The combination of technological progress, lower transport costs and policy liberalisation in the European Union and elsewhere has led to increasing trade and financial flows between countries. This has important consequences for the functioning of the EU economy. While globalisation brings huge benefits and opportunities, it also means that Europe has to face increased competition in all traded goods and services.
Rising international economic integration, or globalisation as it is commonly known, offers many opportunities. EU firms receive easier access to new and expanding markets and sources of finance and technology. EU consumers receive access to a larger variety of goods at lower prices. This opens the prospect of potential significant gains for the Union in terms of higher levels of productivity and real wages. The European Commission estimates that about one-fifth of the increase in EU-15 living standards over the past 50 years is attributable to integration of the world economy, i.e. globalisation. That is why the European Commission has been firmly in favour of greater economic openness. The EU trade policy has been an important instrument to steer world trade liberalisation.
However, the public often associates globalisation with job losses and downward pressures on wages and working conditions. These anxieties are based on fears that increased competition from low-wage countries puts excessive pressure on local producers and workers and may result in the closure, or partial closure, of factories at home and their relocation abroad. While these concerns are not new and understandable, they seem to have been heightened by the rapid emergence of China and India on the world trading scene. In particular, the widespread use of information technologies increasingly erodes the boundaries between what can and cannot be traded.
Finding an adequate response to globalisation may be seen as part of the broader policy challenge for dynamic economies - i.e., to successfully cope with structural economic change. To reap the gains from globalisation it is necessary to undergo a process of adjustment as factors of production - such as capital - move from activities and firms that cannot withstand the increased competition pressure to those that thrive on it. However, while there is evidence that globalisation has not been associated with overall net employment losses, the adjustment of economic structures has costs resulting from resources being moved between firms and activities. The structural adjustment of more rigid labour, capital and product markets can be more costly and painful.
The policy challenge is to turn the potential benefits of globalisation into real gains while minimising the social costs. Measures to improve the functioning of EU markets and to boost innovation performance will help shorten the adjustment process, while targeted policy actions such as the European Globalisation Adjustment Fund will assist affected workers. Besides these internal issues, there are also significant external challenges facing the EU which require policy responses, including:
The Commission plays an important role in the design of a coherent policy strategy to face the challenges of globalisation. It closely analyses the evolution of main trends in world trade and FDI flows and the performance of the EU in this regard. It also regularly analyses the impact of globalisation on the EU’s economic performance and provides policy advice on the basis of its analysis.