Saturday, 29 September 2012

European Economic Issues: Background to the EU

The European Union we know today was formed back in 1957 wen the Treaty of Rome was signed and it came into operation on the 1st of January. It was initially called the European Economic Community. Initially, it had six member states whom had started to integrate their economies as early as 1952 with the European Coal and Steel Community which removed trade restrictions between the countries in an attempt to gain economies of scale and be able to compete with the U.S.A. Most internal tariffs had been abolished and common external tariffs introduced by 1968. However, the European Union at this point was still a 'customs union' rather than a 'common market' because restrictions were still in place on trade (legal, administrative and fiscal).

Many policies were in place at this point that made the EU a very integrated economy, these include:

  • Common Agricultural Policy - Includes common high prices for farm products and import duties to bring foreign food up to EU prices.
  • Regional Policy - Grants to firms and local authorities in deprived regions.
  • Competition Policy - For example, Article 81 of the Amsterdam Treaty says that agreements between firms cannot be made if it will affect competition in trade between member states. 
  • Taxation - VAT is the standard form of indirect tax through the EU.

A further move towards making the EU a single market came in 1987 with the Single European Act. This aimed to remove any extra barriers and form a common market by 1992 using the principle of mutual recognition. This meant that if a firm could do something under the rules of one EU country that firm could do it in all EU countries. It stopped individual governments from making special rules that would keep competition from other EU countries out. In June 1997, the 'Action Plan' aimed to remove any remaining barriers before the launch of the euro currency in January 1999. The 'Internal Market Scoreboard' was published every six months to show the progress made towards the abandonment of restrictions. The last two nations joined the EU in 2007: Bulgaria and Romania to make it 27 members. 

The EU now consists of 27 states. These states are classed into different categories depending on the population of the countries. For example, 6 'big' nations are part of the EU. A 'big' nation in terms of population means that the population is greater than 35 million. Germany and the United Kingdom are two of these 6 'big' countries. Next comes the mid-sized countries of which there are two: Romania (22 million) and the Netherlands (16 million). Smaller than these still are the 'small' countries with a population of between 8 and 11 million, this category includes Greece and Belgium. Finally the rest of the countries are referred to as 'tiny' nations making up less than 5% of the EU25's population between them. Examples of these 'tiny' nations are Denmark and Finland.

As with population, the EU nations can also be categorised based on their income per capita. This is GDP divided by population and is a good way of comparing the wealth of a country with another. 12 countries fall into the 'high' income category. As you'd expect, Germany and the U.K are in this category as well as the likes of Denmark and Italy. 7 countries are classed as medium income; Greece, Portugal and Cyprus are examples of this. The rest of the EU nations fall under the low income band. Luxembourg is the richest country when looking at income per capita, they have an income per capita that's more than double France. The poorer countries have generally done better economically since joining the EU. Here is a graph to show the income per capita figures graphically, taken from the Eurostat website.


The economies in the EU are very uneven in their sizes. For example, the following six nations together make up over 80% of the EU's economy: Germany, France, Italy, Spain, Netherlands and the United Kingdom. The rest of the countries are once again sorter into categories such as 'small', 'tiny' and 'minuscule' depending on the size of their economy. 'Small' is an economy that accounts for between 1% and 3% of the EU's overall economy. Sweden and Belgium, for example. 'Tiny' is an economy that accounts for less than 1% of the EU's overall economy and Hungary and Belgium fall under this title. Finally, 'minuscule' refers to an economy that makes up less than one tenth of 1% of the EU's economy (Latvia, Estonia, Malta).

EU countries tend to most of their trading with, well, themselves. Roughly two thirds of imports of exports are to or from Western Europe. Exports to North America make up roughly 10% of the total and to Asia even less, around 8%. About 80% of these EU exported goods are industrial goods.

The EU's budget has to balance each year. The four sources of funding for the budget are tariff revenue, agricultural levies, VAT resource and GNP based (A tax paid by members based on their GNP). All countries tend to contribute roughly 1% of their GDP to the EU budget, meaning it's not a 'progressive' tax. Germany and the United Kingdom are at the top of the spectrum of countries that donate a lot more than they receive in benefit from being part of the EU, whereas Spain and Greece gain a lot more in benefits than they donate to the EU. The majority of the EU budget is spent on agriculture, roughly 46%, hence the Common Agricultural Policy we hear a lot about.

That's a rough insight into the background and habits of the EU. I wanted to lay some foundations for some of the posts on European economic issues that are to come. Thank you for reading, stay tuned!


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