European Union Economic Overview

The 25-nation European Union (EU), with 460 million residents, is the world’s largest economic area. EU aggregate GDP was $12.86 trillion in 2004, and per capita GDP averaged $28,000, with wide divergences across member states. Buoyed by a robust global expansion, with growth over 5%, EU GDP expanded 2.5% in 2004. EU GDP growth slowed to around 1.6% for 2005, but is projected to strengthen to 2.1% in 2006. Corresponding growth for the 12-nation Euro Area was 2.0% in 2004, around 1.2% in 2005, and a projected 1.8% in 2006. Drivers of growth include rising domestic demand--including private investment--and exports. EU inflation ticked up from 2.1% in 2004 to 2.3% in 2005 and a projected 2.2% in 2006, mostly due to energy price hikes. Manufacturing is strengthening slightly and unemployment is dipping from 9.0% in 2004 to 8.5% in 2005 and 2006.

EU economies are among the world’s most advanced and diverse. Key sectors include metals production and processing, petroleum, coal, cement, chemicals, pharmaceuticals, aerospace, rail equipment, vehicles, construction and industrial equipment, shipbuilding, electrical equipment, machine tools, manufacturing systems, electronics, communications, food/beverage processing, tourism, media, and financial services. Agricultural products include wheat, barley, oilseeds, sugar beets, wine, grapes, dairy products, cattle, sheep, pigs, and poultry. The EU is the world’s leading trader; goods and services exports were about $4.97 trillion, and imports about $4.81 trillion, in 2005. Goods exports include machinery, vehicles, aircraft, plastics, pharmaceuticals, fuels, metals, pulp and paper, textiles, meat, and dairy products. Imported goods include machinery, vehicles, aircraft, plastics, crude oil, chemicals, textiles, metals, and food. Leading EU trading partners are the U.S., China, Japan, and Switzerland.

Though wealthy, Europe faces short- and long-term risks to its prosperity. Near term threats include possible new oil price shocks, a disorderly correction of global imbalances, a H5N1 influenza pandemic, or abrupt cooling of housing markets in the UK, Ireland, and Spain. Longer term, growth in Europe's large economies is tepid at best, though countries such as Ireland and new Central European EU states are more vigorous. Unemployment remains high, labor market flexibility is low, and a rapidly aging population means fewer workers and higher social benefits. In response to these challenges, in 2000 the EU committed to a ten-year reform plan, the Lisbon Agenda, aimed at transforming the EU into a faster-growing, competitive, knowledge-based economy. Key reform targets include the labor and product markets. Failure to make significant progress toward these goals has left Europe's large economies with lagging competitiveness, stagnant productivity and anemic growth, and struggling to respond to the rise of China and India and to meet other challenges of globalization. If EU states do not reform, innovate and raise productivity, living standards will fall in the future. Successful reform is vital for the EU and global prosperity, since the EU is and will remain a key engine of world economic growth.