European Communities WT/TPR/S/214/Rev.1 
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I. ECONOMIC ENVIRONMENT 
(1) MAIN CHARACTERISTICS  
1. The 27 Member States of the European Communities (EC-27) cover a land area of 
4.24 million km2 and have a combined population of 495.1 m illion (Table I.1).  Germany, the most 
populated country, has the highest GDP, followed by the United Kingdom and France.  France is the 
biggest in surface area, followed by Spain and Sweden. In 2006, the EC-27 had a GDP of €11,583 billion, while its per capita income in nominal  terms amounted to €23,50 0.  In terms of per 
capita income, Luxemburg ranks first, followe d by Ireland and Denmark. With the accession of 
Romania and Bulgaria in 2007, the EC population was enlarged by 6.8%, its land area by 9%, and its 
GDP by 2%;  per capita income in nominal terms of  Bulgaria and Romania is, respectively, about 
14% and 19.1% of the EC-27, while their labour productivity, per person employed, is 36.2% and 
42% of the EC-27. 
Table I.1 
Selected indicators, 2007 
 
  GDP per capita 
(2006)  
GDP 
2006  Share in gross value added 
(2006) 
(per cent) 
 
Area 
('000 km2) Population 
(million) euros PPSa  
('000 
million 
euros)  Agriculture 
hunting, 
forestry 
and fishing Industryb Services 
EC-27 4,243 495.1 23,500 23,500  11,583  1.8 26.4 71.7 
Euro-zone 2,487 318.4 26,600 25,800  8,433  1.8 26.8 71.5 
Austria 84 8.3 31,100 30,200  258  1.7 30.7 67.7 
Belgium 31 10.6 30,000 28,900  317  1 24.3 74.7 
Bulgaria 111 7.7 3,300 8,700  25  8.5 31.5 59.9 
Cyprus 9 0.8 18,900 21,900  15  2.1 19.6 77.5 
Czech Republic 79 10.3 11,100 18,600  
114  
2.9
c 38.3c 58.7c 
Denmark 43 5.4 40,500 29,700  220  1.6 26.1 72.3 
Estonia 45 1.3 9,800 15,900  13  3.2 29.1 67.7 
Finland 305 5.3 31,700 27,300  167  2.5 32.4 65.1 
France 544 63.4 28,400 26,500  1,792  2.0 20.7 77.2 
Germany 357 82.3 28,200 26,700  2,322  0.9 29.4 69.7 
Greece 132 11.2 19,300 22,700  214  5.2c 20.8c 74.0c 
Hungary 93 10.1 8,900 15,300  90  4.3 30.7 64.9 
Ireland 70 4.3 41,100 33,500  175  2.1c 36.1c 61.9c 
Italy 301 59.1 25,100 24,300  1,475  2.1 26.6 71.4 
Latvia 65 2.3 7,100 13,100  16  3.7 21.4 74.9 
Lithuania 65 3.4 7,000 13,500  24  5.5 34.9 59.6 
Luxembourg 3 0.5 71,600 65,400  34  0.4 14.7 85.0 
Malta 0.3 0.4 12,400 17,700  5  2.6 21.5 75.9 
Netherlands 34 16.4 32,700 31,000  534  2.2 24.1 73.7 
Poland 313 38.1 7,100 12,400  272  4.4 31.7 63.9 
Portugal 92 10.6 14,700 17,500  155  2.8 24.6 72.5 
Romania 238 21.6 4,500 8,800  97  9.6c 34.5c 55.9c 
Slovak 
Republic 49 5.4 8,300 14,900  
45  
4.0 35.0 61.1 
Slovenia 20 2.0 15,200 20,800  30  2.5c 34.1c 63.4c 
Spain 505 44.5 22,300 24,000  981  2.9 30.4 66.8 
Sweden 411 9.1 33,700 28,200  306  1.4 29.0 69.6 
United Kingdom 244 60.8 31,500 27,900  
1,910  
0.9 22.9 76.2 
Memorandum                  
United States 9,373 300.3 35,000 36,300  10,509  1.2 .. .. 
Japan 378 127.8 27,200 26,700  3,477  .. .. .. 
.. Not available. 
a In euros, measured on the basis of purchasing power standards (PPS). 
b Including construction. 
c 2005 instead of 2006. 
Source:  Eurostat (2008), Yearbook 2008: Europe in figures , Brussels. WT/TPR/S/214/Rev.1 Trade Policy Review 
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2. Services constitute by far the most important sect or in terms of contribution to gross value 
added (GVA) in all EC Member States (Table I.1) .  The share of services in GVA averaged 71.7% in 
the EC-27 in 2006;  this share tends to rise with Member States' income level, ranging between 56% 
in Romania and 85% in Luxemburg.  Manufacturi ng (including construction) contributed 26.4% to 
GVA on average, with shares ranging from unde r 15% in Luxemburg to over 38% in the 
Czech Republic.  Agriculture, hunting, forestry, a nd fishing accounted for 1.8% of GVA in 2006, but 
employed 5.3% of the labour force.1  The contribution of mining and quarrying to GVA is marginal. 
3. Sixteen EC Member States have the euro (€) as their currency and form the "euro area".2  
Slovenia adopted the euro in January 2007, Cypr us and Malta followed in January 2008, and  
Slovakia in January 2009.   The Maastricht convergence criteria fo r adopting the euro are:  price 
stability (i.e. the average inflation rate should not exc eed by more than 1.5 percentage point that of, at 
most, the three best inflation performing Member States);  sustainable fiscal position (public deficit not exceeding 3% of GDP or close to that limit, a nd the ratio of general government debt to GDP not 
over 60% or declining at a "suffi cient pace" towards that level);  exchange rate stability through 
participation in the Exchange Rate Mechanism II (ERM II)
3, respecting the normal fluctuation 
margins without severe tensions for at least two year s;  and low interest rates (the average nominal 
long-term interest rate should not exceed by more than two percentage points that of, at most, the 
three best inflation performing Member States). Mo reover, the Treaty requires legal convergence, i.e. 
compatibility of national legislation, especially th e statutes of central banks. On 21 December 2005, 
the regulations on the introduction of the euro were amended to enable countries to join the euro zone 
in subsequent phases. Apart from a number of te chnical adaptations, the amendment allows for 
different changeover scenarios for individual countries.4  The common monetary policy is managed 
by the Eurosystem, which consists of the independe nt European Central Bank (ECB) and the national 
central banks of the Member States that have adopted the euro. 
4. EC Member States not in the euro area have a derogation and are expected to adopt the euro 
after fulfilling the Maastricht convergence criteria5; the only exceptions are Denmark and the United 
Kingdom, which retained their national currencies through an "opt-out clause". Romania has set a 
target euro adoption date of 2014.  The other Member  States do not have official target dates for euro 
adoption. Estonia, Latvia, and Lithuania, as well as Denmark, participate in the exchange rate 
mechanism ERM II. 
5. The Economic and Monetary Union (EMU) is a unique policy setting system.  It has a 
centralized monetary policy, but decentralized fiscal  policies. The latter are left to the authorities of 
individual Member States, but governed by the EC's  fiscal framework, i.e. the Stability and Growth 
Pact (SGP).  Adopted in 1997, the SGP is aimed at ensuring sound fiscal policies as a means to strengthen the conditions for price stability and fo r robust and sustainable growth conducive to 
                                                     
 
1 International Labour Organization (2008). 
2 The euro is currently legal tender in:  Austria, Belgium, Cyprus, Finland, France, Germany, Greece, 
Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.   
3 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) entere d into force on 1 Januar y 1999, aimed at ensuring  that Member States 
outside the euro area, but participating in the mechan ism, align 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. 
4 Council Regulation (EC) No. 2169/2005. 
5 Having a derogation means that a Member State is exempt from some, but not all, of the provisions 
relating to price stability, sound public finances, and eventual adoption of the euro.  European Communities WT/TPR/S/214/Rev.1 
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employment creation. It consists of three main elements: (i) a political co mmitment to the full and 
timely implementation of the budget surveillance process;  (ii) a preventive arm aiming to ensure long-
term sustainability and to avoid the occurrence of  any excessive deficits; and (iii) a corrective arm 
specifying the actions to be taken if the general gove rnment deficit exceeds the reference value of the 
Treaty, i.e. of 3% of GDP.6  The SGP was reformed in 2005, with  changes to both its preventive and 
corrective arms.7  The emphasis on the fundamentals of fisc al sustainability in setting medium-term 
budgetary objectives strengthened the preventive arm,  while changes to the corrective arm relate to 
the definition of "excessive deficits" and to the m odalities for their correction.   The changes allow for 
a more comprehensive assessment of economic and budgetary developments in the implementation of 
the excessive deficit procedure (EDP). The reformed  SGP also provides for a set of "other relevant 
factors" that the Commission and Council may take in to account when deciding on the existence and 
correction of excessive deficits. A particular i nnovation is that the one-year deadline for corrective 
measures can be extended, and steps in the EDP can be  repeated, if effective actions have been taken 
by the Member State concerned in co mpliance with the initial recommendations. 
6. The EC's Lisbon Strategy, adopted in March 2000 and reformulated in March 2005, is an 
action and development plan aimed at making the EC "the most dynamic and competitive knowledge-
based economy in the world capable of sustainable economic growth with mo re and better jobs and 
greater social cohesion, and respect for the environment by 2010".   
(2) RECENT ECONOMIC DEVELOPMENTS  
7. Economic performance in the EC was generally go od in 2006-07, but weakened substantially 
in 2008 due to increases in commodity prices during the first half of the year and later because of the 
global financial crisis.8 Supported by sound domestic fundamentals that boosted investment and, to a 
lesser degree, private consumption, GDP growth w as 3.1% in 2006 and 2.9% in 2007 in the EC-27, 
and 2.9% and 2.7%, respectively, in the euro area (Table I.2). While the moderation in growth was 
broad-based, performance at the national level remain ed dispersed. GDP growth rates in Bulgaria, the 
Czech Republic, Estonia, Ireland, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia were at 
or exceeded 6% in 2007, while GDP growth in De nmark, Hungary, Italy and Portugal was below 2%.9 
8. The primary objective of the ECB is to maintain price stability in the euro area;  price stability 
is defined as year-on-year increases in the euro area Harmonized Index of Consumer Prices (HICP), below but close to 2%.  Influenced by increasing energy and other commodity prices, inflationary 
                                                     
 
6 The SGP aims to enforce fiscal discipline as a perm anent feature of the EMU. It further specifies the 
procedure (i.e. the excessive deficit procedure), set out in the EU Treaty, to be followed if a Member State 
breaches the 3% of GDP reference value. Under the procedure, the Council may impose a penalty that would 
initially take the form of a non-interest-bearing deposit with the Communities, but could be converted into a fine 
if the excessive deficit was not corrected within two years. 
7 Council Regulation (EC) No. 1055/2005 amended Regulation (EC) No. 1466/97, and Council 
Regulation (EC) No. 1056/2005 amended Regulation (EC) No. 1467/97.  The new Code of Conduct on the 
Content and Format of the Stability and Convergen ce Programmes, endorsed by the ECOFIN Council on 
11 October 2005, also provides guidelines for Member States in drawing up their programmes and facilitating 
the examinations.   
 8 In the wake of the global financial crisis, GDP of th e EC-27 contracted by 0.2% in the third quarter of 
2008, following zero growth in the second quarter.  Th e euro area countries have fa llen into their first recession 
since the introduction of the euro ten years ago, with a 0.2% contraction in the third quarter after a similar 
downturn in the previous quarter ( The Economist , 14 November 2008).  
9 The trend towards income convergence between th e EC-15 and the 12 Member States that have 
joined since May 2004 (NMS-12) has continued over the last few years, as growth rates in the NMS-12 have 
been higher than in the EC -15.  As a result, per capita incomes of  the NMS-12 and the EC-15 are now much 
closer than they were in the late 1990s. DG Economic and Financial Affairs (2008). WT/TPR/S/214/Rev.1 Trade Policy Review 
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pressures remained high in 2006 and 2007 in the EC, in cluding the euro zone.  EC-27 inflation, as 
measured by the HICP, rose from 2.3% in 2005 and 2006 to 2.4% in 2007;  in the euro zone, inflation fell from 2.2% in 2006 to 2.1% in 2007. However,  national inflation rates showed considerable 
variations, from 0.7% in Malta to 10.1% in Latvia in 2007. 
Table I.2 
Key macroeconomic indicators, 2006-07 
 
Real GDP 
growth rate 
(%) Inflation rate  
(HICP annual 
nominal change)
(%) General 
government 
gross debt 
(% of GDP) General 
government 
balance 
 (% of GDP) External 
current 
account  
(% of GDP)  Unemployment 
(% of  labour 
force) 
Country 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007b 2006 2007 
EC-27 3.1 2.9 2.3 2.4 61.3 58.7 -1.4 -0.9 -0.8 -0.7 8.2 7.1 
Euro area 2.9 2.7 2.2 2.1 68.3 66.1 -1.3 -0.6 -0.1 0.1 8.3 7.5 
Austria 3.4 3.1 1.7 2.2 62.0 59.5 -1.5 -0.4 2.5 3.3 4.8 4.4 
Belgium 3.0 2.8 2.3 1.8 87.8 83.9 0.3 -0.3 2.5 2.4 8.3 7.5 
Bulgaria 6.3 6.2 7.4 7.6 22.7 18.2 3.0 0.1 -18.6 -22.5 9.0 6.9 
Cyprus 4.1 4.4 2.2 2.2 64.6 59.5 -1.2 3.5 -5.9 -9.7 4.6 4.0 
Czech Republic 6.8 6.0 2.1 3.0 29.6 28.9 -2.7 -1.0 -2.2 -1.5 7.2 5.3 
Denmark 3.9 1.7 1.9 1.7 30.5 26.2 5.2 4.5 2.6 1.2 3.9 3.8 
Estonia 10.4 6.3 4.4 6.7 4.3 3.5 2.9 2.7 -17.0 -18.5 5.9 4.7 
Finland 4.9 4.5 1.3 1.6 39.2 35.1 4.1 5.3 4.9 5.3 7.7 6.9 
France 2.2 2.2 1.9 1.6 63.6 63.9 -2.4 -2.7 -1.5 -2.0 9.2 8.3 
Germany 3.0 2.5 1.8 2.3 67.6 65.1 -1.5 -0.2 6.3 7.6 9.8 8.4 
Greece 4.5 4.0 3.3 3.0 95.9 94.8 -2.8 -3.5 -11.4 -14. 0 8.9 8.3 
Hungary 4.1 1.1 4.0 7.9 65.6 65.8 -9.3 -5.0 -7.5 -6.4 7.5 7.4 
Ireland 5.7 6.0 2.7 2.9 24.7 24.8 3.0 0.2 -3.6 -5.4 4.5 4.6 
Italy 1.8 1.5 2.2 2.0 106.9 104.1 -3.4 -1.6 -2.0 -1.7 6.8 6.0 
Latvia 12.2 10.3 6.6 10.1 10.7 9.5 -0.2 0.1 -22.5 -22.9 6.8 6.0 
Lithuania 7.8 8.9 3.8 5.8 18.0 17.0 -0.4 -1.2 -10.4 -15.1 5.6 4.3 
Luxembourg 6.4 5.2 3.0 2.7 6.6 7.0 1.3 3.2 10.5 9.8 4.6 4.1 
Malta 3.1 3.7 2.6 0.7 63.9 62.2 -2.3 -1.8 -8.2 -5.5 7.1 6.4 
Netherlands 3.4 3.5 1.7 1.6 47.4 45.7 0.6 0.3 9.8 9.8 3.9 3.2 
Poland 6.2 6.6 1.3 2.6 47.7 44.9 -3.8 -2.0 -2.9 -4.5 13.9 9.6 
Portugal 1.4 1.9 3.0 2.4 64.7 63.6 -3.9 -2.6 -10.4 -10.0 7.8 8.1 
Romania 8.2 6.0 6.6 4.9 12.4 12.9 -2.2 -2.6 -10.6 -13.9 7.3 6.4 
Slovakia 8.5 10.4 4.3 1.9 30.4 29.4 -3.5 -1.9 -7.4 -5.1 13.4 11.1 
Slovenia 5.9 6.8 2.5 3.8 26.7 23.4 -1.2 0.5 -2.8 -4.9 6.0 4.9 
Spain 3.9 3.7 3.6 2.8 39.6 36.2 2.0 2.2 -9.0 -10.1 8.5 8.3 
Sweden 4.1 2.7 1.5 1.7 45.9 40.4 2.3 3.6 8.5 8.4 7.0 6.1 
United Kingdom 2.8 3.0 2.3 2.3 43.4 44.2 -2.7 -2.8 -3.4 -3.8 5.3 5.3 
Source: DG Economic and Financial Affairs (2008), Economic Forecast Autumn 2008 , Luxembourg.  
9. The ECB's key interest rate increased from its historically low level of 2% during 2004 and 
most of 2005 to over 4% in July 2008.  Specifically, the ECB raised its interest rate to 3.75% in 
March 2007, to 4% in June 2007,  and to a peak of 4.25% in July 2008. Nonetheless, on 
15 January 2009, it reduced its key interest rate to 2% (down from 3.75% in October, 3.25% in 
November, and 2.5% in December 2008) in the wake  of the financial crisis. The average long-term 
interest rate in the euro area was 4.6% in August 2008, up from 3.8% in October 2006.10 
10. The labour markets situation in the EC-27 and the euro area generally improved in 2006 and 
2007 following the economic upswing. Employment growth in the EC-27 accelerated to 1.6% in 
2006, from 1.0% in 2005, and was at 0.7% in 2007, owing to structural reforms in both the product 
and labour markets over the last decade, including more employment-friendly wage developments and 
improved matching.  Employment in the euro ar ea increased by 1.4% in 2006 and 1.7% in 2007. 
Unemployment decreased in the EC-27 from 8.2% in  2006 to 7.1% in 2007, while in the euro area it 
fell from 8.3% to 7.5%. Yet new, and some old,  Member States still have high unemployment. 
                                                      
10 ECB online information.  Viewed at:  http://www .ecb.int/stats/monetary/rates/html/index.en.html. European Communities WT/TPR/S/214/Rev.1 
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In 2007, the highest unemployment rate was in Slovakia (11.1%), followed by Poland (9.6%), and 
Germany (8.4%). Denmark and the Netherlands had th e lowest unemployment rates in 2007, at 3.8% 
and 3.2%, respectively.   
11. Among domestic demand components, private inv estment showed the strongest increase in 
the EC-27, growing by 6.1% in 2006 and 5.4% in 2007  (Table I.3).  Consumer spending grew less 
strongly, by 2.2% in both 2006 and 2007, through sli ghtly more than in previous years. Government 
expenditure has increased more slowly than GDP gr owth since 2005. The EC's exports benefited from 
strong global demand; their growth rate peaked at  9.1% in 2006 (the same as for imports), before 
falling to 5.1% in 2007. 
Table I.3  
Growth in real GDP and expenditure components, 2003-07 
(Percentage changes; base year: 2000) 
 2003 2004 2005 2006 2007 
EC-27: 
GDP 1.3 2.5 2.0 3.1 2.9 
Domestic demand 1.9 2.4 2.0 3.1 3.0 
  Household  1.7 2.1 2.0 2.2 2.2 
  Government 2.1 1.8 1.6 1.9 2.1 
  Gross fixed capital formation 1.3 3 3.5 6.1 5.4 
Exports 1.9 7.5 5.9 9.1 5.1 
Imports 3.4 7.6 6.2 9.1 5.3 
EC-25: 
GDP 1.3 2.4 2.0 3.1 2.9 
Domestic demand 1.8 2.4 2.0 3.0 2.8 
  Household  1.7 2.0 1.9 2.1 2.1 
  Government 2.1 1.8 1.6 2.0 2.1 
  Gross fixed capital formation 1.3 2.9 3.4 5.9 5.1 
Exports 1.8 7.5 5.9 9.1 5.1 
Imports 3.3 7.5 6.1 9.0 5.1 
EC-15:  
GDP 1.2 2.3 1.8 2.9 2.7 
Domestic demand 1.7 2.2 1.9 2.8 2.6 
  Household  1.6 1.9 1.8 2.0 1.9 
  Government 2.0 1.8 1.5 1.8 2.1 
  Gross fixed capital formation 1.2 2.7 3.2 5.8 4.8 
Exports 1.3 7.0 5.5 8.6 4.5 
Imports 2.9 6.9 6.0 8.5 4.4 
Euro area:  
GDP 0.8 2.1 1.7 2.9 2.6 
Domestic demand 1.4 1.9 1.9 2.7 2.4 
  Household  1.2 1.6 1.7 1.9 1.6 
  Government 1.7 1.6 1.5 1.9 2.3 
  Gross fixed capital formation 1.3 2.2 3.1 5.4 4.2 
Exports 1.2 7.3 4.9 8.2 6.0 
Imports 3.1 6.9 5.6 8.1 5.4 
Note: Seasonally adjusted data. 
Source: Eurostat online information.  View ed at: http://epp.euros tat.ec.europa.eu/portal/page?_pageid=1090,30070682,109 
 0_33076576&_dad=portal&_schema=PORTAL. 
12. The ratio of government gross debt to GDP in the EC-27 fell to 58.7% in 2007, down from 
63.4% in 2005 and 61.3% in 2006.  In the euro area,  this share remained c onsiderably higher, at 
66.1% in 2007. In 2007, the public debt ratio to GDP was lowest in Estonia (3.5%), and remained above 60% in Italy (with the highest ratio, 104.1% ), Belgium, France, Germany, Greece, Hungary, 
Malta, and Portugal. The fiscal deficit, as percenta ge of GDP, declined from 2.4% in 2005 and 1.4% 
in 2006 to 0.9% in 2007, with the largest deficit be ing recorded by Hungary (5%), followed by Greece 
(3.5%)  (Table I.2). While several Member States have re formed their pension systems in recent years, 
further efforts to address concerns about long-term  fiscal sustainability are still required in the 
majority of Member States. WT/TPR/S/214/Rev.1 Trade Policy Review 
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13. During 2005-07, the euro continued to appreciat e against major currencies, in both nominal 
and real terms.11 In nominal terms, the euro appreciated by 4% in 2007 and 0.3% in 2006 (Table I.4).  
Increases of the real effective exchange rate we re similar, by 3.5% in 2007 and 0.4% in 2006. Against 
the U.S. dollar, the euro appreciated continuously between 2001 and 2007, to US$1.3705. Although 
there was a reversal towards the end of 2008, to US$1.2732 in November, the euro appreciated to 
US$1.346 in December 2008. 
Table I.4 
Euro exchange rates, 2000-08 
(Period averages) 
 Effective exchange rate (EER) of the euroa (1999 Q1=100) Euro exchange rate 
 EER-22 EER-42 (U.S. dollar) 
 Nominal Real Nominal Real  
2000 87.0 86.4 87.9 85.8 0.9236 
2001 87.7 87.1 90.4 87.1 0.8956 
2002 90.1 90.4 94.9 91.0 0.9456 
2003 100.6 101.4 106.8 101.9 1.1312 
2004 104.4 105.1 111.2 105.6 1.2439 
2005 103.3 104.2 109.7 103.7 1.2441 
2006 103.6 104.6 110.0 103.4 1.2556 
2007 107.7 108.3 114.2 106.6 1.3705 
2008b 106.8 106.6 114.2 104.9 1.2732 
a The nominal and real effective exchange rate indices of the eu ro are based on weighted averages  of bilateral euro exchange ra tes.  
The weights capture third-market effects and are based on trade in manufactured goods with the trading partners in the periods 
1995-97 and 1999-01, with the indices being linked at the begi nning of 1999. The EER-22 group of trading partners comprises 
the non-euro area EC Member States; plus Australia; Canada; H ong Kong, China; Japan; Norway; Singapore; Republic of Korea; 
Switzerland; and the United States. The EER- 42 includes 19 additional countri es and covers about 90% of extra-euro-area trade 
in manufactured goods. Real rates are obtained by deflating the nomi nal rate by consumer price indices (HICP for EC countries, 
CPI elsewhere). See the ECB Monthly Bulletin , September 2004 (Box 10), and ECB Occasional Paper No. 2.   
b November.   
Source: ECB online information. Viewed at:  http://www.ecb.int/pub/ pdf/stapobo/spb200812en.pdf.  
(3) TRADE AND INVESTMENT  
14. The growth of EC merchandise trade was strong in 2006, but slowed down in 2007.  The EC 
has remained the world's most important trader in  services. As a percentage of GDP, the EC-27 had 
external current account deficits of 0.8% and 0. 7% in 2006 and 2007, respectively:  large surpluses 
were recorded by the Netherlands (9.8%), Sweden  (8.4%), and Germany (7.6%); whereas the biggest 
deficits were in Latvia (22.9%),  Bulgaria (22.5%), and Estonia (18.5%) (Table I.2).  The services 
account surplus increased from €50.65 billion in 2005 to  €88.4 billion in 2007 (Table I.5).  The EC 
remains the world's largest recipient and supplier of  foreign direct investment (FDI), accounting for 
some 40% of global inward stock and over 50% of global outward stock. It is also a net investor in the 
rest of the world.12 
                                                      
11 The appreciation of the euro over the last few years has had a moderate negative impact on exports. 
However, this was more than mitigated by the strong growth of global demand and world trade up to 2007. 
Recent analysis suggests that  euro area exports react eight times as much to world demand than to the real 
appreciation of the euro. A ccording to calculations by the Commission, euro area exports declined by 
0.8 percentage points per year, on average, during 2001-06 due to the appreciation of the euro, while strong 
world demand contributed, on average, 6 percentage points to annual euro area export growth (European 
Commission, 2007g). 
12 UNCTAD (2008). European Communities WT/TPR/S/214/Rev.1 
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Table I.5  
Balance of payments, 2003-07  
(€ million)  
  2003 2004 2005 2006 2007 
Current account  37,074.0 24,186.0 -7,398.0 -61,309.0 -72,410.0 
Goods and services balance 62,631. 0 13,906.0 -28,580.0 -72,669.0 -65,003.0 
Trade balance 33,034.0 -30,583.0 -79,230.0 -141,791.0 -153,394.0 
Exports 961,828.0 952,674.0 1,049,685.0 1,188,639.0 1,242,499.0 
Imports 928,794.0 983,258.0 1,128,915.0 1,330,431.0 1,395,893.0 
Services balance 29,597.0 44,489.0 50,650.0 69,122.0 88,391.0 
Receipts      
Transportation 76,136.0 93,391.0 104,567.0 109,235.0 118,416.0 
Travel 61,164.0 63,460.0 66,530.0 73,029.0 76,612.0 
Other services 201,433.0 210,914.0 233,630.0 269,988.0 303,962.0 
Communication .. 6,484.0 7,353.0 8,682.0 9,769.0 
Construction .. 9,684.0 12,349.0 13,855.0 15,883.0 
Finance and insurance .. 62,808.0 25,337.0 -32,556.0 -34,978.0 
Computer and information .. 16,354.0 17,350.0 21,911.0 23,535.0 
Royalties and licence fees .. 20,583.0 23,809.0 24,564.0 25,630.0 
Other business .. 102,816.0 118,599.0 131,284.0 147,748.0 
Personal, cultural and recreational services .. 5,370.0 4,909.0 4,760.0 5,007.0 
Government .. 9,136.0 7,873.0 7,896.0 7,714.0 
Not allocated 3,523.0 2,912.0 2,322.0 4.0 2,437.0 
P a y m e n t s       
Transportation 72,823.0 80,920.0 88,364.0 97,519.0 101,976.0 
Travel 82,880.0 81,889.0 88,004.0 89,515.0 94,005.0 
Other services 153,449.0 160,316.0 177,665.0 196,132.0 214,864.0 
Communication .. 7,202.0 8,586.0 10,052.0 10,703.0 
Construction .. 5,923.0 6,215.0 7,119.0 7,934.0 
Finance and insurance .. 101,503.0 112,173.0 122,083.0 127,606.0 
Computer and information .. 8,101.0 8,725.0 10,048.0 10,369.0 
Royalties and licence fees .. 29,306.0 32,014.0 31,998.0 36,192.0 
Other business .. 77,764.0 87,064.0 97,739.0 107,647.0 
Personal, cultural and recreational services .. 6,168.0 6,303.0 7,373.0 5,883.0 
Government .. 5,577.0 6,163.0 6,883.0 7,057.0 
Not allocated 3,507.0 3,064.0 2,366.0 -32.0 2,191.0 
Income balance 15,689.0 58,144.0 74,769.0 69,277.0 49,948.0 
Credit 279,715.0 331,767.0 433,446.0 544,690.0 605,307.0 
Compensation of employees (including border, 
seasonal, and other workers) 11,655.0 12,220.0 12,474.0 13,707.0 14,240.0 
Investment income 268,061.0 319,547.0 420,972.0 530,983.0 591,066.0 
D e b i t       
Compensation of employees (including border, 
seasonal, and other workers) 8,091.0 5,788.0 6,291.0 6,954.0 6,943.0 
Investment income 255,936.0 267,835.0 352,386.0 468,458.0 548,416.0 
Current transfers  -41,245.0 -47,863.0 -53,587.0 -57,917.0 -57,355.0 
Credit 32,130.0 33,308.0 39,638.0 42,353.0 41,652.0 
Debit 73,376.0 81,171.0 93,225.0 100,270.0 99,007.0 
Capital account  -9,622.0 -5,173.0 -10,313.0 -10,774.0 -5,529.0 
Credit 4,833.0 6,214.0 7,150.0 8,280.0 7,969.0 
Debit 14,455.0 11,387.0 17,463.0 19,053.0 13,498.0 
.. Not available.  
Source : Eurostat online information.  Vi ewed at:  http://epp.eu rostat.ec.europa.eu/porta l/page?_pageid=1090,3082,1090_ 
306576&_dad=portal&_schema=PORTAL.  
(i) Trade in goods 
15. EC merchandise trade grew strongly in 2006 and at somewhat lower pace in 2007.  In euro 
terms, exports expanded by 13 .2% in 2006 and 4.5% in 2007, while imports grew by 17.8% 
and 4.9%.  During the period under review, the EC's trade account remained in persistent deficit, 
generally considered to be at sustainable level.  The deficit amounted to €153.4 billion in 2007 and WT/TPR/S/214/Rev.1 Trade Policy Review 
Page 8 
 
 
€141.8 billion in 2006 (Table I.5). The EC's bilate ral deficits were particularly large with Asian 
countries, while trade surpluses were  registered with North America.13  
16. The EC has remained the world's leading trader, accounting for some 17% of world 
merchandise trade. In 2007, it was the largest merc handise exporter and second largest importer, with 
extra-EC exports and imports amounting to €1 ,240 billion and €1,426 billion, respectively. 
Individually, Germany ranks first in global mercha ndise exports, France fifth, the Netherlands sixth, 
the United Kingdom seventh, and Belgium tenth.  Ge rmany is the world's second largest merchandise 
importer, the United Kingdom fourth, France sixth, Italy seventh, the Netherlands eighth, and Belgium tenth
.. With regard to the two recently acceded countries, Bulgaria ranks 47th among 
exporters and 39th among importers, while Romania ranks 39th in terms of exports and 25th in imports.  
17. Traditionally, the United States has been the EC's  most important trading partner, although its 
significance has declined over the years.  In 2007,  the United States accounted for 21.1% of EC-27 
goods exports, down from 24.0% in 2005 and 26.2% in 2003, the U.S. share of goods imports was 
12.7% in 2007, down from 13.9% in 2005 and 16.9% in 2003 (Chart I.1 and Tables AI.1 and AI.3). 
Between 2005 and 2007, the EC's merchandise trade su rplus with the United States fell slightly, from 
€89 billion to €80.4 billion.  Since 2006, China has b een the largest supplier of EC imports, with a 
share of 16.2% in 2007.  Exports to China made up 5.8% of EC total merchandise exports in 2007.  
Switzerland has remained the second most important d estination of EC merchandise exports (7.6% in 
2007), but accounted for only 5.5% of imports.  Imports from the Russian Federation amounted to 10.1% of EC merchandise imports in 2007, while e xports to the Russian Federation were 7.2% of 
total exports.  Japan's share in EC trade has continue d to fall, to 5.5% of im ports and 3.5% of exports. 
By region, the main destination for EC-27 exports  in 2007 was Asia with 23.7%, followed by North 
America (23.3%), while for imports Asia's share wa s 36.5%, followed by non-EC European countries 
(15.3%), and North America (14.3%).  The share of the Middle East in EC exports and imports has declined since 2005; Africa's share in EC imports has declined slightly, while its share in EC exports 
has increased slightly to 8.3%. 
18. Machinery and transport equipment have conti nued to make up the bulk of the EC's exports, 
although this share fell from 44.1% in 2005 to 37.9% in 2007 (Table AI.2 and Chart I.2).  Chemicals 
have remained the second most important category of  export products, with a share of 14.8% in 2007, 
followed by automotive products (9.8%), and other consumer goods (8.7%).  Import patterns show a 
declining share of manufactured goods, to just over 60% in 2007, while the share of primary products 
has increased, in particular through the rising shar e of fuels.  In 2007, EC-27 merchandise imports 
consisted primarily of machinery and transport e quipment (28.9% of total merchandise imports, down 
from 32% in 2005), followed by mining (27.8%, incl uding fuels), and other consumer goods (9.1%) 
(Table AI.4). 
 
                                                     
 
13 There are major differences among Member States in their bilateral trade balances with third 
countries, mainly because of their re lative dynamism of domestic demand, di fferences in the s ectoral structure 
of their imports, and their relative export competitiveness. European Communities WT/TPR/S/214/Rev.1 
 Page 9 
 
 
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%20032004200520062007Chart I.1
Direction of merchandise trade, 2003-07
0% 20% 40% 60% 80% 100%20032004200520062007(a) Exports
(b) Imports
Source: WTO Secretariat calculations, based on Eurostat database.Norway Middle EastJapan Other Europe United States
Other Asia Other America Russian Federation
Turkey ChinaSwitzerland Africa OtherNorway Middle EastJapan Other Europe United States
Other Asia Other America Russian Federation
Turkey ChinaSwitzerland Africa Other
 WT/TPR/S/214/Rev.1 Trade Policy Review 
Page 10 
 
 
0%20%40%60%80%100%
2003 2004 2005 2006 2007
0%10%20%30%40%50%60%70%80%90%100%
2003 2004 2005 2006 2007Chart I.2
Structure of merchandise trade, 2003-07
(a) Exports
(b) Imports
Source: WTO Secretariat calculations, based on Eurostat database.Chemicals Other transport equipmentElectrical machines Other Other mining
Iron and steel Automotive productsFuel Non-electrical machines Other consumer goodsAgriculture Other semi-manufactures Textiles and clothingChemicals Other Automotive productsElectrical machines Iron and steel Other consumer goodsOther transport equipment Agriculture Other semi-manufactures
Mining Non-electrical machines Textiles and clothing
 
 European Communities WT/TPR/S/214/Rev.1 
 Page 11 
 
 
(ii) Trade in services 
19. The EC-27 is the world's largest trader in ser vices.  In 2006, it accounted for 27.3% of global 
services exports and 24.0% of imports.14  EC-27 services exports amount ed to €501.4 billion in 2007 
(up from €402.9 billion in 2005), while service s imports were €413 billion in 2007 (against 
€350 billion in 2005) (Table I.6).  Individually, the United Kingdom is the world's second most 
important exporter of services, followed by Germ any and France.  In terms of services imports, 
Germany ranks second in the world, the United Kingdom  third, and France fifth.  The United States 
and Switzerland are the EC's two most important partners for trade in services. 
Table I.6 
Trade in services, 2005-07 
(€ billion) 
 EC-27 Exports  EC-27 Imports 
 2005 2006 2007a  2005 2006 2007a 
Total (extra-EC)  402.9 441.6 501.4  350.0 373.1 413.0 
   Transportation  104.4 109.7 118.4  87.7 96.2 102.0 
     Sea transport  57.5 57.9 ..  44.4 49.6 .. 
     Air transport   35.6 38.9 ..  30.3 31.6 .. 
     Other transport  11.4 12.9 ..  13.0 15.0 .. 
   Travel  65.4 71.1 76.6  83.8 85.1 94.0 
   Other services 230.8 260.7 304.0  176.2 191.7 214.9 
     Communications services  7.4 8.7 9.8  8.3 9.8 10.7 
     Construction services  11.2 12.1 15.9  6.1 6.6 7.9 
     Insurance services  6.1 14.2 14.3  8.4 7.2 7.8 
     Financial services  35.2 41.9 54.4  14.4 17.4 21.3 
     Computer and information services  17.3 21.0 23.5  8.7 9.7 10.4 
     Royalties and licence fees      23.7 23.4 25.6  32.1 32.6 36.2 
     Other business services 117.1 126.9 147.7  85.8 95.7 107.6 
     Personal, cultural and recreational services  4.9 4.6 5.0  6.3 5.8 5.9 
     Government services, n.i.e.  7.9 7.9 7.7  6.1 6.9 7.1 
   Services not allocated  2.3 0.0 2.4  2.4 0.0 2.2 
Main trading partners         
United States 123.2 134.7 139.0  118.2 122.1 127.9 
Switzerland 49.4 52.7 60.6  38.1 37.8 41.8 
Japan 19.6 18.9 19.4  12.3 12.9 13.4 
Norway 14.7 16.4 ..  9.7 10.5 .. 
Russian Federation 12.3 14.2 18.2  9.1 10.8 11.5 
China (excluding Hong Kong) 12.3 12.8 17.7  9.6 11.3 13.1 
Canada 9.0 10.2 11.2  7.6 8.2 9.5 
Singapore 8.6 10.9 ..  5.6 6.3 .. 
Turkey 4.8 5.7 ..  11.4 11.0 .. 
Australia 8.5 9.0 ..  5.8 6.2 .. 
Hong Kong, China 8.3 6.9 8.4  5.6 6.7 7.8 
India 5.4 7.0 9.0  4.8 5.5 6.6 
Korea (Republic of)  5.8 6.4 ..  3.6 4.0 .. 
Brazil 4.6 5.2 6.6  4.0 4.6 4.8 
South Africa 5.1 5.3 ..  4.1 4.4 .. 
Egypt 2.3 2.3 ..  5.2 5.0 .. 
Croatia 1.9 2.3 ..  4.4 4.8 .. 
Mexico 3.7 4.1 ..  2.8 2.7 .. 
Thailand 1.9 2.0 ..  3.7 4.5 .. 
Nigeria 3.5 4.5 ..  1.1 1.2 .. 
Israel 3.1 3.1 ..  2.3 2.4 .. 
.. Not available. 
a Provisional.   
Source: Eurostat online information.  View ed at:  http://epp.eurostat.ec.eur opa.eu/portal/page?-pageid=1090, 30070682,10 
 90_33076576&_dad=portal&_schema=PORTAL. 
                                                      
14 For exports, the EC was followed by the Unites States (19.1%), Japan (6.0%), China (4.5%), 
and India (3.6%).  For imports, it was followed by the Unites States (15.7%), Japan (7.3%), China (5.1%) and Canada (3.7%). WT/TPR/S/214/Rev.1 Trade Policy Review 
Page 12 
 
 
(iii) Foreign direct investment 
20. The EC-27 remained the world's largest recipien t and supplier of foreign direct investment 
(FDI) during the period under review.  In 2006, it accounted for 40.7% of global inward FDI stock 
and 51.5% of global outward stock.  France, th e United Kingdom, and Germa ny were the main single 
net investors. Most of the new Member States ha ve remained net FDI recipients, although the FDI 
outflows of many of these states have grow n considerably since 2005 (Table I.7). 
21. The EC is a net investor in the rest of the world.  Its FDI inflows and outflows increased 
strongly in 2006 and in 2007 (Table I.7). 
Table I.7 
FDI inflows and outflows, 2005-07 
(€ million) 
  2005  2006  2007a 
  
Outward flows Inward flows  
Outward flows Inward flows  Outward 
flows Inward 
flows 
EC-27 577,602 480,813  605,593 539,928  913,922 677,240 
EC-25 577,322 472,499  605,119 524,907  913,780 663,883 
Austria 9,347 8,981  7,935 4,543  23,154 22,605 
Belgium 26,261 27,640  44,774 50,944  37,881 28,537 
Bulgaria 249 3,103  137 5,961  191 6,101 
Cyprus 449 954  682 1,199  777 1,518 
Czech Republic -15 9,374  1,172 4,804  979 6,710 
Denmark 13,032 10,373  6,771 2,888  11,863 8,272 
Estonia 507 2,254  876 1,341  1,123 1,815 
Finland 3,395 3,820  2,520 4,369  6,300 6,193 
France 97,263 65,177  91,698 64,632  159,306 109,487 
Germany 44,640 28,841  75,491 43,976  122,325 37,205 
Greece 1,173 498  3,322 4,276  3,894 1,399 
Hungary 1,775 6,203  15,043 15,777  25,800 26,831 
Ireland 11,509 -25,482  11,746 -747  12,109 18,917 
Italy 33,581 16,020  33,475 31,184  64,153 22,660 
Latvia 103 573  138 1,339  166 1,595 
Lithuania 278 826  232 1,448  431 1,412 
Luxembourg 99,734 93,578  88,175 99,565  132,865 86,798 
Malta -16 534  0 1,481  14 696 
Netherlands 109,205 38,354  37,542 6,364  22,768 72,653 
Poland 2,729 8284  7,134 15,197  2,392 12831 
Portugal 1,671 3,188  5,557 9,011  4,542 4115 
Romania 31 5,211  357 9,060  -49 7,266 
Slovakia 120 1,952  294 3,325  150 2,157 
Slovenia 535 662  718 512  1,154 1,073 
Spain 33,636 20,119  79,913 21,434  87,387 39,006 
Sweden 21,394 8,210  17,463 18,302  26,831 13,728 
United Kingdom 65,016 141,566  72,448 117,743  165,416 135,670 
a Provisional. 
Source : Eurostat online information.  Vi ewed at: http://epp.eur ostat.ec.europa.eu/portal/page?_pageid=1090,30070682,109 
 0_33076576&_dad=portal&_schema=PORTAL. European Communities WT/TPR/S/214/Rev.1 
 Page 13 
 
 
(4) OUTLOOK  
22. In the context of the marked slowdown in gl obal activity and the persisting turmoil in the 
financial markets, the Commission's interim fo recasts in January 2009 indicated a significant 
reduction in the EC-27's GDP growth rate, from 2.8% in 2007 to 1% in 2008 and -1.8% in 2009.15 
Several Member States are expected to experience a recession, reflecting their exposure to the global 
crisis and country-specific factors, notably compe titiveness. For 2010, a GDP growth rate of 0.5% is 
estimated, with a small recovery foreseen for some, but not all, Member States. Deterioration in the 
labour market is also anticipated, with only 250,000  new jobs to be created  during 2009-10 (compared 
with 6 million jobs in 2007-08). Consequently, the un employment rate is expected to rise from 7% in 
2008 to 8.7% in 2009 and 9.5% in 2010.16 
23. Inflationary pressures, which have resulte d from strong and rapid increases in food and 
energy prices over the last few years, are predicted to fall. As a result, consumer price inflation in the 
EC-27 is estimated to decrease from 3.7% in 2008 to  1.2% in 2009 and 1.9% in 2010. Reflecting the 
high costs of the measures envisaged to respond to  the global economic downturn, the overall public 
deficit in the EC-27, as a percentage of GDP, is pr ojected to deteriorate appreciably from 2% in 2008 
to 4.4% in 2009 and 4.8% in 2010.17 Given the marked slowdown in external demand, growth in 
exports of goods and services from the EC-27 is expect ed to drop by more than two thirds from 2007 
to 2009, while the anticipated deterioration of imports is even more pronounced. Therefore, the 
current account deficit, as a percentage of GDP, is  forecast to increase from 1% in 2008 to 1.5% in 
2009 and 1.4% in 2010.18 
24. In response to the current economic and fi nancial crisis, the Commission unveiled its 
Economic Recovery Plan, on 26 November 2008, based on, inter alia , an immediate budgetary 
impulse amounting to €200 billion (1.5% of EC GDP ), made up of €170 billion from Member States 
and €30 billion from EC funding.19 In addition, the European Invest ment Bank (EIB) is to increase its 
annual level of financing by  some €30 billion over 2009-1020, and the European Bank for 
Reconstruction and Development (EBRD) is also e xpected to add €500 million per year to its present 
level of financing in the new Member States. The Plan falls under the Stability and Growth Pact and 
was approved by the European Council on 11-12 December 2008. 
 
                                                      
15 This situation has put a brake on domestic demand at a time when external demand has also faded. In 
addition, while total investment growth, together with exports, was a key driving force behind the upswing in 
recent years, it is expected to move from 5.4% in 2007 to 0.4% in 2008, -5.9% in 2009, and -0.6% in 2010 
(DG Economic and Financial Affairs, 2009). 
16 DG Economic and Financial Affairs (2009). 
17 Member States will be allowed to exceed the public deficit limit of 3% of GDP provided they remain 
"close" to this  figure, for a temporary period ( Financial Times , 27 November 2008). 
18 DG Economic and Financial Affairs (2009). 
19 The Plan also promotes investment in right skills for future needs, in energy efficiency to create jobs 
and save energy, in clean technologies to boost activ ities like construction and automobiles in the low-carbon 
markets of the future, and in infrastructure and in ter-connection for efficiency and innovation (European 
Commission, 2008a). 
20 EIB's financing will take the form of increased lo ans, equity, guarantees, and risk-sharing. EIB will 
offer SMEs loans for €30 billion, an increase by €10 billion over its usual lending. Some €5 billion will also be made available for the automotive industry, and an additional €5 billion offered under the trans-European 
energy interconnections and broadband infrastructure projects for 2009 and 2010. The Commission also calls on 
commercial banks to resume their key role to finance investment (European Commission online information. Viewed at: http://ec.europa.eu/economy_finance/thema tic_articles/article13502_ en.htm, 1 December 2008).