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Text File | 1994-05-02 | 21KB | 396 lines

<text> <title> Europe: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: European Communities </hdr> <body> 1. General Policy Framework The European Communities (EC) exercise supranational authority over many areas of economic and trade policy of the EC's 12 member states (France, Germany, Belgium, Netherlands, Luxembourg, Italy, United Kingdom, Ireland, Denmark, Greece, Spain, and Portugal). Major policy decisions are made by the various councils of the ministers of the 12 member states. The EC has responsibility for non-military trade and agricultural policy, including tariffs, multilateral negotiations, and customs practices. It also has competence in fisheries and nuclear energy, and increasingly in environment, transportation, telecommunications, and research and development. EC influence on member states' financial and investment policies has been relatively limited. Implementation of the Single Market Program (EC-92) and of economic and monetary union (see discussion below on EMU) during the 1990s will substantially increase the EC's role with regard to tax harmonization, financial services, industrial standards, and monetary and fiscal policy. Currently, members of the European Exchange Rate Mechanism (ERM) (all but Greece and Portugal) are limited in their conduct of interest and exchange rate policies. Full economic and monetary union, characterized by the irrevocable fixing of exchange rates, the adoption of a single currency and the establishment of a single, supra-national central bank, will further restrict flexibility for those member states which realize it. EMU will mean that monetary and exchange rate policies will be determined largely at the Community as opposed to the national level. The drive for economic convergence inherent in the move to full economic and monetary union also implies that member states' fiscal policies will be increasingly influenced by EC considerations. The EC has been making steady progress toward completing the Single Market Program which is designed to create a single EC market and allow all goods, services, people, and capital to move without national restrictions across member state borders. The EC's stated policy is to accomplish this goal through liberalizing measures which will open the EC market through deregulation and reduction of barriers. As the EC has generally followed market principles in pursuing the Single Market Program, U.S. business should find greater and easier access to the larger market provided EC-92 is implemented in an open and non-discriminatory manner. As of December 18, 1991, all 282 directives called for in the Single Market Program had been drafted by the EC Commission, and over 70 percent of these directives had been adopted by the EC Council of Ministers. However, only 49 of the 282 directives have been implemented by all 12 member states. With one year before EC-92's completion, it appears that the overall trend is towards a more liberal trading regime, although certain EC decisions are discriminatory or potentially discouraging or distorting for third countries. 2. Exchange Rate Policies The European Monetary System (EMS) constitutes an arrangement among the participating currencies to maintain their cross-rates within a certain band of fluctuation. This arrangement is called the Exchange Rate Mechanism (ERM) and 10 of the 12 member states participate in it (only Portugal and Greece are outside the ERM). In practice the anchor currency is the Deutsche mark (DM), which moves freely against the U.S. dollar in response to market forces. There were no currency realignments or other significant ERM developments during 1991. The agricultural green rate system is an instrument of trade policy. Current green rates effectively devalue EC currencies 14 percent, stimulating exports and hampering imports. Following year-long negotiations, EC heads of government reached agreement in December 1991 in Maastricht, Holland on a draft treaty on economic and monetary union (EMU). Signature is expected in February 1992, following final editing of the treaty. EC member countries are expected to ratify the EMU treaty during 1992. Implementation of the EMU treaty would result ultimately in the establishment of a single currency and a single monetary authority in the European Community. Full economic and monetary union is intended to eliminate exchange rate risk for intra-EC transactions, facilitate capital market integration, enhance the Single Market's stimulation of intra-EC trade, and promote greater harmonization and coordination of macroeconomic policy within the EC. During Stage 1 of EMU, which is currently underway, all EC members' currencies are to be brought into the ERM and all remaining restrictions on internal EC capital flows are to be lifted. During Stage 2, which is scheduled to begin in 1994, EC members will continue efforts to curb budget deficits and inflation in order to meet economic convergence criteria specified in the EMU as conditions for entering full economic and monetary union. In 1997, provided a majority of EC members are politically willing and economically prepared for full EMU, exchange rates will be irrevocably fixed, the independent, supra-national European Central Bank will be set up and a single currency will be created. If the move to Stage 3 does not occur in 1997 because not enough countries are willing or able, Stage 3 will start definitely by January 1, 1999. 3. Structural Policies Competition Policy: The EC Commission has produced guidelines for an EC approach to industrial competition. The guidelines espouse the benefits of free markets in fostering productivity and efficiency. If the EC adheres to these principles, EC markets will be more open to non-EC enterprises. Tax Policies: a. Indirect taxes: The EC's role in tax policy is limited to the harmonization of direct and indirect taxes in order to avoid competitive distortions. During 1991 the Community decided to harmonize VAT rates over the next few years with a goal of a minimum rate of 15 percent. Countries with a higher minimum rate than 15 percent are free to leave it at that level. The hope is that through competition, the higher rate countries will be forced to lower their minimum rate to 15 percent. The EC has agreed to adopt an EC-wide system of collecting VAT in the country of origin by 1997. b. Indirect taxes: The Community is concerned that widely varying business tax practices may be causing EC firms to be less competitive on world markets. Therefore, in early 1991, a blue ribbon committee, under the chairmanship of former Dutch Finance Minister Ruding, was created to look at the problems and suggest solutions. The Committee's work will not be finished until February 1992. 4. Debt Management Policies Debt management policies are determined by the individual member governments of the Community. 5. Significant Barriers to U.S. Exports EC Variable Levy: A basic principle of the Common Agricultural Policy, Community Preference, ensures that internally produced agricultural products have a competitive advantage over like products imported into the EC, even if the latter are produced at considerably lower costs. Import levies, equalling the differences between higher EC threshold prices and the lowest price of competing imports, plus transportation and handling costs, guarantee that imported products are priced at least as high as, and usually above, Community products. Levies apply to most agricultural commodities: cereals and rice, milk and milk products, beef and veal, sugar and olive oil. Commodities not subject to import levies include oilseeds, vegetable protein meals and non-grain feed ingredients, such as corn gluten feed; import duties on these products are bound at zero under terms negotiated in the Dillon Round. Tariffs: