THE EUROPEAN UNION’S PATH TO GLOBAL ECONOMIC DOMINANCE

– June 15, 2006

In March of 2000, the European Council which met in Lisbon, Portugal, adopted so-called Lisbon Strategy/Project designed to transform the European Union to the most competitive and dynamic economy block in the world. The goal was planned to be achieved as early as in 2010. The adoption of the Strategy was an answer to a strong European desire that the EU played more significant role in world politics and became a new international superpower. As a matter of fact, the majority of the European leaders astounded by the rapid and unprecedented growth of the U.S. economy decided to challenge American economic hegemony and to reshape global financial trends.

The fulfillment of that dream required many courageous decisions but most of all further political and economic integration of the EU. Unfortunately its realization has not proved very successful so far. In 2004 the European Union expanded to 25 states by admitting 10 new members; however it failed to ratify the European Constitution, which was rejected in 2005 by France and the Netherlands, two very important EU states.

Moreover it seems that six years after the adoption of the Strategy, the actual distance to the U.S. economy is even getting bigger. For example, the relation of the present U.S. Gross Domestic Product per capita in Purchasing Power Standards amounts 152.3% of the EU average. Index of labor productivity per person employed in the U.S. amounts 138.6% of the EU average and has been constantly growing since 2000 when it equaled 132.1%. In contrast, the very same index of the oldest and most developed 15 EU member states in relation to the average of present EU was continually decreasing since 2000 when it equaled 107.5%, to reach the amount of 105.7% in 2006. It is furthermore forecasted to fall to 105.3% in 2007.

Another index shows that EU gross domestic expenditure on research and development, calculated as the percentage of the GDP, equaled merely 1.92% in 2003. In that same year the U.S. proportion was 2.59%, while the Japanese spent even more – 3.15%. As the technological advancement plays crucial role in transformation and modernization of every economy, the percentage of yearly EU research and development expenditures does not impress. The visible difference in the abovementioned spending in comparison to the two most advanced world economies – U.S. and Japan – shows that the EU stays noticeably behind them and is not advancing technologically as fast as the others. In American and Japanese economies, “technological revolution” contributed greatly to the fast and impressive growth of their GDP in the recent decades, however it did not happen in the EU where the level of hi-tech development was not as high as in those two countries.

The rate of research and development expenditures is closely correlated with the index of labor productivity. Therefore the unsatisfactory rate of the expenditures in the EU, among other factors, negatively influenced its productivity outcome. As the result, in the period of 1997 – 2001 the labor productivity in the United States was growing approximately 2.3% a year, while in the same time in the EU the growth equaled merely 1.4%.

Originally, one of the goals of the Lisbon Strategy was to allocate by 2006 as much as 3% of the EU combined GDP to research and development; nevertheless it has not been achieved so far.

The EU economy measured in absolute numbers matches that of the U.S. In 2005 the EU Gross Domestic Product in Purchasing Power Parity equaled $12.18 trillion, while the U.S. was only slightly higher – $12.36 trillion. However the yearly growth rate in the EU was merely 1.7%, while the U.S. economy grew in the same time by 3.5%. Moreover the unemployment rate in the EU was substantially higher than in the U.S. and amounted 9.4% in comparison to 5.1% in the United States.

The EU Gross Domestic Product will eventually increase as next new member states join the Union. Nevertheless the whole European economic block most likely will not become principal global economy in the nearest future. There are many internal structural barriers which prevent EU from achieving that goal. For example, the reform of a labor market had to be postponed for several years as the citizens of new member states were temporarily denied the right to work in many parts of the Union. The creation of such barriers not only has been hampering the real competition within the EU but also has been contradicting the key idea of the Lisbon Strategy.

The European Union’s dream to play more important role in world politics and to become the greatest superpower of the twenty first century will not be realized until its economy achieves dominant global position. As it was proved by the rivalry between the Soviet Union and the United States in the times of the Cold War, only superpower backed by exceptionally strong economy can succeed in a global competition to become decisive political force in the world.

It seems that crucial economic reforms in the European Union will not be possible without closer integration and synchronization of national policies of its member states. However at this stage of the EU development it is questionable if any further internal integration will take place in the following several years or decades as France and the Netherlands rejected the European Constitution in 2005, which was giving grounds for such a process. The skepticism toward building one European federal state has been also reflected by the fact that the United Kingdom, Sweden and Denmark decided not to introduce ‘euro’ as their national currencies.

The European Union existing in its present form, merely as an economic block of democratic states, proves to be incapable of realizing the goals adopted by the Lisbon Strategy and achieving dominant economic position in the world.

Sebastian Aulich

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