The European Economy

The Global Context

Christopher M. Dent

• Publisher: Routledge
• Year: 2002
• ISBN:
  9781134780679
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

The shape of the world economy is changing. Globalisation and regionalism have led to the development of powerful but interdependent economic blocs. Much economic potential has shifted from the Atlantic to the Pacific area. In view of this The European Economy argues that economists need a broader, worldwide base of information if these processes and their effect on Europe are to be fully understood. Topics discussed include:
* Europe's experience of the growing trend of regionalism
* the single market
* plans for economic union
* EU enlargement
* Europe's triad rivals
* EU external trade and trade relations
* technology and innovation
* environmental issues
This fresh approach highlights the issues which will challenge European countries into the twenty-first century.

1 Global and regional interdependence
The context of the European challenge

INTRODUCTION

In recent years, the world economy has experienced a series of fundamental changes that has recast the underlying relationships on which it functions. The two principal dynamic forces that have driven this change are regionalism and increasing tendencies towards globalisation. Regionalism involves nation-states forming closer integrational links between them to varying levels of sophistication. These have been mostly formalised through regional integration arrangements (RIAs) or have evolved ‘naturally’ or informally through a private sector led rise in intra-regional trade, investment and financial flows. Regional co-operation is seen by some as another strand of regionalism which can consist of measures to link up infrastructures, improve the management of common resources or have more overtly political objectives than economic ones.

Globalisation is more difficult to define but can be thought of as the highest form of internationalised economic activity. This has chiefly entailed a deepening and widening of corporate integration both within and between the operations of multinational enterprises (MNEs). Both these trends combined have produced an ever elaborate network of relationships that has simultaneously blurred the demarcations of national borders and the internationalised firm’s true identity and origins. Consequently, these developments and continuing reactions to them have created an increasingly interdependent world economy.

Europe has been a major participant in these formative processes. The European Union (EU), which represents fifteen of some of the world’s richest nations, is the most advanced RIA that has yet emerged. The EU has also made substantial endeavours both to assist the regional integration of other nations and develop its own inter-regional links with them. European MNEs are among the largest foreign traders and investors whose corporate presence has been well established in every global region. The size of the European market and progressive European integration has itself induced foreign multinationals to locate there in growing numbers.

In trying to comprehend the position of the European economy within the framework of global and regional interdependence an equally critical examination of its contextual features needs to be considered. These comprise of trends and developments that, in unison with regionalism and globalisation, have affected the structural characteristics of the world economy and the conventional wisdom on which new modes of economic activity have been predicated. Hence, they are also reflective of the fundamental changes that have been engendered by the two dynamic forces. Such features and the challenges that lie therein include:

• The triad structure of world economic superpowers: consisting of the EU, the USA and Japan which together still dominate world trade and investment flows and constitute the major poles of economic wealth. The gravitational pull of these powers has resulted in stronger regionalism, for example, EU enlargements, the North American Free Trade Agreement (NAFTA) and the Asia-Pacific Economic Co-operation (APEC) forum. The Europe-Japan/East Asia link in triadic relationships remains, though, by far the weakest.
• The rise of the ‘new competition’: a number of developing economies, most notably from East Asia, have acquired newly industrialising country (NIC) status in post-war years. For some time they have undermined the competitive advantage of many European producers in labour-intensive, low-tech industries. However, many NICs have now begun to compete in higher value-added sectors spurred on by regional developments, the enabling role played by globalisation and a more integral multilateral trading system.
• The advent of new techno-industrial paradigms: the growth industries of the future appear to rest on the core technology clusters that have formed around information technologies, biotechnologies and new material sciences. The microchip revolution has brought about radical changes to how industrial activity is organised and co-ordinated, both in the workplace and on a cross-border basis. A wider socio-economic impact is also associated with the emergence of the information society.
• The improved management of knowledge and human resources: as a consequence of the above, companies, governments and other organisations have had to adopt a new approach to managing knowledge and human resources. The imperative to develop effective capabilities in knowledge-intensive industries and other activities requires a higher priority to be given to education and training.
• Establishing more sustainable patterns of economic development: the planet has had to bear severe ecological pressures that have originated from an accumulation of environmental malpractices. Most current scientific studies suggest that new patterns of development are necessary to avert global ecological collapse. European and other industrial nations have up to now been largely responsible for these pressures, though developing countries are becoming increasingly answerable on a global scale. This is particularly pronounced where past established patterns have been emulated and growth rates are high.
• The market-oriented pluralist democracy as the leading credible model of economic development: this has led from the large-scale retreat of communism, most notably in Central and Eastern Europe (CEE), and the general implementation of more market friendly policies and practices across countries of diverse economic backgrounds.

In this opening chapter, we shall examine the nature of the European response, both actual and potential, to these challenges. Owing to the coalescent function performed by the EU and its dominance of the European economy, it will take the centre stage of our analysis. We will show that heightening global and regional interdependence and their contextual features has revealed the greater necessity for both:

• improving competitiveness against traditional and new rivals;
• extending or creating collaborative relations with accordant regional or national partners.

Although tensions may arise in balancing these two objectives, we shall also demonstrate that the latter has taken on a primary strategic role in helping to secure the former while consolidating European interests in a broader sense. Thus, a major theme emphasised in our analysis will be the strategic determinants that continue to underlie those actions taken by European business leaders and policy-makers alike in their efforts to meet those challenges.

THE TWIN FORCES OF REGIONALISM AND GLOBALISATION

The growth of regionalism

The development of stronger regional links between proximate countries will, of course, engender a higher degree of interdependence between them. They have also lent to global interdependence where RIAs have nurtured collaborative relations with others. Even among those states which have recently acquired independent status a concurrent aspiration to be part of regionalist initiatives can be noted. For example, the Baltic states and Slovenia have all expressed a wish to join the new Central European Free Trade Area (CEFTA). Institutionalised regionalism between participating members is most likely to commence with the objective of installing a free trade area, whereby tariffs are eliminated between them but each country retains the ability to set its own tariff rates on external imports. These, however, are harmonised within a customs union with the introduction of a common external tariff. Common or internal markets and monetary unions are respectively more progressive forms of RIAs which commit members both to remove further impediments to factor movements and converge their sets of regulations, standards and policies.

The economic attraction of joining such an arrangement lies in the static and dynamic gains that are internally generated and shared. Generally speaking, these include the wider scope for efficiency gains, market opportunities and the acquisition of key strategic assets. Implementing a successful RIA will depend on accommodating its members’ strengths and weaknesses. The presence of significant incompatibilities can lead to the arrangement having to embrace a ‘variable geometry’ approach whereby different integrational schedules and agendas are set within the group. As the 1990s have progressed, this has become more and more relevant and applicable to the EU’s plans for future economic and monetary union (EMU).

The RIA is largely a post-war phenomenon and throughout this period Europe has provided the template for most other aspiring regional groupings. The inauguration of the single European market (SEM) programme, the devising of plans for EMU and the international stature of the EU have made it not only the predominant RIA in Europe but also within the world. Regional agreements have become very popular among nation-states, particularly in very recent years with 33 of the total 108 RIAs that have been notified to the General Agreement on Tariffs and Trade (GATT) Secretariat since 1948 being signed in the early 1990s (see Figure 2.4, p.).

While an RIA can be mainly understood in terms of an internally focused, organisational body of countries its external impact and dimension is of great consequence. This can be most clearly illustrated by briefly charting the progress of the EU since its conception in the 1950s. Even the earliest stages of regionalism could be interpreted as a strategic reaction to the shift in geo-political power that had relatively disadvantaged the international position of Western Europe. This shift was gradually redressed by combining a wider range of activities and attracting new members to its core. The urgency of completing market integration and to realise the benefits it afforded was further underlined by the rise of new sources of competition, first from Japan and later on from the NICs. Fears of the SEM programme creating a ‘Fortress Europe’ in which the market it created was guarded by high protectionist walls and access granted through reciprocity agreements were subsequently articulated by outsiders. As it transpired these fears have been largely unfounded, as we ‘shall discuss in later chapters, although certain defensive mechanisms have been installed.

The most important global effect of RIAs concerns the breaking down of the world economy into separate and sometimes overlapping regional blocs and the implications conveyed for the multilateral trade order. Those analysts who are opposed to the proliferation of regional agreements argue that both sets of relations cannot co-exist owing to the inherent tensions that lie between them. This is based on the belief that regional groups tend to protect their own internally liberalised markets by deploying high tariffs against third country imports.

A corollary of this is replacement of rule-based international relations, upon which multilateralism depends to function effectively, with powerbased relations which ultimately endangers it. Moreover, welfare losses can arise through trade diversion (see Chapter 2) which would have been avoided if regional trade concessions were converted at a multilateral level. It is further argued that the stability of the world trade system is placed at greater risk by RIAs as they act as a safe haven to which its members tactically retreat when faith in multilateralism has been effectively undermined (Bhagwati 1990, 1992).

Conversely, the case for compatibility between formalised regionalism and multilateralism is founded on the notion that RIAs have provided the essential building blocks with which global free trade can be constructed (Lawrence 1991). However, this rests on the assumption that internal liberalisation is matched by equivalent actions in any external regimes. Expectations of such behaviour originate from the hypothesis that what is preached at home will be practised elsewhere. For instance, the liberal mindedness inculcated from the installation of the SEM programme is thought to have had a positive influence upon the Uruguay Round of GATT talks with which it coincided (Woolcock 1993). Where regional integration has been accomplished by the maintenance of liberal external regimes then this has been favourably termed ‘open regionalism’. This objective has even been recently endorsed by the World Trade Organisation (WTO 1995).

The active participation of open-minded RIAs in multilateral negotiations can also simplify them by the fact that fewer contracting parties are now involved. This was shown at the Uruguay Round when the European Commission acted as the interlocutor on behalf of the EU member states. Some regional arrangements may have also introduced liberalisation measures in advance of those that are moderated at a multilateral level in the future. The convergence of the EU’s policy rules on foreign investment and competition could provide the WTO with advantageous starting-points in these respective fields if competence is to be granted over them in the future.

The formation of regional agreements has surfaced in all global regions and only countries with the most autarkic inclinations have remained non-signatories to them (see Table 1.1). Their strength relies on the economic capability and relations that exist between member states, in addition to a common political will. Consequently, the most developed forms of regionalism and those that demonstrate the highest potential are located in relatively prosperous global regions. Hence, the triadic structure of the world economy and the regional links that have been built around it are seen by some as mutually reinforcing to each other.

Table 1.1 Major regional integration arrangements (actual and planned)

In East Asia, where institutionalised regionalism has remained weak, a more informal path to regional integration has occurred through the dynamic expansion of its economy. North American countries currently participate in their own specific RIA and two other overlapping arrangements, thus raising the degree of complexity with respect to regional and global interdependence. The variable geometry that is also evident could be the cause of considerable inconsistencies, arising from potentially conflicting integrational policies and political-economic objectives.

The Pacific Free Trade Area envisaged by the APEC forum and the possibility of a future transatlantic counterpart would leave only the European-East Asian arrangement to complete a triadic framework of trade liberalisation. A scenario of this kind cannot be ruled out for the same reason that it cannot be held as credible. Future plans to establish deeper regional integrational links in all parts of the Triad are dependent on a series of imponderable factors. These become more significant both in relation to the ambitiousness of those plans and the long-range schedules that are trajected for them. The member states of the EU have recently encountered this with the Maastricht Treaty’s programme for economic and monetary union.

Moves towards globalisation

For most of history the internationalisation of economic activity has been typified by the exporting and importing of products between countries. The post-war acceleration of trade intensified this trend; more importantly newer kinds of international exchange began to alter the complexion of the world economy and internationalisation itself. Foreign direct investment (FDI), whereby multinationals have sought to establish both control and ownership of assets that exist beyond the home country of origin, is the most notable of these. Indeed, this is what essentially defines an MNE. The dispersion of a company’s operations across national borders has made it more difficult to determine its own nationality while also threading the links of global interdependence between countries by integrating them into the systems of international production.

In more recent times, this have been achieved through complex integration strategies where the firm has often resembled more a network than a hierarchy, facilitated by international subcontracting, licensing agreements, strategic alliances and other forms of corporate linkage. The integrity of the firm has remained simultaneously intact while it orchestrates these network relationships from a centralised or decentralised command structure.

The latter of these—international strategic alliances—entail firms collaborating together at differing levels of commitment in activities that are designed to render mutual benefits, and hence are orchestrated jointly. They are not a new phenomenon (Kindleberger 1988), but their increased frequency and centrality to the core strategies of many companies make them particularly relevant when understanding MNE behaviour. Multiple participants may be involved in such co-operative ventures from various locations and tend to arise in industries with high entry costs, scale economies and rapidly changing technologies. In many ways they reflect interdependent reactions to compete within oligopolistic market structures with the added significance of the international or global level at which they are pitched. Pressures to collaborate in order to compete are partially founded on the more risk averse strategy this composes.

The multinational enterprise is essentially the product of modern times. Revolutionary technological advances in communications, transport and production have enabled firms to co-ordinate and configurate their actions across different international locations, partly through being able to adapt to the prevailing factoral and market conditions encountered. The cost competitiveness of producing standardised products and the convergence of international consumption patterns have also proved lucrative. Moreover, expansion into a more global c...

Table of contents

• COVER PAGE
• TITLE PAGE
• COPYRIGHT PAGE
• FIGURES
• TABLES
• BOXES
• PREFACE
• ABBREVIATIONS
• 1. GLOBAL AND REGIONAL INTERDEPENDENCE: THE CONTEXT OF THE EUROPEAN CHALLENGE
• 2. REGIONAL INTEGRATION
• 3. SINGLE MARKET, SINGLE MONEY
• 4. EU ENLARGEMENT
• 5. EUROPE AND THE TRIAD
• 6. EU EXTERNAL TRADE AND TRADE RELATIONS
• 7. INTERNATIONALISATION AND GLOBALISATION
• 8. FOREIGN DIRECT INVESTMENT
• 9. TECHNOLOGY AND INNOVATION
• 10. THE HUMAN DIMENSION
• 11. THE ENVIRONMENT
• REFERENCES