The New Europe
The New Europe

On May 1, 2004 the EU was officially enlarged to include, Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Estonia, Latvia, Lithuania, Malta and Cyprus. The addition of these countries created the biggest market in the world with 450 million consumers, which accounts for roughly 20 percent of world trade and produces more than a quarter of the world’s GDP. Besides adding 3.9 million square kilometers to EU territory this increases official languages of the EU from eleven to twenty.

To join the EU, these 10 countries were required to comply with the so-called Copenhagen Criteria:
1) democracy, the rule of law, human rights, respect for minorities;
2) a functioning market economy and the capacity to cope with competitive pressures; and
3) the ability to take on the obligations of membership (in other words, to apply effectively the EU’s rules and policies—the acquis communautaire).
This “fifth enlargement,” the largest in EU history, will continue in 2007 with inclusion of Bulgaria and Romania.

The EU enlargement to include countries of the former Soviet bloc is an important step towards finally overcoming the division of Europe. But this enlargement has important geopolitical and economic implications for the rest of the world. Current EU member hope that ultimately enlargement will strengthen the EU’s role in world affairs—in foreign and security policy, trade policy, and the other fields of global governance. Furthermore, the expansion of the EU and the potential expansion of the European Economic and Monetary Union (EMU) to these new members will have a tremendous impact on the other economies of Western Europe and on countries around the world with trade and financial links to Europe.

Economic Effects

There are important economic effects from expanding the EU. There will be 100 million more consumers, two-thirds more member states and 5 percent added to the total EU GDP. Enlargement also implies the incorporation of economies with very different levels of development and economic structures, producing significant changes in the EU.

For instance, the share of the economy attributed to the public sector is on average significantly higher in the new countries than the current member states, reflecting for many of them their past domination by the state-controlled economic system of the former Soviet Union. Agriculture also contributes a much larger share of GDP in these 10 countries than in the EU-15, reflecting the predominance of small, inefficient farms especially in Poland. Industry in the new members is more specialized in labor-intensive sectors such as textiles and substantial differences exist with respect to technology, productivity, and capital stocks.

Much economic reform has already been accomplished in the “pre-accession phase.” Like all other new members to the EU, this group of ten had to meet several specific economic criteria. New countries were required to meet the Maastricht criteria (e.g. the national debt can not exceed 60 percent of GDP and the budget deficit can not be more than 3 percent of GDP) to demonstrate progress in privatization, reduced government involvement in the economy, dismantling monopolies, removing trade restraints, and developing flexible labor markets, all requirements of the aquis communitaire. All of these reforms will contribute to establishment of the largest free-market in the global economy with significant benefits for both the EU as well as the global economy.

These developments have not happened over night however. Over the last 15 years, the economies in the expanded Europe have been working towards achieving high degrees of interdependence and market orientation. From a trade perspective enlargement began in the 1990s when the EU signed “Europe Agreements” with many of the new member countries. Under these Agreements, 95 percent of trade in industrial and agricultural products with the new member states became duty free. So, the immediate trade impact of enlargement will be comparatively slight. In the long run, however, the enlargement offers considerable potential for growth, particularly in new investment from the “old” 15 to the “new” 10.

To tap into the enormous economic potential of the EU-25 there are still challenges ahead. Inflexible labor markets (i.e. state regulations that make it difficult to terminate employment or decrease wages for reasons of social protection) and excessive, often burdensome regulations on business and industry continue to widen the EU’s productivity gap with America.

As a result the EU is now forced to confront economic reforms that it has postponed or been unable to complete within the EU-15 for decades. The new members however have lower wages and this may provide the motivation in the old members to reform. Pascal Lamy, the EU Trade Commissioner observed that Europe has “built a system around the assimilation of existing technologies, mass production generating economies of scale and an industrial structure dominated by large companies, with stable markets and long-term employment patterns. This system no longer delivers in today’s globalized world.” If the current members do not reform their systems, investors will tend to favor the accession countries, which have reformed.

Internal Issues

The introduction of a substantially larger labor market in the new ten members including a much lower wage base compared to the existing EU has generated some concern among its members. The free movement of labor will be slowly introduced by 2007.

But, a study by the European Commission shows that only 1 percent of the working population of the new members would likely migrate to existing EU states, even if they enjoyed full freedom of movement. Most estimate the principal source of migration will be skilled and educated workers moving West from the new members.

One EC spokeswoman commented, “Far from a wave of immigration that puts a burden on the current member states’ welfare system, the problem that free movement of workers is going to cause is a brain drain and a youth drain in accession countries…[this] will have a detrimental effect on the economic development of those countries and therefore on their ability to reach similar levels of GDP as the current member states.”

While migration estimates are small, there is still the possibility that flexible labor markets and labor forces would allow the EU to achieve much higher levels of productivity and growth in the long-run. In the short-run, however, much of the expected technological advances, productivity improvements, and growth will follow the flows of foreign direct investment both within and from outside Europe.

FDI is a main driver of economic integration in the region. Lamy noted that from 1989 onwards, the 10 new member states have attracted FDI exceeding 150 billion euro. Two-thirds of net capital inflows to the accession countries originated from EU member states.

For these new countries the benefits of increasing FDI from EU-15 countries and the rest of the world will result in the creation of jobs, leading to increased income levels and thereby increased consumer demand. Thus, these countries should see dynamic efficiency gains arising from higher investment and a higher rate of innovation overall.

In addition to increased economic and financial ties between the EU-25 countries and the rest of the world, the enlargement represents a major political accomplishment for the EU.

The criteria for membership, established by the European Council in Copenhagen, have helped establish common political perspectives. The members were required to demonstrate a commitment to democracy, the rule of law, human rights, and respect for minorities. And despite their initial costs to the new members, the adoption of EU policies for protection of the environment, crime, drugs, regulatory standards, and illegal immigration will improve the quality of life for citizens throughout Europe.

The ideals of the new Europe are also expressed in the draft constitution that is currently being debated by the European Parliament and awaits final vote approval from the constituent countries. The constitution, in addition to being a legal and social contract between the EU government and the people of Europe, is a symbolic attempt to establish a stronger political union and identity with the expanded EU.

With the addition of new members, there is also large cultural diversity throughout the new EU-25. As noted above, the EU will have to adopt nine new official languages.

The enlargement of the EU is seen as a positive development by the U.S. Trade between the U.S. and EU constitutes the largest commercial relationship in the world. In 2002, EU-15 exports to the United States were estimated at $227.9 billion, representing 24.1 percent of total EU-15 exports. EU-15 imports from the United States totaled $166.1 billion, representing 17.7 percent of total EU-15 imports. This significant economic relationship has sometimes been overlooked because of disagreements between the two powers on foreign policy issues.

The new members to the EU are viewed as more pro-American—they want Europe to be a partner to the US, not a counterweight in world affairs. At the same time, they want the EU to have a more powerful role in stabilizing its own backyard. These accession countries still look to US leadership and NATO to counterbalance Russian influence in the region.

Additionally, the new regulations that have been adopted by the new 10 members expand the legal framework that governs the movement of goods, persons, services and capital in the global economy.

Higher environmental and regulatory standards in the EU, now implemented by the new ten, will place additional political pressure on the U.S. to match these standards. Environmentalists and public health officials in the U.S. who see globalization as a way to improve global standards, have used stringent EU regulations as a political springboard to support their arguments.

Such regulations affect a broad range of U.S. products and companies from chemical manufacturers to electronic companies. Because of the global nature of the markets for many of these products the U.S. must ultimately address EU regulations that prevent U.S. products from reaching the EU markets due to lower U.S. standards.

There are many other challenges ahead for the EU-25. The EU-25 must now address issues of aging populations, rigid labor markets, and differences in productivity between old and new members. The EU still currently faces high levels of unemployment, and growing income inequalities that will only be exacerbated by the incoming members.

For instance, the average GDP of the incoming members is 60 percent below the average level in the existing EU-15 member states. The new members also have higher levels of price inflation and unemployment that could create friction between policymakers over the correct policies.

If growth does improve, the EU will be able to wield considerable power in the global economy. This could help sustain the European welfare state, and help the EU address the issues of demography, technological innovation, globalization and assume a more prominent position on issues of global governance.

Before this type of growth is possible, many hard and politically unpopular decisions need to be made by the governing authorities in Brussels in order to successfully integrate the 10 new member states into the existing EU. Policy coordination to ameliorate problems in the short-term will be complicated by enlargement and the burdens that the new countries face in trying to meet the demands of regulatory compliance and macro coordination that may be more difficult to achieve than is anticipated.

As Lamy has stated, “What remains to be invented is a common vision of the world and the manner in which we can have a real influence on its evolution.” Thus, the ultimate impact of EU enlargement is still a work in progress.

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