Economy of Europe

The economy of Europe comprises more than 710 million people in 48 different states. Like other continents, the wealth of Europe's states varies, although the poorest are well above the poorest states of other continents (except Australia) in terms of GDP and living standards. The difference in wealth across Europe can be seen in a rough East-West divide. Whilst Western European states all have high GDPs and living standards, many of Eastern Europe's economies are still emerging from the collapse of the Soviet Union and former Yugoslavia. Throughout this article "Europe" and derivatives of the word are taken to include selected states that are geographically in Asia, bordering Europe - such as Azerbaijan and Cyprus.

Europe's largest national economy is that of Germany, which ranks third globally in nominal GDP, and fifth in purchasing power parity (PPP) GDP; and its second is that of the United Kingdom, which ranks fifth globally in nominal GDP and sixth in PPP GDP. If the European Union was a country it would be the world's largest economy - see List of countries by GDP (PPP).

Economic development

Pre-1945: Industrial growth

Prior to World War II, Europe's major financial and industrial states were the United Kingdom, France and Germany. The Industrial Revolution, which began in Britain, had spread rapidly across Europe, and before long the entire continent was at a high level of industry. World War I had briefly led to the industries of some European states stalling, but in the run-up to World War II Europe had recovered well, and was competing with the ever increasing economic might of the United States of America.

However, World War II caused the destruction of most of Europe's industrial centres, and much of the continent's infrastructure was laid to waste.

1945-1990: The Cold War era

Following World War II, European Government was in tatters. Many Western European governments moved to link their economies, laying the foundation for what would become the European Union. This meant a huge increase in shared infrastructure and cross-border trade. Whilst these Western European states rapidly improved their economies, by the 1980s, the economy of the COMECON was struggling, mainly due to the massive cost of the Cold War. The GDP and living standard of Eastern European states were also behind those of their Western neighbours. Even free-market Greece, situated in South-Eastern Europe, struggled due to geographical isolation from Western Europe.

The European Community grew from 6 original members following World War II, to 12 in this period. The emphasis placed upon resurrecting West Germany's economy led to it overtaking the UK as Europe's largest economy.

The rise of the EU

When communism collapsed in Eastern Europe and the USSR around 1991, these states struggled to adapt to free-market systems. There was, however, a huge variation in degrees of success, with Central European states such as Hungary, Slovenia and Poland adapting reasonably quickly, whilst post-Soviet states such as Russia and Ukraine struggled to reform their crumbling infrastructures.

"Western Europe" was quick to develop economic ties with the newly democratic East. While the former Soviet states dealt with change, Yugoslavia descended into civil war.

Europe's largest economy, Germany, struggled upon unification in 1991 with former communist East Germany. The Russian controlled Eastern part of the country had had much of its industrial infrastructure removed during the Cold War, and for many years the West struggled to build the East up to an equal level.

Peace did not come to Yugoslavia for a decade, and by 2003, there were still many NATO and EU peacekeeping troops present in Bosnia and Herzegovina, Macedonia, and Kosovo. War severely hampered economic growth, with only Slovenia making any real progress in the 1990s.

The economy of Europe was by this time dominated by the EU, a huge economic and political organization with then 15 of Europe's states as full members. EU membership was seen as something to aspire to, and the EU gave significant support and aid to those Central and Eastern European states wishing to work towards achieving economies that met the entry criteria. During this time, 12 of the 15 members of the EU became part of the Eurozone, a currency union launched in 1999, whereby each member uses a shared currency, the Euro, which replaced their former national currencies. Three states chose to remain outside the Eurozone and continue with their own currencies, namely Denmark, Sweden and the United Kingdom.

2004-2007: EU expansion

In early 2004, 10 mostly former communist states joined the EU in its biggest ever expansion, enlarging the union to 25 members, with another eight making associated trade agreements. The acceding countries are bound to join the Eurozone and adopt the common currency Euro in the future. The process includes the European Exchange Rate Mechanism, of which some of these countries are already part.

Most European economies are in very good shape, and the continental economy reflects this. Conflict and unrest in some of the former Yugoslavia states and in the Caucasus states are hampering economic growth in those states, however.

In response to the massive EU growth, in 2005 the Russian dominated Commonwealth of Independent States (CIS) created a rival trade bloc to the EU, open to any previous USSR state, (including both the European and Asian states). 12 of the 15 signed up, with the three Baltic states deciding to align themselves with the EU. Despite this, the three Caucasus states have said in the past they would one day consider applying for EU membership, particularly Georgia. This is also true of the Ukraine since the Orange Revolution.

Regional variation

West Europe, with a long history of trade, a free market system, and a high level of development in the previous century, has been wealthier and more stable than the East, even though the gap is converging due to higher growth rates in the East.

The poorest states are those that just emerged from communism and civil wars, namely those of the former Soviet Union and Yugoslavia excluding Slovenia. But also West Europe itself presents some differences, especially between Northern countries (Scandinavia, UK, Ireland, most of Germany) and Southern countries.

European Union

The European Union or EU is a supranational union of 27 European states, the most recent acceding members being Romania and Bulgaria, who became full members in January 1, 2007. It has many activities, the most important being a common single market, consisting of a customs union, a single currency (adopted by 15 of the 27 member states), a Common Agricultural Policy and a Common Fisheries Policy. The European Union also has various initiatives to co-ordinate activities of the member states.

The European Union has the largest economy in the world. The EU economy is expected to grow further over the next decade as more countries join the union - especially considering that the new States are usually poorer than the EU average, and hence the expected fast GDP growth will help achieve the dynamic of the united Europe. It is estimated that the Eurozone will grow around 2.6 per cent this year (2006) [http://www.eubusiness.com/Finance/061106110526.c9tkks7c] , on a par with other industrialized nations such as the United States at 2.6% (Q2 2006) and 1.6 (Q3 2006) [http://bea.gov/bea/glance.htm] .

The union has evolved over time from a primarily economic union to an increasingly political one. This trend is highlighted by the increasing number of policy areas that fall within EU competence: political power has tended to shift upwards from the Member States to the EU.

European Free Trade Association

The European Free Trade Association (EFTA) was established on 3 May 1960 as an alternative for European states that did not wish to join the European Union, creating a trade bloc with fewer central powers.

Today only Iceland, Norway, Switzerland and Liechtenstein remain members of EFTA, as the other members have gradually left to join the EU.

European Economic Area

The European Economic Area (EEA) came into being on 1 January 1994 following an agreement between the European Free Trade Association (EFTA) and the European Union (EU). It was designed to enable EFTA countries to participate in the European Single Market without having to join the EU.

In a referendum, Switzerland (ever keen on neutrality) chose not to participate in the EEA (although it is linked to the European Union by bilateral agreements similar in content to the EEA agreement), so the current members are the EU states plus Norway, Iceland and Liechtenstein.

A Joint Committee consisting of the non EU members plus the European Commission (representing the EU) has the function of extending relevant EU Law to the non EU members.

Commonwealth of Independent States

The Commonwealth of Independent States (CIS) is a confederation consisting of 12 of the 15 states of the former Soviet Union, (the exceptions being the three Baltic states). Although the CIS has few supranational powers, it is more than a purely symbolic organization and possesses co-ordinating powers in the realm of trade, finance, lawmaking and security. The most significant issue for the CIS is the establishment of a full-fledged free trade zone / economic union between the member states, to be launched in 2005. It has also promoted co-operation on democratization and cross-border crime prevention.

Central European Free Trade Agreement

The Central European Free Trade Agreement (CEFTA) is a trade bloc of former Communist countries in central and eastern Europe. The countries that participated and the few that continue to participate in CEFTA have used this form of integration to help them prepare for full membership in the European Union.

Currency and Central Banks

The most common currency within Europe is the euro, the currency of the European Union. To join, each new EU member must meet certain criteria, when these are met their own currencies will be replaced by the euro. Becoming a member of the EU involves a pledge to work towards Eurozone membership, (except in the cases of the United Kingdom and Denmark who have opt-outs). Currently, 15 of the 27 EU member states use the euro. Each EU member's central bank is part of the European System of Central Banks, and in addition, those that use the euro are part of the European Union's central bank, the European Central Bank.

There are some non-EU members who have elected to use the euro as their national currency, either with or without specific agreements with the EU to do so, (those with agreements with the EU may mint their own euro coins). The French overseas territories and departments of Mayotte and Réunion in the Indian Ocean, Guadeloupe and Martinique in the Caribbean and French Guiana in South America all use the euro, among many other islands in the Pacific, Caribbean and indeed around the globe that are ruled directly by European countries.

Some countries while maintaining their own national currency have pegged its value to the euro. In some of these countries, there is a fixed exchange rate between the national currency and the euro and in this case the currency is actually a submultiple of the euro. In other countries, the national currency's value fluctuates within a band (generally 15%) around a set rate. Currencies pegged to the euro include the currencies of Bulgaria, Estonia, Lithuania, Bosnia and Herzegovina and Cape Verde. Denmark, Latvia, and Slovakia have a foreign exchange band tied to the euro.

The CIS is also planning to introduce a single currency among its members.

Below is a list of the central banks and currencies of Europe, with exchange rates between each currency and both the "euro" and "US dollars" as of 17 November 2004.

¹ Whilst most of Serbia uses the Dinar, the Euro is the official currency in the autonomous Kosovo region and is the currency primarily used.

Table correct as of 17 July 2005

tock exchanges

There are many stock exchanges within Europe.

* Pan-European:
** Euronext
** OMX
* Austria:
** Wiener Börse
* Belgium:
** Euronext Brussels
* Bosnia and Herzegovina
** Sarajevo Stock Exchange
** Banja Luka Stock Exchange
* Bulgaria:
** Bulgarian Stock Exchange
* Croatia:
** Zagreb Stock Exchange
** Varaždin Stock Exchange
* Cyprus:
** Cyprus Stock Exchange (CSE)
* Czech Republic:
** Prague Stock Exchange (PSE)
* Denmark:
** Copenhagen Stock Exchange (KFX) (part of OMX)
* Estonia:
** Tallinn Stock Exchange (part of OMX)
* Faroe Islands:
** Faroese Securities Market, in cooperation with Iceland Stock Exchange
* Finland:
** Helsinki Stock Exchange (part of OMX)
* France:
** Euronext Paris ("La Bourse de Paris") (CAC40)
* Georgia
** Georgian Stock Exchange (GSE)
* Germany:
** Frankfurt Stock Exchange (part of Deutsche Börse) (DAX)
* Greece:
**Athens Stock Exchange (General)
* Hungary:
** Budapest Stock Exchange (BSE)
* Iceland:
** Iceland Stock Exchange (Kauphöll Íslands)
* Ireland:
** Irish Stock Exchange (ISEQ)
* Italy:
** Borsa Italiana
* Latvia:
** Riga Stock Exchange (part of OMX)
* Lithuania:
** Vilnius Stock Exchange (part of OMX)
* Luxembourg:
** Luxembourg Stock Exchange
* Macedonia:
** Macedonia Stock Exchange
* Malta:
** Malta Stock Exchange
* Montenegro
** Montenegro Stock Exchange
* Netherlands:
** Euronext Amsterdam
* Norway:
** Oslo Stock Exchange
* Portugal:
**Euronext Lisbon
* Poland:
** Warsaw Stock Exchange (WSE)
* Romania:
** Bucharest Stock Exchange (BVB - Bursa de Valori Bucureşti)
** Rasdaq
* Russia:
** Moscow Interbank Currency Exchange (MICEX)
** RTS Stock Exchange
* Serbia:
** Belgrade Stock Exchange (BELEX)
* Slovakia:
** Bratislava Stock Exchange (BSSE)
* Slovenia:
** Ljubljana Stock Exchange (LJSE)
* Spain:
** Madrid Stock Exchange (IBEX 35)
* Sweden:
** Nordic Growth Market
** Stockholm Stock Exchange (part of OMX)
* Switzerland:
** SWX Swiss Exchange
* Turkey Turkish Republic
** Istanbul Stock Exchange (ISE)
* Ukraine:
** PFTS Ukraine Stock Exchange
** Ukrainian Stock Exchange
* United Kingdom:
** Alternative Investment Market (AIM)
** London Stock Exchange (LSE) (FTSE)

Economic sectors

Agriculture and fishing

Europe's agricultural sector is general highly developed, especially in Western Europe. The process of making Eastern Europe's agriculture more Western is well underway and is helped by the accession of Eastern European states to the EU. The agricultural sector in Europe is helped by the Common Agricultural Policy (CAP), which provides farmers with a minimal price for their products and subsidizes their exports, which increases competitiveness for their products. This policy is highly controversial as it hampers free trade worldwide (protectionism sparks protectionism from other countries and trade blocs: the concept of trade wars) and is violating the concept of "fair trade". This means because of the protectionist nature of the CAP, agricultural products from developing countries are rendered incompetitive in both Europe (an important export market for developing countries) and on theirhome markets (as European agricultural products are dumped on developing countries' markets with help from European agricultural subsidies). This controversy surrounds every system of agricultural subsidies (the United States' policy of subsidizing farmers is also controversial). The CAP is also controversial because 40% of the EU's budget is spent on it, and because of the overproduction caused by it.

The Common Fisheries Policy is surrounded by an extensive system of rules (mainly consisting of quotas) to protect the environment from overfishing. Despite these rules, the cod is becoming increasingly rare in the North Sea. Strict fishing rules are the main reason for Norway and Iceland to stay out of the European Union (and out of the Common Fisheries Policy). Price guarantees and subsidizations of fishermen are implemented in the same way as agricultural subsidies are.

Manufacturing

Europe has a thriving manufacturing sector, with a large part of the world's industrial production taking place in Europe. Most of the continent's industries are concentrated in Western Europe (mainly in the zone that comprises parts of the UK, the Benelux, western Germany, northeastern France, Switzerland, and northern Italy). However, because of the higher wage level and hence production costs, Western Europe is suffering from deindustrialization and offshoring in the traditional (labour intensive) manufacturing sectors. This means that manufacturing has become less important in Western Europe and that jobs are moved to cheaper regions (mainly China and Eastern Europe).

Eastern Europe has been industrialized since the early to mid 20th century but suffered from contraction in the 1990s when the inefficient heavy industry based manufacturing sector crippled after the collapse of communism and the introduction of the market economy.In the 21st century the manufacturing sector in Eastern Europe picked up because of the accession of Eastern European states to the EU and resulting accession to the European Common Market. This caused Western European firms to move jobs from their manufacturing sector to Eastern Europe (see above), which sparked Eastern European industrial growth and employment.

Some of the world's largest manufacturers are European, such as British Petroleum, Royal Dutch Shell, Daimler, Total, Volkswagen, Unilever and Philips. The main products in European industry are automobiles, chemical goods, food, clothing and electronics.

Investing and banking

Europe has a well developed financial sector. Many European cities are financial centres with the City of London being the largest. The European financial sector is helped by the introduction of the euro as common currency. This has made it easier for European households and firms to invest in companies and deposit money on banks in other European countries. Exchange rate fluctuations are now non-existent in the Eurozone. In Eastern Europe, the financial sector is somewhat less developed (mostly because of the communist legacy), but is rapidly developing towards Western European standards. The financial sector in Eastern Europe is helped by economic growth in the region and the commitment of Eastern European governments to achieve these high standards.

European banks are amongst the largest and most profitable in the world (Deutsche Bank, UBS, HSBC, Royal Bank of Scotland, HBOS, BNP Paribas, Unicredit, Banco Santander).

Global trade relations

The bulk of the EU's external trade is done with the United States of America, Brazil, China, [ As regards the EU-China trade relations, see [http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=629289 Paolo Farah] (2006) [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=916768 Five Years of China’s WTO Membership. EU and US Perspectives on China’s Compliance with Transparency Commitments and the Transitional Review Mechanism,] Legal Issues of Economic Integration, Kluwer Law International, Volume 33, Number 3, pp. 263-304. ] India, Russia and non-member European states.

EU members are represented by a single official at the WTO.

The EU is involved in a few minor trade disputes. It had a long running dispute with the USA of allegedly unfair subsidies the US government gives to several companies, such as Boeing. There is also a dispute with China over textile exports, and the EU has a long running ban prohibiting arms trade with the Chinese.

ee also

*Commonwealth of Independent States
*Euro
*Europe
*European Economic Area
*Free trade areas in Europe
*European Free Trade Association
*Central European Free Trade Agreement
*European Union
*History of Europe
*Industrial Revolution
*List of European countries by GDP
*Oil price increases since 2003
*Organization for Security and Co-operation in Europe statistics
*Regions of Europe
*John Grahl

References