Globalisation pertains to the aggregate processes of political, economic, social and environmental interdependence of various economies . This means changes in the previous interaction patterns among European countries that have been limited to the confines of national regulatory and geographic boundaries. Globalisation then results to the mutual widening of the scope of international relations and the foreign players of European domestic economies. Since there are a number of different players, the level of interdependence is not uniform and depends upon the creation of bilateral and unilateral economic agreements between or among states.
This is determined largely by the expected or potential contribution of an economy to the European Union in general to the individual member countries. A core and widely observed impact of globalisation to Europe is the fast expansion in international trade. Multinational corporations have been recognised as the primary catalysing actors of trade expansion because these companies expand their production or marketing activities in other countries to become players in domestic economies.
Multinational companies capitalise on high-technology and developments in transportation as tools in proliferating their business activities in various states. As more multinational corporations engaged in international trade, these considered the world economies as their markets and the playing field for new types of competitive plays. One reason for the move of multinational companies to operate across economies is to search for cheaper resources, including natural resources and labour resources to lower their overall expenditures and achieve cost competitiveness.
Another reason is the search for new and bigger markets as the domestic markets become saturated by the widespread reach of products and services as well as the entry of more industry players. Succeeding discussions focus on the impact of globalisation, particularly the widening or liberalisation of trade in the European Union and its effects on the aggregate EU economy, the dynamics of the single European currency, and the shifts in the labour market. Effects of Globalisation on the European Union Economy
Aggregate EU Economy Coinciding with trade liberalisation is the establishment of the European Union to become the largest economic region in the world. In terms of the market, EU has a population of about 460 million people . This means that for business firms engaged in international trade, EU constitutes a promising market worth the international investment. On a bigger scale, this means greater labour resources and more natural or raw resources to share to support the economic activities of the member economies.
As a unified economy, the European Union consistently achieves increases in gross domestic product by as low as . 7 percent to as high as 2 percent between 2005 to the second quarter of 2007. In relation to the national economies of the member states, the low per capita GDP relative to the GDP of some of the strongest EU economies is explained by the divergent economic growth of the member countries . This means that there is a difference in the economic performance of the stronger and weaker economies.
However, this should be addressed by the purpose of EU is to provide the weaker economies with the economic structural support to boost economic growth. In the past three years, the greatest growth was experienced in 2004. This was attributed to the rise in domestic consumption and exports. Rise in domestic expansion is due to the growth in national income broken down into the corresponding rise in household income due to the infusion of investments into domestic economies . An increase in household income then translates into greater purchasing power of the domestic market expressed as increases in demand.
With increases in demand, production also picks-up resulting to greater household income and greater consumption. The cycle then creates a multiplier effect in the dynamics of supply and demand that changes aggregate economic income. Increased exports from European Union countries to other economies mean increased aggregate income for the European Union. However, in 2006 and 2007 the slowing down of the increase in GDP rate is attributed to the concurrent rise in imports relative to exports .
Balance of trade principle provides three possible scenarios in trade: trade balance, surplus or deficit . Different opinions exist on the implications of these different trade scenarios. A trade balance means that the value of exports is equal to imports, which is a utopian scenario covering a non-continuous stream of economic processes since this does not consider the succeeding production or intervening factors such as changes in exchange rates. This just means that internal and external demands have been met.
A trade surplus offers benefits to an economy or economic area is greater exports relative to imports. This is because exporting brings income into the economy while importing brings income out of the economy. With a greater importing, more income goes out that comes in. This decreases the income for further production. This means that the imports should be limited to the commodities that the EU cannot produce efficiently by itself and that the economy should build on the commodities resulting from its key economic activities with high exportability.
In the case of trade deficit, there are varying opinions on the impact of this scenario to economies such as the EU. On one hand, traditional thinking rests on the negation of the rationale for trade surplus provides that with trade deficit, the income earned by the economy from international trade is less than the amount that goes out of the economy from the purchase of imported commodities. This also decreases the position of the economy in terms of assets of other economies. This is not beneficial to continued economic growth.
On the other hand, neoclassical thinking propounds that trade deficit could offer benefits from the interrelationship between trade deficit and the economic variables of aggregate income and employment. A growing or expanding economy indicates greater demand for local and foreign commodities. With increased demand, investments internally and externally sourced increases to take advantage of the demand. Concurrent to the increase in foreign credits amounts to greater trade deficit.
This thinking means that even if there is trade deficit, the economy is able to sustain continues production through foreign investments that also create employment opportunities. Although this thinking finds empirical support in the experiences of the European Union, the fact that this economic area is implementing certain protective regulations to promote domestic production and investments as well as the labour market means that allowing greater imports more than exports and relying on foreign investments do not constitute a long-term economic strategy.
To build the economies of member states, the economic region should mostly rely upon its core endowments and capabilities such as its diverse and dynamic exporting activities including aircraft, automobile, pharmaceutical, textile, dairy product, and other productions. EU should find a point in the balance of trade that allows long-term growth in this economic area. At present, the EU continues to find that balance with a trade surplus in 2004, an almost equally balanced trade in 2005 and trade deficits in a number of financial quarters in 2006 and 2007.
EU Single Currency As a unified monetary market, the European Union works towards the achievement of three goals: the creation of a single currency market, achievement of price stability, and facilitation of exchange rate flexibility . Overall, the achievement of these goals should usher a stronger economic area that benefits its member countries, especially the weaker economies. Developing a single monetary economy involves a number of interrelated implications.
First is the greater devaluation that occurs in open economies such as the economies of the European Monetary Union (EMU) especially when exports constitute a large part of its aggregate GDP. However, devaluation causes corresponding greater shifts in the supply curve of the open economy resulting to price instabilities. The European Monetary Union continues to experience price instabilities when it loses control of currency devaluation. This situation results to both costs and benefits to the EMU.
An application of the cost-benefit model shows that there are more benefits than costs for EMU as well its member countries from monetary integration. Costs are mostly regulatory including the loss of level of control over the exchange rate, which means that domestic economies no longer hold control over the relative value or performance of its currency since the shifts in currency performance depends upon the economic trends in the bigger economic area as influenced by the performance of EMU members. Another related cost is the loss of autonomy over the national currency.
When economic policies mostly target certain levels of currency control to sway the impact towards targeted outcomes, currency integration indicates further decrease over the single currency. Influences on currency performance lie more in political and economic cooperation more than the actions of the individual states. Still another cost is the emergence of constraints on the development of fiscal policies. Instead of a domestic economy developing its fiscal policy relative to its own goals and direction, compliance with EMU directives now needs consideration together with certain levels of audit requirements.
The nature of these costs indicates that the loss to the member economies is mostly regulatory more than actual losses in monetary terms. These costs also constitute necessities in experiencing the benefits of the currency integration. Benefits of having a single currency are multi-faceted. First benefit is transparency in prices across the various EMU members because of the single currency. This means that the problem of price differences that affects economic competitiveness is minimised.
Second is increased economic efficiency due to the lack of need for planning on fluctuations in exchange rate, protection of a separate national currency, enhanced exchange rate stability in exports, and minimised interest rates. Third is minimised transaction cost arising from business activities across borders within the EMU because of liberalisation from a unification of trade policies. Fourth is the benefit to business firms of the reduction in costs in cross country operations to enable these firms to achieve cost competitiveness. Fifth is the benefit to consumers from lower prices and product or brand options.
However, the achievement of these benefits depends upon the extent of the currency integration. The alignment of the business cycle of EMU members determines the viability of the single currency for EMU members because greater alignment means that the weaker economies are able to cope up with the stronger economies due to infrastructure support of a single currency. Commitment to the objectives of the single currency supports the alignment of business cycles in the same manner that the alignment increases the success of the unified currency goals.
As the EMU member countries enhance their adherence to the single currency, business cycle alignment should improve. Resource mobility also reflects the impact of globalisation to the EU. The mobility of both capital and labour determines the success of the economic union. Mobility of capital from the stronger to the weaker economies supports the development of industries catering to domestic and international demand that in turn results to growth. This means that capital mobility towards the weaker economies should be sufficient enough to influence economic growth.
Labour mobility describes the extent of labour movement from the economies with surplus labour force to the economies with limited labour supply. With the decline in labour supply deficit, income is generated that fuels micro and macro economic growth. With the unification of European economies catalysed by globalisation, the mobility of capital and labour should enhance growth in the economic region. EU Labour Market Changes in the EU labour market have occurred. This is explained by a number of economic models such as labour mobility and the labour supply and demand.
As part of the unification process and to promote labour mobility, EU directives have made it easier for residents of the EU members to obtain working permits from other member states. Due to this cross-country employment liberalisation, labour mobility from economies with labour surplus, especially in the weaker economies has increased. Apart from this, EU has implemented a policy of preferring labour from member countries more than from other non-member countries to realise the optimum impact of labour mobility, income to residents of weaker economies and greater productivity for businesses and industries within EU.
Moreover, the dynamics of the supply and demand of labour now fuses with aggregate supply and demand of labour within the economic area. Together with the ease in labour mobility through employment regulation liberalisation, labour-intensive industries in the EU are able to meet their labour demand. While there remains a greater supply of labour from the weaker economies, this then lowers the price of labour that allows industries to achieve cost competitiveness. Conclusion
Globalisation has affected Europe with its global spread. Globalisation influences economies through the liberalisation of trade but even with adherence to liberalisation, economies should still retain certain degrees of control over their economic activities to secure their long-term goals. As a means of securing economic survival, European countries sought control of the opening of economies and the enhanced competitiveness through the establishment of the European Union.
The establishment of the EU then involved various economic changes particularly in the aggregate performance of this economic area, the dynamics of the singe currency for this economic area, and the shifts in the labour market. For now, EU remains in the process of achieving a fully functional and effective unification, which it should achieve by taking lessons from its experiences. Bibliography Altavilla, C ‘Do EMU Members Share the Same Business Cycle? ’. Journal of Common Market Studies, vol. 42, 2004, pp. 869–896.
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