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The European Union (EU) is an economic and political federation consisting of twenty-seven member countries that make common policy in several areas. The EU was created in 1993 with the signing of the Treaty on European Union, commonly referred to as the Maastricht Treaty, but it was preceded by various European organizations that contributed to the development of the EU. The EU represents the latest and most successful in a series of efforts to unify Europe, including many attempts to achieve unity through force of arms, such as those seen in the campaigns of Napoleon Bonaparte and World War II.

In the wake of the Second World War, which devastated the European infrastructure and economies, efforts began to forge political union through increasing economic interdependence. In 1951 the European Coal and Steel Community (ECSC) was formed to coordinate the production and trading of coal and steel within Europe. In 1957 the member states of the ECSC ratified two treaties creating the European Atomic Energy Community (Euratom) for the collaborative development of commercial nuclear power and the European Economic Community (EEC), an international trade body whose role was to gradually eliminate national tariffs and other barriers to international trade involving member countries. Initially the EEC, or, as it was more frequently referred to at the time, the Common Market, called for a twelve- to fifteen-year period for the institution of a common external tariff among its members, but the timetable was accelerated and a common tariff was instituted in 1967.

Despite this initial success, participation in the EEC was limited to Belgium, France, Germany, Italy, Luxembourg, and the Netherlands. Immediately following the creation of the EEC a rival trade confederation known as the European Free Trade Association (EFTA) was created by Austria, Britain, Denmark, Finland, Norway, Portugal, Sweden, and Switzerland. Although its goals were less comprehensive than those of the EEC, the existence of the EFTA delayed European economic and political unity.

By 1961 the United Kingdom indicated its willingness to join the Common Market if allowed to retain certain tariff structures which favored trade between Britain and its Commonwealth. Negotiations between the EEC and the United Kingdom began, but insurmountable differences arose and Britain was denied access to the Common Market in 1963. Following this setback, however, the Common Market countries worked to strengthen the ties between themselves, culminating in the merger of the ECSC, EEC, and Euratom to form the European Community (EC) in 1967. In the interim the importance of the Commonwealth to the British economy waned considerably and by 1973 Britain, Denmark, and the Republic of Ireland had joined the EC. Greece followed suit in 1981, followed by Portugal and Spain in 1986 and Austria, Finland, and Sweden in 1995.

Even as it expanded, the EC worked to strengthen the economic integration of its membership, establishing a European Monetary System (EMS) featuring the European Currency Unit (ECU, later known as the Euro) in 1979. The EC then passed the Single European Act, which strengthened the EC's ability to regulate the economic, social, and foreign policies of its members, in 1987. The EC took its largest step to date toward true economic integration among its members with the 1992 ratification of the Maastricht Treaty, after which the EC changed its name to the European Union (EU). The Maastricht Treaty also created a central banking system for EU members, established the mechanisms and timetable for the adoption of the Euro as the common currency among members, and further strengthened the EU's ability to influence the public and foreign policies of its members.

The EU originally had twelve member nations: Belgium, Denmark, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Portugal, the Republic of Ireland, Spain, and the United Kingdom. In 1993, the European Council, meeting in Copenhagen, Denmark, determined the criteria for joining the EU. These requirements, known as the Copenhagen criteria, included: (1) a stable democracy which respects human rights and the rule of law; (2) a functioning market economy capable of competition within the EU; and (3) the acceptance of the obligations of membership, including EU law. The European Council has the responsibility for evaluating a country's fulfillment of these criteria.

The EU has enlarged three times since its creation. In 1995, three new members were added: Austria, Finland, and Sweden. In 2004, ten new members were added, mostly from the former Soviet bloc: Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. In 2007, Romania and Bulgaria, who were not ready to join in 2004, were admitted. As of 2008, there were three official candidates for membershipCroatia, Macedonia, and Turkeyand five nations officially recognized as potential candidatesAlbania, Bosnia and Herzegovina, Kosovo, Montenegro, and Serbia.

One of the goals of the EU is economic integration and a common European currency. EU leaders expect great benefits from the adoption of a single currency. International trade within the single currency area will be greatly facilitated by the establishment of what amounts to a single market, complete with uniform pricing and regulation, in place of separate national markets. The creation of a single market is also expected to spur increased competition and the development of more niche products, and ease the acquisition of corporate financing, particularly in what would formerly have been international trade among members of the single currency area. Finally, in the long term, the establishment of the single currency area should simplify European corporate structures, since in time nearly all regulatory statutes within the single currency area should become uniform.

The Maastricht Treaty established conditions that EU member nations would be expected to meet before they would be allowed to participate in the introduction of the single European currency. These conditions were designed to create a convergence among the various national economies of Europe to ease the transition to a single currency and ensure that no single country would benefit or be harmed unduly by its introduction. Such a convergence would also create greater uniformity among the various national economies of the EU, making administration of economic activity within the single-currency area more feasible. The conditions set for participation in the introduction of the Euro and inclusion in the single-currency area included the following:

Despite difficulties faced by some members in meeting these conditions, implementation of the Euro went ahead on schedule through the three phases set forth at Maastricht. Phase one began in 1998 with an EU summit in Brussels, Belgium, that determined which of the fifteen member states had achieved sufficient convergence to participate in the introduction of the Euro. The selected participants were Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain (exceptions were Demark, Greece, Sweden and the UK). Phase two, which commenced on 1 January 1999, introduced the Euro as legal tender within the eleven selected countries, referred to as the single-currency area, although the new currency would only exist as a currency of account, that is, it would exist only on paper or for electronic transactions, as no Euro notes or coins were yet in circulation. Instead, the existing currencies of the participating countries functioned as fixed denominations of the Euro. Phase two also included the subordination of the eleven national banks in the single-currency area to the European Central Bank.

Phase three, which began on 1 January 2002, set the Euro banknotes and coins into circulation and by July 2002, it became the legal tender of the countries, replacing their national currencies. At the time of introduction there were twelve countries in the area using the Euro, known as the Eurozone: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, and Greece. Denmark, Sweden and the UK chose not to use the Euro. By the beginning of 2008, the Eurozone had expanded to include fifteen member nations, with Cyprus, Malta, and Slovenia having joined the original members. Nine of the new EU member states were still operating with a currency other than the Euro. The Accession Treaties signed by all of

these countries requires them to join the Euro; some have already joined the ERM and others have set themselves the goal of joining the Euro as follows:

The initial introduction of the Euro as a currency of account began with a resounding success, as the new currency rose immediately to an exchange rate of 1.17 U.S. dollars to the Euro. Uncertainties about the further progress of European Union raised by conflicts in the Balkans in 1999 soon dampened investor interest in the Euro, however, and its value fell to 1.04 U.S. dollars per Euro by the summer of that year. The Euro continued to slip, and by late 2000, it had fallen to a record low of $0.83. Since 2003, however, the Euro has steadily risen against the dollar, gaining strength in 2007 as the U.S. economy began slipping towards recession; by mid 2008, the Euro was holding steady in the mid $1.50s.

The EU maintains four administrative bodies dealing with specific areas of economic and political activity.

Council of Ministers. The Council of Ministers comprises representatives, usually the foreign ministers, of member states. The presidency of the council rotates between the members on a semiannual basis. When issues of particular concern arise, members may send their heads of state to sit on the council. At such times the council is known as the European Council, and has final authority on all issues not specifically covered in the various treaties creating the EU and its predecessor organizations. The Council of Ministers also maintains the Committee of Permanent Representatives (COREPER), with permanent headquarters in Brussels, Belgium, to sit during the intervals between the council's meetings; and operates an extensive secretariat monitoring economic and political activities within the EU. The Council of Ministers and European Council decide matters involving relations between member states in areas including administration, agriculture and fisheries, internal market and industrial policy, research, energy, transportation, environmental protection, and economic and social affairs. Members of the Council of Ministers or European Council are expected to represent the particular interests of their home country before the EU as a whole.

European Commission. The European Commission serves as the executive organization of the EU. Currently each country has one commissioner except for the five largest countries that have two. The Commission enlarges as more countries join. The European Commission seeks to serve the interests of Europe as a whole in matters including external relations, economic affairs, finance, industrial affairs, and agricultural policies. The European Commission maintains twenty-three directorates general to oversee specific areas of administration and commerce within the EU. It also retains a large staff to translate all EU documents into each of the EU's twenty official languages. Representatives sitting on the European Commission are expected to remain impartial and view the interests of the EU as a whole rather than the particular interests of their home countries.

European Parliament. The European Parliament comprises representatives of the EU member nations who are selected by direct election in their home countries. Although it serves as a forum for the discussion of issues of interest to the individual member states and the EU as a whole, the European Parliament has no power to create or implement legislation. It does, however, have some control over the EU budget, and can pose questions for the consideration of either the Council of Ministers or the European Commission.

Court of Justice. The Court of Justice comprises thirteen judges and six advocates general appointed by EU member governments. Its function is to interpret EU laws and regulations, and its decisions are binding on the EU, its member governments, and firms and individuals in EU member states.

From its creation the EU has maintained the Economic and Social Committee (ESC), an appointed advisory body representing the interests of employers, labor, and consumers before the EU as a whole. Although many of the ESC's responsibilities are now duplicated by the European Parliament, the committee still serves as an advocacy forum for labor unions, industrial and commercial agricultural organizations, and other interest groups.

One ongoing area of contention among the members of the EU is agricultural policy. Each European nation has in place a series of incentives and subsidies designed to benefit its own farmers and ensure a domestically grown food supply. Often these policies are decidedly not beneficial to the EU as a whole, and lead to conflict between rival national organizations representing agricultural and fisheries industries. The degree of contention on agricultural and fisheries issues within the EU can be seen in the

fact that nearly 70 percent of EU expenditures are made to address agricultural issues, even though agriculture employs less than 8 percent of the EU workforce. In an attempt to reduce conflict between national agricultural industries while still supporting European farmers, the EU adopted a Common Agricultural Policy (CAP) as part of the Treaty on European Union.

The CAP seeks to increase agricultural productivity, ensure livable wages for agricultural workers, stabilize agricultural markets, and assure availability of affordable produce throughout the EU. Although the CAP has reduced conflicts within the EU, it has also led to the overproduction of many commodities, including butter, wine, and sugar, and has led to disagreements involving the EU and agricultural exporting nations including the United States and Australia.

The European Social Fund (ESF) and the European Regional Development Fund (ERDF) were established to facilitate the harmonization of social policies within EU member states. The ESF focuses on training and retraining workers to ensure their employability in a changing economic environment, while the ERDF concentrates on building economic infrastructure in the less-developed countries of the EU.

The European Investment Bank (EIB) receives capital contributions from the EU member states, and borrows from international capital markets to fund approved projects. EIB funding may be granted only to those projects of common interest to EU members that are designed to improve the overall international competitiveness of EU industries. EIB loans are also sometimes given to infrastructure development programs operating in less-developed areas of the EU.

Although the EU has accomplished a great deal in its first two decades, many hurdles must still be crossed before true European unity can be achieved. Many EU nations experienced great difficulty in meeting the provisions required by the EU for joining the EMS, although eleven countries met them by the 1 January 1999 deadline. Meeting these provisions forced several EU members, including Italy and Spain, to adopt politically unpopular domestic economic policies. Others, such as the United Kingdom, chose not to take politically unpopular action and thus failed to qualify for participation. Even though the Euro was introduced according to schedule, economic unity has far outstripped political cooperation among EU members to date and real and potential political disagreements within the EU remain a threat to its further development. Although the Eurozone represents a formidable force in international trade, the EU faces several grave challenges as it strives to form an ever closer linkage of its national constituents.

Despite the fact that the Treaty on European Union created a central bank to supercede the national banks of its members, responsibility for the creation of fiscal policies remains in the hands of each national government. As such, there is great potential for the central authority and national economic policy making agencies to adopt conflicting programs. Furthermore, national political institutions within the EU are likely to be more responsive to the desires of their national constituencies than to the well being of the Eurozone as a whole, especially in times of economic instability. It is difficult to see how voters in the nations of the EU will be able to put the good of Europe ahead of their own particular interests.

This difficulty is particularly troublesome as political integration has progressed much more slowly than economic integration, and further political integration has recently suffered several potentially insurmountable setbacks. In 2004, the Treaty establishing a European Constitution (TCE) was signed by the representatives of all twenty-seven member nations, but the treaty failed to be ratified by all of the members. Most members did in fact ratify the TCE by parliamentary measure or popular referendum, but France and the Netherlands both rejected it in referendums. These failures led other members to postpone or call off their ratification procedures. As a result, the European Council called for a period of reflection, which subsequently led to negotiations over a new constitutional treaty, known as the Lisbon Treaty. The Treaty of Lisbon, signed on 13 December 2007, was in the process of being ratified by member nations when the Irish electorate rejected the treaty in June 2008, creating uncertainty as to the future ratification of this version of a European constitution.

Another problem also arises out of the composition of the Eurozone. According to the optimal currency theory first posed by American Robert Mundell in 1961, in order for a single currency to succeed in a multinational area several conditions must be met. There should be no barriers to the movement of labor forces across national, cultural, or linguistic borders within the single-currency area; there should be wage stability throughout the single currency area; and an area-wide system should exist to stabilize imbalanced transfers of labor, goods, or capital within the single-currency area. These conditions do not exist in present-day Europe, where labor mobility is small, largely because of language barriers, and wages vary widely among EU member countries, particularly between those in the West and in the East. Furthermore, the present administrative structure of the EU is not powerful enough to redress imbalanced transfers, which are bound to occur periodically. Such imbalances would engage the sort of

political response discussed previously, to the detriment of the EU as a whole.

Optimal currency theory also holds that for a single currency area to be viable it must not be prone to asymmetric shocks, that is, economic events that lead to imbalanced transfers. Ideally, a single-currency area should comprise similar economies that are likely to be on similar cycles, thus minimizing imbalances. Similarly, the need for a freely transferable labor force within the single-currency area is also necessary to minimize imbalances, since each national member of the area must be able to respond flexibly to changes in wage and price structures.

The EU has made remarkable progress during its first two decades. Although there are significant obstacles in the way of further strengthening of the EU, especially in political matters, the continued enhancement of economic ties binding members is likely to increase the political unity of EU members over time. That this is feasible is evidenced by the efforts of EU nations to conform to the stipulations of the Maastricht Agreement. Maintaining stable currency exchange rates, reducing public and overall government debt, and controlling long-term interest rates are all areas in which national governments and fiscal agencies had exercised complete autonomy in the past. Before the implementation of the Euro's second phase, many doubted that the EU member states could put aside their own internal interests to meet the Maastricht provisions; however, eleven of the fifteen managed to do so, and currently over half of the EU members belong to the Eurozone. Significantly, many had to experience economic slowdowns and increased unemployment in order to do so. Such resolve bodes well for continued strengthening of European unification in both political and economic areas. In fact, the history of the EU to date has been one of overcoming obstacles similar to those faced during the first two phases of the introduction of the Euro, and a unified Europe is and will remain a fact of international economic life for the foreseeable future.

SEE ALSO Free Trade Agreements and Trading Blocs; International Business; International Management

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