Thesis on "Impact of the European Union on World Economy"

Thesis 11 pages (3022 words) Sources: 7 Style: APA

[EXCERPT] . . . .

European Union on the World Economy

In today's increasingly globalized world, the efforts of one region often have a direct effect on the entire globe. With the establishment of the European Union, in 1993, the ripples from this political, social and economic conglomeration were felt around the world. Ushered in with the Maastricht Treaty, the now 27 nation strong European Union has had considerable impact on the world economy, especially the economies of developing countries. To better understand this impact, this paper will begin with an overview and brief history of the European Union. This will be followed by a discussion of global trade, foreign direct investment and the effects of the European Union on the global economy. Lastly, a discussion concerning the European Union's effects on developing countries' economies will be given, as this is an area of considerable impact, for the conglomeration of nations.

Overview and History of the European Union

The European Union is a group of 27 nations, including Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom ("European Union," 2009). These nations have formed an economic union that incorporates a common market with free movements of services, goods, people, and capital. In addition, the European Union has adopted a common external economic policy to coincide with several internal policies. This union of nations has also adopted a common currency, the Euro, through the formation of the European Monetary Union, now also referred to as the Eurozone. There are intense production linkages and trade relations amongst the members of the European Union (Nienhaus, 2002).

The European Union was formed by the Maastricht Treaty, which went into force on November 1st, 1993 ("European Union," 2009). Formally known as the Treaty on European Union, this international agreement was approved by the heads of government of the nations of the European Community, in Maastricht, Netherlands, in December 1991. It was ratified by all European Community nations and signed on February 7th, 1992 ("Maastricht Treaty," 2009).

The treaty established a European Union, with citizenship granted to every person who was a citizen of a member state. Citizenship in the European Union allows people to vote and run for office in local and European Parliament election, in the European Union nation they live, regardless of their nationality ("Masstricht Treaty," 2009). Of course, nationalism still affects the continued development of the European Union.

Darby (2009) notes the objections of French political leaders to the prospective Turkish membership into the European Union. The two countries cultural differences are a source of much of the objections. Darby one of France's objections is "the uncertain role of a predominantly Islamic society within a European political and economic bloc" (p. 205). Although possible political differences in today's hypersensitive world, where the Western world is still undertaking military actions in Islamic nations, is understandable, it is the economic differences that perhaps has France so against the admittance of Turkey.

Darcy (2009) cites a Business Week article noting that Turkey is a country that has an average working week of 45 hours. This is considerably different from that found in France. The French labor market is one that has been globally recognized has having high indirect costs, long paid holidays, and shortened working weeks. Although the French President Sarkozy has vowed to do something about this uncompetitive reputation, over the last decade, France's economic growth has been unimpressive. In contrast, Turkey's automotive sector and manufacturing base have expanded significantly. Although it may be economically advantageous for the European Union, as a whole to welcome Turkey into their folds, specific national issues (such as those found in France) could prevent that decision from being made. Therefore, although the European Union has created a more cohesive multinational identity, clearly nationalism is still in effect for the member states, and still affects their policy decisions.

The Maastricht Treaty not only paved the way for the development of a single European Union currency -- the Euro -- and enhanced economic integration of the member states, but also has resulted in a unified foreign and security policy for all nation members. Advanced cooperation in areas such as immigration, asylum, and judicial affairs has also been an aim of the European Union ("European Union," 2009); however, the impact of the establishment of the European Union on the global economy has been one of the most significant results.

Global Trade, Foreign Direct Investment and the Effects of the European Union on the Global Economy

With the development of the European Union, a global Triad was formed. The Triad of the United States, Japan, and the European Union, according to Nienhaus (2002), dominates global trade and foreign direct investment. When looking at global trade and the effects of the European Union, it's important to discern between intra-European Union trade and extra-European Union trade.

Nienhaus (2002) notes that the European Union can technically be considered a single market, since the mid-1990s. There are very few trade barriers in place for trade amongst European Union members, including technical, legal and fiscal barriers normally associated with transnational trade. With the removal of these barriers, there are virtually no fundamental differences between sales to a customer within an organization's home country and sales to a customer within any of the other European Union countries.

This single market phenomenon has been enhanced with the creation of the European Monetary Union and its single currency -- the Euro. Monetary risks and uncertainties due to exchange rates have been eliminated. As Huner and Ryan (2009) note, with the inception of the Euro, borrowing costs have been lowered. Restrictions on trade and tourism have been eased. The Euro has also boosted economic growth and strengthened the European community. However, one of its primary effects has been on the increase in foreign direct investment.

Because of this ease of trade and reduced risks, a large part of the trade is conducted transnationally, by European Union members, occurs intra-European Union (Nienhaus, 2002). While this makes the European Union less susceptible to the negative effects of things happening in other countries (Schuller & Lidbom, 2009), this fact has also increased competitiveness globally. Countries outside of the European Union, who wish to trade with member nations, find themselves facing increased competition due to these lower barriers to entry from organizations within the European Union and reduced risks. Outside of the European Union, the conglomeration of nations has also had an effect on global trade.

Perhaps most significantly, the external aspects of trade with other countries are specified by the European Union. Member states are not allowed to determine their own external trade policies, relinquishing control of international trade negotiations to the European Union (Nienhaus, 2002). When one considers the size of the European Union economy, this only further the enhances the effects of the European Union as a single entity.

When looking at extra-European Union exports to GDP as a measure of the European Union economy, Nienhaus (2002) surmises that the European Union economy is just as open as the United States and considerably more so than that of Japan. In addition, although the GDP for the European Union are less than that of the United States, according to Nienhaus, their share of the world exports (excluding the intra-European Union exports to one another) are higher than the United States or Japan. Foreign direct investment too is dramatically affected by the advent of the European Union and its position as a single entity.

Over the last two decades, the growth of foreign direct investment has been phenomenal and has resulted in the increased number, size and importance of transnational corporations. The Eurpoean Union has had a significant effect on this growth. According to Nienhaus (2002), in 1998, the European Union was the world's most important outward investor with $386 billion in foreign direct investment outflows registered that year. This was a 77% increase from the year previously. Leading the European Union in foreign direct investment outflows were: the United Kingdom, Germany, France, and the Netherlands.

In addition to these large amounts of foreign direct investment outflows, the European Union receives substantially lower foreign direct investments than their outflow amounts. Citing increases from 1997 to 1998, Nienhaus (2002) notes that the discrepancy between inflows and outflows, for the European Union, nearly doubled. In 1997, the European Union had $92 billion more in foreign direct investment outflows than inflows. The following year that difference between outflows and inflows was $156 billion. To further illustrate what a this significant difference this is, the European Union was also the single most important foreign direct investment recipient in 1998, receiving $230 billion in investment from other countries, more than that invested in the United States.

Since its inception, the European Union has put forth policies that were less preferential and more 'balanced', in regards to trade relations. These policies favor the promotion of economic development through foreign… READ MORE

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