Overview and History of the European Union

European Union on the World Economy

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

Overview and History of the European Union

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Since its inception, the European Union has put forth policies that were less preferential and more ‘balanced’, in regards to trade relations. These policies favor the promotion of economic development through foreign direct investment and private initiatives. This development approach, by the European Union, is similar to the Bretton Woods institutions’ ‘Washington consensus’, which was developed in the latter half of the 1980s, following “several severe balance of payments crises of developing countries” (Nienhaus, 2002, p. 55). The European Union does not favor indiscriminate opening of markets, but rather it looks for more liberal trade arrangements with developing countries and the European Union solely. This policy has been repeatedly criticized by the International Monetary Fund, the World Trade Organization, and World Bank.

The basic philosophy behind this position is that market forces are better able to foster economic development, compared to state intervention. If a developing country has prices which reflect the relative scarcity of goods and services, as well as indicate comparative advantages, these countries will be able to attract foreign investment. This investment will result in a transfer of both capital and technology. As Nienhaus (2002) notes, however, there are some preconditions that must be met.

The macroeconomic environment, according to the European Union, must be stable and predictable. This means inflation should be low. The country should have limited budget deficits. Also, real exchange rates should be stable. Additional preconditions include the removal of price distorting subsidies and regulations. The climate must also be conducive for both domestic and foreign private business. Reforms of commercial and tax laws may need to be made. Privatization and liberalization of the developing country’s financial system should be underway. If these preconditions are met, per the European Union’s policies, external trade liberalization would set effective prices and ensure that the scare resources are allocated efficiently, including especially scarce capital. When the inflow of foreign direct investment is added to the equation, the result should be enhanced production possibilities and exploitation of comparative advantages. As such, the European Union has had a significant effect on the economy of developing countries.

The European Union’s Effect on the Economy of Developing Countries

As Nienhaus (2002) notes the global economy is an interconnected network of both individual nations and regional clusters of countries. These entities are interlinked through cross-border trade of goods and services, as well as movement of production factors, such as labor and capital, as well as financial flows. This interconnectedness began to blossom following World War II, but has been especially vigorous since the 1990s.

The collapse of Communism, along with a global political trend towards deregulation and liberalization, fueled globalization. Of course, there have been other periods in history where internationalization has occurred, such as the Industrial Revolution; however, the globalization that has occurred since the 1990s is markedly different. It wasn’t until approximately two decades ago that the world saw a surge in internationalization through the use of production networks of transnational corporations. According to Nienhaus (2002), this has particularly affected developing countries, specifically through international trade and foreign direct investment. For those developing countries that are more advanced, integration into the global financial system as an ’emerging market’ has also been critical in increasing globalization and has been significantly affected by the creation of the European Union.

The European Union is a significant importer of goods from developing countries. Nienhaus (2002) notes that one fourth of the imports from Latin America’s regional trade organization go to European Union member nations. In addition, “almost 15% of the Asian ASEM countries’ trade is with the European Union” (p. 51). The European Union has adopted policies of openness towards the least developed countries, making them a powerful player in their development. This is accentuated by the strong growth in European Union trade, with these countries, over the years.

Furthermore, the European region traditionally has run payments surpluses, which has made the European Union an important creditor and potential lender internationally, for developing countries. In 1997, according to Nienhaus (2002), 20% of outward stock of the European Union went to developing countries. These primarily included: Argentina, Brazil, China, Malaysia, Mexico, Saudi Arabia, and Singapore. Those receiving the lion’s share of this investment were: China, Brazil, Mexico, and Singapore. However, despite this investment, with the creation of the European Union, the way some developing nations deal with Europe has changed dramatically, resulting in a lost competitive advantage.

The European Union has established a variety of cooperation and association agreements, with developing countries, over the years. This has “led to a very differentiated system of development cooperation” (Nienhaus, 2002, p. 55). Former European colonies in Africa, the Caribbean, and the Pacific (ACP countries) used to have privileged access to the European market, as well as access to financial support under the Lome Convention. However, with the establishment of the European Union, these benefits have eroded, as the transformation economies of Central and Eastern Europe have received similar or even better terms for their market access, through the policies established by the European Union. Other policies such as those aimed at upgrading the development of cooperation with non-European Union countries in the Southern Mediterranean further deteriorates the preferences ACP countries once enjoyed.

As noted, China is one of the largest developing countries receiving foreign direct investment from the European Union. This is not surprising when one considers China’s international merchandise trade expanding at an annual average of 15%, over the last quarter century. This is more than double the global rate, according to Makin (2008). The country’s average annual real GDP growth is approximately an astounding 10%, since the time of Deng Xiaoping’s economic reforms began. Yet, despite the economic power of the European Union, China has been able to negatively affect the European Union’s economy, as well as the global economy.

China’s export grown has outpaced their import growth, since 2000. This has resulted in escalating trade and current account surpluses. As of 2008, Makin (2008) notes that China’s account surplus was at a record 11% of their GDP, and has become a contention point between China and industrial trading partners, such as the European Union, who are experiencing bilateral trade deficits with China. Much of this concern is due to China’s inflexible exchange rate of the yuan. This trade imbalance has resulted in a critical issue for not only the European Union, but the world as well, and demonstrates how despite being a consortium of 27 nations, the European Union is still not all powerful.


The increased globalization that has occurred over the last two decades has forever changed the way economies work. No longer are nations able to fully protect themselves from the effects of other nations economically. This is especially true for large economic forces, such as the European Union. Since 1993, the original 15 nation member conglomerate has grown to 27 countries, expanding from Western Europe further south and east. This powerful economic bloc has had a significant effect on the world’s economy.

When considering global trade, the European Union is one of a Triad of economic powers in the world. Along with the United States and Japan, the European Union is one of the globe’s top exporters, even when one excludes the transnational exportation of goods and services within the borders of the European Union. When it comes to foreign direct investment, the European Union too is a top global competitor. The consortium of countries is one of the world’s leading foreign direct investors, with their outflow of foreign direct investment far surpassing that of their inflow of investment from other countries. These two factors have had a significant effect on the world’s economy by increasing competition and placing a large amount economic power in the hands of the European Union. However, it is developing nations that have been most affected.

Twenty percent of the European Union’s outflow of foreign direct investment has been to developing nations. Countries receiving the largest amount of investment include: China, Brazil, Mexico, and Singapore. However, not all developing nations have been positively affected by the emergence of the European Union. Former European colonies, ACP countries, have lost some of their competitive advantage due to new agreements the European Union has made with other developing countries. In addition, simply because the European Union has significant economic power, it does not mean it has full control of all aspects affecting the global economy, as can be seen in the case of China and the significant trade deficit the European Union has there, while their country has a trade surplus, due in part to the inflexibility of the Chinese yuan. One thing is certain, as the European Union continues to expand, it will increase its economic weight and effect they have on the world economy.


Darby., J. (2009). French antipathy to Turkey’s EU candidacy. Journal of Multilingual & Multicultural Development, 30(3). Retrieved December 8, 2009, from Academic Search Compete database.

European Union. (2009). In Encyclopaedia Britannica. Retrieved December 8, 2009, from Encyclopaedia Britannica Online: http://www.search.eb.com.ezproxy.apollolibrary.com/eb/article-9033265

Hunter, R. & Ryan, L. (2009). Poland, the European Union, and the Euro. Global Economy Journal, 9(2). Retrieved December 8, 2009, from Business Source Complete database.

Maastricht Treaty. (2009). In Encyclopaedia Britannica. Retrieved December 8, 2009, from Encyclopaedia Britannica Online: http://www.search.eb.com.ezproxy.apollolibrary.com/eb/article-9001460

Makin, A. (2008). The inflexible yuan and global imbalances. Global Economy, 8(3). Retrieved December 8, 2009, from Business Source Complete database.

Nienhaus, V. (2002). The European Union in the world economy and implications of EU policies for globalisation efforts of developing countries. Humanomics, 18(1). Retrieved December 7, 2009, from Emerald database.

Schuller, B. & Lidbom, M. (2009). Competitiveness of nations in the global economy. Is Europe internationally competitve? Economics & Management. Retrieved December 8, 2009, from Business Source Complete database.

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