Euroskepticism is almost always in fashion, at least on this side of the Atlantic.
The recent appreciation of the euro has some economists worried about Europe’s near-term growth outlook, but their bigger preoccupation is with the coming accession of 10 new members into the EU.
Many are skeptical that these new economies – Poland, Hungary, Czech Republic, Slovakia, Slovenia, Estonia, Latvia, Lithuania, Malta and Cyprus – can measure up, but such worries have been misplaced before.
In the past, for example, it was argued that Italy could not qualify for the monetary union, yet it did; that Spain and Portugal would be left to a later stage, yet they were not; and that the monetary union would break apart soon after creation, yet it has not. Indeed, the euro has earned its stripes among global investors and is now worth more than at its inception.
History suggests that EU membership will be good for these countries. Consider two countries, one rich and one poor, historically separated by political and economic barriers. If they adopt free trade and the poor country replicates the rich country’s legal and regulatory framework, the poor country begins to attract investment, for it has identical business conditions but lower costs. The result is that the poor country grows faster than the rich country and its living standards catch up.
Historical examples of such convergence include Japan during 1945-85 and Ireland during the 1990s. Statistically, the convergence process looks like a giant V-formation of Canada geese.
The solid performance of the accession countries in the past two years, while the world economy was struggling, is testament to the inherent resilience of the Canada geese formation – when geese are buffeted by strong headwinds, they immediately fall back into formation. Both leaders and followers benefit, because the persistence of the young, eager geese causes the older geese to pick up their performance.
In Europe, this competition from below is helping to motivate pension and labour market reform in France (Agenda 2006) and Germany (Agenda 2010).
Importantly, the global headwinds of the past two years are becoming tailwinds in 2004. We are seeing the first synchronized global expansion since 1996, which makes convergence conditions ideal. European companies throughout the region still face the challenge of adjusting to the stronger euro, but this stressor will be outweighed by a much healthier global economy.
This is not to argue that Europe’s convergence process cannot stumble, for it surely can, as Korea’s was interrupted by the Asian crisis of 1997. For one thing, Hungary and Poland face major fiscal adjustments to meet their EU entry criteria, and some believe that their economies might falter as a result. But government spending cuts and privatization will create even more opportunities for private-sector expansion in those countries – filling the void left behind, or the opposite of government crowding out – so any interruption in convergence will be short-lived.
The bottom line? The expansion of Europe is creating a brand new integrated economy that will be bigger than and as diverse as that of the United States. It offers a wide range of very exciting sales and supply chain partnership opportunities for Canadian companies.
(Stephen Poloz is vice-president and chief economist for Export Development Canada. He can be reached at spoloz@edc.ca)
