The European Union

The EU in the Global Economy

The European Union is on par with the United States as a major centre of power in the global economy. In 2003, the GDP of the EU of 25 was US$11 trillion. This constituted 30.4 per cent of global GDP, the same as that for the United States, and compared with 11.9 per cent for Japan. With a population of over 450 million people, the EU represents an increasingly attractive market. Enlargement of the EU to 25 member states in May 2004 increased the EU's GDP by around US$491 billion. In addition, the EU includes the third, fourth, fifth, sixth and ninth largest economies in the world: Germany, the United Kingdom, France, Italy and Spain. These characteristics combine to create an enormous export and investor market that is mature and sophisticated, combined with rapid growth in its new members.

In 2003, the EU accounted for 15.0 per cent of global merchandise exports (as compared to 10.7 per cent by the US), valued at US$940 billion, not including intra-EU trade. Illustrating the size of the economy, extra-EU merchandise exports in the same year accounted for only 10.2 per cent of the GDP of the EU. Services exports were valued at US$686 billion. Additionally, EU member states comprise six of the world's top 10 exporters of commercial services.

The EU is also a major player in international capital markets, both through lending and investment. The EU is the world's most important source of foreign direct investment flows and, as at 2001, was the domicile of 51 of the world's 100 largest transnational corporations, as ranked by foreign assets.

In 2000, the EU adopted the Lisbon Strategy, an ambitious economic reform program designed to make the EU the most dynamic and competitive knowledge-based economy in the world by 2010. However, implementation of the Strategy has been slow, hampered by weak EU economic growth in recent years.

The EU economy rebounded slightly in 2004, with Consensus Forecasts estimating the EU25 economy grew by 2.3 per cent, up from 1.0 per cent in 2003, but lagging behind the US and Japan at 4.4 and 3.9 per cent respectively. The EU's turnaround was driven mainly by exports, which performed well despite the strong euro. However, there is disparity in the performance of individual EU members. Growth in the euro area was just 1.8 per cent in 2004, with weak domestic demand largely offsetting increased export earnings. Germany, the euro area's largest economy, grew by 1.7 per cent, while France and Spain expanded by 2.2 and 2.6 per cent respectively. Growth in newly acceded EU countries was 4.7 per cent in 2004. While this result was achieved from a low base, with the combined GDP of all ten new members equivalent only to that of the Netherlands, most are forecast to experience average real GDP growth of at least 4 per cent a year in the medium term.

Regularly updated information and statistics on economic activity in the EU is available from the country information pages.

Institutions of the European Union

The European Union binds together 25 member states. The business of the EU is carried out by five institutions. The decision-making institutions are the European Council, the Commission of the European Communities and the European Parliament. The European Court of Justice and the Court of Auditors are judicial bodies.

The European Council is the pre-eminent body of the EU, under which the Heads of State or Government of the EU member states and the President of the European Commission come together in regular summits.

Under current arrangements the Presidency of the European Union rotates among member states on a six-monthly basis. The Presidency is responsible for moving forward issues on the EU agenda, primarily by organising and leading meetings of the European Council and the Council of Ministers, acting as spokesperson of the EU and representing the EU internationally. If ratified, the new Constitutional Treaty would provide for the six-month rotating Presidency to be replaced by a Council President who would be elected for a term of two and a half years. Under the new constitution, groups of three member states would hold the Presidency for a period of 18 months, working under the Council President.

The making of EU legislation (regulations, directives and decisions) is shared between the Commission, the Parliament, and the Council of Ministers. Only the Commission is able to propose new regulations or directives. The proposals then go to the European Parliament and the Council where, depending on the subject area, different legislative processes apply. Processes are complex and can include consultations, cooperation and co‑decision.

The European Commission has extensive powers to initiate and develop Community legislation. However, it has no direct implementation or enforcement powers. The Commission consists of a President and Commissioners from each member state (appointed for five year terms). The Commission also manages the EU's external trade relations and so is the most visible of the EU's institutions to outsiders.

The European Parliament is the one institution that is directly elected by citizens of the member states for a term of five years. Each member state has an allocated number of representatives who are elected, for a five-year term, according to rules drawn up by the individual member state. The Parliament is responsible, with the Council, for adopting the European Community budget. It shares decision-making power with the Council on most internal market policies, and must be consulted on other policy matters before the Council takes a decision.

The Council of the European Union is usually known as the Council of Ministers. The Council, which feeds into the Heads of Government or State deliberations (that is the European Council), is composed of portfolio ministers from each member state, and is responsible for taking decisions on particular portfolio policies (eg, agriculture) that come under European Community competence.

The European Court of Justice is the legal authority of the EU. Its primary task is to interpret the treaties upon which the EU is founded. The Court ensures EU law is uniformly interpreted and implemented in EU member states. It also adjudicates between EU institutions, between EU member states and between the institutions and individual citizens. The Court consists of one judge from each member state and eight advocates-general and is supplemented by a Court of First Instance, comprised of judges from each of the member states. Individuals and businesses may bring cases of European Community law before the Court of First Instance with the possibility of subsequent appeal to the Court of Justice.

The Court of Auditors is the EU's independent audit body. Each year it examines the use of the budget funds and related accounts, and reports to the Council of Ministers and the European Parliament as the joint budgetary authority. It consists of one member from each member state appointed by the Council, after consultation with the Commission and European Parliament, for a renewable six-year term.

The EU is continually developing and reforming itself through amendments to the treaties which govern its operations. At the European Council Summit in June 2004, member states agreed on the text of a new Constitutional Treaty. Among other changes, the constitution sets out new rules for qualified majority voting, the number of Commissioners, and creates the roles of European Council President and EU Foreign Minister.

The constitution must be ratified by all member states, a process which is likely to continue until 2006, with many countries holding public referenda. If the constitution is ratified in time, its provisions are expected to come into force in 2007.

The Single Market and the Common Commercial Policy

The Single Market refers to the creation of a fully integrated market within the EU which allows for the free movement of goods, services and factors of production (including labour).

The Treaty of Rome, signed in 1957, marked the beginning of the evolution of the single market. By 1969, the European Economic Community (EEC) had abolished most tariffs and quotas between states, allowing goods to circulate relatively freely within the EEC. By 1993, the creation of the Single European Market was largely complete, with the removal of most technical and physical barriers to the movement of people, goods, capital and services.

The EU, in conjunction with member states, has in place a number of policies designed to assist the functioning of the market. Among the most important of these policies are:

• free movement of goods: establishment of a customs union covering all trade in goods and adoption of a common customs tariff with respect to third countries;
• free movement of persons: mandating the right of any citizen of an EU member state to live and work in any other EU member state. There will be a phased-in period for this right for citizens of the 10 new member states;
• competition policy: designed to prevent price fixing, collusion and abuse of monopoly or significant market power. The EU adopted the Lisbon Strategy in 2000 to improve, among other things, competition in key sectors such as energy and transport;
• services: providing for the freedom for any member state national to provide services in other member states;
• capital: prohibiting restrictions on the movement of capital, and on payments, within the EU and between member states and third countries;
• taxation: agreement between member states that Value Added Tax (VAT) will be applied at a rate of not less than 15 per cent; and
• Simpler Legislation for the Internal Market: an initiative of the EU aiming to improve and simplify the legislation governing the functioning of the internal market by cutting business red tape.

The Common Commercial Policy is the external aspect of the single market, and harmonises member states' trade policies around common principles relating to tariff rates, trade agreements, liberalisation measures, export policy and anti-dumping. Under the Common Commercial Policy, the European Commission is empowered to negotiate international trade agreements on behalf of the EU. (New member states are obliged to abrogate existing bilateral trade agreements.) The Common Commercial Policy covers only trade in goods, although the Council can, in certain circumstances, extend it to services and intellectual property.

Australia's Trade Relations with the European Union

Australia's Trade with the European Union

The EU, when viewed as a single entity, is Australia's largest trading partner. In the calendar year 2003, two-way merchandise trade between Australia and the EU was valued at $46 billion. Australia sent $15.2 billion worth of merchandise exports to the EU, and received $30.8 billion in imports, resulting in a trade deficit of $15.6 billion. In 2003, total services trade was valued at $14.1 billion, and two-way investment at December 2003 was valued at $489.2 billion.

For the latest statistics on Australia's trade relationship with the EU (PDF)

Exports

Australian merchandise exports have grown over the last ten years from $7.5 billion in 1993 to $15.2 billion in 2003, an average increase of 9 per cent per annum. The EU accounted for 14 per cent of Australia's total exports in 2003, up from 12 per cent in 1993.

Source: ABS data on the DFAT STARS Database

Major Australian exports to the EU in 2003 included non-monetary gold, coal, alcoholic beverages, and wool.

Historically, Australia has been a large exporter of unprocessed primary products. Although exports of primary products continued to grow over the last decade, their proportion in our total exports to the EU has declined (from 49 per cent in 1993 to 34 per cent in 2003).

In 2003, Australian exports of simply transformed manufactures (STMs) to the EU were worth $774 million. These included lead, zinc and copper. In the same period, elaborately transformed manufactures (ETMs) were valued at $2.9 billion, and included medicaments, measuring and controlling instruments, and electrical machinery.

There is a vast difference between the value of our exports to different EU member states which, in 2003, ranged from a high of $7.4 billion to the UK to $50 million to Greece. Australia's exports to the new member states totalled $172 million in 2003. Their integration into the EU should generate new export opportunities for Australia, in particular, in meeting the requirements for improvements to banking, financial, educational and other service industries.

Besides the UK, other important markets for Australian goods in 2003 were Italy ($1.6 billion), Germany ($1.3 billion), the Netherlands ($1.3 billion), France ($990 million), and Belgium/Luxembourg ($694 million). These figures record where goods land, not necessarily their final destination. For example, produce may land in the Netherlands and Belgium, with their major ports of Rotterdam and Antwerp, which is then transshipped to other EU and non-EU European destinations.

Although the EU is a single market, each member state has market preferences which will determine demand and affect final export outcomes for Australian exporters.

Source : ABS data on the DFAT STARS Database

Imports

Australia's total merchandise imports from the EU in 2003 were $30.8 billion. The average annual growth rate in imports over the decade since 1993 has been 8 per cent. Major imports from the EU in 2003 were medicaments, passenger motor vehicles, aircraft and parts, telecommunications equipment, and paper and paperboard. The EU accounted for 24 per cent of Australia's imports in 2003, up from 22 per cent in 1993.

Services

Bilateral trade in services is growing strongly. The EU is Australia's largest overseas market for services, accounting for 22 per cent of our total trade in services in 2003. Services trade with the EU rose 4 per cent in 2003 to $14.1 billion, with exports valued at $6.6 billion and imports at $7.5 billion.

Major Australian services exports were transportation services ($1.4 billion) and travel services ($3.6 billion). Similarly, major imports were also transportation services (comprising 30.1 per cent and worth $2.3 billion) and travel services (comprising 42.3 per cent and worth $3.2 billion). In addition, other areas such as business services, including financial and insurance services, and education are growing steadily.

The United Kingdom accounted for 52.8 per cent ($7.5 billion) of Australia's total two-way trade in services to the EU in 2003, followed by Germany with 13.5 per cent ($1.9 billion) and France with 6.9 per cent ($969 million).

Investment

Total foreign investment in Australia from EU countries, including both direct investment and portfolio investment, was worth $340.7 billion as at December 2003. The EU is thus our largest source of foreign investment. Largest member state investors were the United Kingdom ($258.8 billion), Germany ($17.9 billion) and the Netherlands ($20.4 billion).

The EU is the second largest foreign destination for Australian investors, with investment totalling $148.4 billion as at December 2003. The major EU member state destinations for Australian investment were the United Kingdom ($82.6 billion) and the Netherlands ($12.7 billion).

Agenda for Cooperation

The 20^th Ministerial Consultations between Australia and the European Commission, held in Brussels in May 2004, gave both sides the opportunity to underline the strength of the EU-Australia relationship, based on increased cooperation through regular exchange. Our ongoing review of the relationship since the signing of the original Joint Declaration in 1997 reveals that Australia and the EU have achieved a dynamic work program and intensified exchanges to make progress on a diverse and increasing range of common interests.

The 2003 Australia – EU Agenda for Cooperation [ PDF 121 Kb ], adopted by Australian Ministers and the European Commission, identifies priorities, under seven headline areas, for future engagement. The following areas were identified as high priorities over the next five years: security and strategic issues; trade; education, science and technology; transport; the environment; development cooperation; and migration and asylum.

See the stocktake of activity [ PDF ] since the launch of the agenda.

Australia's Market Access Priorities in the EU

Access to the EU market for industrial products is generally open. However, with few exceptions, access for agricultural products is severely limited. Tariff barriers vary widely, from an average of around four per cent for non‑agricultural products (excluding petroleum) to an average of at least 16 per cent for agricultural products.

In some instances, tariffs (outside tariff quotas under preferential arrangements) are set at prohibitive levels, for example in the sugar sector. Tariff peaks apply to meat, dairy products, processed and unprocessed cereal products, processed fruits and vegetables. Access to high tariff items is mainly subject to tariff quotas. The EU's Common Agricultural Policy (CAP, see below) also impacts on global agricultural trade because of the use of production and export subsidies.

Australia's market access priorities are under constant review. The latest information on priority areas for the EU can be accessed through the TradeWatch online service. Given the potential scope for progress, efforts to improve market access will include a particular focus on these areas over the next 12 months. The following list is not exhaustive. Comments on the appropriateness of the items are welcomed, and should be forwarded to the Department of Foreign Affairs and Trade by email.

The Common Agricultural Policy

The CAP reform packages agreed in June 2003 and April 2004 are welcome steps towards introducing greater market orientation into EU farm production. Separating (decoupling) farm payments from production will help to reduce the negative impact of the CAP on world agricultural markets. The 2003 reforms included arable crops, beef, dairy, rice, seeds, potato starch and nuts, with the 2004 reforms covering the so-called "Mediterranean products" (olives, tobacco, and cotton) and hops.

These reforms, however, do not directly address market access issues, such as tariffs and tariff quotas or export subsidies. These are issues the Australian Government is actively pursuing in the current Doha Round of WTO negotiations.

The EU has circulated proposals on sugar reform which suggest a significant cut in price support following the expiry of the current regime on 30 June 2006. The proposals are presently being considered by member states.

Sugar

In October 2004, the WTO found in favour of complaints lodged by Australia, Brazil and Thailand that the export subsidy schemes on sugar granted by the EU are in breach of its obligations for the reduction of such subsidies under the Agriculture Agreement. The EU is appealing the decision.

Wine

Australia is continuing its efforts under the 1994 Australia-EU Wine Agreement to finalise outstanding issues, which include:

• how to handle traditional expressions used in the description of wines; and
• more flexible EU processes for the authorisation of Australian wine-making practices.

The agreement has allowed some smaller wine producers to enter the market for the first time. Australia's exports to the EU have grown rapidly over recent years with wine now Australia's third largest merchandise trade export to the EU, valued at $1.06 billion in 2003. This represents more than a quadrupling of our wine exports to the EU since the agreement was signed in 1994.

Non-tariff Measures

Australia has initiated a WTO challenge to EU legislation protecting geographical indications for foodstuffs and agricultural products. Potentially affected products are mainly dairy and processed meat products, although a diverse range of other products could also be affected. Examples of terms protected by the EU include "feta" cheese and "kalamata" olives. Wine and spirits, which are covered by separate EU legislation and the Australia-EU Wine Agreement, are not at issue in this dispute.

Coal subsidies in the EU have been progressively reduced over the last ten years and have enabled growth of Australian coal exports to the EU over that period. Australia is seeking to ensure that reductions in EU coal subsidies continue, particularly following the accession to the EU on 1 May 2004 of coal producing countries Poland and the Czech Republic.

The EU has developed complex regulatory systems that affect third countries, such as Australia, when they seek to export to the EU, when the EU's regulatory approaches are adopted by others or when the EU attempts to influence other regulatory regimes. For example, the EU has released draft legislation for a new industrial chemicals strategy. Australia supports the environmental objectives of the draft legislation, but has made representations to the EU urging that the measures proposed under the legislation be the least trade restrictive possible.

European Union Trade Policy

EU member states together constitute the world's largest exporter and importer. Most of the EU's trade remains intra-European, with over 60 per cent of EU member states' exports going to other EU members. Of the EU's external trading partners, the United States is the largest, taking 22.4 per cent of the EU's exports and providing 15.2 per cent of imports in 2003. The May 2004 enlargement of the EU to include 10 countries, mainly from Central and Eastern Europe, increases the percentage of trade which remains intra-EU. These countries accounted for about 12 per cent of the EU's exports in 2003.

The EU plays a leading role in shaping the process of globalisation, multilateral rules and economic development, and is a key player in the current Doha Round of WTO multilateral trade negotiations. It uses WTO dispute settlement procedures to enforce the multilateral trade obligations of its trading partners, and is just as frequently involved as a respondent in trade disputes.

Australia's bilateral trade relationship with the EU is open and generally constructive, with the two sides working through their differences on difficult bilateral tradeissues, such as agriculture. Initiatives to facilitate market access for products such as wine are ongoing, as is work on the Mutual Recognition Agreement between Australia and the EU to remove existing origin restrictions. In the Agenda for Cooperation, adopted in 2003, Australia and the EU committed to continue joint efforts to ensure an ambitious approach to the Doha Round on market access issues, rule-making issues and issues relating to development.

The EU and Regional and Free Trade Agreements

The EU is active in pursuing Free Trade Agreements (FTAs) with other countries and regional groupings. In fact, much of the trade flowing into the EU does so with some level of preference granted under a Regional Trade Agreement (RTA). However, some key sectors, usually agriculture, are often 'carved out' of agreements the EU concludes.

European trade arrangements with developing countries sometimes allow a 12-year implementation period for liberalisation reforms in the developing country. EU development policy is focused on least developed countries (initially through the Lomé Convention, and now the Cotonou Agreement) and Generalised System of Preferences (GSP) beneficiaries. Its "Everything But Arms" initiative eliminates duty and quotas on all products bar arms imported from 49 least developed countries. However, some sensitive products such as rice, sugar and bananas are exempted from the agreement until 2009.

The EU is party to numerous Regional Trade Agreements:

Europe Agreements

The Europe Agreements were concluded with a number of Central and Eastern European countries (CEECs) following the start of their transition to market economies. These agreements are part of the European integration process and form the first steps towards deeper economic and political integration. The agreements provide for reciprocal free trade (zero tariffs) in industrial goods, free movement of services, payments and capital in respect of trade and investments, free movement of labour and cooperation in the fields of environment, transport and customs. Sensitive agricultural products are excluded. With the majority of signatory CEECs having joined the EU in 2004, Romania and Bulgaria are currently the only countries for which the Europe Agreements apply.

European Economic Area

The European Economic Area (EEA) entered into force on 1 January 1994 and extends the EU internal market to Iceland, Liechtenstein and Norway. The EEA provides for the freedom of movement of goods, persons, services and capital throughout the territory of the Contracting Parties. The EEA Joint Committee decides which new EU legislation regarding the internal market should be adopted by Iceland, Liechtenstein and Norway. In addition, the EU's competition policy framework applies (except for agriculture and fisheries).

Switzerland

Switzerland, the EU's second largest trading partner after the US, did not ratify the EEA in a referendum held in 1992 due to the sensitive issue of free movement of persons. The EU and Switzerland concluded seven bilateral agreements in December 1998 on land-based transport, air transport, the free movement of people, agriculture, research and procurement, and technical barriers to trade. In May 2004, Switzerland and the EU signed another nine bilateral agreements addressing areas such as free movement of persons, trade in agricultural products, border and asylum policies, savings taxation and fight against fraud.

Economic Partnership Arrangements with ACP States

The EU endorsed a mandate, in June 2002, to negotiate Economic Partnership Agreements (EPAs) with the 76 countries of the African, Caribbean and Pacific (ACP) regions. The basic principles and the timetable for EPA negotiations were set out in the Cotonou Agreement. This agreement was concluded between the EU and ACP countries in June 2000 and governs development, political and trade aspects of EU-ACP relations. Negotiations for EPAs opened in September 2002 and are expected to be concluded by January 2008. Key elements of the EU's negotiation strategy include enhanced market access into the EU, gradual and managed liberalisation of ACP economies, regional integration across ACP economies, encouraging more beneficial investment, and trade in services.

Mexico

The EU Free Trade Agreement with Mexico entered into force on 1 July 2000. The broad outline of the agreement calls for the EU to grant duty-free entry to most Mexican products between November 1999 and 2003, and for Mexico to gradually open its markets to EU goods by 2007. It provides for free trade in non-agricultural products and covers only 62 per cent of historical agricultural trade. Sensitive agricultural products are excluded. The agreement also covers services, public procurement, competition and intellectual property rights.

Chile

The EU signed an Association Agreement with Chile on 18 November 2002. Apart from a free trade area in goods, services and government procurement, the agreement includes provisions regarding investment, customs and trade facilitation, intellectual property rights, competition and a dispute settlement mechanism. It also includes an agreement on the phasing out of usage of geographical indications and traditional expressions. Since 1 February 2003, the bulk of the trade chapter, the institutional framework and the trade-related cooperation provisions have been applied provisionally.

Mercosur[1]

Negotiations for an FTA between the EU and Mercosur were launched in June 1999 and are continuing. The aim is to achieve a greater level of political and economic cooperation and integration, including by liberalising substantially all trade and goods and services, between the two.

South Africa

The EU Trade, Development and Cooperation Agreementwith South Africa entered into force provisionally on 1 July 2000. Under the agreement, 95 per cent of EU imports from South Africa will be fully liberalised at the end of a 10-year period, and 86 per cent of South Africa's imports from the EU will be fully liberalised at the end of a 12-year period, covering more than 90 per cent of bilateral merchandise trade. Some agricultural concessions are provided within quotas, but sensitive products are excluded. A separate agreement on the recognition, protection and control of wine-name and spirits designations was signed and entered into force on a provisional basis on 28 January 2002.

Euro-Mediterranean

The Euro-Mediterranean Partnership between the EU and Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta, Morocco, the Palestinian Authority, Syria and Tunisia was launched in November 1995 in Barcelona. Libya has also expressed strong interest in joining the Partnership. The partnership foresees the establishment of a Euro-Mediterranean free trade area by 2010. To this end, the EU has signed Association Agreements with all partners except Syria, with which an agreement is still being finalised. Agreements with Egypt and Algeria have been signed but are not yet in force. These agreements provide for free trade in non-agricultural products, while agricultural trade is limited by quotas largely linked to historical flows. They also contain provisions for liberalisation in the area of services, capital movement and competition. In March 2004, Morocco, Tunisia, Jordan and Egypt signed the Agadir Agreement which allows for further regional trade and economic integration. Malta and Cyprus are both now members of the EU.

Balkans

The EU signed its first Stabilisation and Association Agreement (SAA) with the Former Yugoslav Republic of Macedonia (FYROM) on 9 April 2001. The agreements are seen by the EU as of central importance in advancing the reform process in the Balkans and as a major contributing factor to peace and stability in the entire region.

The agreement aims at free trade within a 10-year period and contains sections on trade, the harmonisation of FYROM's legislation with the regulatory framework of the EU, cooperation within the areas of justice and home affairs (in areas such as illegal migration and the smuggling of goods and human beings) and cooperation in the environment, energy, telecommunications and transport sectors.

The EU and Croatia signed the second SAA on 14 May 2001, and negotiations are planned with Albania, Bosnia and Herzegovina, and Serbia and Montenegro.

Issues Affecting Australia's Trade with the EU

European Economic Integration

Economic integration is contributing to the creation of the single market within the EU which allows for the free movement of goods, services and factors of production (including labour).

The significance of this integration for Australian business depends on individual products/services, and companies' ambitions and capabilities. But in general the benefits are twofold: greater scope for operations to span a great number of European countries (but bound by only one set of trade and investment laws); and, for those preferring to focus on one country (at least initially), a greater choice of individual markets.

The Euro

The creation of the euro stands as one of the strongest symbols of European unification. The euro became the official currency of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain on 1 January 1999. Greece adopted the euro on 1 January 2001. National currencies remained in circulation, but at fixed exchange rates against each other, until euro notes and coins were introduced into circulation on 1 January 2002. As a prerequisite to accession, all the new member states will adopt the euro in the coming years although some will be quicker to take it up than others.

The 12 member states that have adopted the euro – termed the 'euro area' – have a range of agreed commitments determining their economic policy settings. Monetary policy for the euro area is determined by the Frankfurt-based European Central Bank (ECB). In addition, the euro area countries are required under the 1992 Maastricht Treaty's Stability and Growth Pact (SGP) to comply with criteria relating to government budget balances and total government debt, with penalties applicable for non-compliance unless in exceptional circumstances (although these penalties are yet to be enforced).

Euro area governments, the Commission and the ECB have been exploring whether greater flexibility should be permitted in these criteria, particularly in managing budget deficits which in some cases – Germany, France, Portugal, Italy, the Netherlands and Greece – have exceeded the deficit ceiling of three per cent of GDP. Insufficient consolidation of public finances in a number of economies has also led their public debt levels to exceed the public debt limit of 60 per cent of GDP.

European monetary authorities are keen that any changes to these criteria not have adverse consequences for the credibility of the euro. The ECB, still a relatively new institution, has been praised for its management of the smooth introduction of the euro into circulation. The ECB has maintained price stability in the euro area, with inflation having averaged around its target ceiling of two per cent. Structural rigidities in euro area product and labour markets have influenced the ECB's ability to stimulate economic growth with looser monetary settings.

The adoption of the euro has a number of economic advantages for euro area economies, namely reduced exchange rate risk, the elimination of intra-euro area currency exchange costs and more transparent pricing for consumers. Political considerations, however, drove the euro's creation. The euro and the euro area have been managed soundly since their inception, but are yet to face a seri

EU Enlargement

The EU of 25 consists of Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom.

Romania and Bulgaria are aiming to join in 2007. Croatia and Turkey have been invited to commence accession negotiations in 2005.

The latest wave of enlargement has significantly changed the demographics of the EU. The EU population has increased by around 20 per cent, from 375 million to over 450 million, and land area by 23 per cent, but GDP has increased only by around 4-5 per cent. The Gross National Income (GNI) per capita for the previous EU of 15 averaged US$27,400 in 2003 whereas in the new member states it was US$6,600.

A candidate country for EU membership is required to meet a number of political and economic criteria before accession negotiations can begin (these are known as the Copenhagen criteria). They are:

• stability of institutions guaranteeing democracy, the rule of law, human rights and the respect for and protection of minorities;
• the existence of a functioning market economy;
• the capacity to cope with competitive pressure and market forces within the EU; and
• the ability to take on the obligations of membership including adherence to the aims of political, economic and monetary union.

Eastward Expansion for the EU:

From a business perspective, the effects of EU enlargement were already being felt in the new member states. All enjoyed very close trade ties, and favourable market access conditions, with the EU of 15 member states. For example, 68 per cent of Poland's two-way merchandise trade was with the EU of 15. EU companies have also made significant investments in the new member states, particularly in Central Europe, encompassing greenfield investments and also participation in the privatisation of state-owned enterprises. Substantial investment has also come from the United States, Japan and the Republic of Korea. Lower wages, a skilled work force, highly educated population, market oriented consumers and favourable geographical location are key attractions of operating in the Central Europe region. In Poland, Hungary and the Czech Republic, inward investment flows for 1996-2001 totalled US$79.4 billion.

With major foreign direct investment inflows, the Central European states have in most cases made good headway in tackling the economic and structural problems bequeathed by their former communist regimes. Physical infrastructure (roads, railways, telecommunications, IT systems, etc) is one of the biggest challenges, and is being addressed using grants and loans from the EU, the World Bank and the European Bank for Reconstruction and Development (Australian companies are already active in seeking out opportunities for participation in these infrastructure projects). Economic stability, growth levels and unemployment vary across the region.

Other key elements of the operating environment in Central Europe are also in need of attention, and are changing rapidly in response to demands from the EU. These range from simplification of administrative procedures (eg, for establishing business operations) to the harmonisation of import regimes, coming into line with common EU standards. Reform of the public service and overhauling of their legal systems have also been targeted.

The rigorous process of gaining EU membership has acted as a strong stimulant for structural and economic reform in the Central European region. In some countries, this has had some short- to medium-term negative consequences (such as high unemployment caused by restructuring of heavy industry and the public service). But it is also producing a growing middle class, marked by affluence and new aspirations - and therefore likely to purchase more and higher priced goods and services.

These forces and the effects of EU membership are illustrated by the examples of Spain and Portugal, which both joined the EU in 1986. EU funding of infrastructure and development, the flow of investment from the rest of the EU and the ability of people to move freely to and from other EU states quickly lifted growth rates and led to a greater degree of economic parity between these states and the rest of the EU. Spain and Portugal also became significant outward investors.

The changes that are taking place in the EU after enlargement present new opportunities to Australian exporters. Similarly the changes in the market environment taking place in the new member states will also affect the way Australians conduct their business in these countries. For a multicultural nation like Australia the expansion of nationalities within the EU holds particular advantages. Australia is home to many who have historical links to the new member states of Central and Eastern Europe and these links can be of benefit when seeking to export overseas.

Australian exporters and investors should consider the case for establishing operations in new or potential member states now, as a base for ready access to other parts of the EU single market and also into the EU's new eastern neighbours including the Balkans, Ukraine and Russia. The potential, in terms of market size, anticipated growth and demand, is certainly attractive.

The opportunities presented in the new member states are already being exploited by some Australian businesses. Across the region, Australian exporters, manufacturers and service providers are finding niche opportunities in alcoholic beverages, commodities, environmental goods and services, financial services, government services, information technology, and manufacturing. Many are establishing regional operations from headquarters in one country.

One of the biggest challenges for Australian exporters will be to compete with European rivals in the new EU member states. Prior to accession, countries still retained a range of quotas and tariffs for goods imported from the EU. These were often more favourable than those applied to Australian products, but they did "level the playing field" slightly. Now, the current EU members enjoy unfettered access to the new markets, albeit following transition periods in some sensitive areas.

As part of enlargement, the new members adopted the EU's Common External Tariff (CET), which has limited access for some Australian exports, while improving access for others. Where changes have resulted in deterioration in market access conditions in the new member states, Australia may have rights under the WTO to seek offsetting market access benefits to the EU as a whole. These rights relate only to tariff rates bound under the WTO and not to applied rates. Australia has notified the EU of its wish to enter into negotiations and has lodged an initial claim of interest.

The Trade Sub-Committee of the Joint Standing Committee of Foreign Affairs, Defence and Trade inquiry, 2003, explored expanding Australia's trade and investment relationships with the countries of Central Europe. See the Committee report (No. 110) and Government's response.

Further economic information on the new member states is also contained in Section Three.

How the Australian Government Assists Business

A number of government agencies have a role in assisting Australian exporters.

The primary trade role of the Department of Foreign Affairs and Trade (DFAT) is to improve access to overseas markets for Australia's goods and services exports. It does this through negotiations in the WTO and other bodies; lobbying other governments to reduce barriers to Australian exports; and facilitating trade and investment through regional groups such as APEC, and in individual countries. DFAT also provides information and data on the economies of different countries and the policies of their governments.

The WTO Trade Law Branch in the Department of Foreign Affairs and Trade serves as a specialised centre on all international trade law matters. The Branch combines a high level of legal expertise with trade policy knowledge. Its objective is to deliver a world-class level of legal service for Australian industry and firms/businesses interested in examining how the WTO dispute settlement regime might be able to assist in addressing specific trade problems.

DFAT also provides advice and information on trade for business through its Business Gateway, the TradeWatch facility, and through the network of overseas embassies, high commissions and consulates. In instances where enquiries are specific to a company's interests, they may be dealt with by Austrade, with which DFAT works closely.

The Australian Trade Commission (Austrade) is the official export and outward investment facilitation agency of the Australian Government. Austrade provides a wide range of export and outward investment services to Australian companies, as well as to international buyers. Austrade operates in 117 locations in 58 countries. A full list of contacts in the EU is contained in the contacts section of this publication. Further information can be obtained by contacting Austrade on 13 28 78 or visiting the Austrade website.

75 staff in 15 markets represent Austrade across the EU. Growth characterises most industry sectors in the EU, which is creating a wide range of trade prospects.

The industry sectors providing opportunities for Australian companies include: agribusiness, wine, automotive, ICT/e-government, sport, services (education, health, tourism, franchising, culture), biotechnology, defence, marine, oil and gas, art, consumer items for retail outlets (jewellery, children's needs, giftware and home wares), fashion and infrastructure (environment, building, roads, ports, airports, railways, energy).

Austrade and TradeStart offers a package of services for first time exporters designed to assist small and medium-sized Australian companies develop their businesses overseas and make their first export sales. The program, called the New Exporter Development Program, provides advice and information about getting into exporting, export coaching and assistance on the ground in foreign markets.

The Export Market Development Grants (EMDG) scheme is the Australian Government's principal financial assistance program for aspiring and current exporters. Administered by Austrade, the purpose of the scheme is to encourage small and medium sized Australian businesses to develop export markets.

eCommerce

Electronic commerce has enormous potential to create business efficiencies and improve productivity. The most intensive use of eCommerce in the future is expected to be transactions between businesses rather than between businesses and consumers. Both the EU and Australia have a high uptake of internet usage. 72 per cent of Australian companies currently use the internet; and the EU is expected to trade 14 per cent of its GDP online by 2005.

The rate of uptake of information technology, particularly internet usage in the EU, varies considerably across the member states. In Sweden, Germany, UK, Finland, the Netherlands and Denmark more than 50 per cent of the total population is connected to the internet, whereas only 15 per cent of Greece's population is connected to the internet. Of the new member states, Slovenia has the highest rate of usage, at 38 per cent of the population. In comparison Australia has one of the world's highest uptakes of information technology in the world, with 64 per cent of households being connected to the internet. In April 2001, Australia and the EU adopted a Joint Statement on cooperation in the global information economy, which sets out a common vision for the development of a global information economy.

Information on business-to-business electronic marketplace can be obtained from eMarket Services an international collaboration of trade promotion organisations focusing on knowledge of business-to-business electronic marketplaces and aims to assist business by providing independent information on eMarkets. Founding partners include Australia, Sweden, Denmark, Norway and Iceland. New partners include Italy, the Netherlands and New Zealand.

Austrade also organises online ebusiness courses, which provide introductory information on eCommerce tools, and their use in pursuing export opportunities.

Export Finance and Insurance Corporation (EFIC), Australia's export credit agency, has a charter from the Government to increase the volume of Australian exports, and reports to the Minister for Trade. It is a self-funding, statutory corporation, wholly-owned and guaranteed by the Commonwealth of Australia. Under the EFIC Act, EFIC undertakes the following key functions:

• facilitating and encouraging Australian export trade by providing insurance and financial services and products to persons involved directly or indirectly in exports;
• encouraging banks and other financial institutions in Australia to finance or assist in financing exports. EFIC seeks to complement the services banks provide and help extend those services to exporters;
• providing information and advice regarding insurance and financial arrangements to support Australian exports.

EFIC assists Australian exporters and investors to compete internationally by providing a range of insurance and finance facilities for their overseas contracts and investments.

The Australian Quarantine and Inspection Service (AQIS) is responsible for certifying that agricultural exports meet importing countries' health and quarantine conditions. AQIS also helps negotiate access to overseas markets by reducing or eliminating technical barriers to trade imposed on the basis of quarantine or health regulations.

AQIS provides advice/assistance to existing and potential exporters of agricultural products and processed foods through its Export Facilitation Program. The five export facilitation officers in the Program provide information on the following topics:

• other countries' import conditions;
• Australian legislative requirements for export;
• documentation including export permits, health, phytosanitary and other certificates;
• AQIS quality assurance arrangements;
• premises registration requirements;
• inspection procedures;
• AQIS fees and charges.

The export facilitators can also act as the initial contact point for exporters who are experiencing any difficulties with their exports in relation to government health documentation or other quarantine barriers. This service is particularly helpful for new exporters who are unfamiliar with Australia's exporting requirements and the importing country's requirements.

The Department of Industry, Tourism and Resources (DITR) provides information and advice on the Australia-European Community Mutual Recognition Agreement (Aust-EC MRA) on Conformity Assessment. The Aust-EC MRA came into force on 1 January 1999 and assists Australian exporters by allowing conformity assessment (testing, inspection and certification) of

products traded between Europe and Australia to be tested and certified for compliance with the regulatory requirements of the importing country prior to export.

The MRA currently covers the following sectors, although more may be added in the future:

• Automotive products
• Electromagnetic compatibility (EMC)
• Low voltage electrical equipment
• Telecommunications terminal equipment
• Machinery
• Medical devices
• Pharmaceuticals – Good Manufacturing Practice (GMP)
• Pressure equipment

The Government also provides assistance with research and development through the tax system and R&D START grants, administered by AusIndustry, a division of the Department of Industry, Tourism and Resources (DITR). In many cases, firms are able to take these new or improved products to overseas markets.

For more information see the DITR or AusIndustry websites.

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[1] Mercosur: also known as its Portuguese acronym, Mercosul, is the Southern Cone Common Market. Mercosur's members are Argentina, Brazil, Uruguay and Paraguay, while Chile and Bolivia are currently associate members.