On May 1, 2004, the 15-member European Union will admit 10 new members. This will increase its current number of consumers from 375 million to 448 million, and result in a significant boost in EU negotiating strength. This also will have ramifications for the euro. What will this mean for the United States and your business?

The New EU and Its Challenges

Current EU members include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. On May 1, the expanding trade bloc will admit the Czech Republic, Hungary, Poland, the Slovak Republic, Slovenia, the Baltic states of Estonia, Latvia and Lithuania, and the Mediterranean islands of Malta and Cyprus. In addition, two other applicant countries, Bulgaria and Romania, may join by 2007. A 13th hopeful, Turkey, has not been given a date to begin accession negotiations.

New members will contribute $680 billion in gross domestic product (GDP) to the EU and erase the last traces of the old “Iron Curtain” from the Cold War years. However, the ever-increasing bloc will not be without its challenges. For example, Western EU members will be required to pump billions of dollars in subsidies into the Eastern economies. And not unlike some of the problems that plagued former West Germany when it absorbed former East Germany, tensions are likely to arise when workers in the West lose jobs to many in the East.

Will U.S. Influence Diminish?

Since World War II and throughout the Cold War period, the United States has been unquestionably the world leader in terms of trade and economic policy. In fact, the Cold War provided much of the glue that held the American-Western European alliance together. However, since the end of the Cold War, and in light of the EU’s expansion plans, the U.S.’s position of dominance is being challenged.

To a greater extent, the EU is questioning the policy decisions of the United States. Consequently, forging new multilateral trade agreements and defending U.S. interests in trade disputes could become more difficult. And, as Eastern Europe grows more affluent and boosts imports, will goods and services from Western European companies displace those from the United States.

Who Is Adopting the Euro?

The euro has been used for non-cash transactions since January 1, 1999. On January 1, 2002, euro coins and notes became available. And by the end of February 2002, the national currencies of Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain were withdrawn in favor of the euro.

But not all EU members favor the adoption of the single European currency. In a nationwide referendum in September 2000, Denmark voted 53 percent to 47 percent against membership in the euro area, also known as Euroland or the Eurozone. Three years later in September 2003, Sweden followed with a similar vote — 56 percent to 42 percent — rejecting the euro. And according to analysts, the United Kingdom is unlikely to adopt the single European currency any time soon. Why have Denmark, Sweden and the UK decided against the euro?

Arguments Against Participation

Those against Eurozone membership argue it would erode national sovereignty and hand over power to the European Central Bank whose “one size fits all” policies may not be welcomed. Furthermore, many are concerned that the single currency could lead to a political union that may promote legislation they do not support.

The UK, which has been especially critical of the euro, has established five economic tests it says must be met before it calls a referendum. The key test is whether the UK economy is converging with those in the Eurozone, and whether this can be sustained in the long term. The second test deals with the country’s ability to cope with the changes adopting the euro would bring. And the remaining three tests assess the impact of this on jobs, foreign investment and the financial services sector.

Prime Minister Tony Blair and Chancellor Gordon Brown support adopting the euro and wish to have a referendum on the issue before the next general election in mid-2006. But the Tories, the opposing conservative party, are against joining the euro in the immediate future. Britain’s attachment to its relatively stable pound sterling, which has an unbroken history of more than 900 years and has dominated global trade for decades, is proving difficult to break.

Benefits of Eurozone Membership

The Eurozone, which represents a population of 305 million people, has benefited from the single European currency in a number of ways. According to an EU study, the single currency eliminated transaction costs related to the existence of various EU currencies estimated at 0.5 percent of GDP. Other studies estimated this cost closer to 1 percent.

An International Monetary Fund study projects the euro will increase GDP growth in participating member economies each year, and by almost 3 percent in 2010. Plus, greater macroeconomic stability and reduced governmental deficits are anticipated in an economically stronger Euroland. These and other benefits generated by the euro are attractive to newcomers.

Will New EU Members Adopt the Euro?

Will the 10 new EU members join Euroland? If so, when? Unlike existing EU members, the accession countries are not being given an option on the euro. They will have to adopt the euro as soon as they fulfill the required criteria. But that still may take time—at least several years in the earliest cases.

Nevertheless, all new EU members will eventually phase out their national currencies in favor of the euro. What impact might this have on the dollar?

Will You Need a Euro Account?

According to the Conference Board, a research organization, 60 percent of world trade is currently denominated in dollars. In the event that the greenback falls from first place, a position it has held since usurping the British pound after World War I, more global business will be conducted in euros. Regardless of which currency is on top, more European companies will request that you transact business in euros. Complying with this request can give you a competitive advantage over companies that don’t.

Consequently, you might consider printing your price lists in euros, and adjusting your ledgers, receivables, and other financial systems to deal with the single currency. Expansion of the euro will, no doubt, simplify doing business in Europe. Plus, dealing with one stable euro instead of several less stable currencies will reduce volatility risk. It also will save on exchange fees. However, keep in mind that dealing with any currency involves a level of risk.

For More Information

To convert euros into dollars, click on CNN’s currency converter (http://money.cnn.com/markets/currencies/), the Universal Currency Converter (www.xe.net/ucc), or Oanda (www.oanda.com). For answers to business and legal questions, visit the European Central Bank (www.ecb.int), and the EU’s website on expansion (www.europa.eu.int/pol/enlarg/index_en.htm).

This article appeared in Impact Analysis, March-April 2004.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author and an international columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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