The European Union (EU) - Business Environment

The EU was established in 1958 by the Treaty of Rome. The six original members, France, West Germany, Italy, Holland, Belgium and Luxembourg, were joined in 1972 by the United Kingdom, Ireland and Denmark. Greece joined in 1981, followed by Spain and Portugal in 1986 and Austria, Finland and Sweden on 1 January 1995. In 2004 ten further countries joined the EU, mainly from eastern Europe: Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. These countries, along with the former East Germany, currently constitute the 25 member states of the Union, a number which is likely to grow further by the end of the decade. Other countries which are waiting to join could bring the number of member states to 29 these are Bulgaria, Croatia, Romania and Turkey.
As a result of the enlargement of the EU, a new constitution was put forward which included changes in voting rights, the size of the EU commission and maintaining national sovereignty. The new constitution has to be ratified by all 25 member states of the EU. Some countries have ratified the new constitution through their parliaments (Greece and Germany, for example) and some countries have ratified the new constitution through a referendum (Spain and Luxembourg, for example). The biggest blows to the new constitution have come from resounding no votes from referenda in France (where there was a 57 per cent no vote) and the Netherlands (where the vote was 62 per cent against). Other countries, including the UK, have not decided what to do about the new constitution and European leaders have entered a time of ‘quiet reflection’ to consider the next move.
The primary aim of the Treaty of Rome was to create a ‘common market’ in which member states were encouraged to trade freely and to bring their economies closer together, ultimately culminating in the creation of a ‘single market’ within the Union. To bring this about, a protected free trade area or ‘customs union’ was established, which involved the removal of tariff barriers between member states and the institution of a common external tariff (CET) on goods from outside the Union.
Institutional structures and Union policies most notably the common agricultural policy (CAP) also contributed to this end and to the creation of a trading bloc of immense proportions. Within this bloc, member states were expected to gain numerous advantages, including increased trade and investment, huge economies of scale and improvements in productivity and cost reductions. To support the goal of increased trade and co-operation between community members, a European monetary system was established in 1979 in which a majority of member states undertook to fix their exchange rates within agreed limits.
A significant step towards the creation of a single market capable of competing effectively with the United States and Japan was taken in 1986 when the then 12 community members signed the Single European Act. This Act established 31 December 1992 as the target date for the creation of a Single European market: an area (comprising the 12 EU countries) without internal frontiers, in which the free movement of goods, services, people and capital was to be ensured within the provisions contained in the Treaty. Among the measures for making the single market a reality were agreements on the following issues: the removal or reduction in obstacles to cross-border travel and trade (e.g. customs checks); the harmonization or approximation of technical and safety standards on a large number of products; closer approximation of excise duties and other fiscal barriers (e.g. VAT); the removal of legal obstacles to trade (e.g. discriminatory purchasing policies); the mutual recognition of qualifications.Further steps in the development of the EU have come with the decision to establish a European Economic Area (EEA) which permits members of the European Free Trade Area (EFTA) to benefit from many of the single market measures and, in particular, from the Treaty on European Union, agreed by the 12 member states in December 1991 at Maastricht. Apart from the institutional changes mentioned in Chapter, the Maastricht Treaty contained provisions for:
increased economic and monetary union between member states;a single currency;a social charter to protect workers’ rights;a common foreign and security policy;community citizenship.
These various measures were scheduled to be introduced over a number of years, although in some cases most notably the United Kingdom specially negotiated ‘opt-out’ clauses have meant that some provisions have not been implemented simultaneously by all member states (e.g. the single currency; the social charter).European monetary union was finally achieved on 1 January 1999 with the creation of ‘Euroland’. Eleven members of the EU are included the UK, Denmark and Sweden chose not to participate, while Greece failed the convergence criteria for membership but has since joined in 2001. Euroland is effectively a single economic zone since it operates with a single currency the euro and members have given up sovereignty over monetary policy, which is now to be determined by the European Central Bank. National sovereignty over fiscal policy has been retained, so there can be some differences in tax rates and government spending, but this is to operate in a framework of ‘harmonization’. The creation of Euroland enables increased specialization across the whole of Europe and bigger economies of scale. Euroland embraces more than 300 million people and is responsible for one-fifth of the world’s output and as such comes a close second to the USA as an economic superpower.
The UK has chosen not to join Euroland and the single currency until a referendum has been held. In 1997 the Chancellor of the Exchequer set out five economic tests of whether the UK should join Euroland or not. These are:

  1. Are business cycles and economic structures of the UK and Euroland compatible and sustainable?
  2. If problems emerge, is there sufficient flexibility to deal with them?
  3. Would joining EMU encourage long-term investment in the UK?
  4. What impact would it have on the competitive position of the UK’s financial services industry?
  5. Will joining EMU promote higher growth, stability and employment?

At the end of 2005, the debate over membership of the euro in the UK has receded from the political agenda (at least for the time being) in view of the more pressing problems encountered by the EU during the year over the new constitution.


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