The European Union WT/TPR/S/72 
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I. ECONOMIC ENVIRONMENT 
(1) INTRODUCTION  
1. Since its last Trade Policy Review in 1997, th e European Union (EU) has made significant 
progress towards the further consolidation of the In ternal Market with the landmark introduction of a 
common currency and the associated Stability and Grow th Pact setting bounds on the fiscal policies of 
participating Member States.  At the same time, the EU has been affected by external developments, 
positively by the ongoing strong external demand em anating from the United States, and negatively 
by the emerging markets' crisis of 1997-98. Othe r factors affecting in particular information 
technology and communications have been similarl y conducive to significant change.  Altogether, 
these developments have renewed awareness of th e complementarities between growth, structural 
change, and trade.  In particular, the 1999 Competitiveness Report of th e European Commission 
argues that "adaptability and rapid structural ch ange are essential for the competitiveness of the 
European economy and its resilience to  world-wide economic fluctuations".1  Capitalizing on the 
economic potential of a quickly changing and comp etitive international environment is seen as 
requiring a correspondingly high degree of flexibility in  labour and goods markets.  Recent experience 
has shown the importance of further economic integra tion through structural adjustment in the context 
of close economic policy coordination, underpin ned by a transparent and open trade regime. 
2. The introduction of the euro for eleven Member States in January 19992, and the new 
initiatives for the completion of the Internal Mark et have allowed focus on other areas, where, 
although there has been progress, the Commission feel s renewed efforts could be made, such as in 
financial services. This is also the case for the s till high rates of unemployment in the EU, despite its 
central position in Community-wide policy targets. Fu rthermore, the euro has made evident the need 
for enhanced coordination of the regulatory framewo rk and macroeconomic policy, in the context of 
the changing economic structure. With monetary pol icy in the euro area under the control of a single 
authority, greater weight now falls on, for exampl e, national fiscal policies to cope with country-
specific developments. Policies that  improve the flexibility of markets could facilitate macroeconomic 
management. 
3. The EU economy is estimated to have grown by  2.3% in 1999. The negative impact of the 
crisis in emerging markets remained limited, main ly due to sustained domestic demand, strong growth 
in other export markets and easier monetary conditi ons. With private consumption up at an average 
annual rate of over 3% in the sec ond half of 1998 and first half of 1999, demand remained healthy, 
notwithstanding somewhat slower export and invest ment growth in the same period. Since early 
summer 1999 the EU economy turned on an accelera ting growth path, with exports benefiting from 
the global recovery after the crisis. The integr ation and development of the EU economy can be 
reinforced and accelerated in the context of comp etitive pressures emanating from an integrated and 
open global economy where the EU, by its sheer size, plays a central role.3 
4. Under pressure both from internal and external  developments, the structure of the EU 
economy continues to change.  The shares of ag riculture and industry both in production and 
                                                      
1 The Commission has endeavoured "to continue exploiting the results of its competitiveness analysis 
within the wider framework of the Cardiff process, th e Broad Economic Policy Guidelines and the European 
Employment Strategy, particularly in relation to struct ural reform issues"  (European Commission, 1999a). 
2 By Council Decision 98/317/EC of 3 May 1998, the participating Member States, also referred to as 
"euro area" countries, are Austria, Belgium, Finlan d, France, Germany, Ireland, Italy, Luxembourg, the 
Netherlands, Portugal, and Spain.  See also Euro pean Monetary Institute (1998) and Annex I.1. 
3 The potential gains of trade liberalization have been pointed out by Nagarajan (1999).  Empirical 
evidence appears to confirm a body of literature arguing that in creased exposure to inte rnational trade lowers 
price-cost margins, thus enhancing the degree of competition (Jacquemin and Sapir, 1991). WT/TPR/S/72 Trade Policy Review 
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employment have declined steadily in all Member States while service-sector employment has grown. 
This progress towards a service-based economy is based  on long-term rather than cyclical trends and 
is particularly noticeable in Austria, France, Germany, Greece, Luxembourg, Spain, and the United 
Kingdom. At the same time, despite  intense employment restructuring, employment growth in 
services has been significantly and systematically  lower in the EU than in the United States.4  The 
future evolution of the productive structure in the EU  is likely to reflect its integration in the world 
economy. 
(2) RECENT ECONOMIC DEVELOPMENTS5 
5. Since the early 1990s, macroeconomic policy in the EU has been aimed at restoring 
macroeconomic fundamentals conducive to sustaina ble growth: price stability and sound budgetary 
positions. This resulted in a remarkable convergen ce of inflation and budgetary performances at the 
start of Stage Three of European Monetary Union (EMU). The launch of the euro on 1 January 1999 represented a milestone, while at the same time reducing the number of available macroeconomic 
instruments, influencing the policy assignment, and moving the dialogue between the economic and monetary authorities to the s upranational level (Annex I.1). 
6. Despite persistent differences between Member States, in particular concerning per capita 
income, they have in common a growing services s ector, whose importance in their respective GDP 
lies between that of Japan and the United States (T able I.1). For the EU as a whole, the share of 
agriculture in value-added is comparable to that  for the United States and Japan, while a number of 
Member States still exhibit shares exceeding 2%. 
Table I.1 
Major features of the EU eco nomy by Member States, 1998 
 
Area 1998 
Population 1998 
GDP per 
capita Share in GDP (per cent), 1997 
 ('000 km2) (million) (ECU) Agriculture Industry Services Construction 
Austria 83.9 8.1 23,494 1.4 24.5 66.3 7.8 
Belgium 30.5 10.2 21,920 1.2 23.6 70.0 5.2 
Denmark 43.1 5.3 28,472 3.2 21.9 69.6 5.2 
Finland 337.0 5.1 21,621 3.9 28.6 61.3 6.2 
France 544.0 58.7 21,661 2.4 23.0 70.1 4.5 
Germany 357.0 82.1 23,282 1.0 27.3 67.2 4.5 
Greece 132.0 10.5 10,2 33 8.1 15.6 68.9 7.4 
Ireland 70.3 3.7 20,479 4.5 35.9 54.6 5.0 
Italy 301.3 57.6 17,837 2.7 26.1 66.3 5.0 
Luxembourg 2.6 0.4 36,428 0.8 15.6 78.1 5.5 
Netherlands 41.5 15.7 21,448 3.0 23.2 68.5 5.3 
Portugal 91.9 10.0 9,615 4.1 27.6 62.3 6.0 
Spain 505.9 39.3 12,899 4.1 27.6 62.3 6.0 
Sweden 450.0 8.8 22,884 1.8 24.1 69.3 4.7 
United Kingdom 244.1 59.1 20,599 1.5 26.5 66.9 5.1 
Total EU 3,191.1 374.6 19,868 2.1 25.3 67.4 5.1 
Memorandum:        
United Statesa 9,373.0 267.6b 29,810b, c 2.0 27.0 71.0 n.a. 
Japana 377.7 126.1b 33,468b, c 2.0 38.0 60.0 n.a. 
 
a Industry includes construction. b 1997 data. 
c U.S. dollars. 
n.a. Not applicable. 
Source:  Data provided by the European Commission a nd World Bank (1999), for the U.S. and Japan. 
                                                      
4 During the 1980s, employment growth in services did not differ greatly across the Atlantic. The 
apparently ever-widening gap between the EU and the United States in the 1990s may be due to greater 
persistence of macroeconomic shocks in the EU (European Commission, 1999a). 
5 This section is based on European Commission (1999a). The European Union WT/TPR/S/72 
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(i) Growth patterns 
7. The pace of economic growth in the EU remained  relatively stable in 1997 and the first half 
of 1998 (Table I.2). The relatively modest growth  performance was partly due to the global economic 
slowdown, contributing to the reduction of the annual ra te of real GDP growth from a solid 3% in the 
first half of 1998 to about 1.75% in the first half of 1999. During this period, extra-EU exports were 
dampened (exports of goods and services grew by 0. 8% in the second quarter of 1999 compared with 
7.5% a year earlier) and manufacturers' business conf idence suffered a setback. Industrial output fell 
temporarily, while the stock of finished products  was increasingly considered as excessive and 
triggered an important downward adjustment in inventories. Investment in equipment also 
decelerated, albeit less than initially feared. 
Table I.2 
Overall performance of the EU economy, 1996-99 
(Per cent) 
 1998  1999 
 1996 1997 1998 
Q2 Q3 Q4  Q1 Q2 Q3 Q4 
 Annual percentage change 
Real GDP 1.6 2.5 2.6 2.8 2.6 1.9  1.7 1.8 2.3 3.1 
Domestic demand 1.4 2.2 3.4 3.2 3.6 3.1  2.9 2.7 2.6 3.1 
  Private consumption 1.9 2.0 2.7 2.8 3.3 3.0  3.0 2.6 2.7 2.9 
  Government consumption 1.7 0.5 1.4 1.4 1.1 1.2  1.4 1.2 1.5 1.5 
  Investment 1.8 3.2 5.2 3.8 5.5 4.3  4.0 5.3 4.6 4.3 
Exports of G&S  4.8 9.6 5.6 7.5 4.3 1.4  0.8 2.1 5.2 7.1 
Imports of G&S 4.1 9.1 8.4 9.4 7.8 5.1  4.3 4.7 6.2 7.5 
Unit labour costsa 2.0 0.7 0.0 -0.1 0.3 0.8  1.7 1.6 0.8 .. 
Money supply (M3)a 5.7 6.1 6.7 4.9 4.6 4.6  5.5 5.4 6.1 6.4 
 Per cent 
Overnight deposit ratea 4.0 4.0 3.1 3.8 3.8 3.1  2.9 2.6 2.4 3.0 
Unemployment rate 10.9 10.6 9.9 .. .. ..  9.4 9.2 9.0 8.8 
 Percentage of GDP at market prices 
Gross savings rate 20.1 20.7 20.9 .. .. ..  .. .. .. .. 
Gross investment rate 19.0 18.8 18.9 .. .. ..  .. .. .. .. 
 
.. Not available.  
a In the 11 countries comprising the euro-area. 
 
Source:  Data provided by the European Commission, Economic  and Financial Affairs Di rectorate-General; ECB, Monthly 
Bulletin ;  and Eurostat, News Releases Nos.  28/2 000 of 1 March 2000, and 33/2000 of 9 March 2000. 
8. The extent of the downturn in the EU was cont ained, however, by several mitigating factors. 
First is the monetary and fiscal policy mix: in a context of low and decelerating inflation, the downward convergence of short-term interest rate s in 1998, the easing of the European Central 
Bank’s key policy rate by 50 basis points in April 1999 , and reductions in official interest rates in 
non-euro-area Member States, all contributed towards strengthening confidence and providing 
adequate support to domestic demand and economic activity. At the same time, budgetary policies 
remained directed towards achieving the required ad justment, thus preventing any adverse effects on 
long-term interest rates. Second, the robustness of economic activity in some sectors helped to weather the deterioration in the external environm ent. Output in the construction sector gathered 
momentum as residential construction was boosted by high household confidence and low interest WT/TPR/S/72 Trade Policy Review 
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rates, whilst public works no longer suffered from fiscal  consolidation efforts. Also, activity  in the 
high-value-added services sectors remained buoyant. Finally, consumer confidence has remained at 
high levels, partly reflecting steady gains in net job creation, which sustained robust growth in private 
consumption. 
9. Growth prospects in the EU have improved markedly since early summer 1999. A positive 
impulse came from improvements on the external side where the pick-up in global activity combined 
favourably with enhanced price competitiveness of EU enterprises due to the depreciation of the euro.  
A recovery in industrial producti on is under way, confidence in manufacturing has rebounded, and the 
assessment of inventories by industrialists increasing ly suggests that the stock adjustment has run its 
course. Domestic demand indicators also helped to strengthen output growth in the remainder of the 
year, reaching 3.1% in the last quarter of 1999. 
10. The deceleration in economic activity in 1998-99  was accompanied by a marked variation in 
output growth rates across euro-area countries. I ndeed, the last two years have witnessed a clear 
widening in growth differences in the euro area as a w hole;  the almost habitual disparity between the 
larger and smaller countries wa s supplemented by the emergence of considerable divergences 
amongst the largest countries.  Among the four la rgest countries, the uneven growth pattern was 
especially striking, with Germany and Italy suffering a steep slowdown from late 1997, and France and Spain enjoying noticeable e xpansion. Growth differences re flect vulnerability to external 
developments, the adjustment of macroeconomic po licies in the run-up to EMU, and disparities in 
potential growth rates. 
(ii) Labour market performance 
11. Unemployment in the EU declined in 1999 to single  digits for the first time in five years;  it 
was 9.2% in 1999 on average, down from 9.9% in 1998 and 10.6% in 1997.
6 According to the 
Commission, the decline in the unemployment rate te nds to understate the extent of the improvement 
in labour market performance over the past two years, as more people appear to have been drawn into 
the labour force, resulting in a higher participation rate. While the present employment rate in the EU 
as a whole may be low, both in historical terms and relative to the rates prevailing in the United States 
and Japan, the upward trend in recent years has been  encouraging, with a further gain in 1999. 
12. However, the speed of employment adjustme nt in the EU appears asymmetric, with 
employment levels adjusting downw ards relatively quickly in the recession of the early 1990s but 
adjustment in the opposite direction taking longer in the current upturn. In 1998, following five years 
of economic expansion, the job losses experience d during 1992-94 were offset.  In 1999, total 
employment in the EU clearly exceeded the peak reached in 1991. Also, the contribution of job 
creation to growth in the 1990s would appear to be high by historical standards;  GDP growth in the 
expansion phase was comparable to that achieved in  the 1980s but with employment growing at a 
faster pace. As a result, labour productivity grow th would seem to have experienced a slowdown. 
13. Despite the general improvement in the EU-wide labour market performance, large 
differences still exist at the level of Member States (T able I.3). In terms of employment growth rates, 
differences across Member States are not only closely related to GDP growth differentials, but also to 
a number of structural factors, which are instrumental  in influencing the relative job-content of growth 
in the respective countries. The present cyclical upt urn is not leading to a significant convergence in 
employment and unemployment rates across Member States, making evident rigidities in the mobility 
of labour. While in some countries, employment rates are much higher than the EU average, in others 
                                                      
6 Unemployment in the euro area fell to just under 11% in 1998, with a further reduction to 10% in 
1999. The European Union WT/TPR/S/72 
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less than 60% of the working-age population is in  active employment and unemployment rates still 
exceed 10%. 
14. Marked differences in current overall employment performance among Member States, 
despite quite similar macroeconomic shocks in past  decades, reveal that th e European employment 
problem is, to an important extent, of a structural  nature. However, as far as the composition of the 
workforce is concerned, national labour market s share some common characteristics. Overall, 
unemployment tends to be long-term and aff ects particularly the unskilled and the young.7   
Table I.3 
Main economic indicators  by Member State, 1996-98 
(Per cent) 
 Interest rates Unemployment General government 
balance Inflation GDP Growth rates 
 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 
Austria 6.3 5.7 4.7 4.3 4.4 4.7 -3.7 -1.9 -2.1 2.8 2.0 0.9 2.0 2.5 3.3 
Belgium 6.5 5.8 4.7 9.7 9.2 8.8 -3.1 -1.9 -1.3 2.3 1.8 1.0 1.3 3.0 2.9 
Denmark 7.2 6.2 4.9 6.8 5.6 5.1 -0.9 0.4 0.8 1.7 2.2 1.9 3.2 3.3 2.7 
Finland 7.1 6.0 4.8 14.6 12.7 11.4 -3.1 -1.2 1.0 1.6 2.5 1.1 4.1 5.6 4.9 
France 6.3 5.6 4.6 12.4 12.3 11.7 -4.1 -3.0 -2.9 1.8 1.1 0.4 1.6 2.3 3.2 
Germany 6.2 5.7 4.6 8.9 9.9 9.4 -3.4 -2.7 -2.1 1.8 1.5 0.8 0.8 1.8 2.3 
Greece .. .. 8.5 9.6 10.0 9.8 -7.5 -3.9 -2.4 8.3 5.6 4.7 2.4 3.2 3.7 
Ireland 7.3 6.3 4.8 11.6 9.8 7.8 -0.3 1.1 2.3 1.4 0.9 2.5 8.3 10.6 11.9 
Italy 9.2 6.7 4.8 12.0 12.0 11.8 -6.6 -2.7 -2.7 4.3 2.5 2.4 0.7 1.5 1.4 
Luxembourg 6.3 5.6 4.7 3.0 2.8 2.8 2.8 2.9 2.1 1.6 0.9 1.0 3.0 3.7 5.7 
Netherlands 6.2 5.6 4.6 6.3 5.2 4.0 -2.0 -0.9 -0.9 1.6 2.0 1.9 3.1 3.6 3.7 
Portugal 8.6 6.4 5.0 7.3 6.8 4.9 -3.3 -2.5 -2.3 3.6 2.0 2.8 3.2 3.7 4.0 
Spain 8.7 6.4 4.8 22.2 20.8 18.8 -4.5 -2.6 -1.8 3.4 2.5 2.0 2.4 3.5 3.8 
Sweden 8.1 6.7 5.0 9.6 9.9 8.3 -3.5 -0.7 2.0 1.2 2.2 1.1 1.3 1.8 2.9 
United 
Kingdom  
7.8 7.0  
5.5  
8.2 7.0 6.3 -4.4 -1.9 0.6 3.1 2.6  
1.9  
2.6 3.5 2.3 
Total EU15 7.3 6.2 4.9 10.9 10.6 9.9 -4.1 -2.3 -1.5 2.7 2.0 1.5 1.6 2.5 2.6 
 
.. Not available. 
 
Source:  Data provided by the European Commission, Ec onomic and Financial Affair s Directorate-General. 
 
(iii) Public finances 
15. All Member States now conduct their budgetary po licies within the framework of the Stability 
and Growth Pact (SGP). For Member States partic ipating in EMU, emphasis in the SGP is put on 
achieving medium-term budgetary positions of "close to  balance or in surplus" to ensure that they 
respect the 3% of GDP deficit ceiling even in periods of normal cyclical slowdown (Box I.1). 
Furthermore, in line with the Broad Economic Po licy Guidelines, budgetary strategies should also be 
appropriately structured to be conduciv e to economic growth and employment. 
                                                      
7 Half of the unemployed in the EU have been looking for a job for 12 months or more. Moreover, 
while workers with high-level professional skills acco unt for only 12% of the unemployed, the share of 
unskilled individuals in total unemployment is close to 50%. In addition, 20% of young people willing to work are unable to find a job. The probability of having a job is also much lower for women and older people than for 
prime-age males. The employment rate for women is  30% lower than for males aged 24-50, while the 
employment rate for older workers is lower s till and has grown less in recent years (European 
Commission, 1999a). WT/TPR/S/72 Trade Policy Review 
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Box I.1:  The Stability and Growth Pact  
The European Union's Stability and Growth Pact, finalized at the Amsterdam European Council in 
June 1997, clarifies the Maastricht Treaty's provision fo r dealing with "excessive deficits" and provides an 
institutional framework for its enforcement, in part through strengthened surveillance and coordination of 
economic policies via the annual review of national stability programmes.  The Pact also calls on 
participants in the Economic and Monetary Union (EMU) to adopt budgetary balance (or even a surplus) as 
a medium-term objective. 
For countries participating in EMU, the Pact consider s a general government deficit above 3% as excessive 
unless the European Commission judges it to be temporary or justified by special circumstances. In the 
case of an excessive deficit, the Council of Ministers will propose a course of action for the country, on the 
recommendation of the Commission, which should be followed by effective measures within four months.  
The Council will monitor the measures, and if they are found to be inappropriate it will make further, more 
detailed proposals.  If corrective measures have not be en implemented within ten months, sanctions will be 
imposed.  These would initially take the form of non -remunerated deposits, with a fixed component equal 
to 0.2% of GDP and a variable component rising in line with the size of the excessive deficit.  Such 
deposits are limited to a maximum of 0.5% of GD P per year, but would accumu late each year until the 
excessive deficit is eliminated.  Provi ded the excessive deficit is corrected  within two years the deposits are 
returned to the country, otherwise th e deposits will become non-refundable (i.e. a fine).  In the event that 
the measures taken by a country are ineffective, the whole process will be restarted but sanctions will be 
imposed within three months. 
When a country is judged to be in recession, which is defined as an annual fall in real output (GDP) of at 
least 0.75%, the Pact will be enforced in a differen tiated manner.  If economic output in a Member State 
declines by 2% or more – and provided the deficit is temporary – exemption from the procedures is granted 
automatically.  In the event of GDP falling by between 0.75% and 2%, exemption can be granted in special circumstances by the Council of Mi nisters.  The country would need to convince the Council that the 
economic decline was "exceptional" in terms of its  abruptness or in relation to past experience. 
Source :  OECD (1999a). 
 
16. The Commission has calculated a "minimum benchmark" for each Member State, based on 
past experience, indicating an underlying budgetary position that would allow automatic stabilizers to 
operate fully below the 3% deficit ceiling, thus in terpreting in operational terms what is "close to 
balance or in surplus". The benchmarks indicate th at most countries should not exceed an underlying 
deficit in the range between 0% to 1% of GDP . According to the stability programmes updated in 
early 2000, economic growth assumptions for 2000 a nd the following few years were revised slightly 
upwards for several Members compared with the or iginal programmes. According to the ECB, some 
of the updated stability programmes clearly represen t a step forward compared with the original 
programmes, while others could be  more ambitious. A few countries already appear to comply fully 
with the requirements of the Stability and Growth Pact and are expected to do so throughout the 
forecasting horizon. However, some governments envi sage only very modest deficit cuts in 2000, 
while stronger efforts are planned for later years. Such a strategy implies that unforeseen 
developments might put fiscal targets at risk. Mo reover, not all countries appear able to create 
sufficient additional safety margins in order to avoid an excessive deficit even in  the event of a future 
protracted decline in growth rates. In most pr ogrammes, adjustments relating to the ageing population 
have yet to be taken sufficiently into account. More over, very high government debt levels in some 
countries would justify additional efforts in fiscal retrenchment.8 
17. Some strains were put on the new SGP frame work by the economic slowdown of autumn 
1998 and the first half of 1999. Despite this slow er growth, budget balan ces generally improved in 
                                                      
8 European Central Bank, Monthly Bulletin , March 2000. The European Union WT/TPR/S/72 
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1999 compared to 1998. In the euro area, the act ual budget deficit was cut from 2% of GDP in 1998 
to 1.5% in 1999.9 In the Union as a whole, the actual defi cit was reduced from 1.5% of GDP in 1998 
to 0.6% in 1999. Among the leading factors are: ta x revenues rising faster than expected in 1999; the 
budgetary effects of the economic slowdown in 1999 (mainly due to an external demand shock and an 
accompanying fall in investment growth) remaining fairly limited; and some Governments may have 
been too prudent about the gains to be expected fro m further reductions in debt service costs in their 
budget plans for 1999. 
18. Increased effectiveness of spending controls has helped to contain primary expenditure 
growth. Government investment expenditures remain ed constant in relation to GDP. At the same 
time, and in the EU as a whole, the gross pub lic debt ratio decreased somewhat in 1999 in 
continuation of the downward trend in  the debt ratio initiated in 1997. 
(iv) Inflation 
19. As a consequence of the slackening economic activity, falling commodity prices, and global 
excess capacity in the wake of the emerging market s' crisis, consumer price inflation in the EU 
declined to historically low levels (1.3% in 1998 compared with 1.7% in 1997).10  Subsequently, the 
recovery in external demand and special supply factor s in the oil market led to an upward pressure on 
prices. In February 2000, the EU's inflation rate was 1.9%.11 Notwithstanding upward pressure on 
prices from external sources during 1999, internal  demand and supply conditions were conducive to 
lower inflation in the EU, as re flected by potential supply outstripping demand, subdued wage 
increases, deregulation, and strong competition. 
20. The headline Harmonized Index of Consumer Prices (HICP) annual inflation rate in 
February 2000 varies across euro-area Member States from around 1.4% in Sweden to 4.6% in Ireland. The dispersion in inflation did not decline in the course of 1999. Underlying inflation in September 1999 was lowest at 0.5% or less in Austria, France, and Germany; and core inflation (excluding oil) was above 2% in Ireland, Portugal, and Spain, and close to 2% in the Netherlands.
12 
(v) Monetary policy 
21. Within the euro area, markets are now operating in the context of a single monetary policy. 
The euro area has common short-term interest rates and no internal exchange rate risk;  these factors 
have resulted in a convergence in longer-term intere st rates. Overall euro-a rea monetary conditions 
were generally accommodative in 1999, against a background of a relatively weak economic 
performance and sustained price stability. The operati ng procedures for an exchange rate mechanism 
in Stage Three of the EMU for other members of the EU, known as ERM II, were adopted in 
September 1998 and became effective on 1 January 1999. Denmark and Greece have chosen to participate in ERM II. 
22. The transition to the new euro-area monetary  policy regime was generally smooth. The 
European Central Bank (ECB) set the main refinanci ng rate to apply at the beginning of the euro at 
3%.
13 Official interest rates remained unchanged until 9 April 1999 when the main refinancing rate 
was reduced by 50 basis points to 2.5% as a res ponse to the downward inflation risk implied by 
                                                      
9 European Central Bank, Monthly Bulletin , March 2000. 
10 Latest figures provided by the Economic and Financial Affairs Directorate-General. 
11 Eurostat News Release No. 37/2000 of 20 March 2000. 
12 European Commission (1999b). 
13 In addition, the ECB set its marginal lending facility at 4.5% and its deposit facility at 2%, 
establishing a "corridor" of 250 basis points within which the overnight rate could fluctuate. WT/TPR/S/72 Trade Policy Review 
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deteriorating growth prospects in the euro-ar ea economy. On 4 November 1999, the ECB restored 
interest rates to the level that applied before the reduction in April to counter an upward trend in the 
balance of inflation risk amid signs of a strengt hening in the euro-area economy since the middle of 
the year. The rates were increased on 3 Februa ry 2000 by 25 basis points, and again on 
15 March 2000 and 27 April 2000, in response to a renewed assessment of the risks to price stability 
in the medium term. 
23. Changes in ECB official inter est rates occurred against a background of strong growth in 
euro-area money supply throughout the year. Money supply developments are particularly relevant 
because the ECB has established a sp ecified reference value for the annual growth rate in the broad 
M3 aggregate as the more important of two pillars in  its monetary policy strategy. The role attributed 
to money supply growth in the policy strategy re flects the assumption of a stable relationship between 
money demand and the price level.14 The unexpected strength of M3 growth in the early months of 
1999 did not deter the ECB from lowering official inte rest rates in April, because the deviation from 
the reference value was considered to be relatively sm all and not to be indicative of incipient inflation 
pressures. However, the widening in the deviation to wards the end of the year was cited as a factor 
underlying the decision to raise official rates. 
(vi) The exchange rate 
24. The ECB has made clear that, in principle, no active exchange rate policy will be pursued. 
This important policy tool is reserved for circum stances where price stability is at stake.  The 
depreciation of the euro following its introduction, against the dollar, the yen, and the pound sterling, 
is mainly attributable to cyclical factors. In pa rticular, according to the ECB, the weakening trend in 
the €/US$ exchange rate reflects, at least during mo st of 1999, an unwinding in the appreciation of the 
ERM currencies against the U.S. do llar in the second half of 1998. Apart from cyclical factors, the 
depreciation in the euro during its first year of existence also reflected market perceptions of 
difficulties in the economic management of the euro  area, such as the role of monetary policy in 
macroeconomic stabilization, the credibility and appr opriate pace of budgetary consolidation, and the 
urgency and scope of structural reform.  These fact ors may have taken a central role in the further 
deterioration of the euro.  
25. As regards non-euro-area Member States, positive interest-rate differentials vis-à-vis the euro 
area, combined with traditional spillover effects from movements in the U.S. dollar, have been 
reflected in the strength of the pound sterling. The Sw edish krona firmed against the euro for much of 
1999 but lost ground in the last quarter. The Dani sh kroner has remained very close to the ERM 
central parity, while the Greek drachma was stable  and significantly above its ERM central parity. 
(3) DEVELOPMENTS IN TRADE  
26. The EU continues to be the world's largest e xporter of merchandise (20.1% of world exports 
in 199815) and is the second largest importer (18.9% of the total). Following extraordinary growth of 
15% in 1997, the value of EU merchandise exports  experienced a considerable slowdown in 1998, 
registering growth of 1.4%, mainly due to decreased demand from Asian countries following the 
financial crisis in the region and c ontinued slow growth in Japan.  The impact of the fall in demand is 
more noticeable in manufactured products, especially machinery (Table AI.1).  The slowdown is less 
                                                      
14 In normal circumstances, therefore, the actual growth  rate in M3 relative to the specified reference 
value will be an important guide to the level of official in terest rates that is appropriate to ensure stable prices. 
However, the ECB stresses that the reference value is not an intermediate policy target so that there can be no 
mechanical link between money supply developments and movements in official interest rates. 
15 Excluding intra-EU trad e (WTO, 1999, Table I.6). The European Union WT/TPR/S/72 
 Page 9 
 
 
marked for merchandise imports, whose growth rate in 1998 was 5.9%, down from 15.7% in 1997 
(Table AI.2).  
27. A significant appreciation of currencies in the ERM during 1998 played an important role in 
the disparate performance between imports and e xports, which narrowed the EU's trade surplus in 
1998 to ECU 22.7 billion fro m ECU 48.6 billion in 1997. 16  Figures for 1999 indicate that exports 
grew by 3%, and imports by 9%.  The resulting € 13.7 billion deficit in the trade balance for 1999 
largely reflects a disproportionate increase in oil im ports due to its threefold price increase during the 
year. Despite the continued weakening of the euro  during the first months of 2000, the deficit may 
increase in the course of the year, as indicated by th e € 12.3 billion deficit in January 2000 alone (the 
deficit was € 6.8 billion in January 1999). 
28. Among the Member States, Germany was the larges t trader in 1998, with a trade surplus of 
more than ECU 38 billion (ECU 70 billion when intr a-EU trade is considered) (Table I.4).  The 
United Kingdom and France were a distant second and third in terms of total trade;  the United Kingdom had a trade deficit of more than ECU 21 billion and the largest share of extra-EU 
imports.  In 1999, Germany had the largest surplus (€ 67.0 billion), and the United Kingdom the 
largest deficit (€ 49.7 billion). Ireland continued to show the strongest trade growth, and has the 
second largest surplus (€ 23.5 billion). 
Table I.4   
Extra-EU trade by EU Member States, 1998 
 Extra-EU trade Extra-EU trade/total trade 
 Exports Imports Exports Imports 
 (ECU million) (per cent) 
Austria 20,477 16,321 35.8 26.3 
Belgium 38,577 43,295 24.2 29.1 
Denmark 14,464 12,391 33.2 29.6 
Finland 17,137 10,080 43.9 34.3 
France 107,615 89,062 37.6 32.4 
Germany 210,545 172,449 43.6 41.7 
Greece 4,513 8,510 47.7 34.1 
Ireland 17,612 14,711 30.2 38.4 
Italy 94,445 73,969 43.8 38.4 
Netherlands 40,204 76,618 21.0 42.8 
Portugal 3,980 7,498 18.4 22.8 
Spain 27,501 35,153 29.5 31.5 
Sweden 31,800 18,772 42.7 31.1 
United Kingdom 102,509 133,532 42.0 46.6 
Total Extra-EU 731,380 712,364 37.0 37.6 
Memorandum (US$ million)     
  United States 634,674 944,350 n.a. n.a. 
  Japan 388,136 280,634 n.a. n.a 
 
n.a. Not applicable. 
 
Source:  European Commission, Intra- and Extra- EU trade  [CD-Rom], Supplement 2, 1999;  and UN, Comtrade data base. 
                                                      
16 Eurostat News Release No. 42/2000 of 3 April 2000. WT/TPR/S/72 Trade Policy Review 
Page 10 
 
 
29. The ratio of extra-EU merchandise trade (imports  plus exports) to GDP for the EU was just 
above 0.19 in 1998;  that of trade in services amounted to 0.06 in 1997. The EU continues to be the world's largest exporter and importer of services, ac counting for around 41.5% of the respective totals 
(figures are available only for cross-border transac tions). France, Germany, Italy, and the United 
Kingdom are the top four Member States, with a joint share of 25.1% and 25.4% respectively.
17  
Travel remains by and large the EU's largest services export and import subsectors;  royalties and licence fees, financial, and insurance services e xports recorded growth rates exceeding 20% in 1997 
(Table AI.3).  The fastest growing imports were in telecommunications services.   
30. The ECB regularly publishes consolidated a nd harmonized balance-of-payments information 
for the euro area, which includes a detailed financial account balance (Box I.2). 
Box I.2:  Balance of payments in the euro area  
The current account surplus of  the euro area fell by € 17.1 billion to € 43.2 billion in 1999 , due primarily to 
a € 18.9 billion decrease in the goods surplus and to a higher deficit for services of € 6.6 billion (compared 
with ECU 0.9 billion for 1998). Two major factors contributed to the decline in the goods surplus: the low 
level of export values during the first half of 1999, due pr imarily to the “carry-over” effects of the steep 
decline in foreign demand in 1998; and the sharp rise in import prices during the year, which was due to 
considerably higher oil prices and the depreciation of th e euro (Table AI.4). By contrast, lower deficits in 
both the income and the current transfers accounts, wh ich fell to € 7.3 billion and € 42.8 billion (from ECU 
11.9 billion and ECU 45.8 billion in 1998), respectively, contributed to limiting the decline in the current 
account surplus during 1999. 
The transition to a common currency appears to ha ve had a positive impact on the financial account 
balance. Net portfolio investment outflows of € 21.3 billion in 1999 were substantially lower than in 1998 
(ECU 85.3 billion). This was related to the swing in debt instruments from net outflows of ECU 84.8 billion in 1998 to net inflows of € 34.8 billion in 1999, triggered both by lower investment by 
euro-area residents in foreign debt securities and stro nger demand from foreign investors for euro-area debt 
instruments, in particular money market instruments. In contrast, high equity investment net outflows reached € 56.1 billion in 1999, compar ed with a net inflow of ECU 0.4 b illion in the same period of 1998, 
mainly as a result of higher investment in foreign eq uities by euro-area residents. Furthermore, net outflows 
of direct investment amounted to € 147.2 billion in 1999, substantially more than the ECU 102.6 billion 
recorded in 1998. The figures for 1999 reflect both an  increase in direct investment abroad by euro-area 
residents, from ECU 183.0 billion to € 212.5 billion, and a decline of foreign direct investment in the euro 
area, from ECU 80.4 billion to € 65.2 billion. 
Source : European Central Bank, Monthly Bulletin , various issues. 
 
(i) Composition of merchandise trade 
31. Broad sectoral trade patterns in the EU have remained relatively unchanged since the last 
Review.  The EU's dependence on mineral fuels and ot her raw materials is depicted by the large share 
of these sectors in total imports and significant sectoral trade deficits in 1998 (Chart I.1 and 
Table AI.2). Together they account for 22% of total imports.18  Nevertheless, and with the exception 
of oil-related products, the highest import figur es among manufactures are for electrical machinery, 
office and data-processing machines, clothing, and road vehicles.19  The top five sectors account for 
32.7% (26.1% excluding oil) of total imports, thus reflecting a relatively dive rsified import demand.  
The sizeable fall in the share of oil imports in value terms for 1998 reflects historically low price 
levels recorded that year and should rise sharply in 1999 following the steep rise in oil prices. During 
                                                      
17 WTO (1999), Table I.7. 
18 SITC Rev.3 one-digit categories 0 through 4. 
19 SITC Rev.3 two-digit categories. The European Union WT/TPR/S/72 
 Page 11 
 
 
1999, there was growth in imports of all product grou ps except "food & drink" and "crude materials". 
The oil price increase during 1999 was reflected in a 26% growth in the value of energy imports;  the 
energy deficit increased by € 13 billion.20 
Source: Euro pean Commission , Intra- and Extra-EU trade [CD-Rom ], Supplement 2 , 1999.Food, 
beverages 
and tobacco
5.9Mineral 
fuels
1.9Chemicals
13.0
Leather, 
rubber, paper, 
textile, etc.
15.4
Road 
vehicles
9.3
Electrical 
machinery
7.2Office 
machines
2.9Other machinery and 
transport equipment
27.4Other  
manufactured
12.2Other  4.7
Total: ECU 731.4 billion Food, 
beverages 
and tobacco
7.0Mineral 
fuels
9.1 Chemicals
7.7
Leather, rubber, 
paper, textile, 
etc.
13.3
Road 
vehicles
5.2
Electrical 
machinery
7.6Office 
machines
7.6Other machinery and 
transport equipment
16.9Other  
manufactured
16.3Other
9.4
Total: ECU 712.4 billion ImportsChart I.1
External trade by sector, 1998
(Per cent)
Exports
0+1 35
6
78
77
75Other 782+4+9SITC 
Rev.3
 
32. Road vehicles, electrical machinery, and other machinery and transport equipment continue to 
be the leading EU exports, with a joint share of 46. 9% of total exports in 1998.  Road vehicles alone 
constituted 9.3% of total exports  in 1998 and grew by 19.7%  between 1996 and 1998 to ECU 68 
billion (Table AI.1).  Sectors with a growing share in  total exports (each with more than 3.5% of the 
total) are power-generating machinery, tel ecommunications equipment, and medical and 
pharmaceutical products, whose exports increased by more than 50% in valu e in each case between 
1995 and 1998. Exports in 1999 were weak across all main product groups except "chemicals" and 
"energy".21 
(ii) Direction of trade 
33. The overall geographical distribution of the EU's external trade has changed slightly since the 
last Review.  The United States remains EU's largest  single trading partner, with shares of 21.3% and 
22% in 1998 imports and exports, respectively (C hart I.2, Tables AI.5 and AI.6).  Merchandise 
exports to the Americas surpassed those to Asia in 1998 (31.5% and 24.9% of the total respectively), 
and imports from the Americas exceeded those from other European countries in both 1997 and 1998.  
While the Asian crisis is largely responsible for export developments in 1998, a clear narrowing was 
                                                      
20 Eurostat News Release No. 42/2000 of 3 April 2000. 
21 Eurostat News Release No. 42/2000 of 3 April 2000. WT/TPR/S/72 Trade Policy Review 
Page 12 
 
 
already evident starting in 1995, thus emphasizi ng the growing importance of the North American 
market for the EU. 
Europe
27.4Asia
34.6America
28.6
Europe
32.5Asia
24.9America
31.5
Source: Euro pean Commission, Intra- and Extra-EU trade,CD-Rom, Supplement 2, 1999.Chart I.2
External trade by partner, 1998
(Per cent)
United States
21.3
Other 
America
7.3
Switzerland  7.0
Poland  2.3
Russian Fed  3.2
Turkey
1.9Other Europe
12.9Middle East
3.8Japan  9.2Other Asia
21.6Africa
7.4Other
2.0
Total: ECU 731.4 billion Total: ECU 712.3 billion Imports Ex ports
United States
22.0
Other 
America
9.5
Switzerland  7.9
Poland  3.8
Russian Fed  2.9
Turkey
3.0Other 
Europe
14.8Middle 
East
6.9Japan
4.3Other Asia
13.6Africa
7.9Other
3.3
 
34. Eastern Europe has also exhibited a growing importance as an export market, with a gain of 
3.3% (to 15.4%) of total merchandise exports between  1995 and 1998.  This reflects the shift in 1998 
of trade orientation in the EU away from traditi onal markets such as Japan, whose import and export 
shares fell from 10% and 5.7% in 1995 to 9.2% and 4.3% in 1998, respectively. Trade with its major partners in 1999 was mixed, with some flows strong and others weak or falling. Particularly strong 
were exports to the United States (13%), Japan ( 12%), China (11%) and Hungary (10%), and imports 
from China (18%), Hungary (18%), the Czech Re public (15%), Russia (12%) and Turkey (10%). 
Exports to Russia (-30%), Norway (-8%) and Turkey (-8%) suffered strong declines.
22 
(4) OUTLOOK FOR 2000  AND 200123 
35. According to the Broad Economic Policy Guid elines for 2000, the key challenges faced by 
the EU are restoring full employment, promoting the transition to a knowledge-based economy, 
preparing for population ageing, and improving social cohesion. In the same direction, the Lisbon European Council meeting of 23 and 24 March 2000 concluded that globaliza tion and the challenges 
of a new, knowledge-driven economy will require a fundamental transformation of the EU economy. 
The Lisbon Council underlined the need for the EU to agree a programme for building knowledge 
infrastructures, enhancing innovation and economic  reform, and modernizing social welfare and 
education systems. It stressed that the EU needs to take action to improve the efficiency of its service 
sectors, particularly in relation to telecommunications  and the Internet. It also recognized the need to 
                                                     
 
22 Eurostat News Release No. 42/2000 of 3 April 2000. 
23 Based on European Commission (1999b, 2000a). The European Union WT/TPR/S/72 
 Page 13 
 
 
speed liberalization in areas such as gas, electricity, postal services, and transport. Other priorities 
identified include intensifying efforts to promote competition and reduce the general level of state 
aids, improving the efficiency and degree of integr ation of financial markets, and creating a more 
friendly environment for starti ng up and developing innovative businesses, especially small and 
medium-sized enterprises.  
36. The European Commission's Spring 2000 forecast i ndicates that real GDP growth in the EU 
will accelerate from 2.3% in 1999 to 3.4% in 2000 and 3.1%  in 2001;  the contribution of net exports 
is expected to shift from negative in 1999 to br oadly neutral. Among domestic demand components, 
private consumption expenditure is forecast to con tinue growing by just over 2.75% per year. Given 
these favourable domestic demand cond itions and rising capital profitability, investment in machinery 
and equipment is likely to accelerate. However, the r ecent rise in interest rates will contain the growth 
of investment, which is expected to be between 6.7%  and 7.5% per year. Investment in construction is 
expected to grow only by around 4%, mainly due to the relatively subdued activity in Germany, 
which is emerging from a period of over-investment. 
37. Moreover, differences in growth trends observe d within the euro area and especially among 
the larger countries in 1999 are expected to diminish  over the next two years. The adjustment of the 
macroeconomic policy mix to th e global economic and financial crises of 1997/98 caused lagged 
reactions in Member States’ economies and is disa ppearing.  Annual growth rates in 2000 for euro-
area countries are expected to range from 2.7% in the case of Italy to 7.5% for Ireland. The two 
largest euro-area countries, Germ any and France, are forecast to grow by 2.9% and 3.7%, 
respectively. Outside the euro area, Denmark is e xpected to record growth of 2% in 2000, the 
United Kingdom is forecast to grow by 3.3%, and Sweden and Greece could each attain 3.9%. 
38. Net job creation is expected to be at a ra te above 1% over the next two years, with 
employment increasing by 1.3% in 2000 and 1.2% in 2001. Further structural reforms would be 
needed for the unemployment rate to be pushed below the forecasted 7.9% in 2001. Higher energy 
prices and the depreciation of the euro could continue  to put upward pressure on inflation, predicted to 
reach 1.8% in 2000 and 1.7% in 2001, up from 1.3% in 1999. Inflation differentials are expected to 
remain wide in the euro area. 
39. Government plans would imply a further improve ment in the average euro-area deficit and 
debt-to-GDP ratio in 2000 and beyond. Most countries are expected to achieve deficits of below 0.5% 
of GDP  (about 1% of GDP in 1999) or fiscal su rpluses and debt levels of below 60% of GDP by 
2002-03. According to current plans, all euro-area Member  States are expected to be able to cope with 
normal cyclical fluctuations by that time.24 
                                                      
24 European Central Bank, Monthly Bulletin , March 2000. WT/TPR/S/72 Trade Policy Review 
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Annex I.1:  Stage 3 of the Economic and Monetary Union: the euro 
Background 
1. The advent of the Economic and Monetary  Union (EMU) constituted one of the most 
important steps towards consolidating a Single European Market. It also embodied a major 
transformation in the international monetary system.  Stage Three of the EMU started on 
1 January 1999 with the replacement of the nationa l currencies of participating countries by a single 
common currency, the euro.1  The eleven national currencies will continue to be legal tender until 
mid-2002, when euro banknotes and coinage, to be  introduced on 1 January 2002, will become the 
sole legal tender for economic tran sactions.  The European Central Bank (ECB), which is at the centre 
of the European System of Central Banks (ESCB), is empowered to coordinate all aspects of the 
common monetary policy with the objective of pr ice stability and supporting general macroeconomic 
policy.2  The ESCB also has all 15 Central Banks as memb ers.  The design set out in the statute of the 
ECB was aimed at cementing the confidence of a credible, non-politicized, and anti-inflationary 
monetary policy unlikely to bow to pressures ar ising from economic hardship and/or political 
considerations. 
Implications for goods and cap ital markets in the euro zone 
2. One of the main objectives of EMU is the consolidat ion of the Internal Market.  This is to be 
achieved by means of a common monetary policy; the tighter coordination of other economic policies, 
in particular taxation and fiscal policy in gene ral; and their integrating impact on all markets.3   For 
example, the Commission recently published an Action Plan containing priorities and timetables for 
measures aimed at improving the Single Market fo r financial services (section IV(4)(ii)). The 
elimination of transaction costs for exchanging differe nt currencies, and lowering the natural layer of 
protection implied in such exchange fees could potentially enhance the working of the goods and 
capital markets in the euro area.  At the same ti me, direct and permanent price comparisons are now 
possible, thus increasing the level of tran sparency to traders and consumers alike.4 
3. An immediate impact is evident in the financ ial sector, where consolidated capital markets 
avoid the risk, which was still present in the ERM,  of exchange rate misalignments and currency 
attacks. The loss of short-term exchange rate va riability between participating currencies has also 
been completely eliminated.  Euro-denominated  bonds thus accounted for 50% of bonds issued 
internationally in the first quarter of 1999, a signifi cant increase from those previously denominated in 
the constituent currencies, wh ich was around 20% to 30%. 
                                                      
1 In accordance with Article 123(4) of the EC Treat y,  the Council of the European Union adopted on 
31 December 1998 the irrevocable conv ersion rates for the euro of partic ipating countries. These rates were 
based on the Exchange Rate Mechanism (ERM) bilateral central rates of the curren cies of the participating 
countries. 
2 Price stability was defined in October 1998 as a year-on-year increase in the Harmonised Index of 
Consumer Prices (HICP) for the euro area of below 2%. On 7 July 1998, the Governing Council of the ECB 
adopted a Recommendation establishing the monetary instruments at the disposition of the ECB. It decided to 
set the reference value for M3 at an annual 4.5%, thus specifying its monetary target towards attaining price 
stability. 
3 The development of a coordinated policy is understood by Duisenberg (1999a) to be an integral 
component if the EU is to benefit from the common currency.  This point is also stressed in Hämäläinen (1999) and Duisenberg (1999b). 
4 The gains are estimated in European Commission (1990) at up to 0.5% of GDP. This is especially 
evident at the banking retail level, where transaction f ees for operations between participating currencies are 
required to be published. The European Union WT/TPR/S/72 
 Page 15 
 
 
4. Furthermore, the risk premiums im plicit in real intere st rates of the participating countries are 
believed to have been reduced.  Facilitating the de velopment of deep and more integrated capital 
markets reduces the long-term interest rates via the elimination of an illiquidity premium.  This has 
been made evident by the high levels of tran sactions reached in money markets immediately 
following the establishment of the euro.   Furtherm ore, as market participants adopt more refined 
methods of adjusting portfolio exposure, the number of participants and the sophistication of position-
taking activities are likely to increase. 
Implications for growth and trade in the euro-zone 
5. In concordance with the aim of common market consolidation and to maintain a high level of 
convergence in Stage Three, the EU adopted the "Stability and Growth Pact" (SGP), detailed in 
Article 104 of the EC Treaty, complementing existi ng procedures and reinforcing budgetary discipline 
(Box I.1). 
6. As public sector debt decreases to levels agreed in the SGP, more room should be created for 
the private sector to issue debt securities.  This is expected to have a positive impact through savings 
redirected to more risky but profitable and value- adding activities.  A similar phenomenon is already 
taking place in the equity markets, as firms are conc entrating their listings to economize on costs.  The 
euro area, by its sheer size and volume of transactions , is likely to attract newcomers and concentrate 
the presence of firms already present. In the long-run,  the diversity and depth of the equities market 
will have a sizeable impact on the efficient allocati on of resources as equity financing becomes more 
readily available.  Finally, the consolidated mark et has already been marked  by an increase in firm-
level consolidation, via mergers and acquisiti ons, an aspect that may demand a more active 
competition policy. 
7. However, questions remain as to the cohesion of  the common market of the euro area given 
the large diversity of the economic bases.  In partic ular, the debate has its origin in the idea of an 
optimal currency area, which would serve as th e foundation for a common currency (Box AI.1).  
Evidence from the first year of the euro suggests that divergent rates of growth and patterns of 
industrial concentration do not a priori  strain the common currency.  On the contrary, regulatory 
differences have been revealed by the euro as a mo re formidable obstacle to economic integration. 
8. The EMU offers participating Member States the potential for greater economic stability and 
enhanced economic performance, which should increase the security and predictability of trade flows 
within the euro area.  The analysis  of the impact on intra-community tr ade is likely to be a key focus 
point once data become available. WT/TPR/S/72 Trade Policy Review 
Page 16 
 
 
Box AI.1:  Is the euro-11 an optimum currency area?  
The political desirability of a large euro area notwith standing, economic studies based on the idea of an 
Optimal Currency Area  (OCA)  point at the partial evidence against its enlargement beyond a set of core 
countries centred around Ge rmany, France, and the Bene lux countries. It is argued that countries in the 
"periphery" are subject to economic shocks of significantly different nature, and lack adequate labour 
mobility. Thus they may gain from independent monetary and exchange-rate policies, a renouncing of 
which could result in more accentuat ed economic fluctuations, with a consequently more inflationary 
policy by the ECB.   Three elements lie at the heart of this argument, and the absence of any one of them 
makes this scenario less likely.   First, the heterogene ity of economic shocks in th e euro-area;  second, the 
purported ability of National Central Banks in identif ying and addressing such imbalances through the use 
of monetary and exchange rate policies; finally, the efficiency of transmission mechanisms in correcting 
structural imbalances.  
Evidence about the incompatibility of heterogeneous shocks with an OCA is contradictory, as the 
experience of the United States exemplifies.  The in troduction of the common currency could facilitate the 
restructuring and expansion of European industry, precipitating a coordination challenge for the 
Commission.  It is hoped that the effective exploitation of economies of scale, t ogether with the necessary 
labour market deregulation, will ease the transition and help the absorption of surplus labour. Concerning 
the loss in effectiveness with a coordinated mone tary transmission mech anism as opposed to a 
decentralized one, evidence is mini mal in light of the already heter ogeneous nature of the countries' 
economies themselves.  It may even prove advantageous for those regions with poor policy timing or very 
volatile monetary policy.  As for the last element, in the case for regional monetary and exchange-rate policies, it is argued that instituting a common curren cy may in fact have an overall positive impact, by 
forcing participating Member States to implement much-n eeded structural reform in stead of resorting to the 
indirect relief of monetary and exchange rate instruments.  
However, it is the very nature of the ECB, centered around the policy objective of price stability and its 
consequent possible inflexibility in addressing legitimate economic imbalances, that could be a source of 
concern.  A severe economic shock in the euro region could potentially destabilize the political support for the euro and weaken the potential benefits of the common currency, such as in creased business confidence 
or serving as a magnet for foreign direct investment.   This gives rise to concern, given the low margin of 
support for the euro among the leading nations, in pa rticular Germany,  and the restrictions that the 
Stability and Growth Pact imposes on the member governments' fiscal policies.  However, these 
restrictions seem to have realigned fiscal budgets,  thus decreasing the likelihood of restrictive fiscal 
policies. 
Source : Eichengreen (1997, 1998), Gros (1996), Currie (1997), Duisenberg (1999c), Issing (1999) and 
The Economist  (1997, 1998). 
 
Implications for world growth and trade 
9. A more closely integrated common market, the regulatory harmonization that this should 
bring about, and the economic recove ry experienced in the aftermath of the emerging markets' crisis 
are likely to foster larger EU trade volumes with th ird countries. This is already evident in the most 
recent data for 1999 and 2000.  Furthermore, the rela tive stability of the euro vis-à-vis other major 
currencies, by reducing speculative capital flows and exchange rate volatility, may also provide an 
incentive for increased trade.5  However, it is uncertain when the euro will stabilize against other 
major currencies in light of its recent volatility an d depreciation of more than 20% from its starting 
value.  The growing importance of the Internal  Market in Community policy may increase pressures 
                                                      
5 This is not valid for the elimination of short-term exchange rate variability, which is not shown to be 
statistically significant, despite repeat ed claims of its trade-creating eff ect, as pointed out by Sekkat (1998). The European Union WT/TPR/S/72 
 Page 17 
 
 
for the protection of its currency, as some leaders have demanded6, depending on whether the self-
sufficiency pressure dominates the Community's increased role as an international trading leader and 
the corresponding opening of its market. 
10. The EMU has already had a marked  impact on  the regulation of services.  As a consequence, 
trade in services is likely to be affected, in partic ular those in banking and legal services.  This is 
particularly relevant for trade between Member St ates, but also – due to increasing consolidation of 
capital markets, an increased scope  for securitization, and the resulting evolution of the EU as a 
regional leader – at a wider pan-European level. However, the postponement of the development of a 
competitive and efficient pan-European banking structure remains one of the main concerns.7 
 
                                                      
6 Financial Times , 29 February 2000. 
7 This is pointed out by Hämäläinen (1999) in regard to political tendencies to preserve "national" 
banking structures.