Europe Facing a Crossroads: New horizon of economic integration

The European Union (EU) was awarded the Nobel Peace Prize on December 10, 2012 for contributing to peace, international reconciliation, democracy, and human rights for over 60 years after the Second World War. This was the first time that the prize was awarded to a regional international organization. Upon receiving the prize, the EU leaders expressed their determination: "We want Europe to become a symbol of hope again" (Herman Van Rompuy, the president of the European Council). "The last 60 years have shown that Europe can unite in peace. Over the next 60 years, Europe must lead the global quest for peace" (José Manuel Barroso, the president of the European Commission).

Two centuries earlier, French Emperor Napoleon Bonaparte entered Moscow. This war, written about by Leo Tolstoy in his novel War and Peace and by Yoshihiko Morozumi, former vice minister of International Trade and Industry, in his work 1812-Nen No Yuki [Snow in 1812], drastically changed the traditionally held concept of war. Firearms developed with modern technology and resource mobilization for war by states supported by emerging nationalism significantly expanded the calamities of war. Morozumi's literature helps one understand how Napoleon transformed conventional war from that mainly between mercenary soldiers into large scale events involving non-combatants.

Wars increasingly grew in scale and hit their peak in the Second World War. Afterwards, Europe started its new endeavors to build a non-war community, starting with the Schuman Plan in 1950 to create the coal and steel community, leading to the foundation of the EU. The ultimate goal of the integration of Europe is to establish lasting peace in the region through accumulating efforts for integration from economic areas and thereby aiming to form a political community in which wars no longer occur.

Throughout the postwar history, Europe has often experienced periods described as crises, although it has overcome each of them through the deepening and expansion of integration. For example, when the region was cloaked in "Europessimism" from the 1970s to the 1980s following the two oil crises, the Single European Act became effective, which set an objective of establishing the single market by 1992. At the same time, following the collapse of Soviet Union in 1991, the EU expanded its integration to central and eastern Europe. It has thus continued to grow while maintaining the unifying force.

Today, however, despite receiving the Nobel Peace Prize, Europe is facing challenges, which include responding to the European sovereign debt crisis starting with Greece's fiscal problem in 2009. The situation remains unstable, having instigated a financial crisis in Cyprus in March of this year. At the December 2012 European Council, a road map for the completion of a genuine Economic and Monetary Union was announced, which indicated the EU's continuous endeavors toward enhanced economic integration. However, the EU, on the one hand, has been conducting the difficult task of finding a common ground for southern European countries, which have little room for expanding fiscal policy measures, and, on the other hand, Germany and Scandinavian countries, which have to face cautious public stances to additional support measures. The EU has continued to expand up until today and has not seriously discussed the possible withdrawal of members. However, in addition to the discussion for the possibility of Greece's withdrawal from the EU, British Prime Minister David Cameron made a speech on January 23 of this year to hold a referendum on the nation's withdrawal from the EU.

With such a centrifugal trend, the EU is searching for areas in which it can play new roles toward overcoming the crises. One such area is trade policy. Especially since last year, the EU has been not only restructuring public finance but also enhancing its pursuit of economic growth, for which it has highlighted trade policy as an important part of its growth strategies. The Compact for Growth and Jobs, which was adopted at the European Council on June 29, 2012, explicitly expressed this idea by stating: "Trade must be better used as an engine for growth." (Note 1) Furthermore, a European Commission document, "External Sources of Growth," issued on July 18, 2012, expressed the idea of emphasizing free trade agreements (FTAs) between advanced countries. Especially, mentioning that over two-thirds of the EU's potential benefit will be gained from trade with Japan and the United States, it noted that FTAs with Japan, the United States, and Canada would "help foster structural reforms and the modernization of the EU economy." (Note 2) The EU aims to expand its market and at the same time promote its regional economic structural reform by deepening economic integration among advanced countries.

Based on such idea, the EU is rapidly accelerating its preparation for negotiating an FTA with the United States. At its summit meeting with the United States in November 2011, the EU agreed to set up a High-Level Working Group on Jobs and Growth. Based on a report from the working group on its analysis, the EU announced on February 13 of this year a joint statement with U.S. President Barack Obama, which indicated that they will initiate the internal procedures necessary to launch negotiations on the Transatlantic Trade and Investment Partnership (TTIP). The joint statement noted that the TTIP negotiation will cover not only traditional areas concerning FTAs such as liberalization of trade and investment but also removing regulations and non-tariff barriers, and emphasized that it will provide an opportunity to contribute not only to the U.S.-EU trade and investment relations but also to developing a global rule for enhancing multilateral trading systems. As President Barroso referred to the TTIP as a "game changer" (Note 3) for world trade, upon the United States and the EU advancing the negotiation toward the ambitious agreement, it can significantly influence the world's trade regime. On the other hand, some hold a cautious view on whether or not the negotiation will make quick progress after its launch, as both parties have different stances on such areas as food security and intellectual property (Note 4). While there are some uncertainties about its future development, the unprecedented fact that the two huge economies, the United States and the EU, expressed their strong political will to launch the negotiation demands attention.

Concurrently enhancing its relations with the United States, the EU also has taken a major step toward strengthening those with Japan. In the past, it had held a cautious stance about an FTA with Japan due to its concern over competition with Japanese industry based on the removal of tariffs. Following the Japan-EU Summit in May 2011, however, it proceeded with the preparation for negotiation. On March 25 of this year, at a telephone summit conference with Prime Minister Shinzo Abe, it was agreed upon to launch negotiation on a Japan-EU Economic Partnership Agreement (EPA). When European Commissioner for Trade Karel De Gucht—who has argued that the possibility of enhancing relations with Japan, located in the world's growth center of Asia, should not be underemphasized—visited Japan on March 25, he stressed that an FTA between the EU and Japan, an ambitious initiative, would help realize economic growth without extra fiscal spending and be an important element for structural reforms for both sides Note 5. Such statement demonstrates the EU's stance in regarding its FTA with Japan as part of its growth strategy mentioned above.

Having promoted its regional market integration over the 60 years after the war, the EU today is expanding its horizon of economic integration to a new phase with FTAs with Japan and the United States, which is not unrelated to the current economic situation of Europe. For Japan, EPA negotiation with the EU, which has accumulated experience on its own economic integration, is expected to involve unprecedentedly diverse areas including non-tariff areas. Nevertheless, it is desirable for Japan to advance negotiation swiftly, capturing this opportunity of the EU's decision to launch negotiation. While the United States and EU are promoting their own respective initiatives toward economic alliances, Japan, too, should pursue new trade policies.

*Opinions expressed or implied in this website are solely those of the author, and do not necessarily represent the views of the Research Institute of Economy, Trade and Industry (RIETI) nor the Ministry of Economy, Trade and Industry (METI).

The original text in Japanese was posted on April 15, 2013.

May 14, 2013