The European Union uses a number of economic development strategies designed to ensure its ability to compete with the United States, Japan, and the developing economies of Asia, Africa, and South America. To increase Europe’s export potential, the EU has focused on lowering the cost of producing goods in Europe. One strategy is to shift labor-intensive industries from the wealthiest EU countries in western Europe, where wages are high, to the relatively poorer, lower-wage member states of Central Europe (Figure 4.13). This strategy has generally worked well, helping poorer European countries prosper while keeping the costs of doing business low enough to restrain European companies from moving away from Europe to places where costs are lower still. However, while the economies of Central Europe have grown, in Europe’s wealthiest countries, the resultant reduction of industrial capacity (deindustrialization) has led to higher unemployment rates. And despite these efforts, some EU firms have moved abroad to cut costs.

As industrial jobs have declined across the region, most Europeans (about 70 percent) have found jobs in the service economy. Services, such as the provision of health care, education, finance, tourism, and information technology, are now the engine of Europe’s integrated economy, drawing hundreds of thousands of new employees to the main European cities. For example, financial corporations that are located in London and serve the entire world play a huge role in the British economy. Many multinational companies are headquartered in London in part to take advantage of the city’s financial sector.

Opportunities for economic growth provided by Europe’s highly educated population have transformed the service sector, with almost 40 percent of all employment in the EU now in knowledge-intensive services. These kinds of jobs require considerable formal education, such as a college or graduate degree, and usually extensive training on the job. Nevertheless, in recent years, there has been concern within the EU about the declining profitability of European high-tech companies, such as the cell phone manufacturer Nokia, which was bought by the U.S. company Microsoft in 2014. Many of these companies have been unable to compete either with Asian companies that can build products more cheaply or with more innovative U.S. companies.

While the EU is making little effort to compete with Asian companies on labor costs, it is now investing more in research and development to better compete with U.S. companies. While the EU lagged behind North America in the development and use of personal computers and the Internet, it still leads the world in cell phone use. The information economy is especially advanced in North and West Europe, though some in South European countries have pioneered high-tech solutions for travel- and tourism-related industries.

A major component of Europe’s service economy is tourism. Europe is the most popular tourist destination in the world, and one job in eight in the European Union is related to tourism. Tourism generates 13.5 percent of the EU’s GDP and 15 percent of its taxes, although this varies with global economic conditions. Europeans are themselves enthusiastic travelers, frequently visiting one another’s countries to attend local festivals (Figure 4.14) as well as traveling to many distant locations throughout the world. This travel is made possible by the long paid annual vacations—usually 4 to 6 weeks—that Europeans are granted by employers. Vacation days can be used a few at a time so that people can take numerous short trips. The most popular holiday destinations among EU members in 2011 were France, Spain, Italy, the United Kingdom, Germany, and Austria.

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Economic Comparisons of the EU and the United States The EU economy now encompasses more than 500 million people (out of a total of 540 million in the whole of Europe)—roughly 200 million more than live in the United States. Collectively, the EU countries are wealthy, with a joint economy slightly larger than that of the United States, making the EU the largest economy in the world and one that exerts a powerful influence on the global trading system (Figure 4.15). Even so, trade between countries within the EU amounts to about twice the monetary value of trade between the EU as a whole and the outside world.

In contrast to the United States, which usually imports far more than it exports—resulting in a trade deficit—the European Union often has maintained a trade balance in which the values of imports and exports are roughly equal. According to the World Bank, in terms of income, the average 2013 GNI per capita (PPP) for the European Union ($33,609) was significantly less than that of the United States ($50,120), although the disparity of wealth in the European Union was also lower by about one-third than in the United States, resulting in lower levels of poverty in the EU.

Careful regulation of EU economies contributes to generally slower economic growth than in the United States. These regulations also make the European Union more resilient to global financial crises, such as the crisis beginning in 2008, largely because of stronger control (than in the United States) of the banking industry and financial markets.

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Economic Integration and a Common Currency Economic integration has addressed a number of problems in Europe. Individual European countries have relatively small populations, which means that they have smaller internal markets for their products. As a result, their companies earn lower profits than those in large countries. The European Union solved this problem by joining European national economies into a common market. Companies in any EU country now have access to a much larger market and can potentially make larger profits through economies of scale (reductions in the unit costs of production that occur when goods or services are efficiently mass-produced, resulting in increased profits per unit). Before the European Union, when businesses sold their products to neighboring countries, their earnings were diminished by tariffs and other regulations, as well as by fees for currency exchanges.

The official currency of the European Union is the euro (є). Eighteen EU countries now use the euro: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. Countries that use the euro have a stronger voice in the creation of EU economic policies, and the use of a common currency greatly facilitates trade, travel, and migration within the European Union. All non-euro member states, except Sweden and the United Kingdom, have currencies whose value is determined by that of the euro. Depending on global financial conditions, either the euro or the U.S. dollar is the preferred currency of international trade and finance.

In recent years, there have been major challenges to the euro, most significantly in the form of a debt crisis that has tested the mechanisms that governments use to maintain economic stability. The debt crisis first emerged in Greece, where government spending was significantly outpacing tax revenues. This was compounded by the growth of Greece’s trade deficit during the global economic slowdown starting (in Europe) in 2008, which affected tourism and reduced demand for Greece’s exports. Similar conditions in other countries led to similar debt crises in other euro zone countries, especially Ireland, Spain, and Portugal.

Normally, governments respond to high levels of debt by borrowing from other countries and then reducing the value of their currency, relative to that of the lenders, which makes these debts easier to pay. However, this was not an option for any member of the euro zone because no country could by itself manipulate the value of the euro. The EU has the European Central Bank (ECB), which controls the value of the euro, but it is strongly influenced by the larger euro zone economies, such as those of Germany and France. Banks in these countries had loaned large amounts of money to Greece and the other indebted governments of the euro zone, and they would lose money if the value of the euro declined. However, because all the economies of the euro zone were threatened by the crises, Germany and France had to act.

In addition to making large, inexpensive loans available to Greece and the other indebted governments through the ECB over the short term, the European Union, with crucial support by Germany and France, developed longer-term mechanisms to limit government debt in all countries that use the euro. This involved strengthening the political and financial ties between EU countries so that economic policies could be better developed and enforced by EU institutions. While many euro zone countries—even those in financial difficulty, such as Greece, Cyprus, and Slovenia—strenuously object to giving EU institutions more control over their financial affairs, their need for loans from the ECB has overridden these objections. Although short- and long-term solutions have been implemented, the euro zone crisis is still ongoing.

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Concerns about food security in Europe have led to heavily subsidized and regulated agricultural systems. Subsidies to agricultural enterprises account for more than 40 percent of the budget of the European Union. Although large-scale food production by agribusiness is now dominant, there has also been a revival of organic and small-scale sustainable techniques.

Food security is especially important to Europeans, probably because stories of post–World War II food shortages are still so vivid. Most food is now produced on large, efficient mechanized farms. These farms require less labor and are more productive per acre than were farms before the 1970s. One result is that only about 2.3 percent of Europeans are now engaged in full-time farming. A second result of the efficiencies of agricultural mechanization is that the percentage of land in crops has declined since the mid-1990s, while forestlands have increased.

The Common Agricultural Program (CAP) The drastic decline of labor and land in farming has had an emotional effect on Europeans, who see it as endangering their cultural heritage and their goal of food self-sufficiency. To address these worries, the European Union established its wide-ranging Common Agricultural Program (CAP), meant to guarantee secure and safe food supplies at affordable prices, provide a secure living for farmers, and preserve the quaint rural landscapes nearly everyone associates with Europe (Figure 4.16).

The CAP has long been criticized for undermining its own goals with its use of tariffs on imported agricultural goods and for giving subsidies (in this case, payments to farmers) to underwrite the costs of food production. Tariffs effectively raise food costs for millions of EU consumers. The subsidies tend to favor large, often corporate-owned farms because payments are based on the amount of land under cultivation. It was this aspect of the CAP that the Smithfield company (with the help of its European partners) took advantage of in setting up its giant pig farms in Romania (recall the opening vignette).

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Protective agricultural policies like tariffs and subsidies—also found in North America, Japan, and elsewhere—can hurt farmers in the developing world. Tariffs lock farmers in poorer countries out of major markets. And subsidies encourage overproduction in rich countries (in order to collect more payments). The result is occasional gluts of farm products that are then sold cheaply on the world market. This practice, called dumping, lowers global prices to the point where farmers in developing countries are driven out of business.

The Growth of Corporate Agriculture and Food Marketing As small family farms disappear in the European Union—just as they did several decades ago in the United States—smaller farms are being consolidated into larger, more profitable operations run by European and foreign corporations (see Figure 4.2A). These farms tend to employ very few laborers and use more machinery and chemical inputs.

The move toward corporate agriculture is strongest in Central Europe. When Communist governments gained power in the mid-twentieth century, they consolidated many small, privately owned farms into large collectives. After the breakup of the Soviet Union, these farms were rented to large corporations, which in turn further mechanized the farms and laid off all but a few laborers. Rural poverty rose. Small towns shrank as farmworkers and young people left for the cities. With EU expansion, the CAP has provided even more incentives for large-scale mechanized agriculture in Central Europe.

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