EUROPE ECONOMY

Course Contents

Introduction.
The economy.
Local Institutions and Regional Integration.
The European Union. European Union Enlargement
Country profiles.
Doing Business in Turkey
Doing business in Spain and Poland
Doing Business in Russia
CASE: Beiersdorf. Global Strategy
CASE: Volkswagen. Global Strategy

The primary objective of this module, is to offer a global vision of Europe Economy

Available Languages: . Summary:

Summary

The economy

For the euro area, real GDP is forecast to increase on average by 1.8 per cent. Positive growth in the rest of the world will continue to support exports, which remain the mainstay of growth. This moderate rate of economic expansion will be associated with only small gains in employment. The average annual unemployment rate in the euro area will be 8.9 per cent in 2005, unchanged from 2004. Inflation is expected to fall slightly below the ECB’s 2 per cent threshold.

The stance of fiscal policy is expected to be broadly neutral (possibly even slightly restrictive) both for the euro area and western Europe as a whole in 2005. In view of the fragility of factors of domestic growth and the dampening effects of the stronger euro on domestic economic activity and inflation, monetary policy in the euro area is likely to continue to “wait-and-see”. The ECB is expected to leave interest rates unchanged in 2005, but there is scope for countering a possible weakening of the recovery by lowering interest rates, particularly as the stronger euro will dampen imported inflation.

For western Europe as a whole, the annual rate of economic growth will be some 2¼ per cent, reflecting the slightly stronger growth momentum in countries outside the euro area. Among the four major west European economies, average annual growth will remain significantly below 2 per cent in Germany and Italy. Economic activity is expected to be stronger in France and the United Kingdom, with real GDP increasing by nearly 2 per cent and by 2.5 per cent, respectively.

The average annual rate of economic expansion in the European Union (EU-25) will be 2.2 per cent i, masking significantly stronger growth in the aggregate of the ten new member States compared to the EU-15.

Economic growth should remain strong in central Europe and the Baltic States (EU-8). Although GDP growth has started to decelerate in the EU-8 countries, recent economic sentiment indicators suggest a favourable short-term outlook. In 2005, the average rate of growth in the EU-8 may slow down somewhat compared with 2004 but, at some 4½ per cent, will remain considerably above the average of western Europe (table 1). A noticeable surge in greenfield FDI projects should accelerate the ongoing process of restructuring and boost exports. Further fiscal consolidation is envisaged in some countries in 2005 but its dampening effect on domestic demand should be marginal.

Most of the south-east European economies are also set to maintain strong rates of growth in 2005 but the unusually high rates achieved in some countries in 2004 will be difficult to sustain. Overall, domestic demand is set to remain buoyant, and should provide solid support to economic activity in these countries. Better financial intermediation and rapid credit expansion will continue to fuel demand and output growth. In the event, real GDP is forecast to increase by somewhat more than 5 per cent in 2005 compared with the preceding year (table 2). If Turkey is excluded from the regional aggregate then the average annual growth rate will be slightly lower. However, given the ongoing enterprise restructuring in many parts of the region the increases in employment are likely to be small.

Economic activity in the CIS as a whole may lose some steam in 2005, but aggregate GDP is nevertheless expected to expand by some 6.5 per cent (table 2). Decelerating growth rates will prevail in all the large CIS economies – Belarus, Kazakhstan, Russia and Ukraine – following the evolution of external factors such as commodity prices and demand in the region’s main markets. Domestic demand in the CIS should generally remain buoyant but its effect on domestic economic activity will depend on the responsiveness of domestic supply. The macroeconomic policy stance should remain broadly neutral in the large economies, with the possible exception of Ukraine where some fiscal tightening can be expected. While in the short run there may be some further improvement in the labour markets, many CIS economies still have to address the challenge of restructuring as labour adjustment has in general been lagging behind that in output.

Local Institutions and Regional Integration.

The European Union (EU) has grown in size with successive waves of accessions. Denmark, Ireland and the United Kingdom joined in 1973 followed by Greece in 1981, Spain and Portugal in 1986 and Austria, Finland and Sweden in 1995. Ten new countries are joining the European Union : Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic and Slovenia. A new era of opportunity begins for Europe. 450 million people in 25 countries can now build their future together, united in peace, freedom and democracy. Bulgaria and Romania expect to follow a few years later and Turkey is also a candidate country.

It is now the world's biggest single market, in population terms, though the North American Free Trade Agreement remains larger in terms of economic might.

In Copenhagen on 13 December 2002, the European Council took one of the most momentous steps in the entire history of European unification. It decided to welcome 10 more countries to join the EU on 1 May 2004. In taking this decision, the European Union was not simply increasing its surface area and its population. It was putting an end to the split in our continent - the rift that, from 1945 onwards, separated the free world from the Communist world. So this fifth enlargement of the EU has a political and moral dimension.

The European Bank for Reconstruction and Development was established in 1991 when communism was crumbling in central and eastern Europe and ex-soviet countries needed support to nurture a new private sector in a democratic environment. Today the EBRD uses the tools of investment to help build market economies and democracies in 27 countries from central Europe to central Asia. The EBRD is the largest single investor in the region and mobilises significant foreign direct investment beyond its own financing. It is owned by 60 countries and two intergovernmental institutions. But despite its public sector shareholders, it invests mainly in private enterprises, usually together with commercial partners.

The Central European Initiative (CEI) is composed of 17 Member States: Albania, Austria, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, the Czech Republic, Hungary, Italy, Macedonia, Moldova, Poland, Romania, Serbia and Montenegro, Slovakia, Slovenia and Ukraine. They embrace a territory of 2.4 million square kilometres and a population of nearly 260 million. As of 1st May 2004, the CEI has 7 EU and 10 non-EU Member Countries

European Free Trade Association (EFTA) is an intergovernmental organisation promoting free trade and strengthening economic relations. EFTA’s Member States are Iceland, Liechtenstein, Norway and Switzerland. The EFTA Secretariat supports the Member States in managing the EFTA free trade area, the EFTA participation in the European Economic Area (EEA) and EFTA's network of free trade agreements. The EFTA Secretariat is headquartered in Geneva, with an Office in Brussels, and a Statistical Office in Luxembourg.

UNITED NATIONS ECONOMIC COMMISSION FOR EUROPE UNECE. The United Nations Economic Commission for Europe (UNECE) is one of the five regional commissions of the United Nations. It is the forum where the countries of western, central and eastern Europe, central Asia and North America – 55 countries in all – come together to forge the tools of their economic cooperation. That cooperation concerns such areas as economics, statistics, environment, transport, trade, industry and enterprise development, sustainable energy, timber and habitat.

Council of the Baltic Sea Status CBSS. The Council of the Baltic Sea States was established at a conference of the foreign ministers of Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Norway, Poland, Russia, Sweden and a member of the European Commission in Copenhagen in March 1992. Iceland joined the CBSS in 1995.