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Published on Jul 8, 2013 in News, Newsletter

Thornhill Capital Global Newsletter – July 2013

 The European Business Environment

The European business environment has been in the process of transformation since the European Union (EU) was formerly established on November 1, 1993. Since that time the 27 member states that make up the EU, 17 of which use the Euro as their currency, operate through a system of supranational independent institutions and intergovernmental negotiated decisions by the member states. (1) Europeanization has subsequently taken root and has boosted the pace of economic developments throughout Europe and its neighboring countries. (2)


Europeanization is broadly defined by some as: A process involving the construction, diffusion and institutionalization of formal and informal rules, procedures, policy paradigms, styles, ways of doing things, and shared beliefs and norms which become incorporated domestically and politically.(3) Others define Europeanization as simply the process of downloading European Union regulations and institutional structures to the domestic level. (4)

In Europe, Europeanization has affected the business environment of its 27 member states. These countries are undergoing an incremental process of reorienting the direction and shape of economic and political dynamics at the domestic level into a unified EU policy. (4) With this unification, the EU is attempting to improve the European business environment by the creation of national policies and laws.

According to Gabriele Suder, the following are the main impacts of Europeanization: (2)

  • The Integration of major, mainly economic, decision-making at the EU level;
  • The widening and strengthening of the single market;
  • An evolving form of federalism through monetary unification;
  • Common policies;
  • An intensification of competition;
  • Liberalization and deregulation;
  • The free movement of labor, goods, services, and capital;
  • The removal of barriers to entry and to trade, for production and investment;
  • Harmonized norms, standards, and legal frameworks;
  • Simplified tax regimes.

As a result, Europeanization has resulted in generally lower costs, the creation of trade, and lower consumer prices. It’s also resulted in unified and uniform business arrangements, making it easier to negotiate trade agreements with various countries.

According to the European Commission, the EU’s trade policy is to maintain and, where necessary, re-invent Europe’s place in global supply chains. Today, many products are no longer made in one place from start to finish. Instead, they are put together in a long series of steps, often in different parts of the world. This new organization of production along global supply chains is blurring economic frontiers and transforming trade relations. For example, a German export is very often also an export for the Czech Republic, Belgium or Poland. A significant amount of the value of a Chinese export is often produced in Europe. Nokia smartphones are made in China, but contain 54% European added value. Even an iPhone, designed in California and manufactured in Shenzhen, China, has a 12% European contribution. The same pattern is repeated in other production processes, from children’s toys to passenger jets. (8)

Deepening relationships between the EU and its key trading partners can contribute significantly to Europe’s recovery. If the EU pursues its ambitious external trade agenda, this could boost the EU’s GDP by 2%, or more than €250 billion. This is equivalent to adding an economy of the size of Austria or Denmark. This ambitious agenda could also help create more than 2 million jobs across the EU. By 2015, 90% of economic growth will be generated outside Europe, with one third in China alone. Hence, tapping into the markets of the EU’s key trading partners will play an increasingly significant role for Europe’s growth in the future. (8)


In spite of Europe’s recent debt crisis, one bright note has been its increased trade with China. Trade in goods and services between the two the EU and China exceeded $500 billion USD in 2012. (5) In fact, the EU is China’s largest trading partner and the EU’s second largest trade partner after the United States. Most of this trade is in industrial and manufactured goods. (6)

But not all has gone smoothly between these two. In May the EU launched an investigation into Chinese telecom network suppliers, and in June the EU said that it will impose a provisional tariff on solar panels imported from China, from 11.8% increasing to 47.6% in two months, as a result of China’s alleged dumping of these products into the European market at below cost. Less than 24 hours after this announcement China responded by investigating European wine imports, worth €763 million in 2012. As former U.S. ambassador to China and Singapore, Jon Huntsman, puts it: The real question becomes: are we able to resolve these disputes without them festering and multiplying in terms of the cost and injury level to business? China is having to live within a rules-based body like the World Trade Organization, and to make sure their (trade) cases are less frivolous than they were before. The onus is on them more and more to ensure that they’ve got trade cases that are grounded in reality.(7)


The European Union’s second largest trading partner in Asia, after China, and its 7th largest globally is Japan. In addition, the EU is Japan’s third largest trading partner, after China and the United States. Together, the EU and Japan account for one-third of the world’s GDP. In 2012 EU exports to Japan reached €55.5 billion, and EU imports from Japan were €63.8 billion. Currently, both sides are in negotiations for a Free Trade Agreement eliminating tariffs between the parties. If an agreement can be reached, experts expect Europe’s economy to rise by 0.6 to 0.6% of its GDP as a result of growth and the creation of an estimated 400,000 jobs. It’s expected that EU exports to Japan could increase by 32.7% while Japanese exports to the EU would increase by 23.5%. (9)

United States

On June 14th, Member States gave the European Commission the green light to start trade and investment talks with the United States. When negotiations are completed this EU-US agreement would be the biggest bilateral trade deal ever negotiated – and it could add around 0.5% to the EU’s annual economic output. The European Union and the United States have the largest bilateral trade relationship and enjoy the most integrated economic relationship in the world. Total US investment in the EU is three times higher than in all of Asia. (10) US investment in Europe in 2011 topped €152 billion. By contrast, US firms invested $40 billion (€30.9 billion) in China between 2000 and 2011, putting China 14th as a destination of US foreign direct investment behind Belgium, France, Germany, Switzerland, Ireland, Britain and the Netherlands (11)

EU investment in the US is around eight times the amount of EU investment in India and China together. EU and United States investments are the real driver of the transatlantic relationship, contributing to growth and jobs on both sides of the Atlantic. It is estimated that a third of the trade across the Atlantic actually consists of intra-company transfers. The transatlantic relationship also defines the shape of the global economy as a whole. Either the EU or the US is the largest trade and investment partner for almost all other countries in the global economy. The transatlantic economy generates close to €3.8 trillion in commercial sales a year and employs up to 15 million workers on both sides of the Atlantic. (10) It has also suffered a blow with the euro crisis, but this transatlantic economy still remains the largest and wealthiest in the world, with over 50% of world GDP in terms of value and 41% in terms of purchasing. (11)

The European Union

european-unionAccording to European Commission, the EU remains the world’s largest exporter, importer, source and recipient of foreign direct investment. The EU has managed to hold on to its 20% share of total world exports despite the rise of China, whereas Japan and the US have seen significant declines in their shares. The EU also has a massive manufacturing trade surplus of €281 billion, a figure that has increased five-fold since 2000 and has more than compensated for the increase in the energy bill over the same period. The EU’s surplus in services has expanded by a factor of 17 in 10 years, to stand at €86 billion in 2010. On agricultural products, the balance has shifted from a deficit of €3.3 billion in 2000 to a surplus of about €7 billion in 2011. About 30 million jobs in the EU, or more than 10% of the total workforce, depend on sales to the rest of the world, an increase of almost 50% since 1995. (8)

The EU has the world’s largest economy. In 2012, it produced $15.97 trillion, barely beating the U.S. with $15.94 trillion. Germany has the strongest country in the EU at $3.123 trillion. According to Kimberly Amadeo, president of, the EU first achieved its leading status in 2007. That year, its GDP was $14.4 trillion, while US GDP was only $13.86 trillion. The EU has held onto its premier position, despite the 2008 financial crisis and the euro-zone debt crisis. (12)

EU Problem Areas

Still, The EU has its problems. According to The Economist, although unemployment in Germany is just 5.4%, Greece and Spain’s unemployment rate is averaging around 27%. For younger people, Germany’s jobless rate is 7.6%, whereas Spain’s is 56% and Greece has reached as high as 64% in February, although these figures can be bloated as they also count young people who are in full-time education. Forecasts show the annual euro-zone GDP shrinking by 0.4% in 2013. Cyprus will take over from Greece as the worst performer in 2013 as its GDP is projected to shrink 8.7% or more. In contrast, Estonia’s growth is projected to rise by 3% in 2013. Latvia, which is projected to join the EU in January, has even more impressive GDP growth, projected at 3.8% in 2013. Surprisingly, some current-account deficits have shrunk. Portugal’s deficit has shrunk from 12.6% of GDP in 2008 to 1.5% in 2012. In the same period Greece’s has fallen from 15% to 3%. Primary budget balances (e.g., excluding interest payments)—a crucial measure in determining the sustainability of public finances—are also on the mend. Greece’s is expected to reach zero in 2013 – an extraordinary swing from its deficit of 10.5% of GDP in 2009. Indeed the highest primary deficit in the EU this year will be run by Britain (of 3.9% of GDP). Despite these improvements, government debt levels are worryingly high in the periphery. Irrespective of a bond buyback late last year and the write-down of over half of privately held debt in March 2012, Greek debt will reach 175% of GDP by the end of this year, an untenable burden. Although Greece is being helped by interest deferral and maturity extension along with very low interest rates, it needs a further restructuring, this time of official debt. Italy’s debt burden continues to rise, to 131% of GDP this year, and debt in Ireland and Portugal is forecast to reach 123%. (13)

According to Marco Buti, Director General of Economic and Financial Affairs for the European Commission, the EU economy is slowly coming out of contraction. In financial markets, risks have decreased, notably for sovereigns and banks in vulnerable countries. Market participants have regained confidence in the integrity of the euro area and in the determination of the EU and its Members States to bring public debt back on a sustainable path and to move forward with the necessary post-crisis adjustments, be they macroeconomic, structural or institutional.

The negative feedback loops between fragile public finances, vulnerable banks and a weak macro-economy that had fuelled the sovereign-debt crisis, in the first half of 2012, have been weakened. However, the improved financial market situation contrasts with the absence of credit growth and the weakness of the near-term outlook for economic activity – even though some signs of a turnaround are now discernible.

This dichotomy is, to a large extent, explained by the broad adjustment process weighing on short-term growth. Balance-sheet adjustment among banks, households, non-financial corporations, and sovereigns is accounting for a large part of the conspicuous frailty of credit and domestic demand. Also, the shift of resources from sectors that had grown unsustainably in the pre-crisis years towards the production of tradable goods and services is holding back output in the short run. At the same time, uncertainty about the macro-financial situation is affecting spending decisions by firms and households and this has been a strong vector transmitting vulnerability from some Member States to the rest of the euro area and EU.


The Future

The present forecast projects a return to moderate growth in the course of this year, as confidence gradually recovers and the global economy becomes more supportive again, while the above mentioned factors continue to weigh on domestic demand. This general improvement is marked by different developments across Member States, with economic growth in some already re-accelerating at present while, in others, GDP is expected to bottom out in the second half of the year. (14)



    1. Suder, Gabriele. Doing Business in Europe, 2nd Edition (London: SAGE Publications Ltd, 2011), 135-146



Alan Refkin               David Dodge

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