central, Eastern and
  Southern Europe
• d) Successful integration of appellant countries
  may reduce the surge of economic migrants seeking
  employment in the existing EU from eastern
  European countries

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Other advantages to older members

• More jobs
• a) European Round Table of Industrialists
  estimates that enlargement could create 300,000
  jobs across current EU Member States
• Higher EU economic growth
• a) Independent research suggests that accession
  of the 7 largest Central European candidates
  could increase UK GDP by 1.75 billionb) There
  is significant economic potential around new
  growth areas like Warsaw, Budapest and Prague
• A cleaner environment
• a) Accession countries have spent huge sums in
  securing improvements to air and water quality to
  meet more stringent EU standards reduction in
  cross-border pollution will have positive
  externalities
• Enlargement will be a catalyst for further
  economic reform in the EU
• a) Reforms to the CAP b) Spur to countries to
  reform their labour markets in the face of
  increasing low-unit labour cost competition from
  accession economies

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Industrial Production
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Sustainability of Euro
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Sustainability of Euro
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Eurozone GDP 2008
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What will determine competiveness and
sustainability of Euro

• Montesquieu observed that two nations who
  traffic with each other become reciprocally
  dependent for if one has an interest in buying,
  the other has an interest in selling and thus
  their union is founded on mutual necessities.
• So, will deeper involvement in inter-trade
  between members mean that the currency will
  become an integral part of EU trade?
• Who will not be using it 2020?

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Greater competiveness etc.

• Technological advancement within EU will force
  member states to become more competitive as
  prices cannot be disguised by exchange rates
• But will demographic trends allow this the
  older economies are seeing an increase in their
  elderly population. EU populations are growing at
  an average 0.3 per annum, whilst US is growing at
  1.3 - immigration within EU will have to
  encouraged but it is politically sensitive

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Competitiveness

• Productivity rates remain low 0.5 in EU 1.5
  in US
• Labour utilisation remains low in some countries
  70 of available workforce work in EU whilst
  80 do so in US. Are our welfare systems too
  generous?
• EU workers work on average 300 hours less then
  their US counterpart.

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Competiveness etc

• Work ethic (Puritan Gift) EU population tends to
  enjoy leisure, whilst US work extra hours
• institutions, regulations, traditions,
  preferences these too influence labour markets.
  What of influence of Trade Unions, will wage
  bargaining be VERY localised?

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Competitiveness

• Structural Changes - Structural reforms are
  crucial in labour markets so as to make them more
  flexible and adaptable, to support the creation
  of new jobs and to increase labour utilisation.
• Will we continue with this drive towards more
  going to HE?
• How will future generations learn?

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Competitiveness

• Employment protection legislation and
  wage-setting mechanisms, including wage
  indexation, also need to be reviewed.
• A sufficient degree of wage differentiation is
  important to ensure that wage adjustments closely
  reflect differences in regional and sectoral
  productivity.
• We trade together BUT we are also in competition
  with one another

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Competitive etc

• With a single currency, cost developments in
  individual countries, as captured by unit labour
  costs, play a key role in determining changes in
  competitiveness across the euro area countries.
• If a countrys unit labour costs persistently
  rise by more than the euro area average, this
  will obviously have a negative impact on its
  competitiveness vis-à-vis the other euro area
  countries as well as vis-à-vis other (non-euro
  area) countries that are competitors in world
  markets.
• Remaining competitive by favourably influencing
  domestic cost developments is, therefore,
  crucially important for economic activity and
  employment

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Competiveness etc

• Further efforts should therefore be made to
  reduce firms entry costs, such as the
  administrative burden on start-ups, and more
  generally to reduce red tape. In this context,
  specific emphasis should be placed on enhancing
  competition within and across our economies by
  liberalising trade in services which account
  for almost seven out of ten jobs in the EU.
• Ensuring an institutional environment that
  encourages business creation and expansion should
  therefore be among the priorities, together with
  supporting innovation and the diffusion of
  technological progress.

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Competitiveness

• In order to successfully harness technological
  advancements and thus to compete in world
  markets on the basis of superior quality and
  scientific and technological edge a continuous
  improvement in human capital is crucial.
• As economic activity becomes increasingly
  knowledge-based and jobs shift from low to
  high-skilled workers through the process of
  Schumpeterian creative destruction, sustained
  investment in education and in research and
  development becomes indispensable.

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Competitiveness etc.

• Sound fiscal policies are not only necessary to
  support the stability-oriented single monetary
  policy healthy public finances are a key element
  in shoring up the confidence of investors,
  businesses and consumers.
• Moreover, public expenditure should aim to
  deliver efficient and competitive public
  services. A reformed public sector can also play
  an important role as a catalyst in stimulating
  the restructuring of the private sector,
  eliminating rigidities and dismantling structures
  that impede competition, efficiency and the
  adaptability of the economy.
• Finally, fiscal policy should not only aim to
  reduce the fiscal burden, but also give due
  regard to the quality of public finances, i.e.
  the structure of public expenditure.

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What of the new member states?
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They are driving EU growth rates?
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Convergence
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Current Account Deficits and Inward Investment
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Financial Integration
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Convergence
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Is the euro challenging the dollar's role as a
global currency?

• Competitiveness of Euro Zone though some
  evidence of divergence is becoming visible e.g.
  Germany v Italy and Spain
• The member states will have to cut costs and
  co-ordinate more on fiscal policy
• Will this promote capacity shift to the east?
• Turbulence in US/Euro rates 4.1 in just TWO
  days in early January 2009.