P o s i t i o n

The Impact of Globalization on European Integration

Jürgen Turek - March 2002

After September 11th 2001 the question emerges how the world has and has not changed - also economically. Three issues are important:

• Which challenges and chances realizes globalization for the European Union that shall be enlarged until 2004?

• How can European decision makers realize 'win-win-situations' in the context of globalization and European integration?

• Have the terror attacks damaged the world economy in the long run?

There is no need to ask whether the events have had consequences for economic growth. However, the attack has only accelerated the move towards economic recession in America, Asia and Western Europe. This development was already likely before September 11th as the bursting of the high-tech-bubble had been hitting corporate investment quickly and consumer spending more gradually. It is estimated that the terror attack will decelerate the growth of the U.S. national product in 2001 and 2002 around 0,3 percent. However, directly after the attacks compensating forces have emerged: cheaper oil; increased spending on security and - in the future - on defense; a greater willingness among governments to boost demand through monetary and fiscal policy. But the positive forces remain weaker than the negative ones. How long the recession lasts will depend particularly on confidence - which in turn will depend on the war against terror.

Hence, economic globalization will continue due to its strong driving forces. The effects challenges European integration. It includes risks as well as chances. With the completion of an internal market the European Union creates one of the largest market places in the world. More economic growth and social prosperity is possible. Economically it is necessary to connect two steps to reach these objectives: to install a strong European Monetary Union (EMU) and to successfully integrate the eastern European states into the EU. The Union, however, faces also other important economic issues: the internationalization of economic activities and the future of labour and social cohesion. These issues are, unfortunately, not settled like the euro. In this context three factors are endangering the social systems in the European welfare states:

• According to most estimates of demographic change, the share of persons older than 60 in world population will rise from 9 % to 16 % over the period 1990-2030. Consequently, fewer contributors will support an increasing number of recipients.

• The number of contributors in many countries of the European Union is expected to remain below the potential number of fully employed. For example, the employment rate of persons under 25 fell by 8.6 % between 1980 and 1994 to a level of 45.7 %. The employment rate of persons between 50 and 64 years of age fell by more than 4 % over the same period to a level of 47.1 %. Thus the average length of retirement increased while the period in which EU citizens contribute to their social system continuously shrank.

• The competition of industrialized countries with the emerging markets of Southeast Asia and Central and Eastern Europe limits the flexibility of social systems. Pressure is greatest on countries that have financed their old-age security system on a pay-as-go basis. Insofar as competition brings decreasing wage growth or drops in real income, the income basis of the social system falls apart.

In this context, globalization and increasing competition influence:

• the production and distribution of goods and services;

• the distribution of labour and prosperity;

• the organization of welfare and social justice.

Globalization touches the sovereignty of states and creates necessaries of cooperation and integration. The European currency as well as the enlargement and the completion of the internal market must be seen in this context. The enlargement produces problems and leads to open questions. On the one hand, people are afraid that enlargement will strengthen the competition in goods, services and employees between western and central European countries - a development that will intensify structural problems in Europe. In face of great unemployment in Europe - around 18 million people were jobless in Western Europe 2000 - the enlargement could lead to a social explosion. On the other hand, it is clear that the European Union is only able to afford the enlargement within the framework of the Union's extensive structural reform that improves the ability to integrate Central Europe into the institutional decision making system of the EU.

The European Commission estimated the costs of enlargement on 75 billion euro between 2000 and 2006. This estimation shall be realistic under the condition that an economic growth of 2.5 percent per year is realized in the western European countries and of 4 percent in the central European states. In this case - from the commission's point of view -, the financial system must not be changed and it should be possible to finance the enlarged European Union with a share of 1.27 percent of the gross domestic product of member states. The enlargement will realize positive effects which will strengthen the competitiveness of the 'old continent' as a whole. Long-term, positive expectations make the integration of Central Europe politically not only likely but also desirable. Already today the EU's enlargement realizes economic growth. One can give reasons for this. A view on the development of trade, for example, between the western and central European states shows a rapid growth. Furthermore, the economic data of these countries are showing significantly positive results. Today, their economic development brings them more into line with the performance of the western European states. Already in 1996, the Czech Republic and Slovenia were on the same economic level like the poorest European states in the EU - Greek and Portugal. Inflation and unemployment decreased in all central European states since the beginning of the 1990s.

Taking these facts into account one may evaluate the economic effects of enlargement and the European Currency Union optimistically. But what about the future of labour in an enlarged Union? Globalization and the structural frictions in many member states of the European Union urgently put this problem on the political agenda. During the Employment Summit (November 20-21st, 1997) the EU tried to find elements of an effective employment strategy that is congruent to the Amsterdam Treaty of 1997. The aim of this initiative was to decrease the unemployment from 18 million today to 9 million people in the future. The employment rate in principle shall rise from 60 % today to 65 % in the future. Therefore nearly 12 million new jobs must be created in Europe.

However, the Employment Summit did not set a strict timetable. The main result was the statement that reducing unemployment is a national task. The members of the summit emphasized the high importance of moderate pay agreements and flexible labour organization. The objective has to be to reverse the trend to higher and higher tax expenses of employment. Nobody at the Summit agreed to proposals to create new finance programs à la Keynes stimulating employment in Europe. However, despite of the refusal - especially of Germany - , to mobilize new money for employment measures, the summit members decided to restack 900 million DM for managing new working places especially in middle class companies. Until 2003, every member state should be able to guarantee a working place for 20 percent of unemployment or to organize re-education. Every member state has to take care of a working place for the unemployed youth or a re-education place before unemployment lasts more than half a year. Another result of the summit was to improve the access to venture capital at the European Investment Bank. Furthermore, venture capital shall be given especially to middle class companies. Due to the reason that the European employment initiative failed, the European Summit in Lisbon (March 23-24th, 2000) put the unemployment again on its agenda. The participants of the meeting declared, that in the running decade Europe should become the most dynamic economic space in the world. They initiated a program that should promote new information technologies and should help to strengthen the European labour markets. The partners formulated the goals of an annual growth of 3 percent and a share of employees of 70 percent of the whole population in Europe. From the point of the European Commission and the member states a consequent technological modernization is the key for Europe's future competitiveness on the world market.

The employment initiatives of the European Union did not yet really create a concept for an European employment policy. However, it is positive that there is political pressure on the EU member states to manage the problem, especially in the area of youth unemployment. Strengthening the ability of the European investment bank to support middle class companies is a well step into the right direction - when translation in action works. However, as long as the unsuccessful translation of the summit's results into action is not connected with sanctions, the losses of prestige for states which do not succeed are limited. On the whole, the measures of the summit were on the line of a supply policy à la Friedman . Nation states hold the competence for employment politics. This needs - in short-terms and in middle-terms - the right policy-mix in nation states (tax politics, social politics, employment politics and education politics) . This meets the sense of the subsidiary principle which is important for further integration since the Maastricht Treaty from 1992 and which is not in contrast to further European integration. In principle, it is not the worst to let employment politics in the responsibility of nation states.

Globalization of world economics is a test for Europe. The challenge is to deal constructively with the problems of internationalization. European Monetary Union as well as European enlargement may be instruments to succeed in a global world. Additionally, the widening of NATO is another instrument when the Common Foreign and Security Policy of the EU (CFSP) gets more influence and the European actors will be able to manage conflicts in Europe by themselves. These great lines of development are very important for the future of the old continent. In combination, they might create synergy effects for successful integration. Beyond the daily debates or technical details of further integration one may not forget the historical dimension of an enlarged Union. The enlarged EU can be successfully settled in the world economy and might help - within a positive-sum-game - to realize benefits for all. This can be the positive perspective for the 21st century. Differentiation and increased flexibility will be key instruments in this context. Due to the share of competence in the supranational system of the EU, the actors - Union, national states and regions - have to take over their responsibilities. Europe needs intelligent politics which help to create a new civic society that treats social consistence and employment as central public goods for its population.

This last point is important. One has to change for a moment from European economic issues to a social policy debate that is shaping the present and future discussions beyond pure economic measures steering globalization. In the last decade of the 20th century there was a vehement discussion about the social consequences of economic globalization which became more and more clear in the run of the time.

The internationalization of economic activities provokes the question, how creative politics can respond to globalization's challenges. When the European currency and the enlargement are adequate reactions to economic internationalization, Europe additionally has to look for a human face of globalization. The internationalization of economics is not only a question of re-creating competitiveness in a neo-liberal manner. It seems to be true that competitiveness has to do a lot with wage costs, with wage rates, with a good quality of products and services, with a transparent competitive system within the European states, with national tax systems, with a good political and legal framework, with a payable social system, with a good education system and with a good economic constitution on the whole. However, debates about globalization have also to take into account its social implications. In this respect the European Union is not as good prepared as with the euro and the EU enlargement.

Beyond the question of the internal balance of markets and social policies it is to ask, which kind of development policy the western world has to create. The terror attack on the U.S. and the war in Afghanistan have demonstrated the necessity to invent a new relationship between the developed and the underdeveloped world. Analyzing globalization many facts show that there is an increasing gap between the rich northern and the poor southern countries of the world. September 11th has also marked the date for alternative politics among the countries and the people in a globalized world.

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