European Union WT/TPR/S/102
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I. ECONOMIC ENVIRONMENT
(1) MAIN CHARACTERISTICS
1. The 15 Member States of the European Uni on (EU) cover a land area of 3.2 million km2 and
have a combined population of 377 million (Table I.1).  Among the 15, the "euro area" is composed
of 12 Member States - Austria, Belgium, Fi nland, France, Germany, Greece, Ireland, Italy,
Luxembourg, the Netherlands, Spain, and Portugal .  The GDP of the EU was some € 8,500 billion in
2000 (17% of world GDP)1, and per capita income was € 22,520 in 2000.  Thirteen countries have
requested accession to the EU (Chapter II(2));  if and when all accede, the EU will gain around 45%
in population, 34% in land area, and 7% in GDP.
Table I.1
Major features of the EU and euro area, 2000
Area Population GDP per capitaShare in GDP
(per cent)
('000 km2) (million) Euro PPSaAgriculture, forestry
and fishery productsIndustry Services
European Union 3,191 376.5 22,520 22,520 2.0 26.0 72.0
Euro area 2,454 302.7 21,530 22,320 2.7 28.8 68.5
Austria 84 8.1 25,390 24,710 1.4 32.3 66.3
Belgium 31 10.2 23,990 24,900 1.4 24.0 74.7
Denmark 43 5.3 32,980 27,070 2.3 22.7 75.0
Finland 337 5.2 25,510 23,220 3.1 29.7 67.1
France 544 59.3 23,250 22,250 2.6 23.3 74.1
Germany 357 82.2 24,750 23,630 1.1 28.0 70.9
Greece 132 10.6 11,530 15,270 8.1 23.0 68.9
Ireland 70 3.8 27,220 26,640 4.5 40.9 54.6
Italy 301 57.7 20,190 22,890 2.6 26.2 71.2
Luxembourg 3 0.4 46,370 42,860 0.6 17.8 81.6
Netherlands 42 15.9 25,180 26,270 2.6 24.2 73.2
Portugal 92 10.0 11,400 16,590 3.3 26.4 70.3
Spain 506 39.4 15,360 18,250 3.3 27.6 69.2
Sweden 450 8.9 27,800 22,960 1.8 28.8 69.3
United Kingdom 244 59.6 25,690 23,340 0.9 25.4 73.7
Memorandum:
United States 9,373 274.0 39,200 35,280 1.4 21.9 76.8
Japan 378 126.3 40,610 25,080 1.7 33.0 65.3
a Euro, measured on the basis of purchasing power standards (PPS).
Source: European Central Bank (2001b);  Eurostat (2001);  Eurostat, "Gross Domestic Product 2000", Theme 2 – 24/2001;
United States Department of Commerce (2001b);  WTO (2000b).
2. Services account for 72% of the EU's GDP, while agriculture, forestry and fishery products
together account for 2%, with the remainder attributed to industry and construction.  Agriculture,
forestry and fishery products account for 4.3% of the civilian labour force of the EU, industry andconstruction account for 29%, and services for 67%.
2
                                                     
1 Eurostat, "Gross Domestic Product 2000", Theme 2 – 24/2001.
2 OECD (2001c).WT/TPR/S/102 Trade Policy Review
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3. External merchandise exports of US$859 billion in 2000 made the EU the largest entity in
world merchandise exports (17%), and the second largest world importer (18% of world imports),
with US$966 billion of merchandise imports.3  With respect to external (cross-border) trade in
commercial services, the EU had exports of € 29 1 billion and imports of € 286 billion in 2000.4  The
EU dominated world foreign direct investment outflows (excluding intra-EU flows) in 2000,
accounting for 47% of the total, and attracting 20% of total FDI inflows.5  The EU held  € 1,549
billion in foreign direct investment stocks in 2000, about one-half of which are held in the United
States.
(2) RECENT ECONOMIC DEVELOPMENTS
4. Since its last Review in mid 2000, the EU ha s experienced much slower economic growth.
While growth was 3.3% in 2000 compared with 2.5%in 1999 (Table I.2)6, it was down to 1.7% in
2001, according to the Commission's Spring 2002 forecasts.7  Although a contraction occurred in the
last quarter of 2001 (on a quarter-over-quarter basis), a recession (defined as two consecutive quarters
of declining GDP) appears to have been avoided, and forecasts are of a recovery developing in the
course of 2002, and taking hold in 2003 (section (5)).
Table I.2
Growth in real GDP and expenditure components of EU-15 and euro area, 1998-01
(Per cent)
1998 1999 2000 2001a
Q1 Q2 Q3
European Union
GDP 2.9 2.5 3.3 2.3 1.7 1.5
Domestic demand 3.7 3.1 3.0 4.7 2.2 0.0
  Household 3.3 3.2 2.7 2.1 2.0 1.9
  Government 1.1 1.8 1.9 2.0 1.9 1.9
  Gross fixed capital formation 5.8 5.2 4.4 1.9 0.3 -1.4
Exports 6.5 4.9 11.3 8.5 4.4 0.1
Imports 9.5 6.8 10.4 7.2 3.3 -1.1
Euro area
GDP 2.9 2.5 3.3 2.3 1.6 1.4
Domestic demand 3.5 3.1 2.8 1.6 1.0 0.7
  Household 3.1 3.0 2.6 1.9 1.8 1.6
  Government 1.0 1.5 2.0 2.0 1.9 2.2
  Gross fixed capital formation 5.1 5.1 4.4 1.6 -0.4 -1.7
Exports 7.1 4.8 11.9 8.6 4.9 0.9
Imports 9.6 6.9 10.1 6.8 3.4 -0.9
a Year-over-year quarterly growth rates, not seasonally adjusted.
Source:  Eurostat, "Quarterly accounts", Theme 2 – 10/2002.
                                                     
3 WTO (2001), Table I.6.
4 Eurostat News Release 117/2001.
5 DG External Trade (2001). "Facts and Figures" [Online].  Available at:
http://europa.eu.int/comm/trade  [7 December 2001].
6 Eurostat, "Gross Domestic Product 2000", Theme 2 – 24/2001.
7 European Commission News Release IP/02/610.European Union WT/TPR/S/102
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5. The Commission attributes the slower economic growth mainly to external shocks.8  First, the
increase in oil prices in 1999-00 fuelled inflation and dampened consumption as real disposable
income declined, and business confidence was adversely affected.  Monetary policy was tightened to
contain inflationary pressures, further dampening consumption and investment.  Secondly, the sharp
downward revisions, in the second half of 2000, in valuations of shares of high-technology companies
and enterprises active in the "new economy", starting in the United States, had adverse wealth effectson consumption and on capital market conditions for affected sectors.  Propagation through the
channels of international trade and through integrated financial markets was swift.  The events of
11 September 2001 in the United States further undermined consumer and business confidence levels.
6. Inflation in the EU, measured by the Harmonize d Index of Consumer Prices (HICP), rose to
2.1% in 2000, from 1.2% in 1999, and peaked at 3.4% in May 2001.
9  Factors boosting inflation in
2000 included, in addition to higher energy prices, the decline of the euro against major currencies
and, in early 2001, rising food prices.  Price pressures eased from June 2001, with continuous declines
in the inflation rate thereafter.  For 2001 as a whole, inflation was 2.3% in EU-15 and 2.5% in the
euro area, and varied across euro-area Member States from 5.1% in the Netherlands to 1.8% in
France.10  However, in Q1 2001, inflation rose again due to the implementation of indirect tax
increases in a number of Member States and high er food prices due to adverse weather conditions, as
well as the effect of the changeover to the euro.
7. According to the Commission's Spring 2002 fore casts lower economic growth in 2001 halted
the progress towards lower unemployment rates, continuous since 1996, in Germany, Portugal and
Luxembourg.11  The Commission estimates an unemployment rate of 7.6% in the EU for 2001, and
forecasts a slight rise in 2002 to 7.8%, with a decline to 7.5% in 2003 (section (5)).  As noted in the
previous Review of the EU, the speed of employmen t adjustment in the EU appears asymmetric, with
employment levels adjusting downwards relatively quickly in a downturn but adjustment in the
opposite direction taking longer in an upturn.12
(3) POLICY DEVELOPMENTS
(i) Objectives of economic policy
8. In addition to the general aims of economic policy13, the Lisbon European Council set a new
strategic goal for the EU for 2010:  "to become the most competitive and dynamic knowledge-based
economy in the world capable of sustainable growth with more and better jobs and greater social
cohesion".14  The Lisbon strategy encompasses policies on higher employment, innovation and
research, economic reform, social cohesion, and sustainable development.  The strategy for the EU
and for the Member States to achieve these goals is set out in the Broad Economic Policy Guidelines(BEPG) adopted annually by the Council.  In 2002, the main components were to:  safeguard
                                                     
8 DG Economic and Financial Affairs (2001e).
9 Eurostat, "Harmonized Indices of Consumer Prices, October 2001", Theme 2 – 39/2001.
10 European Commission News Release IP/02/610.
11 European Commission News Release IP/02/610.
12 WTO (2000a), Vol. 1, p. 4.
13 Article 2 of the EC Treaty states these are:  "to promote throughout the Community a harmonious,
balanced and sustainable development of economic activities, a high level of employment and social protection,equality between men and women, sustainable and non-inflationary growth, a high degree of competitiveness
and convergence of economic performance, a high level of protection and improvement of the quality of the
environment, the raising of the standard of living and quality of life, and economic and social cohesion andsolidarity among Member States".
14 Lisbon European Council, 23-24 March 2000, Presidency Conclusions  [Online].  Available at:
http://ue.eu.int/en/Info/eurocouncil/index.htm  [25 November 2001].WT/TPR/S/102 Trade Policy Review
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macroeconomic stability;  raise labour force participation and employment as well as addressing
persistent unemployment;  strengthen conditions for high productivity growth;  and promote
sustainable development.15
(ii) Economic and monetary union (EMU) 16
(a) Transition to the single currency
9. Eleven Member States were participants in the launch of the euro area on 1 January 1999, and
were joined by Greece on 1 January 2001.17  With respect to other Member States, Denmark’s citizens
rejected participation in a referendum on 28 September 2000, while the Governments of Sweden and
the United Kingdom are considering holding referenda on participation.18
10. The introduction of euro banknotes and coins on 1 January 2002 ended the transition process
during which national currencies had co-existed with the euro as "expressions of the same currency".19
The single currency will enhance the scope for consumers to make price comparisons across markets
and therefore engage in cross-country arbitrage, which complements the Internal Market.20  Costs of
international trade transactions will be reduced, since partners of the EU need no longer operate in 15
separate currencies.  These effects are additional to those already identified as being of benefit as a
result of monetary union.21  The main contribution is, according to the European Central Bank (ECB),
to foster the lasting price stability that contributes to achieving high levels of economic activity and
employment.22  Improved European economic prospects benefit non-EU countries primarily through
the channel of international trade:  "a trade creation effect results from the positive impact on
economic growth in the EU that is linked with the completion of EMU".23
(b) Monetary policy24
11. The 12 participants in the euro area have a common monetary policy, exercised by the
independent European Central Bank, which has price stability as its primary objective.  The ECB has
three elements in its strategy to achieve this objective:  a definition of price stability and two pillars of
monetary policy.25  Price stability has been defined as a year-over-year increase in the Harmonised
Index of Consumer Prices (HICP) of less than 2%  for the euro area in the medium-term.  The two
pillars of monetary policy are:  the quantitative reference value for monetary growth (set at 4.5%
annual growth for M3); and other indicators of potential price developments in the euro area (e.g.,output developments, nominal wages, energy prices).
                                                     
15 European Commission News Release IP/02/609.
16 DG Economic and Financial Affairs (2001a).
17 Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal,
and Spain (Council Decision 98/317/EC), and Greece (Co uncil Decision 2000/427/EC).  As a result of the
territorial sovereignty of participants, the euro was also introduced inter alia  in the French overseas departments
of Guadeloupe, Martinique, French Guyane and Réunion, in the Azores and Madeira and in the Canary Islands.
18 Denmark and the United Kingdom have an opt-out clause for Stage Three of EMU, while Sweden
does not fulfil the convergence criteria.
19 DG Economic and Financial Affairs (1996), p. 8.
20 Gasoriek et al. (2001) quoted in DG Economic and Financial Affairs (2001c).
21 WTO (2000a), Vol. 1, Annex 1.
22 ECB (2001b).
23 Bekx (1998), p. 2.
24 ECB (2001a).
25 ECB (2001b).European Union WT/TPR/S/102
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12. During the period under review, the ECB has developed its understanding of the mechanics of
change in the first pillar, making adjustments for holdings of money-market paper and short-term debt
securities by non-residents, which were leading to  apparent monetary growth in the euro area
consistently above the quantitative reference value.26  The ECB has also shifted its main instrument of
monetary policy from setting the interest rate fo r short-term refinancing operations of commercial
banks to announcing the minimum bid rate.27  With regard to the second pillar, the ECB decided to
publish staff projections for the euro area in the interest of greater transparency.
13. The last Review of the EU, in mid 2000, noted the shift to a less accommodating policy
stance on 4 November 1999, when the ECB raised its interest rate to 3%, to counter an upward trend
in inflation risk amid signs of a strengthening in the euro-area economy.  The ECB further raised its
short-term interest rate six times in the course of 2000, reaching a peak of 4.75% on 5 October.  Thislevel was maintained due to the risk of second-round effects on inflation of wages, fiscal policy, and
pass-through of past oil-price increases and exchange rate declines, despite the rapidly weakening
domestic and external environment, until 10 May 2001, when a reduction of 25 basis points was
decided.  A further reduction of 25 basis points was decided on 30 August 2001.  Following the
events of 11 September in the United States, the ECB again lowered its key interest rate by 50 basispoints, on 17 September, in a concerted action with the Federal Reserve System of the United States.
28
The ECB subsequently re-assessed the inflationary risks in the euro area in the face of a period ofslower growth that appeared to be more prolonged than originally anticipated, cutting interest rates
again by 50 basis points on 8 November 2001.  The level of 3.25% has subsequently been maintained.
(c) Exchange rate developments
14. Euro area participants have a common currency and hence a common exchange rate for other
currencies.  (Denmark, which has not adopted the euro, also participates in the exchange ratemechanism (ERM II), while Sweden and the United Kingdom do not.)  At the time of the previous
Review of the EU, the ECB did not exercise an explicit exchange rate policy for the euro.
29  The ECB
intervened on exchange markets to support the euro in September 2000 (in concert with the monetary
authorities of the United States, Japan, Canada, and the United Kingdom), and in November 2000,
citing the risks of continued depreciation to the objective of price stability.
15. Following its introduction on 1 January 1999 at a rate of US$1.17, the euro depreciated
almost continuously.  A brief recovery in May and June 2000 was followed by a renewed slide in the
summer of 2000, to below US$0.85, which the ECB considered to pose a risk to price stability.  The
euro depreciated further after the intervention of 22 September 2000, reaching US$0.8252 on
26 October 2000, but then recovered after the intervention in early November 2000 to reach US$0.897at the end of December 2000.  In the first part of 2001, the value of the euro was stable in relation to
                                                     
26 ECB Press Conference, 10 May 2001 and ECB Press Conference, 30 August 2001 [Online].
Available at:  http://www.ecb.int  [4 December 2001].
27 On 28 June 2000, the ECB switched from fixed rate tenders to variable rate tenders, announcing in
advance the minimum bid rate.
28 Dr. W.F. Duisenberg, "Testimony before the Committee on Economic and Monetary Affairs of the
European Parliament", 12 December 2001 [Online].  Available at:  http://www.ecb.int  [19 December 2001].
29 Although the EC Treaty provides for the possibility of a Council decision on the "general
orientations for exchange-rate policy" for the euro in relation to non-EU currencies, no such decision has beentaken before or during the period under review.WT/TPR/S/102 Trade Policy Review
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major currencies, but trended down in mid-year, to recover again in the latter part of 2001.30  At the
end of 2001, the euro was about one-quarter lower than the level of 1 January 1999.
(iii) Public finances
16. The Commission has noted that "EMU is a unique policy framework in having a centralised
monetary policy framework but decentralised budgetary policies".31  All Member States (including
those outside the euro area) have agreed to ach ieve medium-term budgetary positions of "close to
balance or in surplus", to ensure deficits are below the "excessive" level of 3% of GDP (Protocol
No. 20 of the EC Treaty), even in periods of nor mal cyclical slowdown, when automatic stabilisers
would be in operation.  This objective is intended to  ensure that the fiscal policy for the euro area is
supportive of the monetary policy of the ECB and confer credibility on the euro.  Over the medium-
term, the IMF considers that such fiscal adjustment will place the European economy on a highergrowth path, mainly due to the "crowding-in" effect on private investment.
32
17. Member State commitments are made operational in the Stability and Growth Pact (SGP)33,
and the BEPG.  Assisted by the Commission, the Council exercises multilateral surveillance annually
on the "stability" programmes of euro area participants and the "convergence" programmes of other
Member States.34  During the period under review, progress was made by all Member States towards
budgetary balance or surplus in 2000, which was required to be achieved, under the 1999 BEPG, "no
later than by the end of 2002".  However, follow ing the onset of slower economic growth in mid
2000, governments still in deficit position have faced increasing difficulty in meeting targets in 2001
and 2002 due to automatically lower tax receipts and higher expenditures.  According to the
Commission's Spring 2002 forecasts, the Member States having achieved a position of balance or
surplus in 2001 were Belgium, Denmark, Greece, Spain, Ireland, Luxembourg, the Netherlands,
Austria, Finland, Sweden and the United Kingdom.35
18. The Council made its first use of the instruments of multilateral surveillance during the period
under review.  On 24 January 2001, Ireland was addressed a "recommendation" as its 2001 budgetary
policy was considered to be overly expansionary in the context of intensified domestic inflationary
pressures.36  The Commission reported in October 2001 that much of the inconsistency had
disappeared due to unexpected economic developments, but that fiscal policy for 2002 should remaingeared to stability.
37  In early 2002, the Commission recommended the Council issue an "early
warning" to Germany and Portugal.38  In the case of Germany, the deficit for 2001 was estimated at
                                                     
30 ECB, Monthly Bulletin , December 2001, Table 10, p. 68 [Online].  Available at:  http://www.ecb.int/
[1 January 2002].
31 DG Economic and Financial Affairs (2001d),  p. 1.
32 IMF (1996).
33 The SGP consists of the Resolution of the Amsterdam European Council of 17 June 1997 on
Stability, Growth and Employment, and Council Regulations 1466/97 (early warning system) and 1467/97(excessive deficit procedure).
34 The latest updates pertain to 2002 on which a report was issued in May 2002, after the deadline for
this report.
35 European Commission Press Release IP/02/610.
36 European Commission Press Release IP/01/105.  Article 99.4 of the EC Treaty states: "Where it is
established…that the economic policies of a Member Stat e are not consistent with the broad guidelines…or that
they risk jeopardising the proper functioning of economic and monetary union, the Council may, acting by a
qualified majority on a recommendation from the Commission, make the necessary recommendations to the
Member State concerned."
37 European Commission Press Release IP/01/1474.
38 Article 6.2 of Council Regulation 1466/97 states: "In the event that the Council identifies significant
divergence of the budgetary position from the medium-term budgetary objective, or the adjustment path towardsEuropean Union WT/TPR/S/102
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2.6% of GDP and was projected to rise to 2.8% in 2002, close to the "excessive" level of 3% of
GDP.39  Germany and Portugal however pledged to respond to the substance of the Commission’s
concerns, notably by ensuring that the 3% threshold for the deficit would not be breached in 2002, and
close to a balanced position would be achieved by 2004, and the procedure was closed.
19. Other aspects of public finances of concern in the process of multilateral surveillance include
the relatively high levels of government debt in a number of Member States, notably Greece,Belgium, and Italy.  Another concern is the very high implicit government liabilities in the euro area
due to ageing populations.  Long-term trends of fertility, mortality, and international migration have
led to a rapidly declining rate of population growth  in the EU, expected to halt population growth by
2025, thereafter declining.
40  As a result, the working age population is expected to shrink rapidly;
between 2000 and 2040, the ratio of seniors to the working age population is expected to about doubleto 49%.
41  This will create substantial pressure on social welfare systems, leading to new demands on
public finances, pointing to the need to reform these systems, increase employment rates, and sustain
balanced budgets over long periods to reduce government debt levels.
(iv) Structural reforms
(a) Overview
20. Structural reforms have acquired a greater importance in fostering the conditions for growth
under monetary union due to the combination of monetary policy geared to achieving price stability
and constraints imposed on fiscal policy under the SGP.42  The 2002 BEPG emphasizes product
market reform, fostering entrepreneurship and the knowledge-based economy, and financial market
integration, and for Member States to reduce the cost of labour, strengthen incentives for people to
take up work and participate in the labour force, and remove barriers to labour mobility.43
(b) Internal Market
21. The Internal Market - intended to achieve the free movement of people, capital, goods and
services - is the main agenda at the EU level for pursuing structural reform, complemented by the
Community’s policy on competition policy and state aids (Chapter III(3)(ii) and (iii)).  During the
period under review, progress has been made on achieving fully integrated securities markets by 2003
and fully integrated financial markets by 2005;  25 measures of the original 42 in the FinancialServices Action Plan (FSAP) have been finalized, and a new "Lamfalussy" approach to legislation
agreed (Chapter IV(3)).  Progress on more competitive telecoms markets has been made through
adoption of a revised telecoms package in February 2002 (Chapter IV(4)), and the legislative
framework for e-commerce is almost in place (Chapter IV(5)).
22. Political agreement was reached at the Barcelona European Council in March 2002 to open
non-household use of electricity and gas to competition as of 2004, and to ensure cross-border
electricity interconnectivity of at least 10% of production capacity by 2005;  this commitment still has
                                                                                                                                                                    
it, it shall, with a view to giving early warning in or der to prevent the occurrence of an excessive deficit,
address, in accordance with Article 103(4) [99.4] a reco mmendation to the Member State concerned to take the
necessary adjustment measures."
39 European Commission Press Release IP/02/610.
40 These trends are comparable to those in Japan, while a much higher level of population increase
obtains in the United States.  In 1999, the population increase in the EU was 2.6 per 1,000 inhabitants compared
with 9.4 per 1,000 in the United States and 1.9 per 1,000 in Japan.
41 DG Economic and Financial Affairs (2001e).
42 DG Economic and Financial Affairs (2001a), p. 9.
43 European Commission Press Release IP/02/609.WT/TPR/S/102 Trade Policy Review
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to be translated into concrete decisions in the Council and European Parliament.44  On postal services,
the Council agreed at the end of 2001 on reducing the scope of business segments reserved to the
incumbent postal operator in 2003 and again in 2006.45  A decisive step to full liberalization could
take place in 2009, contingent on a favourable decision by the Council and European Parliament in
2007, based on a Commission review of the sector focussed on maintaining quality "services of
general interest" in a competitive environment.46
23. Another dimension of completing the Internal Market is implementation in a timely fashion of
legislation, which currently consists of some 1,800 directives and regulations, the bulk being
directives.47  A target of a 1.5% "transposition deficit" (directives only) had been set for the Barcelona
European Council in March 2002, and was met by seven Member States:  Belgium, Denmark,
Finland, the Netherlands, Spain, Sweden, and the United Kingdom.  However, 10% of InternalMarket legislation had not been transposed in a ll the Member States, a fragmentation indicating that
"the Internal Market is still operating at only 90% of its potential".
48  The number of Article 226
infringement proceedings also remains high – 1,500 according to the November 2001 Internal Market
Scoreboard – of which France, Germany, and Italy account for 40%.49
Table I.3
Internal Market Scoreboard, March 2002
MEMBERSa
BD K D E L E F I R I L N L A P F I S U K
Transposition deficits
(%)1.5 0.8 2.6 2.6 1.5 3.0 2.1 1.9 2.3 1.5 1.9 2.4 1.3 0.9 1.3
Infringements
(number)1 2 8 4 0 1 5 0 1 2 5 1 3 2 2 2 4 1 2 2 1 9 2 3 55 97 85 42 73 57 6
a B:  Belgium;  DK:  Denmark;  D:  Germany;  EL:  Greece;  E:  Spain;  F:  France;  IR:  Ireland;  I:  Italy;
L:  Luxembourg;  NL:  The Netherlands;  A:  Austria;  P: Portugal;  FI:  Finland;  S:  Sweden;  UK:  United Kingdom
Source: Data supplied by the European Commission;  and DG Internal Market (2001b).
24. Despite the establishment of the legislative framework to foster European economic
integration, and the monitoring of its transposition and implementation, the Commission concedesthat the goal of European economic integration is still to be achieved.  While the "law of one price"
states that prices should not differ according to geographical location in an integrated market
(accounting for transport costs), the Commission notes that "price dispersion has proven to be large,
persistent and rather stable over time", indicating the scope that exists for convergence.
50  T h e
Commission has also found that "progress seems to have run out of steam", and notes "the
                                                     
44 Barcelona European Council, 15-16 March 2002, Presidency Conclusions  [Online].  Available at:
http://ue.eu.int/en/Info/eurocouncil/index.htm  [25 March 2002].  In March 2001, the Commission proposed full
opening of the gas and electricity markets for all consumers by 2005 and to interconnect national networks
(COM(2001)125, see European Commission Press Release IP/01/356).  According to press reports, France and
Germany had resisted full opening of the electricity market, in the case of France, due to opposition from
Electricité de France (EDF), and in the case of Germ any, due to opposition to a new regulatory authority
(Financial Times , 20 February 2002).
45 European Commission Press Release IP/01/1420.
46 See Commission Communication on the subject (OJ C 17, 19/1/2001) and COM(2001)598.
47 1,492 directives and 275 regulations.  Noting the complexity of the acquis , which spans 80,000 pages
of rules and regulations, the Commission intends to submit a detailed plan of action in May 2002 to reduce by
25% the pages concerned, to further simplify the regulatory environment, building on the SLIM process.
48 DG Internal Market (2001b).
49 COM(2001)309.  See European Commission Press Release IP/01/1604.
50 DG Economic and Financial Affairs (2001c).European Union WT/TPR/S/102
Page 9
conjuncture of a slowing economy with the introduction of the single currency makes it especially
important for the European Union and for Member States to keep to agreed reform timetables".51
(c) Labour market reforms
25. Despite the improvements in employment rates since 1996, the labour force potential of the
EU is generally recognized as being under-utilized.  Recognizing that "the employment rate is too low
and is characterised by insufficient participation in the labour market by women and older workers",the Lisbon European Council agreed the goal of a 70% employment rate by 2010, and a 60% rate for
women, with an interim goal of a 67% employment rate by January 2005, and a 57% rate for women,
set a year later.
52
26. Costs of labour are relatively higher in the EU than in the United States (€ 21.5 per hour in
the EU in 1999, compared with € 17.9 in the United States), and vary significantly across the MemberStates (from € 7 in Portugal to € 27.2 in Austria).
53  In real terms (adjusted for price and productivity
developments), unit labour costs have fallen slightly more in the EU than in the United States since
1996;  within the EU, they have declined the most in Finland, Ireland, and Luxembourg.54  Relatively
rigid labour markets are believed to be the cause of higher structural unemployment and low labour
force participation.55  Although some progress has been made  in this respect, the Commission reports
"the pace of labour market reforms seems to have slowed down in 2001".56
27. Persistently large differences in employment performance across the regions of the EU, and
within Member States have remained a feature of  the period 1996-00, when growth was favourable to
employment creation.57  Certain Member States have relatively low unemployment rates and high
vacancy rates, indicating a mismatch between labour demand and supply.58  Skill bottlenecks and
insufficient language training are barriers to full labour mobility, hindering EU-wide labour markets.59
28. As part of the European Employment Strategy launched in 1997, the Council agreed in
December 2001 on the employment package, consisting of the Joint Employment Report,
Recommendations on the implementation of Member States’ employment policies, and Employment
Guidelines for 2002.60  The Guidelines are to be translated into the National Action Plans for
Employment (NAPs) by Member States.  The employment package notes the need for further efforts
to raise employment rates and maximize labour supply, in keeping with the objectives set at theLisbon and Stockholm European Councils, while re cognizing the prospect of higher unemployment
due to weaker growth.
                                                     
51 COM(2001)736.
52 Stockholm European Council, 23-24 March 2000, Presidency Conclusions  [Online].  Available at:
http://ue.eu.int/en/Info/eurocouncil/index.htm  [25 November 2001].
53 Eurostat, "EU Labour Costs 1999", Theme 3 – 3/2001.
54 Eurostat, "Unit labour costs", General Statistics.
55 ECB (2001b), Section 2.2.
56 DG Economic and Financial Affairs (2002).
57 Eurostat, "Employment in the EU Regions 2000", Theme 3 – 13/2001.
58 OECD (2001d).
59 European Commission Press Release IP/01/1868.
60 European Commission Press Release IP/01/1719.WT/TPR/S/102 Trade Policy Review
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(4) DEVELOPMENTS IN TRADE
(i) Merchandise trade
29. The period of slower economic growth since the last Review of the EU in mid 2000 has had a
marked impact on external trade developments in 2001.61  Following the 23% rise in merchandise
exports in 2000, growth decelerated in 2001 to a provisionally estimated 4%, partly due to slower
growth in major trading partners, and notably in the United States (up 3%), the EU’s leading export
destination.  Imports fell 1% in 2001, notably from the United States (down 1%) and Japan (down
12%), due to slower domestic demand growth and declining energy imports (in value).  On a year-
over-year basis, monthly exports were down 8.9% in December 2001 and imports were down 17.5%
(Chart I.1).  For the year 2001, merchandise exports were estimated at € 1,051 billion and imports at
€ 1,020 billion, reducing the EU's merchandise trade deficit to € 45 billion in 2001, from € 91 billionin 2000.
30. The United States remains the EU’s leading trade partner, accounting for 24.7% of exports in
2000 (Table AI.1), and 19.2% of imports (Table AI.2) , about the same as in 1999.  The expansion of
merchandise exports in 2000 was balanced across other trading partners and destinations for EU
exports, and was led by a marked increase in exports of machinery and transport equipment (up 24%),
after several years of stagnation (Table AI.3).  Within this group, road vehicles was the leading export
of the EU (9.3%), followed by electrical machiner y and appliances (8%).  On the import side, the
share of petroleum rose sharply to reach 11.8% of the total, from 7.9% in 1999 (Table AI.4).  Among
the regions, imports from Central and Eastern Europe rose by 42%, mainly due to sharply higher
imports of oil from the Russian Federation, and energy was also behind the rise in Africa’s share of
                                                     
61 Eurostat News Release STAT/02/22.-20-15-10-5051015202530
2000-12 2001-1 2001-2 2001-3 2001-4 2001-5 2001-6 2001-7 2001-8 2001-9 2001-10 2001-11 2001-12Chart I.1
Merchandise trade developments in the EU, 2000-01
Year-over-year-change (per cent)
Source: Eurostat, "Exports of goods", and "Imports of goods", Key Indicators [Online]. Available at:
http://euro pa.eu.int/comm/eurostat  [22 March 2002].Exports
ImportsEuropean Union WT/TPR/S/102
Page 11
EU imports.  Looking further back, to 1995, the si gnificant changes in relation to 2000 are the rising
share of China, from 4.8% of EU imports to 6.8%,  and declining shares of Switzerland and Japan.
(ii) Commercial services trade62
31. The EU accounts for about a quarter of world trade in commercial services, excluding trade
between the Member States.  In relative terms, the EU earned € 291 billion from commercial service
exports in 2000, compared with € 938 from merchandise exports, a ratio of about one to three.  Thesefigures exclude earnings from providers of commercial services established in other countries, and
thus understate the full importance of services in the EU's external economic relations.  Similarly, the
figures for imports, which indicate € 286 billion of commercial service imports in 2000, exclude the
earnings of service enterprises established in the EU.
32. Travel is the leading category on both the export and import sides, followed by "other
business services", which includes legal, accounting, management, consulting, architectural, and
engineering services (Table I.4).  The fastest growing category of commercial services trade during
the period 1992-00, on both the import and export sides, was computer and information services.
Table I.4
Commercial services exports and imports (extra-EU), 1992-00
(€ billion and per cent)
Exports Imports
Value
(€ bn)Share
(%)Average annual
rate of growth,
1992-00
(%)Value
(€ bn)Share
(%)Average annual
rate of growth,
1992-00
(%)
2000 2000
Total commercial services 291.1 100 8.8 286.1 100 9.3
Transportation 76.3 26.2 6.7 73.3 25.6 7.3
     Sea 32.8 11.3 6.4 35.9 12.5 8.3
     Air 34.6 11.9 7.8 27 9.4 6.5
     Other 8.9 3.1 3.8 10.4 3.6 6.1
Travel 74.6 25.6 9.1 77.7 27.2 9.8
Other services 140.1 48.1 10.9 135 47.2 10.7
     Communications 5.6 1.9 9.5 6.2 2.2 11.0
     Construction 9.2 3.2 2.2 6.4 2.2 6.1
     Insurance 9.1 3.1 10.5 3.7 1.3 0.3
     Financial 18.8 6.5 12.2 9.4 3.3 8.8
     Computer and information 9.4 3.2 25.8 6.3 2.2 14.1
     Royalties and licence fees 13.3 4.6 12.5 20.9 7.3 10.8
     Other business services 71.6 24.6 11.5 75.5 26.4 12.4
      Personal, cultural and
recreational 3.2 1.1 1.2 6.6 2.3 7.5
Note: Commercial services exclude government services.
Source: Eurostat News Release 117/2001.
                                                     
62 Eurostat News Release 117/2001.WT/TPR/S/102 Trade Policy Review
Page 12
33. The United States is the EU’s leading partner for commercial services, accounting for 40% of
exports and of imports, with Japan a distant second.  Due to the magnitude and depth of the
transatlantic economic relationship, the EU’s trade in commercial services is far more concentrated in
terms of trading partners and regions than for merchandise trade.  Significant elements in two-way
commercial services trade are sea and air freight transport services, travel services, and intellectual
property.  The substantial flows of bilateral foreign direct investment also have spill-over effects ontrade in commercial services (45% of EU trade in other business services is with the United States).
63
(5) OUTLOOK
34. The Commission’s Spring 2002 forecasts anticipate a recovery developing in the course of
2002.64  The Commission expects domestic consumption growth to be supplemented by the recovery
of external demand in the United States in the first half of the year, with investment recovering in the
second half as uncertainties resolve themselves (Table I.5).  Growth of the EU economy is expected to
decline to 1.5% in 2002, compared with 1.7% in 2001, but to recover to 2.9% in 2003.
Table I.5
Spring 2002 forecasts of real GDP growth for the EU and the euro area, 2002 and 2003(Year-over-year percentage change)
2002 2003
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
European Union 0.6 1.1 1.7 2.6 3.0 3.0 2.9 2.6
Euro area 0.4 0.9 1.6 2.6 3.0 3.0 2.9 2.6
Memorandum item:
United States 1.4 2.3 3.3 3.7 3.1 2.9 3.1 3.3
Source:  DG Economic and Financial Affairs (2002), Statistical Annex, Table 3, p.111.
35. The Commission anticipates the ECB’s medium-term objective of 2% inflation will be met in
Q2 2002, but that the influence of higher inflation in Q1 2002 will be felt on the yearly average.   The
Commission also anticipates that increases in the unemployment rate could continue into Q3 2002
given the lagged response of the unemployment rate to the cyclical upturn anticipated for the year.The stronger growth predicted for 2003 is expected  to bring the unemployment rate down to 7.5% in
2003, from 7.8% in 2002 and 7.6% in 2001.
36. In its December assessment of economic prospects, the IMF largely shares the Commission’s
assessment of the economic outlook for 2002 and 2003, and adds that the European economy appears
to be less vulnerable to adverse shocks to confidence and activity than the United States because"external balances are stronger;  households are less indebted and less exposed to stock market
developments;  and concerns about overinvestment and overcapacity among firms appear to be
lower", but concludes that "to underpin a robust recovery, it is critical – both for Europe and for the
rest of the world – that such strengths are complemented by more aggressive structural reforms to
labour, product and financial markets".
65
                                                     
63 Eurostat, "Foreign Direct Investment:  main actors in the EU market and the role played by offshore
centres (1992-2000)", Theme 2 – 37/2001.
64 European Commission Press Release IP/02/610, and DG Economic and Financial Affairs (2002).
65 IMF (2001), p. 43.