EU Expansion: From Post-War Vision To Economic Union
Twenty-eight nations in Europe currently participate in the political-economic union known as the European Union, or EU, and 19 participate in its corresponding common currency area, known as the eurozone.
What is today known as the European Union traces its origin to the aftermath of WWII, when France and Germany signed a treaty in 1951 to create the European Coal and Steel Community (ECSC). The ECSC was originally proposed by French Foreign Minister Robert Shuman in April 1950 as a manner to help prevent any future wars between France and Germany. The treaty came into effect in July 1952 and created a common market in the two countries for coal and steel. Both were key elements for war efforts and a source of industrial competition between those two nations.
The establishing of the ECSC was followed by the creation of the European Economic Community in 1957, which included France, West Germany, Italy, Belgium, the Netherlands and Luxembourg. By 1986, the group expanded to 12 countries, also including Austria, Spain, Portugal, United Kingdom, Finland and Ireland. Although the European continent has more than 50 countries geographically, not all have sought membership in the EU or are considered potential members.
A first step towards promoting a unified currency in Europe took place with the creation of European Monetary System in 1979.
At present, participation in the European Monetary System means the following: coordination of economic policy-making between member states, coordination of fiscal policies through limits on government debt and deficits, submission to a centralised independent monetary policy run by the European Central Bank (ECB), adherence of national financial institutions to centralised rules within the euro area, and adoption of the single euro currency.
Launch Of The Euro
Following the signature of the Maastricht Treaty 1992—it allowed for harmonisation of the economic, judicial and foreign policy—the European Community continued expansion to form the EU. The Economic and Monetary Union in Europe was launched on Jan. 1, 1999 with the participation of 11 EU member nations. It included the adoption of the euro, centralised monetary policy and harmonisation of economic policy. The euro was issued as currency with coins and banknotes January 1, 2002, replacing older national currencies of eurozone members.
Some other countries that participate within the EU have either delayed entrance to the monetary union, opted out or have not yet completed requirements to do so. Of these, the United Kingdom has opted out, Denmark has delayed entrance but remains part of the euro area Exchange Rate Mechanism, and seven others (Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania and Sweden) have yet to fulfill entrance criteria.
Sweden is a unique case among these. Although it signed the Maastricht Treaty, it suspended efforts to fulfill entrance criteria after a 2003 referendum that rejected adoption of the euro.
Further, some countries considered part of Europe, such as Norway, Iceland and Switzerland, are neither members of the EU nor the European Monetary Union.
There are other countries that are not EU members but have an agreement to use the euro as currency. These include Andorra, Monaco, San Marino and the Vatican. Two other countries, Kosovo and Montenegro, have also adopted the currency without an agreement.
The remaining EU-member countries—excluding those that signed the Maastricht Treaty without an opt-out provision—have signaled plans to enter the European Monetary Union and adopt the euro over varying time horizons. Those include Bulgaria in 2018; Romania in 2019; and Croatia, Czech Republic, Hungary and Poland in 2020. These dates are pending national political review and compliance with EU economic criteria.
Potential New EU Members
In addition to those EU countries, several other European countries have petitioned for membership in the bloc, including Albania, Macedonia, Montenegro, Serbia and Turkey. Two other countries, Bosnia-Herzegovina and Kosovo are also seen as potential candidates, but have not formalised their candidacies.
Even if accepted immediately as EU members, neither candidate nor potential candidate countries could be admitted as members of the European Monetary Union until at least 2018, as Maastricht Treaty rules require member countries to participate in the Union's exchange rate mechanism for a period of at least two years before admittance.
According to a report published by the European Commission in December 2015, Turkey was seen as the most advanced in terms of preparation and economic competitiveness of the countries considered candidates or potential candidates for entrance into the European Union. Macedonia was considered structurally well prepared but required some improvements in budget and investment conditions. Albania, Montenegro and Serbia were considered "moderately prepared," all requiring improvements in structural, regulatory, investment and human capital development.
In addition to formally recognised candidates and potential candidates, some observers note that the EU could expand in the future to include partner nations in the far Eastern region of the continent. These include Armenia, Azerbaijan, Belarus, Georgia, Moldavia and Ukraine.
Following negotiations for candidacy, new member nations must be approved by the European Council for both entrance to the EU and later entrance as a member of the eurozone.
The EU says that: "To be considered for membership, a country must have stable institutions guaranteeing democracy, the rule of law, human rights and the protection of minority groups. It must also have a functioning market economy that will be able to cope with competitive pressures once inside the EU."
To be eligible for admission into the European currency area, or eurozone, prospective members must meet what are defined under the Maastricht Treaty as economic convergence criteria, which are a series of economic performance parameters for the countries' national economies.
Specifically, the criteria are as follows: consumer price inflation not more than 1.5 percentage points above the best-performing member states, government deficit not more than 3% of GDP, government debt not more than 60% of GDP, long-term interest rate not more than 2 percentage points above three best-performing member states, and participation in exchange rate parity mechanism for two-year period without significant deviation.
Every two years, the European Commission and the European Central Bank assess progress made by the euro-area candidate countries and publish their conclusions about performance in convergence reports.
Political And Economic Conflicts
The original intent of the founders of the eurozone was to stimulate economic integration among EU member states. They believed that the greater size, internal efficiency and robustness to the EU economy as a whole would offer member countries greater opportunities for economic stability, higher growth rates and more employment. In practice, however, the results have been mixed and lingering economic imbalances between member nations have given rise to both political and economic conflicts in the region.
In particular, the European debt crisis, which has unfolded since 2009, has exposed deep differences in the capacity of nations within the eurozone to act in a coordinated manner. The crisis, following on the heels of the global financial crisis in 2007 and 2009, pushed some of the smaller and weaker economies in Europe into heavy indebtedness and strained their ability to meet economic performance criteria within the bloc.
Within this context, the expansion of the bloc with admittance of new members in the coming years has faced some uncertainty. Some critics have suggested that the EU has expanded too quickly to maintain stability. The EU has expanded by 13 members in the last 15 years, and at least six of those have since joined the eurozone common currency area.
Between 2004 and 2015 Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Cyprus, Malta, Bulgaria and Romania all became new members of the EU.
The eurozone currently has 338 million citizens and is responsible for a GDP of €10 trillion. If the eurozone expands to the size of the full 28-nation EU membership, it would have more than 500 million citizens and a GDP of €13 trillion.
The Future: Entrances Or Exits?
Discussions over the expansion of the eurozone come at the same time as some member countries in the EU have discussed their withdrawal from the bloc, or from the common currency area. The most prominent of those cases have been the UK (known as "the Brexit") and Greece. While the UK is not a member of the currency area, its participation in the EU political bloc has been drawn into question since 2013, when Prime Minister David Cameron pledged an electoral review of UK membership in the EU through a referendum. The referendum is scheduled to be held in June 2016.
There has also been repeated speculation about the possible exit of Greece from the eurozone amid its ongoing debt crisis and successive attempts to negotiate bailouts with eurozone partners and creditors.
Spain, Italy and Portugal have also been engulfed in heavy debt in recent years, causing speculation risen about their possible exits. Ironically, calls have even been made for Germany to leave the eurozone, but for a differing reason. Some observers have argued that if Germany, with its comparatively strong economy, exited the eurozone, it could revalue its currency, thus helping correct for trade and investment flow imbalances among nations in Europe.
In the coming years, both the EU and its monetary zone could expand by as many as five members each, and some observers project the EU has the potential to enlarge to as many as 40 total members or more over the next decade. However, the obstacles to that possibility appear large.
Analysts argue that the advantages would include bringing greater economic stability, trade and predictability to the region. However, the eurozone's experience to date has shown that the effort to bring national economies of differing sizes and characteristics into a single economic zone also prompts inefficiencies and political disputes.
In particular, the fact that existing EU rules allow member nations to set their own national budget policies has permitted differences in debt and deficits. These have dragged down growth in some regions and complicated the effort to stimulate the overall economy under a single monetary policy set by the ECB.
Some analysts have recommended that the EU also enter some kind of fiscal union with centrally managed budget policies, but so far that proposal has not been adopted. And while the future expansion of the eurozone remains uncertain, the region will continue to be dominated by one supra-national currency, the euro, alongside more than 20 national currencies of smaller circulation.
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Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…