Start your business in Europe: Introduction
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EU Member States' international trade in goods with Canada, 2015 (in € million)
Eurostat 216/2016 – 30 October 2016
On 30 October 2016, the EU and Canada celebrated the historic conclusion of the Comprehensive Economic and Trade Agreement (CETA). Once implemented, the agreement is expected to remove most tariffs and create new opportunities for businesses, including SMEs. The benefits for Canadian businesses are expected to be significant, especially for small and medium enterprises.
2.The EU at a glance
28 Member States are at the core of the European Union. Nevertheless, there is something unique about the EU; namely, although all of the Member States are independent and sovereign, they in fact have decided to delegate some of the decision-making powers to the institutions they have commonly created. As a consequence, the decisions on particular issues of joint interest are actually made democratically at European level. Therefore, the EU is an organization that can be placed somewhere between the federal system of the United States and the solely intergovernmental cooperation model of the United Nations.
As far as establishing business in the EU is concerned, one of the EU’s greatest achievements is the internal market. There are various definitions of the concept of the internal market, however, the fundamental definition is provided by the Treaty on the functioning of the European Union (hereafter: TFEU)
The internal market is defined there as an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured (art. 26 TFEU).
Other sources describe the internal market as “a group of countries wherein all private economic agents are free to trade, to invest, to offer services, to work and to pay or purchase wherever they prefer. Essential is that all economic freedoms, normally enjoyed in a national market, are extended to the total area of the group.”(J. Pelkmans “Market Integration in the European Community” …, p.154.)
The internal market can also be seen as the meeting place of supply and demand from all the Member States without any discrimination by the Member States or the participants in it on the grounds of nationality or any other distortion of competition.
The internal market has got a deep, economic justification: liberalization, which is conducive to the economic growth and competition, better allocation of resources and their more effective exploration: (A.-L. Sibony, A. Defossez “Liberté d’établissement et libre prestation de service”… p. 511)
The internal market aims at ensuring the compatibility of the rules applicable in the Member States concerning conflict of laws and of jurisdiction.
It offers the opportunity to attain a better overall macro- and microeconomic performance. For instance, producers will profit from it since they will be able to lower costs through taking advantage of cheaper sources of EC component supplies and lower costs of financial services and distribution. (E.Elgar “Free trade, the customs union and internal market”… p.75.)
Fundamental for setting up the business is freedom of establishment that is of decisive importance for the EU. The notion of establishment includes the possibility of pursuing the permanent economic activities in the host Member State, i.e. in other Member State than that to which a company belongs. This may take the form of e.g. a full transition or by setting up an agency, a branch or a subsidiary.
In principle, there is a high level integration between the pursued economic activities and the economy of the receiving country. This implies the host Member State’s responsibility for the regulation of the immigrating company and for sufficient and efficient protection of employees, shareholders and creditors.
Economic and Monetary Union (EMU) represents the real spirit of the integration of the economies of the EU Member States. Within the economic and fiscal policies’ coordination, it involves also the euro as a common currency. All 28 EU Member States participate in the economic union. However, only 19 of them make up the euro area.
The euro currency is the second largest international currency in the world after the United States. Its value, resistance and power of the economy in the euro – area, make the euro more and more attractive also for countries beyond the EU. It is then used in third countries not only for trade but also as currency reserves.
As we already mentioned, the euro is not the currency of all EU Member States. Namely, on the one hand Denmark and the UK applied their ‘opt-out’ clauses in the Treaty that exempted them from participation in the euro area. On the other hand, the remaining 9 Member States are still to meet the necessary conditions for adopting that currency.
The euro area consists of: Belgium, Ireland, Germany, Spain, Estonia, Greece, France, Italy, Austria, Cyprus, Latvia, Lithuania, Luxembourg, Finland, Malta, the Netherlands, Slovakia, Portugal and Slovenia. The Member States of the UE that still keep their national currency and awaits the introduction of the euro zone are (apart from Denmark and the UK): Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania and Sweden.
International trade and business relations are commonly known as having been an engine for global growth. They have a feasible impact on the day-to-day lives of businesses and people around the world and in Europe.
Member States of the EU have consented to apply a common policy on international investment and trade. As a consequence, this common approach amplifies their power in trade negotiations, maximizing their influence and actual impact.
In practice, Member States of the EU are represented by the Commission at the world organizations, summits and meetings, for instance at the World Trade Organization (WTO) as well as in bilateral and multilateral negotiations.
In 2013 the EU entered into negotiation of free trade agreements with its two strategic partners: the US (Transatlantic Trade and Investment Partnership (TTIP)) and with Japan. The fundamental goal is to overcome the classic approach of just removing tariffs and to focus on opening markets for trade, services as well for investment.
Taken together, the US and the EU have the largest bilateral trade and investment relationship in the world, that stand for almost 31% of the world trade and over 49% of the world GDP. Taking into account the evolving political and legal personality of the EU, there is a visible trend of active cooperation across number of sectors: cooperation in energy and energy security, justice and home affairs, science & technology, environment as well as education & training.
Most important and intensive economic relationship is the one between the US and the UE. Despite the economic and financial crisis of recent years, the US and the EU remain each other’s most pertinent and valuable trade and investment partners.
As aforementioned, the transatlantic economy is the largest and most integrated economic relationship in the world, as proven by exceptionally unique levels of mutual investment stocks (€ 2.4 trillion). Total US investment in the EU is three times higher than in Asia, whereas the EU investment in the US is around eight times the amount of EU investment in India and China. Therefore, it is clear that investments are the actual and tangible drivers that enhance the economic growth and increase of jobs placements on both sides of the Atlantic.
More than 15 million people are employed by American companies in Europe or by European companies in the US. The transatlantic economic relationship has great potential which still could be exploited to a much higher extent.
Taking into account that the level of the average tariffs is rather low (under 2 %), it is important for the better cooperation to tackle the non – tariff obstacles. They encompass by and large the customs procedures and the border regulatory restrictions. The difficulty to address these barriers lies in the fact that they are rooted in different approaches to regulations, often based on various historic background and political realities.
The economic crisis continues to catch headlines in most countries and regions all over the world, leading to skepticism about the advantages of establishing and expanding the existing business across borders.
While understanding the mag
nitude of the obstacles the business world is facing, there has been a significant progress made in tackling those difficulties:
At European level:
A firewall was created as well as financial assistance provided for the Member States most in need;
System of economic governance has been reinforced;
The EU is now working towards establishing a true banking union.
At national level:
Member States are taking necessary measures to improve their fiscal position and carry out structural reforms that will boost their growth.
3.How to choose the best European location for your business
When deciding where exactly in Europe it would be most beneficial for you to start your business, you may consider several key factors, such as employment rate, birth / death ratio of enterprises, costs of employment, etc. in a particular European Member State that might be most crucial not only for the statistics but first of all for appreciable profitability and efficiency of the planned business.
Therefore, for your convenience we present below number of schemes and diagrams that should facilitate to make a decision on the final location of an economic activity in Europe. Therefore, in order to evaluate the business-friendly and economic environment worldwide as well as to analyze the conditions of competitiveness, we base the analysis on the following three rankings with each different approach emphasizing a different set of angles:
The Global Competitiveness Index (The World Economic Forum)
focuses on 12 pillars: institutions; infrastructure; macroeconomics; health and primary education; higher education; goods, labor, and financial markets; technology; market size; business sophistication; and innovation.
The Index of Economic Freedom (the Heritage Foundation)
captures economic freedom through 10 dimensions: property rights; corruption; fiscal policy; government spending; business, labor, and monetary policy; trade; investment; and finance.
Doing Business Index (The World Bank)
the 10 dimensions cover starting a business, construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency.
3.1. How easy is it to do a business?
According to the aforementioned report of the World Bank, the highest ranked European countries in 2016 are: Denmark (3rd in the ranking) followed by the UK (#6) and Nordic Countries: Sweden (#8) Norway (#9) and Finland (#10).
Other European significant economies are ranked a little bit lower: Germany (15th in the ranking), swiftly followed by Estonia (#16) and Ireland (# 17) and then the Netherlands (#28) and France (#27). Then there is a small break and the next in the ranking is Spain (#33) and Italy (#45).