To participate in the globalised economy in an interdependent world, the European Union is increasingly required to look beyond the traditional instruments of diplomacy and trade. There are new international rules covering things like financial markets or labour, health and environmental standards. Stand-alone solutions will not always work. Take energy and the environment.

There is a consensus in Europe among governments, citizens and the business community that global warming, linked mainly to emissions of carbon dioxide from the use of fossil fuels (coal, oil and gas), needs immediate action on the part of the EU. Its response to this challenge has an impact on other countries. The EU has taken the international lead in seeking to limit the effects of global warming under the Kyoto protocol, and is committed to cutting its carbon emissions by 8 % from their 1990 levels in 2008-12. Thereafter it intends to cut greenhouse gas emissions by another 20 %, which it will raise to 30 % if other countries follow suit.

The EU has also brought in the world’s first market-based mechanism to cut carbon emissions. It has set a ceiling for the amount of allowable CO2 emissions from industrial plants, leaving companies free to buy or sell available emissions rights, depending on whether they come in under their ceiling limits or not. At the same time, the EU cooperates with other countries like China in devising ways to use energy more efficiently and to burn fossil fuels more cleanly.

But even as the EU tries to cut its energy consumption and promote renewable energy sources, its dependence on outside suppliers for fossil fuels is increasing. The main reason is that its own reserves of oil and gas are dwindling. The European Union is the world’s biggest importer of energy and its second largest consumer.

The EU already depends on just three countries, Russia, Norway and Algeria, for nearly half of its supplies of gas, the least polluting fossil fuel, and without radical action in the short term, its dependence on imported oil will rise from the present 50 % to 70 %. In addition, global demand for oil and gas will increase as countries like China and India press ahead with their economic expansion.

It is therefore in the interest of the EU to reduce its dependence on a small number of suppliers, and to deepen relations with those on which it is most dependent for their mutual benefit as trading partners. The EU’s strategy includes cooperation on investments, technology transfer, mutual access to markets and predictability in commercial relations with countries like Russia, a major source of fossil fuels and potentially of electricity, and the oil and gas producers of north Africa, the Gulf region and central Asia.

The EU and seven countries of southeast Europe have set up a single energy community in which energy market rules will be the same for all. The EU will benefit from greater security of supply of gas and electric power transiting through these countries. The energy markets of the seven countries will operate more efficiently as they apply EU rules and standards.

The euro has become a world currency since its creation in 1999, second only to the dollar for use in commercial transactions and as a reserve currency for countries around the globe. It has even overtaken the dollar in the international bond market where in 2005, the euro made up 46 % of outstanding bonds compared to 37 % for the dollar.

By mutual agreement, the euro is the official currency of three outside countries: Monaco, the Vatican City and San Marino. Andorra, Kosovo and Montenegro use it as their de facto currency. A number of countries use the euro as one of the reference currencies to determine their exchange rate policy. These include Botswana, Croatia, Israel, Jordan, Libya, Morocco, Russia, Serbia, Tunisia and the former Yugoslav Republic of Macedonia.

Since 1999, the euro has increased its role as a reserve currency among the world’s central banks, mainly at the expense of the dollar and the Japanese yen. The switch to the euro has been greater in the case of developing countries than for industrial ones. The figures in the table are for all countries.

Percentage of main currencies in identified reserve holdings of all countries.
Source: IMF, 2006 Annual Report.