European Communities WT/TPR/S/136 
 Page 1 
 
 
I. ECONOMIC ENVIRONMENT 
(1) MAIN CHARACTERISTICS  
1. The 15 member States of the European Communities (EC-15) cover a land area of 
3.2 million km2 and have a combined population of 380.8 million (Table I.1).1 France is the biggest 
country in surface and Germany the most populated, while Luxembourg is the smallest in both area 
and population.  In 2002, the GDP of the EC-15 w as € 9,170 billion (26.7% of world GDP).  Its per 
capita income was € 24,310 (more than four-fold th e world average) in 2003; Luxembourg ranks first, 
followed by Denmark and Ireland.  
Table I.1 
Selected indicators of the EC-15, euro area and the C-10, 2003 
 
Area Population  
GDP  per capita Share in gross value added 
(per cent) 
 ('000 km2) (million) Euro    PPSa  Agriculture, hunting, 
forestry and fishing Industryb  Services 
EC-15 3,154 380.8 24,310 24,300 2.0 26.7 71.3 
Euro area 2,458 306.9 23,500 23,800 2.3 26.9 70.8 
Austria 84 8.1 27,670 26,910 2.3 30.5 67.2 
Belgium 31 10.4 25,620 25,860 1.2 26.1 72.7 
Denmark 43 5.4 34,730 27,190 2.1 25.1 72.8 
Finland 305 5.2 27,510 24,500 3.4 29.9 66.7 
France 544 59.9 25,170 25,120 2.6 24.2 73.2 
Germany 357 82.5 25,800 24,050 1.1 28.6 70.3 
Greece 132 11.0 13,960 17,940 6.7 22.9 70.4 
Ireland 70 4.0 33,710 29,600 3.2 40.5 56.3 
Italy 301 57.5 22,390 23,910 2.5 26.6 70.9 
Luxembourg 3 0.5 51,240 45,270 0.6 16.7 82.7 
Netherlands 34 16.3 27,880 26,570 2.5 24.9 72.6 
Portugal 92 10.5 12,730 16,830 3.6 27.5 68.9 
Spain 505 41.0 18,210 21,270 3.2 28.5 68.3 
Sweden 411 9.0 29,850 25,460 1.8 27.2 71.0 
United Kingdom 244 59.5 26,790 26,830 0.9 25.9 73.2 
C-10 739 74.1  5,850 11,860 3.5 31.3 65.2 
Cyprus 9 0.7 15,850 18,870 4.3 20.2 75.5 
Czech Republic 79 10.2 7,410 15,550 3.4 38.4 58.2 
Estonia 45 1.4 5,470 10,250 5.4 29.3 65.3 
Hungary 93 10.1 7,120 13,430 3.7 30.7 65.6 
Latvia 65 2.3 3,940 9,080 4.5 24.5 71.0 
Lithuania 65 3.5 4,490 10,050 7.1 30.5 62.4 
Malta 0.3 0.4 11,330 16,800 2.8 28.2 69.0 
Poland 313 38.2 4,830 10,400 3.1 30.0 66.9 
Slovak Republic 49 5.4 5,360 11,730 3.9 32.0 64.1 
Slovenia 20 2.0 12,280 16,950 3.0 35.2 61.8 
Memorandum:        
United States 9,373 288.6 33,340 33,710 1.3 21.6 77.1 
Japan 378 127.4 29,910 24,840 1.3 29.1 69.6 
a In euros, measured on the basis of purchasing power standards (PPS). 
b Including construction. 
Source:  Eurostat (2003), 50 years of figures on Europe ; Eurostat (2004), Newcronos Theme 2: economy and 
 finance ; Eurostat (2004), First results of the demographic data collection for 2003 ; ECB  (2004), Statistics Pocket 
 Book ; and information provided by the EC authorities.  
                                                      
1 Since 1 May 2004, the EC is an entity with 25 member States, ten members having acceded on that 
date.  In the main, this report covers the 15 members (EC-15) prior to 1 May 2004;  the ten members that 
acceded to the EC on 1 May 2004 are refered to, for purposes of this report only, as the C-10. WT/TPR/S/136 Trade Policy Review 
Page 2 
 
 
2. With the ten acceding countries (the C-10) – Cyprus, Czech Republic, Estonia, Hungary, 
Latvia, Lithuania, Malta, Poland, Slovak Republic, and Slovenia – the EC population was enlarged by 
20%, its land area by 23.1% and its GDP by 5%2: on average, the C-10's GDP per capita is about one-
quarter of the EC-15's.  Poland contributes almost half of the EC increase in population and land area, 
while Cyprus and Slovenia have the highest per capita income. In 2001, average labour productivity 
in the C-10 was 52.2% that of the EC-15's.3 Trade Policy Reviews (TPRs) of four of the C-10 
(Estonia, Latvia, Lithuania, and Malta) were done before their accession to the EC; appendix Tables 
present data on their trade and economic situations prior to their accession. 
3. Services constitute by far the most important sect or in terms of employment and contribution 
to gross value added (GVA) in the EC-15. The same applies for the C-10.  In 2003, services 
accounted for 71.3% of the EC-15's GVA and employed 68% of its labour force (about the same as in 2000); in the C-10, the corresponding figures were 65.2% and 54%.
4  Industry and construction 
contributed 26.7% to the EC-15's GVA in 2003, and employed 28% of the population, with the remainder attributed to agriculture, hunting, forestry and fishing (Chapter IV(2)).  
4. The economies of the EC-15 range from the mo re agriculture-oriented, relatively labour-
intensive, low-skill and low-wages "EC-South" (e.g. Greece, Portugal, and Spain), to the industrially 
more advanced, services-oriented, capital-intensive and high-wages "EC-North" (e.g. Belgium, France, Germany, Netherlands, and the United Ki ngdom). The EC-15 is also characterized by 
substantial diversity in wealth, with "competitiv eness" conditions differing substantially between 
countries.
5  
5. Some of the acceding countries (e.g. Hungary, Estonia, the Czech Republic, and the Slovak 
Republic) have been rapidly adjusting their industria l structures to those of the more developed EC-15 
members. They have reduced their specialization in labour-intensive, low- skill production, moving 
towards more sophisticated, technology-intensive  industries, and upgrading their exports product 
quality.  Other C-10, such as Latvia and Lithuania,  are still more labour-intensive or natural-resource-
intensive, and continue to exhib it low-skill patterns of specialization.6 
6. Twelve EC member States - Austria, Belgium,  Finland, France, Germany, Greece, Ireland, 
Italy, Luxembourg, the Netherlands, Spain, and Portugal - form the "Euro area", with the euro as their national currency. To be able to adopt the euro, memb er States outside the euro area have to meet the 
Maastricht convergence criteria: price stability (the average inflation rate should not exceed by more 
than 1.5 percentage point that of, at most, the th ree best performing member States in terms of price 
stability); sustainable fiscal position (deficit not exceed ing 3% of GDP or close to that limit, and the 
ratio of general government debt to GDP not over 60% or approaching that level); exchange rate 
stability through participation in the Exchange Ra te Mechanism II (ERM II), respecting the normal 
                                                     
 
2 Compared to previous EC enlargements (i.e. from six to nine members in 1973; from nine to twelve 
in 1981-86; and from twelve to fifteen in 1995), the 2004 expansion is not the biggest in terms of either 
population, surface, and GDP.  The 1973 enlargement has been the largest in terms of population (an increase by 
25%), and GDP (20%); while the accession from nine to  twelve members added the largest surface (30%). WTO 
(2003c), Box IA.2. 
3 European Commission (2003g). 
4 OECD (2003b). 
5 The process of convergence has been slow and, therefore, fostering regional cohesion remains a 
critical policy challenge for the EC.  Some of more successful EC-15 regions (e.g. Oberbayern and Darmstadt in 
Germany; Sterea Ellada in Greece; Ile de France in Fr ance; and Niederosterreich in Austria) benefit from, inter 
alia, good transport and communication networks; strong entr epreneurial culture; high-tech clusters; and links 
between the academic and business communities (European Commission, 2003g). 
6 European Commission (2003g). European Communities WT/TPR/S/136 
 Page 3 
 
 
fluctuation margins without severe tensions for at least two years7; and low interest rates (the average 
nominal long-term interest rate should not exceed by more than 2 percentage points that of, at most, the three best performing member States in terms of price stability). The common monetary policy is 
managed by the Eurosystem, which consists of th e independent European Ce ntral Bank (ECB) and the 
National Central Banks of the member States that have adopted the euro. 
7. Denmark, Sweden and the United Kingdom (UK) have retained their ow n national currencies.  
Denmark and the UK have an opt-out clause from euro area participation, i.e. they have the right to 
remain outside the euro area even when all converg ence criteria are met.  Sweden does not have such 
a clause and is therefore expected to join the ER M II at some stage and subsequently adopt the euro, 
subject to the fulfilment of the necessary conditions.
8 The C-10 entered the EC as member States with 
a derogation;  they participate in the coordination of economic policies to the extent required by the 
Treaty and are expected to work towards fulfilling the Maastricht convergence criteria. 
8. The Economic and Monetary Union (EMU ) is a unique policy framework:  it has a 
centralized monetary policy framework but decentr alized budgetary policies. Fiscal policy has been 
left to the national authorities of each member State on the basis of the Stability and Growth Pact 
(SGP), adopted in 1997. The SGP aims to ensure that sound fiscal policies confer credibility on the 
euro.9 The euro is now the second most widely used cu rrency worldwide, and about half of the area's 
external trade is euro denominated.10 Since the last TPR of the EC, the euro has appreciated 
significantly against major currencies (Table I.2).   
                                                      
7 The ERM provides the framework for coordination of exchange rate policies. It was formed in 1979 
in an attempt to create a zone of exchange rate stability, a prerequisite to the introduction of the euro. A new 
exchange rate mechanism (ERM II) came into force as fr om 1 January 1999. It aims to ensure that member 
States outside the euro area, but participating in the m echanism, orient their policies towards stability and foster 
convergence, which should help them in their efforts to adopt the euro. At the same time, the mechanism is 
intended to help protect the member States adopting the euro from unwarranted pressures in the foreign 
exchange market.  Since Greece joined  the euro zone on 1 January 2001, De nmark is currently the only country 
in the ERM II (the Danish krone may fluctuate +/- 2.25% of the Euro) (European Commission, New exchange-
rate mechanism (ERM II) , [Online]). 
8 To participate in the euro ar ea, member States must fulfil le gal convergence as well as the 
convergence criteria on price stability, government budgetary  position, exchange rates, and interest rates. In 
2002, Sweden fulfilled all convergence criteria, except th at on exchange rates; and legal convergence had not 
been achieved. The Commission, therefore, concluded that th ere should be no change in  the status of Sweden as 
a member State with a derogation. In a referend um on adoption of the euro, held in Sweden on 
14 September 2003, a majority of Swedes voted against adoption (European Commission, Sweden: 
Convergence report 2002 , [Online]). 
9 The SGP has to be seen against th e background of the third stage of  EMU. It specifies the procedure 
to be followed in case a member State breaches the 3% public  deficit limit, on the basis of the Excessive Deficit 
Procedure (EDP), as laid down in th e EU Treaty. It also specifies the procedure for the Council to impose a 
penalty, which initially would take the form of a non-int erest-bearing deposit with the Community, but it could 
also be converted into a fine if the excessive  deficit is not correct ed within two years. 
10 According to IMF estimates, 18.7% of the offici al foreign exchange reserves of IMF member 
countries were denominated in euro at the end of 2002 (IMF, 2003). Some one-fifth of global foreign exchange 
trade involves the Euro (WTO, 2003c). WT/TPR/S/136 Trade Policy Review 
Page 4 
 
 
Table I.2 
Euro exchange rates, 1996-03 
(Period averages) 
 Effective exchange rate of the euroa ECU or euro 
exchange rateb 
 Narrow group Broad group (U.S. dollar) 
 Nominal Real Nominal Real  
1996 108.1 108.7 95.4 105.9 1.2697 
1997 99.1 99.4 90.3 96.6 1.1340 
1998 101.5 101.3 96.5 99.2 1.1211 
1999 95.6 95.7 96.5 95.9 1.0658 
2000 85.4 86.1 88.0 86.0 0.9236 
2001 87.0 88.4 90.8 87.7 0.8956 
2002 89.7 92.3 95.4 91.6 0.9456 
2003 99.9 103.6 106.8 102.0 1.1312 
a The nominal and real effective exchange rate indices of the eu ro are based on weighted averages  of bilateral euro exchange ra tes.  
 They all refer to the Euro 12, i.e. Gr eece is treated as a euro area country prio r to January 2001.  Weights are based on 1995 -97 
 manufactured goods trade with the euro area's main trading pa rtners and capture third-market effects.  The narrow group is 
 composed of the United States; Japan; Switzerland; the Unite d Kingdom; Sweden; Denmark; Norway; Canada; Australia; Hong 
 Kong, China; Republic of Korea;  and Singapore.  The broad gr oup includes 26 additional countries.  Real rates are obtained by  
 deflating the nominal rate by consumer price i ndices (HICP for EU countries, CPI elsewhere).   
b Until December 1998, rates for the ECU;  from January 1999, rates for the euro. 
Source: ECB (2004), Statistics Pocket Book , March, p. 16, Frankfurt. 
(2) RECENT ECONOMIC DEVELOPMENTS  
9. The EC-15's economy has generally been in  growth slowdown since 2001. The reasons for 
the subdued economic activity are mainly domestic : continuous deceleration of productivity growth11; 
structural rigidities, especially concerning labour co sts; reduction in investment expenditure because 
of declining corporate profitability and the increased  cost of capital due to the severe stock market 
contraction of 200212; and low private consumption partly as a result of uncertainty regarding future 
labour and pension income. Moreover, the conti nuous appreciation of the euro against major 
currencies (the U.S. dollar in particular) has weaken ed the "competitiveness" of European exports.  As 
a result, the real GDP growth rate fell from 3.6% in 2000 to 0.8% in 2003 (Table I.3).13 However, the 
EC economy experienced a turnaround in the third quarter of 2003, driven by a surge in foreign 
demand and a revival in industrial production and investment. 
10. Low economic growth over 2001-03 was translated in an upward trend in the unemployment 
rate in the EC-15, which went from 7.6% in 2001 to 8.1% in 2003 (14.2 m illion people). In 2003, the 
highest unemployment rate was recorded in Spai n (11.3%), followed by Greece, Germany, and 
France; Luxembourg (3.7%) recorded the lowest unemployment rate. Among the C-10, Poland has an 
unemployment rate of 19.8%, and the Slovak Repub lic 17.1%; Cyprus has the lowest rate (4.4%) 
(Table I.4). 
                                                      
11 EC's overall productivity growth has slowed markedly since 1995, largely as a result of difficulties in 
taking advantage of information and communication technologies (ICTs), and slow innovations. European Commission (2003g). 
12 In 2002, the total market capitalization of all major EC-15 stock exchanges fell by 31%, from 
€ 7,661 billion in 2001 to € 5,300 billion in 2002 (DG Economic and Financial Affairs, 2002). 
13 In the euro area, GDP growth decreased from 1.4%  in 2001 to 0.4% in 2003, its weakest economic 
growth rate since 1993. Regarding C-10, GDP growth rates ranged from 6.5% in Latvia to 1.3% in Malta in 
2003. European Communities WT/TPR/S/136 
 Page 5 
 
 
Table I.3 
Growth in real GDP  and expenditure components of EC-15 and euro area, 2000-03 
(Percentage changes; base year: 1995) 
 2000 2001 2002 2003 
EC-15: 
GDP 3.6 1.7 1.0 
Domestic demand 3.1 1.4 0.5 
  Household 3.1 2.0 1.1 
  Government 1.9 2.3 2.8 
  Gross fixed capital formation 4.9 0.6 -1.8 
Exports 12.1 3.1 1.4 
Imports 10.9 2.1 0.8 0.8 
1.2 1.4 2.0 
-0.7 
0.1 1.5 
Euro area: 
GDP 3.5 1.6 0.9 
Domestic demand 2.9 1.1 -0.2 
  Household 2.7 1.8 0.5 
  Government 2.1 2.5 2.9 
  Gross fixed capital formation 5.0 0.0 -2.6 
Exports 12.6 3.3 1.7 
Imports 11.2 1.8 0.1 0.4 
1.0 1.1 1.7 
-1.3 
0.0 1.5 
Source:  Eurostat, Gross Domestic Product 2002 , Theme 2 – 56/2003; and information provided by EC authorities.  
Table I.4 
Key macroeconomic indicators, 2002-03 
Country 
 Real GDP 
growth rate Inflation rate  
(HICP annual 
change) General 
government 
debt 
 (% of GDP) General 
government 
balance 
 (% of GDP) Current 
account 
balance 
(% of GDP)  Unemployment 
(% of labour 
force) 
 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 
EC-15 1.1 0.8 2.1 2.0 62.5 64.1 -1.9 -2.6 0.7 0.2 7.7 8.0 
Euro area 0.9 0.4 2.3 2.1 69.2 70.4 -2.3 -2.7 1.3 0.5 8.4 8.8 
Austria 1.4 0.7 1.7 1.3 66.6 65.0 -0.2 -1.1 0.5 -0.4 4.3 4.4 
Belgium 0.7 1.1 1.6 1.5 105.81 100.5 0.1 0.2 5.1 3.7 7.3 8.1 
Denmark 1.0 0.0 2.4 2.0 47.2 45.0 1.7 1.5 2.0 2.9 4.6 5.6 
Finland 2.3 1.9 2.0 1.3 42.6 45.3 4.3 2.3 7.4 5.5 9.1 9.0 
France 1.2 0.2 1.9 2.2 58.6 63.0 -3.2 -4.1 1.6 0.9 8.8 9.4 
Germany 0.2 -0.1 1.3 1.0 60.8 64.2 -3.5 -3.9 3.1 2.6 8.6 9.3 
Greece 3.9 4.2 3.9 3.4 104.7 103.0 -1.4 -3.0 -5.2 -7.0 10.0 9.3 
Ireland 6.9 1.2 4.7 4.0 32.3 32.0 -0.2 0.2 -0.7 -0.9 4.3 4.6 
Italy 0.4 0.3 2.6 2.8 108.0 106.2 -2.3 -2.4 -0.3 -1.2 9.0 8.7 
Luxembourg 1.3 1.8 2.1 2.5 5.7 4.9 2.7 -0.1 .. .. 2.8 3.7 
Netherlands 0.2 -0.8 3.9 2.2 52.6 54.8 -1.9 -3.2 2.1 1.5 2.7 3.8 
Portugal 0.4 -1.3 3.7 3.3 58.1 59.4 -2.7 -2.8 -7.4 -5.0 5.1 6.4 
Spain 2.0 2.4 3.6 3.1 54.6 50.8 0.0 0.3 -2.7 -3.2 11.3 11.3 
Sweden 2.1 1.6 2.0 2.3 52.6 51.9 0.0 0.7 5.1 5.5 4.9 5.6 
United Kingdom 1.6 2.2 1.3 1.4 38.5 39.7 -1.6 -3.2 -1.7 -1.7 5.1 5.0 
C-10 2.4 3.6 2.7 2.1 39.4 42.2 -4.9 -5.7 -5.4 -3.7 14.8 14.3 
Cyprus 2.0 2.0 2.8 4.0 67.1 72.2 -4.6 -6.3 -5.3 -4.4 3.9 4.4 
Czech Republic 2.0 2.9 1.4 -0.1 28.9 37.6 -6.4 -12.9 -6.2 -6.5 7.3 7.8 
Estonia 6.0 4.8 3.6 1.4 5.7 5.8 1.8 2.6 -12.2 -13.7 10.5 10.0 
         Table I.4 (cont'd) 
 WT/TPR/S/136 Trade Policy Review 
Page 6 
 
 
Country 
 Real GDP 
growth rate Inflation rate  
(HICP annual 
change) General 
government 
debt 
 (% of GDP) General 
government 
balance 
 (% of GDP) Current 
account 
balance 
(% of GDP)  Unemployment 
(% of labour 
force) 
 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 
Hungary 3.5 2.9 5.2 4.7 57.1 59.0 -9.3 -5.9 -4.0 -5.7 5.6 5.8 
Latvia 6.1 7.5 2.0 2.9 15.5 15.6 -2.7 -1.8 -7.6 -9.1 12.6 10.5 
Lithuania 6.8 8.9 0.4 -1.1 22.8 21.9 -1.4 -1.7 -5.4 -6.1 13.6 12.7 
Malta 1.7 0.4 2.2 1.3 61.7 72.0 -5.7 -9.7 -4.7 -5.5 7.5 8.2 
Poland 1.4 3.7 1.9 0.7 41.2 45.4 -3.6 -4.1 -2.6 -2.0 19.8 19.8 
Slovak Republic 4.4 4.2 3.5 8.5 43.3 42.8 -5.7 -3.6 -8.2 -0.9 18.7 17.1 
Slovenia 2.9 2.3 7.5 5.7 27.8 27.1 -1.9 -1.8 1.7 0.2 6.1 6.5 
Memorandum:             
United States 2.2 3.1 1.6 2.3 61.0 .. -4.5 -4.7 -4.5 -4.7 5.8 6.0 
Japan -0.4 2.7 -0.9 -0.3 149.4 157.3 -7.9 -7.7 2.8 3.1 5.4 5.1 
.. Not available. 
Source:  European Commission (2004), Economic Forecasts, Spring 2004 , Brussels;  and information provided 
 by the EC authorities.  
11. Monetary discipline, combined with the appr eciation of the euro against major currencies, 
helped to contain inflation pressures coming largely from higher oil prices due to the war in Iraq. Inflation in the EC-15, as measured by the Harmonized Index of Consumer Prices (HICP), decreased 
from 2.2% in 2001 to 2% in 2003.  In the euro area , HICP inflation declined from an annual average 
of 2.3% in 2002 (unchanged from 2001) to 2.1% in  2003. The euro cash changeover in 2002 had a 
temporary and modest impact on overall euro area inflation.
14 In 2003, the inflation rate varied across 
member States, from 4% in Ireland and 3.4% in Gr eece, to 1% in Germany. Inflation in the C-10 
averaged an estimated 2.1% in 200 3; the lowest inflation rate was recorded by Lithuania (-1.1% in 
2003), while the highest was by the Slovak Republic (8.5%) (Table I.4). 
12. The primary objective of the ECB is to mainta in price stability in the euro area (defined as 
year-on-year increase in the euro area HICP by below but close to 2%, over the medium-term). As a result of the economic slowdown and reduced infl ationary pressures, the ECB has been easing its 
monetary policy stance: its key interest rate was reduced from 3.25% on 8 November 2001 to 2.75% 
on 5 December 2002 and 2.5% on 6 March 2003; its pr esent level of 2%, since 5 June 2003, is the 
lowest rate in any member State for some 50 years.
15  
13. At the time of the last TPR of the EC, the eu ro had depreciated contin uously against the U.S. 
dollar16, from its initial level of US$1.17 to US$0.87 in February 2002. Since then, the euro has 
appreciated almost continuously, reaching US$1.29 on 17 February 2004, its highest rate ever; it had 
declined to US$1.19 by the end of April 2004.  The nominal and real effective exchange rates of the 
euro reveal a similar picture, with the former a ppreciating by 17.6% during 2002-03, and the latter by 
                                                      
14 The introduction of the euro on 1 January 2002 ended the transition process during which, national 
currencies had co-existed with the euro as "expressions of the same currency". See WTO (2002). 
15 Nominal interest rates in member States have no t been so low since the 1950s, and real long-term 
interest rates since the late 1970s. European Commission (2003t). 
16 The ECB, in concert with the monetary authoritie s of the United States, Japan, Canada, and the UK, 
intervened to support the euro when it depreciated significantly (WTO, 2002). European Communities WT/TPR/S/136 
 Page 7 
 
 
16.3% over the same period (Table I.2).17 The appreciation of the euro against the U.S. dollar is, 
among other things, widely attributed to the fiscal and current account deficits of the United States. 
14. In the context of a protracted economic slowdow n, fiscal policies have deteriorated, leading to 
breaches of the SGP. On 25 November 2003, th e Council of Economic and Financial Affairs 
Ministers (Ecofin) decided to suspend the rules and procedures that govern the SGP as a result of 
excessive public deficits in France and Germany.18  Indeed, public deficit to GDP in the EC-15 
increased from 1% in 2001 to 2.6% in 2003, and in the euro zone from 1.6% to 2.7%  over the same 
period. In 2003, the public deficit to GDP ratio in France, Germany, Greece, Netherlands, and the UK 
reached or exceeded the 3% limit (Table I.4). The widening of public deficits was caused by both 
revenue decrease and expenditure increase. This dete rioration was due, not only to the support of 
economic activity in time of economic difficulties, but al so to discretionary loosening in countries that 
can ill-afford it, as they suffer from high structural deficits.19  Furthermore, the failure to comply with 
the SGP risks undermining the credibility of the ins titutional framework and the confidence in sound 
public finances of member States across the euro area. The ECB has urged member States to regain 
control over spending trends so as to put  them back on a more sustainable course.20 Among the C-10, 
the Czech Republic has the largest public deficit (1 2.9% of GDP), followed by Malta and Cyprus;  
Estonia has a surplus (2.6%). 
15. Long-term sustainability of public finances in  the EC-15 is hampered by the relatively high 
levels of government debt, partly due to ageing populations. In 2003, public debt remained above 
60% of GDP in six member States, particularly  Italy (106.2%), Greece (103%), and Belgium 
(100.5%). Despite recent pension system reforms u ndertaken by Austria, Finland, France, Greece, 
Portugal, and the UK, the ratio of government debt  to GDP in the EC-15 increased from 63% in 2001 
to 64.1% in 2003, while in the euro zone, it rose fro m 69.4% to 70.4%. Overall, the ratio in the EC-15 
and in the euro zone is above that of the C- 10; Cyprus (72.2%) and Malta (72%) exceed the 60% 
benchmark.  
16. In the Broad Economic Policy Guidelines (BEPG ) for the period 2003-05, adopted on 25 June 
2003, the Council emphasized that the current econom ic situation enhances the need for a speedy 
implementation of the Lisbon strategy, as th e euro changeover, the EC enlargement21, and the global 
economic uncertainty have placed the EC in a "crucial juncture in its history".22 Especially important 
to the Council is sustainable growth. In order to promote it, the Council has proposed, inter alia , to: 
foster employment by implementing labour market reforms (especially improving work incentives, 
reviewing overly restricting regulations, facilita ting labour mobility, and investing in physical and 
human capital); encourage competition in goods and ser vices markets;  accelerate the integration of 
                                                      
17 These effective exchange rates of the euro take into account a broad group of 38 countries. The real 
rate is obtained by deflating the nominal rate by the consumer price index.  
18 In the meeting, euro zone countries voted against the Commission's recommendation to fine France 
and Germany for breaching the budgetary rules and procedur es of the SGP.  Instead, a "political declaration" 
was made indicating how the two countr ies are projected to overrun the p act's deficit targets for the third 
consecutive year in 2004, citing that "too great a consolidation effort in one year may prove economically 
costly". On 13 January 2004, the Commission decided to challenge such a Council decision in the European 
Court of Justice (European Commission Press Release IP/04/35, 13 January 2004).  
19  DG Economic and Financial Affairs (2003b). 
20 ECB, Press Release,  26 November 2003. 
21 The BEPGs are to be extended in spring 2004 to explicitly cover the C-10. 
22 Council of the EC- General Secretariat (2003a). In addition to the EC's general objectives of 
economic policy, the 2000 Lisbon European Council set a new strategy (the Lisbon strategy) in its annually 
adopted BEPG, which aims to make the EC the most  competitive and dynamic knowledge-based economy in 
the world by 2010, capable of sustainable growth, with more and better jobs and greater social cohesion.  WT/TPR/S/136 Trade Policy Review 
Page 8 
 
 
EC capital markets; reduce administrative burdens for entrepreneurs and sm all and medium-sized 
enterprises (SMEs)23; strengthen corporate governance; and invest more in research and education by 
increasing the contribution of the public sector.  
17. Recent trends in external accounts, despite th e continued appreciation of the euro, have raised 
hope of the recovery of the economy in the coming months (sections (3) and (4) below). 
(3) TRADE PERFORMANCE AND INVESTMENT  
18. The EC-15's deficit in transfers and income accounts, and its fluctuating trade balance have 
generally contributed to its current account deficit, despite the surplus of its services account. In 2002, 
the EC-15 registered its first current account surplus (€ 57.2 billion, equivalent to 0.7% of GDP) since 
1998; the current account deficit of € 20.5 billion in 2001 was turned into a surplus, mainly as a result 
of the trade balance which shifted from a deficit of € 38.2 billion in 2001 to a surplus of € 4.8 billion 
in 2002, despite the effective appreciation of the eu ro that year. The trade surplus in 2002 was largely 
due to the large negative growth differential between  the EC-15 and its main trading partners (with 
sluggish demand and dampened imports in the EC- 15, and buoyant demand, notably in the United 
States and Asia), and the lagged pass-through effect s of the appreciation of the euro on the trade 
balance. In 2003, the EC-15 also had a current acc ount surplus of € 49.7 billion. In percentage of 
GDP, Finland and Sweden had the largest current  account surplus in 2003 (5.5%), followed by 
Belgium (3.7%); the largest deficits were regist ered by Greece (7%) and Portugal (5%). With the 
exception of Slovenia, which had a current account surplus of 0.2% of GDP in 2003, the C-10 countries had current account deficits, partly financed  by FDI inflows (section (3) below). The largest 
deficits were in Estonia (13.7%), Latvia  (9.1%), and the Czech Republic (6.5%).  
(i) Trade in goods 
19. Excluding intra-EC trade, the Community continues to be the leading merchandise exporter in 
the world (with a 20%  share in 2002), and the world's second importer (19%).  Individually, Germany 
ranks second as exporter of merchandise goods, with Fr ance fifth, and the United Kingdom sixth.  
Germany also ranks second in the world for goods  imports followed by the United Kingdom and 
France. Among the C-10, Poland is the largest me rchandise trader; the Czech Republic and Hungary 
come next.
24 Based on 2001 world trade values, the C-10 will increase the share of intra-EC trade in 
EC's total merchandise trade from nearly 62% to  67%, while the share of the EC in world 
merchandise exports (including in tra-EC flows) will reach 41%.25 Excluding intra-EC trade, the share 
in world merchandise exports is about 20% for EC-15 , and 18% for EC-25. 
20. External shocks, such as high and volatile  oil prices, geopolitical tensions, and world 
economic recession, have negatively affected the EC's trade since its last TPR.26 The appreciation of 
the euro has somewhat undermined the price competitiveness of EC exports.27  In 2003, the 
                                                      
23 SMEs employ less than 250 people, and constitute the backbone of the EC-15 enterprise culture, with 
over 99% of businesses. 
24 WTO (2003a). 
25 WTO (2003c). 
26 Heightened concerns about oil supplies lifted oil prices in 2002-03, to reach their highest level for 13 
years in early 2003. The thr eat of terrorism also increased risk premiums in international transactions, and 
affected trade through, inter alia , more cumbersome procedures and delays. During 2001-02, world trade, in 
volume terms, grew only by about 1%. WTO (2003c). 
27 At the end of 2003, the euro area "competitivene ss" (based on unit labour costs, and measured 
against 12 industrialized countries) was 2% worse th an its 1980-02 average, an d had deteriorated by 10% 
 European Communities WT/TPR/S/136 
 Page 9 
 
 
Communities' merchandise exports (extra-EC) amounted to € 976.2 billion, up from € 882.5 billion in 
2001, and merchandise imports rose from € 920.7 billion in 2001 to € 987.8 billion in 2003.  The EC-
15's merchandise trade deficit decreased from € 38.2 billion in 2001 to € 11.6 billion in 2003. 
21. The United States remains the EC-15's main  trading partner, accounting for 23.9% of 
merchandise exports in 2002 (down from 24.4% in  2000), and 17.5% of goods imports (compared 
with 19% in 2000) (Chart I.1, and Tables AI.1 a nd AI.2).  Switzerland is the second most important 
destination of EC's merchandise exports (7.1% of the total in 2002), and China  remains the second 
most important source of EC's goods imports (8.3% of the total in 2002, against 6.8% in 2000). While 
Japan's share in both EC's exports and imports  of goods has weakened somewhat, the Russian 
Federation has increased its importance as an EC trade partner. In 2003, the United States was 
estimated to account for 22.6% and 15.3% of EC- 15's merchandise exports and imports, respectively, 
while the EC-15 imported 9.6% of goods from China (P.R.).  
22. The bulk of EC-15's merchandise exports in  2002 was machinery and transport equipment 
(45.5%, down from 46.6% in 2000), followed by chemical products (15.4%), other semi-manufactures (9.2%), agricultural products (6.8%) , textile and clothing (4.3%), and mining (4.3%) 
(Chart I.2 and Table AI.3). EC-15's goods imports  in 2002 primarily consisted of machinery and 
transport equipment (36.1%, down from 38.2% in 2000) , mining (17.6%), agricultural products (9%), 
chemicals (8.2%), textile and clothing (7.4%), and other semi-manufactures (6.7 %) (Table AI.4).  In 
2003, machinery and transport equipment were estim ated to account for 47.5% and 44.1% of EC-15's 
exports and imports, respectively. 
(ii) Trade in services 
23. The EC-15 is the world's leading services tr ader. Excluding intra-EC trade, it accounted for 
25% of exports and 23.8% of imports in 2001.
28 Nevertheless, free movement of services within the 
EC is to be further improved.  Moreover, the EC-15's trade in services has been affected by, inter alia , 
the appreciation of the euro, and by the fear of terrorism that followed the 11 September 2001 attacks. 
Indeed, receipts from travel (exports) fell from 24.2% of total EC-15's services exports in 2000 to 
20.9% in 2002 (Table IV.5)29, while the euro appreciation over 2002-03, also deterred travel, both by 
tourists travelling to the EC and EC tourists (Chapter IV(6)(v)). 
 
                                                                                                                                                                     
relative to 2002. Compared to that of  the euro area, Denmark's "competitiven ess" has remained roughly stable in 
recent years; Sweden's "com petitiveness" was 4% better at the end of  2003 than in 1980 -02; and the United 
Kingdom's "competitiveness" was about 10% less favourable at the end of 2003 than in 1980-02, despite the 
depreciation of the pound sterling agai nst the euro and the U.S. dollar in 2003 (European Commission, 2004a). 
28 In 2001, intra-EC services exports and imports amounted to US$ 345.8 billi on and US$ 35 1.6 billion, 
respectively (OECD, 2003e). 
29 The volume of tourism to Europe from the United States, Japan, and the Middle East dropped, on 
average, by 30% immediately after 11 September 2001 (European Commission, 2001b). WT/TPR/S/136 Trade Policy Review 
Page 10 
 
 
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%19981999200020012002
0% 20% 40% 60% 80% 100%19981999200020012002Chart I.1
Direction of EC's merchandise tradea, 1998-02
(a) Exports
(b) Imports
United Sates
Other EuropeNorway Other AmericaChina (P.R.)
Japan PolandSwitzerlandOther AsiaRussian Federation
Africa
OtherUnited Sates
Other EuropeCzech Republic Other AmericaChina (P.R.)
Japan PolandSwitzerlandOther AsiaRussian Federation
Africa
Other
a
Source:The data are on extra-EC trade.
WTO Secretariat calculations, based on Eurostat data (SITC Rev.3). 
 European Communities WT/TPR/S/136 
 Page 11 
 
 
0%10%20%30%40%50%60%70%80%90%100%
1998 1999 2000 2001 2002
0%10%20%30%40%50%60%70%80%90%100%
1998 1999 2000 2001 2002Chart I.2
Structure of EC's merchandise tradea, 1998-02
(a) Exports
(b) Imports
a
Source:The data are on extra-EC trade.
WTO Secretariat calculations, based on Eurostat data (SITC Rev.3).Agriculture
OtherMachinery and transport equipment
ChemicalsMining Textiles and clothing
Other semi-manufactures
Agriculture
Machinery and transport equipmentOther semi-manufactures
Fuels
OtherTextiles and clothing
ChemicalsOther mining
 WT/TPR/S/136 Trade Policy Review 
Page 12 
 
 
Table I.5 
EC-15's trade in services, 1999-02 
(€ million) 
 EC-15 Exports EC-15 Imports 
 1999 2000 2001 2002 1999 2000 2001 2002 
Total (extra-EU) 264,214 310,675 327,392 336,273 256,801 303,260 317,349 311,923 
Transportation 64,891 81,375 79,156 78,913 60,473 73,260 72,607 73,075 
Travel 63,018 75,404 73,123 70,274 72,080 83,293 85,511 82,231 
Other commercial services 129,961 147,378 163,651 174,506 118,721 140,634 148,793 147,100 
Government services 6,336 6,516 7,413 8,749 5,523 6,073 6,885 5,746 
Main  trading partners          
United States 96,136 118,267 117,275 119,355 101,338 115,926 121,011 110,582 
Switzerland .. 35,415 39,739 38,119 .. 29,918 32,074 33,082 
Japan 16,305 18,720 18,282 17,471 8,732 10,280 10,983 8,994 
Norway .. 7,211 9,696 11,907 .. 7,340 7,493 8,133 
Canada 5,627 7,244 7,007 7,809 5,942 6,596 6,886 7,107 
Turkey 2,753 3,180 2,780 3,005 4,825 6,553 7,361 7,515 
Hong Kong, China .. .. 4,667 4,830 .. .. 4,473 5,400 
Australia 4,520 4,910 6,174 5,609 3,715 4,570 4,469 4,597 
China (P.R.) 2,740 3,454 4,197 5,262 2,871 3,517 3,926 4,596 
Russian Federation 3,202 3,777 5,394 4,747 3,654 4,596 4,704 4,777 
Singapore .. .. 4,887 4,553 .. .. 4,539 4,521 
Poland 3,389 3,999 4,206 4,079 3,772 4,499 5,078 4,733 
Brazil 3,023 3,622 3,131 3,350 2,545 3,176 3,101 3,109 
.. Not Available. 
Source Information provided by the EC authorities. 
24. In 2002, the EC-15 exported services for € 751.1 billion (including intra EU-trade), an 
increase of 10.2% over 2000, and imported € 734 bil lion (up 9.1% from 2000).  Individually, the UK 
is the second largest exporter of services in the worl d, followed by Germany and France. In terms of 
imports of services, Germany ranks second in the world, while the United Kingdom is fourth and 
France fifth. Among the C-10, Poland is  the largest trader of services (32nd in the world in 2002), 
followed by Hungary and the Czech Republic.30 
25. The most important trading partner of the EC -15 in services is by far the United States, which 
in 2002, was the destination of 35.5% of EC-15 e xports and the origin of 35.4% of EC-15 imports 
(Table I.5). The second most important partner is Switzerland, accounting for 11.3% of EC-15 exports 
and 10.6% of imports in 2002. 
(iii) Foreign direct investment 
26. Excluding intra-EC flows, the Community is the world's biggest recipient and supplier of 
foreign direct investment (FDI). In 2002, the EC -15 contributed 37.8% to the world's inward FDI 
stock and 50.2% to outward FDI stock; it is a net investor in the rest of the world. In 2002, EC-15's FDI outflows and inflows were equivalent to 1.5% and 0.8% of its GDP, respectively.  Individually, 
the United Kingdom, Spain, and France were the main  net investors (of FDI) within the EC-15 during 
                                                     
 
30 WTO (2003a). European Communities WT/TPR/S/136 
 Page 13 
 
 
2001-02; Sweden and Belgium were the main net recipients. According to UNCTAD, Austria, 
Greece, and Italy are "below-potential" countri es (i.e. have high FDI potential but low FDI 
performance), while the other EC-15 members and the C-10 (with the exception of Slovenia) are 
"front-runners" coupling high FDI potential and performance.31 
27. In 2002, EC-15's FDI inflow s and outflows (extra-EC) decr eased for the second consecutive 
year: inflows fell by 35.1% compared with 2001, an d outflows by 47.5% (Table IV.6). Consequently, 
EC-15's net FDI registered a sharp fall from € 150.2 b illion in 2001 to € 64.2 billion in 2002. Some of 
the main factors that have affected EC-15's FDI flows are: the reduction of market values of EC 
corporations listed on global stock markets as a resu lt of the stock market contraction of 2002; the fall 
in business confidence partly because of the geopoliti cal tensions linked to the Iraq war, and the 
negative climate generated by corpor ate scandals; and the decline in th e level of global FDI due to the 
slowdown in world economic activity.32  
Table I.6 
EC-15's and C-10's FDI inflows and outflows, 2001-02  
(€ million) 
Country 
 2001 
 2002 
 Outward flows Inward flows Outward flows Inward flows 
EC-15 267,495 117,345  140,407 76,217 
Austria 3,283 1,607 4,616 956 
Belgium .. .. 2,752 6,211 
Belgium/Luxembourg 41,878 34,323 38,092 32,859 
Denmark 7,783 4,066 1,736 2,692 
Finland 1,608 -389 3,231 307 
France 36,220 8,306 28,287 11,893 
Germany 61,491 7,852 3,455 4,930 
Greece 464 77 326 53 
Ireland 3,070 291 2,245 942 
Italy 3,490 3,534 2,910 3,345 
Luxembourg .. .. 35,340 26,648 
Netherlands 32,572 28,144 2,966 6,331 
Portugal 1,521 324 -292 508 
Spain 15,919 4,383 19,703 2,447 
Sweden 3,650 3,230 -575 2,955 
United Kingdom 54,234 18,013 30,932 4,909 
C-10     
Cyprus 652 220 297 -18 
Czech Republic 5,639 165 9,319 281 
Estonia 542 200 307 122 
Hungary 2,440 337 854 264 
    Table I.6 (cont'd) 
 
                                                      
31 UNCTAD estimates the potential of each co untry to attract FDI on the basis of, inter alia , GDP 
growth, GDP per capita, imports and exports, education, country risk, and infrastructure, and then compares this potential level with the actual volume of FDI that each country attracts (UNCTAD, (2003).  
32 In 2002, total FDI flows amounted  to US$651 billion, 20% lower th an in 2001 (US$820 billion); FDI 
flows for 2003 are estimated at US $653 billion (UNCTAD, (2003).  WT/TPR/S/136 Trade Policy Review 
Page 14 
 
 
Country 
 2001 
 2002 
 Outward flows Inward flows Outward flows Inward flows 
Latvia 164 12 396 9 
Lithuania 446 7 732 18 
Malta 294 6 -375 .. 
Poland 5,713 -90 4,119 173 
Slovak Republic 1,579 37 4,012 5 
Slovenia 503 133 1,865 117 
.. Not available. 
Source : Eurostat, " EU FDI with Extra-EU decreased again in 2002" , Theme 2 – 36/2003, Brussels; and  UNCTAD 
 (2003), World Investment Report , Geneva. 
28. The United States is the main investment part ner of the EC-15, albeit with a decreasing share. 
During the period 1997-01, the United States received  52% of the total (extra-EC) FDI and supplied 
59% of non-EC investment to member States. In 2002, the corresponding figures were 32.9% 
(€ 46 billion) and 42.1% (€ 32 billion).  
29. FDI in the C-10 increased by 44% per year, on average, during 1997-00, to € 78.3 billion in 
2000; FDI in the services sector more than quadrupled during the period.33  In 2002, the Czech 
Republic ranked first (among the C-10) in terms of FDI inflows (43.3% of the total), followed by 
Poland and the Slovak Republic (Table I.6). In term s of FDI as a percentage of GDP, Malta was first 
in 2002 (73.8%), followed by Estonia (65.9%) a nd the Czech Republic (54.8%); on the opposite end 
were Poland (23.9%) and Slovenia (23.1%).  
(4) OUTLOOK  
30. The EC's economic outlook is affected by glob al economic prospects, not least in the United 
States, its principal trading partner. During 2004- 05, the Commission expects world GDP growth and 
trade to be robust;  this would foster EC-15's expor ts and help to achieve current account surpluses of 
over 1% of GDP during the period. The EC-15's GDP gr owth rate is anticipated to rise to 2% in 2004 
and to 2.4% in 2005, mainly thanks to increases in domestic demand and cap ital formation, due to 
historically low interest rates. Despite the projected  recovery in the EC-15, its unemployment rate is 
expected to reach 8.2% in 2004, before edgi ng downwards somewhat in 2005. The Commission 
predicts price stability in the EC-15, and forecasts a 2% HICP inflation rate  in 2004, and 1.7% in 
2005.34 
31. Stimulated by both the recovery in the EC-15 and the accession to the EC, average GDP 
growth in the C-10 is foreseen by the Commission to  accelerate to 4% in 2004 and to 4.2% in 2005. 
Inflation in the acceding countries is anticipated to reach, on average, 3.8% in 2004 and 3.3% in 2005, 
mainly due to the liberalization of administ rative prices and a hike of indirect taxes.35 The empirical 
literature supports the view that trade liberaliza tion among countries that trade extensively with one 
another contributes to income convergence.36 Economic growth in the EC-25 is expected to be 
promoted by, inter alia , a more efficient allocation of resources; strong boosts to FDI resulting from 
                                                      
33 Eurostat (2003a). More recent FDI data are not available.  
34 DG Economic and Financial Affairs (2003a), Economic Forecasts , Autumn, Brussels. 
35 DG Economic and Financial Affairs (2004), Economic Forecasts , Spring, Brussels. 
36 Ben-David, Nordstrom, and A. Winters (1999). European Communities WT/TPR/S/136 
 Page 15 
 
 
increased business opportunities; enlarged cross-bor der trade between old and new members; and 
higher productivity as a result of increased competition among member States. 
32. The EC's outlook also depends on long-term trends of demographic factors such as aging 
population, fertility, mortality, and international mi gration. These factors have led to a rapidly 
decreasing population growth rate in the EC, which is  expected to halt by 202 5, and to decline again 
thereafter.  As a result, the working age popula tion will shrink rapidly, and the old-age dependency 
ratio is projected to reach 50% in 2050 (doubling its current 25% level); this has been threatening the 
social cohesion and public finances of all member States.37 Reform of the pension systems in all 
member States, a faster pace of debt reduction, and increasing employment rates are some of the key 
elements in the EC's strategy to tackle the lo oming budgetary implications of such demographic 
considerations. 
 
                                                      
37 The old-age dependency ratio is defined as the ra tio of  the number of people at retirement age (65 
years and over) divided by the number of people of working age (15-64) (Council of the EC, (2003).