On May 24, 2004, the ICCC was proud to host a special luncheon celebrating the EU Enlargement that took place on May 1. In cooperation with EUCOCIT, delegates representing the 10 new EU Countries were treated to a real Irish welcome.
A highlight of the luncheon was a presentation by Dr. Anita Sands. The transcript of her presentation follows.
Good afternoon everybody. General Consuls, Honorary General Consuls, Distinguished Guests, ladies and gentlemen. It is a great pleasure to be here with you this afternoon and I would firstly like to extend my sincere thanks to President Ellis of the Irish Canada Chamber of Commerce and Chairman Ken Tracey of the European Chamber of Commerce for inviting me to speak. It is both an honor and a pleasure to be here amid such impressive representation of European business in Canada.
General Charles de Gualle - a man who, as most Canadians will recall, was not exactly given to much understatement, once spoke of a Europe that stretched from the Atlantic to the Urals. History, ladies and gentlemen, will record May 1st 2004 as the day when that vision became a reality.
The history of the 20th Century will remember Europe as a continent largely defined by hatred and hostility. A continent torn apart by the ravages of two world wars, a continent deeply divided on each side of the Iron Curtain. Through its own momentous efforts, however, Europe has cast aside the shackles of its troubled history, and embarked on a new era of unprecedented political and economic unity.
It is therefore simply impossible to overstate the significance of May 1st; a day when ten Eastern European countries joined the dynamic arena of the European Union. Eight of these ten countries had suffered the wrath of communism but now all ten will enjoy the liberty and equality that is the hallmark of the European Union. This is the dawn of a new day, a day when out of the ashes of communism and conflict blossoms the flower of peace and prosperity. Five decades after the process of European integration began, this latest and largest expansion has finally brought an end to the divisions of the Cold War. Thus we have opened a new chapter in European history and firmly closed another.
But aside from its historical importance, May 1st has fundamentally changed the make up and dynamics of the European Union. A new frontier has emerged, stretching from Portugal to Poland, and has brought with it many significant ramifications for the world economy. Today I hope to bring you on the journey that culminated in Dublin, Ireland, on May 1st and explore some of the potential opportunities and challenges this European expansion holds for you.
Canada focused on the US - But we live in an Increasingly Integrated World
Recent events throughout the globe stand as a stark reminder that we live in an increasingly integrated world. It is indeed a global village, where economic and political interdependencies have prompted higher levels of international cohesion and cooperation. Economic strength has replaced military strength as the ultimate measure of a nation. Explosive growth in international trade has created a truly global economy that few could have imagined half a century ago. The individual economies of the world have become so interwoven that, today, none can be said to be fully independent. This is particularly true of Canada, whose trade relations remain inextricably linked to the fortunes of its nearest neighbor.
As Prime Minister Trudeau correctly put it "Living next to the United States is in some ways like sleeping with an elephant, no matter how friendly and even tempered the beast, one is affected by every twitch and grunt". The recent downturn in the U.S. economy coupled with the current political environment has left us all feeling the twitches and grunts, but especially so in Canada where 80% of exports and 70% of imports continue to originate in the United States. Canada's dependence on the U.S. has made diversification of export destinations a clear objective of the Canadian government. The expansion of the European Union therefore offers Canada an excellent opportunity to fulfill this objective.
Exploit this opportunity - Largest trading block
The European Union is currently Canada's second largest trading partner, yet accounts for just 11% of total Canadian exports. From the EU's perspective, Canada ranks 11th in terms of trade, accounting for 14% of total EU imports and 10% of all EU exports. These figures, though relatively small, are growing fast. In the year 2000, Canadian trade with the EU expanded by 25% and foreign direct investment in both places has become an increasingly important element of this transatlantic relationship.
And this is a relationship on the verge of major alteration. The expansion of the European Union has increased its population by more than 80 million, opening up, to you, a market of over 450M people, a market which constitutes 18% of the world trade and contributes to over 25% of the world's gross domestic product. This makes the EU the world's largest trading block, and not only offers Canada a wealth of opportunity but is undoubtedly worthy of increased attention from Canadian business.
That naturally raises the question as to what are the benefits of the EU enlargement and what are the implications for all of you? As you all know, the EU operates on four fundamental principles - free movement of goods, services, labor and capital. The latest European expansion also brings about four additional advantages of which we all need to be aware.
Potential of Growth - What enlargement means for Europe and for Canada
The first advantage is obviously larger and more open market. The dissolution of all internal borders between the old and new states means that goods imported into the EU at any customs office may be circulated freely throughout the 25 countries. Equally, companies producing in any of the new member states can serve customers in the entire EU without impediment. The extension of the EU's external tariff to these countries will lead to a decrease in their current average trade tariffs from 9% to 4% bringing significant cost advantages to foreign investors.
The second single advantage is a single set of rules brought about by the extension of the EU's trade policy to the new states. The present system whereby Canadian exporters are faced with a variety of import regulations will be a thing of the past. The new union will now have a single set of trade rules, a single tariff system, and a single set of administrative and customs procedures.
The third advantage - a more consistent regulatory environment will safeguard and bolster the interests of Canadian investors in the new member states. Higher standards in terms of technical regulations including the protection of intellectual property rights, strict subsidy disciplines, and access to government procurement opportunities are just a few examples of the new advantages for Canadian companies doing business with the ascension states. From now on, you will be able to operate in these countries under the same regulatory environment you are already accustomed to when doing business in the old EU.
And finally - the 4th advantage - a single voice; The enlarged EU will now speak with a solitary and notably stronger voice in its bilateral and multilateral trade negotiations a fact that will undoubtedly strengthen the overall transatlantic economic relationship. In this capacity, the European Union can also act as a more effective international partner to Canada in tackling regional and global problems of mutual concern.
But being aware of these advantages is of little benefit in the absence of knowing how they might be applied. It is therefore important to step back and examine how these advantages might play out in the ten new member states, all of whom lag drastically behind the EU 15 in terms of economic performance. However, one only has to examine the story of Ireland to gain a clear insight into the potential opportunity for economic growth and international business.
Tale of the Celtic Tiger
In many respects it is remarkably fitting that Ireland should hold the presidency of the EU as we cross this historic threshold. The truth of the matter is that not since we wrote the Book of Kells has Ireland been a role model for a whole lot other than misery and misfortune, but those of you who have visited the Emerald Isle in recent years will know that this is certainly no longer the case. Many of you will of course be familiar with the miraculous story behind Ireland's Celtic Tiger economy - a real life tale of rags to riches that describes how a nation of farmers managed to become the largest exporters of software in the world.
As amusing as that may sound, the ten new ascension states stand to learn many valuable lessons from the Irish story because when we joined the European Union in 1973, our economic profile was remarkably similar to that of several of these newcomers. We were, the runt of the EU litter, so to speak causing the Economist magazine to label us as the "poorest of the rich" because our national income was only 64% of the European Average. Poor fiscal management throughout the 1970s had left Ireland's public finances in disarray, and with our national debt hitting 129% of GDP, Ireland was knocking loudly on the door of international bankruptcy. This crippling economic situation resulted in double digit unemployment, in fact for 21 of the 30 years we've been members of the European Union, we've had the highest or second highest levels of unemployment. What often accompanies unemployment is its ugly cousin emigration and by the end of the 1980s, Irish emigration had reached new heights with over 40,000 departing Irish shores in 1989 alone.
Roll the clock on 15 years, however, and it's a very different story. A story which speaks to the enormous benefits that European membership can help bring about. By the year 2001, the economist magazine was heralding Ireland as Europe's shining light as our national income had reached a phenomenal 121% of the European average. Gazelle like growth throughout the 1990s has left Ireland with the second highest GDP per Capita in Europe. Ireland has been the fastest growing economy in the EU and OECD for the past 7 years, growing at a rate of three times faster than the United States. No matter what economic parameter you care to chose, the Irish economy has gone from being terminally ill to fighting fit. Our national debt is now only 35% of GDP, we've had budget surpluses since 1992, and unemployment has fallen from over 17% to under 5%. On top of this, for the first time in our recent history, Ireland has experienced net inward migration every year since 1996.
So what's the secret of Ireland's success - it was a winning combination of good policy, good timing and a little bit of Irish 'good luck' that resulted in this phenomenal transformation. Ireland's policies really spanned three areas - industrial policy, fiscal policy and education policy.
Our industrial policy originated from the Irish Government's realization that in order to curb emigration they needed to create jobs at home. To do this, they embarked on a policy of "industrialization by invitation" and created the IDA - the industrial development authority - whose sole remit it was to attract overseas companies to Ireland. However, the IDA didn't just target any old companies in any old sector. Instead they focused their attention on what they believed to be up and coming global industries starting with investments in hardware, electronics, and pharmaceuticals and in latter years switching their attention to industries such as software and financial services.
The job of the IDA was made infinitely easier in by a remarkable fiscal policy introduced in 1981. In that year, Ireland slashed its corporate tax rate from 50% to 10% and they guaranteed this rate for 20 years. This policy maneuver was nothing short of a stroke of genius because it turned Ireland, literally overnight, into a low cost base for foreign firms seeking to operate within the common European market. As a result, Ireland is now home to over 1100 foreign companies - a veritable "who's who" of the high tech world.
However, good industrial policy and good fiscal policy wouldn't have made much of a difference without the right kind of workforce. Here again, the Irish showed incredible vision in building up their stock of national human capital. Ireland, like other peripheral states such as Spain, Portugal, Southern Italy and Greece received significant structural and cohesion funds from the European Union. What set Ireland aside, however, was our conscious decision to invest the majority of these funds in people as opposed to infrastructure. Over the past three decades, Ireland has reoriented its education policy to compliment its industrial efforts. We did this by increasing expenditure on education right across the board. We also increased accessibility to third level education by abolishing university fees in the 1990s and we placed a significant emphasis on science and technology related programs.
As a result of these efforts, the Irish education system is now ranked #1 in the world at meeting the needs of industry and Ireland now has the third highest proportion of its population with a university degree - surpassed only by Canada and the United States.
However, as much as good policy had a role to play, Ireland's efforts were certainly assisted by good timing. The increasing pace of globalization and Europeanization gave Ireland a window of opportunity that allowed its policies to come to fruition. It was certainly a case of fortune favoring the well prepared and when the demand for information technology exploded in the early 1990s the Irish army of underemployed scientists and engineers were ready to go to work.
Importance of the Diaspora
The Irish story however, wasn't just about the companies; ironically one of the elements of good luck that came into play was our Diaspora. Many of you who have been involved with the Irish community here over the years, probably all know of people who returned to Ireland in recent times. These returning expatriates made a huge contribution to the Irish economy. My own research found that 75% of indigenous Irish software companies are founded by people who worked abroad at one point in their lives. These were often our top graduates who emigrated in the absence of employment opportunities at home. Having cut their teeth abroad, they returned to Ireland bringing with them a wealth of knowledge about international business and global markets. As one executive put it "when you board a plane to cut a deal for Microsoft, you know what it takes to do business at the highest of international levels".
The same is true for other countries - the success of places such as Israel and India can also be partially attributed to the activity and presence of their international Diaspora, many of whom invest in start up enterprises in their home countries and facilitate business development by connecting companies to international markets and by opening doors for entrepreneurs all over the world. In that regard, all of you, as Diaspora of your own respective nations, have a significant role to play in contributing to the development of your native homelands by virtue of your presence here in Canada.
Because of Ireland's success, it is not surprising that it has become the poster child for economic development within Europe and it is equally unsurprising that the refrain of the day in Dublin on May 1st was "we want to be like Ireland". The lessons from the Celtic tiger have been eagerly absorbed in the new member states where flat taxes and small government are now all the rage. Poland, Hungary and Latvia have all cut corporation tax to below 20%, Slovakia has introduced a 19% flat tax for both corporate and personal income. This winning combination of low taxes with good basic education and makes these countries a very attractive package for Canadian investors and although Ireland had certain advantages, such as being an English speaking member of the EU with close ties to North America, countries such as Poland and Slovakia have the advantage of being located much nearer to the major markets of western Europe.
Another critical consideration of course is the significantly lower wages on offer in these countries. Right now labor costs on average ?26 per hour in Germany and ?24 in countries such as France and the UK. Ireland compares relatively favorably with wages averaging ?17 per hour. However, when pitted against countries such as Poland and the Czech Republic, which can boast labor rates of between ?4-5 per hour, the dramatic shift in the competitive dynamics of Europe is obvious.
In addition, these countries are growing much faster than the traditional stalwart economies of Europe. Over the past three years the new member states have grown at a rate of between 5-8%, about ten times faster than the average experienced in the euro-area. This is having a catalytic effect helping to further heat up the competition within Europe.
There is a wonderful line in Macbeth that says that "If you can look into the seeds of time and say which one will grow and which will not, speak then to me". If this is the case, then perhaps it is time for me to be quiet, because unfortunately I cannot into the economic crystal ball and forecast which of these countries is most likely to follow Ireland's trajectory. I can however say with total certainty that over time // all ten countries will grow and in doing so will constitutes a significant investment opportunity for Canadian business.
Challenges that lie ahead
But although expansion has brought about large opportunities for international business it has also brought its fair share of challenges. These challenges affect not just the countries themselves, but also the older members of the club. The expansion has fundamentally altered the mechanisms of EU operations. We are now faced with the logical concerns that the current political institutions extended to 25 would come to a grinding halt and the permutations that would entail would baffle the most brilliant of mathematicians.
So along with institutional reconfigurations, the EU is also struggling with drafting a new constitution that will articulate our new vision and ensure equality for all. In addition to these challenges members, both old and new, have to contend with difficulties associated with inclusion in European Monetary Union. These countries are working hard to meet the stringent criteria laid out in the Maastricht Treaty and will continue on a path of economic restructuring and policy convergence as part of the process of getting in shape for the Euro. It is forecast, however, that by the end of the decade, the Euro will have replaced the national currency in a number of these countries.
Conclusion
To conclude, it was Thomas Edison who once said that opportunity is missed by most because it is dressed in overalls and looks like work. There's no doubt that we in Europe have a mountain of work ahead of us, but the 25 members of the European Union have donned their overalls, and with this new alliance, are ready to reap the rewards of a foundation laid five decades ago. The Europe of division and depression is gone, and has been replaced by a community with a common value and a common vision - one we invite you to share with us.
So today I would like to use an Irish phrase and extend a cead mile failte - a hundred thousand welcomes - to the ten newest members of our European family - welcome to The Czech Republic and Cyprus, to Estonia and Hungary, to Latvia and Lithuania, welcome also to Malta, Poland, Slovakia and Slovenia. These countries have worked hard to overcome what many thought of as being insurmountable barriers to get to this day. Their determination to embrace democracy and peace, their determination to open their borders to free trade, their determination to overcome the legacy of history, has allowed them to breach the cusp of this great union.
It was Churchill who first looked to Canada as a sterling example for the rest of the world to follow when he spoke of "that long frontier, from the Atlantic to the Pacific ocean, guarded only by neighborly respect and honorable obligations". Churchill also thought of Canada "as an example to every country and a pattern for the future of the world". Well Churchill was right, and now the time has come for us not only to look to Canada but for Canada to look to Europe and cease the opportunity this expansion affords.
Today the map of Europe has been redrawn and we are now a continent where the whole is undoubtedly greater than the sum of its parts. This is a Europe of peace, a Europe of progress and a Europe of prosperity. On May 1st, WE ALL crossed a new frontier and entered a new era of global integration. Ladies and gentleman - Europe's time has come. Canada's moment is now.
Thank you very much.
Dr. Anita M. Sands
asands@andrew.cmu.edu