The enlargement of the European Union to 25 members in May 2004, and probably to 27 in the next three to four years, will not unduly change the place of Europe in the world economy.
Despite the high growth potential, estimated at 4 to 5 per cent per annum, as against 2 to 2.5 per cent for the existing 15 members, the 12 central and eastern Europe countries will by 2010, only account for, at best, 11 per cent of the Greater EU's GDP as against 8.5 per cent in 2000 (in terms of purchasing power parity).
The issues at stake in the new economic geography will, on the other hand, prove to be much more significant.
As a matter of fact, the entry of these countries is the culmination of an intense process of economic integration of the satellite countries of the former USSR, which widens the cost matrix of production within which European firms are operating, while also expanding the market matrix through which firms can sell within the EU.
This constitutes a formidable new order not only for all the European companies, but also for those that wish to establish themselves in Europe or those that have to face competition from firms operating within a Greater Europe.
From a global perspective, this can have important consequences for a country like India. First, Europe is not entrenched in its "fortress"; there are objective factors for a partial rerouting of business traffic since all the surveys on competitiveness show the strong attraction held by the east European economies.
The last Kearney report, which placed India and China at the top of the list, included also the three major east European economies among the 10 most attractive countries of the world.
Actually, in the last few years, the flow of direct investment towards east Europe has been so massive that a small country like the Czech Republic (which has a population of only 10 million) attracts more foreign direct investment (FDI) than the whole of India ($8 billion in 2003). The major share of this FDI comes from the "old" European economies such as Germany and France.
Second, the enlargement of the EU will lead to political, institutional and economic restructuring. This critical phase will persist for at least a decade, during which Europe may be more preoccupied with its own unification problems.
From this point of view, the possibility of Europe becoming a global force capable of taking on the American economy is not off the mark, but it will be many years before it can become a practical reality.
On the other hand, there is no question that the enlarged Europe is becoming virtually the world's largest economy, with its 450- to 550-million inhabitants, if we include all the new countries that will be sharing the economic space of Greater Europe, whether or not they are officially members of the EU, such as Turkey.
This means that Indian firms should strive to fully understand the new geographical trends in the European economy. The latter is less and less a collection of countries and ever more a space centred around new economic regions that goes beyond the old national frontiers, a bit like the situation existing in the American economy.
Indeed, one of the consequences of the expansion towards the east is the restructuring of the European economic space into five belts or zones, within which business transactions will probably be reinforced: north Europe (the old nucleus of the EU 15), the Baltic Rim, central Europe, eastern Europe, and lastly, the Iberian zone2.
These are clear indications of a more polymorphous space, more fragmented somehow than the largely mono-centred Europe that existed around the famous London-Franche-Comte-Hamburg triangle, and represented 55 per cent of the nominal GDP of the old EU15, a third of its population and one-seventh of its area.
These large areas do not really correspond to national frontiers but rather to regional spaces characterised by:
- Strong historical links, just like the ancient Hanseatic league around the Baltic Sea, with similar consumption habits and industrial cultures.
- Much greater intensity of exchanges and investment among the hubs than with other EU countries and, therefore, presenting an additional advantage to the firms directly present in these hubs.
- Greater specialisation of labour within these hubs, of the horizontal intra-industry type between developed regions such as Germany, but henceforth, also vertical with the entry of the less-developed new members.
- At the same time, we see a growing sectorial specialisation in these emerging new regions, although without attaining the levels of the famous large belts of the US. For example, Seattle specialises in the aeronautical industry, and the Great Lakes region in the automobile industry.
All this re-organisation of the European productive space will, of course, take decades to complete. But it is nevertheless imperative for Indian companies to reposition themselves now in view of the significant changes that will take place in the medium term.
As for those selling in the European markets, they must understand that the European competitiveness is discovering new internal sources that the more developed European countries may have previously lost. And they have also to adapt their commercial network and marketing strategy to the new economic geography of Europe.
The writer is financial counsellor, French Treasury, India & South Asia
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