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Saturday, Sept. 24, 2005
EU economic integration rolls on despite political crisis
Problems posed by enlargement spur reforms that will make bloc stronger
After voters in France and the Netherlands rejected the proposed European Union Constitution, the bloc no doubt plunged into a deep crisis, but it is a crisis that will lead to "a period of reflection and a stronger European Union at the end," a Brussels-based think tank expert told a recent symposium in Tokyo.
"We've had many crises before," Fraser Cameron, director of studies at the European Policy Center in Brussels, said. He stressed how Europe over the past five decades has achieved what many scholars and experts doubted would ever be achieved, including market integration and a single currency.
Still, it will take at least two to three years before the EU can revive the troubled constitution treaty, Cameron told the Sept. 6 symposium at Keidanren Kaikan, organized by Keizai Koho Center under the theme, "The EU -- the New Superpower?"
Just over a year after its membership was expanded to 25 by incorporating 10 East European countries, the EU was thrown into crisis in June when it was forced to postpone the deadline for ratifying the constitution until 2007, just after it was rejected in French and Dutch referendums.
Also, EU leaders failed to agree on a long-term budget during their summit meeting also in June, threatening the enlarged bloc with financial paralysis on top of the political crisis over the constitution.
Cameron said the enlargement to 25 member states created the need for change.
"Any organization that almost doubles in size needs to have changes. This was why we tried to have a new constitutional treaty, to make this enlarged EU more democratic, more legitimate, and to ensure that it continue to be efficient with 25 member states," he told the audience.
Cameron explained how the entry of 10 new members -- many of them small former Soviet bloc-states -- increased the EU territory by one-third and its population by one-third but boosted the region's gross domestic product by a mere 5 percent.
"One of the problems that we face as a result of the enlargement was the very different standards in terms of economic performance and political background" between the 10 new members and the 15 old members, he said.
"The enlargement was very much an elite-driven process in Western Europe. The political leaders failed to explain the importance of enlargement to our population, failed to tell them the advantages in terms of security, improved economic prospect and dealing with the big issues like the environment," Cameron said.
"There was a lot of angst and fear among ordinary citizens about the impact of 100 million new citizens joining the EU -- many of whom were working for far lower wages than Western Europe. This was an important factor in the 'No' vote in France and the Netherlands."
And while the decision at the EU summit in June to postpone the ratification deadline was an attempt to keep the constitution alive, Cameron said he thinks the treaty, agreed upon by an EU summit in June 2004, is now "dead."
The constitution was designed to "make the EU more effective, more visible on the international stage by having an EU foreign minister, by making decision-making easier by taking more majority voting, and also simplifying all the previous treaties . . . into one single treaty," he said.
Such steps will continue to be important, and some of its provisions may be revived in another way, "but I think it will take some time," Cameron told the audience.
"I think we will have to wait at least two or three years, until we have a change of leadership in the major countries (such as Germany, France and Britain), and then we will try and see if we can revive the treaty when the new leadership is in place," he said.
Cameron also acknowledged that today's young Europeans, who take the various benefits brought about by successful integration for granted, need to be convinced of the merits of and the urgency of further integration.
"It's quite easy to convince businesspeople of the benefits of integration, but if you are an unemployed worker in France, you are really worried about competitIon from the east. Trying to explain the benefits of this continuing integration process is quite difficult, and so we have to think of new ideas, new reasons and keep on stressing the importance of integration," he said.
Economy on track
Despite the political crisis over the constitution, Europe remains on track economically, Martin Schulz, senior economist with Fujitsu Research Institute, told the same symposium.
The political stalemate does not mean the economic integration of Europe has stopped, the German scholar said. "On the contrary, important structural reforms in the member countries, from labor market reforms to tax reforms, have just started," he said.
While the EU is unlikely to produce major breakthroughs in terms of integration over the coming years, it is likely to become a much better environment for European as well as foreign companies, Schulz predicted.
"From a corporate point of view, the most important development is that an EU-wide rationalization process with low production costs (in Eastern and Southern Europe) and diverse economic growth centers all over Europe have started," he said.
Along with this process, tax competition and structural reforms among member states have now started in earnest, he added.
Schulz noted how the Maastricht Treaty of 1993 -- which transformed the former European Community into the European Union -- pushed the member states to put their house in order, serving as a European way of "gaiatsu" (outside pressure) to internal structural reforms by each government. "The governments have now lost much of their ability to delay market reforms through expansionary monetary and fiscal policies," he said.
The new member states that entered the EU in 2004 had launched an "unprecedented race of economic reforms" in their bid to join the union, Schulz said. They are now "much more focused on economic reforms than the old member states, and they compete heavily for investments that can add to their development process," with tax policy as their key tool for the competition, he noted.
Schulz acknowledged that the enlargement has made intergovernmental negotiations in Brussels "extremely complicated and inefficient."
Since efforts to introduce majority decision-making rules in the European Council and shift more power to the European Parliament will take time, the EU will rely more on initiatives from each of its regions and corporations which, thanks to the already achieved integration and political stability, can now rationalize Europewide production networks with much less political interference, he explained.
Today, it is Eastern Europe that is really pushing reforms within the EU and is pushing other members, including advanced economies like Germany, to become more competitive as well, he said.
Since the mid-199Os, many of the countries in the region have sold much of their banking sectors to major banks in Western Europe, Schulz said, noting that, for example, 89 percent of banks in Czech Republic are now owned by foreign firms.
Tax reforms in Slovakia have been the most radical in Europe, with its tax rates -- among the highest in Europe in 1995 -- having been cut to a flat 19 percent for corporate, personal income and value-added taxes, according to Schulz.
These reforms have made Eastern Europe one of the world's fastest-growing destinations of foreign direct investment, he said. In the Czech Republic, for example, Japan is now the second-largest foreign investor after Germany, he added.
"As a result, production networks all over Europe are developing now, because there are diverse regions and diverse chances. You can produce effectively with low wages and with high skill levels in Eastern Europe and then export to the entire European market with no barriers," Schulz noted.
No such ambition
On the symposium's key theme -- whether the EU will be the next superpower -- Cameron said it will never be a superpower like the United States.
True, the EU today has a total population of 450 million and a combined GDP as big as the U.S., and it is the biggest trading bloc as well as the largest provider of development aid in the world, he said. Still, it is never going to be a military superpower, he said.
The European Union is trying to exercise global leadership, for example, by taking a leading role in pushing the Kyoto Protocol against global warming and in setting up the International Criminal Court, he said.
Cameron predicted that EU membership could expand to 30 to 35 states in the next 10 years. At the same time, he acknowledged that the current 25 members are not equal, for example, in terms of diplomatic influence.
"Some states are more important than others. Some states are more experienced and have more capacity. For example, Britain, France and Germany together have been negotiating with Iran -- one of the key international security issues -- with the support of the U.S.," he noted.
To conclude, Cameron described Europe as "a rather strange superpower slowly and steadily increasing its influence on the world stage, even though there are still many uncertainties on the political and economic front."
"I don't think we will see any major institutional changes in Europe during the next three years until we get a new leadership (in key member states). . . . But I think the European Union has become a relatively predictable power in international relations, standing for multilateral support, offering a different global view than the U.S.," he said.
"I think if you look at global public opinion, that model of the EU as a soft power is increasingly accepted and could very well be a model also for future developments in Asia," he added.
Schulz also said the EU will never be an "integrated nation-state" that would have the power to punish individual members, for example, for noncompliance with the Maastricht Treaty criteria on their fiscal health.
It is rather the market forces -- the big European market -- from which the member states cannot escape, Schulz told the audience.
"Now markets in Europe are really working. . . . They put pressure on the governments and this will continue. So basically, it is not the European Commission or any regulations in the EU that will control the economic performance and policies of the member states," he said.