The European Union / Eurozone...Who's on First?

It was something that newly elected prime minister of the United Kingdom, David Cameron, said about Turkey’s application for membership in the European Union, which made me think about which countries are currently in or slated to be in the European Union, and which countries are in or slated to be in the eurozone and users of the euro as their countries’ currencies. After a bit of research, I now know — and so will you after reading this article.

EUROPEAN UNION

 The European Union (EU), established by the Treaty of Maastricht in 1993, had primary goals of achieving the “four freedoms” of movement: goods, services, capital and people (which included the abolition of passport controls). In order to help achieve those goals, it maintains for its members common policies on trade, agriculture, fisheries, and regional economic and social development. The EU currently has 27 member countries, which are located primarily in Europe:

 The population of the EU is just over 500 million. The combined members’ GDP is the equivalent of US$ 16.5 trillion and represents an estimated 28 percent of world nominal GDP. GDP per capita in the EU is $33,052 compared with $46,400 in the United States.

There are currently four countries who are candidates to join the EU: Croatia, Iceland, Macedonia and Turkey. In addition, Albania, Bosnia, Herzegovina, Montenegro and Serbia are officially recognized as potential candidates. In order to join the EU, a country must meet three criteria: (1) a stable democracy that respects human rights and the rule of law, (2) a functioning market economy capable of competition within the EU, and (3) acceptance of the obligations of membership, including EU law.

The Lisbon Treaty, signed by EU members in 2007 and which went into effect in 2009, provides a process for an EU member country to voluntarily withdraw from the EU. To date, no member state has ever left the EU, although there are numerous political movements across the EU campaigning for withdrawal, and which are becoming more vocal over the last year as a result of the Greek debt crises.

EUROZONE

 The birth of the euro was January 1, 1999. Sixteen EU countries (in bold below) have chosen to adopt the common currency as their sole legal tender, forming the eurozone. Eleven EU countries have chosen not to adopt the euro (in grey):

 The monetary policies of the eurozone countries are the responsibility of the European Central Bank. There is no common fiscal policy, which, as we know now, has led to some big problems not just for the EU but for the world.

The countries that joined the EU since 2004 — Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia — were required by EU mandate to eventually adopt the euro. To date only Slovakia and Slovenia have adopted it.

In order to join the eurozone a country must spend two years in the European Exchange Rate Mechanism (ERM), a system requiring a country’s government/central bank to manage the value of the currency against the euro within a pre-determined band and with low volatility.

The Baltic countries (Estonia, Latvia, and Lithuania) looking to gain economic stability are eager to join the eurozone and are participating in the ERM. Only Latvia has so far gained approval to join, which will be on January 1, 2011.

Britain, Sweden and Denmark

Countries with larger economies and wider trading ties — Britain, Sweden and Denmark — see no clear advantage to joining the eurozone, and following the Greek debt crisis have backed well away from moving forward.

Britain’s politicians and the general public regularly debate the advantages to joining the eurozone. The consensus view has been fairly consistent since the creation of the euro, the view that a country’s exchange rate is a very powerful mechanism for making adjustments to one’s economy, especially in the uncertain world with which we have been living over the last decade. A flexible exchange rate has proven to help a country better cope with big financial shocks than those countries that are tied to a common currency.

For similar reasons, Sweden and Denmark have decided not to join the eurozone. However, since their economies over the last few years have experienced tighter integration and convergence with the eurozone and their monetary policies, particularly Sweden’s, have followed closely with that of the European Central Bank, it may actually make sense now to join.

Any eurozone country that defaults on its sovereign debt would be required by EU mandate to leave the eurozone. So far, Greece has been the only member for which the financial markets entertained such a possibility. Whatever the case, the huge bailout of Greece by the other eurozone members showed their strong interest in preventing any member from leaving. The risk to the rest following a member’s departure would weaken the credibility of the euro, deepening the sense of crisis and possibly forcing other countries to drop out.

Back to Turkey

Certainly an emotionally charged issue is that of Turkey’s application for EU membership. Since negotiations were opened in 2005, both sides of the table — EU leaders and Turkish leaders — have vacillated between wanting in and not wanting in to the club. It remains to be seen if and when Turkey, a country that is geographically, politically and officially part of two continents (a true bridge between Europe and Asia) will in fact become part of the EU. Mr. Cameron thinks they should be, saying that those who oppose Turkey’s EU membership are either “protectionists”, “polarized” or “prejudiced.”

The Future of the EU

A final thought, which I believe is right on target, was made by Liz Alderman writing for the New York Times. She says that “how European Union leaders ultimately handle the Greek problem could either propel Europe to greater economic and political clout in the decades ahead, or downgrade it to a sideshow in a global economic theater directed by China and the United States.” 

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