Managing the European economy after the introduction of the Euro

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# 1.2 Comparative importance of the EU

## 1.2.1 The EU economy

Just to put things into perspective and remind ourselves of some basic background features of the EU, it is useful to provide an outline picture of the size of the EU compared to the USA and Japan. While a lot is made of the rise of China and India as potential competitors to these and other economies, as yet they remain rapidly expanding economic giants whose main impact will probably arise in the next decade. Comparative data on these two economies, and on the EU-12, the USA and Japan, is given in Table 1 (note that these data are measured in terms of US dollars). Clearly China is already a large economy in absolute terms. Several measures of economic size are given in the table: GDP (gross domestic product) and GDP per capita both measured at market prices and at ‘purchasing power parity’ (PPP) adjusted prices. The explanation of the latter is given in the notes to the table. It essentially adjusts GDP to reflect what income can actually comparatively purchase in an economy.

The differences between market prices and PPP prices are striking (and they are somewhat controversial), and they show that although China (and to a lesser extent India) are significant economies in absolute terms, when compared to the three ‘advanced’ economies their GDP per capita remained small in 2003.

### Table 1: Comparative international data, 2003

Population (millions)GDP at market prices (US$000 bn)GDP at PPP adjusted prices* (US$000 bn)GDP per capita at market prices (US$)GDP per capita at PPP adjusted prices (US$)
China1,2881,4106,4351,1004,990
India1,0646003,0965302,880
EU-123068,1758,11522,85026,260
USA29110,88210,87037,61037,500
Japan1274,3263,58334,51028,620
(World Bank, 2003)

Note: * PPP is the artificial common reference currency unit used to express the volume of economic aggregates for the purposes of spatial comparison in real terms. One unit of PPP buys the same given average volume of goods and services in all countries, whereas different amounts of national currency units are needed to buy this volume of goods and services, depending upon the national price level. For any given product, the PPP between two countries A and B is defined as the number of units of country B's currency that are needed in country B to purchase the same quantity of the product as one unit of country A's currency will purchase in country A. These adjustments are made to account for the way in which exchange rate fluctuations do not properly reflect what can actually be purchased with units of currency when comparisons are made between countries (or over time).

Thus, for the next five years at least, the USA and Japan will remain the most obvious comparative competitive cases as far as the EU is concerned. Table 2 provides data which signal some of the key characteristics and differences between these economies presented in terms designed to bring out the importance of differences within the EU as well as between the EU and the USA and Japan (note that these data are measured in respect to the Euro).

The population of the EU-15 was already larger than that of the USA before the ten new members joined in 2004. Note also that if the three largest next most likely new members (Turkey, Romania and Bulgaria) were to join, another 100 million people would be added to the EU total (Croatia has already gained agreement on detailed accession negotiations, but it is a very small economy compared to these three, with a population of 4.6 million in 2003). In terms of national output (GDP), the EU-15 and the USA were almost the same size, so it is when national income is divided by population that differences begin to emerge. Both the USA and Japan have higher GDP per head than the EU. Clearly, the USA is way ahead on this per capita measure (the average US citizen had a 42 per cent greater PPP adjusted income than the average EU-15 citizen in 2005). As shown in Table 2, the growth rates of the USA and the EU were almost identical over the period 2001–05 (but these forecasts overestimated actual turnout rates for the EU for 2004 and 2005, which were considerably lower). Note that Japan had a negative growth rate over this period. Its economy shrank in absolute size (this was also the case for Romania and Bulgaria over the transitional period 1990–2002).

### Table 2 Comparative data for the EU, the USA, Japan and the main EU candidate countries (estimates for 2005)

Population (millions)GDP (at market prices) Euro bnGDP (PPP) Euro bnGDP per head of population (EU-15=100)1GDP per head of population at PPP rates (EU-15=100)Growth rate annual % change 2001–052
EU-1538510.010.01001003.8
EU-2546010.511.087.891.93.9
Japan1284.23.5124.4104.6−0.3
Turkey730.2620.44213.823.23.1
Romania211.1550.1659.929.4−0.1
Bulgaria80.0210.06710.730.5−0.7
(adapted from European Union, 2004; World Bank, 2003)

Note: 1For this and the next column the comparative figures are measured as an index number relative to that of the EU-15 countries, which are designated as 100. 2For Turkey, Romania and Bulgaria, growth rates are averaged over the period 1990–2002.

The differences between the EU-15 and the EU-25 shown in Table 2 arise because the ten new members who joined in 2004 were considerably less wealthy in 2005. And these differences would be further exaggerated if Turkey, Romania and Bulgaria were to join. Even on a PPP adjusted basis Turkey's per capita GDP in 2005 was just a quarter of the EU average. Because it is such a large country in terms of population, this could have the effect of dragging down the EU averages significantly.

Of course the fact that these, and the majority of the ten countries who joined in 2004, are considerably less prosperous than the EU-15 is part of the reason for them wanting to join, and why they should perhaps be welcomed. If the EU is not to become simply a ‘rich man's club’ it is reasonable for less wealthy countries to join so they may be able to prosper by this move, and the already existing members could also benefit by the addition of new markets and sources of labour. However, the economic challenge posed by this is obvious. The EU-15 had achieved a considerable degree of convergence and integration; they had developed common rules and policies that suited their stage of development. As will be discussed later in this course, the advent of a large number of new, less prosperous and somewhat differently organised economies may upset the delicate balances forged between the EU-15 and require a radical rethink of how the expanded EU economy can be managed and governed (see Section 1.6).

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