european union and the euro revolution, volume 283 (contributions to economic analysis)

EUROPEAN UNION AND THE EURO REVOLUTION

CONTRIBUTIONSTO

ECONOMIC ANALYSIS

283

Honorary Editors:

D. W. JORGENSON

J. TINBERGENy

Editors:

B. BALTAGI

E. SADKA

D. WILDASIN

Amsterdam � Boston � Heidelberg � London � New York � Oxford

Paris � San Diego � San Francisco � Singapore � Sydney � Tokyo

EUROPEAN UNION AND THE EUROREVOLUTION

M. DUTTA

Rutgers University, NJ, USA

Amsterdam � Boston � Heidelberg � London � New York � Oxford

Paris � San Diego � San Francisco � Singapore � Sydney � Tokyo

Elsevier

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Contents

Acknowledgments ix

Introduction to the Series xiii

Preface xv

List of Figures xix

List of Tables xxi

CHAPTER 1 The European Union 1

CHAPTER 2 Historical Progression of the European Union 31

CHAPTER 3 The Theory of Supranational Macroeconomics 55

CHAPTER 4 European Central Bank and the Euro: Theory of

Optimum Currency Area Revisited 85

CHAPTER 5 A Constitution for Europe 117

CHAPTER 6 The European Union (EU): The Challenges Ahead 139

CHAPTER 7 The EU and USA 163

CHAPTER 8 The EU: A Learning Model 187

Bibliography 227

Subject Index 237

Acknowledgments

My sincerest appreciation to

Lawrence R. Klein,

Benjamin Franklin Professor of Economics (Emeritus)

University of Pennsylvania

The 1980 Nobel Laureate in Economics

who taught economics and econometrics plus values of life to me;

Robert J. Alexander,

Professor of Economics (Emeritus), Rutgers University, who gave me

encouragement and inspiration to accept the challenge and keep the

Rutgers’ Scarlet flag flying across both the Atlantic and the Pacific;

Dr. Otmar Issing, former Chief Economist and Member of the Executive

Board of the European Central Bank (ECB), who in two personal

conferences thoroughly convinced me of the forcefulness of his thesis: One

money to one Europe;

John M. Letiche, Professor of Economics (Emeritus), University of

California at Berkeley, Juergen Schroeder, Professor of Economics,

Mannheim University, Mannheim, Germany, and Arthur Grimes,

Chairman, Board of Directors, Reserve Bank of New Zealand, formerly

Professor of Economics, Victoria University, Wellington, New Zealand,

who lent their generous scholastic support to help me conclude this book;

Professor M. Fase and Dr. Wim F. V. Vanthoor, former Vice President

and Head of Econometric and Special Research, De Netherlandsche Bank,

Amsterdam, the Netherlands, and M. Jean-Pierre Patat, former Director

General, Des Etudes et des Relations Internationales, Banque de France,

Paris, for having me as a Visiting Scholar with their respective Central

Banks in 2000 and providing me substantive opportunities for

communications with research economists and policy experts at both

banks;

Professor Dr. Dr. h. c. mult. Hans Tietmeyer, Professor Dr. Dr. h. c. mult.

Helmut Schlesinger, Professor Dr. Hermann Remsperger, Dr. Reiner

Koenig, Dr. Heinz Herrmann, and Mr. Wolfgang Schill for having me as a

Visiting Scholar with Der Deutsche Bundesbank in Frankfurt in 1999 and

again in 2000, which gave me opportunities to engage in personal

conferences with a good number of research economists and

administrators of the Bank;

Kiyoshi Kojima, Professor of Economics (Emeritus), Hitotsubashi

University, Tokyo; Shinichi Ichimura, International Center for Studies of

East Asian Development (ICSEAD), Kokura; Hiromitsu Ishi, President

(Emeritus), Hitotsubashi University, Tokyo; Yoshinori Shimuzu,

Hitotsubashi University, Tokyo; Yoko Sazanami, Professor of Economics

(Emeritus), Kieo University, Tokyo; Masumi Kishi, Chuo University,

Tokyo; Yasuhiro Maehara, Bank of Japan, Tokyo, Japan;

Chang Peikang, Huazhong University of Science & Technology, Wuhan;

Zhang Zhongli, Shanghai Academy of Social Sciences, Shanghai; Liu

Guoguang, Chinese Academy of Social Sciences, Beijing; Huang

Fanzhang, China Reform Forum and former Senior Vice President, PRC

State Planning Commission, Beijing; Heping Cao, Peking University,

Beijing, China;

Duk Chung Kim, President (Emeritus), Ajou University and Formerly

Minister for Education, Republic of Korea; Jang-Hee Yoo, EWHA

University, Seoul, Korea;

Chyau Tuan, The Chinese University of Hong Kong; Linda Y. F. Ng, The

Chinese University of Hong Kong, Hong Kong, China;

Tzong-shian Yu, President (Emeritus), The Chung-Hua Institution for

Economic Research, Taipei, Taiwan;

Anwar Nasution, formerly of University of Indonesia and Bank Indonesia,

Jakarta, Indonesia;

Edita Tan, University of the Philippines, Manila, Philippines;

Thienchay Kiranandana, President (Emeritus), Chulalongkorn University,

Bangkok; Sumalee Pityanan, Chulalongkorn University, Bangkok;

Suthiphand Chirativat, Chulalongkorn University, Bangkok, Thailand, and;

R. Radhakrishnan, Director, The Indira Gandhi Institute of Development

Research (IGIDR), Mumbai, India

for their generous professional cooperation for so many years;

Acknowledgmentsx

Swadesh R. Datta-Gupta, NormanMarkowitz, James P. Winder, Terutomo

Ozawa, Terence D. Agbeyegbe, James T. H. Tsao, Richard F. Kosobud, H.

Peter Gray, Richard Hooley, George Rosen, Steven L. Husted, David J.

Green, Robert H. Aten, John Malcolm Dowling, Frank S. T. and Mei-Chu

Hsiao, Peter D. Loeb, Kanta Marwah, Michael G. Plummer, Saleem M.

Khan, Edna E. Ehrlich, Lee Fazio Fiorino, Wenhui Wei, Ming-Chung Wen,

Amiya Sharma, Chien-Chung Nieh, Kiseok Lee, Daniel Tantum, and Mary

Merva for their friendship and research collaboration over the years, giving

me far more than I could ask for;

Donna Ghilino, Dorothy Rinaldi, Paula Seltzer, Janet Goodstein, Debra

Holman, and Janet Budge for their loving friendship;

David T. Motovidlak and Wade Olsson for all their help every time my

computer refused to respond to my commands;

Laura F. Liang, who served as the Research Associate for this project with

a commitment to total excellence and passionate love to deliver the very

best;

and Usha Kaul, Ashok Kaul, Kavery and Bhupender Kaul for their love

and affection which has kept driving me.

Special thanks to

The Fulbright Senior Specialist Program, for designating me a Fulbright

Senior Specialist for a five-year tenure, 2002–2007, Washington, DC;

Der Deutsche Bundesbank, Frankfurt; Banque de France, Paris; De

Netherlandsche Bank, Amsterdam; Bank of Japan, Tokyo; Japan Bank for

International Development, Tokyo; Reserve Bank of New Zealand,

Wellington, New Zealand; Reserve Bank of Australia, Canberra; Ministry of

Finance, Tokyo; Federal Reserve Bank of New York; Federal Reserve Bank

of San Francisco; and Federal Reserve Bank of Atlanta, for having me as a

Visiting Scholar, and/or for inviting me to give research presentations;

Archibald S. Alexander Library, Rutgers – The State University of New

Jersey, New Brunswick, NJ, for all their generous help in collecting data

and source materials;

The University Research Council, Rutgers – The State University of New

Jersey, for their financial support to my research over many years, New

Brunswick, NJ;

Acknowledgments xi

The Ford Foundation; The John D. and Catherine T. MacArthur

Foundation; Asian Development Bank; The East Asian Development

Network of The World Bank; and The United Nations Development

Program, for their funding support for the 24 international conferences

sponsored by the American Committee on Asian Economic Studies

(ACAES) between 1981 and 2002, each of which I had the privilege and

honor to co-chair;

Elsevier, Amsterdam, The Netherlands, for their publication of this volume,

and my very special thanks are due to Vallerie Teng-Broug, Helen Collins,

Mark Newson, and Joy Ideler for their splendid cooperation as I worked

to complete the manuscript.

Acknowledgmentsxii

Introduction to the Series

This series consists of a number of hitherto unpublished studies, which are

introduced by the editors in the belief that they represent fresh contribu-

tions to economic science.

The term ‘economic analysis’ as used in the title of the series has been

adopted because it covers both the activities of the theoretical economist

and the research worker.

Although the analytical method used by the various contributors are

not the same, they are nevertheless conditioned by the common origin of

their studies, namely theoretical problems encountered in practical re-

search. Since for this reason, business cycle research and national acco-

unting, research work on behalf of economic policy, and problems of

planning are the main sources of the subjects dealt with, they necessarily

determine the manner of approach adopted by the authors. Their methods

tend to be ‘practical’ in the sense of not being too far remote from app-

lication to actual economic conditions. In addition, they are quantitative.

It is the hope of the editors that the publication of these studies will help

to stimulate the exchange of scientific information and to reinforce inter-

national cooperation in the field of economics.

The Editors

ICELAND

FINLAND

SWEDEN

DENMARK

IRELAND

UNITED

KINGDOMNETHERLANDS

BELGIUM GERMANY

LUXEMBOURG

FRANCE

SpainPortugal

SWITZERLAND

CZECH

REPUBLIC

SLOVAKIA

AUSTRIAHUNGARY

SLOVENIA

ITALY

CROATIARomania

MOLDOVA

Bulgaria

ALBANIA MACEDONIA

TURKEY

GREECE

CYPRUSMALTA

TUNISIAALGERIAMOROCCO

BOSNIA &

HERZEGOVINA

SERBIA &

MONTENEGRO

NORWAY

ESTONIA

RUSSIA

LATVIA

LITHUANIA

RUSSIA

BELARUS

POLAND

UKRAINE

Memberstates

Countries expectedto join in 2007

Candidatecountries

Preface

In 1936, John Maynard Keynes taught us macroeconomics in the context

of a sovereign nation-state and the Keynesian Revolution went on to

overwhelm the critics. In the post-WWII decades, the concept of supra-

national macroeconomics became the core theme of the continental eco-

nomic integration of Europe. The progression of the historic movement

toward one European family is an accomplishment of immense magnitude.

Students of economics are now aggressively challenged to study the new

paradigm of macroeconomics. One common economic unit with its well-

specified micro- and macroeconomic parameters has been mapped onto

one common geographic unit, the continent of Europe, a group of sov-

ereign European nation-states voluntarily surrendering their erstwhile sov-

ereignty. The official inauguration of one common money, the euro,

managed by one common supranational central bank, the European Cen-

tral Bank (ECB), on January 1, 1999, has been an epochal event in the

eventful history of the European Union (EU) from 1958 through the

present.

As a student of economics, especially macroeconomics, I made efforts

to appreciate the new challenge. In a paper, in the American Economic

Review – Papers and Proceedings (1992), I argued that the traditional

concept of a sovereign nation-state economy warrants re-examination, and

that the concept of supranational macroeconomics merits a welcome re-

view. In the same year, at an international conference at Chulalongkorn

University, Thailand, my presentation on the EU received highly critical

responses. I may have moved too fast, too soon, but since then, events have

progressed positively for the EU. In 1995, I authored another paper

pointing out the limitations of sovereign nation-state-based macroeco-

nomics. As of 1999, with the euro and the ECB firmly established, the

debate became: one money to one Europe. Immediately, I ventured to join

in the debate. That same year, I was received as a Visiting Scholar at Der

Deutsche Bundesbank at Frankfurt, Germany. My intensive interaction

with economists and policy makers at the Bundesbank gave me a fuller

understanding of the economic impact of the euro, adopted by 12 members

of the EU (The United Kingdom, Sweden, and Denmark, also members of

the EU-15, declined to join the Eurosystem and they continue to remain

outside of the Eurozone at the present time). During this visit, I also had an

occasion to have a personal conference with Dr. Otmar Issing, Chief

Economist and a Member of the Executive Board of the ECB. Indeed, I

had the privilege to spend some time with several economists at the ECB.

The following year, I was invited to serve as a Visiting Scholar with three

European national central banks, De Netherlandsche Bank in Amsterdam,

Banque de France in Paris, and Der Deutsche Bundesbank in Frankfurt.

During my stay in Frankfurt, I had a second occasion to have another

personal conference with Dr. Otmar Issing at the ECB, who forcefully

articulated his thesis, one money to one Europe.

Later in 2000, I took the case for the Europeanization of Europe to

Asia. I served as a Visiting Scholar with Japan’s Ministry of Finance in

Tokyo. During this visit, I came to be informed of the frequent subcabinet

level meetings of experts from Korea, China, and Japan toward developing

a plan for monetary and fiscal policy cooperation. I wondered if it was an

embryonic effort toward the Asianization of Asia. During my six-week

tenure as a Visiting Scholar, I had the occasion to confer with economists

at several other Ministries of the Government of Japan. I also visited

several universities and research centers inclusive of Hitotsubashi Univer-

sity, Chuo University, Bank of Japan, Japan Bank for International De-

velopment, and the International Center for the Study of East Asian

Development (ICSEAD) in Kokura.

Presentations and follow-up exchanges with ranking economists and

officials at the Reserve Bank of New Zealand, Wellington, New Zealand in

2004 and earlier at the Reserve Bank of Australia, Canberra, Australia

enriched my understanding of the potential of Asian regional economic

integration.

Since then, my research in this area has taken me to give invited pres-

entations at a large number of universities and research institutions in

China, Korea, Taiwan, the Philippines, Indonesia, Singapore, Malaysia,

Thailand, Viet Nam, Nepal, India, Australia, and New Zealand. Note that

I also gave invited seminars at several universities in the USA and Europe.

My presentations on the EU at the Federal Reserve Bank of New York in

2000, and earlier at the Federal Reserve Bank of San Francisco and the

Federal Reserve Bank of Atlanta drew critical comments as many shared

their reservations about the euro and the EU. My presentation in 2002 at

the special workshop sponsored by the United Nations International

Training and Research (UNITAR) at the United Nations Headquarter in

New York City, however, drew a great deal of appreciation.

European Union and the Euro Revolution is the output of my research

since 1999. I must acknowledge my indebtedness to all my fellow econo-

mists at various forums in so many countries across the Atlantic and the

Pacific, whose comments and constructive criticisms contributed to my

learning. The subject is truly difficult and literature on the subject is quite

limited. This book has eight chapters and in what follows a brief descrip-

tion of each chapter is presented:

Prefacexvi

Chapter 1 introduces the 25 member countries of the EU as of 2004.

Two more countries are scheduled to join the EU membership in 2007. One

European family with all its linguistic, religious, and lifestyle diversities is

analyzed. Jean Monnet’s vision of the Europeanization of Europe remains

the focus. In 2004, the EU had a population base of 455 million in a land

area of 3,852,106 km2 and GDP at US$12.7 trillion, to emerge as a com-

petitive economic unit.

Chapter 2 presents the time profile of the historical progression of the

EU. A review of the Marshall Plan, the OEEC, the OECD, and NATO in

the immediate post-WWII Europe is followed by what I have called the

process of deepening and widening. Beginning with the Benelux Customs

Union, the movement for European economic integration progresses a la the

ECSC in 1951, the Treaty of Rome, the One Europe Act, the Maastricht

Treaty, the Treaty of Amsterdam, and the Treaty of Nice. The chapter adds

discussions about one money, the euro, and the ECB, the need for a Con-

stitution for Europe, and the current administrative structure of the EU.

Chapter 3 examines the theory of supranational macroeconomics and

offers to fill the gap in the literature which has been anchored to traditional

nation-state-based macroeconomies. I have argued that the EU model of a

supranational macroeconomy can be defined by two parameters: its shares

of world output and trade. Individually, none of the EU-25 member econ-

omies has a competitive share, given the world market where one economy,

the USA, enjoys overwhelmingly dominant shares of economic activities,

and by extension, overly influential leadership. However, the EU-25 as an

integrated economic unit has to its credit competitive shares of world out-

put and trade. I have argued that the principle of competition will work in

the world market and help optimize economic gains for all people in all the

continents of the world.

Chapter 4 is an extended exposition of the euro and the ECB. A revisit

with the theory of optimum currency area is called for. Indeed, a definition

of the optimum currency area based on a given currency’s representation

of shares of world output and trade is proposed. The euro–dollar exchange

rate has become a subject of much attention; the fact that the euro has

emerged as a strong currency vis-a-vis the US dollar is significant and its

share as an international reserve currency continues to increase.

Chapter 5 deals with the Constitution for Europe. The EU is struggling

to establish its political integration. The Constitution has been drafted, and

duly signed by the Heads of the EU-25 member countries. The EU pro-

tocol warrants that the constitution must be affirmed by all Member

States. Indeed, a majority of the Member States representing a majority of

the people of the EU has already ratified the Constitution. Without the

complete support of all Member States, the EU is challenged in interna-

tional forums, as it is not recognized as a true political entity, with one

government, one flag, and one national anthem. I have argued that the 10

Preface xvii

new Members who joined the EU in 2004 will make positive contributions

in this regard.

Chapter 6 sums up the challenges ahead for the EU. True, challenges

are welcome as it helps the progressive exploration of new dynamics. The

role of the United Kingdom in the EU continues to be an issue. Will the

UK, Denmark, and Sweden join the Eurosystem? EU membership to the

IMF is a pressing issue even with the ad hoc provision for observer status

granted to the ECB. We examine the debate for restructuring the IMF, the

IBRD, the IFC, and the IDA as the EU with its competitive shares of

contributions is a candidate for international power-sharing. Since the

founding of these international institutions, the USA, with its overwhelm-

ingly large contributions, has played the leadership role and consequently

exercised its veto power.

Chapter 7 deals with the EU and the USA. For the USA, the search is

for expanded geographic cooperation a la APEC, NAFTA, and the

FTAA, which will enable the cooperative entity to command a compet-

itively larger share of world output and trade. However, US efforts have

been limited to traditional FTAs. The EU model of FTA is innovative and

provided for the integration into one economic unit. As such, the EU is

now one member of the WTO with one vote. The USA now has a coun-

terpart that challenges its economic superiority. The FTA model proposed

by the USA is limited and in the absence of a proper model of integration,

results remain sub-optimal.

Chapter 8 invites other continents to accept the EU as a learning model.

We review the notable preparatory steps in the continents of Asia and

Africa. In Asia, the 4 plus 10 model has received much attention. Recently,

Asian leadership has called for an Asian-FTA following the EU-FTA

model, and also for a single Asian money for optimum monetary policy

coordination. Australia–New Zealand has adopted the Closer Economic

Relations Act and their FTA is operationally successful. Will they also

have a common money? Will they join the Asian Economic Community?

Will they elect to join the FTAA, if and when it will be instituted? The

Africa Economic Union is officially in progress and its evolution will be

carefully observed. I have ventured to suggest that a Middle Eastern Eco-

nomic Community warrants much consideration. For pragmatic reasons,

Middle Eastern economies from Turkey to Afghanistan, albeit they all

belong to the continental map of Asia, have not been included in any

model of Asian Economic Community. Turkey is of course a candidate

country for the EU membership. I have suggested that Mediterranean rim

countries of Africa may join the Middle Eastern Economic Community.

Several Central Asian countries and Pakistan also may consider becoming

members of the Middle Eastern Economic Community.

May all my readers forgive me for any and all errors that escaped my

careful scrutiny.

Prefacexviii

List of Figures

3.1: Share of world GDP 66

3.2: Share of world GDP (PPP) 69

3.3A: Share of EU GDP (PPP), 1975 72

3.3B: Share of EU GDP (PPP), 2004 72

3.4: Capital–labor ratios of EU-25 and USA, 2002 79

3.5: Capital–GDP ratios of EU-25 and USA, 2002 81

4.1A: Average monthly exchange rates, USD and EUR 112

4.1B: Average quarterly exchange rates, USD and EUR 112

4.2A: US/EU-12 GDP ratios by volume index and USD/

euro exchange rates, 1999.1–2003.3 113

4.2B: US/EU-12 GDP ratios by price index and USD/euro

exchange rates, 1999.1–2003.3 114

8.1: EU share of world GDP 192

8.2: EU share of world exports 193

8.3: Share of world GDP: Northeast Asia countries

(exclude Japan) 206

8.4: Share of world export: Northeast Asia countries

(exclude Japan) 207

8.5: Share of world GDP: Northeast Asia countries

(include Japan) 207

8.6: Share of world export: Northeast Asia countries

(include Japan) 208

8.7: Share of world GDP: ASEAN-5 countries 208

8.8: Share of world export: ASEAN-5 countries 209

8.9: Share of world GDP: Northeast Asia and ASEAN-5 210

8.10: Share of world export: Northeast Asia and ASEAN-5 211

8.11: Share of world GDP: South Asia countries 212

8.12: Share of world export: South Asia countries 213

8.13: Share of world GDP: 3 Asian regions 214

8.14: Share of world export: 3 Asian regions 215

8.15: Share of world GDP: 4 groups 216

8.16: Share of world export: 4 groups 217

8.17: Share of world GDP: 5 groups 218

8.18: Share of world export: 5 groups 219

List of Tables

Chapter 1

1.1: The EU-25: Membership dates 2

1.2: States on the map of Europe, but not yet candidates

for EU membership 2

1.3: Comparative statistics: EU-25, USA, and Japan

(2003) 4

1.4: Selected macro statistics, EU-25 5

1.5: Sectoral shares of gross domestic product

(GDP)(%), 2005 6

1.6A: The European Union in 2004 7

1.6B: The European Union in 2004 8

1.7: Religion (% of population) 25

1.8: Linguistic diversity of the EU, percentage of

population speaking 27

1.9: Languages in EU-15, percentage of population

(2001) 28

1.10: Percentage of population that think children should

learn English in addition to their mother language 28

Chapter 2

2.1: OECD geographic membership distribution 33

2.2: The Council of Europe: 46 Member States 35

2.3: Key treaties of the EU 36

2.4A: Chronological list of key dates of the European

Union 39

2.4B: Treaties of Accession 41

2.5: The EU administrative structure 48

2.6: The European Parliament 49

2.7: The weighting of votes in the Council 51

2.8: Seat allocation of the Economic and Social

Committee and the Committee of Regions 53

2.9: The EURATOM Committee membership 54

Chapter 3

3.1A: Population, total (in millions) 61

3.1B: EU member countries: Population, total

(in millions) 63

3.1C: Population based on decennial census, 1960–2000

plus 2004 (in millions) 64

3.2A: GDP (constant 2000 US$, in billions) 65

3.2B: EU member countries: GDP (constant 2000 US$, in

billions) 67

3.3A: GDP (PPP) (constant 2000 international $, in

billions) 68

3.3B: EU member countries: GDP (PPP) (constant 2000

international $, in billions) 70

3.3C: Ranking of the EU-25 member economies based on

GDP (PPP) in 2004 (constant 2000 international $,

in billions) 71

3.4: Intra-EU shares of GDP (PPP) (constant 2000


3.5A: Trade in goods and services as a percentage of world

trade (constant 2000 US$, in billions) 73

3.5B: Individual economies of the EU-25: Shares of world

trade in 1990 and 2000 (%) 74

3.6: Trade in goods and services, EU-12, EU-15, EU-25,

and USA as a percentage of world trade (constant

2000 US$, in billions) 75

3.7A: EU-25: GDP (PPP), percentage of world GDP

(constant 2000 international $, in billions) 76

3.7B: A summary of shares of world GDP 77

3.8: GDP (PPP) of EU-12, EU-15, EU-25, USA as a

percentage of world GDP (constant 2000


3.9: Capital–labor ratios of EU-25 and USA 78

3.10: Capital–GDP ratios of EU-25 and USA 80

3.11A: EU-15 FDI outflows to AC-10, 1999–2003 (h, in

millions) 81

3.11B: Shares of FDI outward stocks, end-2002 (%) 81

3.11C: Shares of the AC-10 investment flows from extra-

EU-25 (%), 2001–2003 82

3.11D: Extra-EU FDI inflows, net of reinvested earning by

kind of activity (h, in millions) 82

3.12: Intra-EU trade flows (h, in millions), 1995–2004 82

Chapter 4

4.1: Time limits on currency exchanges with national

central banks 86

List of Tablesxxii

4.2: Fixed euro conversion rates 90

4.3: The administrative structure of the ECB 90

4.4A: Shares of ECB capital stock (%) 92

4.4B: Eurozone national central banks (NCBs) 93

4.4C: Non-Eurozone NCBs (from May 1, 2004) 94

4.5A: Harmonized index of consumer prices (HICP) (%) 96

4.5B: HICP in the Eurozone 97

4.5C: Weights of the main Eurozone HICP components,

2003 and 2004 97

4.6A: Key ECB interest rates 98

4.6B: EONIA and EURIBOR 99

4.7A: Money supply 100

4.7B: Eurozone monetary aggregates 100

4.7C: Percentage shares of components of M3 at

end-2002 (%) 100

4.8A: Amounts of outstanding debt securities

denominated in national currency issued by

residents in the Eurozone, the USA, and Japan at

end-2002 (% of GDP) 101

4.8B: Number of domestic and foreign companies listed

on stock markets in the Eurozone, the USA, and

Japan (end of year) 102

4.8C: Number of Eurozone monetary financial

institutions (end of year) 102

4.9: Stock market capitalization in the Eurozone, the

USA, and Japan (% of GDP) 102

4.10: Key real economic characteristics of the Eurozone,

2004 103

4.11: GDP (PPP), 2004 (%): The Eurozone and USA 106

4.12A: Share of official foreign exchange holdings in

selected currencies (end of year) 108

4.12B: Percent changes in euro and dollar reserve holdings 108

4.13A: Average monthly exchange rates: Euro and USD 110

4.13B: Average quarterly exchange rates: Euro and USD 111

4.14: Quarterly USD/Euro exchange rates and US/EU

GDP based on volume and price indices 113

Appendix 115

Chapter 5

5.1: Adoption of the EU constitution 121

5.2: Capital fund of the European Investment Bank 123

5.3A: Individual rights 126

5.3B: Citizens’ rights 127

5.4: Areas of competence 128

5.5: The institutional framework of the EU Government 129

List of Tables xxiii

5.6: Locations of the Government Institutions of the

European Union 129

5.7A: Population of the Member States approval of the

Constitution, approved 135

5.7B: Population of the Member States approval of the

Constitution, postponed 135

5.7C: Population of the Member States approval of the

Constitution, rejected 136

Chapter 6

6.1A: Member countries shares of IMF: The EU, USA,

and Japan 146

6.1B: GDP in 2004 (constant 2000 US$, in billions) 148

6.2: Quotas of the EU Member States, the USA, and

Japan (%) 149

6.3: Currency composition of official holdings of foreign

currency, end of year (in millions of SDR) 150

6.4: Proposal on restructuring the IMF 151

6.5A: IBRD: Votes and total subscriptions of the EU, the

USA, and Japan 152

6.5B: IFC – Votes and total subscriptions of the EU, the

USA, and Japan 153

6.5C: IDA – Votes and total subscriptions of the EU, the

USA, and Japan 154

6.6: EU and the WTO membership 157

6.7: GDP (PPP) per capita comparison 158

6.8: Sectoral shares of GDP (%), 2005 160

6.9: Shares of GDP (PPP), shares of world exports (%),

and population 161

Chapter 7

7.1A: APEC members 167

7.1B: Key economic indicators of APEC members (as of

December 6, 2005) 168

7.1C: APEC organization 169

7.2A: Key economic indicators of members of the Asian

Economic Summit 171

7.2B: Sectoral shares of GDP of Asian Economic Summit

members (%) 171

7.3A: Key economic indicators of NAFTA members 172

7.3B: Sectoral shares of GDP of NAFTA members (%) 173

7 4A: Key economic indicators of FTAA members 174

7.4B: Sectoral shares of GDP of FTAA members (%) 175

7.4C: FTAA hemispheric summits and ministerial meetings 176

7.5A: Key economic indicators of the EU: a comparative

profile 178

List of Tablesxxiv

7.5B: Sectoral shares of GDP of EU members (%) 179

7.6: The EU and FTAA 179

7.7A: Customs Unions and FTAs in the American

hemisphere 181

7.7B: Free trade agreements in the American hemisphere 182

Chapter 8

8.1: Key economic indicators of the Eurozone, the USA,

and Japan (1999) 188

8.2A: Economies on the Continent of Asia 194

8.2B: Members of the 4+10 model of the Asian Economic

Community 194

8.3A: Sectoral shares of GDP (PPP) (1999) 195

8.3B: Sectoral shares of GDP of the 3+5 model (2005) 195

8.3C: Sectoral shares of GDP of the 4+10 model (2005) 196

8.4: Sectoral shares of GDP of Asia and EU (1988 and

1997) 197

8.5A: GDP and trade of Northeast Asia Countries in 1987

and 1997 198

8.5B: Share of world GDP and trade of Northeast Asia

Countries in 1987 and 1997 (%) 198

8.6A: GDP and trade of ASEANmembers in 1987 and 1997 199

8.6B: Share of world GDP and trade of ASEAN members

in 1987 and 1997 (%) 199

8.7A: GDP and trade of South Asia Countries in 1987 and

1997 200

8.7B: Share of world GDP and trade of South Asia

Countries in 1987 and 1997 (%) 200

8.8A: GDP and trade of ANZ in 1987 and 1997 201

8.8B: Share of world GDP and trade of ANZ in 1987 and

1997 (%) 201

8.9A: GDP and trade of Asia 3+5 model in 1987 and

1997 202

8.9B: Share of world GDP and trade of Asia 3+5 model

in 1987 and 1997 (%) 202

8.10A: GDP and trade of Asia 4+10 model in 1987 and

1997 203

8.10B: Share of world GDP and trade of Asia 4+10 model

in 1987 and 1997 (%) 204

8.11A: GDP and trade of EU members in 1987 and 1997 205

8.11B: Share of world GDP and trade of EU members in

1987 and 1997 (%) 206

8.12: Shares of world GDP (PPP) and trade (%) 219

8.13A: Key economic indicators of African Union members 220

8.13B: Sectoral shares of GDP of African Union members 221

List of Tables xxv

8.14: The organizational structure of the African Union

(AU) 223

8.15A: Economies of the Middle East 223

8.15B: Key economic indicators of economies of the

Middle East 224

8.15C: Sectoral shares of GDP of economies of the Middle

East (%) 224

8.15D: Per capita income (PPP) of economies of the Middle

East (2005) (US$) 225

8.16: Continental economic unions 225

List of Tablesxxvi

CHAPTER 1

The European Union

1.1. Knowing the European Union

To begin, we must understand Jean Monnet’s vision of the Europeanizat-

ion of Europe. As early as the 1940s, when Europe still struggled to recover

and rebuild from the devastation of World War II, he forcefully argued:

‘‘The countries of Europe are not strong enough individually to be able to

guarantee prosperity and social development for their peoples’’ (emphasis

added). Indeed, in terms of economic magnitudes, the individual sovereign

nation-states of Europe were marginal entities. ‘‘The States of Europe must

therefore form a federation or an European entity that would make them

into a common economic unit’’ (Monnet, 1978; see also http://www.

historiasiglo20.org/europe/monnet.htm).

The movement to integrate the continent of Europe into one common

economy has been in progress since the 1950s. This one common economy

has been instituted onto one common geographic unit, the continent of

Europe. Unity based on belonging together to a common geographic unit

defies diversities in language, religion, and lifestyle. Not belonging to the

map of Europe certainly disqualifies a state from European Union (EU)

membership; it follows that the USA, Canada, Australia, and New Zealand

all fail to qualify to be a candidate for EU membership and their European

heritage has not been a factor. The principle of inclusion enables a state on

the map of Europe to join the EU, even if the candidate state is not able or

willing to join the membership any sooner (see Tables 1.1 and 1.2).

What is now the European Union is a union of the people of Europe,

not simply a confederation of European states. Monnet pleaded for the

men and women of Europe to recognize that ‘‘beyond their differences and

geographical boundaries there lies a common interest.’’ This process has

compromised the traditional concept of sovereignty and has required each

of the 25 EU Member States to voluntarily surrender its economic sov-

ereignty. They continue to make efforts to become one European political

entity (Chapter 5). The concept of divisibility of sovereignty is indeed

revolutionary.

We must take into consideration that the traditional concept of sover-

eignty has gone through significant changes in recent times: The Soviet

Union has ceased to be one sovereign entity. The Czech Republic and

Slovakia had a ‘‘Velvet Divorce.’’ The One Europe Act of 1986 has

http://www.historiasiglo20.org/europe/monnet.htm

http://www.historiasiglo20.org/europe/monnet.htm

Table 1.1. The EU-25: Membership dates

1958 Belgium

France

Germany

Italy

Luxembourg

The Netherlands

1973 Denmark

Ireland

United Kingdom

1981 Greece

1986 Portugal

Spain

1995 Austria

Finland

Sweden

2004 Cyprus

Czech Republic

Estonia

Hungary

Latvia

Lithuania

Malta

Poland

Slovakia

Slovenia

Source: http://europa.eu.int/abc/panorama/whatdoes/index_en.htm.

See also Dutta (1999) and Schroeder (2000).

Table 1.2. States on the map of Europe, but not yet

candidates for EU membership

Albania

Andorra

Belarus

Bosnia-Herzegovina

Iceland

Liechtenstein

Moldova

Monaco

Norway

Russia

San Marino

Serbia and Montenegro

Switzerland

Ukraine

Vatican City

Source: http://europa.eu.int/abc/governments/index_en.htm.

European Union and the Euro Revolution2

http://europa.eu.int/abc/panorama/whatdoes/index_en.htm

http://europa.eu.int/abc/governments/index_en.htm

sustained the EU-paradigm of supranational macroeconomics wherein the

15 Member States made a partial concession of their respective sovereignty

(Dutta 1992, 1995a, b, c).

In 1957, Belgium, the Netherlands, Luxembourg, Germany, France, and

Italy signed a treaty to form the European Coal and Steel Community

(ECSC). The six then signed the Treaty of Rome in 1957, and on January 1,

1958, the European Economic Community (EEC) came into being (see

Chapter 2). In 1967, the EEC came to be known as the European Com-

munity (EC). Necessary administrative organization for executive, legisla-

tive, and judicial performances came to function. The EC set up a Council of

Ministers and the European Parliament. Initially, members of the European

Parliament were selected by national parliaments of Member States. How-

ever, since 1979, they have been elected directly by the people for five-year

terms. To adjudicate disputes for the proper implementation of the Treaties

among the Member States, the Court of Justice became indispensable.

Free flow of trade and investment and free movement of labor became

the core of microeconomic policy to further the process of European eco-

nomic integration. The success of the EU Free Trade Area (FTA) led to the

search for a Zone of Monetary Stability. We shall review in the next

chapter the Snake Agreement, the Exchange Rate Mechanism (ERM), the

European System of Central Banks (ESCB), the European Monetary Sys-

tem (EMS), and the European Monetary Union (EMU) as they progressed

and evolved since the 1970s.

The next big phase came in 1986 when the One Europe Act was

adopted. The Maastricht Treaty of 1992 followed and made provisions for

a macroeconomic framework with specific and transparent guidelines for

the monetary and fiscal policy parameters of the EC. Following this pro-

gressive integration, the EC became the EU. EU membership continued to

grow through these years, and by 1995 the EU-15 had proven that it was a

successful economic compact.

As of May 2004, 10 more European states have joined the EU mem-

bership. The EU-25 are: Austria, Belgium, Cyprus, Czech Republic, Den-

mark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland,

Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Slovakia,

Slovenia, Spain, Sweden, the Netherlands, and the United Kingdom.

Table 1.1 presents the expansion of EU membership beginning with the

original six as of January 1, 1958 to the present 25 as of May 1, 2004. Bulgaria

and Romania are acceding countries to be admitted to the EU in 2007. As of

the writing of this book, there are three candidate countries, Croatia, the

former Yugoslav Republic of Macedonia, and Turkey, still in membership

negotiations (http://europa.eu.int/comm/enlargement/index_en.htm). There

are still many other countries on the map of Europe that have decided not

to apply for EU membership. How about these missing links? (see Table 1.2).

With an area of 3,976,372 km2 and a population of 456,953,258 (The

World Factbook, 2005), the EU has emerged as an economic entity of great

The European Union 3

http://europa.eu.int/comm/enlargement/index_en.htm

dimension (Chapter 3). In area, the EU is less than one-half that of the USA.

In population, the EU is the third largest following China and India, the US

being the fourth most populated. In terms of shares of world gross domestic

product (GDP) and trade, the EU and USA are highly competitive.

Table 1.3 reports comparative statistics for the EU-25, the USA, and

Japan for 2003. Note that the USA and Japan were the first and second

largest economy until the EU-25 came with competitive figures. In area, the

USA is much larger than the EU-25, and of course Japan. In population, the

EU-25 leads both the USA and Japan. The EU-25 scores poorly for its

unemployment rate, but the USA and Japan have lower, comparable num-

bers. The inflation rate in EU-25 at 2 percent was at its targeted rate, while

the USA did better and Japan was experiencing slight deflation.

Brussels is the capital of the EU. The executive branch is headed by the

Chief of Union who works with a Cabinet of 25 members, one from each

Member State responsible for one or more policy measures. This President

is designated by the 25 member governments, and the President selects the

other commission members. The European Parliament then confirms them

for five-year tenures.

The EU legislative branch consists of (a) the Council of the EU with

321 votes representing the Member States, and (b) the European Parlia-

ment with 732 seats elected by the people. The population size of the

Member States remains the basis of allocation of votes in the Council and

seats in Parliament.

The judicial branch is composed of the Court of Justice of the European

Commission. A justice is selected from each Member State to serve for a

six-year term, but the Court can sit with just 11 members present. The

Court ensures that treaties are interpreted and applied properly.

Table 1.4 presents selected macroeconomic parameters, specifically the

unemployment rate and inflation rate, both estimated in 2005, and the Gini

index for the individual members of the EU. Poland has the highest un-

employment rate at 18.3 percent, while the Czech Republic, Estonia, France,

Germany, Greece, Slovakia, Slovenia, and Spain record figures between 9

percent and 11.6 percent. Other than Estonia, Greece, Hungary, Latvia, and

Table 1.3. Comparative statistics: EU-25, USA, and Japan (2003)

EU-25 USA Japan

Area (in 000’s km2) 3,893 9,631 378

Population (in millions) 454.56 293.03 127.62

Density (km2) 116.8 30.4 337.6

Unemployment rate (standardized) (%) 9.10 6.00 5.30

Inflation rate (%) 2.00 1.60 �0.20

Note: Figures for area and population do not match exactly with those in The World Fact-

book.

Source: Delegation of the European Commission to the USA. Eurunion.org.


Spain, the inflation rate in the other EU economies remain at or near the

2 percent benchmark, as the EU guideline requires. The EU-25 scores for

unemployment rate and inflation rate as estimated in 2003 are 9.4 percent

and 2.2 percent, respectively. As a measure of income distribution, the Gini

index for EU-25 estimated in 2003 is 32, while estimates of individual mem-

ber economies at specific years show notable variations. Ten member econ-

omies, Estonia, France, Greece, Ireland, Italy, the Netherlands, Poland,

Portugal, Spain, and the United Kingdom, score above 32. Note that three,

Cyprus, Luxembourg, and Malta, report no estimate.

Table 1.5 offers the data on sectoral shares of GDP, which is taken to be

a snapshot of the stage of industrialization of a given economy. A mature

industrialized economy is expected to have a high share of GDP from the

service sector while its shares from the agricultural sector decline and the

industrial sector’s share stabilize at a certain point. Productivity increases in

the agricultural and industrial sectors contribute to the income increases of

Table 1.4. Selected macro statistics, EU-25

Unemployment rate (%) Inflation rate (%) Gini index

EU-25 9.4 2.2 32 (2003)

Austria 5.1 2.3 30 (1997)

Belgium 7.6 2.7 25 (1996)

Cyprus 3.5 2.3 na

Czech Republic 9.1 2.0 25.4 (1996)

Denmark 5.7 1.9 24.7 (1997)

Estonia 9.2 4.0 37.2 (2000)

Finland 7.9 1.2 26.9 (2000)

France 10.0 1.9 32.7 (1995)

Germany 11.6 2.0 28.3 (2000)

Greece 10.8 3.8 35.1 (2003)

Hungary 7.1 3.7 24.4 (1999)

Ireland 4.2 2.7 35.9 (1996)

Italy 7.9 1.9 36 (2000)

Latvia 8.8 5.9 32 (1999)

Lithuania 5.3 2.6 31.9 (2000)

Luxembourg 3.7 2.6 na

Malta 7.0 2.8 na

The Netherlands 6.7 1.6 32.6 (1994)

Poland 18.3 2.1 34.1 (2002)

Portugal 7.3 2.4 38.5 (1997)

Slovakia 11.5 2.8 25.8 (1996)

Slovenia 9.8 2.4 28.4 (1998)

Spain 10.1 3.4 32.5 (1990)

Sweden 6.0 0.5 25 (2000)

United Kingdom 4.7 2.2 36.8 (1999)

Note: All figures for unemployment rate and inflation rate are estimates of 2005, except the

figure for unemployment rate of Malta (2003 est.).

Source: The World Factbook.


the people of the economy who then demand services such as education,

health care, quality environment, music and performing arts, travel and

leisure, and so forth. As they earn more income, they demand more of those

services, and stimulate many more people to demand such services.

Tables 1.6A and 1.6B describe land area, population, GDP, and GDP

per capita of the EU-25 and of each individual member country. Per capita

income in constant 2000 international dollars of the 25 countries varies

between $11,148 for Latvia and $63,598 for Luxembourg, Ireland with

$37,073 coming second behind Luxembourg. Germany, with 18.15 percent

of the EU-25 population and 21.39 percent of GDP, ranks as the largest

unit. France follows next with 13.18 percent of the population and 15.78

percent of GDP, then the UK with 13.05 percent of the population and

16.87 percent of GDP, and Italy with 12.65 percent of the population and

13.18 percent GDP. In 2004, the figures for total land area, population,

and GDP for EU-25 respectively are: 3,852,106 km2, 455,297,046, and

US$12,690.64 trillion (current US dollar).

Table 1.5. Sectoral shares of gross domestic product (GDP)(%), 2005

Agriculture Industry Services

EU-25 (2004) 2.2 27.3 70.5

Austria (2004) 2.3 30.8 66.9

Belgium (2004) 1.3 24.7 74.0

Cyprus 3.8 20.0 76.2

Czech Republic (2004) 3.4 39.3 57.3

Denmark 2.2 24.0 73.8

Estonia 4.1 29.1 66.8

Finland 3.1 30.4 66.5

France 2.5 21.4 76.1

Germany 1.1 28.6 70.3

Greece 6.2 22.1 71.7

Hungary 3.9 30.9 65.3

Ireland (2002) 5.0 46.0 49.0

Italy 2.1 28.8 69.1

Latvia 4.1 26.0 69.9

Lithuania 5.7 32.4 62.0

Luxembourg (2004) 0.5 16.3 83.1

Malta (2003) 3.0 23.0 74.0

The Netherlands 2.1 24.4 73.5

Poland 2.8 31.7 65.5

Portugal 5.2 28.9 65.9

Slovakia 3.6 29.7 66.7

Slovenia 2.8 36.9 60.3

Spain 3.4 28.7 67.9

Sweden 1.8 28.6 69.7

United Kingdom 1.1 26.0 72.9



1.2. Knowing the EU-25

1.2.1. Republic of Austria

Located in Central Europe at the crossroads of the Alps, Austria is a rich

industrialized country with a well-developed market economy and high

standard of living. Austria became a member of the EU in 1995 and of the

Eurosystem in 1999. Vienna is the capital city of the Republic. The admin-

istrative divisions consist of nine states. The President, elected by direct

popular vote for a six-year term is the Chief of State. The Chancellor, chosen

by the President from the plurality party in the National Council, is the

Head of Government. The Council of Ministers is appointed by the Pres-

ident on the advice of the Chancellor. A bicameral legislative branch consists

of (a) the Federal Council of 62 members representing each of the nine

constituent administrative units on the basis of population, with each state

having a minimum of three members and (b) the National Council of 183

Table 1.6A. The European Union in 2004

Country Land area (km2) Land (%) Population (total) Population (%)

Austria 82,730 2.15 8,115,000 1.78

Belgium 30,230 0.78 10,405,000 2.29

Cyprus 9,240 0.24 775,627 0.17

Czech Republic 77,280 2.01 10,183,340 2.24

Denmark 42,430 1.10 5,397,249 1.19

Estonia 42,390 1.10 1,345,000 0.30

Finland 304,590 7.91 5,215,000 1.15

France 550,100 14.28 59,990,540 13.18

Germany 348,950 9.06 82,630,660 18.15

Greece 128,900 3.35 11,074,760 2.43

Hungary 92,100 2.39 10,072,000 2.21

Ireland 68,890 1.79 4,019,000 0.88

Italy 294,110 7.64 57,573,180 12.65

Latvia 62,050 1.61 2,303,000 0.51

Lithuania 62,680 1.63 3,439,000 0.76

Luxembourg 2,586 0.07 450,000 0.10

Malta 320 0.01 401,000 0.09

The Netherlands 33,880 0.88 16,250,000 3.57

Poland 306,290 7.95 38,160,000 8.38

Portugal 91,500 2.38 10,436,000 2.29

Slovak Republic 48,800 1.27 5,390,300 1.18

Slovenia 20,120 0.52 1,995,000 0.44

Spain 499,440 12.97 41,286,390 9.07

Sweden 411,620 10.69 8,985,000 1.97

United Kingdom 240,880 6.25 59,405,000 13.05

EU-25 3,852,106 455,297,046

Source: World Development Indicators (2005).


members elected by direct popular vote for four-year terms. The Supreme

Judicial Court heads the judicial branch of the government.

The economy’s industrial and agricultural sectors have been moder-

nized. Timber is a key industry, 47 percent of its land area being forestland.

Germany is by far the largest trading partner of Austria. As Austria joined

the EU membership, a large number of foreign investors came in to take

advantage of the free flow of investment in the integrated EU regional

economy. The low rate of growth is a challenge for the future.

1.2.2. Kingdom of Belgium

Belgium, a state in Western Europe bordering France and the Netherlands,

enjoys a waterfront with the North Sea. It is the seat of both the EU and the

North Atlantic Treaty Organization (NATO). It joined the Eurosystem in

1999. Brussels is the capital city. With 10 administrative provinces, Belgium

has a federal bicameral parliamentary democracy under a constitutional

Table 1.6B. The European Union in 2004

Country GDP (current US$) GDP (%) GDP per capita

(PPP) (constant

2000 international $)

Austria 290.11 2.29 29,778

Belgium 349.83 2.76 28,698

Cyprus 15.42 0.12 21,193

Czech Republic 107.05 0.84 17,937

Denmark 243.04 1.92 29,591

Estonia 10.81 0.09 12,773

Finland 186.60 1.47 27,594

France 2002.58 15.78 26,910

Germany 2714.42 21.39 26,050

Greece 203.40 1.60 20,318

Hungary 99.71 0.79 15,399

Ireland 183.56 1.45 37,073

Italy 1672.30 13.18 26,063

Latvia 13.63 0.11 11,148

Lithuania 22.26 0.18 12,051

Luxembourg 31.14 0.25 63,598

Malta 5.39 0.04 17,542

The Netherlands 577.26 4.55 29,668

Poland 241.83 1.91 11,921

Portugal 168.28 1.33 18,220

Slovak Republic 41.09 0.32 13,437

Slovenia 32.18 0.25 19,251

Spain 991.44 7.81 23,453

Sweden 346.40 2.73 27,301

United Kingdom 2140.90 16.87 28,545

EU-25 12,690.64



monarchy. The Monarch is the Chief of State. The Prime Minister, the leader

of the majority party or of the majority coalition following legislative elec-

tions, is appointed by the Monarch and is the Head of Government. The

Senate has 71 members serving for four-year terms, 40 directly elected by

popular vote and 31 indirectly elected. The Chamber of Deputies consists of

150 members, directly elected by popular vote on the basis of proportional

representation to serve for four-year terms. The Supreme Court of Justice

heads the judicial branch. Judges serving for life are appointed for by the

Government from a list of candidates submitted by the High Justice Council.

With few natural resources, Belgium is a largely trade-dependent eco-

nomy, importing substantial quantity of raw materials and exporting a

large quantity of manufactured products. Some three-quarters of its trade

is with the EU countries.

1.2.3. Republic of Cyprus

An island economy in the Mediterranean Sea, Cyprus joined the EU on

May 1, 2004. However, the Turkish Republic of Northern Cyprus, rec-

ognized only by Turkey, remains a special area where EU laws are not

enforced. EU laws apply only to the areas under direct control of the

Republic of Cyprus. Turkish and Greek Cypriot communities continue to

disagree on a single island-wide political establishment.

Nicosia is the capital city. Cyprus has six administrative districts. The

President is concurrently the Head of State and the Head of Government,

and elected by popular vote for a five-year term. The post of the Vice

President is reserved for a Turkish Cypriot, but remains vacant. The ap-

pointment of the Council of Ministers is to be made jointly by President

and Vice President. Turkish Cyprus established its own government in

2005. The legislative branch is unicameral. The House of Representative

has 80 seats, 56 assigned to the Greek Cypriots and 24 to the Turkish

Cypriots. Only the 56 seats assigned to the Greek Cypriots have been filled

up by popular vote, members serving for five-year terms. The judicial

branch is led by the Supreme Court, judges being appointed jointly by

President and Vice President.

Cyprus has a market economy, dominated by the service sector, led by

tourism and financial services. The Turkish Cypriot economy, much

poorer, and heavily dependent on transfers from the Turkish government,

has a per capita income roughly one-third of that of their Greek Cypriot

counterparts. Cyprus joined the European ERM (ERM II) in May 2005

and may be able to adopt the euro within two years.

1.2.4. Czech Republic

When the Soviet Union collapsed in 1989, Czechoslovakia regained its

freedom through a peaceful ‘‘Velvet Revolution’’ and on January 1, 1993,

there occurred the ‘‘Velvet Divorce’’ that resulted in the separation of the


national components, the Czech Republic and Slovakia. The Czech Re-

public joined NATO in 1999 and the EU in 2004. Totally landlocked, the

Czech Republic is the traditional military gateway between the Northern

European plain and the Danube Delta in Central Europe.

Prague is the capital city. It has a parliamentary democracy with 13

administrative regions. The President, elected for a five-year term, is the Chief

of State and appoints the Prime Minister to be the Head of Government. The

legislative branch consists of a bicameral Parliament: (a) the Senate with 81

members, elected by popular vote for six-year terms, and (b) the Chamber of

Deputies with 200 members, elected by popular vote for four-year terms.

Members of the Supreme Court and the Constitutional Court, appointed by

the President for 10-year terms, lead the judicial branch.

The economy of the Czech Republic is notably prosperous, leading the

former communist states in Central and Eastern Europe. Germany is its

primary trading partner. The inflation rate is under control and the current

account deficit is beginning to decline. Accession to the EU in 2004 has

given a robust boost to its exports to the EU member countries.

1.2.5. Kingdom of Denmark

A modern prosperous nation in Northern Europe, which is bounded by the

Baltic and North Seas, Denmark joined the NATO in 1949 and the EU

(then EEC) in 1973. Denmark is one of the three original EU-15 countries

who continue to decline the membership of the Eurosystem, as established

on January 1, 1999. Even so, the Danish krone remains pegged to the euro.

The Kingdom of Denmark is a constitutional monarchy. Copenhagen

is the capital city. Denmark has 16 administrative divisions, 14 counties

plus 2 boroughs. Self-governing overseas administrative units of the Faroe

Islands and Greenland should also be noted. The Monarch is the Chief of

State and appoints the Prime Minister, who serves as the head of the

Government. The Cabinet is appointed by the Prime Minister subject to

parliamentary approval. The unicameral legislature consists of the People’s

House with 179 members, including two from Greenland and two from the

Faroe Islands, elected by popular vote for four-year terms. The Supreme

Court with judges appointed by the Monarch for life heads the judicial

system of the country.

High per capita GDP, generous welfare benefits, and a low Gini index

point to high living standards unmatched by any other nation. A net ex-

porter of food and energy, Denmark enjoys a healthy trade surplus.

1.2.6. Republic of Estonia

Located between Latvia and Russia and sharing the coastline with the Baltic

Sea and the Gulf of Finland, Estonia regained its freedom in 1991 with the

collapse of the Soviet Union. Estonia joined the EU and NATO in 2004.


The Republic of Estonia is a parliamentary republic with its capital in

Tallinn. Estonia has 15 administrative divisions. The President is the Head

of State and elected by the Parliament for a five-year term. The Prime

Minister is nominated by the President, subject to the approval by the

Parliament. The unicameral Parliament has 101 members, elected by pop-

ular vote to serve for four-year terms. The National Court, with a Chair-

man appointed by President for a life term, leads the judicial branch of the

government.

Estonia has moved to a market economy with closer economic ties to

the other EU member countries, reinforcing its ties to major trading part-

ners Finland, Sweden, and Germany. Pegging its currency to the euro has

been a helpful economic step for Estonia. With a balanced budget and low

public debt, Estonia has a sound economy. However, the Republic has a

challenge to face for its high current deficits.

1.2.7. Republic of Finland

Between Sweden and Russia, Finland is touched by the Baltic Sea, the Gulf

of Finland to the South, and the Arctic Circle to the North. This is a land

of over 60,000 lakes.

The Republic of Finland has six provinces and its capital city is Helsinki.

The President is elected by popular vote to serve for a six-year term as the

Chief of State. The Prime Minister is the Head of Government and is

appointed by the President from the majority party or the majority coa-

lition in the Parliament, subject to Parliament’s approval. Members of the

Cabinet, the Council of State, are appointed by the President, but remain-

ing responsible to Parliament. Finland’s unicameral Parliament consists of

200 members, elected by popular vote on a proportional basis to serve for

four-year terms. The Supreme Court, with judges appointed by the Pres-

ident leads the judicial branch.

Finland has moved from being a source of raw natural resources to

becoming a mature industrialized economy excelling in high-tech exports.

Finland now enjoys a per capita income matching that of the leading

European economies. It was the only Nordic state to join the Eurosystem

on January 1, 1999, the day the system was initiated. Finland remains a

trade-dependent economy and trades heavily with its neighbors.

1.2.8. French Republic

France is a founding member of the EU, beginning with the ECSC signing

in 1957 and joined the Eurosystem in 1999. Located in Western Europe,

France has an extensive waterfront with the Bay of Biscay, English Chan-

nel, and the Mediterranean Sea. It shares borders with Germany and Spain

and on the other side of the Channel is the UK.

Paris is France’s capital. Administrative divisions of the French Re-

public consist of 22 regions including the ‘‘territorial collectivity’’ of


Corsica. Several other territorial collectivities and overseas departments

around the world also belong to France. The President, elected by popular

vote for a four-year term, is the Chief of State. The President appoints the

Prime Minister, nominated by the national assembly majority, who serves

as the Head of Government. At the suggestion of the Prime Minister, the

President appoints the Council of Ministers. The bicameral legislature is

composed of the Senate and the National Assembly. The Senate has 321

seats, 296 for metropolitan France, 13 for overseas departments and ter-

ritories plus 12 for French nationals abroad. Members are indirectly

elected by an electoral college to serve for nine-year terms. In 2010, 25 new

seats will be added to the Senate for a total of 346. The National Assembly

has 577 members, elected by popular vote under a single member majority

system, serving five-year terms. The Judiciary consists of (a) the Supreme

Court of Appeals, with judges appointed by the President from nomina-

tions by the High Council of the Judiciary; (b) the Constitutional Council

with nine members, with the President, the President of the National

Assembly, and the President of the Senate appointing three each; and (c)

the Council of State.

France’s capitalist market economy, which has been marked by exten-

sive government ownership, is experiencing privatization of many govern-

ment-owned and managed industrial enterprises. The high cost of labor

and labor-market inflexibilities remain a fact. Economic growth has been

slow and unemployment rate has touched the 10 percent rate. France’s

national budget deficit has passed the 3 percent limit of the Eurosystem.

Based on GDP, France is the second largest economy of the EU.

1.2.9. Federal Republic of Germany

Located in Central Europe, Germany has borders with Austria, Belgium,

Czech Republic, Denmark, France, Luxembourg, the Netherlands, Poland,

and Switzerland. Germany is the EU’s largest economy both by GDP and

population.

On November 9, 1989, the Berlin Wall was torn down, and in 1990, the

post-WWII partitioning of Germany ceased to be a fact. Communist-

controlled East Germany and democratic West Germany were reunited. Since

the 1950s, Germany has been a leading actor in the integration of the

continental European economy, joining the Eurosystem in January 1999.

The Federal Republic of Germany has its capital in the city of Berlin.

Sixteen states constitute the country’s administrative divisions. The President,

elected for a five-year term by a Federal Convention is the Chief of State. The

Federal Convention includes all members of the Federal Assembly and an

equal number of delegates elected by the state parliaments. The Chancellor,

elected by the absolute majority of the Federal Assembly, is the Head of

Government. The Cabinet consists of members appointed by the President

on the recommendation of the Chancellor. The Federal Assembly and the


Federal Council are the two chambers of Germany’s bicameral Parliament.

The Assembly has 613 members elected by popular vote under a system

combining direct and proportional representation, serving for four-year

terms. The Council has 69 members where state governments are directly

represented, each having three to six votes depending on its population. The

Federal Constitutional Court, with half its judges elected by the Assembly

and half by the Council, leads the judicial branch.

Germany is a mature industrialized economy with its many and varied

technologically advanced manufactures. It is the largest economy in the

EU and fifth largest in the world. For various reasons, Germany’s eco-

nomic performance in recent years has been poor. The budgetary cost of

unification of East and West Germany has been a critical factor and

structural rigidities in the labor market continue to be a subject of debate.

Note that Germany’s budget deficit has crossed the EU’s 3 percent limit.

Much of the country’s trade is with the EU member countries, USA and

China being notable outsiders.

1.2.10. Hellenic Republic

Greece has an extensive coastline with the Aegean, Ionian, and Mediter-

ranean Seas. This peninsular economy also has an archipelago of about

2,000 islands and dominates the southern approach to the Turkish Straights.

After a brief period of military dictatorship, the Hellenic Republic rejected a

monarchy by a referendum on December 8, 1974 and established a parlia-

mentary form of government.

With its capital in Athens, Greece has 51 prefectures and one autono-

mous region as its administrative divisions. The President, elected by the

parliament for a five-year term with a two-term limitation, is the Chief of

State. The President appoints the leader of the party securing plurality of

vote in the election to serve as the Prime Minister and form the government.

The Cabinet members are appointed by the President on the recommenda-

tion by the Prime Minister. Greece’s unicameral Parliament consists of 300

members, elected by direct popular vote to serve for four-year terms. With

judges appointed for life by the President following consultation with a

judicial council, the Supreme Judicial Court and the Special Supreme

Tribunal head the judicial branch.

Greece is a capitalist market economy, however, the public sector ac-

counts for some 40 percent of its GDP. Greece is a relatively poor economy

with a per capita GDP at about 70 percent of the leading economies of the

Eurosystem. Since 2000, Greece has failed to meet EU criteria of budget

deficit limit of 3 percent of GDP. Indeed, Greece with its public debt at

108.9 percent of GDP (2005 est.) lags far behind the EU benchmark of 60

percent for public debt. Its unemployment rate and inflation rate continue

to be a challenge. Greece joined the EU in 1981 and became the 12th

member of the Eurosystem in 2001.


1.2.11. Republic of Hungary

Located in Central Europe, Hungary offers main land routes between

Western Europe and Balkan Peninsula, and between Ukraine and the

Mediterranean basin.

After prolonged communist control after World War II, in 1956, Hun-

gary withdrew from the Warsaw Pact. In 1990, the country held its first

multiparty democratic elections and initiated a free market economy. It

became a member of the EU in 2004.

The Republic of Hungary has 39 administrative divisions, and the

capital city is Budapest. The President, elected by the National Assembly

for a five-year term is the Chief of State. The Prime Minister is elected by

the National Assembly on the recommendation by the President. Members

of the Council of Ministers are elected by the National Assembly on the

recommendation of the President. The National Assembly is the unicam-

eral legislature of Hungary. It has 386 members, elected by popular vote

under a system of proportional and direct representation to serve for four-

year terms. The judicial branch is led by the Constitutional Court, judges

being elected by the National Assembly for nine-year terms.

The free market economy of Hungary is making steady progress. More

than 80 percent of GDP originates in the private sector. Hungary has been

successful in attracting much foreign investment, totaling more than US

$23 billion since 1989. Germany is by far the largest economic partner of

Hungary. However, per capita income of Hungary remains one-half of that

of the four ranking EU economies. Its unsustainable budget and current

account deficits have been of much concern.

1.2.12. Ireland

Located in the Atlantic Ocean, the farthest western point of the EU region,

Ireland has a unique history of its own. Northern Ireland, about one-sixth of

the island, continues to be a part of the United Kingdom. Negotiations

between the governments of the United Kingdom and Ireland following the

now famous Good Friday Agreement in 1998 continue to be in progress.

Ireland has 26 administrative units, called counties. More than 40 percent

of the population lives within 100km of Dublin, the capital city. The Presi-

dent is elected by popular vote for a seven-year term to serve as the Chief of

State. The Prime Minister is nominated by the House of Representative and

appointed by the President. Members of the Cabinet are appointed by the

President after being nominated by the Prime Minister and approved by the

House of Representatives. Ireland has a bicameral legislature consisting of

the Senate and the House of Representatives. The Senate has 60 members,

49 elected by universities and five vocational panels and 11 nominated by the

Prime Minister, serving for five-year terms. The House consists of 166

members, elected by popular vote on the basis of proportional representa-

tion to serve for five-year terms. The Supreme Court with judges appointed


by the President on the advice of the Prime Minister and the Cabinet, heads

the judicial branch of the government.

Ireland is a small island economy, very much dependent on trade. Once

an agriculture-dominant economy with the potato being its principal crop,

Ireland now is a mature industrialized economy with some 80 percent of its

exports coming from this sector. For 1995–2004, Ireland has grown at an

average annual rate of growth of 7 percent and its per capita GDP is now

10 percent above that of the EU’s big four and is the second highest next to

Luxembourg. Ireland began as one of the four poorer member economies

of the EU-15 and has been one of the great successes of the European

experiment. Ireland is a member of the Eurosystem while the UK has

declined to participate.

1.2.13. Italian Republic

A peninsular entity extending far into the central Mediterranean Sea, Italy

shares borders with Austria, France, Slovenia, Switzerland, San Marino,

and Vatican City. A republic replaced the monarchy in 1946. Italy has been

one of the six founding members of the EU, championing the cause of

European continental economic integration (see ECSC, 1951; EEC, 1957),

joining the Eurosystem in 1999.

Italy has 16 regions plus five autonomous regions. Rome is the capital

city. The President, elected by an electoral college consisting of both houses

of Parliament plus 58 regional representatives, is the Chief of State, serving

for a seven-year term. The Prime Minister, appointed by the President, is

confirmed by the Parliament to be the Head of Government. Members of

the Council of Ministers are nominated by the Prime Minister and ap-

proved by the President. A bicameral legislature, the Italian Parliament has

two chambers, the Senate and the Chamber of Deputies. The Senate has

315 members, elected by popular votes for five-year terms, 232 of them

being elected directly and 83 by regional proportional representation. In

addition, the Senate has a small number of senators-for-life, inclusive of

former Presidents of the Republic. The Chamber of Deputies consists of

630 members, 475 directly elected and 155 by regional proportional rep-

resentation, serving for five-year terms. The Constitutional Court, con-

sisting of 15 judges, 5 appointed by the President, 5 by the Parliament, and

5 by the ordinary and administrative Supreme Courts, leads the judicial

branch.

Italy roughly matches France and the UK in total and per capita in-

come. The Italian economy is lagging and experienced no growth in 2005.

The unemployment rate continues to be high and the inter-regional eco-

nomic gap between the industrial north and the less-developed agricultural

south warrants attention. Italy’s budget deficit has been beyond the EU’s 3

percent ceiling. The challenge is overwhelming as Italy has been slow to

implement critical reforms to enhance their competitiveness.


1.2.14. Republic of Latvia

In 1991, Latvia became a sovereign nation-state economy after the fall of

the USSR. Located in Eastern Europe between Estonia and Lithuania, and

Russia to its eastern border, Latvia has a waterfront with the Baltic Sea in

the west.

The Republic of Latvia adopted a parliamentary democratic form of

government. Its administrative units are composed of 26 counties and 7

municipalities. Riga on the Gulf of Riga in the north is the capital city. The

President, elected by parliament for a four-year term, is the Chief of State.

The Prime Minister, appointed by the President, is the Head of Govern-

ment. The Council of Ministers is nominated by the Prime Minister subject

to the approval by the Parliament. Latvia’s unicameral Parliament has 100

members, elected by direct popular vote, serving for four-year terms. The

Judiciary is headed by the Supreme Court with judges’ appointments con-

firmed by the Parliament.

Latvia’s economy gained impetus by reducing its dependence on the

Russian market, and shifting its economic partnership to the EU countries.

Privatization of state-owned economic enterprises progressed as Latvia

moved to be a free market economy. Latvia became a member of the EU in

2004. Earlier in February 1999, Latvia was admitted to the membership of

the World Trade Organization (WTO). The twin deficits of current account

and government budget are of concern. The Latvian–Russian border treaty

of 1997 remains to be signed and ratified.

1.2.15. Republic of Lithuania

Lithuania proclaimed its independence from the Soviet Union in 1990 and

Moscow accepted the fact in September 1991. Located in Eastern Europe,

Lithuania shares borders with Russia, Poland, Latvia, and Belarus, and

has a waterfront with the Baltic Sea.

The Republic of Lithuania has a unicameral parliamentary democracy.

Ten counties constitute its administrative divisions with Vilnius as the

capital city. The President, elected by popular vote for a five-year term, is

the Chief of State. The Premier, appointed by the President with the ap-

proval of the Parliament, is the Head of Government. The President ap-

points the Council of Ministers, nominated by the Premier. The unicameral

Parliament has 141 members, 71 elected directly by popular vote and 70 by

proportional representation, serving for four-year terms. The Judiciary

consists of the Constitutional Court, the Supreme Court, and the Court of

Appeal. Judges for all courts are appointed by the President.

The economy of Lithuania has become market-oriented with more than

80 percent of enterprises being privatized. The privatization of the large,

state-owned utilities has made significant progress. In May 2004, Lithuania

became a member of both the EU and the WTO. Progressive economic

integration with the EU partner economies has been a fact. Russia continues


to be an important trading partner while Germany has become Lithuania’s

most engaging economic partner.

1.2.16. Grand Duchy of Luxembourg

With a very small area (2,586 km2), Luxembourg is located in Western

Europe, landlocked by Belgium, France, and Germany. Luxembourg is

one of the six founding members of the EU movement initiated in 1950s

and joined the Eurosystem on January 1, 1999.

The Grand Duchy of Luxembourg is a constitutional monarchy. The

three districts, Diekirch, Grevenmacher, and Luxembourg, constitute the

country’s administrative divisions. The Grand Duke is the Chief of State

and the office is hereditary. The Duke appoints the leader of the majority

or of the majority coalition to the post of Prime Minister, who is the Head

of Government. Both the Prime Minister and Deputy Minister are re-

sponsible to the Chamber of Deputies. The Prime Minister recommends

members of the Council of Ministers to be appointed by the Monarch. The

unicameral Chamber of Deputies has 60 members, elected by direct pop-

ular vote for five-year terms. It merits attention that universal suffrage in

Luxembourg is compulsory. The judicial branch consists of judicial courts

and tribunals and judges for all courts being appointed for life by the

Duke.

Luxembourg’s is a high-income economy, having the highest per capita

income not only in the EU, but also in the world. Economic growth has

been excellent with low inflation and unemployment rates. The financial

sector of Luxembourg with most banks being foreign-owned with extensive

international businesses, accounts for about 22 percent of its GDP. Its

industrial sector, earlier dominated by steel, has been diversified. Given its

small population base, Luxembourg heavily depends on foreign and cross-

border workers.

1.2.17. Republic of Malta

Formerly a British colony, and then a member of the Commonwealth led

by the UK, Malta became independent of the UK on September 21, 1964.

After a decade, Malta became a republic. It is an island economy in the

Mediterranean Sea south of Italy.

With no administrative divisions, the government functions from the

capital city of Valletta, while local councils carry out administrative orders.

The President, elected by the House of Representative for a five-year term,

is the Chief of State. The President appoints the leader of the majority or of

majority coalition to serve as the Prime Minister for a five-year term. The

President also appoints the Deputy Prime Minister on the advice of the

Prime Minister. The Cabinet members are appointed by the President,

again on the advice of the Prime Minister. The legislature, consisting of the

House of Representatives is unicameral. It usually has 65 members, elected


by popular vote on the basis of proportional representation, and they serve

for five-year terms. The party with the largest popular vote may be as-

signed additional seats, so that a legislative majority can be ensured.

The economy is trade-dependent, exporting manufactures, especially of

electronics and textiles. With mild winters and dry summers, Malta is also

an attractive tourist destination. Commercial exploitation of the conti-

nental shelf between Malta and Tunisia for possible oil exploration has

been a subject for negotiation.

1.2.18. Kingdom of the Netherlands

The Netherlands shares borders with Belgium and Germany. Its access to

the North Sea gives it a vantage waterfront. The Netherlands is one of the

six founding members of the ECSC, now the EU, and has been a member

of the Eurosystem since its initiation on January 1, 1999.

Amsterdam is the capital while The Hague is the seat of government.

Twelve provinces constitute the administrative divisions. It also has two

dependent areas, Aruba and the Netherlands Antilles. The Kingdom of the

Netherlands has a constitutional monarchy. The Monarch is the Chief of

State and the office is hereditary. The Monarch appoints the leader of the

majority party or of the majority coalition to serve as the Prime Minister.

The Monarch also appoints the Deputy Prime Minister and the Council of

Ministers on the advice of the Prime Minister. Note that the Netherlands

has a Council of State consisting of the Monarch, the heir apparent, and

councilors, for consultations with the Cabinet on legislative and admini-

strative policy. The bicameral legislature, States General, has two houses:

the First Chamber, with 75 members indirectly elected by the country’s 12

provincial councils for four-year terms; and the Second Chamber, with 150

members directly elected by popular vote to serve four-year terms. The

Supreme Court, with justices nominated by the Monarch for a life term,

leads the judicial branch.

The Netherlands is a rich, free-market, trade-dependent economy. With

stable labor/industrial relations, and moderate unemployment and infla-

tion rates, the Netherlands maintains a good current account surplus. It

has been very successful in attracting foreign direct investment. Its high-

tech agricultural sector lends much support to its food-processing industry

and also to its exports. Other than the USA and the EU partner countries,

China has become an important trading partner of the Netherlands, es-

pecially for imports (7.4 percent in 2004).

1.2.19. Republic of Poland

Located in Central Europe, east of Germany, Poland’s border countries

include Russia and Ukraine. Its coastline with the Baltic Sea is limited.

Devastations of the World War II and the post-WWII Soviet occupation


are of course a part of Poland’s history. In 1990, Poland installed a re-

public, led by a popularly elected President. Poland joined the EU in 2004.

The Republic of Poland has 16 provinces and Warsaw is the capital

city. The President, elected for a five-year term, is the Chief of State. The

Prime Minister is the Head of Government assisted by a Deputy Prime

Minister. Both are appointed by the President and subject to confirmation

by the Sejm, the popular house of the bicameral legislature. The Senate has

100 members, elected by a majority vote on a provincial basis, serving for

four-year terms. The Sejm has 460 seats elected directly under a complex

system of proportional representation. When the two houses meet jointly,

albeit on rare occasions, it is called the National Assembly. Two seats in

the Sejm are reserved for the ethnic minorities. Supreme Court judges are

appointed by the President on the recommendation of the National Coun-

cil of the Judiciary to serve for indefinite time period. The judges of the

Constitutional Tribunal are chosen by the Sejm for nine-year terms and are

also part of the Judiciary. The rulings of the Constitutional Tribunal are

final. Court decisions can however be appealed to the European Court of

Justice in Strasbourg.

Poland’s adoption of a policy of economic liberalization can be ranked

as a success story, leading the transition economies. Privatization of small-

and medium-sized state-owned enterprises has encouraged the growth of

private businesses but much remains to be done. The infrastructure war-

rants further restructuring and reforms in welfare, health care, and edu-

cation present serious challenges, somewhat alleviated by a grant of about

$23.2 billion in EU funds available through 2006. Germany by far has

become the largest trading partner but overall, exports to EU partner

countries are on the rise. Imports in 2004 include large shares from both

Russia (7.3 percent) and China (4.6 percent).

1.2.20. Portuguese Republic

Portugal, on the North Atlantic Ocean, west of Spain, enjoys a huge

coastline with a temperate maritime climate. A revolution in 1910 deposed

the monarchy, but for many years, successive repressive governments fol-

lowed. In 1974, Portugal was able to introduce democratic reforms and

soon gave independence to all its colonies in Africa. Portugal became a

member of the EU in 1986 and joined the Eurosystem in 1999.

The Portuguese Republic has a parliamentary democracy with 18 dis-

tricts and two autonomous regions as the administrative divisions. The

capital city is Lisbon. The President, elected by popular vote for a five-year

term, is the Chief of State and appoints the leader of the majority party or

of the majority coalition to serve as the Prime Minister. The Council of

Ministers is also appointed by the President on the recommendation of the

Prime Minister. There is also a Council of State to serve as a consultative

body to the President. The unicameral Assembly of the Republic has 230


members, elected by popular vote, serving for four-year terms. The Su-

preme Court with judges appointed for life by the Conselho Superior da

Magistratura leads the Judiciary.

A progressive policy of privatization of many state-controlled busi-

nesses and liberal economic policies over the years have allowed Portugal

to experience economic growth at an average rate above that of the EU for

much of the past decade. Its per capita income has risen to two-thirds of

that of the big four EU member economies. However, new competition

from new EU members from Eastern and Central Europe and from over-

seas has become a challenge. Portugal must get its action plan in order to

keep its budget deficit within the 3 percent of GDP ceiling.

1.2.21. Slovak Republic

Landlocked within Central Europe, Slovakia shares borders with Austria,

the Czech Republic, Hungary, Poland, and Ukraine. The Slovaks and the

Czechs made a Velvet Divorce to form two independent sovereign nation-

states on January 1, 1993 and the state of Czechoslovakia ceased to exist as

one sovereign nation-state.

The Republic has installed a parliamentary democracy with its capital

in Bratislava. The President, elected by direct, popular vote for a five-year

term, is the Chief of State. The Prime Minister, appointed by the President,

is the Head of Government. The legislature is unicameral; the National

Council of the Slovak Republic has 150 members, elected on the basis of

proportional representation for four-year terms. The Judiciary is led by the

Supreme Court with judges elected by the National Council, and the

Constitutional Court with judges appointed by the President from a group

of nominees approved by the National Council.

Transition from the erstwhile communist economic system to free mar-

ket capitalism has made excellent progress. Foreign investment has poured

in and the banking sector is now largely foreign-owned. The rate of growth

has been good. However, an unemployment rate of 11.5 percent in 2005 is

of concern. Germany is the country’s leading trading partner and the

Czech Republic coming second.

1.2.22. Republic of Slovenia

Slovenia borders the Adriatic Sea, west of Austria and northeast of Croatia.

In 1991, the Slovenes established their independence from Yugoslavia. His-

torical ties to Western Europe have been helpful for its transformation to a

modern state. Slovenia became a member of the EU in 2004.

It has instituted a parliamentary democratic republic and its capital is

Ljubljana. Currently, 193 municipalities constitute its administrative divi-

sions. The President, elected by popular vote for a five-year term, is the Chief

of State. The Prime Minister, appointed by the President to serve as the Head

of Government, is the leader of the majority or of the majority coalition in


the National Assembly. The Council of Ministers is nominated by the Prime

Minister, subject to the approval by the National Assembly. The legislature is

bicameral with (a) the National Assembly and (b) the National Council. The

National Assembly consists of 90 members, 40 directly elected, and 50 elected

on a proportional basis, with members serving for four-year terms. The

National Council is primarily an advisory board with limited legislative

powers with members elected indirectly by an electoral college for five-year

terms. The Judiciary consists of (a) the Supreme Court with judges elected by

the National Assembly on the recommendation of the Judicial Council and

(b) the Constitutional Court with judges elected for nine-year terms by the

National Assembly on the nomination by the President.

The economy has made good progress. Necessary structural reforms

have attracted broad-based foreign participation in Slovenia and helped to

lower the unemployment rate. The share of GDP from the agricultural

sector estimated at 6 percent in 2005 points to the fact that Slovenia is still

a relatively agriculture-dependent economy. To become a member of the

Eurosystem, Slovenia is struggling hard to maintain its budget deficits,

public debt, and inflation rate within the EU ceilings. Recently, Slovenia

has passed the necessary evaluation of eligibility to this end. Germany is

the country’s leading trading partner.

1.2.23. Kingdom of Spain

Part of the Iberian Peninsula, Spain has a coastline with the Bay of Biscay,

Mediterranean Sea, and the North Atlantic Ocean. Spain has a history of

its own, remaining neutral during both the World Wars. It suffered a

devastating civil war from 1936 to 1939. In 1986, Spain became a member

of the EU and joined the Eurosystem in 1999.

The Kingdom of Spain is a constitutional monarchy and Madrid is the

capital city. The administrative divisions consist of 17 autonomous com-

munities and two autonomous cities. The Monarch is the Chief of State,

and the office is hereditary. Following legislative elections, the leader of the

majority party or of the majority coalition is designated by the Monarch to

serve as both President of the Government and Prime Minister, subject

to the approval by the National Assembly. In addition, there is a Council

of State to serve as the supreme consultative organ of the government, but

its recommendations are not binding. The legislature is bicameral, con-

sisting of the Senate and the Congress of Deputies. The Senate has 259

members, 208 directly elected by popular vote and 51 appointed by the

regional legislatures, serving for four-year terms. The Congress of Deputies

has 350 members, elected by popular vote on block lists by proportional

representation and serve for four-year terms. The judicial branch is led by

the Supreme Court.

The Spanish economy experienced a boom briefly from 1986 to 1990,

averaging an annual rate of growth of 5 percent. Since then it shared the


general EU experience of a slowdown. On a per capita basis, Spain has 80

percent of the average income of the four ranking EU members. Unem-

ployment rate at 10.1 percent remains high. France and Germany

are Spain’s major trading partners. Territorial disputes with the UK over

Gibraltar and with Morocco over the coastal enclaves merit attention. The

internal secessionist movement of the Basque Fatherland and Liberty

(ETA) may be resolved by the bold initiative of 2006. The recent agreement

to this effect is most welcome.

1.2.24. Kingdom of Sweden

Home of the Nobel Awards, inclusive of the Nobel Memorial Award for

Economics established in 1968, Sweden captures global attention for its

contributions to knowledge and global understanding. Sweden has not

participated in any war in nearly 200 years. Sweden became a member of

the EU in 1995 and elected not to join the Eurosystem in 1999. It shares

borders with Norway and Finland, while the Gulf of Bothnia and the

Baltic Sea offer an extensive coastline. The Oresund Bridge, which was

inaugurated in July 2000, links Sweden and Denmark. This bridge is a

symbol of togetherness among the Nordic nations and the rest of Europe.

Sweden has a constitutional monarchy. The Monarch is the Head of

State and the Prime Minister, elected by the Parliament, is the Head of

Government. The Cabinet is appointed by the Prime Minister. The uni-

cameral Parliament has 349 members, elected by popular vote on a pro-

portional basis, serving for four-year terms. The Judiciary is led by the

Supreme Court with judges appointed by the Prime Minister and the

Cabinet. The 21 counties constitute its administrative divisions and Stock-

holm is the capital city.

Sweden is a rich and mature industrialized economy, successfully com-

bining high-tech capitalism and extensive social welfare benefits. Agricul-

ture accounts for 2 percent of GDP and employment. Privately owned

firms produce 90 percent of industrial output, with the engineering indus-

try comprising one-half of output and exports. The Swedish central bank

follows a strong antiinflationary policy with a target of 2 percent a year. A

budgetary policy committed to fiscal discipline is to be noted. A very large

percentage of Sweden’s trade takes place within the EU FTA, Germany

being the leading partner. Some significant exports to the USA are also

reported.

1.2.25. United Kingdom of Great Britain and Northern Ireland

At its zenith, the British Empire covered one-fourth of the earth’s surface

and the sun never set in the Empire. After World War II, the Empire slowly

liquidated. The United Kingdom successfully restructured its new economy

and assumed its due role in the post-WWII world.


An island in the North Atlantic Ocean, the Kingdom is separated from

the rest of the continental Europe by the English Channel. France is on the

other side of the Channel, and the underwater Chunnel railroad provides a

landmark link between the two countries. Across the Atlantic Ocean, the

trans-Atlantic relationship between USA and UKwarrants attention. Ireland

is another island economy immediately to the west of the UK. The Good

Friday Agreement of 1998 between the UK and the Irish Republic will

hopefully resolve the territorial dispute of the UK’s sovereignty over one-

sixth of Northern Ireland.

Joining the EU became a topic of much discussion after World War II.

Prime Minister Churchill in a speech in 1946 in Switzerland pleaded for

European cooperation, but was not certain if the UK would become a member

of the continental group (see Bulletin of the European Economic Community,

1965). The British Commonwealth, later the Commonwealth of Nations, failed

to be a viable economic option. However, the historical bonds, notably trade

relations, with the former colonies became an issue of much debate for the

United Kingdom. The UK was totally opposed to the supranational European

institutions. The prolonged negotiations to join the EEC, consisting of

Germany, France, Italy, Belgium, the Netherlands, and Luxembourg col-

lapsed. The core issue for the UK was to secure exemption from the EEC’s

requirement for a common trade policy for the rest of the world. The trade links

with the former colonies, now members of the Commonwealth of Nations,

proved to be too pressing an issue. Jointly with Sweden, Switzerland, Norway,

Denmark, Austria, and Portugal, the UK led the European Free Trade As-

sociation (EFTA), but the economic prosperity of the EEC in 1960s became

quite persuasive. Finally, the UK became a member of the EU in 1973. How-

ever, it declined to join the Eurosystem in 1999.

The United Kingdom of Great Britain and Ireland has a constitutional

monarchy. Administrative divisions include 47 boroughs, 36 counties, 29

London boroughs, 12 cities and boroughs, 10 districts, 12 cities, and three

royal boroughs. In addition, there are numerous dependent areas: Anguilla,

Bermuda, the British Indian Ocean Territory, the British Virgin Islands, the

Cayman Islands, the Falkland Islands, Gibraltar, Guernsey, Jersey, the Isle

of Man, Montserrat, the Pitcairn Islands, Saint Helena and Ascension,

South Georgia and the South Sandwich Islands, and the Turks and Caicos

Islands. The Monarch is the Chief of State. The Prime Minister is the Head

of Government and is usually the leader of the majority party or of the

majority coalition in the Parliament. The Cabinet is appointed by the

Prime Minister. The legislature is bicameral. The House of Lords consists

of some life peers, some hereditary peers, and some clergy. There is no

election, but the House of Lords Act of 1999 has made provisions for

reform in this regard. The House of Commons has 646 members, elected

by popular vote, usually serving five-year terms.

In 1999, there were elections for a new Scottish Parliament and a new

Welsh Parliament. The representation of Northern Ireland to the British


Parliament may be substantively resolved by the successful implementation

of the Good Friday Agreement. The judicial branch of the government

consists of (a) the House of Lords, the highest court of appeal; (b) the

Supreme Courts of England, Wales, and Northern Ireland (inclusive of the

Courts of Appeal, the High Courts of Justice, and the Crown Courts); and

(c) Scotland’s Court of Session and Court of Judiciary.

The birthplace of the Industrial Revolution, the UK is a mature in-

dustrialized economy and one of the four ranking EU economies. The

privatization of government-owned- and managed enterprises has been in

progress and the growth of social welfare programs has been contained.

Inflation and unemployment rates are low. In 2005, the economic growth

rate became as low as 1.8 percent. Much of its trade is within the EU FTA.

Germany is the leading partner, but the US is also a significant trading

partner. The UK has not joined the Eurosystem, but is a beneficiary of the

EU-FTA.

The UK continues to have territorial disputes with Spain, Mauritius and

Seychelles, Argentina, Chile, Iceland, Denmark, and the Irish Republic.

1.3. Unity in diversity

1.3.1. Religion

A commitment to individuality, intellectualism, enlightenment, and ren-

aissance based on science and information technology has progressed to a

state of European secularization. The movement to protest against organi-

zed religion has witnessed a historical process of revolutionary changes

contributing to the overall acceptance of the principle of separation be-

tween religion and state. Nevertheless, sporadic cases continue to plague

specific situations in Europe.

Table 1.7 presents a picture of religious affiliations of the people of

Europe. Most of them are Christians, albeit of many different affiliations:

Catholics, Protestants, Greek Orthodox, Russian Orthodox, Methodist,

Seventh-Day Adventist, Pentecostal, Maronite, Armenian Apostolic, Evan-

gelical Lutheran, Lutheran National Church, Calvinist, Church of Ireland,

Dutch Reformed, Eastern Orthodox, and Anglican. They have their inter-

group dissents and disputes inclusive of occasional violent interactions.

Historians and philosophers have written at length about intrafaith con-

flicts. The same has been the history of other faiths: Judaism, Islam, and

other religions. Based on data available, France, Italy, Luxembourg,

and Sweden record some notable Jewish populations. Moslem communities

are reported in Austria, Cyprus, France, Denmark, Germany, Italy, and

Luxembourg. The UK reports 1 percent Hindus and Sweden records some

Buddhists.

Two points should be taken note of: first, occasional inter-faith and/or

intrafaith conflicts apart, there has in general been a religious peace,


allowing people of diverse faiths and affiliations to live in Europe, enjoying

their economic prosperity. Second, the category of ‘‘others’’ warrants spe-

cial mention. Given the global mobility of people, small groups with many

different religious affiliations have come to be a part of the European

population. In addition, the category of ‘‘others’’ includes ‘‘unspecified.’’

Evidently, an increasingly significant percentage of the people of Europe

considers religion a personal matter and elects not to be identified by their

respective religious affiliations. This certainly points to interfaith and/or

intrafaith religious toleration and an absence of fundamentalism. Religion

will not be a factor of disintegrating diversity in the process of European

integration.

Table 1.7. Religion (% of population)

Christian Jewish Moslem Others

Austria (2001) 78.3 4.2 17.5

Belgium 100

Cyprus 82 18

Czech Republic (2001) 28.9 71.1

Denmark 98 2

Estonia (2000) 27.8 72.2

Finland (2003) 86.4 13.6

France 85–90 1 5–10 4

Germany 68 3.7 28.3

Greece 98 1.3 0.7

Hungary (2001) 74.4 25.6

Ireland (2002) 93 7

Italy Predominantly Christian, some Jewish, and a growing Moslem

community

Latvia 100

Lithuania (2001) 85 15

Luxembourg (2000) 100 Some Jewish and Moslem

Malta 98 2

The Netherlands

(2002)

51 5.5 43.5

Poland (2002) 91.4 8.6

Portugal (1995) >94

Slovakia (2001) 83.8 16.2

Slovenia (2002) 61 2.4 36.6

Spain 94 6

Sweden 87 Some Jewish, Moslem, and Buddhist

United Kingdom

(2001)

71.6 2.7 25.7

Notes: (1) Christians include Catholics, Protestants, Greek Orthodox, Maronite, Armenian

Apostolic, Evangelical Lutheran, Lutheran National Church, Methodist, Seventh-Day Ad-

ventist, Pentecostal, Calvinist, Church of Ireland, Russian Orthodox, Dutch Reformed, East-

ern Orthodox, and Anglican. (2) Others include unspecified and no affiliation reported. (3)

UK population includes 1% Hindus. (4) Year of census are in parentheses.

Source: The World Factbook (2006).


1.3.2. Linguistic diversity: EU official languages

Multilingualism is the core policy of the EU. The long-term objective for

all EU citizens will be to speak two languages in addition to an individual’s

mother tongue. The 20 official languages of the EU are: Czech, Danish,

Dutch, English, Estonian, Finnish, French, German, Greek, Hungarian,

Italian, Latvian, Lithuanian, Maltese, Polish, Portuguese, Slovak, Slovene,

Spanish, and Swedish. Irish (Gaelic) will become the 21st official language

as of January 1, 2007. Let us begin by greeting the people of the EU in their

official languages.

Czech Dobre rano Italian Buon giorno

Danish God morgen Latvian Labrit

Dutch Goedemorgen Lithuanian Labas Rytas

English Good morning Maltese L-Ghodwa t-tajba

Estonian Tere hommikust Polish Dzie0n dobry

Finnish Hyvaa huomenta Portuguese Bom dia

French Bonjour Slovak Dobre rano

German Guten Morgen Slovene Dobro jutro

Greek Kalimera Spanish Buenos dıas

Hungarian Jo reggelt Swedish God morgon

Table 1.8 is a presentation of the linguistic diversity of the EU. Based on

Eurobarometer surveys in 2001, we note the two points pointing to the EU

commitment to an agenda of multiligualism is on a positive trend: (a) the

number of EU citizens who know at least one foreign language has increased

from 47 percent in 2001 to 56 percent in 2005 and (b) the percentage of

Europeans acknowledging usefulness of knowledge of foreign languages

have gone up from 72 percent in 2002 to 83 percent in 2005. Many tongues

in one European family is the outcome.

Table 1.9 lends evidence to the comparative standing of several languages,

English leading and German, French, Italian, and Spanish following. There is

a strong preference for learning English language (see Table 1.10). English has

been adopted as the official language of the European Central Bank (ECB).

International trade and commerce in English covers the USA, Canada, Aus-

tralia, New Zealand, India, and several other South and Southeast Asian

countries. It follows that linguistic diversity is not a challenge to the EU-25.

If one reviews the functioning of multilingual sovereign nation-states,

one must conclude that linguistic diversities enrich a country. Table 1.8

shows that Finland has two official languages, while Spain has four, and

Luxembourg enlists three languages. A quick review of other multilingual

countries tells us: Canada has two official languages, English and French;

New Zealand lists two official languages, English and Maori; and India has

18 official languages, and English continues to be most widely spoken. We

suggest that the EU will have no problem with some 20 official languages.


1.3.3. Lifestyle diversities in the EU

Much has been written about diversities of lifestyle in the EU. How much

do they vary from Ireland to Finland, Sweden to Malta? Various drinks in

the UK are far too different from those across the English Channel. The

culinary arts and fashion styles vary from one Member State of EU to

another. However, there does exist one European lifestyle, as one observes

carefully. The oneness of the European lifestyle can be appreciated as we

Table 1.8. Linguistic diversity of the EU, percentage of population speaking

Percent speaking

national language(s)

Other EU languages Other languages

Austria 96 3 2

Belgium Dutch 56, French

38, German 0.4

5 3

Cyprus 98 2 1

Czech Republic 98 2 0.7

Denmark 97 2 2

Estonia 82 1 18

Finland Finnish 94,

Swedish 5

0.8 0.4

France 93 6 3

Germany 90 3 8

Greece 99 0.2 0.7

Hungary 100 0.8 0.6

Ireland English 94, Irish 11 2 0.2

Italy 95 5 1

Latvia 73 1 27

Lithuania 88 5 7

Luxembourg Luxembourgish 77,

French 6,

German 4

14 0.8

Malta 97 Maltese, 2

English

0.6 —

The Netherlands 96 3 3

Poland 98 1 1

Portugal 100 0.6 0.1

Slovakia 88 12 2

Slovenia 95 1 5

Spain Spanish 89, Catalan

9, Galician 5,

Basque 1

1 2

Sweden 95 5 2

United Kingdom 92 3 5

Note: ‘‘Other EU languages’’ include the EU official languages spoken in a country where

there are no state languages. The category ‘‘Other languages’’ includes nonindigenous lan-

guages plus regional/minority languages that do not have EU official status.

Source: Eurobarometer 243 (February 2006).


Table 1.9. Languages in EU-15, percentage of population (2001)

Language Mother tongue or conversational ability Most commonly used

English 47 51

German 32 32

French 28 26

Italian 18 16

Spanish 15 15

Dutch 7

Greek 3

Portuguese 3

Swedish 3

Danish 2

Finnish 1

Polish 10

Russian 7

Source: European Commission, Special Eurobarometer Survey 54.

Table 1.10. Percentage of population that think children

should learn English in addition to their mother language

EU-25 77

Austria 84

Belgium 88

Cyprus 98

Czech Republic 89

Denmark 94

Estonia 94

Finland 85

France 91

Germany 89

Greece 96

Hungary 85

Irelanda

Italy 84

Latvia 94

Lithuania 93

Luxembourg 59

Malta 90

Netherlands 90

Poland 90

Portugal 90

Slovakia 87

Slovenia 96

Spain 85

Sweden 99

United Kingdoma

Source: Eurobarometer 243, Eurostat.aUK and Ireland are English speaking: Ireland prefers 64% for learning

French while UK’s preference is 71% to learn French.


compare it with the lifestyle in USA or in any other continent. Only in 2005

the EU has agreed to free trade in wines manufactured in USA, where no

oak barrels are used. They claim that many of their food products such as

cookies, candy, cheese, and chocolate are much too different from the

competing US products. They made automobiles far too different. Their

fashion products and art works are claimed to be much superior to those of

the USA. Note that due to high-tech communication a la the multiphased

media, lifestyle across the globe is getting to be globalized. American fast

food chains, Starbucks coffee, and Haagen-Dazs ice cream are ready to

welcome a visitor in any country across the continents. Japanese sushi,

Indian curry, Chinese eating houses, Korean food chains, and Vietnamese

cuisine have become increasingly regular on all continents. We conclude

that lifestyle variations in the EU will be a plus, not a negative factor,

toward EU’s integration. Indeed, such variations will add to the colorful

life experience of European consumers. There are lifestyle diversities in

USA where the experience in Boston, MA is quite different from that in

Austin, TX. One in Hawaii is far too different from the one in Pennsyl-

vania’s Amish countries. Regional diversities in the lifestyle of the people

in China, India, Indonesia, and Australia are very much on record. How

about the rich diversities in lifestyles of Scotland, Wales, Northern Ireland,

and England in the island country of United Kingdom?

1.4. Two articles of faith

We note that the EU has made a commitment to two articles of faith. First,

pluralistic democratic form of government based on universal suffrage at age

18 is the core framework of government. Luxembourg has made the suffrage

compulsory. The hereditary Monarchies in Belgium, Denmark, Luxem-

bourg, the Netherlands, Spain, Sweden, and the United Kingdom are strictly

constitutional. Members of the legislatures are directly elected by popular

votes or on a proportional representation basis. When there are bicameral

legislatures, members of the popular house are so elected, while those of the

upper house may be elected indirectly. In all cases the tenure of membership

is defined by law. The rule of law is upheld by proper judicial institutions.

Most member countries have written constitutions, a major exception being

the UK. However its unwritten constitution, based on statutes, common

law, and practice, has experienced historic success. Cyprus, of course, con-

tinues to have a constitutional crisis. As per rule of law, the death penalty is

forbidden. The EU is also a signatory to the Kyoto environmental protocol

pointing to its concern for environmental pollution.

Second, the EU economies have a firm commitment to free market cap-

italism. Private ownership of property and the means of production is the

rule. Social welfare programs especially for health care and education plus

necessary affirmative action programs to ensure access to the labor market

by the minorities in a member country are to be accommodated. Of course,


there must be provisions for defense, security, law and order, and environ-

mental protection with a commitment to a balanced budget. Deficits and

public debts are to be limited by EU guidelines. Commitment to full employ-

ment without inflation is the cornerstone of macroeconomic policy para-

meters, defined by monetary and fiscal policies, transparent and subject to

proper judicial review.

Economic gains of the member economies must be the goal. The EU

with its competitive shares of world output and trade will add to global

competitiveness, which will expectedly add to global economic welfare.

Individually, no Member State of the EU could accomplish the job, as

Monnet taught us.


CHAPTER 2

Historical Progression of the European Union

2.1. European Union: an overview

In just a short half century, the European Union (EU) has emerged as a

paradigm of supranational, continent-based single economy with micro-

and macroeconomic parameters. The process began soon after World War

II. The initial steps that started with the Benelux Customs Union and the

European Coal and Steel Community (ECSC) of France and Germany in

1951 soon progressed to the European Economic Community (EEC) in

1957. A unique framework of Free Trade Area (FTA) came into existence.

Its success called for the Single Europe Act (SEA) in 1986, followed by the

Maastricht Treaty in 1992, whereby one common economy became one

single economy. The Amsterdam Treaty and the Treaty of Nice followed.

The EU-25 as of 2004 (and soon to be EU-27 in 2007) is the result of

enlargement of EU membership and follow-up changes to the Treaties; the

federation of the peoples of the continent of Europe has approached a

reality.

2.2. The post-WWII Europe

The overwhelming challenge of post-WWII Europe was recovering from

widespread death and devastation. To meet this challenge, the Organiza-

tion for European Economic Cooperation (OEEC) was established on

April 16, 1948 with its secretariat in Paris. OEEC membership consisting

of Austria, Belgium, Denmark, France, Greece, Iceland, Ireland, Italy,

Luxembourg, the Netherlands, Norway, Portugal, Sweden, Switzerland,

Turkey, UK, West Germany, plus several occupation zones and the Anglo-

American Free Territory of Trieste, was strictly limited to European

countries and did not include the USA. (Trieste has since been returned to

Italian sovereignty.)

An executive committee of seven was charged with the administration

of the OEEC. The principle of consensus became the rule and all decisions

required unanimity. George C. Marshall, the then US Secretary of State, at

his now-famous lecture at Harvard University on June 5, 1947, outlined

the Marshall Plan for an American aid program for European recovery.

Secretary Marshall spoke of the enormity of the crisis relative to ‘‘the

rehabilitation of Europe, the physical loss of life, the visible destruction of

cities, factories, mines and railroads’’ and ‘‘the dislocation of the entire

fabric of European economy.’’ He persuaded America to act and the

Marshall Plan was soon approved. For its optimum functioning, the

OEEC elected to adopt the following principles:

� to promote cooperation among the participating countries;� to develop intra-European trade by reducing tariffs and other barriers;� to study the feasibility of creating a customs union or a FTA;� to study the multilateralization of payments; and� to achieve conditions for better utilization of labor.

The OEEC was charged with the responsibility of developing the Euro-

pean Recovery Program which would administer the US aid under the

Marshall Plan and its effective allocation. The equitable distribution of US

aid toward proper European economic integration became an issue of

debate. In the autumn of 1949, the Americans became increasingly frus-

trated with the operational aspects of the Marshall Plan. The European

Payments Union (EPU) set up under OEEC in September 1950 had made

little progress. Efforts to remove inconvertibility of the European curren-

cies and quantity restrictions and to suppress bilateral commercial prac-

tices remained unsuccessful. The EPU was dissolved on December 27, 1958

when the currencies became convertible with the US dollar.

The crisis took a serious turn in 1952. The OEEC became unable to

function properly because the Marshall Plan was unexpectedly ended when

American emphasis shifted to mutual security, bringing the continent of

Europe under the American-led defense umbrella, the North Atlantic

Treaty Organization (NATO). NATO continues to function and its mem-

bership as of 2006 includes Belgium, Bulgaria, Canada, the Czech Repub-

lic, Denmark, Estonia, France, Germany, Greece, Hungary, Iceland, Italy,

Latvia, Lithuania, Luxembourg, the Netherlands, Norway, Poland, Por-

tugal, Romania, Slovakia, Slovenia, Spain, Turkey, the United Kingdom,

and the United States.

At a convention of 20 countries on December 14, 1960, the Organization

for Economic Cooperation and Development (OECD) with the USA in a

leadership position was constituted. In September 1961, the OEEC ceased to

exist and the OECD assumed the role of overseeing economic cooperation

and development. The OECD continues to function with its head office in

Paris. As of 2006, it has become a global forum for 30 countries from North

America, Europe, Asia, and Oceania with a broad-based agenda for eco-

nomic and social development. The OECDmember countries are: Australia,

Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France,

Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxem-

bourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal,

Slovakia, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and

the United States. With approximately a third of the OECD’s Gross


Domestic Product (GDP), the US plays a leading role and Japan with its

share of a little more than 10 percent of OECD’s GDP is the next in

rank.

Table 2.1 presents OECD’s geographic membership distribution. From

North America are the USA, Canada, and Mexico. Australia and New

Zealand are from Oceania. Other than Norway, Iceland, Switzerland, and

Turkey, the remaining 19 European OECD members, Austria, Belgium,

Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary,

Ireland, Italy, Luxembourg, the Netherlands, Poland, Portugal, Slovakia,

Spain, Sweden, and the United Kingdom, are concurrently members of the

EU. Cyprus, Estonia, Latvia, Lithuania, Malta, and Slovenia are part of

the EU-25 but are not part of OECD. In general, OECD membership has

been limited to selected richer countries and there is no membership from

Africa, South America, or the Middle East. Asian membership is all too

limited, Japan being a founding member and Korea being admitted in

1996. Indeed, the OECD is a club of the richer nations of the world.

Membership to the EU is of course restricted to the continent of Europe,

and it presents a unique economic paradigm of integrating erstwhile sov-

ereign nation-state economies of Europe into one continental economy with

emphasis on oneness of Europe (see Chapter 3). The OECD and the EU

have been engaged in undertaking active joint research on issues of mutual

concern.

2.3. Process of deepening and widening

As the post-WWII economic recovery progressed in Europe, the countries

in Western Europe faced a new challenge. Individually, as Monnet argued,

each European economy was unable to do what was to be done for the

optimum economic prosperity of their respective peoples. With a rich

endowment of human capital, industrial know-how, and substantive eco-

nomic cooperation and aid from USA, the reconstruction of the war-

ravaged European economies was soon accomplished. Indeed, this process

of deepening the economies based on physical capital per unit of labor

became a reality. There was a great need to widen the markets for further

growth of each economy. The economies of Europe, relatively labor-scarce

and capital-intensive, needed widening of the market to secure the supply

Table 2.1. OECD geographic membership distribution

Europe North America Asia Oceania

23 3 2 2

Note: Turkey is included in Europe, even though most of Turkey is on

the continental map of Asia.

Source: OECD.

Historical Progression of the European Union 33

of more raw materials and labor and also to find new markets for their

mass-produced manufactures as the economic system warranted larger

scales of production.

The pre-WWII model of imperialism was no longer an option. The

remote colonies of imperial powers revolted as macroeconomic policies

were dictated by the Home government of each imperial power. The Home

governments set up the tax policies of their respective colonies and the

Central Banks of the imperial countries managed the colonial monetary

policies. The colonies recognized that economic gains were not evenly

shared by the peoples of the colonies, and the tilt in favor of the people in

the home country of an imperial power became notable. The proclamation

came loud and clear: No taxation without representation! Soon the cost of

maintaining an empire became much too much, and the net gain for the

imperial power became questionable. The imperial model collapsed under

its own burden. The search for an economic regime to integrate the pro-

cesses of deepening and widening across the continent of Europe began.

It would have to be different from the imperial framework of political

supremacy over remote colonies in distant continents.

The search for an option followed. Jacob Viner’s (1950) Treatise on

Customs Union drew much attention. The customs union, a group of sov-

ereign nation-state economies with a common external tariff and free flow of

trade, investment, and labor within the group, became the message. As early

as 1921, Belgium and Luxembourg instituted an economic union. Following

the London Customs Convention in September 1944, the Benelux Customs

Union brought together Belgium, Luxembourg and the Netherlands in a

compact in 1948, and free trade among them without any tariffs became

operational. Obviously, the unit cost of goods and services in trade, exempt

from custom duties, became cheaper and trade grew, contributing to the

growth of income of the peoples. The concept of Customs Union survived

the economists’ debate of whether it resulted in a net trade gain or just a

trade substitution (Abrego et al., 2001, 2005). On February 3, 1958, the

Treaty of Benelux Economic Union was signed, and became operative in

1960. The Customs Union and then the Economic Union of the Benelux

countries had only a limited effect, simply because the three economies

together were of very small dimension in terms of their shares of Europe’s

total output and trade. However, their actions led the European integration

movement. In 1951, France, Germany, and Italy entered into a cooperative

agreement on coal and steel with the Benelux nations.

2.4. Toward the European Union

The movement toward EU progressed through successive stages. The

Hague Congress, with delegates from 20 European countries, on May

7–11, 1948, proposed a European Assembly. The Council of Europe was

set up on January 27–28, 1949 with its head office in Strasbourg, France.


The Council of Europe is the oldest political organization of the continent

with a continent-wide program anchored to the core values of human

rights, parliamentary democracy, and the rule of law. The Committee of

Ministers consists of each of the 46 nations’ Foreign Minister or their

designated representative and became the Council’s decision-making au-

thority (see Table 2.2). It has granted observer status to the USA, Japan,

Mexico, Israel, and Canada. The Council, a pan-European body, must be

distinguished from the EU. Turkey earned its place in the Council of

Europe, and is a candidate country for EU membership. Geographically,

Turkey’s belonging to Europe is marginal but the history of the Ottoman

Empire and Turkish rule over much of Europe remains a fact. In modern

times, Turkey provides a deep access to the Mediterranean Sea and the

Middle East, sharing a common border with Iran, Iraq, and Syria.

On May 9, 1950, Robert Schuman, then French Minister for Foreign

Affairs, gave a speech on Monnet’s concept of one Europe and urged for

broader economic cooperation of France and Germany with their Euro-

pean neighbors. On May 9, 1950, Franco-German joint undertaking for

coal and steel production was placed under a common High Authority, a

legal entity, functioning with an Assembly, a Council of Ministers, and a

Table 2.2. The Council of Europe: 46 Member States

Albania Liechtenstein

Andorra Lithuania

Armenia Luxembourg

Austria Malta

Azerbaijan Moldova

Belgium Monaco

Bosnia-Herzegovina The Netherlands

Bulgaria Norway

Croatia Poland

Cyprus Portugal

Czech Republic Romania

Denmark Russian Federation

Estonia San Marino

Finland Serbia and Montenegroa

France Slovakia

Georgia Slovenia

Germany Spain

Greece Sweden

Hungary Switzerland

Iceland The former Yugoslav Republic of Macedonia

Ireland Turkey

Italy Ukraine

Latvia United Kingdom

Source: http://www.coe.int/T/e/Com/about_coe/.aIn May 2006, Montenegro voted to secede from Serbia.


http://www.coe.int/T/e/Com/about_coe/.

Court of Justice. A supranational institution with its legislative, executive,

and judicial branches came into existence.

On April 18, 1951, the ECSC brought together Germany, France, and

Italy with the three Benelux countries for cooperation on the two specific

commodities and the agreement became operational on July 23, 1952. This

became the initiation of the broader economic union of Europe. From the

Treaty of ECSC (1951) to the Treaty of Nice (2001), some 16 treaties were

enacted to create the EU that exists today (see Table 2.3).

On June 1–2, 1955, the Foreign Ministers of the six countries elected to

extend the two-commodity-specific agreement to the economy as a whole.

On March 25, 1957, at a meeting in Rome, the six countries signed the

Treaty of Rome and formally established the EEC and the European

Atomic Energy Community (EURATOM). Both bodies became effective

on January 1, 1958. The six EEC Member States signed the Merger Treaty

that merged the executive bodies of the ECSC, the EEC, and Euratom, and

established a single Council and a single Commission in 1967. The EEC

was renamed the European Community (EC) in 1967, and then the EC

became the EU on November 1, 1993 following the signing of the Treaty

on European Union at Maastricht on February 7, 1992.

The emphasis on unanimous rule became the key. This principle of

consensus is known as the ‘‘Luxembourg compromise’’ of January 29, 1966.

At the Hague Summit on December 1–2, 1969, the leadership of the EEC

voted to expand European integration. The consensus principle became a

more significant factor as EU membership grew beyond a pre-established

limit. The 2002 vote for the accession of the AC-10 to the EU became a

subject of debate in Ireland. Even with the support of the Government of

Ireland, the Irish Parliament voted it down and a referendum was needed to

secure Ireland’s approval. The expansion to 25 Member States in May 2004

became a historic accomplishment. The EU’s European Council, meeting at

Copenhagen in 2002, affirmed Bulgaria and Romania to join EU mem-

bership in 2007.

Table 2.3. Key treaties of the EU

Treaty Date signed

The Treaty of Rome 1957

The Euratom Treaty 1957

Act of Accession and Adjustments 1972

One Europe Act 1986

The Maastricht Treaty 1992

The Amsterdam Treaty 1997

The Nice Treaty 2001

The European Constitution Treaty 2004

Note: For successive Treaties of Accession, see Table 2.4B.

Source: Compiled from various EU publications.


2.5. The Treaty of Rome

Germany and France earlier had agreed upon for limited cooperation relative

to the two specific commodities, coal and steel, and formed the ECSC. Italy

and the three Benelux countries joined soon after. In September 1957,

Belgium, France, Germany, Italy, Luxembourg, and the Netherlands, – the

six ECSC member countries, signed the Treaty of Rome in Rome. The

Treaty became effective on January 1, 1958 and the EEC was instituted.

The EEC took over the broader charge of an economic union. Signatories to

the Treaty of Rome proclaimed to lay the foundation of ‘‘an ever-closer

union of the peoples of Europe.’’

The EEC provided for:

(a) intraregional free flow of trade in goods and services without any cus-

toms, tariffs, quantitative restrictions, or any and all other measures of

restrictions;

(b) free flow of investment with coordinated actions for possible balance of

payments adjustments;

(c) freedom of movement of persons;

(d) a common agricultural policy covering agriculture and trade in agri-

cultural products – ‘‘the products of the soil, of stock-farming and of

fisheries and products of first-stage processing directly related to these

products’’;

(e) a common transportation policy;

(f) a European Social Fund to improve employment opportunities and

standard of living across the Member States;

(g) a European Investment Fund to lend funds to correct intraregional

structural imbalances; and

(h) a common EEC customs, tariff, and commercial policy toward the rest

of the world.

The EEC made a firm commitment to the principle of competition. The

community was not to be an exclusive fortress. Indeed, the EEC would

engage in global economic activities with open competition. The Treaty

went on to make detailed statements regarding specific subjects. Let us take

note of these two: free movement of labor and free trade in services. Sub-

ject to limitations justified on grounds of public policy, security, and

health, workers could accept employment and reside in a Member State of

their choice. Freedom of movement for labor, the Treaty further stated,

was to be secured by the end of the 12-year transitional period. Indeed, the

agenda was accomplished 18 months sooner. Trade in services included

those of (a) industrial and commercial character and (b) activities of

craftsmen and professionals.

Article 95 of the Treaty dealt with intra-EEC tax policy. A Member

State was required not to impose, directly or indirectly, internal taxation of


any kind on the products of other Member States in excess of what it

imposed on the products of its own. Any taxation on the products of other

Member States which might constitute an act of indirect protection for its

own products was also prohibited. The Member States were directed to

amend their respective laws as necessary for the implementation of the

Treaty. The Treaty stipulated that the common market was to be ‘‘pro-

gressively established’’ over a period of 12 years, divided into three stages

of four years.

The EEC’s unique paradigm of FTA was credited with successful eco-

nomic accomplishments. The first reduction of tariffs on intra-EEC trade of

manufactured goods by 10 percent became effective on January 1, 1959.

Successive 10 percent tariff reductions followed on June 1, 1960; January 1,

1961; January 1, 1962; July 1, 1962; January 1, 1963; January 1, 1965; January

1, 1966; and July 1, 1967. The process was completed on July 1, 1968, 18

months earlier than the given 12-year period of transition, and became a

subject of much attention. Intra-EEC tariffs were totally liquidated. The EEC

Common Market, as one integrated economic unit, adopted common cus-

toms duties in trade with the rest of the world as of July 1, 1968.

The Treaty spelled out the necessary administrative institutions. The

executive branch consisted of the Council and the Commission. The Euro-

pean Parliament is the legislative branch, and the Judiciary is led by the

Court of Justice. Seats in Parliament are allocated to Member States by

population. As of July 17, 1979, members are directly elected by universal

suffrage. In addition, an Economic and Social Committee was established

to assist the Council and the Commission in an advisory capacity. Re-

cently, the Committee of Regions has been formed (see also Table 2.5). The

EEC gave us the basic objectives of the supranational economic model of

one common economic unit mapped onto one common geographic region

with provisions for an intraregional governmental framework with legis-

lative, executive, and judicial institutions.

In Tables 2.4A and 2.4B, we present the historical progress of the EEC,

and its eventual transformation to the EU.

2.6. The Acts of Accession and Amendments to the Treaties

Three countries, Denmark, Ireland, and the UK, became candidates

for admission to the Community in 1969. Hence, the Act of Accession

and Amendments to the Treaties contracted earlier by the six original

members became a necessity. Indeed, the collective Accession Acts facil-

itated the expansion of the EEC from six original members to the EU-25 in

2004.

The Act of Accession, adopted on January 22, 1972, made the three

original treaties, the ECSC Treaty (1951), the Treaty of Rome (1957), and

the Euratom Treaty (1957), binding on the new entrants. Under the pro-

visions of the Act of Accession, the new Member States undertook to accept


Table 2.4A. Chronological list of key dates of the European Union

Treaty, agreement, or event Date

European Coal and Steel Community (ECSC) 18 April 1951

Effective 23 July 1952

Treaty of Rome 25 March 1957

Effective 1 January 1958

European Atomic Energy Community 25 March 1957


Common Agricultural Policy (CAP) 30 July 1962


Abolishment of customs and tariffs on industrial goods 31 December 1969

Effective (18 months ahead of schedule) 1 July 1968

Merger Treaty 8 April 1965


SNAKE Agreement 24 April 1972

Effective until 1 January 1979

Establishment of European Council procedures 9–10 Dec 1974

European Court of Auditors 22 July 1975

Effective 1 June 1977

European Monetary System 6–7 July 1978

Effective 13 March 1979

First direct election of European Parliament 7–10 June 1979

ESPIRIT Program 28 February 1984

Single Europe Act 17–28 February 1986


ERASMUS Program 15 June 1987

European Council on Economic and Monetary Union 9 December 1989

Schengen Agreement abolishes EEC border checks 19 June 1990

East and West Germany reunified 12 September 1990

Effective 3 October 1990

EMU Conferences in Rome 14 December 1990

Maastricht Treaty 7 February 1992

Effective 1 November 1993

Creation of the Single Market 1 January 1993

Amsterdam Treaty 2 October 1997

Effective 1 May 1999

Accession Process for AC-10, Turkey, Bulgaria, and Romania 30 March 1998

(Continued on next page)


all agreements or conventions concluded by the original Member States. The

new Member States also undertook to accept the protocols on the inter-

pretation of the conventions (Article 220 of the EEC Treaty) by the Court of

Justice, signed by the six original Member States. The new three were wel-

come to enter into negotiations with the original six to make necessary

adjustments to their respective economic systems. The EEC–FTA, without

customs, tariffs, and quantitative restrictions of any and all forms, became

the norm for all nine Member States. The period of transition for the new

three was to terminate at the end of 1977 as the Act stipulated. Provisions

were made to adjust the membership of all legislative, administrative, and

judicial institutions: the Assembly, the Council, the Commission, the Court

of Justice, the Economic and Social Committee, the ECSC Consultative

Committee, and the Scientific and Technical Committee related to the

Euratom Treaty. The Act determined the financial contributions the three

new Member States were to make. Five joint declarations covering (a) the

Court of Justice; (b) the UK’s Base Areas in Cyprus; (c) the fisheries sector;

Table 2.4A. (Continued )

Treaty, agreement, or event Date

Brussels European Council – 11 members will join Eurosystem 3 May 1998


Eurosystem under the European Central Bank 1 January 1999

Transition completed 1 January 2002

European Charter of Fundamental Rights 3–4 June 1999

Turkey recognized as a candidate country 10–11 December 1999

Greece joins Eurosystem 19–20 June 2000


Treaty of Nice 26 February 2001

Effective 1 February 2003

Laeken European Council calls for European Constitution 14–15 December 2001

End of dual currency circulation in Eurozone 28 February 2002

EU-15 ratifies Kyoto Protocol 31 May 2002

Seville European Council agreement on asylum and immigration

policy

21–22 June 2002

EU Draft Constitution completed 10 June 2003

Treaty on the EU Constitution signed 29 October 2004

Ratification Deadline 1 November 2006

Ratification Extension Deadline Mid-2007

Accession talks with Turkey and Croatia 16–17 December 2004

Source: http://europa.eu.int/abc/12lessons/key_dates_en.htm.


http://europa.eu.int/abc/12lessons/key_dates_en.htm.

(d) development of trade relations with Ceylon (Sri Lanka), India, Malaysia,

Pakistan, and Singapore; and (e) the free movement of workers across the

member countries also became a part of the protocol.

The objective of the Community, now expanded to nine Member States,

continued to be ‘‘an ever closer union among the peoples of Europe,’’ on the

foundations already laid by the original six. The instruments of the Act were

duly signed and sealed in Brussels on January 22, 1972, and became the

Treaty of the nineMember States, to be effective on January 1, 1973, provided

that instruments of ratification were deposited with the Government of the

Italian Republic by December 31, 1972.

Accession of other European Member States followed, becoming the

EU-15 by 1995 and in 2004, the EU-25 (see Table 1.1). The Act of Accession

of 1972 became an important document for progressive expansion of the

Community toward one Europe.

2.7. The Euratom Treaty

The EEC recognized the fact that conventional sources of energy were

limited, and agreed to explore nuclear energy for the industrial develop-

ment of the Member States as an option. The Treaty made specific pro-

visions for the development of atomic energy with proper safeguards

against potential environmental hazards and possible military use of the

enriched nuclear weapons. Nuclear energy was to be limited to civilian

purposes. No major changes have ever been made to the Euratom Treaty.

Table 2.4B. Treaties of Accession

Treaty Date

Accession of Denmark, Ireland, and the UK to EC 1 January 1972


Accession of Greece to EC 28 May 1979


Accession of Spain and Portugal to EC 6 December 1985


Accession of Austria, Finland, and Sweden to EU 24 June 1994


Accession of Cyprus, the Czech Republic, Estonia, Hungary,

Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia

23 April 2003

Effective 1 May 2004

Accession Treaty of Bulgaria and Romania 25 April 2005

Effective (following European Council decision) 1 January 2007

Source: http://europa.eu.int/abc/12lessons/key_dates_en.htm, http://www.eu2005.lu/en/

calendrier/2005/04/25bg-ro/index.html.


http://europa.eu.int/abc/12lessons/key_dates_en.htm

http://www.eu2005.lu/en/calendrier/2005/04/25bg-ro/index.html.

http://www.eu2005.lu/en/calendrier/2005/04/25bg-ro/index.html.

The specific tasks of EURATOM Committee are:

� to promote research and dissemination of technical information;� to establish uniform safety standards to protect the health of workers

and of the general public;� to facilitate investment and ensure the establishment of the basic infra-

structure to meet the potential demand of the Member States;� to ensure that all users in the EU receive a regular and equitable supply

of ores and nuclear fuels; and� to make certain that civil nuclear materials are not diverted to military

purposes.

Indeed, the Euratom safeguards are in conformity with the guidelines

developed by the International Atomic Energy Agency (IAEA).

2.8. The Single Europe Act

The Single Europe Act (SEA), signed in Luxembourg on February 17,

1986 and in The Hague on February 18, 1986, became effective on July 1,

1987. This was the first major revision of the Treaty of Rome and the

objective was to add new momentum to European integration. The EEC

became the EU, with more intra-EU institutional power. The focus was on

a common EU agenda for research and development, an EU-wide environ-

mental policy, and a common foreign policy. The SEA made necessary

amendments to the decision-making procedure within the EU Council and

added to the powers of the EU Commission and the European Parliament.

To facilitate the EU’s economic integration toward establishing a Single

Market, ‘‘an area without internal frontiers in which the free movement of

goods, persons, services, and capital is ensured,’’ the Council was permit-

ted to take qualified majority decisions, abandoning the principle of con-

sensus because Member States had often failed to be unanimous and

delayed decision making. However, unanimity continued to be the rule for

decisions relative to taxation, free movement of persons, and the rights and

interest of employed persons. The transition of the Common Market to a

Single Market as of January 1, 1993 was the end product of the SEA.

Successfully establishing an FTA in the 1960s, based on free flow of

trade and investment and freedom of movement of labor brought sub-

stantive economic prosperity for the households and business units of the

Community. This microeconomic framework of the EEC (Dutta, 2005)

soon came to face specific challenges: each member country continued to

exercise its sovereign right with respect to its independent monetary and

fiscal policies; variations in tax systems and budgetary policies distorted

optimal resource allocation among the Member States of the Community;

fluctuations of exchange rates became a corollary of independent money

and monetary policies of each sovereign Member State; free trade and free


movement of workers were major issues of concern. However the devel-

opment of a free flow of modern high-tech and large-scale investments

matured over a much longer time period, and these investments became

very much exposed to the risk of exchange rate fluctuations. Note that

investments across the borders within the EEC became critically important

because this would minimize the intracommunity income gaps by taking

jobs to the workers. Mass migration of workers was contained. The search

for a stable monetary zone followed.

Convergence of economic and monetary policies became imperative.

The now famous Snake Agreement of 1972 failed to provide intracommu-

nity monetary stability and was replaced by the European Monetary Sys-

tem (EMS) in 1979. The EMS in its varied forms became a learning process

for the Committee of Governors of the Central Banks. The Governors of

the Central Banks, working under the laws of the central bank of their

respective member countries, had to coordinate their monetary policies

toward intracommunity exchange rate stabilization, in the context of fiscal

policies formulated by the various sovereign member governments. How-

ever, they had no institutional mechanism for the joint enforcement of the

decisions taken by themselves. The Committee could hardly exercise mon-

etary authority which a common central bank of the EU could develop and

administer for the Community. The search for a zone of monetary stability

thus progressed to its next stage: in 1989, the European Monetary Union

(EMU) was established, and eventually the European Central Bank (ECB)

took charge of developing and managing the monetary policy for the

Eurozone on January 1, 1999 (see European Commission, 1989).

In addition, the EEC came to recognize the need for (a) economic and

social cohesion, (b) better intracommunity structural adjustment, (c) re-

search and technological development, and (d) environmental awareness.

Amendments to the Euratom Treaty of 1957 became necessary and one

common foreign policy for the EU was another issue of concern.

2.9. The Maastricht Treaty

The Maastricht Treaty, also called the Treaty of the European Union, was

signed on February 7, 1992 and became effective on November 1, 1993. Sig-

natories included Belgium, Denmark, Germany, Greece, Spain, France,

Ireland, Italy, Luxembourg, the Netherlands, Portugal, and the United King-

dom, plus Austria, Finland and Sweden who later joined the group of 15. The

Treaty resolved ‘‘to continue the process of creating an ever closer union among

the peoples of Europe.’’ The Community came to be named the EU (EU-15).

Article B of the Treaty warrants specific mention and we state it below.

‘‘The Union shall set itself the following objectives:

- to promote economic and social progress which is balanced and sustainable, in

particular through the creation of an area without internal frontiers, through the

strengthening of economic and social cohesion and through the establishment of


economic and monetary union, ultimately including a single currency in accordance

with the provisions of the Treaty;

- to assert its identity on the international scene, in particular through the implemen-

tation of a common foreign and security policy including the eventual framing of a

common defense policy, which might in time lead to a common defense;

- to strengthen the protection of the rights and interests of the nationals of its Member

States through the introduction of a citizenship of the Union;

- to develop close cooperation on justice and home affairs;

- to maintain in full the acquis communautaire and build on it with a view to consider,

through the procedure referred to in Article N (2), to what extent the policies and

forms of cooperation introduced by this Treaty may need to be revised with the aim of

ensuring the effectiveness of the mechanisms and the institutions of the Community.’’

The Treaty established a citizenship of the Union whereby a citizen of a

Member State automatically became a citizen of the Union with due privi-

leges and responsibilities. Freedom to move and reside in any part of the

Union territory was assured to all citizens, subject, however, to directives

and regulations, as may be in place for effective administrative reasons.

For intra-EU free flow of trade and investment, the harmonization of

relevant laws across the Member States became a necessity. The Treaty

provided for common rules on competition, taxation, and approximation

of laws. The Treaty continued the Community’s institutional structure

consisting of (a) a European Parliament, (b) a Council and a Commission,

(c) a Court of Justice, and (d) a Court of Auditors. Provisions were made

for a European System of Central Banks and an ECB (see Chapter 4).

To provide loan capital and issue guarantees for loan issuances for

intra-EU structural adjustments across the Member States, a European

Investment Bank (EIB) was established, having ‘‘a legal personality,’’ op-

erating on a not-for-profit basis, with membership of all Member States.

The Bank would work in cooperation with the European Fund and other

community financial institutions. A provision was also made for emer-

gency financial assistance for specific distress situations, ‘‘caused by ex-

ceptional occurrences beyond its control.’’ It is to be noted that for

economic issues, the EU thus came to assume the responsibility of a central

government for all its Member States. To ensure closer coordination of

economic policies and sustained convergence of economic performances,

Member States became subject to ‘‘multilateral surveillance.’’

The Treaty spelled out the objectives of common foreign and security

policy as follows:

- ‘‘to safeguard the common values, fundamental interests, and independence of the

Union;

- to strengthen the security of the Union and its Member States in all ways;

- to preserve peace and strengthen international security, in accordance with the prin-

ciples of the United Nations Charter as well as the principles of the Helsinki Final Act

and the objectives of the Paris Charter;


- to promote international cooperation;

- to develop and consolidate democracy and the rule of law, and respect for human

rights and fundamental freedoms’’ (Title V, Article J.1).

In addition, the Treaty made provisions for Social Policy, Education

and Vocational Training, Youth, Culture, Public Health, Consumer Pro-

tection, Trans-European Networks, Industrial Policy, Economic and So-

cial Cohesion, Research and Technological Development, Environment,

and Development Cooperation. The Treaty also made revisions to the

ECSC and the EURATOM.

The Maastricht Treaty provided specific guidelines for monetary and

fiscal policy parameters and warrants special attention. To follow the pol-

icy of balancing the budget would, of course, be optimal for a Member

State. The EU Council adopted reference points not to be exceeded by

Member States, a limit of 3 percent of GDP for the budget deficit and 60

percent of GDP for national debt. In the event that a Member State violated

these limits, the Council would make recommendations, but not make the

occurrence publicly known. In the absence of proper corrective response

from the concerned Member State, the EIB and the EU Parliament would

be notified and the recommendations made by the Council would be made

public.

The maintenance of price stability is the core of the monetary policy

and the EU central banking system must adhere to a noninflationary pol-

icy. The Treaty (Article 109j) stipulated that the rate of inflation in a

Member State could be no more than 1.5 percent above the average of the

three best performing Member States in terms of price stability. The quan-

tity of money supply was thus made subject to a reference.

The Maastricht Treaty provided for a three-stage move toward a single

currency: the liberalization of the movement of capital began on January 1,

1990; convergence of Member States’ economic policies commenced on

January 1, 1994; a single currency under one common central bank, the

ECB, was inaugurated on January 1, 1999. Admission to the membership

of the single-currency group, the Treaty stipulated, was to be subject to a

member country’s ability to conform to the stated provisions of fiscal and

monetary stability.

2.10. The Treaty of Amsterdam

Following 15 months of intensive deliberations at a series of European

Council meetings in Florence, Dublin, and Noordwijk from 1996 to 1997,

a consensus emerged regarding the necessary revisions to the Maastricht

Treaty. The Treaty of Amsterdam was signed by all 15 EU members on

October 2, 1997 and became effective on May 1, 1999.

Necessary amendments to all earlier treaties of the Union (EU, EC, EEC,

ECSC) became a formal part of the Treaty. Commitment to the concept of


fundamental social rights as defined in the 1961 European Social Charter

and the 1989 Community Charter of the Fundamental Social Rights of

Workers also became a part of the Treaty. The focus on an ever closer union

of the peoples of Europe was reiterated with an emphasis on transparency so

that all EU decisions are made ‘‘as openly as possible and as closely as

possible to the citizen’’ (Part 1, Article 1 of the Treaty). The EU Council’s

earlier decision for the election of representatives to the European Parlia-

ment by direct universal suffrage was appended to the Treaty.

The Treaty underscored the need for a common defense toward the

implementation of the agenda of a common foreign and security policy for

the EU, with the provision that the European Council would define ‘‘the

principles of and general guidelines for such a common policy.’’ The role of

NATO and its membership for some EU members came to be an impor-

tant issue in this regard. The Treaty goes on to state that the President of

the EU will be in charge of all matters relating to common foreign and

security policy and have the full cooperation of all EU Member States.

Status of the EU member states serving on the United Nations (UN)

Security Council, permanent or otherwise, was taken note of. Does this

imply that these members will be allowed to act in that capacity inde-

pendent of their obligations to the EU? The Amsterdam Treaty sought to

restructure the EU so that it could face the challenges relative to (a) rapid

changes in the international state of affairs, (b) globalization of the eco-

nomy, (c) the fight against terrorism, (d) international crime and drug

trafficking, and (e) ecological issues.

For the protection of freedom of the peoples, the Treaty provided for a

common EU citizenship with clarifications of the link between national

and European citizenship. The Treaty referred to the effectiveness of intra-

EU free movement of people when appropriate measures were taken with

respect to external border controls, asylum, and immigration.

The Amsterdam Treaty endorsed enlargement of the EU, limiting the

total to 20 member countries, and stated the specific provision that ‘‘at

least one year before the membership of the EU exceeds twenty, a con-

ference of representatives of the governments of the Member States shall

be convened in order to carry out a comprehensive review of the provisions

of the Treaties on the composition and functioning of the institutions.’’

2.11. The Treaty of Nice

The Treaty of Nice was signed on February 26, 2001. After being ratified

by all 15 Member States, it became effective on February 1, 2003. The EU

Council meetings in 1999 in Cologne and Helsinki, and an intergovern-

mental conference and the Fiera Council meeting in 2000, contributed to

the Treaty of Nice. As usual, necessary amendments to all prior treaties

became a part of the new Treaty. The Treaty of Nice also dealt with the

protocol on enlargement of the EU.


The Treaty of Nice addressed the four key areas:

� size and composition of the Commission;� weighting of votes in the Council;� extension of qualified majority voting; and� enhanced cooperation.

The new weighting of the votes in the EU Council was in favor of the

more populous Member States. Consequently, a redistribution of votes

among the 25 members came to be in place. The change in the composition

of the EU Commission increased the power of the President and redefined

the procedure of nomination for the office of the President. For the ju-

diciary, reorganization followed because of a growing number of legal

issues that needed to be attended to. Cases were divided between the Court

of Justice and the Court of First Instance. A provision was made for the

creation of special judicial chambers. The EU Parliament provided for the

extension of membership and adjustment of seats to current and future

members. Provisions were made for the composition and nomination of a

member to the Court of Auditors, the European Economic and Social

Committee, and the Committee of Regions.

The Treaty of Accession soon followed and was signed in Athens on

April 16, 2003, admitting 10 new members to the EU, to be effective on

May 1, 2004. With the increase in the membership of the EU, the need for

possible action against a Member State in default of its commitment to its

obligations of EU membership was noted and a provision was conse-

quently made. On a proposal by the European Parliament, the Commis-

sion, or one-third of the Member States, the Council, acting by a four-fifths

majority after obtaining the assent of the European Parliament, may de-

termine the case of a serious breach of EU principle by a Member State.

Provisions were also made for the Member State in question to present its

own defense to the appropriate authority.

Under the umbrella program of the EU’s common defense and security

policy, the Treaty of Nice provided for the establishment of a Political and

Security Committee to monitor the international situation. The High Rep-

resentative for the common foreign and security policy shall have the re-

sponsibility to keep the European Parliament and all members of the

Council fully advised on issues of concern.

The Treaty of Nice has placed much focus on ‘‘enhanced cooperation’’

among EU Member States, enabling as many of them as possible to take

part in a specific program, with the EU Commission extending helpful

cooperation. The Treaty also adds stipulations for the work environment,

workers’ health and safety, social security and social protection of workers,

representation and collective defense of workers and employers, nondis-

crimination or any policy of social exclusion, and conditions of employ-

ment for third-country nationals legally residing in the EU territory.


A shared commitment to peace, stability, and economic prosperity in

the continent of Europe remains the core of the EU objectives. To be more

specific, they are:

� to ensure peace and political stability throughout the continent;� to secure greater prosperity for Europe’ citizens by extending the Euro-

pean socioeconomic model and the Eurozone, while at the same time

protecting the environment;� to further democracy through the compliance of the EU’s Charter of

Fundamental Rights;� to reinforce Europe’s role internationally, particularly in trade matters;

and� to ensure cultural enrichment.

2.12. The EU government

Table 2.5 offers a presentation of institutions related to all three branches

of the EU government. Also, special functional institutions are listed.

2.12.1. The European Parliament

The European Parliament shall be elected by direct universal suffrage by

the citizens of the Union for a five-year term. The number of members of

the European Parliament shall not exceed 732 (Table 2.6). Members of

Parliament will exercise their legislative duties in individual capacity with

no binding commitment to any instructions from any other bodies. The

Parliament shall have legislative duties and exercise political supervision

over the Commission with authority to pass a motion of censure requiring

Table 2.5. The EU administrative structure

Legislative Parliament

Executive Council

Commission

Judiciary Court of Justice

Special functional institutions Euratom Committee

Court of Auditors

Economic and Social Committee

European Investment Bank

European Monetary Fund

Committee of Regions

Source: Treaty of Nice.


the members of the Commission to resign as a body. Parliament will make

decisions by a majority vote unless otherwise specified.

2.12.2. The Council

The European Council consists of the Heads of State or Government of the

Member States. The Council will appoint a President who will be respon-

sible for ensuring ‘‘the coherence of the European Council’s work and raise

its profile without jeopardizing the institutional balance within the Union.’’

The European Council consists of the Heads of States or Governments

of the Member States of the EU and constitutes its highest executive au-

thority. The functions of the Council are broadly defined; two of note are

to formulate recommendations in the field of cooperation, and to periodi-

cally inform the Parliament of its activities and answering written or oral

questions raised by members of the Parliament. The Council shall vote by a

simple majority of weighted votes cast.

Table 2.6. The European Parliament

Member States Seats Total

Austria 17

Belgium 22

Cyprus 6

Czech Republic 20

Denmark 13

Estonia 6

Finland 13

France 72

Germany 99

Greece 22

Hungary 20

Ireland 12

Italy 72

Latvia 8

Lithuania 12

Luxembourg 6

Malta 5

The Netherlands 25

Poland 50

Portugal 22

Slovakia 13

Slovenia 7

Spain 50

Sweden 18

United Kingdom 72 682

Bulgaria 17

Romania 33 732



The Council shall meet in two different, subject-based configurations: the

General Affairs Council and the Foreign Affairs Council. The Foreign Affairs

Council will be chaired by the Minister for Foreign Affairs. The President of

the Council is assigned to chair the General Affairs Council, which is re-

sponsible for consistent performance of the EU agenda. As and when the

Council deliberates and votes on draft legislation, it is required to meet in

public. The proposal to set up a separate Legislative Council was abandoned.

The Council has been given well-specified assignments:

� to provide the Union with the necessary impetus for its development,

defining the general political directions and priorities thereof;� to act on issues of ‘‘more constitutional nature,’’ such as the composition

of the European Parliament; and� to nominate and appoint the President of the Commission.

The Council does not exercise any legislative function. However, the

Council can be called upon to debate a legislative act. The Council of

Ministers shall consist of the representatives of the Member States at the

ministerial level and adopts all laws, in most cases, jointly with European

Parliament. When the recently drafted EU Constitution is adopted, the

European Parliament will assume specific legislative authority.

The Presidency of the Council of all configurations other than Foreign

Affairs, will be held by Member State representatives following the prin-

ciple of ‘‘equal rotation.’’ However, once the European Constitution has

been adopted, the Presidency will be elected by qualified majority for a 30-

month tenure, renewable only once. The European Council can remove the

President for ‘‘serious misconduct’’ or inability to perform the duties of the

office. The President may not concurrently hold a national mandate. This

will preclude incumbent Heads of Member States and governments from

accepting the office.

The weighting of votes in the Council, the composition of the Economic

and Social Committee, and the composition of the Committee of Regions

will follow the weights noted in Table 2.7.

Note that to be adopted, Acts of the Council shall require at least 258

votes, cast by a majority of the members, where the Treaty requires them to

be adopted on a proposal from the Commission. In other cases, acts of the

Council shall require at least 258 votes cast by at least two-thirds of the

members to be adopted.

The Council, meeting in the composition of Heads of State or Government

and acting by a qualified majority, shall nominate the President of the Com-

mission, and the appointment will be subject to the approval of the European

Parliament. The Council acting by a qualified majority and with accord with

the nominee for President shall propose the list of other candidates for Mem-

bers of the Commission. The nominees will be in accordance with the pro-

posals of each Member State. The President and other Members of the


Commission thus nominated, as a body, shall be subject to the approval by the

European Parliament. Following Parliament’s approval, the Council, acting

by a qualified majority, shall appoint the President and Members of the

Commission. The President will serve as the Chief Executive, allocating port-

folios to other members. The President shall appoint a Vice President from

among the Commission Members. Members will serve at the pleasure of the

President and will resign if so requested by the President.

The Council, acting unanimously, may alter the number of its members.

Indeed, the plan is to reduce the number of members as of 2014. At that

time, the Council will select Commissioners according to a system of ro-

tation between Member States unanimously decided upon. The Council is

required to follow the following principles:

� Member States shall be treated on ‘‘a strictly equal footing;’’ and� each successive Commission will reflect ‘‘satisfactorily the demographic

and geographical range of all the Member States.’’

Table 2.7. The weighting of votes in the Council

Members of the Council Weighted votes Total

Austria 10

Belgium 12

Cyprus 4

Czech Republic 12

Denmark 7

Estonia 4

Finland 7

France 29

Germany 29

Greece 12

Hungary 12

Ireland 7

Italy 29

Latvia 4

Lithuania 7

Luxembourg 4

Malta 3

The Netherlands 13

Poland 27

Portugal 12

Slovakia 7

Slovenia 4

Spain 27

Sweden 10


Bulgaria 10

Romania 14 345



2.12.3. The Commission

General competence and independence beyond doubt is the basis for the

appointment of Commission members. The present Commission includes

one national of each of the Member States and is headed by a President.

The Commission has a Minister of Foreign Affairs, who assumes the duties

of the High Representative for the Common Foreign and Security Policy

and the Commissioner for External Affairs, as well as some of the func-

tions in the area of external affairs, currently performed by the Council

Presidency, and reports to both the Council and the Commission.

2.12.4. General Secretariat

The Council shall be assisted by a General Secretariat, headed by a Sec-

retary General and a Deputy Secretary General, who will be appointed by

the Council by a qualified majority.

2.12.5. Judiciary

The Judiciary consisting of the Court of Justice, the Court of First In-

stance, and the Judicial Panel, was further elaborated by the Treaty: The

Court of Justice shall consist of one judge from each Member State, chosen

from the list of qualified persons ‘‘whose independence is beyond doubt.’’

The Court will be assisted by eight Advocates General. Should the Court

so request, the Council, acting unanimously, may increase the number of

Advocates General. The Court of First Instance shall comprise of one

judge from each Member State, from amongst those qualified persons

whose independence is beyond doubt. Both the Court of Justice and The

Court of First Instance will appoint a Registrar and lay down their re-

spective rules of governance. The Treaty also states specific guidelines for

appointment of judicial panels, should there be an occasion.

2.12.6. Functional institutional bodies

The EU shall have the following functional institutional bodies:

� The Court of Auditors� The EIB� The Economic and Social Committee� The European Monetary Fund

All rules or conditions relative to the taxation of current or former Mem-

ber States shall require unanimity within the Council.

The Court of Auditors shall examine the accounts of revenues and

expenditures and provide the European Parliament and the Council with a

statement of proper accounting. Auditors are appointed for a term of six

years, and their appointments are renewable. Auditors will appoint one


from among themselves to act as the President of the Court of Auditors for

a three-year renewable tenure. The Council, acting by a qualified majority

after consulting the European Parliament, shall adopt the list of Auditors,

which will be in accordance with the proposals made by each Member

State. The Court of Auditors shall draw up its rules of procedure, subject

to the approval of the Council acting by a qualified majority. The EIB with

the Member States as its constituent members will function as a legal

entity. The European Monetary Fund is an organization in which EU

Member States deposit reserves dedicated toward stabilizing exchange

rates within the EU.

2.12.7. Three special advisory committees

The EU has appointed three specific function-oriented advisory commit-

tees, as discussed earlier. Following the enlargement of membership of the

Table 2.8. Seat allocation of the Economic and

Social Committee and the Committee of Regions

Member States Seats Total

Austria 12

Belgium 12

Cyprus 6

Czech Republic 12

Denmark 9

Estonia 7

Finland 9

France 24

Germany 24

Greece 12

Hungary 12

Ireland 9

Italy 24

Latvia 7

Lithuania 7

Luxembourg 6

Malta 5

The Netherlands 12

Poland 21

Portugal 12

Slovakia 9

Slovenia 7

Spain 21

Sweden 12


Bulgaria 12

Romania 15 344



EU to 25 members in May 2004 (expected to become 27 in 2007), the

Economic and Social Committee and the Committee of the Regions have

been expanded, each with same number of members with limitation at 350

members as shown in Table 2.8.

2.12.8. The EURATOM Committee

For the 2004–2009 term beginning January 1, 2004, EURATOM Com-

mittee will have membership distributions as seen in Table 2.9.

2.13. On to the European family

The political integration of the EU is yet to come. The EU Constitution

remains to be adopted (see Chapter 5). The then British Prime Minister,

Winston Churchill, in his Zurich University lecture on September 19, 1946,

spoke eloquently: ‘‘It is to recreate the European Familyy to provide it

with a structure under which it can dwell in peace, in safety and in freedom.

We must build a kind of United States of Europe.’’ The Prime Minister

urged for ‘‘a partnership between Germany and France.’’ This was to be a

strategic program to keep Europe from experiencing the horrors of a third

world war. However, as economic integration of Europe progressed, the

emergence of one single continental economy became a more engaging

issue. Indeed, it is what the post-WWII Europe longed for. A theoretical

analysis of a supranational macroeconomy remains to be explored.

Table 2.9. The EURATOM Committee membership

Member States Number of representatives

to be elected

Weights where the

Committee is to act by

qualified majority

Austria 17 10

Belgium 22 12

Denmark 13 7

Finland 13 7

France 72 29

Germany 99 29

Greece 22 12

Ireland 12 7

Italy 72 29

Luxembourg 6 4

The Netherlands 25 13

Portugal 22 12

Spain 50 27

Sweden 18 10




CHAPTER 3

The Theory of Supranational Macroeconomics

3.1. Macroeconomic theory, theory of growth and business cycles

John Maynard Keynes’ (1936) The General Theory of Employment, Interest

and Money gave us the macroeconomic theory for an economy of a sov-

ereign nation-state. Concerned students of macroeconomics may study

earlier works. Did Karl Marx’s Das Kapital and, the Physiocrats’ A Tab-

leau Economique, offer to teach us some aspects of macroeconomics? One

may venture to suggest that The Arthashatra by Kautilya, written in San-

skrit some 2,000 years ago, was an ancient treatise on macroeconomics.

The Keynesian Revolution by Lawrence R. Klein (1947) presents a syn-

thetic exposition of Keynes’ General Theory by a simultaneous system of

behavioral equations, integrating the real and monetary sectors of the

economy with a static production function. Necessary definitional equa-

tions complete the system. The system includes a function for the aggregate

level of money demand, but assumes that the aggregate stock of money

supply was given.

Sði;Y Þ ¼ Iði;Y Þ

Mdði;Y Þ ¼ Ms where Ms is given

Q ¼ f ðN;KÞ where K is given

Y ¼ C þ S ¼ C þ I ; it follows that S ¼ I

where Y is the aggregate level of income; S the aggregate level of savings; I

the aggregate level of investment; i the rate of interest; Q the aggregate level

of output; K the aggregate stock of (physical) capital; N the aggregate

stock of labor; Md the aggregate stock of money demanded; and Ms the

aggregate of stock of money supplied, assumed given.

The model assumes that government expenditure (G) is determined by

nonmarket factors. For simplicity, it is also assumed that the economy is

closed, hence variables such as exports (X) and imports (M) are not in-

cluded in the definitional equation of aggregate level of income (Y). As-

suming price stability, or P ¼ 1, and the accounting identity, PQ�Y, we

can say Q�Y.

The Harrod–Domar model, in its multiplier-accelerator formulation,

presented a much referred-to extension of the Keynesian model to its

dynamic analysis and we learnt the growth model based on the capital–

output and savings–income ratios. The exposition taught us that the aggre-

gate level of income at the current time period is a function of the aggregate

level of income of the previous time period factored by the capital–output

ratio divided by the capital–output ratio minus the savings–income ratio.

The model defines the savings–income ratio and capital–income ratio as

follows:

S ¼ aY t

K ¼ bY t

Given the accounting identity Kt–Kt�1�It, and S ¼ I from the simple

model, C+S ¼ C+I ¼ Y,

bðY t � Y t�1Þ ¼ I t

It follows,

aY t ¼ bðY t � Y t�1Þ

or; aY t � bY t ¼ �bY t�1

or; Y tðb� aÞ ¼ bY t�1

or; Y t ¼ ðb=b� aÞY t�1

Klein added the capital–labor ratio, money–output ratio, and income

distribution ratio to present a growth model based on a set of five ratios. The

exercises in business cycle models have also been familiar (see Kalecki, 1935;

Tinbergen, 1939; Kaldor, 1940; Metzler, 1941; Domar, 1946; Samuelson,

1947, 1962; Klein, 1950, 1953, 1962; Goodwin, 1955; Robinson, 1956; Kahn,

1959; Klein et al., 1961; Kaldor and Mirrlees, 1962; Hahn and Mathews,

1964).

We have been taught that nation-states are accidents of history. They

vary in area, population, and endowment of natural resources, as well as

economic dimensions, defined by gross domestic product (GDP) (see also

Tinbergen, 1939; Klein, 1950; Klein et al., 1961). The lessons continue to

remain limited to a mature industrialized sovereign nation-state economy,

often referred to as a viable economy. The individual member economies of

the EU-15 in Western and Central Europe have been viable economies,

and thus were able to recover from the devastation of World War II rel-

atively quickly. Individually, each of these economies was ready to exper-

iment with macroeconomic model specifications inclusive of growth and

cyclical fluctuation patterns. Several of them constructed large-scale

econometric models. The dimensions of these economies as defined by

their respective shares of world output and trade have not been compet-

itively large and the European Union (EU) member economies were


challenged to explore a model that would be economically competitive in

the world market.

The EU is in the process of evolution. Its economic integration remains

to be supported by its political integration. During the transition period,

ad hoc arrangements will continue to be critically important. The macro-

economic theory as we have briefly reviewed above will of course be valid

for the EU. We proceed to evaluate the theory of competition in the global

market and its impact on the emergence of the EU. Indeed, continental

regionalization may be the optimum option following the historic collapse

of the imperial model.

3.2. Industrialization and internationalization: the imperial model

Industrialization and internationalization became an interactive historic

process. Let us begin with the simple Cobb–Douglass production function

and state that aggregate level of output (Q) is a nonlinear function of the

aggregate stock of capital (K ) and aggregate stock of labor (N ). The

function is stated as follows:

Q ¼ f 1ðN ;KÞ

Dividing both sides by K, we obtain,

Q=K ¼ f 2ðN=KÞ

Rewriting this, we have a capital–output ratio as a function of the capital–

labor ratio

K=Q ¼ f 3ðK=NÞ

As industrialization progresses, the production mode of the economy

will have more capital (K ) per unit of labor (N ), making each unit of

output (Q) more capital-intensive, evident in terms of better product qual-

ity as measured by consumer acceptance. As the capital–labor ratio (K/N)

increases, marginal physical productivity of labor (MPPn) increases, and so

does the wage rate. The economy’s income increases, with consequent in-

creases in savings; the savings–income ratio moves up. Increased savings

contribute to increased investment, and then to an increase in the capital

stock (K ). Given the definitional relationship, aggregate stock of capital

(K ) at the current time period minus aggregate stock of capital (K ) at the

previous time period is identically equal to aggregate level of investment (I )

for the current period, K t � K t�1 � I t. The capital-intensive production

mode induces large-scale production, which helps minimize the unit cost of

production and maximize the profit income.

Industrialization initiates a unique process where the economy’s capital

–labor ratio, capital–output ratio, and savings–income ratio move up. Given

the factors of price stability and optimum income distribution, the economy

experiences a high rate of growth. The labor force available in a given

The Theory of Supranational Macroeconomics 57

economy is limited, as is its endowment of natural resources. To sustain the

high rate of growth, the industrialized economy must seek out external mar-

kets to serve as additional sources of supply of labor and natural resources.

The foreign economies will eventually become an overseas market for the

specific economy’s industrial output.

This familiar history unfolded as the Industrial Revolution in Europe

progressed. Many industrialized European countries were prompted to es-

tablish imperial regimes of varying dimensions. We have discussed earlier

that the imperial model collapsed under its own weight as the model failed to

share its economic prosperity equitably among the peoples of an imperial

mother country and those of her colonies. Liquidation of the empires, big or

small, became a reality. The imperial model was anchored to the concept of

a superpower presiding over one or more colonial economies with authority

to take unilateral macroeconomic actions by specified monetary and fiscal

legislations. Indeed, imperialism and unilateralism became the modus ope-

randi of any given superpower regime. The colonies successively revolted

and their declarations of independence were embodied in the proclamation,

‘‘No taxation without representation!’’ (see Chapter 1).

3.3. The EU: a supranational macroeconomy

The EU offers an unprecedented economic structure. Never before had

several sovereign nation-state economies as advanced and industrialized as

these were voluntarily surrendered their economic sovereignty and become

one single integrated continental economy. The EU began with the six

economies in Central and Western Europe and progressed to the 15 mem-

bers in 1995, 25 members in 2004, and is on track to be the EU-27 in 2007.

In the process, the concept of traditional sovereignty has been critically

revisited. Member economies of the EU have accepted divisibility of their

sovereignty, economic and political. Twelve of them have adopted one

currency, the euro, under one common central bank, the European Central

Bank (ECB). The 10 new members have offered to join the Eurosystem,

subject to their ability to meet the necessary conditions outlined in the

Maastricht Treaty. Three members, the UK, Denmark, and Sweden, con-

tinue to resist acceptance of the common currency. Even so, they have

accepted one common membership to the World Trade Organization

(WTO) with one single vote. The EU has accepted the condition that no

member economy of the EU will be exempt from one common trade policy

with respect to the rest of the world. The UK’s insistence for special privi-

leges for their former colonies, now members of the Commonwealth, was

met with total rejection.

Member States belonging to the continent of Europe as observed on the

map of the world constitute the EU, with no members from the continents of

Africa, Asia, Americas, and Oceania. Bi-continental Russia is not an EU

candidate country, nor are those in the Middle East. In Chapter 1, we have


reviewed the diversities of language, religion, and lifestyle of the EUMember

States, and have argued that unity based on geography make them members

of the EU. Unity in diversity has been the overwhelming cohesive force.

We now explore an economic rational for this continental unity. Globa-

lization is of course the order of the present-day economy. Following the

roster of the United Nations (UN), the world economy consists of 191

sovereign nation-states. (With the latest admission of Montenegro to the

UN membership the total will become 192.) Two parameters are important

in this analysis: (a) each individual economy’s share of world’s GDP and

(b) each individual economy’s share of world trade. The fact is that exports

of an individual economy must be imports of trading partners’ economies.

Thus, taking a global aggregate, exports equal imports. It can also be

argued that exports of an economy directly relate to its GDP.

Consider the US economy, one of the 191, that has to its credit about 20

percent of world GDP; the next largest share, Japan, has some 5 percent of

world GDP. The trade shares of these two countries follow a parallel

pattern. The remaining individual economies enjoy only marginal shares of

world GDP and trade. It is true that newly industrialized economies in-

clusive of China, India, South Korea, Malaysia, Thailand, Singapore,

Brazil, and Russia have made significant gains in their respective shares of

world GDP and trade. However, the petroleum-rich economies continue to

remain limited from this perspective. Indeed, there are no other individual

economies with competitively large shares of world GDP and trade. It

follows that one member economy with some 20 percent of world GDP

and 15 percent of world trade emerges as the dominant actor in the world

economy. In the post-WWII decades, the USA became that one dominant

economy and the dollar was king. The rest of the world depended heavily

on the USA for food and manufactures, often coming in the form of aid.

The USA also became the principal buyer of the output of other economies

and the global market soon ceased to be competitive. Indeed, this eco-

nomic framework became one of monopoly–monopsony.

During the Cold War decades, the USA assumed the responsibility of

military defense and maintaining economic stability for the economies of

the free, noncommunist world. Kindleberger (1985) forcefully argued that

the burden for the USA was too much to bear indefinitely.

During the post-WWII period, the European Community (EC) became

the challenging new economic entity. Individually, each member economy

of the EC, enjoyed only marginal shares of world GDP and trade. Even the

big four, Germany, France, the UK, and Italy, each had far less than what

could be considered competitive shares. By its shares of world output and

trade, Japan continued to be the second largest economy, albeit a distant

second. However, if the countries of the EC were treated as one common

economy, its aggregated shares of world trade and output would have

made the Community an effective competitor to the USA, and placed far

ahead of Japan.


The emergence of the EU has made the world market competitive

again. The rationale of supranational macroeconomics must be studied in

this context. Given the rich human capital and advanced technological

abilities, the economies of Western Europe soon regained their economic

vitality, but they realized that their individual noncompetitive shares of

world output and trade could not face stiff competition from a single

economy with overwhelming shares of world output and trade. Each of

these economies would continue to be a price-taker and the superpower

economy would dictate the terms of trade. Would the situation ever change

over time? Could Germany, France, the UK, or Italy eventually become an

effective competitor in the world market against the USA? The facts we

present below do not point to that eventuality.

The European Coal and Steel Community (ECSC), beginning with six

member economies in the 1950s soon became an experiment of great eco-

nomic success and the process of continental economic integration pro-

gressed rapidly. One single integrated continental economy of Europe with

its commonly shared intraregional micro- and macroeconomic policies for

the 25 Member States is now a fact. One common currency, the euro,

under one common central bank, the ECB, for the 12 member economies

of the Eurosystem, is a part of this unfolding economic story.

The world economy has now become a regime with two leading curren-

cies, the dollar and the euro. If the EU becomes a learning model for the rest

of the world, the situation of a truly competitive, multipolar global economy

will be a dynamic subject for study for years to come (see Chapter 8). The

effective competition between the EU and the USA, who together produce a

little more than one-half of world output and whose share of the world trade

approaches the 60 percent benchmark, will be beneficial for the microeco-

nomic units in both economies. On both sides of the Atlantic, households

will maximize their gains and businesses will maximize their profits. The

goods and services each economy will produce will be quality and cost-

competitive, and prices will be as they should be in a competitive market.

The absence of competition made prices monopolistic, and the price of

what others manufactured and sold in the world market became subject to

the monopsonistic influence from the one single dominant buyer. Compe-

tition will allow people in the world to benefit from goods and services of

better quality at competitively lower prices offered by the EU and the USA.

3.4. The EU: population, GDP and trade

We begin with an evaluation of the competitive population bases of the EU

and the USA. A profile is evident. Table 3.1A presents the population base

of each member economy of the EU-25. Decennial population data for

1960 through 2000 plus that of 2004, the latest year of data available, is

reviewed. Over the time period, the profile of the population base for the 25

Member States of the EU maintains a consistent pattern. Germany leads


and moves from 72.67 million in 1960 to 82.63 million in 2004. France, the

United Kingdom, and Italy come next and record figures from some 50

million each in 1960, approaching 60 million in 2004. Beginning with 30.46

million in 1960, Spain reached 41.29 million in 2004. Of the new 10 joining

the EU in 2004, Poland, with her 29.56 million people in 1960 moved up to

38.16 million in 2004, a population base comparable to that of Spain. At

the other end, of the EU-15, Luxembourg reports a population base of 0.32

million in 1960 and 0.45 million in 2004. Of the new 10 members of the EU

(EU-10, often referred to as AC-10, 10 acceding countries), Malta and

Cyprus have a small population, each with less than a million people over

the time period.

Table 3.1A. Population, total (in millions)

1960 1970 1980 1990 2000 2004

Austria 7.05 7.43 7.55 7.73 8.01 8.12

Belgium 9.12 9.64 9.85 9.97 10.25 10.41

Cyprus 0.57 0.62 0.61 0.68 0.76 0.78

Czech Republic 9.55 9.78 10.23 10.36 10.27 10.18

Denmark 4.58 4.93 5.12 5.14 5.34 5.40

Estonia 1.22 1.37 1.48 1.57 1.37 1.35

Finland 4.43 4.61 4.78 4.99 5.17 5.22

France 45.68 50.77 53.88 56.74 58.89 59.99

Germany 72.67 77.72 78.30 79.43 82.21 82.63

Greece 8.33 8.79 9.64 10.16 10.56 11.07

Hungary 9.98 10.34 10.71 10.37 10.02 10.07

Ireland 2.83 2.95 3.40 3.51 3.81 4.02

Italy 50.20 53.82 56.43 56.72 57.69 57.57

Latvia 2.13 2.37 2.54 2.67 2.37 2.30

Lithuania 2.78 3.14 3.41 3.70 3.51 3.44

Luxembourg 0.32 0.34 0.37 0.38 0.44 0.45

Malta 0.33 0.33 0.36 0.36 0.39 0.40

The Netherlands 11.49 13.04 14.15 14.95 15.92 16.25

Poland 29.56 32.53 35.58 38.12 38.65 38.16

Portugal 8.94 9.04 9.77 9.90 10.13 10.44

Slovak Republic 3.99 4.53 4.98 5.28 5.39 5.39

Slovenia 1.58 1.73 1.90 2.00 1.99 2.00

Spain 30.46 33.78 37.39 38.84 40.50 41.29

Sweden 7.48 8.04 8.31 8.56 8.87 8.99

United Kingdom 52.37 55.63 56.33 57.56 58.88 59.41

Total EU population 377.65 407.25 427.08 439.67 451.40 455.30

% of world 12.50 11.08 9.64 8.37 7.46 7.18

% Growth 7.84 4.87 2.95 2.67 0.86

United States 180.67 205.05 227.23 249.44 282.22 293.51

% of world 5.98 5.58 5.13 4.75 4.66 4.63

% Growth 13.49 10.81 9.78 13.14 4.00



Total EU population, its shares of world population, and its decennial

rates of growth are then compared with those of the USA. The EU’s share

of world population has systematically declined from 12.50 percent in 1960

to 7.18 percent in 2004. For the same time period, the US share has fallen

from 5.98 percent to 4.63 percent. In 2004, the EU-25 with 7.18 percent of

the world population has a much higher percentage than the USA with

4.63 percent of the world population. With China and India each having a

population greater than 1 billion people, the EU with 455.3 million people

in 2004 is now the third largest populous economic unit. The USA with

293.51 million in 2004 is the fourth in rank.

The declining decennial rates of growth of population are evident for

both the EU and the USA. Comparing rates of birth, death, emigration, and

immigration for the EU and the USA, the latter does have an advantage on

immigration. Because many member countries of the EU have declining

birth rates, several EU countries have recently initiated processes to liber-

alize their immigration and naturalization laws to promote immigration of

the labor force from abroad, especially for those with specific skills. In terms

of the population base, the EU-25 is competitively ahead of USA.

The population base impacts an economy for both the supply and

demand facets as it contributes to labor supply and to the consumption

demand for goods and services produced. Given the competitive nature of

the industrial know-how and high-tech skill of the labor force in the EU

and the USA, the situation merits attention. Insofar as the growth of

human capital is concerned, the EU’s emphasis on environment and health

care may place the USA at a competitive disadvantage.

Table 3.1B presents the population profile of the EU-25, comparing the

EU-15 with that of the 10 newly admitted members of the EU. In 2004, the

10 new members added a total of 74.06 million to the total of 381.23 million

of the original EU members. In terms of percentage, the original 15 had

83.73 percent and the new 10 contributed 16.27 percent. It is to be noted that

for 1960 through 2000, the decennial population shares of the EU-15 and the

EU-10 remain stable at 83 percent and 17 percent, respectively.

Table 3.1C offers a summary of population sizes of the EU-25 in terms

of millions of people. For the time period under review, three of them,

Cyprus, Luxembourg, and Malta, each has less than 1 million people; two

of them, Estonia and Slovenia, each has less than 2 million people; six of

them, Denmark, Finland, Ireland, Latvia, Lithuania, and Slovak Republic,

each has some 5 million people; seven of them, Austria, Belgium, Czech

Republic, Greece, Hungary, Portugal and Sweden, each with 7–10 million

population is the next group; one of the EU-25, the Netherlands has its

population varying between 11 and 16 million. Two of them, Poland and

Spain rank in the group between 29 and 41 million people. Three of them,

France, Italy, and the United Kingdom belong to the group of 45–60

million while Germany with its population varying between 72 and 83

million makes the group of one with the highest ranking.


Table 3.2A reviews comparative GDP positions for the EU and USA.

Figures are for 1960, 1970, 1980, 1990, 2000, and 2004. Within the EU,

Germany ranks first and is followed by the UK, while France and Italy

remain a close third and fourth. For this period, no individual EU member

country even approaches the total of the USA. However, the EU-25 does

and can easily be seen as a close competitor. Percentages of world GDP for

the EU-25 correspond closely to the USA from 1980 onward. For the time

period, shares of world GDP for the EU-25 and the USA approximate 25

percent and 30 percent, respectively. We will see that the situation is reversed

when we examine GDP shares in terms of purchasing power parity (PPP).

Let us note that the decennial rates of growth of GDP have declined

over time for both the EU and the USA. In 2004, the rates of growth of

Table 3.1B. EU member countries: Population, total (in millions)

1960 1970 1980 1990 2000 2004

Austria 7.05 7.43 7.55 7.73 8.01 8.12

Belgium 9.12 9.64 9.85 9.97 10.25 10.41

Denmark 4.58 4.93 5.12 5.14 5.34 5.40

Finland 4.43 4.61 4.78 4.99 5.17 5.22

France 45.68 50.77 53.88 56.74 58.89 59.99

Germany 72.67 77.72 78.30 79.43 82.21 82.63

Greece 8.33 8.79 9.64 10.16 10.56 11.07

Ireland 2.83 2.95 3.40 3.51 3.81 4.02

Italy 50.20 53.82 56.43 56.72 57.69 57.57

Luxembourg 0.32 0.34 0.37 0.38 0.44 0.45

The Netherlands 11.49 13.04 14.15 14.95 15.92 16.25

Portugal 8.94 9.04 9.77 9.90 10.13 10.44

Spain 30.46 33.78 37.39 38.84 40.50 41.29

Sweden 7.48 8.04 8.31 8.56 8.87 8.99

United Kingdom 52.37 55.63 56.33 57.56 58.88 59.41

Total 315.95 340.53 355.27 364.56 376.68 381.23

% of EU-25 83.66 83.62 83.19 82.92 83.45 83.73

Cyprus 0.57 0.62 0.61 0.68 0.76 0.78

Czech Republic 9.55 9.78 10.23 10.36 10.27 10.18

Estonia 1.22 1.37 1.48 1.57 1.37 1.35

Hungary 9.98 10.34 10.71 10.37 10.02 10.07

Latvia 2.13 2.37 2.54 2.67 2.37 2.30

Lithuania 2.78 3.14 3.41 3.70 3.51 3.44

Malta 0.33 0.33 0.36 0.36 0.39 0.40

Poland 29.56 32.53 35.58 38.12 38.65 38.16

Slovak Republic 3.99 4.53 4.98 5.28 5.39 5.39

Slovenia 1.58 1.73 1.90 2.00 1.99 2.00

Total 61.70 66.71 71.81 75.11 74.72 74.06

% of EU-25 16.34 16.38 16.81 17.08 16.55 16.27



GDP of the EU-25, the USA and the world from 2000 at 6.41 percent,

10.58 percent, and 10.56 percent, merit attention. For 1990 and 2000, the

decennial rate of growth of USA’s GDP is above the rate of growth of

world GDP, while for the EU-25, the figures are lower. It is instructive to

note that the GDP bases in the aggregate of the EU-25 and the USA and

their respective shares of world GDP have become closely competitive.

Figure 3.1 is a graphic presentation of percent of world GDP of the EU-10,

EU-15, EU-25, and the USA, for the period 1960–2004.

Table 3.2B compares the GDP bases of the original EU-15 and the new

AC-10. The new AC-10 adds only marginally to the EU-25 total for the

time period under review. In 2004, the original EU-15 contributes 95.49

percent of the total while the new AC-10 adds only 4.51 percent. We have

complete data for 1990 and 2000, and the story is the same, the AC-10

would have added just some 5 percent to the total of EU-25 GDP. The new

10 are pre-industrialized economies; their initiative to join the membership

of the EU relates to their plans for industrialization.

Reviews of GDP in constant US dollars are open to dispute. A com-

parative evaluation based on GDP in PPP (international billion dollars) in

2000 is in order. Table 3.3A presents the relevant data for all the individual

economies of the EU-25. It also compares the total of the EU-25 with the

GDP of the USA and their comparative growth rates vis-a-vis the rate of

growth of the world GDP.

Evidently, for GDP in PPP, no individual EU-25 economy is anywhere

near the USA. For the time period, Germany with its largest individual

total varying between $1.2 trillion and $2.2 trillion is far outdistanced by

the USA whose totals vary between $4.3 and $10.8 trillion. In 2004, the

United Kingdom, France, and Italy with their respective GDPs at $1.7,

$1.6, $1.5 (PPP in US$ trillions) come next in that order. It is to be noted

that based on PPP dollars, the EU-25 shares of world GDP are larger than

Table 3.1C. Population based on decennial census, 1960–2000 plus 2004(in millions)

Population Number of

countries

Countries

0.32–0.78 3 Luxembourg, Malta, and Cyprus

1.22–2.00 2 Estonia and Slovenia

2.13–5.40 6 Finland, Ireland, Latvia, Lithuania, Slovak

Republic, and Denmark

7.05–11.07 7 Austria, Belgium, Czech Republic, Greece,

Hungary, Portugal, and Sweden

11.49–16.25 1 The Netherlands

29.56–41.29 2 Poland and Spain

45.68–59.99 3 France, Italy, and United Kingdom

72.67–82.63 1 Germany

Note: Based on Table 3.1A.


those of the USA for all time periods. For the specific time intervals, the

rates of growth are consistently higher for the USA than the EU by a

margin of 3–10 percent. Understandably, the rates of growth of the world

GDP are marginally higher than those of both the EU-25 and the USA.

Figure 3.2 is a graphical presentation of the share of world GDP in PPP.

Figures 3.1 and 3.2 compare shares of world GDP in US dollars and in

PPP, respectively, the EU-25 leading the USA.

Table 3.2A. GDP (constant 2000 US$, in billions)

1960 1970 1980 1990 2000 2004

Austria 52.65 83.41 118.92 150.47 190.41 200.23

Belgium 67.96 108.46 151.09 184.36 228.30 240.70

Cyprus — — 3.33 6.10 9.15 10.27

Czech Republic — — — 54.40 55.71 62.61

Denmark 57.42 88.93 107.58 125.72 158.23 166.94

Estonia — — 5.02 5.94 5.46 6.95

Finland 32.15 51.39 73.76 99.57 119.91 130.93

France 357.82 615.09 851.84 1,087.46 1,308.40 1,389.20

Germany — — 1,231.47 1,545.84 1,870.28 1,917.76

Greece 25.42 53.00 83.07 88.95 112.10 131.62

Hungary 12.97 24.43 38.60 43.22 46.68 53.78

Ireland 13.80 20.81 33.06 47.18 94.75 117.03

Italy 295.26 514.42 733.51 917.51 1,074.76 1,113.69

Latvia — 4.96 8.05 10.43 7.73 10.37

Lithuania — — — 15.99 11.38 15.12

Luxembourg 3.88 5.48 7.08 11.48 19.60 21.57

Malta 0.36 0.59 1.60 2.34 3.81 3.81

The Netherlands 102.09 167.27 223.02 278.28 370.64 377.89

Poland — — — 116.36 166.55 186.40

Portugal 19.97 37.01 58.81 80.98 106.46 108.48

Slovak Republic — — — 19.56 20.22 24.19

Slovenia — — — 15.99 19.07 21.69

Spain 110.86 226.39 323.24 431.64 561.76 622.55

Sweden 82.94 130.53 158.42 196.84 239.57 259.78

United Kingdom 544.82 720.80 875.44 1,135.84 1,439.35 1,574.62

EU-25 1,780.36 2,852.98 5,086.89 6,672.43 8,240.25 8,768.18

% of world GDP 24.42 23.39 28.88 27.90 26.10 25.12

% Growth 60.25 78.30 31.17 23.50 6.41

United States 2,553.59 3,721.70 5,128.00 7,055.00 9,764.80 10,798.08

% of world GDP 35.03 30.51 29.11 29.50 30.93 30.93

% Growth 45.74 37.79 37.58 38.41 10.58

World 7,290.04 12,197.29 17,612.94 23,913.97 31,573.38 34,907.66

% Growth 67.31 44.40 35.78 32.03 10.56

Note: Percentage growth is over past period.



Table 3.3B compares the EU-15 with the EU-10. GDP figures are in

PPP 2000 billions of international dollars. In PPP, the new AC-10 adds

marginally to the EU-25 total for 1975 and 1980; the contributions moved

up from 2.07 percent in 1975 to 9.11 percent in 2004. A trend is in progress

as some economies of the AC-10 advance on industrialization. In any case,

adjustments of the data for PPP have resulted in a different assessment of

comparative growth rates of the EU and the USA.

Table 3.3C ranks the member economies of the EU-25 in terms of GDP

(PPP in constant 2000 international dollars) of 2004. The figures for 1975,

1980, 1990 and 2000 in Table 3.3A show the same pattern. Indeed, GDP of

each economy has increased over the time period. The same is true for the

USA. The GDP in PPP 2000 of the USA in 2004 is $10,800. The USA is far

ahead of Germany, whose GDP is the largest among the EU-25. Individ-

ually, no member economy of the EU-25 can compete with the USA.

Table 3.4 compares member economies of the EU-25 in terms of their

respective shares of the EU-25 GDP (PPP in constant 2000 international

dollars) for 1975, 1990, and 2004. Germany is the largest economy of the EU-

25 with its share of 20 percent of the total. France and the United Kingdom,

each with a share of about 15 percent, compete for the second position, while

Italy with its share of 14 percent is a close fourth. Based on available data, as

many as eight member economies, Cyprus, Estonia, Latvia, Lithuania,

Luxembourg, Malta, the Slovak Republic, and Slovenia, have less than 1

percent share of the EU-25 GDP. Figures 3.3A and 3.3B present comparative

Figure 3.1. Share of world GDP

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

1960 1970 1980 1990 2000 2004

Year

Pe

rce

nt

EU-10

EU-15

EU-25

United States

Note: Based on Table 3.2A


expositions of the shares of GDP in PPP in 1975 and 2004, respectively for

members of the EU-25.

Table 3.5A offers an exposition of the EU-25 in terms of their respec-

tive trade in goods and services, by value and by their respective shares of

the world trade. Data relate to both exports and imports for the two

specific years, 1990 and 2000. With shares of world trade for both exports

and imports at about 8 percent, Germany ranks first in the EU-25 while

France, the United Kingdom, and Italy with their respective shares at some

5 percent follow next. A large number of the EU-25 member economies

have less than 1 percent share of world trade. The USA with its shares of

world trade at some 14 percent for exports and 14–18 percent for imports is

far ahead of any individual member economy of the EU-25.

Table 3.2B. EU member countries: GDP (constant 2000 US$, in billions)

1960 1970 1980 1990 2000 2004

Austria 52.65 83.41 118.92 150.47 190.41 200.23

Belgium 67.96 108.46 151.09 184.36 228.30 240.70

Denmark 57.42 88.93 107.58 125.72 158.23 166.94

Finland 32.15 51.39 73.76 99.57 119.91 130.93

France 357.82 615.09 851.84 1,087.46 1,308.40 1,389.20

Germany — — 1,231.47 1,545.84 1,870.28 1,917.76

Greece 25.42 53.00 83.07 88.95 112.10 131.62

Ireland 13.80 20.81 33.06 47.18 94.75 117.03

Italy 295.26 514.42 733.51 917.51 1,074.76 1,113.69

Luxembourg 3.88 5.48 7.08 11.48 19.60 21.57

The Netherlands 102.09 167.27 223.02 278.28 370.64 377.89

Portugal 19.97 37.01 58.81 80.98 106.46 108.48

Spain 110.86 226.39 323.24 431.64 561.76 622.55

Sweden 82.94 130.53 158.42 196.84 239.57 259.78

United Kingdom 544.82 720.80 875.44 1,135.84 1,439.35 1,574.62

Total 1,767.02 2,822.99 5,030.30 6,382.11 7,894.50 8,372.98

% of EU-25 99.25 98.95 98.89 95.65 95.80 95.49

Cyprus — — 3.33 6.10 9.15 10.27

Czech Republic — — — 54.40 55.71 62.61

Estonia — — 5.02 5.94 5.46 6.95

Hungary 12.97 24.43 38.60 43.22 46.68 53.78

Latvia — 4.96 8.05 10.43 7.73 10.37

Lithuania — — — 15.99 11.38 15.12

Malta 0.36 0.59 1.60 2.34 3.81 3.81

Poland — — — 116.36 166.55 186.40

Slovak Republic — — — 19.56 20.22 24.19

Slovenia — — — 15.99 19.07 21.69

Total 13.34 29.98 56.59 290.32 345.75 395.20

% of EU-25 0.75 1.05 1.11 4.35 4.20 4.51



Table 3.5B is quite revealing. As many as 14 EU economies report 1

percent or less of world trade, exports, and imports. Germany, with its

shares at about 8 percent over the time period is the highest trading econ-

omy of the EU-25. During the same period, the United States reports an

annual average of about 15 percent of the world trade.

In Table 3.6, we extend the analysis to compare the trade shares of the

EU in various groups and the USA. It is instructive to compare these

Table 3.3A. GDP (PPP) (constant 2000 international $, in billions)

1975 1980 1990 2000 2004

Austria 121.00 143.00 180.00 231.00 242.00

Belgium 161.00 190.00 231.00 281.00 299.00

Cyprus 2.94 5.11 9.36 15.20 16.40

Czech Republic — — — 158.00 183.00

Denmark 90.30 103.00 122.00 153.00 160.00

Estonia — — 14.00 13.40 17.20

Finland 70.30 81.60 112.00 132.00 144.00

France 856.00 993.00 1,280.00 1,520.00 1,610.00

Germany 1,160.00 1,360.00 1,700.00 2,090.00 2,150.00

Greece 113.00 138.00 148.00 190.00 225.00

Hungary 89.10 106.00 122.00 134.00 155.00

Ireland 26.80 34.90 54.00 115.00 149.00

Italy 793.00 975.00 1,240.00 1,440.00 1,500.00

Latvia 16.20 19.60 25.40 18.80 25.70

Lithuania — — 42.40 30.70 41.40

Luxembourg 8.28 8.70 12.50 25.60 28.60

Malta 1.52 2.70 3.96 7.16 7.03

The Netherlands 242.00 274.00 348.00 459.00 482.00

Poland — — 295.00 402.00 455.00

Portugal 79.30 104.00 141.00 187.00 190.00

Slovak Republic — — 57.90 61.00 72.40

Slovenia — — — 33.60 38.40

Spain 452.00 501.00 668.00 874.00 968.00

Sweden 140.00 151.00 191.00 230.00 245.00

United Kingdom 877.00 975.00 1,270.00 1,570.00 1,700.00

EU-25 5,299.74 6,165.61 8,267.52 10,371.46 11,104.13

% of world GDP 26.90 25.80 24.90 23.05 21.44

% Growth 16.34 34.09 25.45 7.06

United States 4,290.00 5,140.00 7,090.00 9,590.00 10,800.00

% of world GDP 21.78 21.51 21.36 21.31 20.85

% Growth 19.81 37.94 35.26 12.62

World 19,700.00 23,900.00 33,200.00 45,000.00 51,800.00

% Growth 21.32 38.91 35.54 15.11

Note: Percentage growth is over past period.



findings to those in Tables 3.3C and 3.5B. Member economies of the EU-25

with smaller GDP bases also have smaller trade shares, which is to be

expected. The economic integration movement in Europe must be studied in

the context of an individual EU member economy’s inability to compete in

the world market while the USA is the predominant actor by measures of

world output and trade. In Table 3.6, we study Europe in three frameworks

of integration. The EU-12 consists of the member economies of the EU who

have accepted the common currency and are members of the Eurosystem.

The EU-15 consists of the EU-12 plus Denmark, Sweden, and the United

Kingdom, who have elected not to accept the common currency. Next, the

EU-25 which consists of the EU-15 and the AC-10, the most recent group

admitted to EU membership.

We have selected trade data for 1990 and 2000, and the pattern appears

to be consistent over time. The share of world trade of the EU-12 at 28

percent, the EU-15 at 36 percent, and the EU-25 at 37 percent, are far

larger than that of the USA at about 15 percent for the time period. In the

absence of integration, none of the individual sovereign nation-state econ-

omies of Europe would be able to compete with the USA in the world

market.

To pursue our research, we return to the GDP of the EU-25 (PPP in

constant 2000 international dollars) and we select three specific time periods,

1975, 1990, and 2004 to present percentage of world share in Table 3.7A.

Figure 3.2. Share of world GDP (PPP)

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

1975 1980 1990 2000 2004

Year

Perc

en

tag

e

EU-10

EU-15

EU-25

United States

Note: Based on Table 3.3A


Selection of 2004 is for pragmatic consideration, being the most recent year

of complete data availability for the EU-25. The years 1975 and 1990 should

help present a time profile for our analysis. Two points warrant our im-

mediate attention. First, in terms of shares of world output, individual EU

member countries are far too small to face competition with the USA in the

world market. Table 3.7B points to the fact that 19 of the 25 member

economies have marginal economic dimensions of less than one percent of

world GDP for all three time periods. The time profile is clearly demon-

strated and we must conclude that given their respective economic struc-

tures, their shares of the world output will follow the pattern and that

Table 3.3B. EU member countries: GDP (PPP) (constant 2000international $, in billions)

1975 1980 1990 2000 2004

Austria 121.00 143.00 180.00 231.00 242.00

Belgium 161.00 190.00 231.00 281.00 299.00

Denmark 90.30 103.00 122.00 153.00 160.00

Finland 70.30 81.60 112.00 132.00 144.00

France 856.00 993.00 1,280.00 1,520.00 1,610.00

Germany 1,160.00 1,360.00 1,700.00 2,090.00 2,150.00

Greece 113.00 138.00 148.00 190.00 225.00

Ireland 26.80 34.90 54.00 115.00 149.00

Italy 793.00 975.00 1,240.00 1,440.00 1,500.00

Luxembourg 8.28 8.70 12.50 25.60 28.60

The Netherlands 242.00 274.00 348.00 459.00 482.00

Portugal 79.30 104.00 141.00 187.00 190.00

Spain 452.00 501.00 668.00 874.00 968.00

Sweden 140.00 151.00 191.00 230.00 245.00

United Kingdom 877.00 975.00 1,270.00 1,570.00 1,700.00

Total 5,189.98 6,032.20 7,697.50 9,497.60 10,092.60

% of EU-25 97.93 97.84 93.11 91.57 90.89

Cyprus 2.94 5.11 9.36 15.20 16.40

Czech Republic — — — 158.00 183.00

Estonia — — 14.00 13.40 17.20

Hungary 89.10 106.00 122.00 134.00 155.00

Latvia 16.20 19.60 25.40 18.80 25.70

Lithuania — — 42.40 30.70 41.40

Malta 1.52 2.70 3.96 7.16 7.03

Poland — — 295.00 402.00 455.00

Slovak Republic — — 57.90 61.00 72.40

Slovenia — — — 33.60 38.40

Total 109.76 133.41 570.02 873.86 1,011.53

% of EU-25 2.07 2.16 6.89 8.43 9.11



Table 3.3C. Ranking of the EU-25 member economies based on GDP(PPP) in 2004 (constant 2000 international $, in billions)

Less than 50 51–200 201–500 501–1,000 1,001–2,000 2000 plus

Cyprus Czech Republic Austria Spain France Germany

Estonia Denmark Belgium Italy

Latvia Finland Greece United Kingdom

Lithuania Hungary The Netherlands

Luxembourg Ireland Poland

Malta Portugal Sweden

Slovenia Slovak Republic

Note: Based on data in Table 3.3A. Data for the Czech Republic, Estonia, Poland, Lithuania,

the Slovak Republic, and Slovenia are for limited years.

Table 3.4. Intra-EU shares of GDP (PPP) (constant 2000 international $,

in billions)

1975 % Share 1990 % Share 2004 % Share

Austria 121.00 2.28 180.00 2.18 242.00 2.18

Belgium 161.00 3.04 231.00 2.79 299.00 2.69

Cyprus 2.94 0.06 9.36 0.11 16.40 0.15

Czech Republic — — — — 183.00 1.65

Denmark 90.30 1.70 122.00 1.48 160.00 1.44

Estonia — — 14.00 0.17 17.20 0.15

Finland 70.30 1.33 112.00 1.35 144.00 1.30

France 856.00 16.15 1,280.00 15.48 1,610.00 14.50

Germany 1,160.00 21.89 1,700.00 20.56 2,150.00 19.36

Greece 113.00 2.13 148.00 1.79 225.00 2.03

Hungary 89.10 1.68 122.00 1.48 155.00 1.40

Ireland 26.80 0.51 54.00 0.65 149.00 1.34

Italy 793.00 14.96 1,240.00 15.00 1,500.00 13.51

Latvia 16.20 0.31 25.40 0.31 25.70 0.23

Lithuania — — 42.40 0.51 41.40 0.37

Luxembourg 8.28 0.16 12.50 0.15 28.60 0.26

Malta 1.52 0.03 3.96 0.05 7.03 0.06

The Netherlands 242.00 4.57 348.00 4.21 482.00 4.34

Poland — — 295.00 3.57 455.00 4.10

Portugal 79.30 1.50 141.00 1.71 190.00 1.71

Slovak Republic — — 57.90 0.70 72.40 0.65

Slovenia — — — — 38.40 0.35

Spain 452.00 8.53 668.00 8.08 968.00 8.72

Sweden 140.00 2.64 191.00 2.31 245.00 2.21

United Kingdom 877.00 16.55 1,270.00 15.36 1,700.00 15.31

EU-25 5,299.74 8,267.52 11,104.13

Note: Based on data from Table 3.3A.


individually, it would not be possible for any member economy of the EU to

be a competitive actor in the world market. But, as an integrated European

continental economy, the EU has emerged as a competitor to the USA (see

Table 3.8).

Figure 3.3B. Share of EU GDP (PPP), 2004

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Austr

ia

Belg

ium

Cypru

s

Czech R

epublic

Denm

ark

Esto

nia

Fin

land

Fra

nce

Germ

any

Gre

ece

Hungary

Irela

nd

Italy

Latv

ia

Lithuania

Luxem

bourg

Malta

Neth

erlands

Pola

nd

Port

ugal

Slo

vak R

epublic

Slo

venia

Spain

Sw

eden

United K

ingdom

EU Member

Perc

en

t

Note: Based on Table 3.4

Figure 3.3A. Share of EU GDP (PPP), 1975

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Au

str

ia

Be

lgiu

m

Cyp

rus

Cze

ch

Re

pu

blic

De

nm

ark

Esto

nia

Fin

lan

d

Fra

nce

Ge

rma

ny

Gre

ece

Hu

ng

ary

Ire

lan

d

Ita

ly

La

tvia

Lith

ua

nia

Lu

xe

mb

ou

rg

Ma

lta

Ne

the

rla

nd

s

Po

lan

d

Po

rtu

ga

l

Slo

va

k R

ep

ub

lic

Slo

ve

nia

Sp

ain

Sw

ed

en

Un

ite

d K

ing

do

m

EU Member

Pe

rcen

t



Table 3.5A. Trade in goods and services as a percentage of world trade(constant 2000 US$, in billions)

Trade in goods

and services

1990 % Share 2000 % Share

Austria Exports 53.20 1.28 95.70 1.20

Imports 52.80 1.25 96.90 1.22

Belgium Exports 123.00 2.96 195.00 2.45

Imports 120.00 2.83 188.00 2.37

Cyprus Exports — — — —

Imports — — — —

Czech Republic Exports 16.40 0.40 35.90 0.45

Imports 15.80 0.37 37.60 0.47

Denmark Exports 42.40 1.02 69.80 0.88

Imports 33.70 0.79 60.30 0.76

Estonia Exports — — 4.82 0.06

Imports — — 5.03 0.06

Finland Exports 21.20 0.51 51.50 0.65

Imports 24.50 0.58 40.50 0.51

France Exports 196.00 4.72 374.00 4.70

Imports 205.00 4.83 357.00 4.50

Germany Exports 350.00 8.43 632.00 7.95

Imports 351.00 8.28 625.00 7.87

Greece Exports 13.20 0.32 28.70 0.36

Imports 19.20 0.45 38.30 0.48

Hungary Exports 15.50 0.37 34.50 0.43

Imports 13.20 0.31 36.30 0.46

Ireland Exports 22.80 0.55 92.30 1.16

Imports 22.30 0.53 79.90 1.01

Italy Exports 175.00 4.22 304.00 3.82

Imports 187.00 4.41 293.00 3.69

Latvia Exports — — 3.27 0.04

Imports — — 3.89 0.05

Lithuania Exports — — 5.11 0.06

Imports — — 5.83 0.07

Luxembourg Exports 12.10 0.29 29.80 0.37

Imports 11.10 0.26 25.70 0.32

Malta Exports — — — —

Imports — — — —

The Netherlands Exports 130.00 3.13 250.00 3.14

Imports 123.00 2.90 231.00 2.91

Poland Exports 17.20 0.41 46.40 0.58

Imports 12.90 0.30 57.30 0.72

Portugal Exports 20.30 0.49 33.60 0.42

Imports 22.50 0.53 45.50 0.57

Slovak Republic Exports — — 14.30 0.18

Imports 5.59 0.13 14.80 0.19

Slovenia Exports 10.80 0.26 10.70 0.13

Imports 8.75 0.21 11.40 0.14

Spain Exports 64.70 1.56 169.00 2.13

Imports 76.20 1.80 182.00 2.29

Sweden Exports 52.10 1.26 110.00 1.38

Imports 56.40 1.33 96.50 1.22

United Kingdom Exports 225.00 5.42 404.00 5.08

Imports 238.00 5.61 434.00 5.47



Table 3.8 shows that the EU-25 with its shares of world GDP at 26.90

percent, 24.90 percent, and 21.44 percent vis-a-vis the USA at 21.78 percent,

21.36 percent, and 20.85 percent in 1975, 1990, and 2004, respectively, has

emerged as a competitive actor. In 2004, when the EU-25 became a legal

economic entity, their shares of world GDP topped that of the USA. The

shares of the EU-15 and of the USA are also effectively competitive. We also

compare the shares of the EU-12 with that of the USA, and the level of

competition is still noteworthy. The economic integration of the continent of

Europe is the core of the supranational macroeconomy of the EU.

As many as 11 of the EU-15 had less than 1 percent of world GDP, and

consequently marginal shares of world trade. Even of the four larger ones,

Germany, France, the UK, and Italy, shares of world GDP and trade were

nowhere near and large enough to be competitive with those of the USA.

We have shown that for successive decades in the postwar period, the


Trade in goods

and services


United States Exports 553.00 13.33 1,100.00 13.84

Imports 607.00 14.32 1,480.00 18.64

World Exports 4,150.00 7,950.00

Imports 4,240.00 7,940.00


Table 3.5B. Individual economies of the EU-25: Shares of world trade in

1990 and 2000 (%)

0.04–1.16 1.20–3.14 3.69–5.61 7.87–8.43

Czech Republic Austria France Germany

Denmark Belgium Italy

Estonia The Netherlands United Kingdom

Finland Spain

Greece Sweden

Hungary

Ireland

Latvia

Lithuania

Luxembourg

Poland

Portugal

Slovak Republic

Slovenia

Note: Based on Table 3.5. No data for Cyprus and Malta. Data for Estonia, Latvia, Lithua-

nia, and Slovak Republic only for the year 2000.


situation generally remains the same. One way for these economies of

Europe was to integrate and become one single economy. The EU-15, the

EU-12 with their euro, and now the EU-25 have competitive shares of

world GDP and trade vis-a-vis the USA. The healthy competition between

these two economic units separated by the Atlantic will enrich the global

economy.

3.5. The EU-25: an overview of the production map of the EU-25

One common economy of the EU must be based on one common production

map. In what follows, we investigate the production map of the EU member

economies in terms of the capital–labor ratio and the capital–output ratio for

the three selected time periods: 1980, 1990, and 2002.

Table 3.9 reports the capital–labor ratios for the 25 member economies of

the EU and also of the USA. Of the 25 economies, 22 report consistent

increases in the ratio over the time period under review. Greece, the Nether-

lands, and Hungary show the same pattern between 1980 and 2002, each

having a lower ratio in 1990. Italy is an anomaly, showing a persistent decline

in the ratio. The capital–labor ratio for the USA moves up from 7,145 in 1980

to 12,568 in 2002.

The graphic exposition (Figure 3.4) points to the fact that with the

exception of Luxembourg and Ireland, the remaining 23 EU member

economies lag behind the USA by measure of capital–labor ratio. How-

ever, Ireland’s ratio is close to that of the USA. Italy, Denmark, Austria,

Belgium, and the Netherlands can be viewed as the nearest group of

economies approximating the ratio of the USA. The next proximate group

Table 3.6. Trade in goods and services, EU-12, EU-15, EU-25, and USA asa percentage of world trade (constant 2000 US$, in billions)

Trade in goods

and services


EU-12 Exports 1,181.50 28.47 2,255.60 28.37

Imports 1,214.60 28.65 2,202.80 27.74

EU-15 Exports 1,501.00 36.17 2,839.40 35.72

Imports 1,542.70 36.38 2,793.60 35.18

EU-25 Exports 1,560.90 37.61 2,994.40 37.67

Imports 1,598.94 37.71 2,965.75 37.35

USA Exports 553.00 13.33 1,100.00 13.84

Imports 607.00 14.32 1,480.00 18.64

World Exports 4,150.00 7,950.00

Imports 4,240.00 7,940.00

Note: EU-12 are Member States of the Eurosystem, EU-15 the Member States from 1995 until

the 2004 enlargement, and EU-25 the current Member States of the European Union. Ad-

justments for intra-EU trade remains to be reported, which may not change the comparative

position.



consists of France, Finland, Germany, the United Kingdom, Sweden,

Spain, Greece, and Portugal. The remote set of economies includes Slove-

nia, the Czech Republic, Estonia, Hungary, the Slovak Republic, Latvia,

Poland, and Lithuania, which are less industrialized and more labor-

intensive. Intra-EU free flow of investment and free flow of trade will

enable the EU to attain competitive economic standing vis-a-vis the USA.

Free movement of labor within the EU member economies will further

accentuate the process. Individually, the economies of Europe will never be

able to be competitive.

In Table 3.10 the capital–output ratios for the EU-25 member eco-

nomies and the USA for three years in the period 1980–2002 are presented.

During this time, the ratios of several economies including Spain and the

United Kingdom show an upward turn, while others inclusive of Germany

and Italy show a decline. Ireland, the Netherlands, and some others do not

report much of a change. The United States is far out. The graphic ex-

position (Figure 3.5) demonstrates the situation. Italy, Germany, France,

Table 3.7A. EU-25: GDP (PPP), percentage of world GDP (constant2000 international $, in billions)


Austria 121.00 0.6142 180.00 0.5422 242.00 0.4672

Belgium 161.00 0.8173 231.00 0.6958 299.00 0.5772

Cyprus 2.94 0.0149 9.36 0.0282 16.40 0.0317

Czech Republic — — — — 183.00 0.3533

Denmark 90.30 0.4584 122.00 0.3675 160.00 0.3089

Estonia — — 14.00 0.0422 17.20 0.0332

Finland 70.30 0.3569 112.00 0.3373 144.00 0.2780

France 856.00 4.3452 1,280.00 3.8554 1,610.00 3.1081

Germany 1,160.00 5.8883 1,700.00 5.1205 2,150.00 4.1506

Greece 113.00 0.5736 148.00 0.4458 225.00 0.4344

Hungary 89.10 0.4523 122.00 0.3675 155.00 0.2992

Ireland 26.80 0.1360 54.00 0.1627 149.00 0.2876

Italy 793.00 4.0254 1,240.00 3.7349 1,500.00 2.8958

Latvia 16.20 0.0822 25.40 0.0765 25.70 0.0496

Lithuania — — 42.40 0.1277 41.40 0.0799

Luxembourg 8.28 0.0420 12.50 0.0377 28.60 0.0552

Malta 1.52 0.0077 3.96 0.0119 7.03 0.0136

The Netherlands 242.00 1.2284 348.00 1.0482 482.00 0.9305

Poland — — 295.00 0.8886 455.00 0.8784

Portugal 79.30 0.4025 141.00 0.4247 190.00 0.3668

Slovak Republic — — 57.90 0.1744 72.40 0.1398

Slovenia — — — — 38.40 0.0741

Spain 452.00 2.2944 668.00 2.0120 968.00 1.8687

Sweden 140.00 0.7107 191.00 0.5753 245.00 0.4730

United Kingdom 877.00 4.4518 1,270.00 3.8253 1,700.00 3.2819

World 19,700.00 33,200.00 51,800.00



Spain, the United Kingdom, Poland, and the Netherlands lead the EU-25.

One integrated common economy of the EU with intraregional free flows

of investment and trade will remedy the imbalance, and the EU and the

USA will be the competitive economic units.

Intra-EU free flows of investment and trade have been referred to. They

will help progressive economic integration of the European continental

economy. Foreign investments will naturally seek profitable investment

opportunities in the continental market of Europe. In addition, investment

Table 3.7B. A summary of shares of world GDP

o 0.90% 0.93–2.29% 2.89–5.88%

Austria The Netherlands France

Belgium Spain Germany

Cyprus Italy

Czech Republic United Kingdom

Denmark

Estonia

Finland

Greece

Hungary

Ireland

Latvia

Lithuania

Luxembourg

Malta

Poland

Portugal

Slovak Republic

Slovenia

Sweden

Note: Compiled from Table 3.7A. Data for Czech Republic, Estonia,

Lithuania, Poland, and Slovenia are for selected years.

Table 3.8. GDP (PPP) of EU-12, EU-15, EU-25, USA as a percentage of

world GDP (constant 2000 international $, in billions)


EU-12 4,082.68 20.72 6,114.50 18.42 7,987.60 15.42

EU-15 5,189.98 26.35 7,697.50 23.19 10,092.60 19.48

EU-25 5,299.74 26.90 8,267.52 24.90 11,104.13 21.44

USA 4,290.00 21.78 7,090.00 21.36 10,800.00 20.85

World 19,700.00 33,200.00 51,800.00

Note: EU-12 are Member States of the Eurosystem, EU-15 the Member States until the 2004

enlargement, and EU-25 the current Member States of the European Union.



and trade will bring employment to where the people are, and free move-

ment of labor may be less of a contributing factor. How could the rest of

the world do without any economic engagement with the EU-25, which

produces such a major share of world output? Our immediate focus will

be on intra-EU flows of investment and trade, presented in Tables 3.11

and 3.12.

Table 3.11A describes the time profile of investment flows from the EU-

15 to the AC-10 for 1999–2003. The shares of extra-EU-15 varied between

4 percent and 6 percent. Table 3.11B presents the share of outward stocks

of foreign direct investment (FDI) to the AC-10 in 2002. In terms of stocks

at end-2002, the EU-15 held h120 billion in the AC-10, 6 percent of total

extra-EU-15 FDI stocks. One common macroeconomy, with one common

currency, will be a strong motivating force for intraregional investment

flows. This will also induce the rest of the world to follow with more FDI in

the expanded market of the EU-25. The integration of the AC-10 into the

EU has successfully invited FDI in this manner, with Poland, the Czech

Table 3.9. Capital–labor ratios of EU-25 and USA

1980 1990 2002

Austria 8,777 10,071 11,823

Belgium 8,518 9,993 11,397

Cyprus — — —

Czech Republic — 2,420 3,084

Denmark 6,401 7,462 11,963

Estonia — 2,224 2,723

Finland 8,788 10,746 9,425

France 7,269 9,352 9,851

Germany 7,733 8,521 8,988

Greece 5,184 4,147 6,222

Hungary 1,734 1,626 2,654

Ireland 7,275 8,470 13,965

Italy 22,876 15,820 12,441

Latvia 3,356 4,606 1,869

Lithuania — — 1,603

Luxembourg 9,439 15,506 22,961

Malta — — —

The Netherlands 9,195 9,115 10,412

Poland — 1,144 1,675

Portugal 3,017 4,002 5,496

Slovak Republic — — 2,102

Slovenia — 2,286 5,119

Spain 4,900 7,025 8,287

Sweden 7,276 9,026 8,465

United Kingdom 4,238 6,364 8,754

United States 7,145 8,571 12,568

Note: K ¼ Gross capital formation, N ¼ Total labor force. No data reported for Cyprus and

Malta. Lithuania only reported data for 2002.

Source: Based on data from World Development Indicators (2005).


Republic, and Hungary, attracting as much as 83 percent of FDI from the

rest of the EU. Table 3.11C presents FDI flows to the AC-10 from outside

the EU. Table 3.11D relates to FDI inflows from the extra-EU countries to

the EU by types of activity.

Germany has been the major investor to the acceding countries. At the

end of 2002, Germany held 23 percent FDI stocks, followed by France (11

percent), Austria (10 percent), and the Netherlands (9 percent) (see Eu-

ropean Union foreign direct investment yearbook, 2005 (EUROSTAT)). The

intra-EU investment flows from the 12 members of the Eurosystem will

avoid the risk of exchange rate fluctuations once the AC-10 become full

fledged members of the euro. It should be noted that between 2001 and

2003, the AC-10 welcomed some h10 billion in foreign investments from

outside the EU-25 which included the USA, Canada, Japan, South Korea,

Australia, and New Zealand.

Table 3.11D presents data on EU FDI inflows from the extra-EU

countries. The cumulative total for 1998–2002 amounted to h552 billion.

The share of services in extra-EU inflows reached an average of about 82

percent, with the high point in 2002 at a value of h108 billion, some 90

percent of the total inflow. The service sector includes money and banking,

other financial services, high-tech communication services, high-tech com-

munications, and tourism.

Table 3.12 presents data on intra-EU trade and shows a pattern for

1995–2004. The cross-border intra-EU trade, free from all tariffs and

quantitative restrictions in any and all forms, expectedly increases albeit at

Figure 3.4. Capital–labor ratios of EU-25 and USA, 2002

0

5000

10000

15000

20000

25000

Lith

ua

nia

Po

lan

d

Latv

ia

Slo

vak R

epublic

Hu

ng

ary

Esto

nia

Cze

ch

Re

pu

blic

Slo

ve

nia

Port

ugal

Gre

ece

Sp

ain

Sw

ed

en

Un

ite

d K

ing

do

m

Ge

rma

ny

Fin

lan

d

Fra

nce

Ne

the

rla

nd

s

Be

lgiu

m

Austr

ia

Denm

ark

Italy

Un

ite

d S

tate

s

Ire

lan

d

Lu

xe

mb

ou

rg

Source: Data taken from World Development Indicators (2005)

Note: Cyprus and Malta did not report data and are not included


fluctuating rates. All other things being equal, the growth of the overall EU

economy will expectedly follow the growth trend.

3.6. Supranational macroeconomics of the EU

The emergence of the supranational macroeconomy of the EU-25 has fi-

nally become a reality. May this encourage sovereign nation economies of

marginal economic dimensions to redefine their established concept of

sovereignty?

The supranational macroeconomics of the EU-25 has been evaluated

first in terms of GDP and trade. GDP is the base for aggregate demand

and aggregate supply. With relevant data of the EU-25 trade with the rest

of the world, we have examined the demand for EU output of goods and

services by the rest of the world, and the EU’s demand for the output

produced by the rest of the world.

Next, we studied the production map of the EU’s integrated single

common European economy, limiting the study to the capital/labor and

Table 3.10. Capital–GDP ratios of EU-25 and USA

1980 1990 2002

Austria 1,892,765 1,838,089 1,825,082

Belgium 2,189,844 2,178,851 2,161,702

Cyprus — — —

Czech Republic — 2,514,696 3,093,914

Denmark 828,604 887,217 1,162,103

Estonia — 501,703 449,036

Finland 1,373,846 1,382,082 1,023,543

France 10,942,490 12,051,700 11,662,439

Germany 18,439,708 17,470,947 15,894,967

Greece 2,263,542 1,987,580 2,725,665

Hungary 2,463,456 1,846,517 2,611,954

Ireland 942,420 824,780 854,824

Italy 39,776,544 23,861,937 16,608,153

Latvia 1,511,086 1,718,571 639,081

Lithuania — — 786,338

Luxembourg 74,203 85,160 93,712

Malta — — —

The Netherlands 3,292,873 3,379,653 3,331,361

Poland — 7,010,636 7,506,512

Portugal 2,308,297 2,358,381 2,765,848

Slovak Republic — — 1,531,558

Slovenia — 289,976 514,545

Spain 7,934,348 9,987,107 10,410,970

Sweden 1,605,104 1,817,545 1,482,177

United Kingdom 7,335,284 9,223,250 10,306,720

United States 34,828,168 38,213,018 53,465,545

Note: K ¼ Gross capital formation.

Source: Based on data from World Development Indicators (2005).


Table 3.11A. EU-15 FDI outflows to AC-10, 1999–2003 (h, in millions)

1999 2000 2001 2002 2003

Extra-EU-15 320,307 435,676 304,466 133,453 130,767

AC-10 13,034 20.754 18,969 5,940 5.854

Share of extra-EU-15 (%) 4 5 6 4 4

Note: The AC-10 are members of the EU-25 as of May 2004.

Source: European Union Foreign Direct Investment Yearbook (2005, p. 36).

Table 3.11B. Shares of FDI outward stocks, end-2002 (%)

Czech Republic 24

Hungary 22

Slovakia 6

Slovenia 2

Poland 37

Cyprus 4

Malta 1

Estonia, Lithuania, and Latvia 4

Total 100


Figure 3.5. Capital–GDP ratios of EU-25 and USA, 2002

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

Lu

xe

mb

ou

rg

Esto

nia

Slo

ve

nia

La

tvia

Lith

ua

nia

Ire

lan

d

Fin

lan

d

De

nm

ark

Sw

ed

en

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ep

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lic

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str

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rtu

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l

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ch

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pu

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nd

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ing

do

m

Sp

ain

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nce

Ge

rma

ny

Ita

ly

Un

ite

d S

tate

s

Source: Data taken from World Development Indicators (2005)

Note: Cyprus and Malta did not report data and are not included


capital/output ratios. The intra-EU flows of investment and trade have

contributed to broaden the EU’s economic base. A positive growth trend

stemming from these free flows is evident. The EU-15 countries have been

investing in the new 10; it so happens this investment attracted other

Table 3.12. Intra-EU trade flows (h, in millions), 1995–2004

Exports % Change Imports % Change

1995 1,051,698 995,471

1996 1,130,421 7.49 1,064,953 6.98

1997 1,240,898 9.77 1,161,811 9.10

1998 1,344,807 8.37 1,268,876 9.22

1999 1,510,323 12.31 1,438,165 13.34

2000 1,781,193 17.93 1,696,692 17.98

2001 1,841,814 3.40 1,737,555 2.41

2002 1,864,984 1.26 1,750,002 0.72

2003 1,878,543 0.73 1,781,235 1.78

2004 2,022,742 7.68 1,941,181 8.98

Source: Statistical Yearbook (1958–2004, p. 92) (EUROSTAT).

Table 3.11D. Extra-EU FDI inflows, net of reinvested earning by kind ofactivity (h, in millions)

Manufacturing Services Other sectors Total

1998 20,105 64,655 2,223 86,983

1999 23,390 76,907 5,957 106,254

2000 (7,679) 109,517 32,888 134,726

2001 13,280 92,549 (2,519) 103,310

2002 11,148 108,458 688 120,294

1998–2002 60,244 452,086 39,237 551,567


Table 3.11C. Shares of the AC-10 investment flows fromextra-EU-25 (%), 2001–2003

Czech Republic 23

Hungary 21

Cyprus 16

Poland 15

Slovenia 11

Others 14

Total 100



investments from around the world to the new group of EU members.

Based on relevant data on GDP and trade, the overall economic structure

of the EU-25 matches that of the USA.

The political integration of the EU is yet to come and the EU Con-

stitution remains to be adopted (see Chapter 5). Even so, the progress since

the ECSC in 1951 has been spectacular. For the period, intraregional

macroeconomic policy based on one common monetary and fiscal policy

has not been optimally operational. As the process progresses, the macro-

economic framework of the EU will become more universally appreciated

(Dutta, 2001). However, a comprehensive econometric model of the single

economy of the EU with dynamic properties remains to be the subject of

study.


CHAPTER 4

European Central Bank and the Euro: Theoryof Optimum Currency Area Revisited

4.1. One money to one Europe: one USA to one money

One common money, the euro, managed by one common central bank, the

European Central Bank (ECB), for 12 member economies of the European

Union (EU) has been an epochal event in the eventful process of European

integration. The ECB, the first-ever supranational central bank, provides

the core of EU’s supranational macroeconomics. The headquarters of the

ECB is located in Frankfurt, Germany. English has been adopted as its

official language. On January 1, 1999, the first stage began with the euro

being introduced as an accounting unit, and was uniquely defined in terms

of the national currencies of each of the participating member economies

and was initially valued at h1.17 ¼ $1.00. More than 300 million people in

12 EU member countries have adopted the euro as their currency. The euro

has been accepted internationally as a major currency, and based on its

performance for 1999–2004, the ECB has already earned observer status in

the International Monetary Fund (IMF).

The second stage came on January 1, 2001, when the euro became a

medium of exchange. At this point, the euro began circulating along with

the national currency of each member economy of the system. Prices of

goods and services were quoted in both the euro and the national currency

at its fixed rate, and could be paid in either currency. Many men and

women of wisdom warned that the dual circulation of the old national

currency and the new supranational currency could never work, but to the

surprise of many, the system did not provoke any protest movement.

The third and final stage came in 2002, when the euro became the

exclusive currency of the Eurozone and the national currencies were sys-

tematically withdrawn from circulation. Austria, Belgium, Finland,

France, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal,

and Spain withdrew their respective national currencies from circulation by

February 2002. Germany already completed the withdrawal by December

31, 2001 to lead the process. Acceptance of payments in national currencies

ceased to be obligatory, while payments in euro became so. Most national

central banks (NCBs) still honor exchanges of national currency to the

euro (see Table 4.1).

The euro has served as a unit of account, a medium of exchange, and a

store of value, not only for all households and businesses in the Eurozone, but

also globally, serving all the functions that a legal tender money of a sovereign

nation-state economy is expected to do. Indeed, the euro has become a com-

peting international reserve currency, and the euro–dollar exchange rate fluc-

tuations have become a topic for much discussion for all concerned (see

Section 4.5). Will one money lead to one Europe? (see Arestis et al., 1999;

Issing, 1996, 1998, 1999a, b, 2001, 2002a, b, c, 2004; also Sawyer, 1999;

Sleijpen, 1999; Issing et al., 2001).

The experience of the USA in this regard has been in the reverse order:

one political union led to one money. The Declaration of Independence was

approved by the Second Continental Congress on July 4, 1776. The Treaty of

Paris followed in 1783, when Great Britain formally acknowledged the inde-

pendence of the USA. The Constitution was adopted in 1789 and George

Washington assumed the office as the first President of the United States of

America later that year. A common currency was never introduced because

there was a popular distrust of one common currency under one common

central bank. Individual states had their own banks who independently

issued currencies and did their profitable businesses.

It was not until 1791 when the Continental Congress chartered the first

Bank of the United States which was expected to be modeled after the Bank

of England. The charter lapsed in 1811 and a permanent NCB for the US

was yet to be established. In 1816, the second Bank of the United States was

chartered by the Congress and the charter was due to expire in 1836. The

issue became highly political and President Jackson successfully blocked

efforts to re-charter the national bank, leaving the market free and open to

banks in various states. A state of economic panic followed because there

Table 4.1. Time limits on currency exchanges with national central banks

National central bank Exchange of banknotes until Exchange of coins until

Belgium Unlimited 31 December 2004

Germany Unlimited Unlimited

Greece 01 March 2012 1 March 2004

Spain Unlimited Unlimited

France 17 February 2012 17 February 2005

Ireland Unlimited Unlimited

Italy 29 February 2012 29 February 2012

Luxembourg Unlimited 31 December 2004

The Netherlandsa 01 January 2032 01 January 2007

Austria Unlimited Unlimited

Portugal 28 February 2022 31 December 2002

Finland 29 February 2012 29 February 2012

Source: http://www.ecb.int/bc/exchange/html/index.en.html.aDe Nederlandsche Bank will not exchange guilders in every case. Guilders obtained from

commercial activities after January 27, 2002 will no longer be exchanged. For more infor-

mation, please see the website of De Nederlandsche Bank.


http://www.ecb.int/bc/exchange/html/index.en.html.

was no lender of the last resort. The National Bank Act of 1863, amended in

1864, proved to be another feeble attempt. From the 1870s through the

1890s, the USA experienced national challenges when the two rival groups

fought for the gold and silver currencies. Conflicts between the gold- and

silver-producing regions remain a part of history. Could a bimetallic cur-

rency regime be adopted and maintained successfully?

By 1912, the original 13 colonies expanded to a country of 48 states, but

still had no common currency under a common central bank. The absence

of one common currency managed by an NCB for the United States of

America continued to be a serious economic issue of concern. Finally, the

system collapsed under the strain of over-speculation in money manage-

ment by various state banks. The Banking Crisis of 1907 and consequent

damages in the financial market became a national crisis. The National

Commission on Money did a study in 1911, and its report was published

the year after, and it recommended the establishment of a central bank

fully in the private sector (see Walton and Rockoff, 2002).

Critics pressed for a central bank with statutory power to manage the

monetary policy of the United States of America. The issue became too

pressing and finally Congress moved to pass the Federal Reserve Bank Act

in 1913, creating the Federal Reserve System (FRS). The US dollar, man-

aged by one central bank, the FRS, with 12 regional Federal Reserve

Banks, was ultimately instituted 124 years after the political union of the

USA became institutionalized in 1789. The New Deal’s banking legisla-

tion, specifically the Banking Act of 1933, reinforced the leadership role of

the FRS for managing national monetary policy (see Current et al., 1983).

The EU has drawn on 124 years of American experience and took steps

to introduce one money with one central bank at the soonest possible

opportunity. On January 1, 1999, 11 Member States of the EU-15 vol-

untarily surrendered their respective monetary sovereignty and adopted the

euro as their common currency, managed by the ECB. Greece’s member-

ship to become the 12th member of the ECB was approved in 2000 and

Greece joined the Eurosystem on January 1, 2001. The EU-12 became the

regime of one common money, the euro. True, the EU continues to strug-

gle for a single political identity. The US experience has been costly as one

examines the dire consequences of the monetary crises of the pre-Fed years.

One money has given the EU a degree of economic integration, ensuring

free movement of capital within the Eurozone without exposure to the

risks of exchange rate fluctuations. Standardization of the money market

of the Eurozone, hitherto under diverse banking laws under different

NCBs, working under laws enacted by their respective national govern-

ments, has been an accomplishment. The competitive strength of the euro

in the world markets has made this young currency an international reserve

currency competing with the US dollar, the British pound sterling, and the

Japanese yen. Will one money, the euro, be a positive contribution to the

EU’s political integration?

European Central Bank and the Euro 87

4.2. The European Central Bank

As early as 1962, the European Commission made its first proposal for

economic and monetary union. In May 1964, a Committee of Governors

of the central banks of the Member States of the European Economic

Community (EEC) was formed to institutionalize cooperation among the

EEC central banks. The 1970 Werner Report proposed an agenda for an

economic and monetary union by 1980 (Werner Report, 1970). In April

1972, the SNAKE system for progressive convergence of the margins of

fluctuations of exchange rates among the currencies of EEC Member

States was established. To support the SNAKE system, the European

Monetary Cooperation Fund (EMCF) was set up in April 1973. The sys-

tem did not work, and in March 1979, the European Monetary System

(EMS) was created. These early efforts for economic and monetary co-

operation among independent sovereign Member States of the EEC

proved to be of limited consequence. The Single European Act of 1986

became the answer: One Europe will have one money.

In June 1988, the European Council approved of the appointment of a

committee for the progressive realization of an Economic and Monetary

Union (EMU). The Committee, chaired by Jacques Delors, the then Presi-

dent of the European Commission, consisted of the governors of the cen-

tral banks of the then European Community (EC) Member States, the

General Manager of the Bank for International Settlements (BIS), the

President of the Banco Exterior de Espana, and Niels Thygesen, a pro-

fessor of economics from Denmark. The Delors Report proposed a three-

phase process to achieve economic and monetary union.

The first phase of EMU began on July 1, 1990, when all restrictions on

the movement of capital between Member States were abolished. In De-

cember 1990, an intergovernmental conference to prepare for phases two and

three of EMU were launched. The second phase of EMU began on January

1, 1994, when the European Monetary Institute (EMI) was established. The

EMI was a step-in transition and had no responsibility to manage the mone-

tary policy of the EU. The two specific tasks for the EMI were to strengthen

cooperation among the central banks of the Member States, and to make

preparatory arrangements to set up the European System of Central Banks

(ESCB) for the creation of a single currency at the third phase. The EMI

provided a forum for debates and dialogues. The third and final phase of

EMU came in December 1995 when the European Council voted to name

the single currency the euro, and for it to be initiated on January 1, 1999. The

EMI also continued further preparatory work for the new exchange rate

mechanism (Study Group of EMU, 1973; Coppel et al., 2000).

In June 1997, the European Council adopted the Stability and Growth

Pact that ensured fiscal discipline in support of the common monetary policy

based on the euro. The Council of Finance Ministers of the 12 countries of

the Eurozone (ECO-FIN) assumed the operational responsibility of working


with the ECB to this end. On May 2, 1998, the Council of the EU, in the

composition of the Heads of State or Government of the 11 euro members,

unanimously voted to approve of the euro, to be managed by one common

central bank, the ECB. They also came to an understanding for the ap-

pointment of members to the Executive Board of the ECB, consisting of the

President, the Vice President, and four other members. Their appointment

came into effect on June 1, 1998 along with the formal institutionalization of

the ECB. The ECB became operational on January 1, 1999.

All Member States of the Eurosystem had to fulfill the convergence

criteria as per the Maastricht Treaty which stated numerical benchmarks

for the rate of inflation, budget deficit, and national debt (see Chapters 2

and 3). The ECB assumed the responsibility of managing the monetary

policy of the Eurozone. The quantity of money to be supplied and the core

rates of interest to be charged became the ECB’s assignment, in the context

of fiscal discipline as per the compact of growth with stability. Austria,

Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the

Netherlands, Portugal, and Spain were the 11 original signatories. Fol-

lowing a decision by the European Council on June 19, 2000, Greece

became a member of the ECB on January 1, 2001.

The inauguration of the ECB on January 1, 1999, the first-ever sup-

ranational central bank, became a new milestone in the process of Euro-

pean integration. The EMU began with the coordination of exchange rates

among the national currencies of the Eurozone. The period of dual cur-

rencies circulation ended in February 2002. The ECB irrevocably fixed

exchange rates by defining the value of each currency in terms of the euro

(see Table 4.2).

4.2.1. The administrative structure

Table 4.3 describes the ECB’s administrative structure consisting of the

Executive Board, the Governing Council, and the General Council.

4.2.2. The Executive Board and the Governing Council

The Executive Board consists of the President, the Vice President, and four

other Members appointed by common accord of the Heads of State or

Government of the Member States of the Eurozone. The Board is respon-

sible for the current business of the ECB, insofar as implementation of the

monetary policy is concerned. As such, they also assume specific powers

delegated to it by the Governing Council.

The Governing Council, consisting of the six members of the Executive

Board and the 12 Governors of the NCBs of the 12 Member States, has a

twofold task: to formulate the monetary policy of the Eurozone, and to

specify guidelines and necessary instructions for their implementation.

Each member of the Governing Council has one vote, and the President of


the ECB exercises the tie-breaking vote, if needed. Each member casts his/

her vote independent of the interests of his/her country.

With the expansion of the EU from 15 to 25 members in 2004, 10 new

members will join the Eurosystem as per terms of accession. The voting

rights of the members of the Governing Council will follow a new format.

The six members of the Executive Board will continue to enjoy their voting

rights as before. The voting rights of the NCB Governors will begin to

rotate once the number of Eurozone countries exceeds 15; votes will be

limited to 12 countries at a time. However, participation of all 25 NCB

Governors in all Governing Council meetings has been a stipulation.

4.2.3. The General Council

The General Council consists of the 18 members of the Governing Council

plus the 13 Governors of the NCBs not yet part of the Eurozone as of May

1, 2004. The 13 are: the three members of the EU-15, Denmark, Sweden,

and the UK; and the 10 new members admitted to the EU in 2004 who are

in the process of evaluation of the convergence criteria. Since its accession,

Slovenia has become eligible to adopt the euro and its membership to the

Table 4.3. The administrative structure of the ECB

I Executive Board President, Vice President, and four other members

II Governing Council President, Vice President, and four other members

Governors of the 12 NCBs

III General Council President, Vice President, and four other members

Governors of all EU NCBs

Source: ECB (2004).

Table 4.2. Fixed euro conversion rates

Currency Units of national currency

for 1 Euro

Belgian franc 40.3399

Deutsche mark 1.95583

Spanish peseta 166.386

French franc 6.55957

Greek drachma 340.75

Irish pound 0.787564

Italian lira 1936.27

Luxembourg franc 40.3399

Dutch guilder 2.20371

Austrian schilling 13.7603

Portuguese escudo 200.482

Finnish markka 5.94573

Source: http://www.ecb.int/bc/intro/html/index.en.html#fix.


http://www.ecb.int/bc/intro/html/index.en.html#fix.

Eurosystem is expected to follow on January 1, 2007. Since the 13 have not

yet adopted the euro as their currency, the General Council has no privi-

leges to the formulation of monetary policy of the Eurozone.

The General Council is a consultative body with no voting rights. It

traces its origin to the EMI. However, the 13 must share specific respon-

sibilities regarding the policy of price stability, and necessary preparation

for irrevocably fixing exchange rates of the national currencies to the euro.

Indeed, each of these 13 NCBs has already been assigned their respective

share of capital stock contributions to be made to the ECB (see Tables

4.4A and 4.4B).

The ECB is responsible for processing the applications of the 10 new

members of the EU for their membership of the Eurozone. Even the three

out-members, as members of the EU Free Trade Area, belonging to one

common membership of the WTO with one vote, are required to relate

their respective national monetary policies to that of the Eurozone.

Whether the three out-members will adopt the euro remains an open issue

(see Chapter 6).

The General Council provides a forum for exchange of views regarding the

ECB’s monetary policy. For this broader agenda, the ECB collects relevant

statistical information from all countries of the EU-25. Having a compre-

hensive database alone can optimize the process of information-sharing.

4.2.4. Two issues of concern: the administrative structure of the ECB

The establishment of the ECB as the historic supranational central bank of

the EU warranted careful resolution of fundamental issues relative to cen-

tral banking. The equality of each member country and the synthetic in-

tegration of their banking laws, formulated historically by their respective

governments, had to be addressed. One way to accomplish this objective

was to invite all the Governors of the NCBs to serve as ex-officio members

of the Governing Council. They could help convergence of banking laws of

the member countries. Each Governor, with one vote, assured equality of

member countries, large or small. As they voted in the meetings of the

Governing Council, they were instructed to act on their independent judg-

ment of the merit of the issue under consideration, without seeking or

taking any instruction ‘‘from Community institutions or bodies, from any

government of a Member State or from any other body.’’ It was also

necessary to ensure that a comprehensive view of the monetary policy of

the Eurozone was taken. The six members of the Executive Board, the

President, the Vice President, and the four other members, jointly ap-

pointed by all member governments, are entrusted with this assignment.

4.2.5. Independence of the ECB

The independence of a central bank is a critically important issue. Its

authority to manage the monetary policy of an economy must be free from


partisan political interferences of governments in power. The fiscal policy

of an economy in a pluralistic democratic form of government is managed

by the executive branch, subject of course, to the approval of the legislative

branch.

The optimal coordination of the monetary and fiscal policies is an issue,

and it can be successfully done if and only if the monetary authority of the

central bank is not compromised by political influence trading. One way to

ensure this has been to make the tenure of the Central Bank Heads fixed.

For the ECB, the six members of the Executive Board have a fixed tenure

Table 4.4A. Shares of ECB capital stock (%)

National Central Bank June 1,

1998–Dec 31,

2003

January 1,

2004–April

30, 2004

May 1, 2004

onward

Nationale Bank van Belgie/Banque

Nationale de Belgique (Belgium)

2.8658 2.8297 2.5502

Deutsche Bundesbank (Germany) 24.4935 23.4040 21.1364

Bank of Greece (Greece) 2.0564 2.1614 1.8974

Banco de Espana (Spain) 8.8935 8.7801 7.7758

Banque de France (France) 16.8337 16.5175 14.8712

Central Bank and Financial Services

Authority of Ireland (Ireland)

0.8496 1.0254 0.9219

Banca d’Italia (Italy) 14.8950 14.5726 13.0516

Banque centrale du Luxembourg

(Luxembourg)

0.1492 0.1798 0.1568

De Nederlandsche Bank (Netherlands) 4.2780 4.4323 3.9955

Oesterreichische Nationalbank (Austria) 2.3594 2.3019 2.0800

Banco de Portugal (Portugal) 1.9232 2.0129 1.7653

Suomen Pankki (Finland) 1.3970 1.4298 1.2887

Eurozone 80.9943 79.6384 71.4908

Ceska narodnı banka (Czech Republic) 1.4584

Danmarks Nationalbank (Denmark) 1.6709 1.7216 1.5663

Eesti Pank (Estonia) 0.1784

Central Bank of Cyprus (Cyprus) 0.1300

Latvijas Banka (Latvia) 0.2978

Lietuvos bankas (Lithuania) 0.4425

Magyar Nemzeti Bank (Hungary) 1.3884

Central Bank of Malta (Malta) 0.0647

Narodowy Bank Polski (Poland) 5.1380

Banka Slovenije (Slovenia) 0.3345

Narodna banka Slovenska (Slovakia) 0.7147

Sveriges Riksbank (Sweden) 2.6537 2.6636 2.4133

Bank of England (United Kingdom) 14.6811 15.9764 14.3822

Non-Eurozone 19.0057 20.3616 28.5092

EU-25 100 100 100

Source: ECB, see also Scheller (2004, pp. 114–116).


of seven years, with no provision for re-appointment. This precludes any

possibility of the six members to be tempted to trade a favor with one or

another member government(s) to win a possible re-appointment. No

provision for their removal by impeachment should also to be noted. In-

dependent decision making by the members of the Executive Board is the

objective.

In addition, a provision has been made to prohibit any central bank

funding by the public sector. The ECB has its own budget and its share

capital is subscribed and paid up by the NCBs of the Eurozone, ensuring

no financial interlinking with the budget and finances of the EU-25 ad-

ministration. We have also noted that members of the Governing Council

are required to exercise their voting privileges at Council meetings with

total commitment to independent evaluation of the merit of the issue under

review.

4.2.6. Capital stock of the ECB

Based on population and gross domestic product (GDP) of the Member

States, their respective capital shares to the ECB have been determined.

NCBs of the EU Member States are constituent members of the ECB and

each is required to contribute a share capital (see Table 4.4A). The shares

were first calculated in 1998, pending the formal inauguration of the ECB on

January 1, 1999. Following expanded membership of the EU, they were

adjusted on January 1, 2004, and again on May 1, 2004. The shares of

Eurozone NCBs have decreased over this period. The 12 members of the

Table 4.4B. Eurozone national central banks (NCBs)

NCB Capital key (%) Paid-up capital (h)

Nationale Bank van Belgie/Banque

Nationale de Belgique

2.5502 141,910,195.14

Deutsche Bundesbank 21.1364 1,176,170,750.76

Bank of Greece 1.8974 105,584,034.30

Banco de Espana 7.7758 432,697,551.32

Banque de France 14.8712 827,533,093.09

Central Bank and Financial Services

Authority of Ireland

0.9219 51,300,685.79

Banca d’Italia 13.0516 726,278,371.47

Banque centrale du Luxembourg 0.1568 8,725,401.38

De Nederlandsche Bank 3.9955 222,336,359.77

Oesterreichische Nationalbank 2.08 115,745,120.34

Banco de Portugal 1.7653 98,233,106.22

Suomen Pankki-Finlands Ban 1.2887 71,711,892.59

Total 71.4908 3,978,226,562.17

Source: http://www.ecb.int/ecb/orga/capital/html/index.en.html.


http://www.ecb.int/ecb/orga/capital/html/index.en.html.

Eurozone have fully paid up their subscriptions and the total amounts to

h3,978,226,562 (Table 4.4B). As of May 1, 2004, the total capital shares

contributed is h5,564,669,247. It should be noted that the three out-members

of the Eurozone, Denmark, Sweden, and the United Kingdom, have been

assigned ECB shares to the amount of h71,524,141, and the new members

have contributed h39,526,847 (Table 4.4C). Noneuro countries are not

partners to the ECB’s profit or loss.

4.2.7. The ECB’s functions

The basic tasks of the ECB are:

� to define and implement the monetary policy of the system;� to manage foreign exchange rates;� to hold and manage the official foreign reserves of the Member States;

and� to promote smooth operation of payment systems.

The Maastricht Treaty provided specific criteria relative to price stabi-

lity, public finances relative to budget deficit and national debt as per-

centages of GDP, exchange rate stability, long-term interest rates, and

central bank independence. The euro has not merely survived; today, it is a

stable currency based on competitive economic benchmarks of shares of

world output and trade (see Chapter 3, also Section 4.5). To formulate the

monetary policy with one common currency, for the 12 member countries

Table 4.4C. Non-Eurozone NCBs (from May 1, 2004)

NCB Capital key (%) Paid-up capital (h)

Danmarks Nationalbank 1.5663 6,101,159.01

Sveriges Riksbank 2.4133 9,400,451.41

Bank of England 14.3822 56,022,530.23

Subtotal initial non-Eurozone NCBs 18.3618 71,524,140.65

Ceska narodnı banka 1.4584 5,680,859.54

Eesti Pank 0.1784 694,915.90

Central Bank of Cyprus 0.13 506,384.90

Latvijas Banka 0.2978 1,160,010.95

Lietuvos bankas 0.4425 1,723,656.30

Magyar Nemzeti Bank 1.3884 5,408,190.75

Central Bank of Malta 0.0647 252,023.87

Narodowy Bank Polski 5.138 20,013,889.41

Banka Slovenije 0.3345 1,302,967.30

Narodna banka Slovenska 0.7147 2,783,948.38

Subtotal new non-Eurozone NCBs 10.1474 39,526,847.30

Total 28.5092 111,050,987.95

Source: http://www.ecb.int/ecb/orga/capital/html/index.en.html.



with their respective sovereign national governments independently man-

aging their fiscal policies was indeed a challenging task. The transmission

of monetary policy became a concern, as member economies could be

struck by asymmetric shocks.

Price stability naturally became the prime concern of the ECB. Indeed,

price stability enhances the potential of economic growth, and thus con-

tributes to the agenda of full employment and full capacity utilization.

Price stability ensures transparency of relative prices and helps optimal

allocation of limited resources. The absence of inflation normalizes the rate

of interest and should enable an economy to experience a robust savings-

investment behavioral pattern.

The construction of a comprehensive price index acceptable to the euro

community, and to the world at large, became the immediate task. The

result is the Harmonized Index of Consumer Prices (HICP). Short-term

price fluctuations can hardly be controlled; long term-price control will, of

course, be exposed to too much uncertainty. For pragmatic consideration,

the focus came to be on medium-term price stability. The ECB follows a

two-pillar framework combining its economic analysis with its monetary

analysis. Economic analysis covers the real situations in the market as the

supply–demand blades of a pair of scissors operate. The monetary analysis

involves the critical decisions for the central bank in an economy to an-

ticipate market behavior, and act either to encourage the market’s rational

behavior, or to restrain its irrational exuberance. To make it transparent, a

numerical benchmark was essential and a 2 percent upper bound for in-

flation became the guideline. A zero rate of inflation can be left for abstract

theoretical expositions. How could a deflationary price policy ever be

helpful to the Eurozone? For several Member States, deviations from the 2

percent guideline have been accommodated as long as concerned Member

States agreed to make necessary corrections.

Table 4.5A shows that the Eurozone in general has approximated its

inflation target in 2004 and 2005; the same is true for the remaining 13

noneuro economies of the EU-25. This was made possible by economic

integration with free flow of trade and investment and free movement of

labor. Selected countries, Greece and Finland in the Eurozone, and Sweden,

Latvia, and Hungary in the non-Eurozone, point to the varying degrees of

inflationary pressures for 2004 and 2005.

The ECB has a firm commitment to price stability. Following the recent

increase in the oil prices, inflationary pressure has become a global con-

cern. On June 8, 2006, the ECB raised its key interest rate by 25 basis

points to 2.75 percent. Analysts suggest that oil prices will continue to add

pressure to prices and inflation, and speculate that the ECB may continue

to raise its key rate by another 25 basis points to 3 percent by September

2006.

Table 4.5B presents an annual average of the HICP for 2001–2005 at

2.2 percent, and the annual HICP for 2002–2005 closely approximates the


target rate of 2 percent. Table 4.5C states the weights used for the HICP

index in 2003 and 2004 for goods and services. The weights for 2003 were

59 percent and 41 percent, respectively. Decomposition of goods into four

categories and services into five, advise readers more about the method-

ology used in the construction of the HICP. The weights, as expected, vary

over time. In 2004, weights for goods and services were 58.7 percent and

41.3 percent, respectively. Transparency makes the acceptance of the HICP

both in the EU and in the rest of the world effective.

Tables 4.6A and 4.6B review the interest rate structure of the ECB for

the stated time period. Table 4.6A provides the interest rates for (a) deposit

facility, (b) main refinancing rate, fixed as well as variable with minimum

bid, and (c) marginal lending facility. Deposit facility enables counterpar-

ties to make overnight deposits with an NCB at the pre-specified interest

rate. The main refinancing rate relates to the rate of interest for regular

Table 4.5A. Harmonized index of consumer prices (HICP) (%)

2004 2005

Belgium 1.9 2.5

Germany 1.8 1.9

Greece 3.0 3.5

Spain 3.1 3.4

France 2.3 1.9

Ireland 2.3 2.2

Italy 2.3 2.2

Luxembourg 3.2 3.8

The Netherlands 1.4 1.5

Austria 2.0 2.1

Portugal 2.5 2.1

Finland 0.1 0.8

Eurozone 2.1 2.2

Czech Republic 2.6 1.6

Denmark 0.9 1.7

Estonia 3.0 4.1

Cyprus 1.9 2.0

Latvia 6.2 6.9

Lithuania 1.2 2.7

Hungary 6.8 3.5

Malta 2.7 2.5

Poland 3.6 2.2

Slovenia 3.6 2.5

Slovakia 7.5 2.8

Sweden 1.0 0.8

United Kingdom 1.3 2.1

EU 2.1 2.2

Source: Eurostat.


open market operations, executed by the Eurosystem, by a weekly stand-

ard tender which normally has a maturity of one week. Main refinancing

operations are the most significant open market operations and enables

counterparties to bid for money at the fixed rate. Executed at the initiative

of the ECB, they play an important role regarding money supply and

management of the liquidity situation in the money market. Counterparties

to the Eurosystem’s monetary policy operations are required to satisfy

specific eligibility criteria relative to minimum reserve and their financial

standing. At the end of 2003, there were 6,776 credit institutions in the

system; only 2,243 fulfilled the eligibility criteria for participating in open

market operations. Marginal lending facility and deposit facility covered

many others. Marginal lending facility is a standing facility of the Euro-

system, enabling counterparties to receive overnight credit from an NCB at

the pre-specified rate.

Table 4.5C. Weights of the main Eurozone HICP

components, 2003 and 2004

Component 2003 2004

Goods 59.1 58.7

Unprocessed food 7.6 7.7

Processed food 11.7 11.8

Nonenergy industrial goods 31.6 31.0

Energy 8.2 8.1

Services 40.9 41.3

Housing services 10.4 10.4

Transport 6.3 6.4

Communication 2.9 2.9

Recreation and personal services 14.9 15.0

Miscellaneous 6.4 6.6

Source: Eurostat.

Table 4.5B. HICP in the Eurozone

%

2002 2.3

2003 2.1

2004 2.1

2005 2.2

Annual average

1991–1995 3.2

1996–2000 1.6

2001–2005 2.2

Source: Eutrostat.


From June 9, 2000 through August 31, 2001, the interest rate on deposit

facility moved above 3 percent, then, until December 6, 2005, the rate came

down below 2 percent. The ECB has since begun raising rates in response

to the US FED’s efforts to raise interest rates. The interest rates for the

main refinancing and marginal lending facility follow a similar pattern.

Table 4.6B presents data on interest rates for EONIA and EURIBOR.

EONIA is the overnight interest rate prevailing in the euro inter-bank

overnight market. The index is calculated as a weighted average of the

interest rates on unsecured overnight interbank lending transactions in

euros, as reported by a panel of contributing banks. EURIBOR is the rate

of interest at which a prime bank lends euros to another prime bank, and

the index is computed daily for inter-bank deposits with different

Table 4.6A. Key ECB interest rates

Deposit

facility

Main refinancing rate Marginal

lending

facility

Minimum bid

Fixed Variable

1999

January 01 2.00 3.00 4.50

January 04 2.75 3.00 3.25

January 22 2.00 3.00 4.50

April 09 1.50 2.50 3.50

November 05 2.00 3.00 4.00

2000

February 04 2.25 3.25 4.25

March 17 2.50 3.50 4.50

April 28 2.75 3.75 4.75

June 09 3.25 4.25 5.25

June 28 3.25 4.25 5.25

September 01 3.50 4.50 5.50

October 06 3.75 4.75 5.75

2001

May 11 3.50 4.50 5.50

August 31 3.25 4.25 5.25

September 18 2.75 3.75 4.75

November 09 2.25 3.25 4.25

2002

December 06 1.75 2.75 3.75

2003

March 07 1.50 2.50 3.50

June 06 1.00 2.00 3.00

2005

December 06 1.25 2.25 3.25

2006

March 08 1.50 2.50 3.50

June 15 1.75 2.75 3.75

Source: http://www.ecb.int/stats/monetary/rates/html/index.en.html.


http://www.ecb.int/stats/monetary/rates/html/index.en.html

maturities of up to 12 months. We present EURIBOR for both one year

and one month. UNIBOR and EONIA follow the parallel time path.

The Governing Council of the ECB sets the key interest rates of the EU

discussed above to indicate the direction of the monetary policy of the

ECB. Some Eurozone countries inclusive of Cyprus, the Czech Republic,

Hungary, Lithuania, Poland, Slovenia, and Slovakia use Repo instruments

for refinancing operations at the Repo rate (see the Appendix).

4.2.8. ECB’s money supply

Tables 4.7A–4.7C relate to the ECB’s money supply. Table 4.7A presents

the money supply, M1, M2, and M3, for 2003–2005 and the rate of growth

of money supply for each category. To be effective, increases in money

supply of each category must correspond to the economic conditions in the

real market. The ECB has the responsibility of managing the money supply

for the Eurosystem, given the well-specified guideline for price stability.

Table 4.7B explains the system’s monetary aggregates, M1, M2, and

M3. M1 is the narrowest monetary aggregate, comprising currency in cir-

culation plus overnight deposits held with monetary financial institutions

(MFIs) and central government at the post office or treasury. M2 is an

intermediate aggregate that includes M1, deposits with a maximum ma-

turity of two years, and deposits redeemable at notice up to three months.

M3 is the broadest monetary aggregate with seven components: currency

Table 4.6B. EONIA and EURIBOR

EONIA EURIBOR

(1 year) (1 month)

2003 2.32 2.34 2.35

2004 2.05 2.27 2.08

2005 2.09 2.33 2.14

Monthly

2005.1 2.08 2.31 2.11

2005.2 2.06 2.31 2.10

2005.3 2.06 2.33 2.10

2005.4 2.08 2.27 2.10

2005.5 2.07 2.19 2.10

2005.6 2.06 2.10 2.10

2005.7 2.07 2.17 2.11

2005.8 2.06 2.22 2.11

2005.9 2.09 2.22 2.12

2005.1 2.07 2.41 2.12

2005.11 2.09 2.68 2.22

2005.12 2.28 2.78 2.41

2006.1 2.33 2.83 2.39

Source: The monetary policy of the ECB (2004).

Note: Third and sixth month EURIBOR not reported.


in circulation, overnight deposits, deposits with an agreed maturity up to

two years, deposits redeemable at notice up to three months, repurchase

agreements, money market funds shares/units, and debt securities with a

maturity up to two years. Table 4.7C offers a percentage distribution of

M3 in terms of the seven above components at the end of 2002.

To promote a benchmark, the ECB has adopted a reference value set at

4.5 percent for M3 and has not changed it since 1998. The annual rate of

Table 4.7A. Money supply

M1 M2 M3

Amount (h, in billions)

2003 2680.60 5233.90 6141.10

2004 2912.70 5573.60 6534.20

2005 3417.10 6065.60 7056.80

Rate of growth (%)

2003 December 10.60 7.60 7.10

2004 December 9.00 6.70 6.60

2005 December 11.30 8.40 7.30

Source: ECB.

Table 4.7B. Eurozone monetary aggregates

Liability M1 M2 M3

Currency in circulation � � �

Overnight deposits � � �

Deposit with an agreed maturity up to 2 years � �

Deposits redeemable at notice up to 3 months � �

Repurchase agreements �

Money market funds shares/units �

Debt securities issued with a maturity up to 2 years �

Source: ECB.

Table 4.7C. Percentage shares of components of M3 at end-2002 (%)

Currency in circulation 6

Overnight deposits 36

Deposit with an agreed maturity up to 2 years 19

Deposits redeemable at notice up to 3 months 25

Repurchase agreements 4

Money market funds shares/units 8

Debt securities issued with a maturity up to 2 years 2

Total 100

Source: ECB.


M3 growth is considered compatible with the policy of price stability over

the medium term. The rate of growth of real GDP must be a key com-

ponent to take into consideration. The Governing Council of the ECB

monitors the operation of the reference value and is responsible for nec-

essary action, as and when necessary.

The ECB, as the supranational central bank of the Eurozone, is re-

quired to present its Annual Report on its activities of the previous and

current year to the European Parliament, the EU Council, the European

Commission, and the European Council. The European Parliament may

hold a general debate on the Annual Report of the ECB. In addition,

protocol further requires that the ECB may be required to make necessary

presentations to specific groups in legislative and executive branches of the

regional administration, who share the responsibility for the supervision of

monetary policy.

4.3. The Eurozone, the USA and Japan: money market structures and stock

market capitalization

Given the fact that the euro is a baby currency of just a few years, a

comparison of the money market structure of the Eurozone with those of

the USA and Japan, the first and the second largest economies in the pre-

euro global market, is quite revealing. Table 4.8A shows that, as percent-

ages of GDP at end-2002, Japan leads for the total debt securities issued,

and also for debt securities issued in national currency by the general

government. The USA follows for the total but leads in debt securities

issued in national currency by corporations, financial as well as nonfinan-

cial. The Eurozone comes last overall, but leads Japan for debts issued in

national currency by financial corporations and the USA for debt issued

by the general government. The comparison at one time point limits the

robustness of the findings. The specific point to note is the viability of

the Eurozone as it competes with the two leading currency regimes of the

world.

Table 4.8A. Amounts of outstanding debt securities denominated in

national currency issued by residents in the Eurozone, the USA, and Japan

at end-2002 (% of GDP)

Total Issued by corporations Issued by general government

Financial Nonfinancial

Eurozone 105.4 44.7 6.6 54.1

USA 153.7 88.1 22.8 42.8

Japan 160.1 27.5 17.9 114.8

Source: ECB and Bank for International Settlements.


Table 4.8B demonstrates that the Eurozone has a comparatively large

financial market. All three markets also show a positive growth trend.

Table 4.8C is a simple exposition of the financial monetary institutions in

the Eurozone.

Table 4.9 is an evaluation of the relative position of the three currency

regimes for 1990–2002 in terms of stock market capitalization as percent-

ages of GDP. The USA continues to be in the lead, but the Eurozone has

emerged as a competitor to Japan.

4.4. The economic structure: the Eurozone, the USA, and Japan

Table 4.10 presents statistics relative to the economic structure of the EU-12

and offers a comparison with the USA and Japan. As of 2004, the Eurozone

Table 4.8B. Number of domestic and foreign companies listed on stockmarkets in the Eurozone, the USA, and Japan (end of year)

1990 1995 2000 2002

Eurozone 4,276 5,106 5,516 6,271

USA 6,765 8,160 7,851 6,586

Japan 1,752 1,791 2,096 2,153

Source: ECB.

Table 4.8C. Number of Eurozone monetary financial institutions

(end of year)

2000 2002

Credit institutions 7,464 6,906

Money market funds 1,604 1,620

Central banks and other institutions 20 18

All MFIs 9,088 8,544

Source: ECB.

Table 4.9. Stock market capitalization in the Eurozone, the USA, and

Japan (% of GDP)

Eurozone USA Japan

1990 21 53 90

1995 28 92 73

1998 76 141 54

2000 87 153 67

2001 72 136 56

2002 47 104 58

Source: World Federation of Exchanges.


has a population base larger than that of the USA and of Japan. In terms of

shares of world GDP, the EU-12 has emerged as a competitively large

market vis-a-vis USA. Japan, formerly the second largest economy, is now a

distant third. The economic structure is generally defined by sectoral shares

of GDP and the pattern is evident: the agricultural sector makes a marginal

contribution to GDP, the industrial sector’s contributions to GDP vary

between 20 percent and 30 percent, and the service sector is dominant. This

is what we have learned to be the ideal structure of mature industrialized

economies.

The labor market profiles of the Eurozone, USA, and Japan are gen-

erally competitive. The unemployment rate in the Eurozone is higher with

a relatively lower labor force participation rate. With the labor force par-

ticipation rate at 75.4 percent and the employment rate at 71.2 percent, the

Table 4.10. Key real economy characteristics of the Eurozone, 2004

Unit Eurozone USA Japan

Populationa Millions 309.7 294.0 127.6

GDP (share of world GDP)b % 15.3 20.9 6.9

GDP per capitab h thousands 24.4 34.7 25.9

Sectors of productionc

Agriculture, fishing, and forestry % of GDP 2.2 0.8 1.2

Industry (including constructions) % of GDP 27.1 20.0 29.2

Services (including nonmarket services) % of GDP 70.8 79.5 69.6

Unemployment rate (share of labor force) % 8.8 5.5 4.7

Labor force participation rate % 69.2 75.4 72.0

Employment rated % 62.8 71.2 68.4

General government

Surplus (+) or deficit (�) % of GDP �2.7 �4.4 �7.0

Gross debte % of GDP 70.6 48.7 149.2f

Exports of goodsg % of GDP 14.8 6.9 11.5

Exports of goods and servicesg % of GDP 19.5 9.8 13.6

Imports of goodsg % of GDP 13.5 12.6 8.7

Imports of goods and servicesg % of GDP 17.8 15.0 11.6

Exports (share of world exportsh 31.1 10.4 5.7

Current account balanceg % of GDP 0.6 �5.7 3.7

Source: Eurostat, IMF, European Commission, OECD, Reuters, ECB, national data, and

ECB calculations.aEurozone: annual average; United States: mid-year; Japan: October 1.bData for United States and Japan converted into euro at OECD purchasing power Parities

(PPPs).cBased on real value added.dAs a ratio of the number of persons to the working age population (those aged between 15

and 64).eFor Eurozone: gross government debt as defined in Council Regulation (EC) No. 3605/93.f2003 figures.gBalance of payments data, only extra-Eurozone trade flows for the Eurozone.hIMF World Economic Outlook; the world export share of the Eurozone includes intra-area

trade, which represents roughly 50% of the Eurozone’s total exports.


USA leads both the Eurozone and Japan. Much has been written about the

‘‘structural rigidities’’ in the labor market in the Eurozone. Differences in

the education and social systems, and demands for leisure, a shorter work

week, and early retirement in the Eurozone have become subjects of study.

In 2004, data on the government account in terms of budget deficit and

national debt reveal that the Eurozone and the USA remain comparable

while Japan is at a competitive disadvantage

The Eurozone is in the process of enlargement. Consequently, its pop-

ulation base and economic activity parameters will be larger. The inter-

national economic order will experience a structural change.

4.5. Euro–dollar currency regimes: the theory of optimum currency area

revisited

With the euro introduced at an exchange rate of h1.00 ¼ $1.17 on January

1, 1999, the euro had a 17 percent premium over the dollar. Soon the new

currency depreciated, hitting a low of h1 ¼ $0.8252 on October 26, 2000

and continued to fluctuate below the US dollar until July 15, 2002. The

lack of confidence in the euro, representing one integrated economy of the

12 erstwhile sovereign nation-state economies, was understandable. How-

ever, the euro soon earned global confidence, and reached its high point at

h1 ¼ $1.3633 on December 28, 2004. The annual averages for 2004 and

2005 were h1 ¼ $1.24 and h1 ¼ $1.37, respectively.

The dollar remains weak against the euro, continuing to be several base

points higher than the initial exchange rate of $1.17. Much has been writ-

ten for these euro–dollar exchange rate fluctuations. One can argue that

these fluctuations are market-determined and not exposed to extra-

economic factors (Dutta, 2005).

Ranking economists have joined the debate and they argue that the

depreciation of the dollar will help correct the imbalance in the US current

account. Other things being equal, following the neoclassical theory of

international trade, based on one or another form of the theory of com-

parative advantage, will eventually contribute to this desired outcome.

However, other things are seldom equal. One important factor warrants

careful attention. Of the 191 sovereign nation-state economies who are

members of the United Nations, one economy is too dominant in terms of

its shares of world output and trade and the international market ceases to

be competitive (see Chapter 3). Given the fact that overwhelmingly large

number of sovereign nation-state economies of the world have only mar-

ginal shares of world output and trade to their respective accounts, and

that a small number of countries command a disproportionately larger

share of world output and trade, the world market is tilted against the

majority of the member economies. They become price-takers with no

ability to be competitive actors in the world market (Dutta, 1962, 1965,

1976; Linnemann, 1966).


One may consider yet another interesting aspect relative to the imba-

lance in the US current account. Will domestic dollar consumers in the

USA cut down their consumption of European imports as they become

increasingly more expensive? So far, American consumers have not been so

responsive to the market. Demand for imports has a complex value of

superiority, real or assumed, and price-inelasticity of imports remain to be

carefully considered. Of course, in the long run, the theory is expected to

prevail. Economists are familiar with the statement that in the long run, we

all are dead.

The presence of the twin deficits, the current account deficit and the

budget deficit, certainly adds to the complexity of the current economic sit-

uation of the USA and the value of its dollar. The huge budget deficit and the

growing national debt, much of which is owned by foreigners, certainly limit

the potential of optimum operational success of exchange rate fluctuations.

The situation is further aggravated by the fact that much of the US budget

deficit and national debt can be attributed to our military efforts around the

world. Protection against terrorism has become an issue of much concern

since the tragic events of September 11, 2001. If the deficit was incurred to

further augment the productivity of the US economy, it would have a differ-

ent impact and confidence in the US economy and its dollar would have

remained unshaken. Given the economic relationship between USA and East

Asian countries, Asian Central Banks will continue to hold, but limit acqui-

sitions of new dollar reserves until the euro market fully emerges. However, I

argue that the dollar has not lost its muscle (Norris, 2005).

Indeed, the dollar does have its muscle, defined in terms of its shares of

world output and trade. Now a competing currency, the euro, with a

relatively stronger muscle, as defined by its shares of world output and

trade in recent years, offers a challenge. It is instructive to note that in

2004, based on relevant data in constant 2000 US dollar, the US share of

world output at 30.93 percent compares with the EU-25 share of 25.12

percent. However, based on GDP in PPP (2000 international dollar), in the

same year, 2004, the EU-25 share at 21.44 percent compares with the

USA’s share at 20.85 percent (see Tables 3.2A and 3.3A). Obviously, the

USA and the EU-25 have highly competitive shares of world output. The

latest figures for trade are far more revealing. In 2000, the US share of

world imports was 18.64 percent while the EU-25 share was 37.35 percent.

For world exports, the US share was 13.84 percent compared with the EU-

25 share of 37.67 percent (see Table 3.6). However, the trade data warrants

adjustment for intra-EU trade, thought it does not change the comparative

economic positions.

As we proceed to limit the comparison of the dollar and euro currency

regimes based on the members of the Eurozone, we may review the eco-

nomic magnitude of the EU-12. Based on GDP in PPP data of 2004, it is

noted that individual member countries have marginal shares of world

GDP, and together, the EU-12 represents some 72 percent of the GDP of


the EU-25 (Table 4.11). As per the terms of accession, the new 10 members,

admitted to the EU in 2004, as well as the two candidate countries expected

to join in 2007, are applicants for membership to the Eurozone. Denmark,

Sweden, and the UK, will expectedly come to reexamine their respective

positions of declining to adopt the euro in light of the expansion of the EU

and the euro. Comparisons between the euro and dollar’s economic po-

sitions, will then be truly useful.

Our process of learning what we have not yet learned must continue to

progress. However, the real challenge will be to unlearn a great deal of the

preconceived values we began with in the pre-EU world order. I have

argued that the absence of a well-structured intraregional macroeconomic

core will not help an individual sovereign nation-state-based economy to

optimize the economic gains for its micro-actors, households and business

units, since most of these individual economies are limited by marginal

values of the two parameters, its shares of world GDP and trade. Its

competitive functioning as an open economy thus faces a serious bottle-

neck. I have further argued that an intraregional macroeconomic core

within a global macroeconomic system is in order (see Chapter 8, also

Dutta, 2000a, b, 2002a, b, c, 2005).

We also need to take note of two important factors contributing to the

structural changes in the global market. The first factor occurred on Au-

gust 15, 1971, when the fixed gold value of the dollar at US$ 35 per ounce

of pure gold was discontinued. Charles Kindleberger (1985) made an elo-

quent exposition in his address to the American Economic Association

when he stated that it was too much for the dollar to bear the burden of

military and economic security of the free world for an indefinite period.

Some wrongly argued that it would be an occasion to the return to the gold

standard. What we got was the Group of 5, now Group of 8, which elects

Table 4.11. GDP (PPP), 2004 (%): The Eurozone and USA

Share of world Share of EU-25

Austria 0.47 2.18

Belgium 0.58 2.69

Finland 0.28 1.30

France 3.11 14.50

Germany 4.15 19.36

Greece 0.43 2.03

Ireland 0.29 1.34

Italy 2.90 13.51

Luxembourg 0.06 0.26


Portugal 0.37 1.71

Spain 1.87 8.72

USA 20.85

Note: Based on Tables 3.4 and 3.7A.


to expand itself as needed to discuss economic cooperation among the

select group of economies.

The second factor to note is the fact that the traditional concept of

sovereignty, both political and economic, has radically changed (Dutta,

1995a, b, c). The Soviet Union has collapsed and the sovereign nations in

Western Europe have progressed to map out one economy on to one

geography to expand the EU. The concept of continental or hemispheric

economic regionalization may be the substantive basis for globalization,

anchored in the concepts of free flow of trade, free flow of investment, and

free movement of labor. Ideally, each continental regional group will have

competitive shares of world output and trade to be competitive actors in

the global market.

To appreciate the emerging new paradigm of the international eco-

nomic framework in the post-Cold War world, it is helpful to revisit the

theory of Optimum Currency Areas (see De Grauwe, 1997). Robert Mun-

dell taught us the theory of optimum currency area in his seminal work in

1961 (Mundell, 1961, 1970, 1999, 2003). Of course, until 1971, the US

dollar was the only global currency and it still remains the most valued

international reserve currency. The concept of an optimum currency area

can help explain the new continental economic regionalism. Okita (1989)

sought to explain policy approaches in the framework of economic re-

gional communities in the context of global economic cooperation, and

thus posed the question if we will have one world or several.

The EU is an integrated continental economic unit with competitive

shares of world output and trade. The euro has become a competitive

currency and it will become stronger when the 10 new members meet

convergence criteria to join and the three out-members can no longer resist

its lure. Even limiting our discussion to the EU-12 of the Eurozone, it is

clear that the euro and dollar have become two highly competitive cur-

rencies. Since we have shown that a currency’s competitive strength de-

pends on the volume of goods and services its economy produces and its

share of world trade, let us define the optimality of a currency by its

competitive shares of world output and trade, and not by its geographical

area or the size of its population (see also Hesse, 1993; Letiche, 1993, 2000;

Issing, 1996, 1999a, b, 2001, 2002a, b, c; Temperton, 1998; Obstfeld, 1999;

Welsh, 1999; Vanthoor, 1998, 1999, 2002; Dutta, 2004).

Let us turn to the subject of euro–dollar exchange rate fluctuations.

Table 4.12A presents share of official foreign exchange holdings for se-

lected years since the introduction of the euro in 1999 as an international

currency. For all countries, the US dollar and the Japanese yen have lost

some ground, but the British pound sterling improved its share of official

world currency reserves. For developing countries, we see a parallel move-

ment in reserve holdings, but for industrialized countries, all three curren-

cies have lost some market shares. The key point, however, is that for all

categories, the euro has been steadily gaining ground. For all countries, the


dollar’s share of international foreign exchange holdings have declined

from the high of 71.0 percent in 1999 to 65.8 percent in 2003. For the euro,

its share has moved up from the low of 17.9 percent in 1999 to a high of

25.3 percent in 2003. Given its shares of world output and trade, the euro is

a serious challenge to the dollar’s role in the global economy. Table 4.12B

makes this point quite explicit. The Japanese and British economies do not

have competitive shares of world output and trade and their currencies, the

yen and the pound sterling, are not competitive vis-a-vis the US dollar and

the euro.

Several factors warrant careful review. While the euro is the official

currency of 12 members of EU-15, UK, Denmark, and Sweden continue to

remain the three out-members, and persist in using their respective national

currencies. As full members of the EU, they enjoy advantages of free flow

of trade, free flow of investment, and free movement of labor in the in-

tegrated EU market. This cannot continue indefinitely; sooner or later the

Table 4.12A. Share of official foreign exchange holdings in selectedcurrencies (end of year)

Currency 1999 2000 2001 2002 2003 2004

All countries

US dollar 71.0 70.5 70.7 66.5 65.8 65.9

Japanese yen 6.4 6.3 5.2 4.5 4.1 3.9

Pound sterling 2.9 2.8 2.7 2.9 2.6 3.3

Euro 17.9 18.8 19.8 24.2 25.3 24.9

Industrialized countries

US dollar 73.5 72.5 72.7 68.9 70.5 71.5

Japanese yen 6.7 6.5 5.6 4.4 3.8 3.6

Pound Sterling 2.2 2.0 1.9 2.1 1.5 1.9

Euro 16.1 17.1 18.0 22.4 22.1 20.9

Developing countries

US dollar 68.2 68.2 68.6 64.0 60.7 59.9

Japanese yen 6.0 6.0 4.9 4.7 4.4 4.3

Pound sterling 3.7 3.6 3.6 3.8 3.9 4.8

Euro 19.9 20.6 21.8 26.1 28.9 29.2

Source: IMF Annual Report (2005).

Table 4.12B. Percent changes in euro and dollar reserve holdings

US dollar Euro

All countries �7.18 39.11

Industrialized countries �2.72 29.81

Developing countries �12.17 46.73

Note: Based on data from Table 4.12A.


three will have to opt for the euro or leave the EU. We have reasons to

believe that they will elect to join the Eurosystem. In the WTO, the EU is

already recognized as a single member represented by one representative

with one vote. One can also argue that the pound, krone, and krona are

sheltered currencies and are not truly free-floating currencies in the global

market.

A suggestion to stabilize euro–dollar exchange rate involves immediately

granting the ECB full membership to the IMF. However, the principle of

competition between the euro and the dollar economic regimes alone will

optimize global economic gains, while a plan to establish a euro–dollar he-

gemony will be counterproductive. The concept of an ‘‘Anglo-Saxon’’ cur-

rency will provoke a new currency debate, based on race and caste, hardly an

optimal option. In the financial markets, references to a dollar market con-

sisting of the American, Australian, and New Zealand dollars are already in

existence (Grimes et al., 2000). The Japanese yen will have a different

framework until an Asian economic community is formally instituted.

The new 10 members of EU will have to go through a process to

become full members of the Eurozone. As of May 16, 2006, Slovenia has

fulfilled the convergence criteria to join the Eurosystem. The 10 have a

deep interest in joining the Eurozone since that will promote the free flow

of investment from the rest of the EU since such investments will be free

from barriers and exchange rate fluctuations. The rest of the EU will also

be a market for their products and the unrestricted intra-EU trade will

facilitate the process. The Europeanization of Europe will be an economic

reality. Once the process is completed, the EU with its commanding shares

of world output and trade will be a great challenge to the US dollar. The

rest of the world will have to be engaged in economic activities, trade as

well investment, with both the EU and US, and they will need to hold both

currencies as their respective official reserve shares. It seems likely that the

share of official reserves held in dollars will continue to decline, while the

share invested in the euro will continue to increase.

Furthermore, the ECB is not yet a member of the IMF. Notwithstanding

its present ‘‘observer status,’’ the ECB will not be a member until the EU

becomes a true political entity with one flag, one constitution, and one Chief

Executive. The EU is currently engaged in adopting a constitution and the

process will ensure the EU’s political integration (see Chapter 5). Let us note

that a great deal of functional integration for common environment, public

health, terrorism and security, and competitive market cooperation has al-

ready been accomplished. The EU has appointed an Executive Head, estab-

lished a European Parliament and Judiciary, but the core issue is whether the

government of each member country will completely surrender its respective

executive, legislative, and judicial powers to the EU Government. For the

ECB, the voluntary surrender of the monetary sovereignty of 12 Member

States under a pact of growth with stability is to be taken note of. They

adopted the pragmatic design of divisibility of sovereignty so that fiscal


Table 4.13A. Average monthly exchange rates: Euro and USD

Date USD to EUR EUR to USD Date USD to EUR EUR to USD

Jan 1999 0.8626 1.1599 Oct 2002 1.0197 0.9812

Feb 1999 0.8935 1.1198 Nov 2002 0.9981 1.0023

Mar 1999 0.9197 1.0879 Dec 2002 0.9808 1.0202

Apr 1999 0.9334 1.0719 Jan 2003 0.9420 1.0621

May 1999 0.9417 1.0625 Feb 2003 0.9279 1.0780

Jun 1999 0.9625 1.0395 Mar 2003 0.9274 1.0788

Jul 1999 0.9666 1.0354 Apr 2003 0.9212 1.0862

Aug 1999 0.9425 1.0615 May 2003 0.8658 1.1559

Sep 1999 0.9535 1.0494 Jun 2003 0.8569 1.1677

Oct 1999 0.9340 1.0713 Jul 2003 0.8787 1.1387

Nov 1999 0.9681 1.0336 Aug 2003 0.8968 1.1159

Dec 1999 0.9894 1.0113 Sep 2003 0.8893 1.1253

Jan 2000 0.9879 1.0131 Oct 2003 0.8546 1.1706

Feb 2000 1.0164 0.9844 Nov 2003 0.8541 1.1716

Mar 2000 1.0355 0.9663 Dec 2003 0.8137 1.2296

Apr 2000 1.0568 0.9470 Jan 2004 0.7940 1.2601

May 2000 1.1011 0.9089 Feb 2004 0.7927 1.2621

Jun 2000 1.0534 0.9499 Mar 2004 0.8154 1.2269

Jul 2000 1.0636 0.9408 Apr 2004 0.8327 1.2015

Aug 2000 1.1044 0.9060 May 2004 0.8335 1.2003

Sep 2000 1.1469 0.8727 Jun 2004 0.8233 1.2151

Oct 2000 1.1699 0.8561 Jul 2004 0.8149 1.2278

Nov 2000 1.1712 0.8546 Aug 2004 0.8199 1.2201

Dec 2000 1.1115 0.9007 Sep 2004 0.8194 1.2208

Jan 2001 1.0647 0.9400 Oct 2004 0.7997 1.2511

Feb 2001 1.0843 0.9229 Nov 2004 0.7692 1.3006

Mar 2001 1.0990 0.9109 Dec 2004 0.7466 1.3399

Apr 2001 1.1207 0.8929 Jan 2005 0.7603 1.3160

May 2001 1.1411 0.8771 Feb 2005 0.7690 1.3009

Jun 2001 1.1716 0.8540 Mar 2005 0.7575 1.3207

Jul 2001 1.1623 0.8610 Apr 2005 0.7727 1.2945

Aug 2001 1.1103 0.9013 May 2005 0.7878 1.2699

Sep 2001 1.0964 0.9126 Jun 2005 0.8219 1.2171

Oct 2001 1.1041 0.9062 Jul 2005 0.8306 1.2044

Nov 2001 1.1255 0.8891 Aug 2005 0.8135 1.2297

Dec 2001 1.1213 0.8922 Sep 2005 0.8150 1.2276

Jan 2002 1.1310 0.8847 Oct 2005 0.8310 1.2037

Feb 2002 1.1493 0.8705 Nov 2005 0.8483 1.1793

Mar 2002 1.1421 0.8759 Dec 2005 0.8438 1.1856

Apr 2002 1.1290 0.8862 Jan 2006 0.8273 1.2093

May 2002 1.0910 0.9171 Feb 2006 0.8368 1.1955

Jun 2002 1.0478 0.9552 Mar 2006 0.8320 1.2023

Jul 2002 1.0075 0.9931 Apr 2006 0.8169 1.2247

Aug 2002 1.0226 0.9784 May 2006 0.7836 1.2766

Sep 2002 1.0207 0.9801 Jun 2006 0.7893 1.2674

Source: OANDA.


policies could be effectively tailored to the ECB’s monetary policy. The suc-

cessful results of this experience can be a learning model for the voluntary

surrender of political sovereignty by the EU member countries to facilitate

the progress to political integration. Once the process has been completed,

the ECB will be a powerful member of the IMF and theWorld Bank with full

voting rights (see Chapter 6).

We have analyzed the euro–dollar exchange rates in Table 4.13A

(monthly) and Table 4.13B (quarterly). Figures 4.1A and 4.1B are graphic

expositions of the corresponding data. It is evident that the euro and the

dollar are two competing currencies. As we have discussed before, follow-

ing the initial period, the euro experienced a significant period of depre-

ciation. The turning point came in November 2002. The period of the euro

gaining confidence in the world market continues. However, the US dollar

has resisted its downward pressure. It is my hypothesis that based on

Table 4.13B. Average quarterly exchange rates: Euro and USD

Date USD to EUR EUR to USD

1999 Q1 0.8919 1.1226

1999 Q2 0.9458 1.0395

1999 Q3 0.9542 1.0494

1999 Q4 0.9638 1.0113

2000 Q1 1.0132 0.9663

2000 Q2 1.0707 0.9499

2000 Q3 1.1045 0.8727

2000 Q4 1.1506 0.9007

2001 Q1 1.0826 0.9109

2001 Q2 1.1444 0.8540

2001 Q3 1.1233 0.9126

2001 Q4 1.1168 0.8922

2002 Q1 1.1405 0.8759

2002 Q2 1.0893 0.9552

2002 Q3 1.0169 0.9801

2002 Q4 0.9996 1.0202

2003 Q1 0.9326 1.0788

2003 Q2 0.8811 1.1677

2003 Q3 0.8882 1.1253

2003 Q4 0.8407 1.2296

2004 Q1 0.8009 1.2269

2004 Q2 0.8298 1.2151

2004 Q3 0.8180 1.2208

2004 Q4 0.7719 1.2972

2005 Q1 0.7623 1.3124

2005 Q2 0.7941 1.2606

2005 Q3 0.8197 1.2205

2005 Q4 0.8410 1.1897

2006 Q1 0.8319 1.2026

2006 Q2 0.7965 1.2565

Source: OANDA.


Figure

4.1A.

Avera

gemonthly

exchangerates,

USD

andEUR

0.0

00

0

0.2

00

0

0.4

00

0

0.6

00

0

0.8

00

0

1.0

00

0

1.2

00

0

1.4

00

0

1.6

00

0

Jan-99

Apr-99

Jul-99

Oct-99

Jan-00

Apr-00

Jul-00

Oct-00

Jan-01

Apr-01

Jul-01

Oct-01

Jan-02

Apr-02

Jul-02

Oct-02

Jan-03

Apr-03

Jul-03

Oct-03

Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Tim

e

Exchange Rate

US

D to

EU

R

EU

R to

US

D

Note:

Based

onTable

4.13A

Figure

4.1B.

Avera

gequarterly

exchangerates,

USD

andEUR

0

0.2

0.4

0.6

0.8 1

1.2

1.4

1999 Q1

1999 Q2

1999 Q3

1999 Q4

2000 Q1

2000 Q2

2000 Q3

2000 Q4

2001 Q1

2001 Q2

2001 Q3

2001 Q4

2002 Q1

2002 Q2

2002 Q3

2002 Q4

2003 Q1

2003 Q2

2003 Q3

2003 Q4

2004 Q1

2004 Q2

2004 Q3

2004 Q4

2005 Q1

2005 Q2

2005 Q3

2005 Q4

2006 Q1

2006 Q2

Tim

e

Exchange Rate

US

D to

EU

R

EU

R to

US

D

Note:

Based

onTable

4.13B

EuropeanUnionandtheEuro

Revo

lutio

n112

Table 4.14. Quarterly USD/Euro exchange rates and US/EU GDP basedon volume and price indices

Quarter USD to euro

exchange rate

USA/EU GDP ratio

based on volume

index

USA/EU GDP ratio

based on price index

1999.1 0.8919 1.0691 0.9925

1999.2 0.9458 1.0705 0.9944

1999.3 0.9542 1.0706 0.9972

1999.4 0.9638 1.0779 1.0009

2000.1 1.0132 1.0691 1.0047

2000.2 1.0707 1.0764 1.0084

2000.3 1.1045 1.0708 1.0102

2000.4 1.1506 1.0695 1.0092

2001.1 1.0826 1.0613 1.0073

2001.2 1.1444 1.0586 1.0073

2001.3 1.1233 1.0534 1.0063

2001.4 1.1168 1.0594 1.0054

2002.1 1.1405 1.0678 1.0045

2002.2 1.0893 1.0674 1.0036

2002.3 1.0169 1.0741 1.0036

2002.4 0.9996 1.0766 1.0035

2003.1 0.9326 1.0817 1.0053

2003.2 0.8811 1.0937 1.0026

2003.3 0.8882 1.1087 1.0009

Source: Quarterly National Accounts, OECD (2003, No. 4); OANDA, see also Dutta (2005).

Figure 4.2A. US/EU-12 GDP ratios by volume index and USD/euro

exchange rates, 1999.1–2003.3

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

19

99

.1

19

99

.2

19

99

.3

19

99

.4

20

00

.1

20

00

.2

20

00

.3

20

00

.4

20

01

.1

20

01

.2

20

01

.3

20

01

.4

20

02

.1

20

02

.2

20

02

.3

20

02

.4

20

03

.1

20

03

.2

20

03

.3

USA/EU-12 GDP Ratio Based on Volume Index

USD to Euro Exchange Rate



shares of world GDP and trade, these two currencies are now the two

optimum currencies. Indeed, the theory of optimum currency area war-

rants a definition. In Table 4.14, we further analyze the competitive po-

sition of the two currencies in terms of their relative GDP ratios based on

both volume and price indices. Figures 4.2A and 4.2B offer an exposition

in support of my hypothesis.

4.6. Revisiting the theory of optimum currency area

We have reviewed the standing of the ECB as the central bank of the

Eurozone and the emergence of the euro since 1999 as a competitive global

currency. Politics is not just the art of the possible, but as Jean Monnet

taught us, it is also the art of making possible tomorrow what cannot yet

be done today (Monnet, 1978; see also Hesse, 1993; Letiche, 1993, 2000;

Issing, 1996, 1999a, b, 2001, 2002a, b, c; Temperton, 1998; Obstfeld, 1999;

Welsh, 1999; Vanthoor, 1998, 1999, 2002; Dutta, 2004).

Figure 4.2B. US/EU-12 GDP ratios by price index and USD/euroexchange rates, 1999.1–2003.3

0

0.2

0.4

0.6

0.8

1

1.2

1.41999.1

1999.2

1999.3

1999.4

2000.1

2000.2

2000.3

2000.4

2001.1

2001.2

2001.3

2001.4

2002.1

2002.2

2002.3

2002.4

2003.1

2003.2

2003.3

USA/EU-12 GDP Ratio Based on Price Index

USD to Euro Exchange Rate



Appendix

Official lending rates Official refinancing

operation rates

Official deposit rates Other official rates

Eurozone Marginal lending facility Main refinancing operations Deposit facility —

DK Certificates of deposits — Deposit Discount

SE Lending Repo Deposit Discount/reference

UK Repo — — —

ISL Overnight loans discount rates Repo yield — —

NO Overnight lending — Sight deposit —

CH Advances on pawn — — —

BG — — — Basic interest rate

CY Marginal lending Repo Overnight deposit Reverse repo

CZ Lombard Repo – 2 weeks Discount ––

EE — — — —

HU Overnight collateralized loan Repo – 1 day Deposit – 1 day Reference rate – 2 weeks

LT Overnight loans — — Liquidity loans

LV Lombard Refinancing Deposit Repo loans – 7 days

MT Standby (collateralized loan) Central intervention Overnight deposit Discount

PL Lombard Repo Deposit Discount

RO Discount Lombard Deposit —

SI Lombard Representative interest rate Overnight deposit ––

SK Discount NBS repo Overnight sterilization repo

rate

—

TR Advance Repo or intervention rate — Discount

US Fed funds — — Discount

JP Discount — — —

Source: http://europa.eu.int/estatref/info/sdds/en/exint/centrt_sm.htm.

EuropeanCentra

lBankandtheEuro

115

http://europa.eu.int/estatref/info/sdds/en/exint/centrt_sm.htm.

CHAPTER 5

A Constitution for Europe

5.1. One Europe, one government, one constitution

The Treaty drafting the Constitution for Europe was signed in Rome on

October 29, 2004. The Constitution provides for a federal form of gov-

ernment. Signatories to the Treaty included all Heads of State or Gov-

ernment of the 25 Member States of the European Union (EU). As per the

EU principle of consensus, it requires unanimous approval by all Member

States for the Constitution to be effective.

The EU is one integrated economy with one common membership to the

World Trade Organization (WTO) with one vote. Citizens of the EU enjoy

freedom of movement and may elect to reside in the geographical territory of

any country of the EU. Twelve Member States of the EU have adopted one

common currency, the euro, under one European Central Bank (ECB). The

ECB has earned observer status at the International Monetary Fund (IMF)

and the euro has become an international reserve currency competing with the

US dollar. With the third largest population base of the world, the EU com-

mands competitive shares of world output and trade (see Chapters 2 and 4).

The EU has set up a well-structured intra-EU administrative system

with executive, legislative, and judicial branches. The EU Council assem-

bles with the presence of the Heads of States or Government, Monarchs,

Presidents, Chancellors, and Prime Ministers of the Member States. The

EU Council is a forum for these 25 Heads of State, each representing a

country with its own national flag and constitution. There is no single

executive head to represent the entire EU. The EU has also constituted

several special committees with specific assignments. All EU provisions are

agreed upon by Treaties and Agreements (see Chapter 2).

The pressing need for one constitution and one flag for the EU is

becoming urgent. Toward meeting circumstantial needs, ad hoc arrange-

ments for functional integration have been in progress. There has been a

prolonged debate in this regard, but indeed, one Europe as one political

entity is to be the order of the day.

5.1.1. A confederation or a federation?

Will Europe become a federation of states or a confederation of states?

Indeed, the debate goes back to April 18, 1951, when the European Coal

and Steel Community (ECSC) was established in Paris. The ECSC Treaty

provided for a High Authority with supranational powers, and Robert

Schuman, the French Minister for Foreign Affairs from 1948 to 1953,

stated that this was just the first step toward a broader agenda establishing

‘‘a wider and deeper community between countries long opposed to one

another by bloody conflicts.’’ The ECSC, he continued, would build ‘‘the

first concrete foundation of a European federationy’’ (see Pryce, 1973).

In his Memoirs of the years 1945–1953, the German Chancellor Konrad

Adenauer writes, ‘‘this Plan was to be the beginning of a federal structure

of Europe’’ (see Bainbridge and Teasdale, 1995). However, in 1962, the

French President Charles de Gaulle characterized the concept of a united

Europe ‘‘a myth.’’ He saw it as l’Europe des Etats, a coalition, rather a

confederation, of European states and closed the subject to further dis-

cussion. On July 3–4, 1964, French and German leaders met to consider

the possible reopening of the debate for a political union of Europe. Eco-

nomic integration of the EU continued to make rapid progress and the case

for the political integration progressively became pressing issues. We have

stated earlier that economic integration led the EU leadership to search for

‘‘a zone of monetary stability’’ (Chapter 2). The risk of exposure to intra-

EU exchange rate fluctuations, and the domination of the US and its dollar

in the global market became subjects of discussion. A Swiss commentary

on one common European currency in a French newspaper drew much

attention (see Vanthoor, 1998, 1999, 2002). The Italian Foreign Minister,

Aldo Moro, wrote in November 1969 that ‘‘economic construction’’ in

Europe must be followed by ‘‘political construction’’ and invited the EU

leadership to take the necessary actions (Bulletin of the European Com-

munities, 1969).

In 1970, the French President Georges Pompidou talked of European

political union in the context of a European confederation. The plans for

the European Monetary Union which would facilitate the intra-EU free

flow of investments without the risks of exchange rate fluctuations were

being prepared. One money managed by one central bank became the focal

point as the transfer of sovereign monetary powers of the Member States

to a central monetary institution, a supranational central bank, would

certainly constitute a partial political union. We have discussed earlier the

concept of divisibility of sovereign authority as 12 Member States volun-

tarily surrendered their respective monetary sovereignty to join the Euro-

system (see Chapter 4).

In 1971, Pompidou argued for a confederation of European states with a

government whose decision would apply to all Member States since the ad

hoc institutional arrangements of the EU were not permanent solutions.

The Dutch Secretary of Foreign Affairs Hans de Koster pointed out that

the concept of confederation could at best be an intermediate stage. Ul-

timately, he argued, that a federation of European states was needed. A

federation with proper institutional provisions would optimize the


economic and political gains for all the people of the continent of the EC.

Finally, the European federation became the agenda.

A federation or a confederation was the debate when the United States

of America drafted its Constitution during the years 1776–1787. Should the

national government remain ‘‘a relatively weak and unimportant force,’’

each state remaining ‘‘virtually a sovereign nation?’’ In November 1777,

the drafting committee came out with its proposal for the Articles of

Confederation, which would limit the power of the national government to

the conduct of war and peace, management of foreign policy and prep-

aration of the national budget inclusive of appropriations, debt, and is-

suance of money. It could not regulate trade, draft troops, or levy taxes

directly. The President of the United States would not be a strong executive

authority and was to act as the presiding officer at the sessions of the

Congress. Congress itself was to overview the execution of the laws it

enacted, and for this it would appoint an executive committee consisting of

13 members, one from each of the 13 constituent colonies.

Provisions for the appointment of ad hoc functional committees were

also proposed. Nine of the 13 states, a two-thirds majority, were to approve

any important measure before Congress could vote on it. For the ratifi-

cation and any amendment to the Articles of Confederation, all 13 state

legislatures would have to approve. By its ratification in 1781, the Articles

provided for each state retaining its sovereignty, freedom, and independ-

ence. Each state would be represented in the Congress by no less than two

and no more than seven members, each state having one vote. Based on the

value of their respective land, each state was to contribute revenue to the

‘‘Common Treasury’’ of the national government. By the late 1780s, critics

of the Articles of Confederation forcefully argued that if adopted, it would

expose America to instability with an unstable national government. They

were able to convince the American people to consider a federation with a

written constitution upheld by three branches of government, executive,

legislative, and judicial. These branches were equal but independent and

provided a system of checks and balances to ensure the individual citizen’s

right to freedom. The Constitution went into effect in 1789 and the United

States of America became a federation of 13 states, becoming 50 states

today. The US Constitution has proved to be an enduring document ca-

pable of accommodating successive amendments (see Current et al., 1983).

The Treaty drafting the Constitution for Europe, signed in Rome on

October 29, 2004, provides for a federal form of government subject to the

approval of all 25 Member States of the EU (see The Constitution

for Europe, 2005). Fifteen Member States, Austria, Belgium, Cyprus,

Estonia, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxem-

bourg, Malta, Slovakia, Slovenia, and Spain, have approved of the

EU Constitution so far. Following the negative referendum in France and

the Netherlands in 2005, the EU Constitution is said to be ‘‘on ice.’’ It

suggests that the document is in abeyance. As many as eight Member

A Constitution for Europe 119

States, the Czech Republic, Denmark, Finland, Ireland, Poland, Portugal,

Sweden, and the UK, have elected to postpone the decision (see Table 5.1).

It is interesting to recall that the USA adopted its Constitution in 1789 by a

majority vote because the unanimous decision required to pass the Articles

was unrealistic. If the EU adopted the majority rule, the EU Constitution,

approved by 15 of the 25 Member States, would have already been adopted.

5.2. The EU Constitution

The draft Constitution as approved by a Treaty, signed in Rome on October

29, 2004, begins with due recognition of the work accomplished by the series

of Treaties and Agreements establishing the EU (see Chapter 2). Proud of

their respective national identities and history, the Constitution notes in its

preamble that the peoples of Europe are resolved to forge ‘‘a closer unity

and a common European identity.’’ The EU is a unique paradigm of ‘‘unity

in diversity,’’ which will remain the motto of the EU. The individual’s ‘in-

violable and inalienable rights’’ for freedom, democracy, equality, the rule of

law, and respect for human rights are proclaimed to be the core message of

the Constitution (see Chapter 1). In what follows, I refer to a select group of

issues discussed and defined by the EU Constitution.

5.2.1. Economic growth and price stability

The objectives with a specific reference to economics cover balanced eco-

nomic growth with price stability, a highly competitive social market

economy aiming at full employment and social progress, and a high level of

protection and improvement of the quality of the environment. Europe’s

priority for environmental quality merits special attention (see Chapter 1).

The euro will be the currency of the Union, the Constitution states. Indeed,

the currency which was inaugurated on January 1, 1999 has become the

common currency of 12 Member States and has proved its competitive

economic strength (see Chapter 4). It should be noted that the economic

agenda places its focus on balanced growth and price stability, a combi-

nation of fiscal and monetary policy of the Union. The policy of balanced

growth and price stability will accommodate the policy of full employment.

The Constitution states that cooperation between the Union and Member

States will help maintain a high rate of employment, but it should be noted

that a high rate of capacity underutilization will compromise the rate of

growth. Member States shall conduct and coordinate their economic pol-

icies toward achieving the common economic policy of the Union. On the

recommendation of the European Commission, the European Council

shall develop an integrated economic plan for the Members States. The

Council shall monitor economic developments in the Member States, thus

ensuring ‘‘a closer cooperation of the economic policies and sustained

convergence of the economic performances of the Member States.’’


Table 5.1. Adoption of the EU constitution

Member state Procedure Date scheduled

Austria Parliamentary Approval by the Nationalrat 11

May 2005

Approval by Bundesrat 25 May

2005

Belgium Parliamentary Approval by the Senate 28 April

2005

Approval by the Chamber 19 May

2005

Cyprus Parliamentary Approval by the House 30 June

2005

Czech Republic Referendum Referendum postponed to end of

2006–beginning of 2007

Denmark Referendum Referendum postponed (no new

date has been set)

Estonia Parliamentary Approval by Parliament 9 May

2006

Finland Parliamentary Presentation of a report to the

Parliament by the Government

25 November 2005.

France Referendum Referendum 29 May 2005 negative

(No: 54.68%; turn out: 69.34%)

Germany Parliamentary Approval by Bundestag 12 May

2005

Adoption by Bundesrat 27 May

2005

Greece Parliamentary Approval by Parliament 19 April

2005

Hungary Parliamentary Approval by Parliament 20

December 2004

Ireland Parliamentary+referendum Referendum postponed (no date

has been set)

Italy Parliamentary Approval by the Chamber 25

January 2005

Approval by the Senate 6 April

2005

Latvia Parliamentary Approval by the Chamber 2 June

2005

Lithuania Parliamentary Approval by Parliament 11

November 2004

Luxembourg Parliamentary+consultative Approval by the Chamber (first

reading) on 28 June 2005.

Referendum Positive Referendum 10 July 2005

(Yes: 56.52%, No: 43.48%)

Final approval by the Chamber 25

October 2005 (57 votes in favor,

1 against)

Malta Parliamentary Approval by Parliament 6 July

2005

The Netherlands Parliamentary+consultative

referendum

Referendum 1 June 2005 negative

(No: 61.6%, turn out: 62.8%)



5.2.2. Energy policy

The EU Constitution states provisions for its energy policy with a firm com-

mitment to the protection of environmental quality. The agenda is to ensure

the proper functioning of the energy market and the security of the energy

supply. Energy efficiency, energy conservation, and the development of re-

newable sources of energy will be the guideline. The Committee of Regions

and the Economic and Social Committee will have the specific responsibility.

A reference to the Euratom Treaty should be noted (see Chapter 2).

5.2.3. European Investment Bank

The European Investment Bank (EIB), a special institution with the 25 EU

Member States as its constituent members, will be responsible for the bal-

anced and steady development of the internal market. The bank will have

access to the capital market and will have its own capital resources as

established (see Table 5.2). Working as a non-for-profit organization, the

Investment Bank will grant loans and give guarantees toward the financing

of special projects for developing less-developed regions in the EU, for

modernizing and/or developing projects of a specific size or nature requir-

ing a volume of funds which could not be otherwise raised, and for regional

projects of common interest to several Member States which could not be

Table 5.1. (Continued )

Member state Procedure Date scheduled

Poland No decision so far Ratification postponed (no date

has been set)

Portugal Referendum Referendum postponed (no date

has been set)

Slovakia Parliamentary Approval by Parliament 11 May

2005

Slovenia Parliamentary Approval by Parliament 1

February 2005

Spain Parliamentary+consultative

referendum

Referendum 20 February 2005

(Yes: 76.7%, turnout: 42.3%)

Approval of the Congress 28 April

2005

Approval of the Senate 18 May

2005

Sweden Parliamentary Ratification postponed (no date

has been set)

United Kingdom Parliamentary+referendum Parliamentary ratification process

suspended 6 June 2005

Note: Status as of May 10, 2006. Estonia is the first Member State to approve the Constitution

after the rejection by the French and the Dutch in May–June 2005.

Source: http://europa.eu.int/constitution/ratification_en.htm.


http://europa.eu.int/constitution/ratification_en.htm.

financed by the Member States themselves. The capital of the Bank has

been determined to be h163,653,737,000 (see Table 5.2).

The EIB is a core financial institution of the Union. The EU-15 began

with the European Fund which operated on a strictly commercial basis for

lending funds to concerned Member States for necessary structural ad-

justments. The richer Member States contributed capital to the European

Fund and the relatively poorer Member States borrowed from it. Upon

successful completion of a project, loans were repaid with due service

charges. The income gaps among the Member States came to be mini-

mized. The EU Member States remain donor countries and the Fund helps

direct these funds to investment projects which will minimize intra-EU

income gaps. The EIB will continue this mission. The class distinction

between the richer and poorer Member States will expectedly cease to be as

pronounced. As a donor group, the EU will continue to play a positive role

at the World Bank in helping the economic development of poorer nations.

The Member States shall be liable only up to the amount of their

respective shares of the capital subscribed. Acting unanimously, the Board

Table 5.2. Capital fund of the European Investment Bank

Member state Capital fund in h

Germany 26,649,532,500

France 26,649,532,500

Italy 26,649,532,500

United Kingdom 26,649,532,500

Spain 15,989,719,500

Belgium 7,387,065,000

The Netherlands 7,387,065,000

Sweden 4,900,585,500

Denmark 3,740,283,000

Austria 3,666,973,500

Poland 3,411,263,500

Finland 2,106,816,000

Greece 2,003,725,500

Portugal 1,291,287,000

Czech Republic 1,258,785,500

Hungary 1,190,868,500

Ireland 935,070,000

Slovakia 428,490,500

Slovenia 397,815,000

Lithuania 249,617,500

Luxembourg 187,015,500

Cyprus 183,382,000

Latvia 152,335,000

Estonia 117,640,000

Malta 69,804,000

Source: Treaty establishing a Constitution for Europe, p. 255.


of Governors of the EIB shall fix the percentage to be paid up, as and

when an increase of the subscribed capital is necessary. On average, 5

percent of the subscribed capital shall be paid in by Member States (see

Table 5.2).

The EIB shall be directed and managed by a Board of Governors, a

Board of Directors, and a Management Committee. The Board of Gov-

ernors consists of Ministers designated by the Member States; it is re-

sponsible for formulating the general directives for the Bank’s credit

policy, and also for the overall supervision regarding implementation of

the directives. The Board of Governors will also appoint the Board of

Directors, consisting of 26 members and 16 alternates for a five-year term.

The European Commission and the Member States shall each nominate

one Director. The nomination of alternate members for appointment by

the Board of Governors shall follow the procedure laid down in the Con-

stitution: Germany, France, Italy, and the United Kingdom, will each

nominate two alternates, one each by the common accord of (a) Spain and

Portugal; (b) Belgium, Luxembourg, and the Netherlands; (c) Denmark,

Greece, and Ireland; and (d) Austria, Finland, and Sweden. Three alter-

nates will be nominated by the common accord of the Czech Republic,

Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovenia,

and Slovakia. Finally, one alternate director shall be nominated by the

European Commission. The appointment of directors and alternates shall

be renewable. The Board of Directors shall select six nonvoting experts,

three as members, and three as alternates. A broad criteria of independence

and competence for these appointments are noted. For lack of competence,

a director may be compulsorily retired by the Board of Governors acting

on a qualified majority. Following the policy guideline of the Board of

Governors, the Board of Directors shall run the EIB’s administration.

Decisions of the Board of Directors shall ordinarily be taken by at least

one-third of the members entitled to vote, and represent at least 50 percent

of the subscribed capital. A qualified majority shall require 18 votes and

the representation of 68 percent of the subscribed capital.

The Management Committee shall consist of a President and eight Vice

Presidents, appointed by the Board of Governors for a period of six years

on the advice of the Board of Directors. Their appointments shall be re-

newable. On a proposal by the Board of Directors acting by a qualified

majority, the Board of Governors, acting by a qualified majority, may

compulsorily retire a member of the Management Committee. Acting un-

der the supervision of the President and the Board of Directors, the Man-

agement Committee shall be responsible for the current business of the

Bank, raising loans in the capital market and granting finances to qualified

projects in the Member States. The Bank shall deal with each Member

State through the authority designated by that State. The Bank shall co-

operate with all international organizations working in related fields.


5.2.4. Citizenship and the individual rights

Every national of a Member State shall likewise be a citizen of the EU.

Fundamental rights guaranteed by the European Convention for the Pro-

tection of Human Rights and Fundamental Freedoms will be the Union’s

obligation. In addition to the right to move and reside freely in the territory

of the Members States, a citizen will have the right to vote and seek elec-

tion to the European Parliament and to the municipal boards in the

Member States of their residence under the same conditions as nationals of

the Member State. In recognition of the fact that the EU is a multilingual

entity (see Chapter 1), the Constitution provides for a citizen the right to

petition the European Parliament, the European Ombudsman, or any ad-

visory body of the Union in any of the official languages and also to obtain

a reply in the same language.

5.2.5. The Ombudsman

The Office of Ombudsman, as provided in the Constitution, warrants spe-

cial mention. The European Parliament shall elect a European Ombuds-

man, after each election of Parliament, for the duration of its term of

office. The appointment to the office is renewable. For complaints against

possible cases of maladministration in the activities of the EU govern-

mental institutions, bodies, offices, or agencies, except the Court of Justice,

any citizen of the Union and a natural or legal entity will have access to the

Ombudsman to lodge a complaint. The party lodging such a complaint

shall have the right to be advised of the findings. The Ombudsman may

independently initiate inquiries into specific cases, and the findings shall be

made available to the appropriate authorities, with a copy of the report

provided to the European Parliament. During his/her tenure of office, the

Ombudsman shall not be engaged in any other occupation, gainful or not.

For an act of serious misconduct, the Ombudsman can be relieved by the

Court of Justice at the request of the European Parliament.

5.2.6. Human dignity of a person

Human dignity is inviolable. The dignity of a person constitutes the real

basis of fundamental rights. The 1948 Universal Declaration of Human

Rights states so in its preamble: ‘‘recognition of the inherent dignity and of

the equal and inalienable rights of all members of the human family is the

foundation of freedom, justice and peace in the world.’’

Every individual has the right to life which makes the death penalty or

execution an act of violation of the Constitution. The death penalty con-

tinues to be administered in the United States of America (see Chapter 1).

In terms of Article III-257, the EU shall constitute an area of freedom,

security, and justice with due respect for fundamental rights and the


different legal systems and traditions of the Member States. The Union

shall ensure internal border controls for persons and shall frame a common

policy on asylum, immigration, and external border control, with fairness

to third-country nationals inclusive of ‘‘stateless persons.’’ The EU shall

make efforts to ensure a high level of security through effective measures.

To prevent and combat crime, racism, and xenophobia. The European

Parliament shall ensure proper legislative actions and the European Coun-

cil shall appoint a Standing Committee to do what is required in this

regard.

The enumeration of the specific rights by the Constitution is summed

up in Tables 5.3A and 5.3B.

A note on the right to good government is very instructive. Let it be a

franchise for good citizenship and good government. This right includes:

(a) the right of every person to be heard before any individual measure

would affect him/her adversely is taken;

(b) the right of every person to have access to his or her file, while re-

specting the legitimate interests of confidentiality and of professional

and business secrecy; and

(c) the obligation of the administration to give reasons for its decisions.

A further note on the updating of the wording of the right to marry and

begin a family is in order. The new wording includes accommodation of

national legislations to recognize arrangements other than a marriage for

starting a family.

Table 5.3A. Individual rights

A Right to life

B Right to the integrity of the person

C Right not to be subjected to torture or degrading treatment

D Right not to be held as a slave or in servitude, not to perform forced or compulsory

labor, not to be part of human trafficking

E Right to liberty and security

F Right to respect for individual’s private and family life

G Right to the protection of personal data

H Right to marry and to found a family

I Right to freedom of thought, conscience, and freedom

J Right to freedom of expression

K Right to freedom of assembly and to freedom of associations at all levels

L Right to freedom of the arts and sciences, academic freedom to be respected

M Right to education

N Right to engage in work and to pursue a freely chosen/accepted occupation

O Right to conduct a business in accordance with the Union law and national laws

P Right to property

Q Right to asylum, as per rules of the Geneva Convention of July 28, 1951 and the

Protocol of January 31, 1967, and in accordance with the Constitution.

Source: Treaty establishing a Constitution for Europe.


5.2.7. One nation, one flag, one anthem

The national flag of the EU will be, ‘‘a circle of twelve golden stars on a

blue background.’’ The national anthem of the Union shall be based on the

‘Ode to Joy’ from the Ninth Symphony by Ludwig van Beethoven. Europe

Day shall be celebrated on May 9 each year.

5.2.8. The European Union and the Member States

The cooperation between the Union and the Member States is the basic

platform for a federated form of the EU government. Member States shall

facilitate the achievement of the Union’s tasks and refrain from taking any

measure which could jeopardize the Union’s objectives. The Constitution

and laws adopted by the Union shall have ‘‘primacy over the law of the

Member States’’ (Table 5.4). The Constitution enumerates areas of com-

petence for the EU and areas for competence to be shared with the Mem-

ber States, as well as areas for concurrent competence. In addition, a

provision is made for a flexibility clause to meet challenging situations, a

significantly necessary provision for a federal constitution.

5.2.9. Institutional framework of the EU Government

The institutional framework of the government of the EU is specified in the

Constitution. Table 5.5 presents the summary (see Chapter 2, and Chapter 4

for the ECB). In addition, the Constitution stipulates provisions for the

appointment of specialized courts.

It is instructive to note that the protocol of the Constitution enumerates

specific locations of the institutions of the EU Government. With the Eu-

ropean Parliament in Strasbourg and the ECB in Frankfurt, most other

institutions are located in Brussels or Luxembourg. However, the General

Secretariat of the Parliament are located in both cities. These two cities

have become the hub of the EU Government.

The European Parliament shall have its seat in Strasbourg where the 12

monthly sessions, including the budget session, will be held. Additional

Table 5.3B. Citizens’ rights

A Right to vote and be a candidate for election to the European Parliament

B Right to vote and be a candidate for municipal elections of Member States

C Right to good administration

D Right of access to documents

E Right to petition to the European Ombudsman

F Right to petition to the European Parliament

G Right to move and reside freely within the territory of the Member States

H Right to diplomatic and consular protection



sessions of Parliament and Parliamentary Committee meetings are held in

Brussels. The General Secretariat of the Parliament and its departments

shall operate out of Luxembourg. The European Council shall have its seat

in Brussels, but during the months of April, June, and October, the Council

shall hold its meetings in Luxembourg. The Commission shall have its seat

in Brussels, while specific departments shall be located in Luxembourg.

The Court of Justice of the EU, the EIB, and the Court of Auditors shall

have their seats in Luxembourg. The ECB will continue to have its seat in

Frankfurt. Both the Committee of Regions and the Economic and Social

Committee shall have seats in Brussels. Europol, with its very special mis-

sion has its seat at The Hague (see Table 5.6).

Table 5.4. Areas of competence

Exclusive competence of the Union

A Customs Union

B Competition rules for the internal market

C Monetary policy

D Conservation of marine biological resources under the common fisheries policy

E Common commercial policy

F International agreement regarding a common foreign policy and defense

Shared competence with Member States

A Internal market

B Social policy as specified

C Cohesion: economic, social, and territorial

D Agriculture and fisheries, excepting marine biological resources

E Environment

F Consumer protection

G Transport

H Trans-European networks

I Energy

J Areas of freedom, security, and justice

K Common safety concern regarding public health

Areas of supporting, coordinating, or complimentary action

A Protection and improvement of human health

B Industry

C Culture

D Tourism

E Education, youth, sport, and vocational training

F Civil protection

G Administrative cooperation


Note: Shared competence with Member States include special provisions for (a) Research,

Technological Development and Space and (b) Development Cooperation and Humanitarian

Aid, enabling Member States to exercise their parts of the related job.


5.2.10. Enhanced cooperation

The continental geography of Europe, with all its manifold diversities, is

the core of unity in diversity of one Europe. The Constitution for Europe

has its due focus on the concept of enhanced cooperation, social, eco-

nomic, and political. The Constitution provides for a federation of Mem-

ber States, a United States of Europe.

The European Council will be the forum for deliberations with the

participation of all members of the Council. Voting rights are limited to

members of the Council representing the Member States participating in

enhanced cooperation. Unanimity shall be constituted only by their votes.

A qualified majority is usually defined as at least 55 percent of the Council

members representing the participating Member States, comprising at least

65 percent of the population of these states, but shall differ in specific cases.

Table 5.6. Locations of the Government Institutions of the European

Union

Institution Locations

The European Parliament Strasbourg

The European Council Brussels

The European Commission Brussels

The Court of Justice Luxembourg

The European Central Bank Frankfurt

The Court of Auditors Luxembourg

The Committee of the Regions Brussels

The Economic and Social Committee Brussels

The European Investment Bank Luxembourg

Europol The Hague

The General Secretariat of the Parliament Luxembourg/Brussels


Table 5.5. The institutional framework of the EU Government

The European Parliament Maximum allowable number of members: 750

The European Council Heads of State or Government of the Member States

The Council of Ministers One from each Member State at the ministerial level

The European Commission One national from each Member State

The Court of Justice One judge from each Member State to be assisted by

Advocates-General

The General Court One judge from each Member State

The Court of Auditors One national of each Member State

The Committee of Regions Maximum allowable number of members: 350

Economic and Social

Committee

Maximum allowable number of members: 350



Compliance with the Constitution and the law of the Union shall be

binding on any proposal for enhanced cooperation. Shared respect for the

Union’s overall objective will unite the Member States participating in an

enhanced cooperation program with other nonparticipating Member States.

Areas of exclusive competence for the Union government (see Table 5.4) and

the common foreign and security policy shall remain beyond the domain for

enhanced cooperation.

In all other areas, a proposal for enhanced cooperation with due spec-

ification of the scope and objectives shall be presented to the European

Commission. The Commission shall review if the proposal would be con-

sistent with general policies of the Union. The Commission may then sub-

mit it to the European Council. If a proposal is declined, the concerned

Member States will be advised accordingly. If the Commission makes a

proposal and the consent of the European Parliament is given, the Council

will make the proper authorization. For this, the Council shall act unani-

mously. The proposal shall be reviewed by the Union’s Minister for For-

eign Affairs to ensure it is not in violation of the Union’s common foreign

and security policy. The Commission shall have the authority to evaluate

the progress of a program for enhanced cooperation and make necessary

recommendations to the participating Member States. Any Member State

willing to participate in a program for enhanced cooperation in progress

shall notify its intentions to the Council, the Union Minister for Foreign

Affairs, and the Commission. The Commission shall respond within four

months from the date of the receipt of the notification.

The cases for enhanced cooperation in one or another proposed area

among the concerned Member States point to the emerging needs as the

number of Member States continues to grow. The intimate locational proxi-

mity of the original six members of the EEC in the 1950s and 1960s gave it a

different framework than the more region-specific concerns now required for

the provisions for enhanced cooperation. Expectedly, over time, these issues

will help the process of Europeanization of the continent of Europe. Thus,

the programs for enhanced cooperation shall serve as crucial steps toward

continental integration, political, economic, and social.

5.3. Functional integration

As the process of European integration progresses, issues of common

concern have presented themselves for appropriate action by the EU. Let

us refer to them as programs for functional integration.

5.3.1. Intra-EU free flow of trade

Trade became the immediate issue following the Treaty of Rome, whereby a

unique paradigm of a Free Trade Area (FTA) emerged and the free flow of

trade with no cross-border restrictions of any sort added to the volume of


trade and optimized economic gains for all the participating economies. The

simple model of mutual accreditation and standardization of goods in trade

solved a problem which could have otherwise been overwhelming. The ap-

pointment of a new bureaucracy at the EU level would certainly not be cost

effective; indeed the EU is simplifying trade matters by increasingly dealing

with the world in a single voice. We have discussed before (see Chapters 2

and 3) that the EU-15 is one integrated trade unit with one membership of

the WTO with one vote. As such, the EU will act as one trading unit with

respect to the rest of the world. As per terms of accession, the incoming new

EU members will join this WTO membership and act as one.

5.3.2. Euro and the European Central Bank

A second key fact of integration came on January 1, 1999 when the ECB

was instituted with the euro as the common money of the Eurosystem

nations. At present, 12 Member States have adopted the euro (see Chapter

4). The EU Constitution states that the euro shall be the currency of the

EU. The 10 new members of the EU, as they acceded to the Union, became

candidates to join the Eurosystem in 2004. Obviously, this shall facilitate

the intra-Eurozone free flow of capital.

5.3.3. Free movement of labor

The free movement of labor was a part of the original economic integration

compact a la the Treaty of Rome and the policy continued to operate as

EU membership expanded. Normalization of the working environment to

protect workers’ health and safety became an issue. The anticipated mass

migration of labor from poorer member economies to richer member

economies failed to materialize. Investment and jobs moved to Member

States where labor was underemployed and wage rates were relatively

lower. The economic gains, profit incomes for the rich investing nations

and wage/salary incomes from employment in the poorer ones all in-

creased, a shared prosperity for all in the Union. Necessary adjustments of

labor laws across the Member States followed as a model of functional

integration of the intra-EU labor market and interim administrative struc-

tures have been in place (see Chapter 3).

The Constitution for Europe, as and when adopted, will make neces-

sary provisions for the Union Government to do its job to harmonize the

EU labor market. This will require standardization relating to wages and

benefits, especially health and pension benefits, work schedule and retire-

ment guidelines, work force participation, unionization and nondiscrimi-

nation for age, religion, sex and sexual orientation. Respect for each

Member State’s historic values and time-honored practices shall, of course,

be a constitutional provision.


5.3.4. Environment

Environment has been a pressing issue for the EU. With a much larger

population base living on a much smaller geographic area vis-a-vis the

USA (Chapter 3), the population density of the EU is a critical factor. As

industrialization had a longer history in Europe, the consequent industrial

pollution adds more to Europe’s concern for the environment. The dev-

astations of two World Wars certainly aggravated the situation. The EU

shall provide for the necessary coordination to protect and improve the

quality of its environment and has been a signatory to the Kyoto Protocol.

Each Member State has its own environmental program headed by an

Environmental Commissioner or a designated ranking officer. Because of

the pressing nature of these issues, transcontinental coordination can

hardly wait until the adoption of the Constitution. An interim arrangement

is in place. The coordination of the activities of the environmental officials

of the Member States shall be assumed by an Environmental Commis-

sioner for the EU, to be chosen by the Member States on a rotational basis.

5.3.5. Immigration and naturalization laws

Each Member State of course has its designated official for immigration

and naturalization. Several of the EU Member States had an imperial

heritage with colonies on other continents. As the imperial regimes came to

their end, special immigration provisions were often made for the peoples

of the former colonies. With provisions for free intra-EU movement of

labor, these immigrants will have the same freedom of movement if they

become citizens of their respective adopted homeland.

Third-country nationals legally working in the EU Member States are

also an issue which warrants intra-EU attention. Several Member States

are now making necessary amendments to their respective immigration

laws to facilitate immigration of labor with desirable skills such as medi-

cine, health care, engineering, and IT. Foreign investors with high-value

investments, in some cases, may receive special immigration privileges.

Immigration laws also need to accommodate those who seek asylum for

political, religious, or any other acceptable reasons. In these regards, the

immigration and naturalization laws of the EU are modeled upon those of

the USA, famously known to be a nation of immigrants.

Pending the adoption of the Constitution for Europe, an interim ar-

rangement for intra-EU coordination of laws in this regard by a designated

EU official has become a necessity.

5.3.6. Transportation and networks

Intra-EU coordination of transportation by land, water, and air is very

much another pressing issue as cross-border restrictions have ceased to

exist. The free flow of trade and free movement of people, with a right to


accept employment and reside in any Member State of the Union, call for

standardization of the laws and rules in regard to transportation. Pending

the adoption of the Constitution for Europe, interim arrangements have

been made. In regard to high-tech information processing, transcontinental

networks also warrants an interim intra-EU management.

5.3.7. The principle of competition and antitrust activity

The EU has adopted the principle of competition as its rule for the internal

market. Each Member State had its related administrative provision, but

now intra-EU coordination has been effectively put in place. The EU, with

its continental market, has become an economy of a competitively large

dimension by its shares of world output and trade (see Chapter 3), at-

tracting foreign corporations with high-value investments. Will they be

allowed to command unduly large market shares, contributing to a market

structure of duopoly/oligopoly, and thus to compromise the competition

principle? Recently, several cases of prosecution against some American

corporate giants inclusive of Microsoft, Coca-Cola, GE and Honeywell,

and Intel, before the designated court of law in the EU have been widely

reported. For this, the EU could hardly wait for the adoption of the Con-

stitution.

5.3.8. Terrorism and protection

Wars in Afghanistan and Iraq, following the destruction of the World

Trade Center in New York City on September 11, 2001, have spawned

more violent acts of terrorism that have become a global concern. The

incidents in Madrid and London are now well documented. EU authorities

must act to deal with the challenges of terrorism and must assume its

responsibility for the safety and protection of the peoples in all Member

States. Each Member State has its own police and intelligence services

under its appropriate Ministry, but again, urgent measures for intra-EU

administrative cooperation have been called for. The USA has recently

designated a new post to the Cabinet, the Secretary for Homeland Security.

How can the EU do without their own Homeland Security Chief with the

responsibility to coordinate all necessary steps for the EU-wide protection

against terrorism?

5.3.9. Foreign policy

With a commitment to a common foreign policy, by common accord of the

Member States, the EU has designated a Foreign Policy Coordinator with

the authority to represent the concerns and interests of the EU in foreign

affairs as the Foreign Minister of the EU. Each Member State will main-

tain its independent Minister for Foreign Affairs until the Constitution for

Europe is adopted. The EU will then have one government with one Head,


and the rest of the world will only accept the EU Foreign Minister as the

official spokesperson for the EU. Only then will the EU Foreign Minister

be accredited to represent the EU at the United Nations (UN). In the

meantime, the foreign ministers of individual Member States will continue

to perform their responsibilities. In the Security Council of the UN, France

and the United Kingdom are the two permanent members from the EU

and their Foreign Ministers continue to occupy their respective seats at its

meetings. However, it is important to note that the incumbent Foreign

Policy Coordinator of the EU has been well received in specific cases of

international conflict resolution including the dialogue with Iran relative to

the nuclear crisis and the Israeli–Palestinian conflict.

5.3.10. Defense and security

Common defense and security is a necessary corollary. Member States of

the EU no longer have national borders. Together, the EU has a territorial

border with its neighboring sovereign nation-states: Russia and several

other states in the east, countries of the continent of Africa to the South,

Turkey and others in Asia and Middle East, and the USA, west across the

Atlantic Ocean.

Again by common accord, the EU has a designated Chief for Defense

and Security. However, until the Constitution provides for one EU with

one Head, the EU designee will continue to have a limited audience and the

defense ministers of the EU Member States will be called upon for relevant

duties. The rest of the world will limit their contact with the EU Coor-

dinator for Defense and Security.

5.4. Majority of the states and majority of the people

As the membership of the EU progressed to 25 in 2004, soon to be 27 in

2007, and with many others at the state of candidacy, the EU’s principle of

consensus became a problem. The EU rule was to have unanimous ap-

proval of any decision. This gave any one single Member State veto power.

As in the UN with 191 sovereign nation members, only the five permanent

members of the Security Council enjoy veto powers. Any one of the five

can veto a decision and stop the UN from taking a contemplated action.

The proposed Constitution for the federation of the European States shall

deny that veto power to a single Member State so that rule by the majority

can sustain the stable functioning of the EU.

Following negative votes in French and Dutch referendum, the Con-

stitution for Europe is said to be on the ice. As we have noted earlier, it has

been approved by a majority of the Member States. An analysis of the

population in Table 5.7A shows that it has received the approval of Mem-

ber States representing the majority of the people, 52.11 percent to be

precise (see also Tables 5.7B and 5.7C).


The federation of the United States of America experienced a Civil War

in which the country suffered the greatest loss of life from war in its

history. The North and the South of the country have, however, remained

united. Over the years since the Civil War, many challenges had to be

overcome before the 48 US states emerged as the leader of the post-WWII

world with the world’s largest economy. Recently, Alaska and Hawaii

Table: 5.7A. Population of the Member States approvalof the Constitution, approved

Status 2004 population

in millions

Austria Approved 8.120

Belgium Approved 10.410

Cyprus Approved 0.780

Estonia Approved 1.350

Germany Approved 82.630

Greece Approved 11.070

Hungary Approved 10.070

Italy Approved 57.570

Latvia Approved 2.300

Lithuania Approved 3.440

Luxembourg Approved 0.450

Malta Approved 0.400

Slovak Republic Approved 5.390

Slovenia Approved 2.000

Spain Approved 41.290

Total 237.270

% of EU population 52.110

Note: Based on Tables 3.1A and 5.1.

Table 5.7B. Population of the Member States approval

of the Constitution, postponed


in millions

Czech Republic Postponed 10.180

Denmark Postponed 5.400

Finland Postponed 5.220

Ireland Postponed 4.020

Poland Postponed 38.160

Portugal Postponed 10.440

Sweden Postponed 8.990

United Kingdom Postponed 59.410

Total 141.820




joined the membership of the federation and the USA now has 50 states.

Indeed, the USA had to resolve many more problems before it became a

one person, one vote democracy on August 6, 1965, when the Voting

Rights Act was signed into law by President Lyndon B. Johnson. Nothing

points to the apprehension that the EU will experience a civil war before

the Constitution for the federation of the European states will have been

finally adopted. Democratic institutions based on the principle of one

person, one vote have been a part of the institutional framework of the

EU. True, the Europeans have had their share of wars and bloody con-

flicts, but the unity in diversity must be the motto for the present and for

the future. Functional integrations, as stated above, have lent much sup-

port to the foundation of the EU. The cordial and cooperative way these

integrations have worked must indicate that for the people of Europe there

is a natural commitment to one united European family, bonded together

by the fact of their belonging to the continent of Europe.

The economic integration of sovereign nation-state economies in Europe

has progressed to an amazing extent. There is no such precedent in the

history of mankind (see Chapter 3). To sustain the spectacular economic

gains, the EU is ready for its political integration. Individual Member States

of Europe could never accomplish what they together have been able to do.

One Europe, one economy, and one political entity, has emerged as a com-

petitive actor in the world (see Chapter 3). A retreat will be self-destructive.

One pragmatic option will be for the Member States to go ahead any-

way with the establishment of the one government of the EU, with one

national flag and one national anthem, while the Constitution is in limbo.

That was the case for the 12 Member States who elected to go ahead with

the ECB and euro. Could the 15 who ratified the Constitution go ahead

with setting a federal government? That solution will not be optimum for a

broader political integration. Though the Treaty on October 29, 2004 in

Rome, ‘‘Establishing a Constitution of Europe’’ was signed by all 25

Member States at the meeting of the European Council in its configuration

of Heads of States or Government, the time has come for further delib-

erations. The next best pragmatic solution for the European leadership is

Table 5.7C. Population of the Member States approval of theConstitution, rejected


in millions

France Rejected 59.99

The Netherlands Rejected 16.25

Total 76.24




to extend the date for the adoption of the Constitution, which they have

already done, providing a new deadline of 2008.

It is critical for researchers to underscore the fundamental points of

contention. Following the Constitution for Europe, let us focus on the

following points:

The Constitution for Europe shall provide for the institutional frame-

work of the EU federal government which will ensure majority rule of the

people and of the Member States. Equality of the Member States shall

make sure that smaller Member States can share power with the larger

ones, who will have much larger population bases and larger dimensions of

economic activities, on the basis of equality. Of course, democracy based

on the cardinal principle of one person, one vote, based on universal

sufferage, shall not be compromised. The Members States with larger

population bases will not be limited in power-sharing. They are represented

in the European Parliament, where the weighting of votes is based on

population.

The principle of decision making by a majority of the Member States

and a majority of the people will give the federation of the European states,

the EU, a strong and effective central government. Alternatively, a weak

government, based on confrontation and suboptimal cooperation among

the Member States, will make the Union indecisive and ineffective, and

which will fail to deliver what it has promised to the people of Europe. The

rule of governance in a federation of states where legislative decisions are

taken by the majority of the States and the majority of the people will be an

achievement.

The United States of America presents a model where the legislature

consists of the two chambers: the Senate is based on equality of states

whereby each state, large or small, in terms of population, has two mem-

bers, and the House of Representatives is based on population where one

person has one vote. Members of both Chambers are expected to cast votes

independently.

The President of the United States is the Head of the executive branch,

elected directly by popular vote, subject to the approval by the Electoral

College. In the 2000 presidential elections, there was a compromising sit-

uation for the Electoral College, and the election was finally decided by a

5–4 majority vote of the US Supreme Court. The EU may consider

adopting a parallel model without the complex provision of the electoral

college. The Office of the Court of Justice in the Constitution for Europe

has been well defined and can perform due arbitration as and when nec-

essary.

The Judiciary of the Union has its authority well defined by the Con-

stitution. Transparency shall be the core guideline for the administration of

justice. The Court of Justice of the Union shall be the supreme judicial

authority and shall have the authority for due interpretation of the Con-

stitution and EU laws. Each nominee for the Court shall take an oath


before the Court of Justice, sitting in open court, to perform his/her duties

‘‘impartially and conscientiously.’’

Judges may not concurrently hold any political or administrative office

or engage in any other occupation gainful or not, unless otherwise per-

mitted by the European Council. The Court of Justice shall remain in

permanent session. Of the 25 judges, one from each Member State, every

three years, 13 and 12 judges shall be replaced alternately. The Consti-

tution provides specific provisions for the removal of a judge due to in-

competence or the failure to discharge his/her normal duties.

Critics of the EU who have retained their faith in the historical sovereign

rights of nation-states may have their reservations. Should the EU be able to

compete concurrently with the USA and with China? (see Garten, 2004).

Should the EU movement collapse, they will be vindicated. But we have

argued that the concept of traditional sovereignty is a part of history, and a

new paradigm of continental economic and political integration has begun.

Europe has advanced too far for any possible disintegration and will be the

learning model for other continents. The American Hemispheric Economic

Cooperation and the Asian Continental Economic Union, with Asian

Money and China sharing the leadership position are now subjects of intense

study (see Chapter 8).

The decision to extend the date for the ratification of the Constitution

for Europe until 2008 is expected to be consequential. As per the Terms of

Accession, the new 10 Member States who have been admitted to EU

membership in May 2004, have also committed themselves to join the

Eurosystem. Slovenia, has already been cleared of the eligibility verifica-

tion process and will be welcomed to the Eurozone on January 1, 2007. It is

expected that the necessary evaluation process for the remaining nine will

be completed by the end of 2006. The Eurozone with the participation of

22 Member States out of the 25, will certainly contribute a strong mo-

mentum to the movement for the political integration of Europe. A cel-

ebration for the approval of the Constitution for Europe will be in order.

One money to one Europe, a prophetic statement made years ago will

finally come true in 2008 (Issing, 1999a, b).


CHAPTER 6

The European Union (EU): The ChallengesAhead

6.1. Challenges are welcome

Confronted with challenges, resolute actions follow and revolutionary

changes occur. Challenges contribute to creativity and dynamism, and

should be welcomed. The sovereign nation-states of the continent of Eu-

rope agreed to mutual cooperation and elected to have a common inte-

grated continental economy following the challenges of tragic experiences

resulting from years of bloody conflicts and confrontations. With an area

of about 4 million square kilometers and a population of some 457 million,

the European Union (EU) is now the third most populous economy with

competitive shares of world output and trade. Even so, many new chal-

lenges are waiting to be resolved.

As many as 15 sovereign nation-states on the map of Europe, including

Belarus, Moldova, and Ukraine in the east, Norway in the North, Iceland

in the Atlantic, Serbia and Montenegro in the Southeast, Liechtenstein,

Monaco, and Switzerland at the center of the continent, and San Marino

within Italy have not yet joined the EU membership. Many of these coun-

tries have made ad hoc arrangements with the EU for specific issues. Re-

cently, by a referendum based on universal franchise, Montenegro became

an independent, sovereign state and has promptly been admitted to be the

192nd member of the United Nations (UN). Montenegro is very much a

candidate for the EU membership. Will these other states continue to be

the missing links on the map of Europe? (see Chapter 1).

Russia and Turkey are countries that straddle two continents and con-

stitute very special cases. Russia has vast areas in both the European and

Asian continents. One option for Russia will be to opt for the membership

of the EU with consequent economic and political integration. Alterna-

tively, Russia may elect to join the much anticipated Asian Economic

Community, as and when it is instituted. Russia’s progressively increasing

economic cooperation with the EU countries and the Asian nations of

China, India, Japan, and Korea must be noted. Given the relatively large

endowment of natural resources inclusive of petroleum and natural gas,

and a vast geographical area, Russia may elect to remain an independent

economy by itself.

Turkey is a different case. Geographically, it is marginally in Europe;

the vast majority of its territory is on the map of Asia. As we have dis-

cussed earlier, Turkey has had an important role in the history of Europe,

and is now a candidate for EU membership. The issue for consideration is

whether the EU will go beyond the map of Europe.

The high level of economic integration of the Member States of the EU

has been reviewed earlier (see Chapters 3 and 4). The political integration

of the EU-25 is in progress. A majority of the 25 Member States, 14 of the

25, and representing a majority of its population, 52-plus percent, have

approved the Constitution for Europe (see Chapter 5).

The political integration of the EU-25 will not be functionally effective

until the Constitution is adopted by all 25 Member States. The principle of

unanimity continues to be a binding guideline for the EU. In the absence of

political integration of the EU-25, two points warrant urgent attention.

Will the macroeconomic framework of the EU-25 be able to function

optimally? Of course, interim provisions are already in place. Secondly, the

international standing of the EU continues to remain exposed to serious

limitations, notwithstanding current provisions for recognition by the

World Trade Organization (WTO) and the International Monetary Fund

(IMF) (see Chapters 3 and 4).

The gradual enlargement of the EU from 6 to 27 in 2007, and more in

the years ahead poses a challenge of its own. Adding more Member States

adds more to the diversities of the EU in language, religion, lifestyle, and

levels of economic development. The economies of the new 10 are less

industrialized and more agriculture dominant. The EU represents a com-

munity of values: liberty, democracy, human rights, fundamental free-

doms, and the rule of law. These values are formally embodied in the

Constitution for Europe which remains to be adopted (see Chapter 5). The

EU has a commitment to a comprehensive agenda of economic growth,

social cohesion, and protection of environmental quality. As the number of

Member States grow, the EU must face the challenge of ensuring that

incoming countries share the value system and commit to a balanced de-

velopment agenda. The EU’s respect for the dignity of life and consequent

abolition of death penalty will be binding for all incoming members. The

evidence so far has been encouragingly positive. There is a shared com-

mitment on the part of old 15 and the new 10 to enrich the EU in the

process of its enlargement.

6.2. One European economy and one Europe

The Progress of one common European economy with well-defined micro-

and macroeconomic parameters and the movement for the adoption of the

Constitution for Europe toward the EU’s political integration have already

been discussed earlier (see Chapters 3–5).


Intra-EU microeconomic cooperation based on unrestricted cross-border

trade, investment, and movement of labor successfully overcame the challenge

of the absence of a zone of monetary stability. One money, the euro, managed

by one supranational central bank, the European Central Bank (ECB), came

to be in place on January 1, 1999. Supranational monetary policy could be

optimally functional only with proper fiscal policy cooperation as assured by

the Council of Finance Ministers of the 12 participating member economies of

the Eurosystem (ECO-FIN).

The records point to the fact that the numerical guidelines established

by the Maastricht Treaty of 1992 and adopted by the ECB have been

violated by several member countries. Germany and France were both

taken to Europe’s highest judiciary for exceeding debt limits. Italy also had

a default problem. The ECB did not adopt a policy of penal enforcement

of the guidelines. A policy of accommodation in each case became the final

outcome, following the involved Member States’ agreement to correct the

situation. Critics argue that the ECB really did not have the authority to

take necessary disciplinary actions. Dealing with the 12 Finance Ministers

of 12 sovereign member countries as the ECB did, its authority to for-

mulate and administer supranational monetary policy lacked the manda-

tory power base. In a sovereign nation-state economy, the national central

bank (NCB) chief and the national finance minister engage in both formal

and informal contacts and communications to ensure coordination of

monetary and fiscal policies for the growth of the individual economy with

price stability. In general, the agenda also includes the objective of full

employment with no inflation. The head of an NCB facilitates the process

of coordination by making periodic appearances before the legislature of

the country. Indeed, testimonies before the legislature, open to public,

provide opportunities for extensive dialogues and discussions toward fur-

ther strengthening the process.

The ECB Chairman has a challenging assignment: to deal with the 12

Finance Ministers. This is a task all too complicated, and thus the result is

at times suboptimal. With the adoption of the Constitution for Europe,

one central government of the EU-25 will have one finance minister, who

will be the one person to interact with the ECB President for the coor-

dination of the fiscal and monetary policies of the Eurosystem.

The case for optimum cooperation between the two cannot be taken for

granted. The central bank of a sovereign nation-state economy and its

ministry of finance may at times elect to follow policies which are not

complimentary. Let us review the present situation in the USA. Following

the US Constitution, both the Chairman of the FED and the Treasury

Secretary are appointed by the President of the United States of America,

subject to the approval of the US Senate. For the present Bush Admin-

istration, both belong to the same political party as the President, and both

command professional respect and endorsement. The Chairman of the

Federal Reserve System and the Secretary of the Treasury have failed to

The European Union (EU): The Challenges Ahead 141

cooperate substantively. Consequently, the coordination of the country’s

monetary and fiscal policies has ceased to be optimal. These two individ-

uals can have one-to-one contacts and communications and their testimo-

nies before the US Congress should have produced the balanced

coordination necessary between the country’s monetary and fiscal policies.

In 2006, the US national debt is projected to approach as high as 80

percent of its gross domestic product (GDP). The deficit will continue to

increase, given the international commitments of the USA, and the admini-

stration’s unwavering commitment to its supply-side macroeconomic policy-

oriented tax cuts. Threats of inflation have been noted. With its commitment

to economic growth with no inflation, or price stability, over the past two

years, the FED has raised the key interest rates 17 consecutive times, 25 basis

points each time in its efforts to contain inflationary pressures. As of June 29,

2006, the federal fund rate (the overnight interbank lending rate) was raised

to 5.25 percent and the discount rate (FED lending to the banks) to 6.25

percent. The monetary policy of price stability may accommodate the fiscal

policy of a government by adding to the budget deficit and national debt if it

is directed to the development of the economy’s labor and capital resource

base, contributing to economy’s productivity. If monetary policy is unilat-

erally anchored to price stability, it will be in conflict with the fiscal policy.

At present, the fact that the ECB deals with 12 finance ministers may

not be the critical issue, and one wonders if the adverse comments on the

performance of the ECB in this regard have been overstated. The monetary

policy of the supranational ECB, working with 12 independent member

governments, will have to incorporate specific foreign and domestic pol-

icies of these national member governments. The ECB’s monetary policy,

with a pronounced priority for price stability, may not be uniformly com-

patible with the specific fiscal policy of the central government of the EU as

and when one will be instituted. Member countries in violation of the

numerical guidelines may have their respective fiscal policies targeted to a

growth-cum-employment policy. The coordination of monetary and fiscal

policies of an economy warrants further independent analysis.

6.3. The United Kingdom and the EU

For the United Kingdom, the record of its membership of the EU has a

history of its own (see Chapters 1 and 3). Their initial reservations to join

EU membership soon became a part of EU history. The UK is observed to

be on the map of Europe and its joining the EU became a fact in 1973.

Their participation in the Exchange Rate Mechanism ended and they

elected not to join the Eurosystem in 1999. They have decided to postpone

the referendum for the approval of the Constitution for Europe’s political

integration. It has also been pointed out that the UK has a special dip-

lomatic plus intelligence-sharing relationship with the USA, as has been

evident during the Iraq War. A careful exposition is in order.


The UK’s strong economic ties with its former colonies led to its efforts to

constitute the Commonwealth of Nations. This global organization based on

the togetherness of the English-speaking peoples was an early attempt for a

UK-led free trade area (FTA). In 1960, the UK took initiative to form the

European Free Trade Area (EFTA), as opposed to joining the European

Economic Community’s (EEC’s) FTA. The UK did apply to join the EEC in

1961, but French opposition blocked the UK’s membership. In 1967, the UK

reapplied and was blocked again by France. In 1969, the European Council

and the European Commission reassessed their position about the UK. The

Accession Treaty of the UK was signed in 1972, effective on January 1, 1973,

some 15 years after the original compact of the six European nations came

into existence.

The UK declined to adopt the euro in 1999, and argued for a careful

evaluation of a five-point platform before a referendum to joining the

Eurosystem would be held. The five tests are for convergence, flexibility,

investment, financial services, and employment and growth. As of 2003,

only the test for benefits to financial services was met, and the UK con-

tinues to use the pound sterling with the Bank of England as its NCB. The

UK reaps the benefits of the FTA of the EU without complete commit-

ment. They have also successfully argued for preferential tax treatment

from the EU.

Fluctuations of the exchange rates of the euro and the pound sterling

have been subject of much critical review. The UK, as a full member of the

EU and a full participant in the EU’s FTA, has a large share of intra-EU

trade. Appreciation of the pound sterling vis-a-vis the euro, will have an

adverse impact on its trade with the Eurozone. Persistence of the appre-

ciation of the pound sterling may encourage the migration of investments,

and by extension employment. The potential relocation of investments in

the economies of the Eurozone is a major concern. For foreign investors

from the USA, Japan, and other oil-rich countries that elected to locate

their investments in the United Kingdom based on their historic relation-

ships with the Bank of England and the pound sterling, economic gains

from unrestricted free trade with the EU member countries, became a point

for consideration. Now that they are familiar with the euro and the ECB,

they may move some investments to the Eurozone which will be free from

the risk of exchange rate fluctuations. This will cause much unemployment

in the UK. As you would expect a depreciation of the pound sterling will

have the reverse consequences. In any event, the British government has

proclaimed its pro-European policy, with a commitment to join the Euro-

system as and when the situation will justify it.

The imperial heritage of the UK has made the pound sterling an in-

ternational reserve currency. Many independent countries, including

former British colonies, continue to have good trade relations with the

UK and naturally, they find it convenient to hold some of their foreign

exchange reserves in pound sterling. Since its introduction, the euro has


greatly out-competed the pound sterling as an international reserve cur-

rency (see Table 4.12A).

Belonging to the map of Europe remains the key factor for the UK. Its

official position is that it is a committed member of the EU and will join

the Eurosystem at the appropriate time. The Chunnel Tunnel linking the

UK to continental Europe is a notable landmark. I have argued that when

the membership of the Eurosystem reaches 22, the current 12 and the new

10, the movement for the complete political and monetary integration of

the EU will gather a new momentum (see Chapter 5). As a signatory to the

2004 Treaty establishing a Constitution for Europe, the UK pledged to

consider its approval. Pending further review, the UK has decided to

postpone the referendum and suspended Parliamentary ratification.

For Denmark and Sweden, the other out-members of the Eurosystem, the

issue of exchange rate fluctuations of their respective national currencies vis-

a-vis the euro has not been of much concern. Following their historical trade-

paths, their respective currencies became effectively tied to the euro through

the German deutschmark, whose euro value has been invariably fixed since

1999. The trade of the two countries relate mostly to the Eurozone.

6.4. The EU and the IMF

The ECB earned its observer status at the IMF on December 21, 1998. In

1944, at Bretton Woods in New Hampshire, a conference was convened

under US leadership. Forty-five nations from all the continents partici-

pated at the conference. Open economic policy became the theme of the

conference and it advocated the free flow of trade and investment among

the nations of the world to add to the economic prosperity of all nations.

Two institutions were established, the IMF and the World Bank (WB),

each with a membership of 29 members in 1945.

The IMF was to coordinate exchange rates among the currencies of the

member countries. Based on its share of world output and trade, the US

dollar was the lead currency, and each currency was defined by its dollar

value. Each member nation was given the authority to change this rate

unilaterally within a specified margin. Furthermore, each member nation

was allowed to apply to the IMF Board for a second variation, again

within a prespecified margin. For any further variations, the IMF Board

would have the authority to review the situation and take appropriate

actions. Provisions were also made for liquidity, should a member nation

be exposed to a temporary crisis. This built-in flexibility certainly facili-

tated acceptance of the provisions by the member nations.

The IMF must face the issue of the 12 member countries of the Euro-

system. As of 2002, the 12 national currencies on the IMF books have

ceased to be in existence and have been replaced with the euro. The euro

has become a strong and competitive currency, an international reserve

currency recognized by the IMF. The IMF should not continue to manage


the exchange rates of the 12 nonexistent currencies vis-a-vis other curren-

cies of the 184 members (as of 2006). The issue with the IMF is thus all too

critical and urgent. A judicious allocation of the institution’s administra-

tive resources is the immediate issue.

The IMF Charter must be revised to clarify the relationship between the

Eurozone and the IMF. Each member nation in the IMF, led by the prin-

cipals of its NCB and the ministry of finance of its national government

constitutes one delegation with one vote, weighted for its voting shares (see

Table 6.1A). The Eurosystem, led by the supranational ECB, is not joined by

one finance minister. Indeed, the 12 Member States continue to have sov-

ereign national governments, each with its independent finance minister. To

allow the IMF to invite the ECB Chairman, joined by the 12 finance ministers

of the 12 Member States of the Eurosystem, with the entire delegation having

one vote, duly weighted, would technically be a violation of the IMF Charter.

Only a sovereign nation-state economy may be a member of the organization.

Hence, the ad hoc solution has been to give the ECB an observer status. Each

Member State of the Eurosystem will continue to have its official delegation to

the IMF, led by the heads of its national bank and its national finance min-

istry. The ECB’s Office of the Observer coordinates the delegation’s activities

without an independent voting right of its own. However, the heads of the 12

NCBs are ex-officiomembers of the Governing Board of the ECB, chaired by

the President of the ECB. Thus, the Office of the Observer at the IMF, under

the leadership of the ECB President, will have substantive coordinating pow-

ers as and when an issue is up for vote at the IMF.

6.5. The International Monetary Fund

A serious challenge for the EU is to gain its share of power in the affairs of

governance of the post-WWII international institutions. We begin with the

membership of the EU at the IMF.

At the Bretton Woods conference in 1944, each member country’s share

of world GDP became the principal criteria for the allocation of shares.

Based on GDP, the USA was the largest economy and Japan the second

largest. The USA had Special Drawing Rights (SDR) holdings and voting

rights at about 17 percent, making it the most dominant member of the

IMF, and also enjoying veto power in its decision making. Japan, the second

largest economy, was a distant second with its shares at about 6 percent, and

adopted a policy of following US leadership. Together, the two commanded

about a quarter of the SDR and voting rights. The European economies

were in the process of postwar economic recovery but even after recovery,

individually, each of them had only marginal shares of world GDP (see

Chapter 3). Other participating countries from Asia, Africa, and South

America had even smaller GDP bases. Table 6.1A presents the holdings of

SDR and voting numbers of the EU, USA, and Japan in the IMF.


The membership of the IMF has increased from 29 in 1945 to 184 at the

present time, and all 184 member countries are participants in SDR. The

GDP of the member countries, based on their respective outputs of goods

and services and adjusted for population, relates to its SDR allocations and

consequently to its voting rights in the IMF governance. The EU-25, as one

integrated economy, has aggregate percentages of SDR and of voting

shares much larger than those of the USA and Japan, but must overcome

the challenge of political integration before the EU has the leadership

position in the IMF. The USA, with its share of SDR at 17.40 percent and

Table 6.1A. Member countries shares of IMF: The EU, USA, and Japan

Quota % of total Votes % of total

Member country (millions of SDRs) (numbera)

Austria 1872.3 0.88 18,973 0.87

Belgium 4605.2 2.16 46,302 2.13

Finland 1263.8 0.59 12,888 0.59

France 10738.5 5.03 107,635 4.95

Germany 13008.2 6.09 130,332 5.99

Greece 823.0 0.39 8,480 0.39

Ireland 838.4 0.39 8,634 0.4

Italy 7055.5 3.31 70,805 3.25

Luxemburg 279.1 0.13 3,041 0.14

The Netherlands 5162.4 2.42 51,874 2.38

Portugal 867.4 0.41 8,924 0.41

Spain 3048.9 1.43 30,739 1.41

Eurozone 49562.7 23.23 498,627 22.91

Denmark 1642.8 0.77 16,678 0.77

Sweden 2395.5 1.12 24,205 1.11

United Kingdom 10738.5 5.03 107,635 4.95

Cyprus 139.6 0.07 1,646 0.08

Czech Republic 819.3 0.38 8,443 0.39

Estonia 65.2 0.03 902 0.04

Hungary 1038.4 0.49 10,634 0.49

Latvia 126.8 0.06 1,518 0.07

Lithuania 144.2 0.07 1,692 0.08

Malta 102.0 0.05 1,270 0.06

Poland 1369.0 0.64 13,940 0.64

Slovakia 357.5 0.17 3,825 0.18

Slovenia 231.7 0.11 2,567 0.12

Non-Eurozone 19170.5 8.99 194955.0 8.98

EU-25 total 68733.2 32.22 693582.0 31.89

USA 37149.3 17.38 371,743 17.08

Japan 13312.8 6.24 133,378 6.13

Source: IMF, www.imf.org/external/np/sec/memdir/members.htm.aVoting power varies on certain matters pertaining to the General Department with use of the

Fund’s resources in that Department.


http://www.imf.org/external/np/sec/memdir/members.htm

its voting rights at 17.08 percent, continues to lead the IMF. Japan, with its

SDR share of 6.24 percent and its share of voting right of 6.13 percent, is

the second ranking member. If the Member States of the EU are taken

individually in the IMF, we observe that Germany, the largest economy of

the EU has 6.09 percent of SDR shares and 5.99 percent share of voting

rights, just behind Japan. France and the UK share the same ranking while

Italy follows closely. Shares of SDR and voting rights of Belgium, the

Netherlands, Spain, and Sweden vary between 1 percent and 3 percent. For

the remaining 17 Member States of the EU, the individual shares of SDR

and voting rights are less than 1 percent. The subtotal of the Eurozone’s

SDR shares at 23.23 percent and voting rights at 22.91 percent are com-

petitively large, ranking the EU-12 far ahead of Japan. It also challenges the

leadership position of the USA (see Table 6.1A). Pending political integra-

tion, the EU-25 cannot earn its highest rank and voting powers in the IMF

so long as the current IMF Charter remains binding. The challenge of

managing the interim system is real. The Eurozone has achieved its mon-

etary integration and must play its constructive role for the management of

exchange rates at the IMF. The ECB’s Observer Status is a positive step in

this regard.

In Table 6.1B we present a simple GDP-based comparison of IMF fund-

ing. In 2000, an outside committee, the Cooper Committee, chaired by

Richard Cooper, made some further calculations. The two variables for the

Committee’s calculation were (a) GDP and (b) the variability of current

receipts and net long-term capital flows, with the coefficient on the former

twice that of the latter. The former is the economy’s potential ability to

contribute to the IMF, while the latter relates to the potential need to bor-

row. Given our immediate task to evaluate the EU’s competitive standing in

the IMF, we have not referred to the Cooper Calculations (see also Truman,

2006). In Table 6.2, we refer to some specific calculations (see Truman, 2006).

Our objective is limited to a comparison of the EU, the USA, and Japan,

based on their relative abilities to contribute to the Fund (see Table 6.1B). It

is to be further noted that our comparison is limited to the richer countries

of the world, whose potential ability to borrow from the Fund is not an issue

of concern. To restate, our task is to compare the competitive GDP base

of the EU and its new role in the governance of the IMF and also in other

post-WWII international institutions.

Table 6.2 relates to a comparison of the current data with a focus on the

EU and its competitive position vis-a-vis the USA and Japan. For a more

comprehensive review, data are also presented for the Eurozone.

Table 6.3 demonstrates that over a short period of time from 1999 to

2004, based on year-end values (in millions of SDR) of the currency com-

position of the IMF’s official holdings of foreign exchange, the euro has

become very much competitive, especially vis-a-vis the pound sterling and

the yen. For 1999–2004, the growth rate for the euro was 125 percent, while

that of the pound sterling was much lower at 83 percent. The yen actually


records a negative rate of growth for the same time period. In terms of

percentage growth, the euro is a serious challenge also to the dollar whose

growth rate is just 50 percent.

6.5.1. Restructuring of the IMF

The Bretton Woods organizations were established in an institutionalized

effort by wealthier countries to reach out to poorer ones, and the goal was

to make the world a better place for all the people of the world. With the

rise of communism, these efforts became conditional, and the IMF was

Table 6.1B. GDP in 2004 (constant 2000 US$, in billions)

GDP % of world

Austria 200.00 0.5731

Belgium 241.00 0.6905

Finland 131.00 0.3754

France 1,390.00 3.9828

Germany 1,920.00 5.5014

Greece 132.00 0.3782

Ireland 117.00 0.3352

Italy 1,110.00 3.1805



Portugal 108.00 0.3095

Spain 623.00 1.7851

Eurozone 6,371.60 18.2567

Denmark 167.00 0.4785

Sweden 260.00 0.7450

United Kingdom 1,570.00 4.4986

Cyprus 10.30 0.0295


Estonia 6.95 0.0199

Hungary 53.80 0.1542

Latvia 10.40 0.0298

Lithuania 15.10 0.0433

Malta 3.81 0.0109

Poland 186.00 0.5330

Slovak Republic 24.20 0.0693

Slovenia 21.70 0.0622

Non-Eurozone 2,391.86 6.8535

EU-25 8,763.46 25.1102

United States 10,800.00 30.9456

Japan 4,932.89 14.1343

World 34,900.00

Note: Percentages are calculated.



unable to do what it promised to do. The rich became richer, the poor

became poorer. It is instructive to note that currently, 60 member countries

have over 90 percent of shares (current 91.53 percent and calculated 95.49

percent), and the remaining 124 member countries have the rest (8.47 per-

cent current and 4.51 percent calculated) (see the note of Table 6.2 for the

method of calculation).

Table 6.2. Quotas of the EU Member States, the USA, and Japan (%)

Current Calculated

Austria 0.88 1.09

Belgium 2.16 1.99

Finland 0.59 0.55

France 5.03 4.37

Germany 6.09 7.02

Greece 0.39 0.41

Ireland 0.39 1.67

Italy 3.30 3.42



Portugal 0.41 0.50

Spain 1.43 2.04

Eurozone 23.22 27.65

Denmark 0.77 1.04

Sweden 1.12 1.23

United Kingdom 5.03 5.72

Cyprus 0.07 na


Estonia 0.03 na

Hungary 0.49 0.40

Latvia 0.06 na

Lithuania 0.07 na

Malta 0.05 na

Poland 0.64 0.64

Slovakia 0.17 0.18

Slovenia 0.11 na

Non-Eurozone 8.99 9.66

EU-25 32.21 37.31

USA 17.38 17.80

Japan 6.23 7.27

Note: The calculated quota of a member is based on the results of five formulas: one tra-

ditional Breton Woods formula and four others. The final number is the higher of the Bretton

Woods calculation and the average of the lowest two of the remaining four calculations after

adjustment. Calculated data are based on 1990–2002 data (IMF, 2004).

Source: IMF (2004), see Table 6.1A for current shares. See also Edwin, M.T. ‘‘Rearranging

IMF chairs and shares: The sine qua non of IMF reform.’’ In Truman E.M., (eds), Reforming

the IMF for the 21st Century. Washington, DC: Institute for International Education.


Restructuring of the IMF has become a critically important subject of

study. In September 2005, the Institute for International Economics spon-

sored a special conference on Reforming the IMF for the 21st Century, and

special report #19 is the scholastic output (see Truman, 2006). The issue of

restructuring the Bretton Woods institutions, the IMF and the WB, re-

ceived a great deal of attention following the debate, Stiglitz initiated with

forceful articulation(see Stiglitz, 2001). The broader issue of discontent

between the rich and the poor countries warrants urgent remedial measures

(Chapter 8). Our task will be limited to evaluating the emerging situation

relative to the eventful process of the Europeanization of Europe and the

USA and its relevance toward a plan to restructure the IMF. In Table 6.4

we present a recent proposal to the IMF.

As we review the new allocations of the quota, both the one-step approach

and the two-step approach are designed to accomplish the same target. The

EU and the USA will have power balanced between them so that both will

have equal shares of SDRs and votes. The intermediate step in the two-step

approach is a pragmatic consideration. The debate remains open. A reduction

of the total of the collective EU shares in the one-step and two-step ap-

proaches is open to negotiations where extra-economic considerations shall

come to prevail. The USA was the single-most dominant member country,

contributing hugely to the SDR capital holding of the IMF in the pre-EU

period, and as such, easily exercised veto power in the organization’s decision-

making process. Can the IMF become a power-sharing institution under

which the EU and the USA can share the veto power and the leadership role?

This will be a step forward. More inputs will come to the decision-

making process and the IMF will become a more proactive organization

that should benefit the rest of the members of the IMF. The wisdom of two

groups of scholars will certainly be a larger pool of knowledge for the

Board of Governors of the IMF to draw upon. The world community at

large will expectedly be better off. I venture to add that this sharing of veto

power in the decision-making process of the IMF will encourage sovereign

nation-state economies in other continents to accept the EU paradigm as a

Table 6.3. Currency composition of official holdings of foreign currency,end of year (in millions of SDR)

US dollar Euro Pound sterling Japanese yen

1999 711,606 179,924 29,013 63,966

2000 802,249 213,949 31,531 71,399

2001 853,761 239,703 32,708 63,186

2002 844,975 307,215 37,036 57,552

2003 940,876 361,995 37,526 58,961

2004 1,069,200 404,086 53,092 63,896

% Change over period 50.25 124.59 82.99 �0.11

Source: IMF Annual Report (2005).


learning model. Each continental regional economic entity will eventually

command competitive shares of world GDP and correspondingly have

competitive quotas of SDR and voting shares to have an active involve-

ment in decision making.

Restructuring will be the beginning of the end of veto power by any one

individual super-economy. In the pre-EU regime, individual European

economies, each with its smaller GDP base, had to accept the veto power

of the USA. Now, the EU has a chance to make their views equally pow-

erful and will hopefully make the best decision to make this a reality. It is

important to note that the EU is still in the process of further expansion.

Two more Member States are expected to join the EU in 2007 and reviews

of several other candidates are in progress. Reforming the IMF for the 21st

century must be addressed in this context.

Given the progressive internationalization of the financial markets, a la

cutting-edge communication technology, the emerging framework of power-

sharing in the IMF will add to the stability of national and regional econ-

omies. The pursuit of stability-oriented objectives by the euro and the dollar

currency regimes, and the collaborative efforts of the ECB and the FED,

within their respective delegations to the IMF, will be a positive factor.

6.6. The EU and the World Bank

We begin our discussions with the International Bank for Reconstruction

and Development (IBRD), the principal program of the WB. In Table 6.5A,

we compare the relative positions of the EU, the USA, and Japan. We also

Table 6.4. Proposal on restructuring the IMF

Starting quota New quota

SDR (billions) Share (%) SDR (billions) Share (%)

One-step approach

The EU 68.7 32 68.7 18

The USA 37.1 17 68.7 18

The rest of the IMF 107.6 50 244.4 64

Total membership 213.4 99 381.8 100

Two-step approach

The EU 68.7 32 68.7 21

The USA 37.1 17 57.6 18



The EU 68.7 21 86.5 18

The USA 57.6 18 86.5 18



Note: SDR – special drawing rights.

Source: IMF International Financial Statistics, see also Truman (2006).


show that the Eurozone, which has achieved a higher level of integration,

has a share large enough to be competitive. The earlier rankings of the USA

and Japan as the first and second largest economies of the world face a

challenge and a restructuring of the administration of the IBRD is in order.

We present the data for the International Finance Corporation (IFC) in

Table 6.5B, and for the International Development Association (IDA) in

Table 6.5C.

As of June 19, 2006, the USA, with its subscription share of 16.85

percent and its voting right of 16.39 percent of the total, enjoys a com-

manding position in the IBRD. For the IFC, the USA with its

Table 6.5A. IBRD: Votes and total subscriptions of the EU, the USA, andJapan

Total subscriptions % of total Voting rights % of total

1944 (US$, millions) Number of votes

Austria 1,106.30 0.70 11,313 0.70

Belgium 2,898.30 1.84 29,233 1.81

Finland 856.00 0.54 8,810 0.54

France 6,939.70 4.41 69,647 4.30

Germany 7,239.90 4.60 72,649 4.49

Greece 168.40 0.11 1,934 0.12

Ireland 527.10 0.34 5,521 0.34

Italy 4,479.50 2.85 45,045 2.78

Luxembourg 165.20 0.11 1,902 0.12

The Netherlands 3,550.30 2.26 35,753 2.21

Portugal 546.00 0.35 5,710 0.35

Spain 2,799.70 1.78 28,247 1.75

Eurozone 31,276.40 19.89 315,764.00 19.51

Denmark 1,345.10 0.86 13,701 0.85

Sweden 1,497.40 0.95 15,224 0.94

United Kingdom 6,939.70 4.41 69,647 4.30

Cyprus 146.10 0.09 1,711 0.11

Czech Republic 630.80 0.40 6,558 0.41

Estonia 92.30 0.06 1,173 0.07

Hungary 805.00 0.51 8,300 0.51

Latvia 138.40 0.09 1,634 0.10

Lithuania 150.70 0.10 1,757 0.11

Malta 107.40 0.07 1,324 0.08

Poland 1,090.80 0.69 11,158 0.69

Slovakia 321.60 0.20 3,466 0.21

Slovenia 126.10 0.08 1,511 0.09

Non-Eurozone 13,391.40 8.51 137,164.00 8.47

EU-25 44,667.80 28.40 452,928.00 27.98

USA 26,496.90 16.85 265,219 16.39

Japan 12,700.00 8.08 127,250 7.86

Source: The World Bank.


subscriptions at 24.09 percent and voting right of 23.65 percent of the total

is the leader. The same is true for the IDA, where the USA enjoys a voting

right of 13.39 percent of the total. Japan as the second largest economy had

its subscription at 8.08 percent of the total funds of the IBRD and voting

rights of 7.86 percent. For the IFC, Japan’s subscription is at 5.97 percent

of the total with its voting right at 5.87 percent. For the IDA, Japan’s 10.36

percent of the voting rights is the second largest of the total. Together, the

USA and Japan contribute some 25 percent of the total fund and enjoy a

corresponding share of the voting rights in the IBRD. For the IFC, the two

contribute 30.06 percent of subscriptions and their voting rights total 29.52

Table 6.5B. IFC – Votes and total subscriptions of the EU, the USA, andJapan

Total subscriptions % of total Voting rights % of total

(US$, 000’s) Number of votes

Austria 19,741 0.84 19,991 0.83

Belgium 50,610 2.14 50,860 2.11

Finland 15,697 0.66 15,947 0.66

France 121,015 5.12 121,265 5.04

Germany 128,908 5.45 129,158 5.36

Greece 6,898 0.29 7,148 0.30

Ireland 1,290 0.05 1,540 0.06

Italy 81,342 3.44 81,592 3.39

Luxembourg 2,139 0.09 2,389 0.10

The Netherlands 56,131 2.37 56,381 2.34

Portugal 8,324 0.35 8,574 0.36

Spain 37,026 1.57 37,276 1.55

Eurozone 529,121 22.37 532,121 22.10

Denmark 18,554 0.78 18,804 0.78

Sweden 26,876 1.14 27,126 1.13

United Kingdom 121,015 5.12 121,265 5.04

Cyprus 2,139 0.09 2,389 0.10

Czech Republic 8,913 0.38 9,163 0.38

Estonia 1,434 0.06 1,684 0.07

Hungary 10,932 0.46 11,182 0.46

Latvia 2,150 0.09 2,400 0.10

Lithuania 2,341 0.10 2,591 0.11

Malta 1,615 0.07 1,865 0.08

Poland 7,236 0.31 7,486 0.31

Slovakia 4,457 0.19 4,707 0.21

Slovenia 1,585 0.07 1,835 0.08

Non-Eurozone 209,247 8.86 212,497 8.85

EU-25 738,368 31.23 744,618 30.95

USA 569,379 24.09 569,629 23.65

Japan 141,174 5.97 141,424 5.87



percent. The voting rights of the two in the IDA are 23.75 percent of the

total. Without the presence of the EU as a political entity, the leadership of

the USA remains beyond question and that of Japan follows. Germany,

France, United Kingdom, and Italy trail behind, while the rest of the

participating countries make limited contributions and share limited voting

powers.

The post-EU regime presents a picture of different competitive ranking.

The Eurozone alone outranks both the USA and Japan. The total of the 25

member subscriptions and the total of their voting rights have given the

EU a commanding position in the WB institutions – IBRD, IFC, and IDA.

Table 6.5C. IDA – Votes and total subscriptions of the EU, theUSA, and Japan

Voting rights % of total

Number of votes

Austria 172,388 1.10

Belgium 442,902 2.82

Finland 94,474 0.60

France 654,788 4.17

Germany 1,043,130 6.64

Greece 39,635 0.25

Ireland 44,943 0.29

Italy 426,350 2.71

Luxembourg 36,541 0.23

The Netherlands 330,811 2.11

Portugal 42,015 0.27

Spain 113,072 0.72

Eurozone 3,441,049 21.91

Denmark 158,811 1.01

Sweden 304,604 1.94

United Kingdom 794,820 5.06

Cyprus 42,204 0.27

Czech Republic 72,449 0.46

Estonia — —

Hungary 109,301 0.70

Latvia 36,322 0.23

Lithuania — —

Malta — —

Poland 344,305 2.19

Slovakia 46,958 0.30

Slovenia 34,947 0.22

Non-Eurozone 1,944,721 12.38

EU-25 5,385,770 34.29

USA 2,102,894 13.39

Japan 1,626,574 10.36



Structural issues regarding changes between Member States of the EU will

be the responsibility of the European Investment Bank (see Chapter 4).

Since the founding of the WB, the USA has made the largest contri-

butions to the Bank, and consequently controlled the administration of the

Bank. Thus far, the President of the WB has been an American appointed

by the President of the USA. It is now the turn of the EU to take a leading

role and appoint the President of the WB to offer leadership in all aspects.

The USA, as the second ranking member, will of course share power, but

will there be an effort to make the EU and the USA equals in sharing the

power of managing the WB with equal subscriptions and voting rights?

I have argued against a shared hegemony of the two systems, the USA

and the EU, and the two currency regimes, the euro and the dollar. Uni-

lateralism of one or of the two is equally unacceptable and irrelevant.

Competition between the EU and the USA, with their competitive shares

of world economic activity, will be welcome. Not only will it optimize the

economic gains of the peoples of Europe and the USA, but also for all the

peoples of the rest of the world (Dutta, 2000a, b, 2002a, b, c; see also

Chapters 3, 4, and 8).

The EU has made a commitment to work with the WB as its strategic

partner toward achieving Millennium Development Goals (MDGs) by

2015. The MDGs are a set of eight targets addressing poverty reduction,

universal primary education, gender equality, child mortality, maternal

health, HIV/AIDS and other communicable diseases, and environmental

sustainability. This global agenda is of course commendable and the USA

and other richer member countries of the WB must share the commitment.

The challenge, however, is to restructure the Bretton Woods organizations,

the IMF and the WB, to achieve their optimum administrative efficiency.

6.7. The EU and the World Trade Organization

The EU is a leading member of the WTO, with all its Member States

represented by one representative with one vote. Saudi Arabia has been

admitted to the WTO as its 149th member. Russia was expected to become

the 150th member of the WTO, but was blocked by the United States in

July 2006.

The Fourth Ministerial Conference in Doha, Qatar in November 2001

made a set of declarations, the Doha Declaration. It includes issues relative

to agriculture and subsidies, textiles and clothing, technical barriers to

trade and trade-related investment measures, and rules of origin. The

Doha Declaration remains to be acted upon and the EU is expected to play

a key leadership role. The WTO is facing a division on the specific issues of

agriculture and farm subsidies. The mature industrialized economies con-

tinue to offer subsidies to their farmers and the farmers in less industri-

alized and preindustrialized poorer member countries remain unable to

compete in the world market. The goal is to eliminate restrictions and


distortions in world agricultural markets because agriculture continues to

be a major economic activity in the vast of majority of the economies of the

world. The mature industrialized economies each have their pet issues in-

cluding market-access for nonagricultural products. Trade-related aspects

of intellectual property rights (TRIP) and environment are also issues of

their prime concern.

Based on its share of world economic activities, the EU is the leading

member of the WTO and must accept the challenge to ensure the success of

the Doha Declaration. The EU is particularly concerned about environ-

mental issues and has taken measures to slow and reverse the process of

global warming. They have also begun putting pressure on the biggest

polluter, the US, to follow suit. This is the big story of An Inconvenient

Truth. The industrial revolutions in China and India are following their

natural course, adding to the wealth of the world at the expense of the

global environment. Industrialized nations cannot begin to criticize the

newly industrialized nations before they have fulfilled their own obligations

to the worlds’ environment. Happily, the EU has signed the Kyoto Pro-

tocol. Perhaps the WTO should make its membership contingent upon

accepting the Kyoto Protocol. TRIP is an independent legal issue that

should be subject to an international legal code binding upon all member

countries of the WTO. Provisions for severe punitive measures will be

welcome. If a member country fails to cooperate in this regard, its mem-

bership should be terminated.

I venture to suggest that there must be an innovative way to tackle the

agricultural issues threatening to divide the WTO community. The EU, as

the new leader of the WB, may institute a special fund to end subsidies in

any form in any country by 2020. Farmers in poorer countries may receive

from the Fund equal subsidies for the transitional period. The objective

should be to achieve fair market prices of agricultural products from all

producing countries. If industrialized nations fail to help the industrial-

ization of the poorer nations by reducing their dependence on the agri-

cultural sector, the wave of illegal migration and widespread protest

movements against globalization will not cease.

Based on its share of the world trade, the EU is the largest trading

economy of the new world (see Chapter 3) and it must accept the challenge

to help promote free trade among the 149 WTO member countries. Cur-

rently on the roster of the UN, there are 192 sovereign nation-states. The

membership of the remaining 43 UN members will truly make the WTO an

organization for world trade. If peoples of these 43 countries remain out-

side the WTO and denied the consequent opportunities of free global

trade, the WTO as a whole will remain deprived of the potential economic

gains of the free trade which would follow. Given the growing economic

resource base of Russia, its accession to the WTO, currently blocked by the

USA, may be an issue for the EU to promote. The proposed FTA between

the EU and Russia will certainly be a benefit in this regard.


Table 6.6 shows that all Member States of the EU-25, and Bulgaria and

Romania, scheduled for accession in 2007, are members of the WTO.

Twenty of the 27 became members of the WTO on January 1, 1995.

6.8. Normalization of the intra-EU income gaps

The challenge to normalize income gaps among the Member States of the

EU merits a critical review. The persistence of income gaps among the

Member States would only fuel the debate if the regional economic inte-

gration in the EU was of any merit, or there would be no reason for poorer

Member States to accept what they would designate as the framework of

neoimperialism. Belonging together must be anchored to the concept of

shared prosperity to prevent these Member States from exercising their

rights to protest against economic exploitation by the richer ones. The

second core issue relates to a simple mathematical formula. For laggards to

catch up with leaders there must be a period of accelerated growth of their

Table 6.6. EU and the WTO membership

Membership date

Austria January 1, 1995

Belgium January 1, 1995

Cyprus July 30, 1995

Czech Republic January 1, 1995

Denmark January 1, 1995

Estonia November 13, 1999

Finland January 1, 1995

France January 1, 1995

Germany January 1, 1995

Greece January 1, 1995

Hungary January 1, 1995

Ireland January 1, 1995

Italy January 1, 1995

Latvia February 10, 1999

Lithuania May 31, 2001

Luxembourg January 1, 1995

Malta January 1, 1995

The Netherlands January 1, 1995

Poland July 1, 1995

Portugal January 1, 1995

Slovakia January 1, 1995

Slovenia July 30, 1995

Spain January 1, 1995

Sweden January 1, 1995

United Kingdom January 1, 1995

Bulgaria December 1, 1996

Romania January 1, 1995

Source: WTO.


respective economies. Given the right to free movement within the Union,

the people in poorer states may move to richer states to find employment.

Alternatively, the system may provide for investments by richer states in

poorer states so that jobs may be created where the people reside. On the

other side of the dispute, people in richer states are concerned to have their

jobs taken away by those foreign workers moving to their state or seeing a

boom in those economies at the expense of theirs. It will require a sig-

nificant effort to prove and to assure them that the economic progress of

their poorer neighbors will add to their own economic prosperity in the

long run. Overall, it is a win-win game to be learnt with patience.

Based on the relative levels of industrialization and economic affluence,

Greece, Ireland, Spain, and Portugal were found to be lagging. The Eu-

ropean Fund, heavily supported by with contributions from the richer

Member States, undertook the responsibility to make structural adjust-

ments in all disadvantaged Member economies. The Fund works on a

commercial basis, granting loans and collecting repayments with service

charges.

Table 6.7 reports the progress of the four less affluent economies in

1987, Ireland, Greece, Portugal, and Spain vis-a-vis Germany, the largest

member economy of the Union, and their relative standings in 1987, 1998,

and 2004. These years were selected because 1987 is the period immediately

following the One Europe Act of 1986, when the economic integration of

the EU-15 came to have its parameters more well defined, 1998 being right

before the formalization of the Eurosystem, and 2004 being the latest year

for which relevant data is available. Ireland began with a base score of 64

in 1987 and moved up to 100 in 1998 and on to 142 in 2004. Based on per

capita income, Ireland is now the second richest economy of the Union,

next to Luxembourg, as stated earlier. For Portugal, the base in 1987 was

62, progressing to 70 in 1998, and remaining unchanged by 2004. Spain

with its score at 78 in 1987, moved up to 83 in 1998, and to 90 in 2004.

Greece had a score of 72 in 1987, but experienced a decline in 1998 to 66,

but has since recovered and continued to grow, reaching 78 in 2004. These

four economies are booming and they have ceased to be relatively low-

wage, preindustrialized economies.

Table 6.7. GDP (PPP) per capita comparison

1987 1998 2004

Germany 100 100 100

Ireland 64 100 142

Portugal 62 70 70

Spain 78 83 90

Greece 72 66 78

Source: Calculated based on World Development Indicators. See also Schroeder (2000) and

Dutta (2002).


The issue of intra-EU income gaps will be one of concern as the EU

membership expands. In 2004, the AC-10 was admitted to EU membership

to become part of the EU-25. They are less industrialized and the normal-

ization of intra-EU per capita income must be an objective. Even before

joining, the expectation of their accession caused investments to flow from

richer Member States to the AC-10. The AC-10, as per the Agreement of

Accession, elected to join the Eurozone to facilitate investment flows from

richer Eurozone Member States. As the process made the AC-10 move

ahead, extra-EU investment flows also came to explore investment oppor-

tunities in these economies, adding to their growth at an accelerated rate.

The mass migration of the people from the new 10 seeking employment in

the richer countries is not an optimum option. The EU can draw upon its

past experience and create jobs where more labor is relatively abundant, and

consequently at a relatively low wage rate.

In Table 6.8, based on sectoral shares of GDP in 2005 (unless otherwise

noted), the EU-10 is evidently more agriculture-dominant. The member-

ship of the EU will further accelerate industrialization of these economies.

The table also shows that the EU-15 and the EU-10 share competitive

levels of industrialization. As we compare the EU-25 with the USA, the

EU as a whole must become less agriculturally dependent and increase

their shares of the service sector.

6.9. The EU and the world beyond

The EU is on its way to outrank the USA and Japan, formerly the largest

and the second largest economies of the world. The challenge for the EU is

to share its economic leadership to globalize economic prosperity with all

the peoples of the world. Making necessary adjustments for the other

mature industrialized economies and the newly industrialized economies of

Asia, a disproportionate majority of the 6 billion people of the world

remain denied of the living standard they deserve. Much to the surprise of

many, China’s industrial revolution has been accomplished. The same is

true for India’s great leap forward in high-tech industrialization. Brazil in

South America has earned its place on the economic map of the world. Oil-

rich countries of the Middle East present an exclusive economic map of

their own. Russia, rich in huge reserves of natural gas and petroleum, has

emerged as an economic power, earning its seat at G-8 meetings, and

recently making its currency, Rouble, fully convertible.

Table 6.9 reports the relevant data for the EU and the USA. The EU

must accept the responsibility of the economic leadership of the world and

develop a plan to take the necessary actions. Dealing with China and India,

each with over 1 billion people, will certainly be a very special assignment.

Asian economies based on the 4+10 model (Chapter 8) have made robust

announcements for Asian Economic Cooperation with one common Asian

money. As the Europeanization of Europe is becoming a reality, the


Asianization of Asia cannot remain far behind. Africa is Europe’s imme-

diate neighbor and the Organization for the African States has now be-

come the African Union (AU). If even a small percentage of the revenues

earned on the mineral resources exploited from the continent of Africa

were shared with its native population, the economy of the continent

would have been far different. The imperial model devastated the society

and peoples of Africa.

The EU is currently engaged in a dialogue with its African neighbors

regarding the critical subject of illegal immigration. If there should be jobs

in the EU to be filled up by these immigrants, the issuance of immigration

papers for the guest workers will be an option. If not, the EU, with the

resources at its command, can help to further develop an investment

Table 6.8. Sectoral shares of GDP (%), 2005

Agriculture Industry Services

EU-25 (2004) 2.2 27.3 70.5

USA 1.0 20.7 78.3

Austria (2004) 2.3 30.8 66.9

Belgium (2004) 1.3 24.7 74.0

Denmark 2.2 24.0 73.8

Finland 3.1 30.4 66.5

France 2.5 21.4 76.1

Germany 1.1 28.6 70.3

Greece 6.2 22.1 71.7

Ireland (2002) 5.0 46.0 49.0

Italy 2.1 28.8 69.1

Luxembourg (2004) 0.5 16.3 83.1


Portugal 5.2 28.9 65.9

Spain 3.4 28.7 67.9

Sweden 1.8 28.6 69.7


EU-15 2.7 27.3 70.0

Cyprus 3.8 20.0 76.2

Czech Republic (2004) 3.4 39.3 57.3

Estonia 4.1 29.1 66.8

Hungary 3.9 30.9 65.3

Latvia 4.1 26.0 69.9

Lithuania 5.7 32.4 62.0

Malta (2003) 3.0 23.0 74.0

Poland 2.8 31.7 65.5

Slovakia 3.6 29.7 66.7

Slovenia 2.8 36.9 60.3

EU-10 3.7 29.9 66.4



program in the African economies where they are waiting, hungry for

employment. The AU seems to be ready to learn from the economic model

of the European continental regionalism (see Chapter 8).

Russia is Europe’s other immediate neighbor. Decades of Cold War

hostility are now left behind, and in 2006, Russia was invited to host the G-8

meeting at St. Petersburg. The USA, Canada, Japan, the United Kingdom,

France, Germany, and Italy joined Russia at the two-day summit in July

2006. Instead of an agenda for an in-depth discussion of economic coop-

eration with Russia, the summit was caught up in the conflicts in the Middle

East.

6.10. The EU and the challenge of leadership

The EU, the integrated economy of the continent of Europe, has emerged

as the largest economic entity in the world. The dimension of its economic

activities, as measured by the EU’s shares of world output and trade, is

immensely large and outranks the USA, previously the largest economy

since World War II. The USA continues to command competitive shares of

world output and trade, and will continue to offer effective competition.

The EU must accept the challenge of this economic leadership. To

sustain its competitive ability, the EU must initiate competitive programs,

especially for the progressive enrichment of human capital. The USA be-

came a victim of its self-confidence when much to the surprise of many, the

findings of a Blue Ribbon Presidential Commission in 1985 reported that

the per capita productivity of the USA was behind that of the United

Kingdom, France, and West Germany in Europe, and South Korea and

Japan in Asia (Report of the President’s Commission on Industrial Pro-

ductivity, 1985, p. 28). Aggressive efforts based on monetary and fiscal

policies since then have been in place. Recent studies have reported sig-

nificant productivity gains in the American economy. One wonders if

American consumers continue to prefer imported automobiles, steel, cam-

era, and photographic materials.

The EU has a lesson to learn. The American experience may be at-

tributed to the historical fact that until the emergence of the EU-regime,

the USA, with its overwhelmingly large shares of world output and trade,

Table 6.9. Shares of GDP (PPP), shares of world exports (%), andpopulation

GDP (PPP) (%) World exports (%) Population (in millions)

2004 2000 2004

USA 20.85 13.84 293.51

EU 21.44 37.67 455.30

Source: Complied from Tables 3.1, 3.3A, and 3.5.


functioned in the world market without any notable competition. Japan,

the second largest economy at the time, was a remote second. Germany,

France, the United Kingdom, and Italy followed. Other countries had

rather marginal shares, many with less than 1 percent shares of world

output and trade, and the Communist economies were completely outside

the competitive market economic system. In the post-EU global economic

order, the EU and the USA will be vigilant competitors. In addition, the

erstwhile Communist economies have joined the new order as Socialist

market economies, and evolved to be potential competitors. The compe-

tition between the EU and the USA will be the key factor, assuring effec-

tive functioning of the free market with optimum resource allocation and

price competitiveness.

The competition in the world market may collapse if the USA and the

EU agree to act as equals and jointly share veto powers in all international

economic forums. That will compromise the optimization of economic

gains for all the peoples of the world. For the present, there is much

competition between the EU and the USA. The world will benefit from a

much better extra-wide-body super-jet as the American Boeing and the

European Airbus compete. Competition between the EU and the USA to

capture shares of the world market for their manufactured products have

contributed to quality and cost-competitive products, goods, and services

in trade, benefiting the consumers in all countries. Indeed, the EU has

adopted the principle of competition as one of its tenets and has made

adequate provisions for the enforcement of the competition principle. We

have discussed earlier that several business corporations from the USA

have been prosecuted in the court of law. The implementation process must

be transparent and fully open to judicial review. The euro, the currency of

the Eurosystem, in a short period of seven years, has become a competitive

international currency vis-a-vis the US dollar (see Chapter 4). At the on-

going Doha Round, the EU and the USA have joined forces to engage in a

diplomatic dialogue with developing economies in support of their respec-

tive programs for farm subsidies. However, they are in competition with

each other and cannot agree on how best to do it.

A competitive world market is in order. The proposal for an Asian

continental economic union with one common Asian money is on the

table. The African Economic Union is expected to follow. The EU has led

the continental economic integration movement. Will the Free Trade Area

of the Americas (FTAA) become a base for an American Hemispheric

Economic Union? The EU has a responsibility to offer constructive lead-

ership to other continents. The possibility of a trans-Atlantic economic

integration of the EU and the USA establishing a new order of unilat-

eralism of the alliance will evoke protests and disapproval of the rest of the

world.


CHAPTER 7

The EU and USA

7.1. Participation and cooperation

Allied forces commanded by the American Five Star General Eisenhower

won the War in Europe on May 8, 1945, and Western Europe was lib-

erated. Immediately thereafter, in 1947, President Truman signed the

Marshall Plan to make funds available for the economic reconstruction of

war-ravaged Europe. Much to the applause of thousands of Europeans,

President Kennedy stood at the high podium facing the Berlin Wall and

proclaimed, ‘‘I am a Berliner.’’ President Reagan called for the end of the

Cold War and the Berlin Wall came down in 1989. During the conflicts in

Southeastern Europe in the 1990s, President Clinton led the war under

NATO command, with full support of European allies, and stopped the

massacre of innocent peoples in the region. Since World War II, the core of

America’s European policy has been one of participation and cooperation.

Soon after World War II, on April 16, 1948, the Organization for

European Economic Cooperation (OEEC) was founded, with its member-

ship limited to the European countries. The USA could not be a member of

the OEEC even though all of the organization’s operations depended on

the funds from the Marshall Plan. America asked for participation; the

Organization for Economic Cooperation and Development (OECD) with

American membership was formed in September 1961 to take over the

assignment of economic reconstruction in Europe with US input, and the

OEEC ceased to exist. In 1949, American concern for the security of Eu-

rope resulted in the establishment of the North Atlantic Treaty Organi-

zation (NATO), headed by an American General. The Soviet hegemony in

Eastern Europe was a serious security problem and the challenges of the

Cold War were to be met.

The OECD and NATO became the two post-WWII institutions with

provisions for American participation and cooperation with Europe, the

OECD for European economic reconstruction and development, and

NATO to protect democracy in North America and Europe (see Chapter 2).

The economic reconstruction of Europe came to be successfully ac-

complished, but the economies of Western Europe began to recognize that

individually, each was an economy of limited dimensions, given their pop-

ulation bases, geographical areas, and shares of national output and trade

with the rest of the world. This spurred the movement for economic in-

tegration, which progressed at an unprecedented pace. The formation of

the Customs Union (CU) of the Benelux countries was quickly followed

by the European Coal and Steel Community (ECSC) of 1951, progressing

to the European Economic Community (EEC) in 1957, the European

Community (EC) in 1967, and finally to the European Union (EU) in 1992.

The EEC began with six-member economies effective on January 1, 1958,

and in 2004, 25 countries constituted the EU, with two more members to

be admitted by 2007. The candidacy of several other countries continues to

be under review. On January 1, 1999, 12 Member States of the EU

achieved an economic integration at a much higher level than ever before

as they adopted one common money, the euro, under a common central

bank, the European Central Bank (ECB). The process of political inte-

gration is still in progress, but a majority of the Member States have

already approved of the Constitution for one European government.

The EU is a continent-based institution of the Europeans, by the Eu-

ropeans, and for the Europeans. Their belonging to the map of Europe is a

fact and their commitment to the trans-Atlantic alliance is not disputed.

The Atlantic is a great divide between Europe and the USA, and the

friendly trans-Atlantic relationship must be viewed in that context. The

principle of participation and cooperation must be a shared commitment

to a broad-based agenda of values. Unilateral action by either side will

compromise the goal of trans-Atlantic cooperation, and must be ruled out.

NATO continues to be the defense umbrella under American com-

mand. The EU no longer needs financial support for their sustained eco-

nomic progress, allowing the OECD to broaden its membership beyond

Europe and North America. However, this expanded membership includes

no country from Africa and Latin America, and its Asian membership

continues to be limited to Japan and the Republic of Korea. May the EU

and the USA, joined by other richer countries of the world, consider de-

voting OECD resources to the economic reconstruction and development

of poorer countries (see Chapters 3–5).

7.1.1. The USA and regions of economic cooperation

As the continental economic integration of European countries continued

to gather momentum, the USA moved to explore various economic op-

tions for itself. However, its efforts fell far short of what was happening in

Western Europe. The EU became one common continental union based in

its unique framework of a Free Trade Area (FTA) (see Chapters 3 and 4).

The USA has also worked with what I have called the traditional frame-

work of FTA, FTA in name only, and truly based on strategic consid-

erations. This agenda precluded any scheme for a comprehensive regional

economic integration. In 1985, the USA–Israel FTA was established, not

based on geographical contiguity, but on a shared commitment to values.


The Australia–US FTA (AUSFTA) that became effective on January 1,

2005, is the latest in this category.

In the absence of any historical precedent, the emergence of the EU

where erstwhile sovereign nation-states compromised their traditional right

to sovereignty and voluntarily became members of the EU, there may be a

great deal of misconception. As the EEC became functionally operational,

the United Kingdom led a counter-movement by joining a few European

neighbors and forming the European Free Trade Area (EFTA). The UK’s

participation in the EFTA presented a problem for their EC membership

until 1973 when the UK became a member of the EU. The EFTA failed

(see Chapters 2 and 6). For the USA, there seems to have been a total

inability to evaluate the continental integration movement in Europe.

Outside of academia, ‘‘One Europe’’ was not thought to be an event of any

potential. Uncertain of its position regarding the EU, the USA lackadai-

sically explored three options for economic regional cooperation.

7.1.2. Asia-Pacific economic cooperation

As the events in Western Europe continued to gather momentum, two sets

of events came to influence American policy toward regionalization at-

tempts, which I have called pull and push factors (Dutta, 1999). In the

1970s, the newly industrializing economies of Asia, the Republic of Korea,

Chinese Taipei (Taiwan), Hong Kong (now returned to Chinese sover-

eignty), and Singapore, soon joined by Thailand and Malaysia, brought an

economic awareness of Asia beyond Japan. Asian countries in general were

only known for their history, philosophy, exotic culinary arts, and mys-

ticism. On September 5, 1983, the New York Times published a feature

story on the passing of an economic ‘‘milestone’’ in 1982, when the United

States, for the first time in its history, did more trade on trans-Pacific

routes than on trans-Atlantic routes (Silk, 1983). Indeed, in 1981, US trade

with Europe was US$ 115.1 billion, while the total with Asia-Pacific came

to be $131.4 billion. Just the previous year, US trade with Europe still had

an edge over trade with Asia-Pacific at US$ 119.0 billion–US$ 117.4 bil-

lion. This historic event launched a new trend of a US trade deficit with

Asia. In 1982, the gap was US$ 14 billion, further widening to US$ 28 and

US$ 39 billion in 1983 and 1984, respectively. The Asia-Pacific trade total

included the two-way US trade with all countries from Afghanistan to

Papua New Guinea plus the island economies of the Oceania. The Euro-

pean total included the two-way US trade with all countries in Western

Europe and Eastern Europe including the USSR (Dutta, 1987; Klein, 1987;

Linder, 1987; see also Dutta, 1985).

There was profit to be made by trade and investment in the Asian

economies beyond Japan. Some economists conveyed their concern for the

export-led growth of Asia’s newly industrializing economies. They became

industrialized mostly at the expense of American consumers, the critics

The EU and USA 165

argued. Lawrence Klein made an articulate exposition to elucidate the

point that export-led growth could not sustain itself indefinitely and that

Asia’s growth was the result of the import–export-led growth model

(Klein, 1990). For the industrialization of their respective preindustrial

economies dependent on traditional agricultural activities, Asian countries

had to import capital goods and equipment from the mature industrialized

countries. They could only pay for these imports by way of exporting a

significant part of their newly manufactured products to the world market

and earn export revenues in convertible currencies. Some of these Asian

countries borrowed from investment banking institutions in the USA and

other richer countries, while others took advantage of joint ventures or

foreign direct investment (FDI), with 100 percent foreign ownership. Eco-

nomic gains from Asian investments became the pull factor (Fry, 1996).

The push factor came from events across the Atlantic. There was no

clear understanding of the emerging process of the European economic

integration. There was a sense of apprehension that trade with the Euro-

pean markets would become limited for non-European trade partners.

Debates and discussions by economists and business leaders in Japan and

Canada became pronounced. They became concerned that their market

shares in Europe would be reduced. Australia and New Zealand soon

voiced their concerns. The fact that these two isolated South Pacific in-

dustrialized economies, with a huge endowment of natural resources, and

small population, did not belong to the map of Europe was made clear to

them. These two former colonies had maintained substantive economic ties

with the UK, but were summarily left out when in 1973 the UK became a

member of the EC. The FTA of the EU required unrestricted intra-EU

trade with common trade restrictions against the rest of the world and the

UK was required to impose trade restrictions on its trade with Australia

and New Zealand. Japan, Canada, Australia, and New Zealand then per-

suaded the USA to consider a regional cooperation of their own in re-

sponse, and the five became the proponents of the Asia-Pacific Economic

Cooperation (APEC). With its huge population base and a very large share

of world economic activity, APEC would be a market big enough to com-

pete with the European continental economy (Bergsten, 1995).

On November 6–7, 1989, Indonesia, the Republic of Korea, Malaysia,

Singapore, Thailand, the Philippines, and Brunei Darussalam, joined the

USA, Canada, Japan, Australia, and New Zealand at a conference in Can-

berra, Australia and formally constituted APEC with its secretariat in Singa-

pore. In 1991, the People’s Republic of China, Hong Kong, and Chinese

Taipei joined the APEC membership, followed by Mexico and Papua New

Guinea in 1993. Chile joined in 1994, and in 1998 Peru, Russia, and Vietnam

became APEC members. All told, APEC currently has 21 members on the

two shores of the Pacific (Table 7.1A). The one exclusive criteria of APEC

membership is that each member country must be touched by the waters of

the Pacific Ocean. This precludes India, other South Asian countries, and


several in Southeast Asia from APEC membership, but this is a weak de-

lineation of APEC’s geographical boundaries. In the case of the EU, the

criterion for membership is belonging to the map of Europe as observed on

the map of the world. The map of the European continent is well defined and

offers a definitive geographical identity, while the Pacific Ocean is far too vast.

Just as the Atlantic Ocean is a divide between Europe and the Americas, so

must the Pacific Ocean be a divide between Asia and the Americas. APEC

member countries on the American shore of the Pacific do not share a sense of

geographic bond with their fellow APEC member countries on the Asian

shore of the Pacific, and having the largest body of water between the two

continents will make it all the more difficult to do so.

With an area of 62,298 thousand km2, a population base of 2.6 billion

people, GDP of over US$ 24 trillion, an average per capita GDP of US$

9,330, exports of over US$ 4 trillion, and imports of US$ 4.3 trillion, APEC

is a huge market area with enormous potential (Table 7.1B). It continues to

function and has been responsible for publishing a series of working papers,

authored by its various working groups (see Table 7.1C). The annual APEC

Summit meetings are held in a member country on rotation, and are at-

tended by the 21 Heads of States/Governments. The Summit has become a

colorful global media event, especially when the leaders in attendance appear

in the national costume of the host country of the year.

Table 7.1A. APEC members

APEC members Date of joining Continent

Australia 6–7 Nov 1989 Oceania

Brunei Darussalam 6–7 Nov 1989 Asia

Canada 6–7 Nov 1989 Americas

Chile 11–12 Nov 1994 Americas

People’s Republic of China 12–14 Nov 1991 Asia

Hong Kong, China 12–14 Nov 1991 Asia

Indonesia 6–7 Nov 1989 Asia

Japan 6–7 Nov 1989 Asia

Republic of Korea 6–7 Nov 1989 Asia

Malaysia 6–7 Nov 1989 Asia

Mexico 17–19 Nov 1993 Americas

New Zealand 6–7 Nov 1989 Oceania

Papua New Guinea 17–19 Nov 1993 Oceania

Peru 14–15 Nov 1998 Americas

Philippines 6–7 Nov 1989 Asia

Russia 14–15 Nov 1998 Asia

Singapore 6–7 Nov 1989 Asia

Thailand 6–7 Nov 1989 Asia

Chinese Taipei 12–14 Nov 1991 Asia

United States 6–7 Nov 1989 Americas

Vietnam 14–15 Nov 1998 Asia

Source: APEC, http://www.apec.org/content/apec/member_economies.html.

The EU and USA 167

http://www.apec.org/content/apec/member_economies.html.

Table 7.1B. Key economic indicators of APEC members (as of December 6, 2005)

Member country Area (000’s km2) Population

(in millions)

GDP

US$ billion

GDP per

capita US$

Exports

US$ millions

Imports

US$ millions

Australia 7,692 20.2 692.4 33,629 86,551 103,863

Brunei Darussalam 6 0.4 5.7 15,764 4,713 1,638

Canada 9,971 32.0 1,084.1 33,648 315,858 271,869

Chile 757 15.4 105.8 6,807 32,548 24,769

China 9,561 1,299.8 1,851.2 1,416 593,647 560,811

Hong Kong, China 1 6.9 174.0 25,006 265,763 273,361

Indonesia 1,905 223.8 280.9 1,237 71,585 46,525

Japan 378 127.3 4,694.3 36,841 566,191 455,661

Korea 99 48.2 819.2 16,897 253,845 224,463

Malaysia 330 25.5 129.4 4,989 125,857 105,297

Mexico 1,958 105.0 734.9 6,920 177,095 171,714

New Zealand 271 4.1 108.7 26,373 20,334 21,716

Papua New Guinea 463 5.9 3.5 585 4,321 1,463

Peru 1,285 27.5 78.2 2,798 12,111 8,872

Philippines 300 86.2 95.6 1,088 39,588 40,297

Russia 17,075 144.0 719.2 5,015 171,431 86,593

Singapore 1 4.2 116.3 27,180 179,755 163,982

Thailand 513 64.6 178.1 2,736 97,098 95,197

Chinese Taipei 36 22.5 335.2 14,857 174,350 168,715

United States 9,364 293.0 12,365.9 41,815 818,775 1,469,704

Vietnam 332 82.6 51.0 610 26,061 32,734

APEC total 62,298 2,639.1 24,623.6 9,330 4,037,477 4,329,244

EU 3,852 455.3 12,690.6 27,873 3,228,550 3,096,680

Source: APEC, Economic Fact Sheets, http://www.dfat.gov.au/geo/fs, The APEC Region Trade and Investment 2005. EU data from Tables 1.6A and 1.6B, EU

exports and imports for 2002, World Development Indicators (2005).

EuropeanUnionandtheEuro

Revo

lutio

n168

http://www.dfat.gov.au/geo/fs

APEC has failed to deliver what it promised to the peoples of its 21

member countries. Officially, the APEC Free Trade Area is expected to be

operational in 2010, but the 1994 Summit adopting a 10–20 formula has

effectively shelved the issue of implementation for the future. The plan

provided that, beginning in 2000, the industrialized member countries in-

cluding the USA, Canada, Japan, Australia, and New Zealand are to es-

tablish an FTA in 10 years, while the rest will have 20 years. With no

concrete agenda planned for the present, the failure to deliver any result

became a source of disappointment for many APEC enthusiasts. Talks for

intra-APEC free flow of investment and free movement of labor are con-

sidered premature. On the European continent, an FTA with free flow of

Table 7.1C. APEC organization

Summit of Heads of State/Government

Foreign Ministers’ Meetings

Sectoral Ministerial Meeting

Education

Energy

Environmental Sustainable Development

Finance

Health

Human Resource Development

Mining

Ocean-related

Regional Science & Technology Co-Op

Small & Medium Enterprise

Telecommunications Information

Trade

Transportation

Women’s Affairs

Tourism

Working Groups

Agricultural Technical Cooperation

Energy

Fisheries

Human Resource Development

Industrial Science & Technology

Marine Resources Conservation

Small & Medium Enterprises

Telecommunications & Information

Tourism

Trade Promotion

Transportation

Secretariat at Singapore

APEC Business Advisory Council

Eminent Persons Groupa

Source: APEC, see also Dutta (1999).aEminent Persons Group was constituted by one eminent person from each member country,

assigned to develop the institutional framework of APEC and has since been dissolved.

The EU and USA 169

trade, free flow of investment, and free movement of labor became an

accomplishment for the EEC much sooner than the transition period of 12

years agreed upon (see Chapter 2).

Two further items, I have argued, point to the inadequacy of APEC.

First, the APEC failed to anticipate the Asian financial crisis in 1998. The

IMF and the World Bank (WB) produced copious postcrisis studies and

took specific measures to correct the imbalance, rather too little, too late.

Second, the APEC summits in recent years, under American leadership,

devoted a major portion of its deliberations to terrorism and security, with

little focus on APEC. True economic cooperation, exposed to terrorism

and consequent insecurity, is a nonsequitur, but the scheduled discussion

on economic cooperation should not have been put aside.

Disappointment for the Asian countries became manifest and the Asian

APEC member countries began to hold their own Asian Economic Sum-

mits beginning in 1998. Three from Northeast Asia, China, Korea, and

Japan, and five members from Southeast Asia, Thailand, Indonesia, Ma-

laysia, Philippines, and Singapore (these five are the original members of

the Association of Southeast Asian Nations, or ASEAN, formed in 1965),

came together to review the issues relative to their economic cooperation.

This is now known as the 3+5 model, for economic dialogue and possible

action from the perspective of Asia. At the 2003 Asian Economic Summit

in Jakarta, five new members of ASEAN, Myanmar, Cambodia, Laos,

Vietnam, and Brunei Darussalam, and India from South Asia were invited

to participate in talks, enlarging the 3+5 model of Asian Economic Co-

operation to the 4+10 model.

At the recent Asian Economic Summit in Kuala Lumpur, Malaysia,

leaders called for Asian economic cooperation and an Asian Free Trade

Area (FTA) following the EU model. At the Asian Development Bank

annual economic conference in Hyderabad, India, in 2006, the leaders of

China, Korea, and Japan made a joint statement that Asian economic

cooperation needs to be based on one common Asian Money. Expectedly,

the host country recorded its support. In what other circumstance could

the three Asian leaders use a platform in India to make such an an-

nouncement?

Currently, there is no action plan for the set up of the APEC-FTA to be

functional by 2020, or to seek to be one member in the WTO with one vote,

as has been the case for the EU-FTA. The procedure of mutual accred-

itation and standardization of goods in trade adopted by the EU-FTA

could hardly work for the FTA of the APEC at this stage, and a Working

Group of APEC has been assigned to work on this specific issue. Even if

the APEC-FTA comes online, a policy of mutual accreditation is not likely

to work. Given the divergent levels of industrial development among the

APEC member economies, an agreement on quality control measures is

not likely to be achieved (Tables 7.2A, 7.2B, and 7.3A). Free flow of

investment and free movement of labor, accomplished in Europe remain as


Table 7.2A. Key economic indicators of members of the Asian EconomicSummit

Member country Area

(000’s

km2)

Population

(in millions)

GDP (PPP)

US$ billion

GDP US$

billion

Exports

US$

billion

Imports

US$

billion

China 9,597 1,314.0 8,859.0 2,225.0 752.2 631.8

Japan 378 127.5 4,018.0 4,664.0 550.5 451.1

Korea 98 48.8 965.3 801.2 288.2 256.0

India 3,288 1,095.4 3,611.0 719.8 76.2 113.1

Singapore 1 4.5 124.3 110.6 204.8 188.3

Malaysia 330 24.4 290.2 122.0 147.1 118.7

Philippines 300 89.5 451.3 91.4 41.3 42.7

Thailand 514 64.6 560.7 183.9 105.8 107.0

Indonesia 1,919 245.5 865.6 270.0 83.6 62.0

Myanmar 679 47.4 78.7 7.5 3.1 3.5

Laos 237 6.4 12.1 2.5 0.4 0.5

Cambodia 181 13.9 30.7 4.7 2.7 3.5

Vietnama 330 84.4 232.2 43.8 32.2 36.9

Brunei Darussalam 6 0.4 6.8 – 4.5 1.6

Total 4+10 17,842 3,166.7 20,106.0 9,246.4 2,292.6 2,016.7

Note: Export data (fob) while import data (cif). For China, Japan, Korea, India, Malaysia,

and the Philippines, imports (fob).

Source: The World Factbook (July 20, 2006).aGDP data for Vietnam is from 2003.

Table 7.2B. Sectoral shares of GDP of Asian Economic Summit

members (%)

Country Agriculture Industry Services

China 12.5 47.3 40.3

Japan 4.6 27.8 67.7

Korea 3.3 40.3 56.3

India 18.6 27.6 53.8

Singapore Negligible 33.9 66.1

Malaysia 8.4 48.0 43.6

Philippines 14.4 32.6 53.0

Thailand 9.9 44.1 46.0

Indonesia 13.4 45.8 40.8

Myanmar 56.4 8.2 35.3

Laos 45.5 28.7 25.8

Cambodia 35.0 30.0 35.0

Vietnam 20.9 41.0 38.1

Brunei Darussalam 3.6 56.1 40.3

Source: The World Factbook (July 20, 2006).

The EU and USA 171

issues to be discussed in the foreseeable future in the context of APEC. One

wonders if the APEC initiative has been reduced to an empty exercise, but

we still must wait until 2020 for an appropriate evaluation of the APEC.

7.1.3. The North American Free Trade Area

The North American Free Trade Area (NAFTA) including Canada, the

USA, and Mexico, was signed in 1992 and became effective in 1994. Before

signing NAFTA, the USA and Canada concluded the Canada–USA FTA

(CUS-FTA), which came into force on January 1, 1989. Canada is the

largest trading partner of the USA, and as much as 70 percent of Canadian

trade is with the USA. Thus, the CUS-FTA came to be considered a

natural cross-border economic cooperation. The welfare effects of the free

trade agreements among regional economies were expected to be positive

because neighbors are natural trading partners (Krugman, 1991; Summers,

1991). However, though the two neighboring countries shared a common

geography in continental North America with comparable levels of eco-

nomic development and had their respective dollars in a free float in the

market, the CUS-FTA missed the opportunity to pursue unrestricted free

trade, free flow of investment, and free movement of labor to effectively

compete with the EU-FTA.

Notwithstanding the opposition from many concerned groups,

NAFTA stands on its own economic merit and was supported by the

US Congress and President. The present discussion will thus be limited to

its relevance in the context of the EU-FTA and its ability to provide a

competitive economic regime vis-a-vis the EU.

NAFTA is what we have called a strategic FTA. It does not promise a

North American economic integration with unrestricted intra-NAFTA

trade and investment flows and free movement of labor. The NAFTA has

no plan to apply for one membership of the WTO with one vote. There is

no suggestion for one money, though the US dollar is and probably will

continue to be the anchor currency. The USA and Canada have been in

several trade disputes and they are contesting parties in the courts of law.

The illegal immigration of millions of laborers from Mexico remains a

Table 7.3A. Key economic indicators of NAFTA members

Member

country

Area

(000’s

km2)

Population

(in millions)

GDP US$

billion

GDP (PPP)

US$ billion

Exports

US$

billion

Imports

US$

billion

Canada 9,985 33.1 1,114.0 1,035.0 364.8 317.7

USA 9,631 298.4 12,360.0 12,490.0 927.5 1,727.0

Mexico 1,973 107.5 1,067.0 693.0 213.7 223.7

Total 21,589 439.0 14,541.0 14,218.0 1,506.0 2,268.4



point of hot debate in the United States. One view is that several million of

may be allowed to earn the citizenship of the United States and they should

be beneficiaries of work permits for the interim period. Let us note that all

factories in the USA did not move to Mexico. Illegal immigration from

Mexico is a fact determined by market conditions relative to labor demand

in the USA and labor supply in Mexico. The issue has to be dealt with

independent of the NAFTA, which offers no provision for the intra-

NAFTA free movement of labor. Much has been reported on the issue of

trade creation and trade diversion under NAFTA (Krueger, 1999; Bur-

fisher et al., 1999; Salazar-Xirinachs, 2002) and the findings point to no

trade diversion impact. Simply put, there is no way to compare the

NAFTA-FTA with the EU-FTA at this time.

The magnitude of the NAFTA economy is also not substantively com-

petitive with that of the EU. However, it will strengthen the relative com-

petitive positions of North America and Europe (Table 7.3A). Canada and

Mexico add 140 million people to the USA’s total of 298 million. As for

GDP (PPP), the US total of US$ 12 trillion will be augmented by US$ 2

trillion. The totals of exports and imports for NAFTA are US$ 1.5 trillion

and US$ 2.3 trillion, respectively, not counting for intra-NAFTA trade.

We have compared the relative position of the USA and the EU (Chapters

3 and 4). Based on sectoral shares of GDP (Table 7.3B), the levels of

industrialization of the three economies point to the compatibility of their

closer economic integration. One wonders why it did not happen. Let us

further note that with the enlargement of the EU by 10 economies of

Eastern Europe to the EU membership in 2004, the compatibility of the

levels of industrialization may warrant more liberal interpretation. I have

argued that geographic unity is the core factor, and the commitment of the

member economies in the region must be unqualified. Sovereign nation-

state economies, as we have been rightly taught, are ‘‘accidents of history.’’

7.1.4. Free trade area of the Americas

The USA hosted a conference of the 34 democratic economic regimes from

the American hemisphere in Miami, Florida in December, 1994. The 34

Heads of States/Governments resolved to institute the FTA of the Ameri-

cas (FTAA) by 2005, and the Miami Summit’s Declaration of Principles

and Plan for Action became the core documents. Though the FTAA failed

Table 7.3B. Sectoral shares of GDP of NAFTA members (%)

Member country Agriculture Industry Service

Canada 2.2 29.4 68.4

USA 1.0 20.4 78.7

Mexico 3.8 25.9 70.2


The EU and USA 173

to materialize by 2005, this was an elegant effort to compete with the

magnitude of the EU’s economic dimension. All countries in the American

hemisphere except Cuba attended the conference.

Table 7.4A presents the key economic indicators of the 34 participating

countries with a population base of 875.8 million and total GDP (PPP) at

US billion $17,898.6 plus their hemispheric totals of trade figures (exports

as well as imports). Table 7.4B relates to the data of sectoral shares of

GDP, a profile of industrialization of these countries.

Table 7.4A. Key economic indicators of FTAA members

Member country Population GDP (PPP) Exports Imports

(millions) US$ billion US$ billion US$ billion

Antigua and Barbuda 0.1 0.8 0.2 0.7

Argentina 39.9 518.1 40.0 28.8

Bahamas 0.3 6.1 0.5 1.8

Barbados 0.3 4.8 0.2 1.5

Belize 0.3 1.8 0.4 0.6

Bolivia 9.0 26.0 2.4 1.9

Brazil 188.1 1,556.0 115.1 78.0

Canada 33.1 1,114.0 364.8 317.7

Chile 16.1 187.1 38.0 30.1

Colombia 43.6 337.5 19.3 18.0

Costa Rica 4.1 44.7 7.0 9.7

Dominica 0.1 0.4 0.1 0.2

Dominican Republic 9.2 63.7 5.8 9.8

Ecuador 13.6 30.7 9.2 8.4

El Salvador 6.8 31.2 3.6 6.7

Grenada 0.0 0.0 0.0 0.0

Guatemala 12.3 56.9 3.9 7.7

Guyana 0.8 3.6 0.6 0.7

Haiti 8.3 14.2 0.4 1.5

Honduras 7.3 20.6 1.7 4.2

Jamaica 2.8 12.2 1.6 4.1

Mexico 107.5 1,067.0 213.7 223.7

Nicaragua 5.6 16.1 1.6 2.9

Panama 3.2 22.8 7.5 8.7

Paraguay 6.5 29.1 3.1 3.8

Peru 28.3 164.5 16.0 12.2

St. Vincent and the Grenadines 0.1 0.3 0.0 0.2

St. Lucia 0.0 0.9 0.1 0.4

St. Kitts and Nevis 0.0 0.3 0.1 0.4

Suriname 0.0 2.8 0.9 0.8

Trinidad and Tobago 1.1 18.0 9.2 6.0

Uruguay 3.4 33.0 3.6 3.5

USA 298.4 12,360.0 927.5 1,727.0

Venezuela 25.7 153.7 52.7 24.6

Total 875.8 17,898.6 1,850.7 2,546.3



During the 1994–1998 period of preparation, the 34 Ministers for

Trade, set up 12 working groups to examine trade-related issues of concern

and made their findings available to the public. Four ministerial meetings

took place during this period. At the fourth meeting in San Jose, Costa

Rica, the Ministers agreed upon the general principles and objectives of the

FTAA to be considered by the Heads of States and Governments. The

Second Hemispheric Summit took place in April 1998 in Santiago, Chile

where issues for further deliberation were identified for follow-up minis-

terial meetings. Following two more ministerial meetings, the third Hemi-

spheric Summit was held in Quebec City, Canada on April 20–22, 2001.

Table 7.4B. Sectoral shares of GDP of FTAA members (%)


Antigua and Barbuda 3.9 19.2 76.8

Argentina 9.5 35.8 54.7

Bahamas 3.0 7.0 90.0

Barbados 6.0 16.0 78.0

Belizea 14.2 15.2 61.2

Bolivia 12.8 35.2 52.0

Brazil 8.4 40.0 51.6

Canada 2.2 29.4 68.4

Chile 6.0 49.3 44.7

Colombia 12.5 34.2 53.3

Costa Rica 8.8 29.9 61.4

Dominica 18.0 24.0 58.0

Dominican Republic 11.2 30.6 58.2

Ecuador 7.0 31.2 61.8

El Salvador 9.9 30.2 59.9

Grenada 7.7 23.9 68.4

Guatemala 22.7 18.8 58.5

Guyana 37.0 20.3 42.7

Haiti 28.0 20.0 52.0

Honduras 13.9 31.2 54.9

Jamaica 4.9 33.7 61.5

Mexico 3.8 25.9 70.2

Nicaragua 16.5 27.5 56.0

Panama 6.8 15.6 77.6

Paraguay 22.4 20.7 56.9

Peru 8.0 27.0 65.0

St. Vincent and the Grenadines 10.0 26.0 64.0

St. Lucia 7.0 20.0 73.0

St. Kitts and Nevis 3.5 25.8 70.7

Suriname 13.0 22.0 65.0

Trinidad and Tobago 0.7 57.0 42.3

Uruguay 9.3 31.1 59.6

USA 1.0 20.4 78.7

Venezuela 4.0 41.9 54.1

Source: The World Factbook (July 20, 2006).aTotal does not add up to 100.

The EU and USA 175

The commitment to institute FTAA by January 2005 remains to be ful-

filled. The Trade Negotiations Committee (TNC), with the support of the

Consultative Group of Smaller Economies (CGSE), worked on the special

needs of the less developed and smaller economies in the hemisphere. The

seventh and eighth ministerial meetings further pursued the deliberations

for the Hemispheric Cooperation Program (HCP). The Chairmanship of

the entire process, the site of the negotiations, as well as the Chairs and

Vice Chairs of the various negotiating groups and other committees and

groups, rotates among the member countries. The ninth ministerial meet-

ing scheduled in Brazil for 2004 did not meet (Table 7.4C).

For the discussion in the context of the EU, the immediate concern is to

determine if the FTAA will be a strategic FTA or an integrated economy with

unrestricted intra-FTAA free trade, free flow of investment, and free move-

ment of labor, possibly with one hemispheric money managed by one hemi-

spheric central bank. American Presidents of both political parties have lent

strong endorsement to the concept of hemispheric economic cooperation as

they personally represented the USA at the Summit Meetings. An American

Hemispheric Economic cooperation remains to be distinguished from the

concept of economic union, a la the EU. If there has been marginal progress

for the FTAA, the growing political alienation between the USA and several

Latin American countries does not point to a promising immediate future.

The leading industrialized countries in the hemisphere must be ready to

face the issues relative to

� normalization of intra-FTAA income gaps,� equality of Member States large and small, and an administrative

framework for decision making with majority of Member States and

majority of the people, or with unanimity,

Table 7.4C. FTAA hemispheric summits and ministerial meetings

Date Location

Summits of Heads of State/Government

The First Hemispheric Summit, December 1994 Miami, USA

The Second Hemispheric Summit April 1998 Santiago, Chile

The Third Hemispheric Summit April 2001 Quebec City, Canada

Special Summit 2004 Monterrey, Mexico

The Fourth Hemispheric Summit November 2005 Mar del Plata, Argentina

Ministerial Meetings

The First Ministerial Meeting June 1995 Denver, USA

The Second Ministerial Meeting March 1996 Cartagena, Colombia

The Third Ministerial Meeting May 1997 Belo Horizonte, Brazil

The Fourth Ministerial Meeting March 1998 San Jose, Costa Rica.

The Fifth Ministerial Meeting November 1999 Toronto, Canada

The Sixth Ministerial Meeting April 2001 Buenos Aires, Argentina

The Seventh Ministerial Meeting November 2002 Quito, Ecuador

The Eighth Ministerial Meeting November 2003 Miami, USA

Source: http://www.ftaa-alca.org/alca_e.asp.


http://www.ftaa-alca.org/alca_e.asp

� unity in diversity – linguistic, religious, cultural, lifestyle divergences,� common citizenship,� common defense and security plan,� common money and a common central bank,� membership in international institutions, especially IMF, WB, and

WTO, and� membership to the G8 Summit, following Russian participation as of

1997. As of 1991, Russia was invited to attend the G7 meetings as a guest

member and we learnt about the ‘‘G7 plus 1’’ group. In 1997, Russia

became full member and the G8 became the forum. The EU and the

USA may develop a collaborative, constructive approach at the G8

meetings. Any attempt to question the democratic standing of any

Member States will be unhelpful if the goal is to obtain Russian coop-

eration and participation.

One view is that the USA is the predominant economy in the Americas.

By itself, the USA has a competitive share of world economic activity, as

defined by its shares of world output and trade. The situation will be

different once the Constitution for Europe is adopted and the EU becomes

one political entity, with due claim to its share of control of the post-WWII

international institutions. Will there be an occasion to move the head-

quarters of the WB, the IMF, and the United Nations to a location in the

EU territory?

Should the Constitution for Europe be adopted by the new target date

of 2008 (see Chapter 5), the issue of the Americanization of America will

be in the forefront. For now, research establishments studying the mani-

fold implications of the American hemispheric economic integration must

continue to function with necessary funding. The American Hemispheric

Economic Union, once it becomes a reality, will be an economic unit with

875 million people, adding over 500 million people to the American pop-

ulation and it will be very much competitive with the population base of

the EU. In terms of GDP, the hemispheric total will add some 5 trillion

dollars to the total of the USA, no small amount. The hemispheric pop-

ulation base and GDP aggregate will be competitively large vis-a-vis the

EU. Indeed, the American Hemispheric Economic Union will come to lead

the EU. In Tables 7.5A and 7.5B, a profile of the EU is presented for

comparison with the FTAA (see Tables 7.4A and 7.4B). Table 7.6 presents

a summary of this comparison.

The USA, as the overwhelmingly dominant economy of the hemi-

sphere, must assume its burden of leadership. There will be an opportunity

to learn from the EU experience. The American Hemispheric Economic

Cooperation will empower the peoples of the poorer member countries to

promote a faster rate of growth of the poorer economies for an interim

period. One sure way not to have a huge influx of illegal immigrants from

the poorer neighboring countries will be for the USA and other richer

countries to take their investments to where the labor supply is more

The EU and USA 177

abundant. If the intra-FTAA investment flows will have to be free from the

risk of exchange rate fluctuations, one money managed by one Hemi-

spheric Central Bank will be an issue for consideration. The EU will serve

as a learning model. Can one American Hemispheric Economy with one

money lead to the American hemispheric political integration?

Without a sincere attempt to make the FTAA workable, rich countries

in the hemisphere cannot continue to enjoy their economic affluence when

their immediate neighbors are so poor. The core issue is economics, but

there are many social ramifications. The construction of walls all around

the borders of a country to stem illegal immigration will take that country

into a state of splendid isolation. In turn, poorer economies will have an

alternative option to seek investments from the EU, Japan, and other

newly industrialized Asian economies, including China and India. The

Organization of American States (OAS), an intrahemispheric political

Table 7.5A. Key economic indicators of the EU: a comparative profile


(in millions) US$ billion US$ billion US$ billion

Austria 8.2 257.6 122.5 118.8

Belgium 10.4 325.0 269.6 264.5

Cyprusa 0.8 16.8 1.2 5.6

Czech Republic 10.2 199.4 78.4 76.6

Denmark 5.5 188.1 85.0 74.7

Estonia 1.3 22.3 7.4 9.2

Finland 5.2 161.5 67.9 56.5

France 60.9 1,816.0 443.4 473.3

Germany 82.4 2,504.0 1,016.0 801.0

Greece 10.7 236.8 18.5 48.2

Hungary 10.0 162.6 61.8 64.8

Ireland 4.1 164.6 102.0 65.5

Italy 58.1 1,698.0 371.9 369.2

Latvia 2.3 30.3 5.7 8.6

Lithuania 3.6 49.2 11.0 13.3

Luxembourg 0.5 30.7 13.4 18.7

Malta 0.4 7.9 2.7 3.9

The Netherlands 16.5 499.8 365.1 326.6

Poland 38.5 514.0 92.7 95.7

Portugal 10.6 204.4 38.8 60.4

Slovakia 5.4 87.3 32.4 34.5

Slovenia 2.0 43.4 18.5 19.6

Spain 40.4 1,029.0 193.3 271.8

Sweden 9.0 268.0 126.6 104.4

United Kingdom 60.6 1,830.0 327.7 483.7

Total 457.6 12,346.7 3,873.5 3,869.1

Note: Exports and imports fob.

Source: The World Factbook (July 20, 2006).aFigures relate to the Republic of Cyprus only.


cooperation platform, cannot be sustained without a solid economic con-

tent. With massive inflows of FDI from the USA, poorer countries in the

American hemisphere have the potential to grow at a hefty rate of 8 per-

cent to 10 percent as China has done for the past 25 years. Poor neighbors

will also be a potential market for the industrial products made in the

USA. The newly manufactured products from the investment from their

richer neighbors will be quality and cost effective and their exports back to

the richer investing countries will favorably impact their domestic price

level and thus ease growth without the inflation pressure. The investments

Table 7.5B. Sectoral shares of GDP of EU members (%)


Austria 1.8 30.4 67.8

Belgium 1.0 24.0 74.9

Cyprusa 3.7 19.8 76.5

Czech Republic 3.4 39.3 57.3

Denmark 1.8 24.6 73.5

Estonia 4.0 29.4 66.6

Finland 2.8 29.5 67.6

France 2.2 21.4 76.4

Germany 0.9 29.6 69.5

Greece 5.4 21.3 73.3

Hungary 3.7 31.2 65.1

Ireland 5.0 46.0 49.0

Italy 2.1 29.1 68.8

Latvia 4.0 26.1 69.9

Lithuania 5.5 32.5 62.0

Luxembourg 1.0 13.0 86.0

Malta 3.0 23.0 74.0


Poland 5.0 31.1 64.0

Portugal 5.3 27.4 67.3

Slovakia 3.5 29.4 67.2

Slovenia 2.8 36.9 60.3

Spain 4.0 29.5 66.5

Sweden 1.1 28.2 70.7


Source: The World Factbook (July 20, 2006).aExports and imports job.

Table 7.6. The EU and FTAA

Population GDP (PPP) Exports Imports


EU 457.6 12,346.7 3,873.5 3,869.1

FTAA 875.8 17,898.6 1,850.7 2,546.3

Note: Based on Tables 7.4A and 7.5A.

The EU and USA 179

in poorer neighboring countries in the hemisphere will generate profit and

increasing corporate tax revenue on repatriated profits will effectively re-

duce the budget deficit. Any consequent increase of the national debt will

cease to be spectacular.

The rich nations of the Hemisphere have a choice of their own. Is the

inter-American Bank for Development optimally structured? The Euro-

pean Investment Bank offers a model. The NATO led by the USA will

have to find a place for the southern neighbors in the American hemi-

sphere, who belong to the South Atlantic.

7.2. FTAA on ice

The FTAA is on ice, as is the Constitution for Europe. Following the

adoption of the Constitution for Europe, the EU will become one sov-

ereign nation-state with one national government. This may further

prompt the FTAA to become a preparatory step toward the establishment

of the American Hemispheric Economic Union.

Meanwhile, a proliferation of agreements for CU and Free Trade Areas

(FTA) in various regions of the world has been in progress. In Tables 7.7A

and 7.7B, four CU and nine FTAs in the American hemisphere are listed.

Many more agreements for regional trade preferences or free trade areas

have been reported. Negotiations between Mercosur and the Andean

Community in 2005 resulted in an agreement to end all import tariffs in 15

years and will constitute the largest FTA in the Southern hemisphere. The

case has also been made for the Latin American Free Trade Area. How-

ever, all these efforts resemble strategic regional agreements for trade

preferences. They are indeed far from the model of the FTA of the EU with

a total commitment for economic integration.

Reportedly, for 1990 and 1999, intra-MERCOSUR imports increased

at an annual rate of growth of 15 percent, intra-Andean imports grew at an

annual rate of 15 percent, intra-regional imports of CACM grew at an

annual rate of 16 percent, intra-CARICOM imports grew at an annual rate

of 10.4 percent, and intra-NAFTA imports grew at an annual rate of 10.1

percent (Inter-American Development Bank, 2000).

7.3. The continent of Europe and the American hemisphere

I have reviewed three specific programs for regional economic cooperation

led by the United States of America in the post-EU global regime. To

reiterate, they are: the APEC of 1989, the NAFTA of 1992, and the Free

Trade Area of the Americas (FTAA) of 1994. Others have argued that

these efforts came independent of the continental integration activities in

Europe. Let it be noted that all three programs were initiated after 1986

when the One Europe Act was signed by all 15 members of the EU. In

particular, NAFTA and the FTAA appear to be direct responses to the


1992 Maastricht Treaty, which defined the macroeconomic agenda of the

EU (see Chapters 2–4). In 2004, EU membership expanded to 25 nations,

and as per the terms of accession, the new 10 member countries, the AC-10,

have elected to accept and abide by all the prior agreements. One Europe is

Table 7.7A. Customs Unions and FTAs in the American hemisphere

Customs Unions Current members Signed Effective

Mercado Comun

Centroamericano

(MCCA)

Guatemala 1960 1961

Honduras

El Salvador

Nicaragua

Costa Rica

Andean Community (CAN) Bolivia 1969 1969

Columbia

Ecuador

Peru

Venezuela

Caribbean Community

(CARICOM)

Antigua and Barbuda 1973 1973

Bahamas

Barbados

Belize

Dominica

Grenada

Guyana

Haiti

Jamaica

Montserrat

St. Lucia

St. Kitts and Nevis

St. Vincent and the

Grenadines

Suriname

Trinidad and Tobago

CARICOM Associate

Members

Anguilla

Bermuda

British Virgin Islands

Cayman Islands

Turks and Caicos Islands

Mercado Comun del Sur

(MERCOSUR)

Argentina 1991 1994

Brazil

Paraguay

Uruguay

Source: Salazar-Xirinachs (2002), MERCOSUR, CARICOM, CAN, http://www.britannica.com.

The EU and USA 181

http://www.britannica.com.

the commitment of the EU. For the USA, participation in APEC,

NAFTA, and the FTAA were different strategic responses of the US to the

progressing EU movement. The competitive shares of economic activities,

as defined by shares of worlds’ output and trade, became the concern. The

US leadership in the world economy came to be challenged, albeit a

friendly challenge.

The USA adopted the EU paradigm of a supranational economy by

inviting neighboring economies to form a regional group. The APEC pro-

gram, based on the concept of a trans-Pacific neighborhood, was not well

defined. NAFTA was not strong enough as a regional grouping because

the combined economic activity base of the USA, Canada, and Mexico, are

not competitively large enough. The FTAA, based on hemispheric togeth-

erness, will provide a substantial economic edge for the Americas.

However, the leadership on this shore of the Atlantic has failed to

appreciate that the EU was a program to establish a supranational

Table 7.7B. Free trade agreements in the American hemisphere

FTAs Current members Signed Effective

Canada–USA Canada 1989

USA

North American Free Trade

Agreement (NAFTA)

Canada 1992 1994

USA

Mexico

Mexico/Chile FTA Mexico 1992

Chile

Costa Rica–Mexico Free

Trade Agreement (CRI-

MEX FTA)

Costa Rica 1994 1995

Mexico

Mexico/Colombia/

Venezuela FTA (G3)

Columbia 1994 1995

Mexico

Venezuela

Mexico–Bolivia FTA Mexico 1994 1995

Bolivia

Canada–Chile Free Trade

Agreement (CCFTA)

Canada 1996 1997

Chile

Mexico–Nicaragua FTA Mexico 1997 1998

Nicaragua

Mexico–Northern Triangle Guatemala 2000 2001

Honduras

El Salvador

Mexico

Source: Salazar-Xirinachs (2002), MERCOSUR, CARICOM, CAN,

http://www.investinmexico.com.mx/pied/cds/pied_bancomext/why_mexico/trade_filename.htm.


http://www.investinmexico.com.mx/pied/cds/pied_bancomext/why_mexico/trade_filename.htm.

economy with articulate specification of micro and macroeconomic pa-

rameters, effectively coordinated by an EU administration with its legis-

lative, executive, and judicial branches in an optimal order, pending the

political integration of the EU. On the American shore of the Atlantic, a

FTA has been the extent of regionalization goals. I have argued that the

revolutionary FTA of the EEC was anchored to the concept of one com-

mon economic unit based on one common geographic unit, the continent

of Europe. On the other hand, the traditional FTA adopted by the USA

limits its activities to trade preferences within the region. It does not re-

quire a common trade policy for the rest of the world, nor does it seek to

consolidate its members into one economic or political entity.

NAFTA could have been the first step for Canada, the USA, and

Mexico to have an FTA with unrestricted cross-border free trade, free flow

of investment, and free movement of labor with an interim administrative

infrastructure similar to the EU. The expansion of the EU to include less-

industrialized countries in Eastern and Southeastern Europe also reflects

the situation in the American hemisphere, where the 33 countries in the

South are less industrialized (see Table 7.4B). Given the commitment

and the role of the leading economies in the hemisphere, integration with

the less-industrialized countries of the South is an obvious challenge that

can be overcome by comprehensive cooperation and the lessons of the EU

experience.

7.4. OECD and NATO

Both the OECD and NATO, the two post-WWII institutions, continue to

maintain US leadership for economic reconstruction and military defense

of the continent of Europe. They have completed their respective objectives

and it is time for change. The EU is now ready to assume its own economic

and defense responsibilities and the USA must accommodate the reality of

post-Cold War Europe.

The OECD is known to be a club of the rich nations of the world. Even

with the membership of OECD enlarged, the poorer countries of the world

remain excluded from its membership. We have noted that not a single

OECD member is from the continents of Africa or South America. Most

of its members are from Europe, many of whom have become members of

the EU. I have argued that if the agenda of the OECD is to promote

economic development, it should invite those poorer countries to join its

membership. Alternatively, the OECD may consider merging itself with

the WB, specifically with its program for International Development As-

sistance. Of course, the OECD can and must continue to function as an

international think tank, studying economic cooperation and development.

NATO, as we have discussed earlier, is the post-WWII defense umbrella

under American Command. By definition, the umbrella covers countries

across the North Atlantic, but the EU is ready for its own common

The EU and USA 183

European defense and security. And because defense and foreign policies

go hand in hand, the EU is also ready for its one common foreign policy.

However, the political integration of the EU must wait for the adoption of

the Constitution for Europe by all its member countries. Even so, the

Foreign Policy Chief of the EU has been frequently called upon to play

critical roles, especially in the post-Iraq War Middle East, where the USA

has restricted its contact with Iran, Syria, and the Hamas Government of

Palestine. Additionally, NATO will not be a sufficient defense umbrella for

the American hemisphere. Since the EU is able and willing to pay for its

defense, let them have their own defense umbrella. Let the USA lead an

American Hemispheric Defense Organization (AHDO). Global defense

will have to remain a joint responsibility of both Europe and the Americas,

supported by the rest of the world.

A cost–benefit analysis of NATO is in order. In the recent wars in

Afghanistan and Iraq, NATO had no role to play; the USA led the two

wars alone. In August 2006, NATO assumed a limited role in the war in

Afghanistan under Canadian–EU command, while the USA continued to

carry out its independent military role in the same country. The divisibility

of NATO command will be yet another novel experience. Since its found-

ing, NATO has always been under the American command, but the new

provisions will eventually lead to two independent defense umbrellas, one

under American command and another under EU–Canadian joint com-

mand. Indeed, the EU has proposed a common defense and security policy

under its independent command.

Some have argued that both OECD and NATO have become platforms

for influence-peddling. As and when candidate countries become members

of the EU, they are also invited to join NATO membership that will assure

them of defense under the American Command. This will undermine the

EU policy for one common defense and security for the continent of Eu-

rope as the trans-Atlantic defense alliance has a history of its own. The

EU–USA relationship is already strained by war in Iraq and will be further

challenged unless the agenda of NATO is redefined. For the OECD, it is

not necessary to provide economic assistance to the EU members in East-

ern Europe since the European Investment Bank plays this role. A failure

to redirect the OECD agenda to the economic development of the world at

large will also challenge the relationship between the EU and the USA. The

role of the OECD should be independent of intercontinental politics.

7.5. Lessons to learn

The post-WWII regime has come to an end. The Cold War has been over

for 15 years. The EU has become an innovative model of continental

economic and political regionalization, whereby one continent with one

common family of Europeans has become one country. The industriali-

zation of Asian economies has prompted actions for regionalization. The


African Economic Union (AEU) is being led by a preparatory committee

headed by the major African countries. The success of the EU experiment

will provide a learning model for Asia and Africa (see Chapter 8).

For the USA, the lesson to learn is to accept the EU as a viable eco-

nomic entity and a strong competitor in the world market. Any efforts to

challenge the EU will be counterproductive and will be seen as an exercise

in resisting fundamental changes in the world, political, economic, and

social. Though American leadership was the only option after WWII and

during the Cold War, it will be helpful to recall the warnings that the USA

could not support the military and economic stability of the anticommu-

nist, free world indefinitely (Kindleberger, 1985). Truly, the cost became

overwhelming.

Unilateralism in any form is a symbol of imperialism: one superpower

controlling the economic and political destiny of the rest of the democratic,

free-market world on its own terms. The EU has become a competitive

world power and warrants recognition. Based on the specific criteria of

economic activities as we have stated earlier, the EU has the largest shares

of world output and trade. However, until there is formal political inte-

gration, there is a legal case for denying due recognition to the EU. The

policy of minimizing the EU on a technicality is unwelcome. Sooner or

later, the USA must accept the fact that the EU is the effective continental

government of Europe and share power with it. The ongoing efforts for

power-sharing at the International Monetary Fund and the WB (see

Chapter 6) should extend to all international institutions.

Following the Iraq War, recently aggravated by the limited invasion of

Lebanon, the leadership position of the USA in the Middle East continues

to be under scrutiny. Given the proximity of the region to the continent of

Europe, the EU will expectedly have a greater motivation for peace when

engaged in communications and negotiations with the political leaders of

the region. Indeed, the vast area from Turkey to Pakistan inclusive of

Morocco, Algeria, Libya, Egypt, Palestine, Jordan, Saudi Arabia, Kuwait,

Oman, Qatar, and Iran, have expressed their disapproval of America’s

‘‘cowboy diplomacy’’ (Allen and Ratnesar, July 17, 2006). Even the Prime

Minister of Iraq, an allied government of the USA, failed to approve the

policy and lent only qualified support. The Iraq War has been a costly

lesson for the USA. The EU as a whole refused to endorse the Iraq War,

though some European countries lent limited support. The USA alone has

paid the brunt of the cost, both in terms of money and lives of men and

women in arms. This is an occasion for the EU leadership to play a positive

role in the Middle East.

The USA has challenged the democratic institutions of the Russian

government and blocked its membership to the WTO at the G-8 Summit in

St. Petersburg in July 2006. In response, Russia has criticized the recent

lapses in American democracy. The tense relationship between the USA

and Russia will have an adverse economic impact on both nations. The EU

The EU and USA 185

is considering an agreement with Russia, its immediate neighbor with a

rich endowment of natural resources, to institute a FTA. Since discussions

between the USA and Russia can be expected to only deliver suboptimal

results, the EU is engaged in a more constructive communication for eco-

nomic cooperation with Russia.

At the WTO, there is a lack of substantive cooperation. The USA and

the EU ought to take a constructive, collaborative approach to coordinate

their farm subsidy policies. The Doha Round of trade negotiations at the

WTO should be rescued by focusing on the long-term economic benefits of

free trade and not be hampered by immediate political considerations.

Given its own continental framework, the EU is expected to welcome

the American Hemispheric Economic Union. Mutual recognition and co-

operation will add to the economic gains of all the peoples of the two

continents. We must wait and watch as and when the new policy will be put

in place. The sooner this happens, the better the outcome. The EU and the

American Hemispheric Economic Union will have 25 percent of world

population and some 60 percent of the world’s total economic activities

and will be an enormously substantive resource base to help the economic

development of the rest of the world. Economic reconstruction efforts

around the world must not be conditional and politically manipulative.

For the continents of Africa and Asia, a robust joint effort will be

welcome. The EU has an economic interest in Asian countries, and ex-

pectedly it will have much reservation if the USA leads an effort to assert

economic influence in Asia a la APEC. Indeed, the EU has expanded its

economic cooperation with major Asian economies, including Japan,

South Korea, China, and India. The USA has responded in capturing its

share of the large Asian market. The continent of Africa is in Europe’s

immediate vicinity and the EU has already begun to formulate a proactive

African economic development policy. The USA also has its responsibility

for the continent of Africa and should step up its efforts. A competitive

EU–USA initiative is very much in order to establish the basic infrastruc-

ture that will permit accelerated economic growth in Africa. However, the

erstwhile policy of the imperial superpower domination of dividing areas of

influence in the two continents between the EU and the USA will be

counterproductive and a new policy of constructive engagement is called

for. Both Africa and Asia are eager to learn from the EU model of con-

tinental economic integration with intraregional micro and macroecono-

mic policy guidelines. Each continental economy with its competitive

shares of world output and trade and endowment of natural resources will

be able to be a competitive actor in the world market (see Chapter 8).


CHAPTER 8

The EU: A Learning Model

8.1. Continental regionalization and globalization

One world at one step will be too big a step. For one in Luxembourg it will

be relatively more convenient to locate Latvia on the map of Europe; to

search for Laos in Asia will be too much of a task. A man or a woman in

Nepal will easily guess Mongolia is somewhere in the continent of Asia; he

or she will have great difficulty to figure out where Martinique is in South

America. A citizen of Chad will have less of a problem to locate Burkina

Faso on the map of Africa, but will struggle hard to find Brunei Darussa-

lam in Asia. The message is simple and straightforward. The map of the

continent is easily accessible. The map of the world is much too large and

unfamiliar. Hence, the European Union (EU) covering the continent of

Europe and its progress over the past half century toward successfully

developing a framework of continental regionalization has become very

much a learning model.

The appreciation of the EU warrants a comprehensive understanding of

the core of the European economic union based on the shared belonging

of the people of Europe to one common geographic unit. Independent of

linguistic, religious, and lifestyle diversities, they are members of one com-

mon family of Europeans. Historical experiences of war and destruction

helped foster the new awareness of oneness and unity. The issue is one of

learning from this experience. The rest of the world must learn from the

EU experience and hopefully avoid wars and destruction among countries

in a given continent. Cross-border conflicts of violence, often reinforced by

economic or political sanctions, have been the tragic history in most con-

tinents.

Indeed, continental regionalization will minimize the chances of inter-

continental conflicts, because each continent will enjoy competitive equal-

ity in terms of core strength based on economic activities. A global order of

peace will expectedly follow. To ensure the cooperation and participation

of the Member States of a continental union, and of their population, a

democratic administration will be a necessary condition. The majority of

the people and a majority of the Member States in a given continental

union must cast their votes for the government of the union. Thus, the

values of peace and democracy will be the foundation of the new inter-

continental world order.

Today, Europe is far beyond a Customs Union (CU) or a traditional

Free Trade Area (FTA). The EU-FTA ensures a free flow of trade of all

goods and services amongst all EU member economies, with no trade

barriers or restrictions of any kind among them, and enforces a common

set of restrictions vis-a-vis the rest of the world without any exceptions.

The EU-FTA is one of the members of the World Trade Organization

(WTO) with one vote. Goods and services traded in the EU are stand-

ardized by mutual accreditation by member countries. Unrestricted cross-

border trade flows minimize the cost of traded goods and permit them to

be sold at a lower price. Intra-EU trade increases and adds to the profit of

businesses and gains to consumers in terms of quality and price competitive

goods and services. The economic prosperity can gather more momentum

as free flows of investment are immune from the risk of exchange rate

fluctuations as and when more Member States adopt the common currency

of the Eurozone. Free movement of labor within the EU has not caused

any problem and no mass migration from one member country with rel-

atively low income to another with relatively high income has taken place.

Indeed, free flows of investments have helped to create jobs where the

people, unemployed or under-employed, reside. The growth in employ-

ment and income in the EU economy attracts more inflows of investments

from other savings-rich foreign countries. It is to be noted that the intra-

EU income gaps have become more normalized.

We have demonstrated that given time, individual member economies

would not gain competitive shares of world output and trade. The EU

paradigm offers a unique lesson to learn: competitive shares of world output

and trade can be acquired by integrating economies belonging to the conti-

nental geography. At present, the EU commands the largest shares of world

output and trade, outranking the USA, and pushing Japan to a remote third

position (see Chapters 3 and 4). Table 8.1 presents population, comparative

trade figures, and shares of world GDP for the Eurozone, the USA, and

Japan.

Based on the data (Table 8.1), one can conclude that the Eurozone of

the 12 in-members of the EU has a competitively large share of world trade

Table 8.1. Key economic indicators of the Eurozone, the USA, and Japan

(1999)

Eurozone USA Japan

Population (millions) (2000) 302 272 127

Shares of world GDP (PPP) (%) 16.2 21.9 7.6

Shares of world exports 18.9 15.2 9.1

Exports of goods and services (% of GDP) 16.9 10.3 10.7

Imports of goods and services (% of GDP) 15.9 13.2 9.1

Note: World exports are net of intra-Eurozone trade flows. Trade data are in 1995 US$.

Source: Issing (2001, p. 3).


as well as larger shares of exports and imports of goods and services as

percentages of GDP. Both the USA and Japan lag behind. The Eurozone

also commands a competitive share of world GDP (PPP) with a subst-

antively larger population base. For the EU-25, the shares of world GDP

are much larger, and its population base is the third largest in the world,

behind only China and India.

With competitive shares of world output and trade, the EU and the

USA can compete more effectively in the world market, with the competi-

tive presence of the two leading actors in the market. The importance of a

competitive open market has been the primary lesson in economics. To the

extent world competition will be more effectively operational, it will help

the process of optimization of economic gains for all microeconomic ac-

tors, households, and business units, belonging to all the economies of the

world.

As per the Treaties of Accession, the new 10 members of the EU, the

AC-10, admitted to the EU membership in 2004, have accepted all pro-

visions of the EU-FTA. The same is true for the two candidate states,

Romania and Bulgaria, who are scheduled to join the EU in 2007. Indeed,

the terms of accession will be the same for all candidate countries under

review for EU membership in future.

Will the American Hemispheric Economic Union also be able to suc-

cessfully address these crucial issues? Traditional FTAs are limited to re-

gional trade preferences, with no plan for regional integration. Strategic

and extra-economic considerations often dictate the formation of such

FTAs. The recent USA–Australia FTA may be a case in point. However,

the novelty of the EU-FTA has made its appeal to other continents.

Since the Asian financial crisis in 1998–1999, there have been talks about

an Asian Money, call it the AM$, and frequent subcabinet level conferences

of Japan, Korea, and China plus Singapore, Malaysia, Thailand, Indonesia,

and the Philippines, known as the 3+5 model, have been held. In 2003,

India joined the group, and we now have the 4 (the 3 and India) plus 10 (the

original five of Association of South East Asian Nations (ASEAN) and

Myanmar, Cambodia, Laos, Vietnam, and Brunei Darussalam) model.

Recently in 2006, the case for the Asian Money has been made by three

leaders of Asian economies, China, Japan, and Korea. Should there be an

Asian continental economy with one common money, it will be yet another

competitive economic regime based on its shares of world output and trade.

The distinguished scholar-politician, Saburo Okita, taught us about the

‘‘several worlds,’’ as we have stated earlier. I have argued that the optimum

currency areas warrant a definition by their respective shares of world output

and trade (seeMonnet, 1978; Dutta, 1992, 1996a, 1999, 2000a, b, 2002a, b, c,

2004; Issing, 1996, 2001; Klein, 1994, 1998; Krugman, 1994; Letiche, 1997;

Mazzucelli, 1997; Schroeder, 2000; Yoo, 1996).

Much has been written about the gravity model. Some scholars argue

that the core of the gravity model depends on extra-economic factors such as

The EU: A Learning Model 189

language, religion, lifestyle, and culture to hold an economic grouping to-

gether, whereas many economists have sought to relate the gravity model to

geographical distance between two market points and the associated cost of

transportation. To define distances between any two points proved to be a

challenging problem as modes of transportation, waterways, railroad, road

transportation, airways, bridges, and tunnels, progressively underwent rev-

olutionary changes. The internet is but the latest to challenge the old-fash-

ioned gravity model. Let us recall that in respective imperial models,

physical distances between London and Sydney, Paris and Hanoi, The

Hague and Jakarta, were politically the shortest. Indeed, the cost-effective-

ness of transport between any two distant points was secured by the im-

position of monetary and fiscal policy parameters by the respective home

governments. The imperial models proved to be ineffective as and when

satellite economies or colonies revolted. I have argued that the macroecono-

mic core is the core of successful economic regionalization, given the concept

of a map of the worldview of a region within the context of globalization

(Dutta, 1996b, 2000a, b 2002a, b, c, 2004; Lau and Kim, 1994).

The successful accelerated rate of industrialization for certain East

Asian economies beyond Japan and the normalization of the economic

relationship with the People’s Republic of China (PRC) has created a

strong pull factor which combined with the push factor of forceful Euro-

pean economic regionalization to motivate 21 sovereign nation-state econ-

omies on the two shores of the Pacific Ocean, to constitute the Asia-Pacific

Economic Cooperation (APEC) (see Dutta, 1999). Their belonging to a

map of the worldview of a region was defined by an ocean (see Chapter 7).

Just as the Atlantic Ocean serves to separate the Americas from Europe, so

should the Pacific Ocean separate the Americas from Asia. The two con-

tinents simply do not belong together because they are not observed to be

so on the map of the world and this certainly can define the limited delivery

of the APEC.

Students of economics who share commitment to the paradigm of globa-

lism and regionalism note with much care that the American Hemispheric

Economic Union must be a subject of more intensive study (see Chapter 7).

The Organization for African States recently has discussed the feasibility to

‘‘reinvent’’ itself as the African Economic Union following the model of the

EU (Onishi (2001)). Recently, the case for an Australian–New Zealand

economic integration with one common currency, possibly managed by one

intraregional common central bank, has been investigated (Grimes et al.,

2000).

8.2. The Asian Economic Union: the case for an intraregional approach:

specification of the model

The challenges for progressive industrialization of Asian economies after

the financial crisis have drawn international attention. Any newly


industrialized/industrializing individual economy in Asia, even given its

economic magnitude, defined by its shares of world output and trade,

could hardly be expected to cope with the situation alone. For the US, the

challenge of the financial meltdown of 1987–1988 was no less overwhelm-

ing. Given its very large economic base, with shares of world GDP at

roughly 20 percent and its share of world trade at some 15 percent, the

institution of a special restitution fund finally became a more viable so-

lution as the program struggled to redefine itself over the years.

The two parameters to note for any economy are (a) its share of world

GDP (GDPi/GDPw) and (b) its share of world exports (Xi/Xw). Let us

consider a simple model: country Alpha’s exports (Xa) are functionally

dependent on the level of world GDP (GDPw), the price level at home in

country Alpha (Pa), the price level in the world market (Pw), and the level

of export in the world market (Xw). Similarly, country Alpha’s imports

(Ma) will be functionally dependent on the level of GDP in country Alpha

(GDPa), the level of exports of country Alpha (X

a), the price level in the

home market of country Alpha (Pa) and the price level in the world market

(Pw) (Dutta, 1998).

We rewrite the two equations,

Xa ¼ f 1ðGDPw;Xw;Pa;PwÞ ð1Þ

Ma ¼ f 2ðGDPa;Xa;Pa;PwÞ ð2Þ

In equilibrium, and taking Pa/Pw on the left-hand side, the Pa/Pw will be

functionally dependent on

Pa=Pw ¼ f 3ðGDPw; Xw; GDPa; XaÞ ð3Þ

It follows that if the two variables, GDPa and Xa were competitive shares

of GDPw and Xw, respectively, country Alpha would have a competitive

advantage. The relative stability of the home and world price ratio would

be a comfortable base for a stable exchange rate for its currency. Foreign

investors, exporting capital goods to this economy and/or importing man-

ufactured products from economy Alpha would comfortably have less ex-

posure to exchange rate fluctuation risks.

8.3. Asian Economic Community

A brief review of the lessons to learn from the EU is in the following order:

1. The map of Asia is as real as the map of Europe. Pan-Asian culture and

civilization is as real as the concept of pan-European culture and civi-

lization; the message is clearly unity in diversity. The grim history of

intraregional hostilities and wars in Europe and Asia cannot be allowed

to stand in the way of continental economic unity.

2. Given time, an individual country cannot command a large enough

share of world output and trade, when there is one economy with a


dominant share of world output and trade. One innovative option for

Europe was to form the EU to compete with the USA (see Chapters 3

and 4) (see Figures 8.1 and 8.2).

3. Any effort toward Asian Economic Community (AEC) must be based

on a comprehensive intraregional micro- and macroeconomic agenda.

The potentials of an FTA are well known, but cannot be functionally

operational without the free flow of investment and some form of free

movement of labor. This intra-Asian microeconomic structure must be

supported by an intra-Asian macroeconomic framework. A replication

of the EU model is not a necessary condition, but as it has evolved over

50 years, the EU presents a comprehensive learning model for Asia as

they plan for the Asian continental economic regionalization.

4. The membership of the AEC must be anchored to the principle of in-

clusion. In Europe, the initiative came in 1958 from six European states.

Over time, its membership grew to 15 sovereign nation economies, and

in 2004 the EU has 25 Member States. In Asia, three East Asian eco-

nomies, Japan, Korea, and China, plus the original five members of the

ASEAN, Singapore, Malaysia, Thailand, Indonesia, and the Philip-

pines, appear to have begun to study a 3+5 intraregional economic

integration model. As of 2003, five other ASEAN members, Myanmar,

Laos, Cambodia, Vietnam, and Brunei Darussalam, plus India from

South Asia, have been invited to join the AEC. Thus, the 3+5 model

has been expanded to become the 4+10 model (see Table 8.2B). Other

countries on the map of Asia will also be eligible to apply for its

Figure 8.1. EU Share of world GDP

0

5

10

15

20

25

30

35

40

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Year

Percen

t

Austria Belgium Cyprus Czech Republic DenmarkEstonia Finland France Germany GreeceHungary Ireland Italy Latvia LithuaniaLuxembourg Malta Netherlands Poland PortugalSlovak Republic Slovenia Spain Sweden United KingdomHistoric EU Eurozone (12) EU25 United States

Note: Based on World Development Indicators (2005)


membership as and when they will be ready. Perhaps in time, Australia

and New Zealand in the South Pacific will elect to join the AEC.

5. Uniformity of the level of industrialization of prospective member econ-

omies of the AEC, even of the 3+5 group has been an issue of concern.

Beyond Japan, most of these economies have been traditional, agricul-

ture-dominant economies and may not be ready for a jump to intrare-

gional economic integration. Critics argue that conformity of economic

structures is necessary. Uniformity relative to the level of industrialization

of the EU’s member economies has not been subject of much research.

However, the original 15 members of the EU achieved a level of indus-

trialization though 11 of them were known to be ahead of four others.

With the admission of 10 new, less-industrialized members in 2004 from

Eastern Europe, the situation has become different. We shall return to

explore the issue further.

Table 8.2A covers the continental map of Asia with 42 sovereign nation-

states. Cyprus has become a member of the EU and Turkey is now a

candidate country. Hong Kong and Macao returned to Chinese sover-

eignty and have been integrated into the PRC as special units of admin-

istration. Bahrain, Cyprus, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon,

Oman, Palestine, Qatar, Saudi Arabia, Syria, Turkey, the United Arab

Emirates, and Yemen constitute the Middle East, a special region com-

manding much of the world’s attention. The region is endowed with enor-

mous reserve of petroleum, a precious commodity of high global demand.

Figure 8.2. EU share of world exports

0

5

10

15

20

25

30

35

40

45

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Year

Percen

t

Austria Belgium Cyprus Czech Republic DenmarkEstonia Finland France Germany Greece

Hungary Ireland Italy Latvia LithuaniaLuxembourg Malta Netherlands Poland Portugal

Slovak Republic Slovenia Spain Sweden United KingdomHistoric EU Eurozone (12) EU25 United States

Note: Based on World Development Indicators (2005)


However, the ongoing conflict in the Middle East makes one wonder if

there can ever be a Middle Eastern region with an agenda for economic

and political integration. I have suggested earlier that the recent Middle

Eastern policy of the USA may encourage a regional compact of the

countries from Turkey to Pakistan plus others in the Northern rim of

Africa from Egypt to Morocco (see Chapter 7). Nonetheless, there has

been an initiative with the AEC to form an effective regional grouping

(Table 8.2B), which will be our focus.

Much has been written about whether the level of industrialization in

Asian economies will warrant continental integration following the EU

model (Dutta and Tantum, 1988). The familiar argument has been that the

AEC would be unsuccessful given the level of industrialization of the par-

ticipating economies. They say that Europe is too different and Asia can-

not do what has been done in Europe. The focus on sectoral shares of GDP

of the member countries became the center of debate. Critics were anxious

to contain the spread of the EU movement to other continents or the

Table 8.2A. Economies on the Continent of Asia

Afghanistan Indonesia Maldives Syria

Bahrain Iran Mongolia Thailand

Bangladesh Iraq Nepal Turkey

Bhutan Israel Oman United Arab Emirates

Brunei Darussalam Japan Pakistan Yemen

Myanmar Jordan Palestine Viet Nam

Cambodia Kuwait Philippines Taipei (China)

Cyprus Laos Qatar North Korea

Korean Republic Lebanon Saudi Arabia People’s Republic of China

Hong Kong (China) Macao (China) Singapore

India Malaysia Sri Lanka

Note: Sixteen economies are considered to be a separate geographic grouping known as the

Middle East (see Table 8.15A). Cyprus and Turkey are part of the Middle East, but Cyprus

has been admitted to the EU and Turkey is a candidate country.


Table 8.2B. Members of the 4+10 model of the

Asian Economic Community

Four Ten

Japan Singapore Myanmar

Korea Malaysia Laos

China Thailand Cambodia

India Indonesia Brunei Darussalam

Philippines Viet Nam

Source: Dutta (2004), see also Chapter 7.


theory of comparative advantage based on trade among many countries

would no longer hold.

Based on the sectoral shares of GDP (PPP) in 1999, Issing (2001)

presents a comparative profile of the Eurozone, the USA, and Japan (see

Table 8.3A). Table 8.3B presents the profile of industrialization for the

select economies of Northeast and Southeast Asia. Table 8.3C follows with

the data on sectoral shares of GDP of the member countries of the AEC.

We can see that Japan is a mature industrialized economy. Korea, Taiwan,

and Singapore have approached the high bar set by Japan. Thailand and

Malaysia present a progressive record, and Indonesia and the Philippines

have records of a similar trend. Brunei Darussalam has a unique profile of

its own. India and China with their huge economic dimensions have earned

a special ranking. Myanmar, Laos, Cambodia, and Vietnam lag behind.

The overall picture of the region appears encouraging, more so, when one

compares the relative position of the AEC with the EU in 2004.

I argue that the core issue is geographic unity and the commitment of

member countries to make the regional compact work. For the AEC, led by

Japan, a major economy, joined by Korea, an economy of great industrial

Table 8.3A. Sectoral shares of GDP (PPP) (1999)

Eurozone USA Japan

Agriculture 2.8 1.6 1.8

Industry 28.5 27.3 36.4

Services 68.7 71.1 61.9

Total 100 100 100

Source: Issing (2001).

Table 8.3B. Sectoral shares of GDP of the 3+5

model (2005)


Japan 1.7 25.8 72.5

Korea 3.3 40.3 56.3

China 12.5 47.3 40.3aTaiwan 2.4 34.6 63.0

Thailand 9.9 44.1 46.0

Singapore — 33.9 66.1

Malaysia 8.4 48.0 43.6

Indonesia 13.4 45.8 40.8


Source: The World Factbook (July 20, 2006).aAsian Development Bank: Asian Development Outlook, 2001,

p. 213.


accomplishment, and China and India with the enormity of their respective

economic bases, an economic regionalization plan will be a success, earning

the group competitive shares of world output and trade.

The comparative study of a select group of Asian economies and the 15

EU economies for 1988 and 1997 shows that the trend of industrialization is

evident (Table 8.4). The selection of the years of 1988 and 1997 for a com-

parison should be instructive. Industrialization of Asian economies has pro-

gressed through the 1970s and 1980s. In Europe, the EU-12 signed One

Europe Agreement in 1986, followed by their adoption of the Maastricht

Treaty in 1992 where the EU’s macroeconomic guidelines came to be defined.

For all nine Asian economies, shares of GDP from the agricultural

sector have decreased over the time period. They are no longer agriculture-

dominant, traditional economies and they have proved much to the sur-

prise of many that industrialization in Asia can progress beyond Japan.

Their respective shares of GDP from the industry and service sectors have

either increased or stabilized. For Hong Kong and Singapore, the service

sector continues to be very dominant. For the same period, Ireland, Por-

tugal, Spain, and Greece record much dependence on their respective ag-

ricultural sectors. Of course, these economies have now experienced great

changes in terms of industrialization (see Chapters 3 and 4). The economic

integration under the EU paradigm has been a positive factor. All four

have also become members of the Eurozone. These ‘‘lagging’’ economies

are now booming and Ireland is the great success of the EU experiment.

In Tables 8.5A–8.10B, we present GDP and volume of trade as well as

the share of world income and trade for certain groups of Asian Pacific

Table 8.3C. Sectoral shares of GDP of the 4+10model (2005)


Japan 1.7 25.8 72.5

Korea 3.3 40.3 56.3

China 12.5 47.3 40.3

India 18.6 27.6 53.8

Singapore — 33.9 66.1

Thailand 9.9 44.1 46.0

Malaysia 8.4 48.0 43.6

Indonesia 13.4 45.8 40.8


Myanmar 56.4 8.2 35.3

Laos 45.5 28.7 25.8

Cambodia 35.0 30.0 35.0

Vietnam 20.9 41.0 38.1

Brunei Darussalam 3.6 56.1 40.3

Note: 2004 estimate for Brunei.



countries. Trade analysis in these tables includes both exports and imports.

Our presentations cover data for 1987 and 1997, so that we have an over-

view of the time profile of change over the decade. For the convenience of

comparison, the figures and shares are also presented for the Eurozone, the

EU-15, and the USA. Tables 8.11A and 8.11B present the related data for

the same time period for the countries that comprise the EU-15. Generally,

the relative shares of the individual regions designated in the study have

not varied very much over the time period. However, it is to be noted that

the AEC, beginning with the 3+5 model, has a competitive share of world

output and trade.

It is instructive to note that GDP (PPP) of 10 of the 15 EU countries,

Austria, Belgium, Denmark, Finland, Greece, Ireland, Luxembourg, the

Netherlands, Portugal, and Sweden, as late as 1997, remain less than 1

percent of world GDP. The United States maintained a share of 21 percent

for this time. Following economic integration, the EU shares come to be

Table 8.4. Sectoral shares of GDP of Asia and EU (1988 and 1997)

Region Country name Agriculture Industry Service

1988 1997 1988 1997 1988 1997

Asia Indonesia 22.48 16.09 37.27 44.33 40.25 39.58

Malaysia 19.32 11.15 35.51 44.64 45.17 44.21

Philippines 22.96 18.69 35.16 32.21 41.88 49.10

Singapore 0.39 0.15 38.07 34.53 61.53 65.32

Thailand 16.18 9.73 34.58 41.30 49.24 48.97

China 25.66 19.09 44.13 49.99 30.21 30.93

Hong Kong, China 0.32 0.12 27.64 14.71 72.04 85.17

Japan 2.67 1.74 40.73 37.18 56.61 61.07

Taipei, China 5.04 2.55 44.84 35.32 50.13 62.14

Korea 10.10 5.35 43.13 43.08 46.78 51.57

EU Finland 6.53 na 37.10 na 56.37 61.69

Sweden 3.24 na 34.79 na 61.98 na

Denmark 4.35 na 27.96 na 67.68 na

The Netherlands 3.92 na 28.65 na 67.43 na

Belgium 1.88 1.13 30.27 27.62 67.85 71.54

Luxembourg 1.93 0.80 na na 98.69 104.00

France 3.34 2.25 29.80 26.21 66.87 71.53

Germany na 1.09 na na na 44.19

Italy 3.61 2.63 34.02 30.50 62.38 66.37

Spain 5.30 na 35.07 na 59.63 25.06

Portugal 5.85 na 38.69 na 55.47 na

Greece 13.06 na 22.56 na 64.38 na

Ireland 9.76 na na na 60.66 na

Austria 3.13 na 32.52 na 64.35 68.07

United Kingdom 1.78 na 37.03 na 61.19 66.67

Note: In 1997, Luxembourg’s share of service sector of GDP was more than 100%.

Source: Asian Development Bank: Asian Development Outlook (2001).


over 20 percent in the same period. The net result is that the economic units

separated by the Atlantic, the EU, and the USA, have become competitive

actors in the world market. The trade share of the EU is much larger than

that of the US; the data reported in the table is not adjusted for intra-EU

trade; however, trade data so adjusted that is recently published have

shown its shares to be large enough to ensure effective competition (see

Table 8.1, also Chapter 7).

Table 8.5A. GDP and trade of Northeast Asia Countries in 1987 and 1997

GDP Exports Imports

1987 1997 1987 1997 1987 1997

China 1,247.26 3,880.21 46.53 190.82 49.06 160.65

Hong Kong, China 77.79 153.22 76.43 230.66 69.23 238.86

Taipei, China 148.40 291.40 71.41 141.26 50.54 136.81

Korea, Rep. 280.49 703.96 67.36 203.76 52.31 183.54

Japan 1,971.91 3,199.26 316.41 572.10 220.38 457.62

Total 3,725.85 8,228.05 578.14 1,338.60 441.52 1,177.48

Eurozone 4,071.31 6,160.93 1,327.20 2,362.63 1,286.14 2,169.05

EU-15 5,502.77 7,853.50 1,824.19 2,940.57 1,778.64 2,734.35

USA 5,006.72 8,149.82 400.50 1,064.95 572.73 1,200.38

World total 23,492.08 38,800.99 3,919.67 7,485.47 4,032.52 7,346.28

Note: (1) GDP is PPP-adjusted international $, billions. (2) Exports and imports are in 1995

constant US$, billions, at market price. (3) Exports are not adjusted for intra-EU trade.

Source: World Bank 2001 Yearbook.

Table 8.5B. Share of world GDP and trade of Northeast Asia Countries in

1987 and 1997 (%)

Share of world GDP Share of world exports Share of world imports

1987 1997 1987 1997 1987 1997

China 5.31 10.00 1.19 2.55 1.22 2.19Hong Kong, China 0.33 0.39 1.95 3.08 1.72 3.25Taipei, China 0.63 0.75 1.82 1.89 1.25 1.86Korea, Rep. 1.19 1.81 1.72 2.72 1.30 2.50Japan 8.39 8.25 8.07 7.64 5.47 6.23

Total 15.86 21.21 14.75 17.88 10.95 16.03

Eurozone 17.33 15.88 33.86 31.56 31.89 29.53EU-15 23.42 20.24 46.54 39.28 44.11 37.22USA 21.31 21.00 10.22 14.23 14.20 16.34

Source: Based on Table 8.5A.


Tables 8.5A and 8.5B deal with the relevant data for the Northeast

Asian economies of China, Hong Kong, Taipei, Korea, and Japan. In

1997, the five Northeast Asian economies have a share of 21 percent of the

world GDP, matching the shares of the USA and the EU. For trade,

the group is closely competitive with the USA, but behind the EU and the

Eurozone.

Table 8.6A. GDP and trade of ASEAN members in 1987 and 1997

GDP Exports Imports

1987 1997 1987 1997 1987 1997

Indonesia 270.64 644.82 28.29 62.06 28.79 75.16

Malaysia 63.39 185.76 26.40 94.11 19.09 95.62

Philippines 165.92 276.50 13.39 36.57 13.58 43.75

Singapore 28.14 77.95 38.18 122.66 43.34 129.93

Thailand 143.09 390.37 20.55 73.50 20.25 72.02

Total 671.18 1,575.40 126.81 388.90 125.05 416.48

Eurozone 4,071.31 6,160.93 1,327.20 2,362.63 1,286.14 2,169.05

EU-15 5,502.77 7,853.50 1,824.19 2,940.57 1,778.64 2,734.35

USA 5,006.72 8,149.82 400.50 1,064.95 572.73 1,200.38

World total 23,492.08 38,800.99 3,919.67 7,485.47 4,032.52 7,346.28

Notes: (1) GDP is PPP-adjusted international $, billions. (2) Exports and imports are in 1995



Table 8.6B. Share of world GDP and trade of ASEAN members in 1987

and 1997 (%)


1987 1997 1987 1997 1987 1997

Indonesia 1.15 1.66 0.72 0.83 0.71 1.02

Malaysia 0.27 0.48 0.67 1.26 0.47 1.30

Philippines 0.71 0.71 0.34 0.49 0.34 0.60

Singapore 0.12 0.20 0.97 1.64 1.07 1.77

Thailand 0.61 1.01 0.52 0.98 0.50 0.98

Total 2.86 4.06 3.24 5.20 3.10 5.67

Eurozone 17.33 15.88 33.86 31.56 31.89 29.53

EU-15 23.42 20.24 46.54 39.28 44.11 37.22

USA 21.31 21.00 10.22 14.23 14.20 16.34



Tables 8.6A and 8.6B cover the ASEAN-5. Tables 8.7A and 8.7B

present the related data for South Asian economies. Tables 8.8A and 8.8B

present the data for Australia and New Zealand. It is evident that in 1997,

the shares of world GDP and world trade for the select group of Northeast

Asia (Tables 8.5A and 8.5B) and Southeast Asia (Tables 8.6A and 8.6B)

add up to 25.27 percent of world GDP, 23.08 percent of world exports, and

21.70 percent of world imports. It follows that the AEC will thus be able to

Table 8.7A. GDP and trade of South Asia Countries in 1987 and 1997

GDP Exports Imports

1987 1997 1987 1997 1987 1997

Bangladesh 94.67 170.82 1.38 5.21 2.62 7.26

India 904.62 1,962.31 15.70 45.10 27.40 63.04

Nepal 13.34 27.27 0.34 1.28 0.60 1.83

Pakistan 114.35 229.05 5.76 9.30 9.91 14.12

Sri Lanka 28.67 56.31 2.49 5.29 3.70 6.70

Total 1,155.65 2,445.76 25.67 66.18 44.23 92.95

Eurozone 4,071.31 6,160.93 1,327.20 2,362.63 1,286.14 2,169.05

EU-15 5,502.77 7,853.50 1,824.19 2,940.57 1,778.64 2,734.35

USA 5,006.72 8,149.82 400.50 1,064.95 572.73 1,200.38

World total 23,492.08 38,800.99 3,919.67 7,485.47 4,032.52 7,346.28




Table 8.7B. Share of world GDP and trade of South Asia Countries in 1987

and 1997 (%)


1987 1997 1987 1997 1987 1997

Bangladesh 0.40 0.44 0.04 0.07 0.06 0.10

India 3.85 5.06 0.40 0.60 0.68 0.86

Nepal 0.06 0.07 0.01 0.02 0.01 0.02

Pakistan 0.49 0.59 0.15 0.12 0.25 0.19

Sri Lanka 0.12 0.15 0.06 0.07 0.09 0.09

Total 4.92 6.30 0.65 0.88 1.10 1.27

Eurozone 17.33 15.88 33.86 31.56 31.89 29.53

EU-15 23.42 20.24 46.54 39.28 44.11 37.22

USA 21.31 21.00 10.22 14.23 14.20 16.34



add to the level of effective competition in the world market. The principle

of inclusion will progressively lead to the admission of economies of South

Asia and the South Pacific to the AEC. The learning model will be the EU

as it moves on to the Europeanization of Europe with most of the Eu-

ropean economies in one continental unit.

We move from the decade-based analyses presented in Tables 8.5A–8.10B

to an extended analysis based on annual data over a quarter of a century

from 1975 to 1999, and our objective is to capture any substantive variation

in the relative shares of world output and trade for the individual sovereign

nation economies, the subgroups they belong to, the aggregation of the

subgroups, and its relevance for the Eurozone and the USA. The graphic

presentations refer to the two parameters, shares of world output and

trade.

Table 8.8A. GDP and trade of ANZ in 1987 and 1997

GDP Exports Imports

1987 1997 1987 1997 1987 1997

Australia 251.35 425.30 41.72 83.92 39.49 93.00

New Zealand 45.65 68.69 12.68 19.19 11.15 19.24

Total 297.00 493.99 54.40 103.11 50.64 112.24

Eurozone 4,071.31 6,160.93 1,327.20 2,362.63 1,286.14 2,169.05

EU-15 5,502.77 7,853.50 1,824.19 2,940.57 1,778.64 2,734.35

USA 5,006.72 8,149.82 400.50 1,064.95 572.73 1,200.38

World total 23,492.08 38,800.99 3,919.67 7,485.47 4,032.52 7,346.28

Notes: (1) GDP is PPP-adjusted International $, billions. (2) Exports and imports are in 1995



Table 8.8B. Share of world GDP and trade of ANZ in 1987 and 1997 (%)


1987 1997 1987 1997 1987 1997

Australia 1.07 1.10 1.06 1.12 0.98 1.27

New Zealand 0.19 0.18 0.32 0.26 0.28 0.26

Total 1.26 1.27 1.39 1.38 1.26 1.53

Eurozone 17.33 15.88 33.86 31.56 31.89 29.53

EU-15 23.42 20.24 46.54 39.28 44.11 37.22

USA 21.31 21.00 10.22 14.23 14.20 16.34



Table 8.9A. GDP and trade of Asia 3+5 model in 1987 and 1997

GDP Exports Imports

1987 1997 1987 1997 1987 1997

China 1,247.26 3,880.21 46.53 190.82 49.06 160.65

Korea, Rep. 280.49 703.96 67.36 203.76 52.31 183.54

Japan 1,971.91 3,199.26 316.41 572.10 220.38 457.62

Indonesia 270.64 644.82 28.29 62.06 28.79 75.16

Malaysia 63.39 185.76 26.40 94.11 19.09 95.62

Philippines 165.92 276.50 13.39 36.57 13.58 43.75

Singapore 28.14 77.95 38.18 122.66 43.34 129.93

Thailand 143.09 390.37 20.55 73.50 20.25 72.02

Total 4,170.84 9,358.83 557.11 1,355.58 446.80 1,218.29

Eurozone 4,071.31 6,160.93 1,327.20 2,362.63 1,286.14 2,169.05

EU-15 5,502.77 7,853.50 1,824.19 2,940.57 1,778.64 2,734.35

USA 5,006.72 8,149.82 400.50 1,064.95 572.73 1,200.38

World total 23,492.08 38,800.99 3,919.67 7,485.47 4,032.52 7,346.28




Table 8.9B. Share of world GDP and trade of Asia 3+5 model in 1987 and

1997 (%)


1987 1997 1987 1997 1987 1997

China 5.31 10.00 1.19 2.55 1.22 2.19

Korea, Rep. 1.19 1.81 1.72 2.72 1.30 2.50

Japan 8.39 8.25 8.07 7.64 5.47 6.23

Indonesia 1.15 1.66 0.72 0.83 0.71 1.02

Malaysia 0.27 0.48 0.67 1.26 0.47 1.30

Philippines 0.71 0.71 0.34 0.49 0.34 0.60

Singapore 0.12 0.20 0.97 1.64 1.07 1.77

Thailand 0.61 1.01 0.52 0.98 0.50 0.98

Total 17.75 24.12 14.21 18.11 11.08 16.58

Eurozone 17.33 15.88 33.86 31.56 31.89 29.53

EU-15 23.42 20.24 46.54 39.28 44.11 37.22

USA 21.31 21.00 10.22 14.23 14.20 16.34



We begin in Figures 8.3 and 8.4 with Northeast Asia exclusive of Japan,

which covers China, Hong Kong, the Republic of Korea, and Taipei.

Figures 8.5 and 8.6 relate to Northeast Asia inclusive of Japan. Figures 8.7

and 8.8 present ASEAN-5 of Indonesia, Malaysia, the Philippines, Singa-

pore, and Thailand. Figures 8.9 and 8.10 show Northeast Asia with and

without Japan, and ASEAN-5. In Figures 8.11 and 8.12, South Asia is pre-

sented which covers Bangladesh, India, Nepal, Pakistan, and Sri Lanka.

Figures 8.13 and 8.14 compare the three Asian groupings of Northeast,

ASEAN-5, and South Asia. In Figures 8.15 and 8.16, Northeast and South-

east Asia are related to the Eurozone and the USA. Figures 8.17 and 8.18

present a comparison for all the regions, Northeast, ASEAN-5, South Asia,

the Eurozone, and the USA.

The annual data based on these graphic presentations show a pattern

for sufficient regional shares of world output and export in support of

regional economic integration. The conclusion for economic integration in

Asia can be supported by the empirical evidence, based on the two para-

meters, its share of world output and trade vis-a-vis the respective shares of

Table 8.10A. GDP and trade of Asia 4+10 model in 1987 and 1997

GDP Exports Imports

1987 1997 1987 1997 1987 1997

China 1,247.26 3,880.21 46.53 190.82 49.06 160.65

India 904.62 1,962.31 15.70 45.10 27.40 63.04

Korea, Rep. 280.49 703.96 67.36 203.76 52.31 183.54

Japan 1,971.91 3,199.26 316.41 572.10 220.38 457.62

Indonesia 270.64 644.82 28.29 62.06 28.79 75.16

Malaysia 63.39 185.76 26.40 94.11 19.09 95.62

Philippines 165.92 276.50 13.39 36.57 13.58 43.75

Singapore 28.14 77.95 38.18 122.66 43.34 129.93

Thailand 143.09 390.37 20.55 73.50 20.25 72.02

Myanmar — — — — — —

Laos — — — — — —

Cambodia — — — — — —

Vietnam — — — — — —

Brunei Darussalam — — — — — —

Total 5,075.46 11,321.14 572.81 1,400.68 474.20 1,281.33

Eurozone 4,071.31 6,160.93 1,327.20 2,362.63 1,286.14 2,169.05

EU-15 5,502.77 7,853.50 1,824.19 2,940.57 1,778.64 2,734.35

USA 5,006.72 8,149.82 400.50 1,064.95 572.73 1,200.38

World total 23,492.08 38,800.99 3,919.67 7,485.47 4,032.52 7,346.28





the EU and the USA. Indeed, each individual Asian economy, inclusive of

China and India, together having one-third of the world’s population, has

marginal shares of world GDP and of world exports. For years, Japan has

enjoyed the second largest ranking, next to USA, in terms of shares of

world output and trade. An Asian regional economic integration will be

positive for the paradigm of globalism. The 3+5 model is a promising first

step (see also Kojima, 2000; Letiche, 2000), which has now expanded to the

4+10 model. A more comprehensive Asian model inclusive of the three

regional subgroups, Northeast, Southeast, and South, is also discussed (see

Table 8.12).

8.4. The African Economic Union

Africa is not a ‘‘lost’’ or a ‘‘forgotten’’ continent. The people of Africa

must assume the responsibility of earning a place for Africa on the map of

the world (see Tables 8.13A and 8.13B). The New Partnership for Africa’s

Development (NEPAD) is a step in this direction based on five initiatives:

� Peace, Security, Democracy, and Political Governance,� Economic and Corporate Governance,

Table 8.10B. Share of world GDP and trade of Asia 4+10 model in 1987and 1997 (%)


1987 1997 1987 1997 1987 1997

China 5.31 10.00 1.19 2.55 1.22 2.19

India 3.85 5.06 0.40 0.60 0.68 0.86

Korea, Rep. 1.19 1.81 1.72 2.72 1.30 2.50

Japan 8.39 8.25 8.07 7.64 5.47 6.23

Indonesia 1.15 1.66 0.72 0.83 0.71 1.02

Malaysia 0.27 0.48 0.67 1.26 0.47 1.30

Philippines 0.71 0.71 0.34 0.49 0.34 0.60

Singapore 0.12 0.20 0.97 1.64 1.07 1.77

Thailand 0.61 1.01 0.52 0.98 0.50 0.98

Myanmar — — — — — —

Laos — — — — — —

Cambodia — — — — — —

Vietnam — — — — — —

Brunei Darussalam — — — — — —

Total 21.60 29.18 14.61 18.71 11.76 17.44

Eurozone 17.33 15.88 33.86 31.56 31.89 29.53

EU-15 23.42 20.24 46.54 39.28 44.11 37.22

USA 21.31 21.00 10.22 14.23 14.20 16.34



� Capital Flows,� Market Access, and� Human Resources.

In July 2002, 53 Heads of State representing 53 of Africa’s nation-states

met in Durban, South Africa to establish the African Union (AU) to

replace the 39-year-old Organization for African Unity (OAU). The OAU

was established on May 25, 1963 in Addis Ababa, Ethiopia, with 32 par-

ticipating African governments. This was the beginning of the African

continental integration movement. However, it focused more on political

cooperation without substantive emphasis on economic alliance. It failed

to sustain itself and in 1999, an assembly of the Heads of State and Gov-

ernment recognized the limitations of the OAU and made necessary in-

itiatives to promote continental economic integration. To quote Kenichi

Ohmae (1993):

‘‘The nation state has become an unnatural, even dysfunctional, unit for organizing

human activity and managing economic endeavor in a borderless world. It overlooks

the true linkages and synergies that exist among often disparate populations by com-

bining important measures of human activity at the wrong level of analysisy region

states are natural economic zonesy’’

Table 8.11A. GDP and trade of EU members in 1987 and 1997

GDP Exports Imports

1987 1997 1987 1997 1987 1997

Austria 122.93 189.38 56.65 104.61 57.17 105.99

Belgium 165.16 245.65 126.66 209.20 118.56 194.74

Denmark — 132.01 45.47 69.26 41.08 63.13

Finland 75.04 107.87 30.69 57.81 29.28 44.58

France 855.32 1,260.55 215.74 404.39 224.18 356.38

Germany — 1,858.89 — 701.48 — 652.80

Greece 99.73 149.76 15.27 23.14 18.18 34.34

Ireland 34.20 78.15 21.30 66.95 21.56 56.72

Italy 847.05 1,234.40 170.77 317.79 168.89 276.69

Luxembourg 5.75 15.33 12.42 22.28 12.22 19.32

The Netherlands 218.97 350.71 155.86 271.58 149.98 242.99

Portugal 90.19 149.85 19.56 37.64 20.25 45.24

Spain 410.98 653.25 73.26 167.73 67.40 162.31

Sweden 135.99 187.75 66.31 113.83 62.86 93.05

United Kingdom 832.98 1,239.96 223.39 372.88 228.58 386.06

EU-15 3,894.29 7,853.51 1,233.35 2,940.57 1,220.19 2,734.34

USA 5,006.72 8,149.82 400.50 1,064.95 572.73 1,200.38

World total 23,492.08 38,800.99 3,919.67 7,485.47 4,032.52 7,346.28


constant US$, billions, at market price. (3) Exports are not adjusted for intro-EU trade.



Table 8.11B. Share of world GDP and trade of EU members in 1987 and1997 (%)


1987 1997 1987 1997 1987 1997

Austria 0.52 0.49 1.45 1.40 1.42 1.44

Belgium 0.70 0.63 3.23 2.79 2.94 2.65

Denmark – 0.34 1.16 0.93 1.02 0.86

Finland 0.32 0.28 0.78 0.77 0.73 0.61

France 3.64 3.25 5.50 5.40 5.56 4.85

Germany – 4.79 – 9.37 – 8.89

Greece 0.42 0.39 0.39 0.31 0.45 0.47

Ireland 0.15 0.20 0.54 0.89 0.53 0.77

Italy 3.61 3.18 4.36 4.25 4.19 3.77

Luxembourg 0.02 0.04 0.32 0.30 0.30 0.26

The Netherlands 0.93 0.90 3.98 3.63 3.72 3.31

Portugal 0.38 0.39 0.50 0.50 0.50 0.62

Spain 1.75 1.68 1.87 2.24 1.67 2.21

Sweden 0.58 0.48 1.69 1.52 1.56 1.27

United Kingdom 3.55 3.20 5.70 4.98 5.67 5.26

EU-15 16.58 20.24 31.47 39.28 30.26 37.22

USA 21.31 21.00 10.22 14.23 14.20 16.34


Figure 8.3. Share of world GDP: Northeast Asia countries (exclude Japan)

0%

2%

4%

6%

8%

10%

12%

14%

ChinaHong Kong, ChinaKorea, Rep.Taipei, ChinaNortheast Asia

Total (Exclude Japan)

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Percen

t

Year

Notes: (1) GDP is PPP-adjusted international billion $ (2) Export and import are in 1995

constant billion $ US at market price

Source: World Bank 2001 Yearbook


Figure 8.4. Share of world export: Northeast Asia countries (exclude Japan)

0%

2%

4%

6%

8%

10%

12%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Year

Percen

tChinaHong Kong, ChinaKorea, Rep.Taipei, ChinaNortheast Asia

Total (Exclude Japan)




Figure 8.5. Share of world GDP: Northeast Asia countries (include Japan)

0%

5%

10%

15%

20%

25%

Year

ChinaHong Kong, ChinaJapan

Korea, Rep.Taipei,ChinaNortheast Asia

Total (Include Japan)

Percen

t

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999





Figure 8.6. Share of world export: Northeast Asia countries (include Japan)

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

Percen

t

Korea, Rep.

Taipei, China

Northeast Asia

Total (include Japan)

China

Hong Kong, China

Japan

Notes: (1) GDP is PPP-adjusted international billion $. (2) Export and import are in 1995



Figure 8.7. Share of world GDP: ASEAN-5 countries

Indonesia

MalaysiaPhilippines

Singapore

ThailandSoutheast Asia Total

5%

4%

4%

3%

3%

2%

2%

1%

1%

0%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Year

Percen

t





The major step to economic regionalization came with the institution of

the AU at the Durban conference. The AU is modeled on the EU and will

have an African Parliament and an African Government with a standing

army to settle intra-Africa regional disputes. The AU plans to have a

central bank so that monetary policy may be coordinated to facilitate

continental economic cooperation and capital flows for investment and

industrialization. President Thabo Mbeki of South Africa was the first

chairman of the AU. He wanted all to know that ‘‘through our actions, let

us proclaim to the world that this is a continent of democracy, a continent

of good government where the people participate and the rule of law is

upheld.’’ The world eagerly waits for the AU to deliver what it has prom-

ised to the peoples of Africa. Africa must win the war on poverty.

It is instructive to note that the continental economic integration move-

ment in Africa progressed at the same time regionalization was gathering

momentum in Europe. With a total surface area of 30.31 million square

kilometers, Africa is the second largest continent, next to Asia. As early as

1970, South Africa joined its immediate neighbors Botswana, Swaziland, and

Lesotho, forming the Southern African Customs Union (SACU), and Na-

mibia later joined the group. Let us recall that CUs became a mode of eco-

nomic integration in the 1940s in Western Europe. Soon came the Southern

Figure 8.8. Share of world export: ASEAN-5 countries

0%

1%

2%

3%

4%

5%

6%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Year

Percen

t

IndonesiaMalaysia

Philippines

SingaporeThailandSoutheast Asia Total





African Development Conference (SADC), which brought together the Mem-

ber States of the SACU and Angola, Mozambique, Zimbabwe, Zambia, and

Malawi. The Treaty of Enhanced East African Cooperation (TEEAC) en-

suring ‘‘free flow of goods and people’’ among Kenya, Uganda, and Tan-

zania, is now a part of the record. Somalia, Ethiopia, and The Sudan were

joined by Djibouti and Eritrea to constitute the regional compact referred to

as the Horn of Africa. The Economic Community of Central African States

(ECCAS) includes Member States of Rwanda, Burundi, Cameroon, the Cen-

tral African Republic, Chad, Equatorial Guinea, Congo, Gabon, and the

Democratic Republic of Congo. The Economic Community of West African

States (ECOWAS), the East African Community (EAC), the Common Mar-

ket for Eastern and Central Africa (COMSEA), the Central African Customs

Union (UDEAC), the West African Customs Union (UDEAO) also became

steps in the process.

Five Mediterranean countries in the northern rim of Africa, Morocco,

Algeria, Tunisia, Libya, and Egypt have historical ties and are geographi-

cally contiguous to Middle East and will have a choice to be Member

Figure 8.9. Share of world GDP: Northeast Asia and ASEAN-5

0%

5%

10%

15%

20%

25%

Year

Percen

t

Northeast Asia Total

(Exclude Japan)

Southeast Asia Total

Japan


(Include Japan)

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999





States of the AU or of the Middle East, a geographical compact which

could also have competitive shares of world output and trade.

The subregional economic cooperation efforts in Africa, as noted

above, failed to produce robust results. Feature stories on the African

continent continued to be dominated by incidents of political instability,

corrupt military dictatorship, genocide, mass migration of refugees, and

natural calamities including flood, drought, famine, and epidemics. How-

ever, it remains to be appreciated that the political and professional lead-

ership of Africa have heard the people and sought to do their best to

respond to the eventful changes for the welfare of the peoples of the con-

tinent. The EU is now a learning model for the AU to fully develop its own

potential.

The AU administration has set up executive, legislative, and judicial

branches. The Assembly and the Executive Council of Ministers perform

executive functions, while the Parliament and the Court of Justice have

their legislative and judicial assignments, respectively. In addition, the AU

has several Directorates, an Office of the Legal Counsel, and the Secre-

tariat (see Table 8.14).

Figure 8.10. Share of world export: Northeast Asia and ASEAN-5

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Year

Percen

t


(Exclude Japan)Southeast AsiaTotal

JapanNortheast Asia Total

(Include Japan)





8.5. The Middle East

The 16 countries of the Middle East (Table 8.15A) belong to the map of

Asia. For reasons of pragmatic considerations they have been placed in their

own special regional group, the Middle East. The region has an area of 6

million square kilometers, and a population base of 259.91 million. The

region’s GDP (PPP), exports, and imports amount to US$ 2,114.36 billion,

US$ 528.42 billion, and US$ 380.27 billion, respectively (Table 8.15B).

Sectoral shares of GDP point to the economic structures of the member

countries (Table 8.15C), and there is a pattern of uniformity. Let us note

that the per capita income of the member economies of the Middle East

makes the region a competitive market (Table 8.15D). One needs to explore,

based on the region’s shares of world output and trade, if the Middle East

will be a viable economic region in the world market.

Pakistan and several other Central Asian countries, geographically

contiguous to the Middle East, may consider joining this regional compact.

I have argued that the five countries in the Northern Rim of the Continent

of Africa, Morocco, Algeria, Tunisia, Libya, and Egypt, may prefer this

region’s membership to that of the AU. The geographical contiguity is the

core issue.

Figure 8.11. Share of world GDP: South Asia countries

0%

1%

2%

3%

4%

5%

6%

7%

8%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Year

Percen

t

Bangladesh

India

Nepal

Pakistan

Sri Lanka

South Asia Total





The Middle East, in its larger context, will clearly have competitive

shares of world output and trade. Under specific circumstances, the Middle

East has earned its geographical identification. Its inclusion in the AEC has

not been a subject of any study. The five states of the Northern Rim of

Africa have a history of collaboration with the Middle Eastern countries.

Two queries warrant immediate responses:

1. A Middle Eastern economic region will be one based on religion, an

Islamic Region. This will not be the case and findings will point out the

truth in this. While a vast majority of the people in the Middle East

subscribe to the religion of Islam, there are many who represent Chris-

tianity, Judaism, Hinduism, Buddhism, Zoroastrianism, and other re-

ligious affiliations. The Mesopotamian civilization in the valleys of the

Euphrates and the Tigris in Iraq has a history of its own; the Buddhist

Statue in Afghanistan has been a subject of much reference. The Middle

East will be predominantly Islamic as much as the EU is predominantly

Christian, each region with a scattered presence of every other religion.

The Islamic countries of Indonesia and Malaysia will remain members

of the AEC as they are. Australia and New Zealand were denied

Figure 8.12. Share of world export: South Asia countries

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Year

Percen

t

Bangladesh

India

Nepal

Pakistan

Sri Lanka

South Asia Total





membership of the EU because their physical location was clearly out-

side the map of Europe; the fact that the majority of the peoples in these

two South Pacific countries are Christian has been no point for con-

sideration. Of course, international religious conferences for each reli-

gion for intra- and intergroup dialogues of philosophy and ethics will

continue to take place. A successful Middle East regional economic

compact will be multireligious, multilingual, and multicultural.

2. The role of Israel as a member of the Middle Eastern regional economic/

political union will be overemphasized. Here again is a lesson to learn

from the EU; Europe’s long history of wars and violent conflicts among

the member nations of the EU has not proven to be a disintegrating

factor. Israel has much to offer with its resource base in human capital

and high-tech industrial capabilities. Alternatively, Israel will remain a

missing link until the peoples of Israel make a decision of their own.

There are many missing links on the map of Europe inclusive of Nor-

way, Switzerland, Monaco, and Vatican City, who have yet to apply for

EU membership (see Chapter 1). The principle of inclusion, not

Figure 8.13. Share of world GDP: 3 Asian regions

0%

5%

10%

15%

20%

25%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Year

Percen

t


(Exclude Japan)


South Asia Total


(Include Japan)





exclusion, will be the norm. As such, a country belonging to the region’s

map will have the right to apply for membership as and when it elects to

do so. The admission of new members will of course be subject to their

willingness to accept all outstanding contractual obligations and their

ability to pay the established membership dues.

8.6. Asia and Africa

Based on data below (Table 8.16), the AEC’s 4+10 model will fit neatly

into the scheme of competitive shares of world output and trade. The AU

has a different case. Africa is not nearly as densely populated as Asia and

the AU does not yet have competitive shares of world output and trade.

However, Africa has a competitively large endowment of natural re-

sources; each individual Member State has limited domestic savings for

necessary investment to explore and market its natural resources. The need

for foreign investments is now the mode of operation. Overseas corporate

Figure 8.14. Share of world export: 3 Asian region

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Year

Percen

t


(Exclude Japan)


South Asia Total


(Include Japan)





giants have done the exploration and eventually became the dominant

forces in many countries. The consequent inadequacies are on record and

the riches of the continent have failed to benefit her peoples. Once the AU

evolves into a strong continental compact, a strong leadership will follow.

Overseas investments from savings-rich mature industrialized countries

will flow into Africa ensuring economic gains for the peoples of Africa and

profits for foreign investors.

Table 8.16 presents the comparative database, – area, population, GDP

(PPP), exports and imports – for the five regional groups: the African

union (AU), the Asian Economic Community of the 4+10 model (AEC

4+10), the European Union (EU), the United States of America (USA),

the Free Trade Area of the Americas (FTAA) plus the world total.

8.7. The protest movement: Antiglobalism

The challenges of the new millennium will, of course, be real. We must con-

tinue to learn, but the real challenge will be to unlearn a great deal of what we

Figure 8.15. Share of world GDP: 4 groups

0%

5%

10%

15%

20%

25%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Year

Percen

t


(Exclude Japan)


Eurozone

United States


(Include Japan)





had learned in the past. I have argued that in the absence of a well-structured

intraregional macroeconomic core, an individual sovereign nation-state

economy cannot optimize economic gains for its micro-actors, households

as well as business units, since most of these individual economies are limited

by marginal values of two parameters: its shares of world GDP and world

trade. Its competitive functioning as an open economy will face a serious

bottleneck. The macroeconomic core relates to a complimentary system of

monetary and fiscal agenda. Exclusively focusing on a monetary agenda may

be self-defeating since the absence of fiscal discipline will be counterproduc-

tive. I have further argued that an intraregional macroeconomic core within a

global macroeconomic system is in order.

The proposal for a global convention of the Heads of the Central Banks

of the world is receiving serious consideration. May the World Bank (WB)

and the International Monetry Fund (IMF) be merged and restructured

into a new institution to serve as a World Central Bank. In 2000, George

Soros authored a monograph advocating the establishment of such an

Figure 8.16. Share of world export: 4 groups

0%

5%

10%

15%

20%

25%

30%

35%

40%

Percen

t

Year

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999


(Exclude Japan)Southeast Asia Total

South Asia Total

Eurozone


(Include Japan)





institution (Soros, 1998, 2000). Without restructuring, if the 182-member

IMF is reconstituted as the new WB, it will continue to suffer from its

present limitations and be unable to take prompt, preemptive decisions and

actions as and when necessary.

Economic regionalization in its many and varied forms within the glo-

bal order has indeed been a part of our economic history. The imperial

order became outdated and was replaced by the post-WWII order of glo-

balization, based on the concept of one world, and reinforced by inter-

national financial institutions, the IMF and the WB. This system has

struggled to do its job, until disintegration came following the end of the

fixed gold value of the US dollar in 1971. The world witnessed the po-

larization of national economies into the rich nations of the North and the

poor nations of the South. The richer countries continue to become richer

while the poorer ones get poorer. An overwhelmingly large number of poor

nations face a very limited number of rich nations. The protest movement

against globalism has a message. A global economic order continues to

elude us.

A map of the worldview of a region has become the new focus of

economic regionalization. The EU illustrates this, developing its own in-

dependent supranational macroeconomic framework and allowing each

Figure 8.17. Share of world GDP: 5 groups

0%

5%

10%

15%

20%

25%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Year

Percen

t


(Exclude Japan)


South Asia Total

Eurozone

United States


(Include Japan)





Member State to maintain its own economic core. Special provisions have

been made for the EU for its membership to international bodies (see

Chapters 3 and 4). The challenge of the new millennium may be to con-

vince all traditional sovereign nation-state economies to voluntarily

Table 8.12. Shares of world GDP (PPP) and trade (%)

GDP Exports Imports

1987 1997 1987 1997 1987 1997

Asia 3+5 17.75 24.12 14.21 18.11 11.08 16.58

Asia 4+10 21.60 29.18 14.61 18.71 11.76 17.44

Asiaa 23.64 31.57 18.64 23.96 15.15 22.96

Asia+ANZ 24.90 32.84 20.03 25.34 16.40 24.49

Eurozone 17.33 15.88 33.86 31.56 31.89 29.53

EU-15 23.42 20.24 46.54 39.28 44.11 37.22

USA 21.31 21.00 10.22 14.23 14.20 16.34

Notes: (1) ANZ ¼ Australia and New Zealand. (2) Asia 4+10�5 countries did not report.

Source: Based on Tables 8.5A–8.10B.aAsia ¼ Northeast Asia-5+Southeast Asia-5+South Asia-5 (Tables 8.5–8.7).

Figure 8.18. Share of world export: 5 groups

0%

5%

10%

15%

20%

25%

30%

35%

40%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Year

Percen

t


(Exclude Japan)Southeast Asia Total

South Asia Total

Eurozone

United States


(Include Japan)





Table 8.13A. Key economic indicators of African Union members



Algeria 32.93 233.20 49.59 22.53

Angola 12.13 45.90 26.80 8.17

Benin 7.86 8.60 0.83 1.04

Botswana 1.64 17.20 3.68 3.37

Burkina Faso 13.90 17.00 0.40 0.99

Burundi 8.09 5.70 0.05 0.20

Cameroon 17.34 40.80 3.24 2.51

Cape Verde 0.42 3.00 0.07 0.50

Central African

Republic

4.30 4.80 0.13 0.20

Chad 9.94 14.80 3.02 0.75

Comoros 0.69 0.44 0.03 0.12

Congo 3.70 4.63 2.21 0.81

Dem. Republic of

Congo

62.66 40.67 1.11 1.32

Ivory Coast 17.65 28.52 6.49 4.76

Djibouti 0.49 0.62 0.25 0.99

Egypt 78.89 303.50 14.33 24.10

Equatorial Guinea 0.54 25.69 6.73 1.86

Eritrea 4.79 4.47 0.03 0.68

Ethiopia 74.78 62.88 0.61 2.72

Gabon 1.42 9.54 5.81 1.53

Gambia 1.64 3.02 0.14 0.18

Ghana 22.41 54.45 2.91 4.27

Guinea 9.69 18.99 0.61 0.68

Guinea-Bissau 1.44 1.19 0.12 0.18

Kenya 34.71 37.15 3.17 5.13

Lesotho 2.02 5.12 0.60 1.17

Liberia 3.04 2.78 0.91 4.84

Libya 5.90 65.79 30.79 10.82

Madagascar 18.60 16.36 0.95 1.40

Malawi 13.01 7.52 0.36 0.65

Mali 11.72 13.56 0.32 1.86

Mauritania 3.18 6.89 0.78 1.12

Mauritius 1.24 16.09 1.95 2.51

Mozambique 19.69 26.03 1.69 2.04

Namibia 2.04 14.23 2.04 2.35

Niger 12.53 11.28 0.22 0.59

Nigeria 131.86 174.10 52.16 25.95

Rwanda 8.65 12.65 0.10 0.24

Republique Araba

Sahraouie

Democratique

(Western Sahara)

0.27 na na na

Sao Tome/Principe 0.19 0.21 0.01 0.04

Senegal 11.99 20.53 1.53 2.41

Seychelles 0.08 0.63 0.31 0.46

Sierra Leone 6.01 4.92 0.19 0.53

Somalia 8.86 4.81 0.24 0.58






South Africa 44.19 533.20 50.91 52.97

Sudan 41.24 85.65 6.99 5.03

Swaziland 1.14 5.66 1.99 2.15

Tanzania 37.45 27.07 1.58 2.39

Togo 5.55 8.97 0.77 1.05

Tunisia 10.18 83.54 10.30 12.86

Uganda 28.20 48.73 0.77 1.61

Zambia 11.50 10.59 1.95 1.93

Zimbabwe 12.24 28.37 1.64 2.06

Total 876.62 2,222.04 304.41 231.20

Notes: (1) Exports and imports – fob. (2) Republique Araba Sahraouie Democratique is a

member of the AU, but is recognized as a Non-Self-Governing Territory by the UN.

(3) Morocco is the one state in the continent, not yet a member of the AU.


Table 8.13B. Sectoral shares of GDP of African Union members


Algeria 10.1 60.0 29.8

Angola 9.6 65.8 24.6

Benin 1.6 13.8 54.6

Botswana 2.4 46.9 50.7

Burkina Faso 32.2 19.6 48.2

Burundi 46.3 20.3 33.4

Cameroon 44.8 17.0 38.2

Cape Verde 12.1 21.9 66.0

Central African Republic 55.0 20.0 25.0

Chad 33.5 25.9 40.6

Comoros 40.0 4.0 56.0

Congo 6.2 57.0 36.9

Dem. Republic of Congo 55.0 11.0 34.0

Ivory Coast 27.9 17.1 55.0

Djibouti 3.5 15.8 80.7

Egypt 14.9 35.7 49.3

Equatorial Guinea 3.0 90.6 6.2

Eritrea 10.2 25.4 64.3

Ethiopia 47.5 9.9 42.6

Gabon 6.1 59.2 34.8

Gambia 30.8 14.2 54.9

Ghana 36.6 24.6 38.7

Guinea 23.7 36.2 40.1

Guinea-Bissau 62.0 12.0 26.0

Kenya 16.3 18.8 65.1

Lesotho 16.3 44.3 39.4

Liberia 76.9 5.4 17.7



compromise their sovereign authority, and accept a new international

economic order. Each continental economic region with its integrated

micro- and macroeconomic parameters will command competitive shares

of world output and trade. Each continental regional union will contribute

competitive shares to the capital funds of each of the global organizations

and play its competitive role for the management in each case. Let all

sovereign nation-state-based individual economies welcome this new in-

ternational economic order. This will also make the globalization model

effective. We have already seen their challenge to the order of globalization

played out on the streets of Seattle, Ontario, Washington, Rome, Paris,

London, and Geneva.

Returning to Table 8.1, the Eurozone, the USA, and Japan have 700

million people in 2000, commanding about one-half of world output and

trade. The Eurozone membership is limited to 12 nation-state economies.

Table 8.13B. (Continued )


Libya 7.6 49.9 42.5

Madagascar 27.6 16.5 55.9

Malawi 34.2 15.8 49.9

Mali 45.0 17.0 38.0

Mauritania 25.0 29.0 46.0

Mauritius 5.9 29.8 64.3

Mozambique 26.2 34.8 39.0

Namibia 9.7 31.5 58.8

Niger 39.0 17.0 44.0

Nigeria 26.9 48.7 24.4

Rwanda 40.1 22.9 37.0

Republique Araba

Sahraouie Democratique

(Western Sahara)

na na 40.0

Sao Tome/ Principe 16.7 14.8 68.4

Senegal 17.2 20.9 61.9

Seychelles 3.2 30.4 66.5

Sierra Leone 49.0 31.0 21.0

Somalia 65.0 10.0 25.0

South Africa 2.5 30.3 67.1

Sudan 38.7 20.3 41.0

Swaziland 11.9 51.5 36.6

Tanzania 43.2 17.2 39.6

Togo 39.5 20.4 40.1

Tunisia 13.2 31.8 55.0

Uganda 31.1 22.2 46.9

Zambia 22.0 29.0 48.9

Zimbabwe 17.9 24.3 57.9

Note: Republique Araba Sahraouie Democratique is a member of the AU, but is recognized

as a Non-Self-Governing Territory by the UN.



Table 8.14. The organizational structure of the African Union (AU)

Organ Composition

Assembly Heads of States of all Member States

Executive Council of Ministers Foreign Ministers or ranking designees

The Permanent Representative Committee

(PRC)aPermanent representatives of the Union and other

Plenipotentiaries of Member States

Pan-African Parliament Five Parliamentarians from each Member State

The African Court of Justice Eleven judges chosen by the Assembly

Directorates Peace and security

Political affairs

Infrastructure and energy

Social affairs

Human resources, science, and technology

Trade and industry

Rural economy and agriculture

Economic affairsb

Conferences and events

Women, gender, and development

Programming, budgeting, finance, and accounting

Administration and human resource development

Office of the Legal Counsel

The Commission Chairperson

Deputy Chairperson

One commissioner each for 8 of the directoratesc

Financial Institutions African Central Bank

African Monetary Fund

African Investment Bank

Note: The Commission is indeed the secretariat of the AU and is located in African Union

Headquarters, Roosevelt Street, W21K19, Addis Ababa, Ethiopia.

Source: http://www.africa-union.org/root/au/AUC/Departments/Departments.htm.

http://www.africa-union.org/home/Welcome.htm.

http://www.dfa.gov.za/au.nepad/au_nutshell.htm.

http://www.africa-union.org/root/au/AUC/AUCleaders/aucleaders.htmaThe Permanent Representative Committee serves as the Advisory Council to the Executive

Council. The PRC meets at least once a month and make decisions by a two-thirds majority.bThe economic affairs directorate looks after economic integration, monetary affairs, invest-

ment, and development.cThe Commission has commissioners responsible for the following directorates: peace and

security, political affairs, infrastructure and energy, social affairs, human resources and sci-

ence and technology, trade and industry, rural economy and agriculture, and economic affairs.

Table 8.15A. Economies of the Middle East

Bahrain Oman

Cyprus Palestine

Iran Qatar

Iraq Saudi Arabia

Israel Syria

Jordan Turkey

Kuwait United Arab Emirates

Lebanon Yemen



http://www.africa-union.org/root/au/AUC/Departments/Departments.htm.

http://www.africa-union.org/home/Welcome.htm.

http://www.dfa.gov.za/au.nepad/au_nutshell.htm.

http://www.africa-union.org/root/au/AUC/AUCleaders/aucleaders.htm

Table 8.15B. Key economic indicators of economies of the Middle East

Country Area Population GDP (PPP) Exports Imports

(000’s km2) (in millions) US$ billion US$ billion US$ billion

Bahrain 0.67 0.70 15.83 11.17 7.83

Cyprusa 9.25 0.78 16.78 1.24 5.55

Iran 1,648.00 68.69 561.60 55.42 42.50

Iraq 437.07 26.78 94.10 17.78 19.57

Israel 20.77 6.40 154.50 40.14 43.19

Jordan 92.30 5.91 26.80 4.23 8.68

Kuwait 17.82 2.42 44.77 44.43 12.23

Lebanon 10.40 3.87 23.69 1.78 8.86

Oman 212.47 3.10 39.65 19.01 8.71

Palestine na na na na na

Qatar 11.44 0.89 23.64 24.90 6.71

Saudi Arabia 1,960.58 27.02 338.00 165.00 44.93

Syria 185.18 18.88 72.33 6.34 5.97

Turkey 780.58 70.41 572.00 27.49 101.20

United Arab Emirates 82.88 2.60 111.30 103.10 60.15

Yemen 527.97 21.46 19.37 6.39 4.19

Total 5,997.38 259.91 2,114.36 528.42 380.27

Source: The World Factbook (July 20, 2006).aIncludes North Cyprus (Greek). The GDP (PPP) of North Cyprus is US$7,135 billion.

Exports and imports are fob.

Table 8.15C. Sectoral shares of GDP of economies of the Middle East (%)

Agriculture Industry Service

Bahrain 0.5 38.7 60.8

Cyprus 3.7 19.8 76.5

Iran 11.6 42.4 46.0

Iraq 7.3 66.6 26.1

Israel 2.6 31.7 65.7

Jordan 3.3 28.7 68.0

Kuwait 0.4 47.9 51.6

Lebanon 12.0 21.0 67.0

Oman 2.7 39.0 58.3

Palestine na na na

Qatar 0.2 80.1 19.7

Saudi Arabia 3.3 61.3 35.4

Syria 24.9 23.0 51.9

Turkey 11.7 29.8 58.5

United Arab Emirates 4.0 58.5 37.5

Yemen 13.5 47.2 39.3

Source: World Development Indicators (2001) and Asian Development Bank Key Indicators

(2001).


Thus, the 14 economies enjoy a commanding position. The remaining 170-

plus nation-state economies with 5 billion-plus people have much less to

share with. Individually, none can be a competitive actor in the world

market. Globalization will be made real when peoples and governments

welcome the EU/euro model and promote regional economic unions, each

with its competitive shares of world output and trade, contributing

to economic gains of all the peoples in all the continents (see Monnet,

1978; Dutta, 1992, 1999, 2000a, b; Issing, 1996, 2000, 2001; Harberger,

1996; Kiyoshi, 2000; Letiche, 1997, 1998; Lloyd, 1996; Maehara, 1998;

Mazzucelli, 1997; Petri, 1993; Schroeder, 2000; Yamazawa, 1994).

Table 8.15D. Per capita income (PPP) of economies of the Middle East

(2005) (US$)

Bahrain 23,000 Oman 13,200

Cyprus 21,500 Palestine na

Iran 83,000 Qatar 27,400

Iraq 3,400 Saudi Arabia 12,800

Israel 24,600 Syria 3,900

Jordan 4,700 Turkey 8,200

Kuwait 19,200 United Arab Emirates 43,400

Lebanon 6,200 Yemen 900


Table 8.16. Continental economic unions

Economic Area (in millions Population GDP (PPP) Exports Imports

Region km2) (in millions) US$ billion US$ billion US$ billion

AU 30.31 876.62 2,222.04 304.41 231.20

AEC (4+10) 17.84 3,166.74 9,246.36 2,292.63 2,016.70

EU 3.98 456.95 13,310.00 1,318.00 1,402.00

USA 9.63 298.44 12,490.00 927.50 1,727.00

FTAA 39.94 875.84 17,898.59 1,850.66 2,546.33

World 510.07 6,525.17 43,070.00 10,330.00 10,300.00

Notes: (1) EU trade figures are adjusted for intra-EU trade. (2) AU area includes the entire

continent of Africa, inclusive of Morocco.

Source: The World Factbook (Aug 8, 2006).


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Subject Index

AC-10 36, 39, 61, 64, 66, 69, 78, 79, 81,

82, 159, 189

African Economic Union (AEU)

204–212

African Union (AU) 160, 205, 209, 211,

215, 216, 220–223

American Hemispheric Economic

Cooperation/Union 138, 162, 176,

177, 180, 186, 189, 190

antiglobalism 216–225

articles of confederation 119

articles of faith 29–30

Asia and Africa 215–216

Asia Pacific Economic Cooperation

(APEC) 165–172, 190

3+5 model 170

4+10 model 170

Asian free trade area 169, 170

Asian Development Bank (ADB) 170

Asian Economic Cooperation (AEC)

159, 170, 192–195, 197, 200, 201, 213,

215, 216

Asian money 138, 159, 162, 170, 189

Association of South East Asian

Nations (ASEAN) 170, 189, 192,

199, 200, 203, 208, 209

Benelux Customs Union 31, 34

Bretton Woods

International Monetary Fund (IMF)

145–151

Restructuring 148–151

World Bank (WB) 151–155

International Bank for Recon-

struction and Development

(IBRD) 151–155

International Development Asso-

ciation (IDA) 151–155

International Finance Corporation

(IFC) 151–155

candidate countries 3, 35, 40, 58, 106,

184, 189, 193

common market 38, 42

confederation 117–120

continental regionalization 57,

187–190

Council of Europe 34, 35

cowboy diplomacy 185

Customs Union (CU) 32, 34, 128, 164,

181, 188

deepening and widening 33–34

dual currency circulation 40

economic integration 15, 16, 32, 42, 54,

57, 60, 69, 74, 77, 87, 95, 118, 131,

136, 140, 157, 158, 162, 164, 166, 173,

180, 186, 196, 197, 203

enhanced cooperation 47, 129–130

EU-10 61, 62, 64, 66, 159, 160

EU-12 69, 74, 75, 77, 87, 102, 103, 105,

107, 113, 147, 196

EU-15 3, 10, 15, 28, 40, 41, 43, 56, 61,

62, 64, 66, 69, 74, 75, 77, 78, 81, 82,

87, 90, 108, 123, 131, 158–160,

197–206, 219

EU-25 2–24, 26, 31, 33, 38, 41,

60, 62–67, 69, 71, 74–80, 82, 93,

95, 105, 106, 140, 141, 146, 147,

159, 189

EU flag 109, 117, 127, 136

Euro–dollar currency regime 104–114

Europe day 127

European Central Bank (ECB)

capital stock 93–94

executive board 89–90

general council 90–91

governing council 89–90

European Charter of Fundamental

Rights 40, 48, 125

European Coal and Steel Community

(ECSC) 3, 11, 18, 31, 36–40, 45, 60,

83, 118, 164

European Community (EC) 3, 36, 41,

45, 59, 88, 164–166

European continental economy 33, 54,

58, 60, 72, 77, 139, 166

European Council of Finance Ministers

(ECO-FIN) 88, 141

European Economic Community

(EEC) 3, 10, 23, 31, 36–38, 40–43, 45,

88, 130, 143, 164, 165, 170, 183

European family 54

European Free Trade Area (EFTA) 23,

143, 165

European Government

Committee of Regions 53

Court of Justice 52

Euratom Committee 54

European Commission 52

European Council 49–51

European Court of Auditors 52–53

European Economic and Social

Committee 52–53

European Investment Bank 52–53,

122–124

European Monetary Fund 52–53

European Parliament 48–49

European Monetary Cooperation Fund

(EMCF) 88

European Monetary Institute (EMI)

88, 91

European Monetary System (EMS) 3,

39, 43, 88

European Monetary Union (EMU) 3,

39, 43, 89, 118

European Payments Union (EPU) 32

European System of Central Banks

(ESCB) 3, 44, 88

European Union (EU) 1–30, 31–54

Europeanization of Europe 1, 109, 150,

159, 201

Eurosystem 7, 8, 10–13, 15, 17–19, 21–24,

40, 58, 60, 69, 79, 87, 89–91, 97, 99,

109, 118, 131, 138, 141–145, 158, 162

Eurozone 40, 43, 48, 85–97, 99–104,

106, 109, 114, 138, 143–149, 152–155,

188, 189, 195–204, 222

exchange rate 42, 43, 53, 88, 89, 91, 94,

104, 109–114, 144, 145, 147

Exchange Rate Mechanism (ERM) 3,

9, 88, 142

Federal Reserve System (FRS/FED)

87, 98, 141, 142, 151

federation 117–120

foreign direct investment 18, 78, 79, 81,

82, 166, 179

framework of integration 69

Free Trade Area (FTA) 3, 31, 91,

130, 164

Free Trade Area of the Americas

(FTAA) 162, 173–180, 216

functional integration 130–134

G-8 159, 161, 185

globalization 187–190

gravity model 189, 190

growth with stability 89, 109

Harmonized Index of Consumer Prices

(HICP) 95–97

imperial model 57–58

import–export-led growth model 166

interest rates 94, 96, 98, 99, 142

International Atomic Energy Agency

(IAEA) 42

international currency reserves

107–108, 150

Iraq War 142, 184, 185

Jean Monnet 1, 114

Kyoto Protocol 29, 40, 132, 156

Subject Index238

learning model 187–225

level of industrialization 193, 194

Luxembourg compromise 36

macroeconomic theory 55–57

Marshall Plan 31, 32, 163

mature industrialized economy 5, 11,

13, 15, 22, 24, 195

Mercosur 180, 181

Middle East 212–215

millennium development goals 155

money supply (M1, M2, M3) 99–101

mutual accreditation and standardiza-

tion 131, 170

New Partnership for Africa’s Develop-

ment (NEPAD) 204

normalized income gap 157–159

North American Free Trade Area

(NAFTA) 172–173

North Atlantic Treaty Organization

(NATO) 8, 10, 32, 46, 163, 164, 180,

183–184

northern rim of Africa 194, 210, 212, 213

observer status 35, 85, 109, 117, 144,

145, 147

ombudsman 125

on ice 119, 180

one common money 85, 87, 164

optimum currency area 85–115

Organization for African Unity (OAU)

205

Organization for Economic Coopera-

tion and Development (OECD) 32,

33, 163, 164, 183–184

Organization for European Economic

Cooperation (OEEC) 31, 32, 163

Organization of American States

(OAS) 178

out-members 91, 94, 107, 108, 144

political integration 55, 57, 83, 87, 109,

111, 118, 136, 138, 140, 141, 146, 147,

164, 183–185, 194

post-WWII model

the North and the South 218

pound sterling and euro 87, 113, 143,

147

price stability 45, 55, 57, 91, 94, 95, 99,

101, 120–122, 142

principle of competition 37, 109, 133,

162

principle of inclusion 1, 192, 201, 214

production map of the EU-25 75–80

progressive integration 3, 16, 77

pull factor 165, 166, 190

push factor 165, 166, 190

Russia 2, 10, 11, 16, 18, 19, 58, 59, 134,

155, 156, 159, 161, 166–168, 177, 185,

186

Snake agreement 3, 39, 43, 88

sovereign nation-state 1, 16, 20, 26, 33,

34, 55, 56, 58, 59, 69, 86, 104, 106,

134, 136, 139, 141, 145, 150, 156, 165,

180, 190, 217, 219, 222

sovereignty 1, 3, 23, 31, 58, 80, 87, 107,

109, 111, 118, 119, 138, 165, 195

special drawing rights (SDRs) 145–147,

150, 151

supranational mcroeconomy 58–60

third-country nationals 47, 126, 132

Treaties

Acts (Treaties) of Accession and

Amendments 38–41

Amsterdam Treaty 45–46

Euratom Treaty 41–42

European Constitution Treaty

(Constitution for Europe) 36,

117–138

Maastricht Treaty 43–45

Nice Treaty 46–48

One Europe Act 42–43

Single Europe Act 42–43

Treaty of Rome 37–38

Treaty of Benelux Economic Union 34

Turkey 3, 9, 31–33, 35, 39, 40, 134, 139,

140, 193, 194, 223–225

Subject Index 239

UK membership to EU 142–144

unilateralism 58, 155, 162, 185

United Nations (UN) 44, 46, 59, 104,

134, 139, 156, 177

United Nations Security Council 46, 134

unity in diversity 24–29

EU official languages 26–27

lifestyle diversities 27–29

religion 24–25

Universal Declaration of Human

Rights 125

universal suffrage 17, 29, 38, 46, 48

World Trade Organization (WTO) 16,

58, 91, 109, 117, 131, 140, 155–157,

170, 172, 177, 185, 186, 188

Doha Declaration 155, 156

Subject Index240

Contents

Acknowledgments ix

Introduction to the Series xiii

Preface xv

List of Figures xix

List of Tables xxi

CHAPTER 1 The European Union 1

CHAPTER 2 Historical Progression of the European Union 31

CHAPTER 3 The Theory of Supranational Macroeconomics 55

CHAPTER 4 European Central Bank and the Euro: Theory of

Optimum Currency Area Revisited 85

CHAPTER 5 A Constitution for Europe 117

CHAPTER 6 The European Union (EU): The Challenges Ahead 139

CHAPTER 7 The EU and USA 163

CHAPTER 8 The EU: A Learning Model 187

Bibliography 227

Subject Index 237

european union and the euro revolution, volume 283 (contributions to economic analysis)

Documents