Issues In European Economics
Length: 1992 words (5.7 double-spaced pages)
Economic integration between national countries can be defined as the removal of trade obstacles in the production and movement of goods between these countries. Integration does not stop there as furthermore common policies are introduced. Along with these policies comes governing bodies over these policies editing and modifying to better the collective group.
Integration between countries can be absolutely essential for survival in the world market. Over the past 50 years, superpowers like America and China have been dominating markets due to their huge supply of labour and other resources. Smaller countries did not have the capital nor the reputation to compete against these big firms. On top of that, the firms that raised enough capital to venture into foreign markets were hit with large trade tariffs and quotas, set by individual governments.
This effectively made profitable foreign projects almost impossible.
When the European Union was officially constituted in 1992 by the Treaty on European Union, a whole new means of national co-operation was set to pass. Certain aspects of today’s current European Union existed even before this Union was formed, however now an official and respected body has been formed to govern many economical areas with efficiency. This integration mainly focused on economic growth and prosperity.
A main activity of the EU is first the establishment and then after the administration of a collective single market, which effectively eliminates trade barriers between member states. Customs Unions, Common Agricultural Policies and other policies are then set up as part of this market. Some have adopted a single currency policy (The Euro).
The European Union offered many more equal opportunities for firms, which was only one of many benefits it offers;
• Improved Competition leads to more efficient work methods and cost reductions.
• Removed trade barriers allow improved location opportunities for a company. Also offers free movement of labour, goods and services.
• A common system of taxation and also a fixed exchange rate to most members.
• Companies can exploit other economies which may have a high demand for a particular product.
• More firms working together which contributes to technological improvements.
• Company growth will occur more rapidly.
• A closer step to obtaining a Common Procurement Policy.
• A common set of rules and regulations governing production, employment and trade.
The EU board can opt to exclusively offer their tariff free priced goods to members. This is known as Preferential Trading.
Prior to the European Union’s formation there was a diverse range of prices and costs between EU states concerning the agricultural market. “The average variation from EC mean price without indirect taxes in 1985 was 15% consumer goods and 12 % capital goods,” (pg 113 – The European Union) which shows the big difference between European prices.
Agriculture manufacturers within the EU all have to comply with their Common Agricultural Policy (CAP). This is effectively a set of rules governing the movement of products. Agricultural goods that are produced throughout the European Union are set with a minimum selling price. This amount ensures that the goods will not be sold below this specific price. It is known as a floor price. This value per unit of the goods in question will always be higher than that of the equilibrium price, and as a result surplus goods will be produced.
A surplus of agricultural goods has benefits and drawbacks. The benefits of this CAP are that there are always sufficient food stockpiles in case of famine, prices of goods are stabilized and by offering farmers a stabile and often increasing wages they subsequently re-invest in the market area creating growth. These surpluses contribute to reducing world famine as they are often given as aid.
After these benefits come the drawbacks. To keep a stabile floor price the intervention board of the EU has to occasionally buy goods to ensure more demand. Storing this excess stock can prove costly. “Each year around £80 per head of the EU population” (pg 75 – Essentials of Economics) is spent on storing these excess foods. Another problem is that firms often are left with surplus goods which they illegally try to sell their goods off at cheap prices. A big portion of all this excess food is sold off to third world countries.
EU Subsidised food stocks sold to countries create many problems. Local farmers find competing against the subsidised food almost impossible. Local food exporters may also suffer as other countries would much rather have the cheaper European stocks. This leads to insufficient investment in the market and more rural farmers move to crowded cities where they are not needed.
Manufactured goods throughout the European Community, like in the Agricultural market, have a customs union with a common external tariff. This is essential as in the manufactured goods section there is a wider range of diversity between the products that are on sale. The manufacturing industry has more products, and so more prices and more compatibility problems. By 1985 a supposed ‘integrated market’ was in operation but in truth it was far from it. The EC recognized this and in 1992 they brought the ‘Common Market’ program into action. This was considered a huge leap towards European integration.
This program promoted integration and made it easier. The main reasons that this program advanced the manufacturing market were that more trade was occurring between the EC states and so more money was being re-invested into the market. More and more prices were converging towards a common market price and companies were obtaining better locations for their production. The increased competition contributes to a converged price as it provokes companies to find cheaper ways of producing their product. They will also always be some compatibility problems that cannot be ironed out through a market policy, like different plug sockets in different countries, however the European Union has improved manufacture markets on a whole significantly.
Government Procured Goods
Government procured goods is works, supplies and services provided by national, regional or local bodies. It is a broad sector and must financially support these services. The EU alone spends £500 billion a year on these areas. Problems occur when a biased procurement contract is passed. This means that a government will choose a contract from a domestic supplier, when purchasing something like military equipment, over a more affordable and competitive price abroad. The EU is getting ever closer to eradicating this special treatment and perfecting a Common Procurement Policy.
After looking into the EU’s markets it is now time to assess a specific country and its economy, then compare it to that of the EU. The nation I have chosen is Germany.
World War 2 had no greater affect on one economy than that of the German Economy. Prior to it, the economy was strictly run through state intervention and domination. The main goals of the new economy were to make an equal economy that not only helps the rich but the poor also. They sought for a social market. The economy is very structured and directed however there is one governing body. The Economy tries to remain competitive with rules over monopolistic tendencies. Now the German Economy is the 5th largest nation economy in the world.
The German Economy can be described in two parts. First of all the German Economy is conservative in that it still uses some of its old traditions with state roles in the economy. They are not big risk takers and they are cautious when concerning investment. The other side argues that the German Economy is dynamic as it is heavily geared toward growth.
The German government is part of the EU, but it insists on making its own decisions when it comes to domestic problems. They support supranationalism which is a form a convergence between bodies, however they wish to remain with power. Other countries that support this means of integration are France and Italy. Although more efficient and competitive economies are present in Europe, Germany opts to turn to tradition when concerning the traditional industries weighing down the economic growth.
German Agriculture is the smaller of the markets. Compared to its industry sector it is not as strong. It contributes only a small part of the nations GDP which is very different in other European countries such as Spain. Both the EU’s CAP and their own government heavily subsidise the food, leaving little profit if sold.
The German industry sector is very good at processing and has been renowned as this for many years. It is home to such big firms as Siemens. It is the largest market sector by far and contributes 38 % of the GDP. The German Economy is well known for its extremely efficient smaller firms, that do not offer the diversity of some companies but offer second to none quality. They produce specialized goods of all varieties, such as chemicals and electrical products.
Also in Germany there is less taxation on consumer goods than there is in other EU members For instance on an E class 220 CDI Mercedes;
• In Germany the cost of the car before tax was $33250 and after tax was $38570 (38570 – 33250 = 5320). Therefore the tax is $5320 or 16 %.
• In Spain the cost of the car before tax was $33483 and after tax was $42858 (42858 – 33483 = 9375). Therefore the tax is $9375 or 28 %.
This shows a drastic contrast in taxation.
The sector is among the world’s largest and advanced producers of iron, steel, coal, cement, chemicals, vehicles and electronics. It’s the world’s leader of brown coal production. The production of hard coal is slowly being reduced as high costs and increasing subsidies.
Germany is a very traditional and patriotic country and this has an knock on effect with contracts regarding the government. The EU works towards a Common Procurement Policy, however obtaining this is near impossible. Germany still elects its favored companies over the more competitive and efficient companies, which causes problems. Also provides a large amount of electricity to Europe.
Germany spent $38.8 billion on defense in 2002. That was 1.4% of its GDP. Germany takes particular interest in their military forces and are members of the UN peacekeeping force. 63.8 % of the labor workforce work in the services sector.
Reducing food stockpiles to minimal levels to reduce wasted national income on storage and decay. Also this would provide smaller foreign firms the chance to increase their production/sales, with less of the population eating from the subsidised stock. In turn the firms would invest into the market providing desperate income for their country. This would diversify the market by opening new areas with which comes new jobs.
After identifying the problem with byist government purchases, a new stricter approach could be formatted to prevent them. This would ensure the best company is rewarded and ensures a efficient competitive environment between companies. Germany are renowned for their favoritism and particular attention should be paid to them.
Better public surveys should take place so that a better understanding of what the European Society on a whole would like to be seen done to improve integration. This would give integration policies a better idea of what direction to head in.
Often transactions between countries can take a long time to be complete and so better procedures and methods could be used in ports and customs.
• Sloman J (2004) Essentials of Economics, Third Edition. Essex England. Pearson Education Ltd.
• Nello SS (2005) The European Union; Economics, Policies and History. New York USA. McGraw-Hill Publications (UK) Ltd.
(A website entirely dedicated to information on German Culture)
(A large website with broad information on every world country)
(Like the previous website, this offers information on many different countries)
(Nice small personal website with information on Germany)
(European Car Sales Report, giving exact figures)
(A website highlighting information about different countries)