Article How will the enlargement affect the old members of the European Union?

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1 econstor Der Open-Access-Publiktionsserver der ZBW Leibniz-Informtionszentrum Wirtschft The Open Access Publiction Server of the ZBW Leibniz Informtion Centre for Economics Lmmers, Konrd Article How will the enlrgement ffect the old members of the Europen Union? Intereconomics Suggested Cittion: Lmmers, Konrd (2004) : How will the enlrgement ffect the old members of the Europen Union?, Intereconomics, ISSN , Vol. 39, Iss. 3, pp This Version is vilble t: Stndrd-Nutzungsbedingungen: Die Dokumente uf EconStor dürfen zu eigenen wissenschftlichen Zwecken und zum Privtgebruch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich usstellen, öffentlich zugänglich mchen, vertreiben oder nderweitig nutzen. Sofern die Verfsser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt hben sollten, gelten bweichend von diesen Nutzungsbedingungen die in der dort gennnten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor my be sved nd copied for your personl nd scholrly purposes. You re not to copy documents for public or commercil purposes, to exhibit the documents publicly, to mke them publicly vilble on the internet, or to distribute or otherwise use the documents in public. If the documents hve been mde vilble under n Open Content Licence (especilly Cretive Commons Licences), you my exercise further usge rights s specified in the indicted licence. zbw Leibniz-Informtionszentrum Wirtschft Leibniz Informtion Centre for Economics

2 Konrd Lmmers* How Will the Enlrgement Affect the Old Members of the Europen Union? The recent enlrgement of the Europen Union by ten countries hs chnged the frmework for economic ctivities in Europe. This rticle sheds some light on the resulting mcro effects on the old member sttes nd discusses the distribution effects both between the incumbent countries nd within these countries s well s the respective djustment requirements. In conclusion rough ssessment is mde of the future growth performnce of the enlrged EU. The enlrgement on 1 My 2004 is the fourth time the EU hs dmitted new members since it ws founded s the Europen Economic Community in No previous enlrgement hs tken in s mny countries t once. The number of member countries incresed by two thirds (Tble 1). Also, no previous enlrgement hs dmitted new countries so different in economic terms from the existing EU members. Per cpit income in the new member countries, mesured t current exchnge rtes s well s in purchsing power prities, is fr below the EU-15 verge (Figure 1). The ccession of the reltively poor new member countries lowers per cpit income (t current exchnge rtes) in the enlrged EU by 13 %. Most of the ccession countries re smll with the exception of Polnd nd they re not very densely populted. As result, estern enlrgement increses the popultion of the EU by only 20 % nd its re by 25 %. Since the new member sttes re much poorer thn the verge of the EU-15, their contribution to the economic output of the EU is significntly smller. Totl GDP increses by less thn 5 % (mesured t current exchnge rtes). The GNP of Polnd, the lrgest ccession country, is equivlent to tht of the smll old EU country Denmrk. In terms of GNP, ll other new member countries re less importnt thn Irelnd, the smllest old member country besides Luxembourg (Figure 2). At the moment of enlrgement, the * Hed of the Deprtment Europen Integrtion, Hmburg Institute of Interntionl Economics (HWWA), Germny. 132 economic importnce of the new member countries will be roughly equivlent to tht of the Netherlnds or some of the Germn Länder, e.g. North Rhine-Westphli or Bvri. Given the reltively minor economic importnce of the ccession countries compred to tht of the EU-15, it might be concluded tht the effects of enlrgement on the old members will be very limited. However, this could be misleding conclusion for severl resons. Firstly, it is very probble tht the reltive economic importnce of old nd new member countries will chnge. The new member countries re lredy undergoing ctching-up process. For the lst couple of yers the growth performnce of the cceding countries hs been much better thn tht of the EU-15. Especilly lrge differences exist between the old continentl member sttes Frnce, Germny nd Itly on the one hnd nd the new Bltic member sttes Estoni, Ltvi nd Lithuni on the other hnd (Tble 2). Secondly, the dynmics of the ctching-up process in the new member countries, which is driven by mrket-oriented reforms nd which involves the introduction of efficient tx regimes nd socil security systems, together with the low cost of lbour in these countries, will possibly plce competitive pressure on the economies of the old member sttes with frreching djustment requirements. Thirdly, the competitive pressure might be incresed by immigrnts from ccession countries, bove ll into Germny nd Austri, nd could necessitte djustments to the wel-

3 Tble 1 EU Enlrgements Increse (%) in GDP per cpit of number of re popultion countries cceding sttes EU=100 b 1st enlrgement 1973 (Denmrk, Irelnd, United Kingdom) nd enlrgement 1981/86 (Greece, Portugl, Spin) rd enlrgement 1995 (Austri, Finlnd, Sweden) th enlrgement 2004 (Cyprus, Czech Republic, Estoni, Hungry, Ltvi, Lithuni, Mlt, Polnd, Slovki, Sloveni) Current exchnge rtes. b GDP per cpit of incumbent sttes t the moment of enlrgement. Sources: Eurostt (severl yers); Deutsche Bnk Reserch: Die deutsche Buwirtschft im Zuge der EU-Osterweiterung, Sonderbericht, 11 October 2002, Frnkfurt m Min; own clcultions. fre stte. Fourthly, the politicl power which the new member countries will bring into the decision-mking process of the EU is fr lrger thn their present economic significnce. Fifthly, the huge difference in per cpit income between the ccession countries nd the EU-15 in combintion with the power of the new member sttes in the EU s decision-mking processes could led to considerble redistribution conflicts between the old nd the new member sttes. In order to shed more light on the relevnce of these rguments Figure 1 GDP per cpit in Acceding Countries, EU-15 = 100, 2003 Cyprus Czech Republic Estoni Hungry Ltvi Lithuni Mlt Polnd Slovki Sloveni t current exchnge rtes forecst. Source: Eurostt in purchsing power prities Tble 2 Economic Growth (Increse in GDP) in EU-15 nd Accession Countries, b c EU Frnce, Germny, Itly Others Accession Countries Bltic Sttes,d Others Weighted by GDP in 2000; b forecst; c verge of yerly growth rtes; d Estoni, Ltvi, Lithuni. Sources: IMF (severl yers); Arbeitsgemeinschft deutscher wirtschftswissenschftlicher Forschungsinstitute e.v. (severl yers); own clcultions. we hve to sk which institutionl chnges hve tken plce on My 1. Institutionl Chnges Cused by Enlrgement It is often rgued tht the countries becoming member sttes of the EU re lredy highly integrted into western Europe. Severl pre-ccession greements hve lredy been in force prtly since the erly 1990s, nd these greements hve led to intensive trde nd direct investment reltions between ccession countries nd the EU-15 before enlrgement. This is true. Nevertheless, 1 My 2004 brought bout institutionl chnges ltering the environment for economic ctivities. In order to ssess the economic effects of estern enlrgement, the following issues re relevnt: Customs Union: The ccession countries will become members of the EU customs union. Any existing triffs between old nd new member countries will be completely bolished. However, with the exception of griculturl nd other sensitive products, triffs between old nd new members hve lredy been bolished in the course of the vrious pre-ccession greements mentioned bove. Furthermore, the externl triff of the EU hs to be pplied to new members imports from third countries nd the new members hve to trnsfer competence in trde issues with third countries to the EU. Internl Mrket: The internl mrket will be extended to the new member sttes. This mens tht the four so-clled principle freedoms will come into force in the enlrged EU, i.e. the free movement of people, goods, services nd cpitl. Internl mrket rules should ensure tht trde flows s well s crossborder movements of cpitl nd lbour re not 133

4 Figure 2 Gross Ntionl Product of the Enlrged EU Shres of the Member Countries in % Germny United Kingdom Frnce Itly Spin Netherlnds Belgium Sweden Austri Denmrk Polnd Greece Finlnd Portugl Irelnd Czech Republic Hungry Slovki Sloveni Luxembourg Ltvi Estoni Lithuni Cyprus Mlt less thn 0.1% Source: Europen Commission impeded nd tht firms nd citizens will be ble to settle in ny country of the enlrged EU. Border controls hve to be bolished. However, importnt exceptions will be in force for severl yers. As long s the new members cnnot gurntee the protection of the new EU borders with third countries ccording to the Schengen stndrd persons will be controlled when pssing border between old nd new members. Furthermore, the old member countries hve the possibility to restrict immigrtion from the new ones for up to seven yers nd, with the exception of Irelnd nd the United Kingdom, ll of them will mke use of this option. On the other hnd, the buying of griculturl lnd nd forests in some of the new member countries by citizens of other member sttes will be limited for the time being Acquis communutire: The Acquis hs to be pplied fully with some exceptions for limited period in the new member sttes. It contins ll the regultions which hve been implemented in the EU from its beginning. The underlying philosophy of the EU is tht the ppliction of the Acquis is the precondition for functioning internl mrket. It ims to ensure equl economic conditions for ll economic gents cross the entire EU with regrd to socil nd environmentl issues s well s the sfegurding of helth cre. EU Budget: The new member countries will be included in the EU budget system. On the one hnd, they ech hve to contribute to the budget (under the current rules every member stte hs to py up to 1.25 % of its GDP). On the other hnd, they will receive finncil resources out of this budget. Due to their low GDP, their finncil contribution will be smll. Since they re poor, however, nd since griculture is still of fr more importnce thn in the old member sttes, the ccession countries will drw significnt sums out of the EU budget. As result, the new member sttes will become net receivers, nd enlrgement will crete direct budgetry costs for the old member sttes. Decision-mking: The new member sttes re included in the institutions which re relevnt for mking decisions within the EU, nmely the Europen Council nd the Europen Prliment. The number of sets (Europen Prliment) nd votes (Europen Council) for every country s well s the voting procedure for reching decisions by qulified mjorities re lid down in the Trety of Nice, greed upon in December In the mentime, the drft Trety estblishing Constitution for Europe drwn up by the Europen Convention is on the tble, including new decision-mking rules. The drft ws hevily opposed by Polnd nd Spin becuse their voting power in the Europen Council compred to tht of the lrge member countries would be weker thn under the Trety of Nice (Tble 3). Now, fter the election of new prliment in Spin on 14 Mrch 2004 with the consequence of chnge of government, it seems tht both countries re redy to give up their rigorous opposition. As long s no greement hs been reched upon Europen Constitution, post-enlrgement decisions will be tken in ccordnce with the Trety of Nice. Europen Monetry Union (EMU): The enlrgement of the EU on 1 My does not include membership of the ccession countries in the EMU t this point in time. The ccession countries hve to go through

5 Tble 3 Voting Power in the Europen Council in the Enlrged EU by Country (in %, EU-25 = 100) ccording to the Trety of Nice (fter 1 Nov. 2004) vrious stges, comprble to those the present members of the euro re hd to pss before they joined the EMU. At the end of this process, the countries will be evluted in the light of the convergence criteri lid down in the Trety of Mstricht. As things re, the first new member countries will join the EMU in 2007 t the erliest. Mcro Effects In recent yers, number of studies hve been undertken in order to ssess the impct of enlrgement on the old member sttes. Most of these studies indicte the effects in terms of chnges in the GDP of the country under considertion (or tht of the EU) fter severl yers of enlrgement compred with hypotheticl sitution without enlrgement. Only some studies explicitly choose welfre focus. 1 The ccording to the proposl for Europen Constitution Germny United Kingdom Frnce Itly Spin Polnd Netherlnds Greece Czech Republic Belgium Hungry Portugl Sweden Austri Slovki Denmrk Finlnd Irelnd Lithuni Ltvi Sloveni Estoni Cyprus Luxembourg Mlt EU Source: T. Fischer, A. Metz: Mit Nizz m Abgrund?, Reform- Spotlight 1, CAP, E.g. W. Kohler: Estern Enlrgement of the EU: A Comprehensive Welfre Assessment, HWWA Discussion Pper, No. 260, Hmburg 2004; nd H. D icke, F. Foders: Wirtschftliche Auswirkungen einer EU-Erweiterung uf die Mitgliedsstten, Kieler Studien, No. 309, Tübingen 2000, Mohr Siebeck. Authors Tble 4 Effects of Enlrgement Results of Severl Studies Increse in GDP in EU-15 (%) Increse in GDP in ccession countries (%) Brown-Derdorff-Djnkov-Stern c Bldwin-Frncois-Portes d Neck-Hber-McKibbin e Lejour-de Mooij-Nhuis f EU-Commission b g Breuss b h Kohler Computed generl equilibrium models; b Mcroeconometric models; c Czech Republic, Hungry, Polnd; d Czech Republic, Hungry, Polnd, Slovki, Sloveni, Bulgri, Romni; e previously centrlly plnned economies of Centrl nd Estern Europe, excluding the countries of the former Soviet Union; f Czech Republic, Hungry, Polnd, Slovki, Sloveni, Bulgri, Romni; g Increse of the verge nnul growth rte of eight CEECs during the period ; h Czech Republic, Hungry, Polnd. Sources: D. Brown, A. Derdorff, S. Djnkow: An economic ssessment of the integrtion of Czechoslovki, Hungry, nd Polnd into the Europen Union, in: S. W. B lck (ed.): Europe s economy looks est Implictions for Germny nd the Europen Union, Cmbridge 1997; R. B ldwin, J. Frncois, R. Portes: The Costs nd Benefits of Estern Enlrgement: The Impct on the EU nd Centrl Europe, in: Economic Policy, No. 24, 1997, pp ; R. N eck, G. Hber, W. J. McKibbin: Mcroeconomic Impcts of n EU Membership of Centrl nd Estern Europen Economies, Ludwig Boltzmnn Institut, Forschungsbericht, No. 9917, Vienn, October 1999; A. L ejour, R. de Mooij, R. Nhuis: EU enlrgement: Economic implictions for countries nd industries, CPB Document, No. 011, The Hgue 2001; Europen Communities, Directorte Generl for Economic nd Finncil Affirs: The economic impct of enlrgement, Enlrgement pper No. 4, Brussels 2001; W. Kohler: Estern Enlrgement of the EU: A Comprehensive Welfre Assessment, HWWA Discussion Pper, No. 260, Hmburg 2004; F. Breuss: Mcroeconomic effects of EU enlrgement for old nd new members, Working Ppers, No. 143, Vienn 2001; F. B r euss: Benefits nd Dngers of EU Enlrgement, in: Empiric, No. 29, 2002, pp ; F. B r euss: EU-Osterweiterung: Ein Wchstumsimpuls für den gesmten Wirtschftsrum?, in: R. C esr, K. Lmmers, H.-E. Schrrer (eds.): Eine Zwischenbilnz der Lissbon-Strtegie, HWWA-Studies, (forthcoming in 2004); own grouping nd ddendum. ssessment of the enlrgement impct is bsed either on computble generl equilibrium models (CGEmodels) or on mcro models. 2 As fr s the chnnels re concerned through which the chnged institutionl environment ffects the economies the following, principlly, hve to be tken into ccount: sttic gins from trde nd dynmic effects of trde integrtion sttic nd dynmic gins of integrtion through cpitl flows nd cross-border migrtion costs of structurl chnge, especilly on the lbour mrkets 2 In CGE-models the numericl vlues re set by plusible ssumptions. Mcro-models re bsed on equtions estimted econometriclly. 135

6 effects of the redistribution of resources by EU policies, especilly with regrd to the common griculturl policy s well s the cohesion nd structurl funds. Only few of the existing empiricl studies consider ll the bove-mentioned effects simultneously nd most of them hve certin shortcomings. Nevertheless, these studies provide vluble informtion nd the results re surprisingly consistent. They cn be summrised s follows (see lso Tble 4). The economic impct of enlrgement on the old member countries is reltively smll. Most of the studies ssess ccumulted income gins in the rnge of % of the GDP of the EU-15 fter severl yers of enlrgement. The rte of growth will not be stimulted on sustinble bsis. In bsolute terms, this would men n income gin of between 16 nd 23 billion for the whole re of the EU-15. The clculted welfre gins re lso in the rnge of % of GDP. 3 The gins re the result of sttic nd dynmic effects of trde s well s of fctor mobility. Attention hs to be pid to the fct tht income gins 4 s well s welfre gins 5 will be relised even though these studies tke into ccount the trnsfer pyments which the old member sttes hve to shoulder. The new member countries benefit from enlrgement much more thn the old ones. Most studies clculte income gins to be t lest ten times higher. These gins re the result of ssumed nd expected trnsfers, s well s tht of n intensified integrtion of mrkets. In detil, they consist of both sttic nd dynmic trde effects with regrd to goods nd services s well s sttic nd dynmic effects resulting from incresed inflows of foreign direct investment. 6 With regrd to these results, some explntory notes nd reservtions hve to be mde. Some of the studies do not distinguish between integrtion effects before nd fter the legl EU membership of the ccession countries. Actully, mjor prts of the clculted 3 Welfre gins should not be equted with income or growth effects. Income or growth effects ignore foregone consumption for ccumultion s well s investment in the stedy stte solution. 4 See F. B r e u s s : EU-Osterweiterung: Ein Wchstumsimpuls für den gesmten Wirtschftsrum?, in: R. C esr, K. Lmmers, H.-E. Schrrer (eds.): Eine Zwischenbilnz der Lissbon-Strtegie, HWWA-Studies, (forthcoming in 2004). 5 See W. Kohler, op. cit. 6 See F. Breuss, op. cit. 136 enlrgement effects do not pper fter 1 My 2004, but hve in fct lredy been relised before tht dte. As mentioned bove, the implementtion of severl greements hs ment tht trde between ccession nd incumbent countries s well s tht mong the ccession countries ws lredy liberlised to gret extent during the 1990s. The ccession countries hve lso removed the most severe obstcles to foreign direct investment. Trde flows with regrd to both their regionl orienttion nd their structurl composition nd direct investment reltions between estern nd western Europe lredy show expected ptterns tking into considertion differences in fctor endowment, per cpit income nd mrket potentil. Severl yers go trde ptterns lredy showed high similrity to those which hd existed before the Second World Wr. 7 Consequently, some uthors expect the old member sttes to experience very few further effects s fr s the goods, services nd cpitl mrkets re concerned. 8 Wht will certinly hve n impct on the old members, however, re the economic effects of politicl integrtion, which include the fct tht the ccession countries will receive significnt trnsfer pyments nd which for the old member sttes will imply loss of resources nd will thus result in negtive welfre effects. However, it is precisely the vilble clcultions regrding the effects of trnsfer pyments which involve considerble uncertinties. It is true, of course, tht the extent to which the new member countries would receive trnsfer pyments up to the end of 2006 ws estblished within the frmework of the Copenhgen ccession decisions of December Also, the ssessment tht the ccession countries will continue to be net receivers within the frmework of the EU budget beyond 2006 is very probbly correct. However, to wht extent this will be the cse, nd how the effects of resource deprivtion will be distributed mong the old member countries, will be the result of negotitions between the Europen Commission, the Europen Prliment nd bove ll the 25 member sttes. The EU s finncil plnning nd consequent budgetry effects on the individul member sttes require the pprovl of ll the countries. In Februry 2004, the 7 D. Pizolo: The Integrtion Process between Estern nd Western Europe, Kiel Studies No. 310, Berlin-Heidelberg 2001, Springer; P. Brenton, F. di Muro, M. Lücke: Economic Integrtion nd FDI: An Empiricl Anlysis of Foreign Investment in the EU nd in Centrl nd Estern Europe, in: Empiric, 1999, No. 26.2, pp E.g. H. Dicke, F. Foders, op. cit.

7 Figure 3 Net Beneficiries of nd Net Contributors to the EU Budget, 2002 (in % of GDP) Greece Portugl Irelnd Spin Finlnd Denmrk Belgium Austri Frnce United Kingdom Itly Germny Luxembourg Sweden Netherlnds Source: Europen Commission Europen Commission presented its finncil plnning proposls for the period , which provide for substntil increse in expenditures even in reltion to GDP. Some net donors Germny, Frnce, the United Kingdom, the Netherlnds, Austri nd Sweden hve lredy spoken out ginst the Commission s proposl. Others, the trditionl net beneficiries Spin, Greece nd Portugl nd of course the cceding countries, re in fvour of extending the budget s proposed by the Europen Commission (for contributions to the EU budget by country see Figure 3). Negotitions on the EU budget nd its relted fiscl effects on individul member countries will probbly continue into It is not improbble tht decision on the budget nd relted trnsfer pyments will be linked to negotitions on the Europen Convention s drft Trety estblishing Constitution for Europe. The vilble clcultions prtly fil to tke into ccount the full costs of extending the cquis communutire to the ccession countries. Although the ccession countries hve been grnted whole rnge of trnsitionl rrngements regrding the ppliction of this set of EU rules, dopting the cquis communutire will nonetheless crete costs for economic ctivities in these countries nd so reduce the production cost dvntges they will otherwise enjoy. This in turn implies tht the djustment pressure on producers in the old member sttes brought bout by enlrgement will be lower. This is probbly n importnt reson why mnufcturers in the old member sttes demnded the full ccession of the estern Europen reform economies into the EU rther thn just their ssocition. 9 In ny cse, the ppliction of the cquis in the ccession countries prevents wht would otherwise be possibly stronger increse in GDP. From this point of view, enlrgement is less fvourble for the ccession countries thn sitution in which they re merely ssocited with the EU economic re. 10 These comments on the results of vilble empiricl studies hve no mteril effect on the generl finding tht the effects of enlrgement on the existing EU seen in its entirety re smll. On the contrry, both the justified postultion tht mny of the expected effects hve tken plce before My 1 nd the indisputble fct regrding the dditionl costs with which producers in the new member sttes re fced fter My 1 seem to indicte tht the effects on the economic re of the existing EU will be even less substntil. However, these ssessments re only true for the old member sttes s whole. On the other hnd, enlrgement entils considerble djustment costs tht re extremely uneqully distributed mong the old member sttes nd, within these sttes, re uneqully distributed mong the vrious sectors of the economy, regions, production fctors nd individul people. These distribution effects hrbour considerble conflict potentil with n uncertin end s fr s economic policy rections to these effects re concerned. Distributionl Effects: Benefits nd Losses by Countries According to the vilble studies, Germny nd Austri nd, to significntly lesser extent, Finlnd cn chieve reltively strong welfre improvements nd income gins (Figures 4 nd 5). 11 These re the countries directly bordering on the ccession countries or which re closest to them. On the one hnd, these income gins nd welfre improvements re the result of trde effects nd on the other hnd prticulrly s fr s Austri nd Germny re concerned re due to potentil immigrtion from the ccession countries. 9 This is demonstrted for exmple by sttement issued by the Bundesverbnd der Deutschen Industrie (BDI): Only if there re relistic prospects of swift nd complete implementtion of the cquis will the ccession of the reform economies be possible without serious distortions of competition nd encumbrnces on the economy on both sides (BDI 1997 cited in H. D icke, F. Foders, op. cit., p. 137; uthor s trnsltion). 10 H. Dicke, F. Foders, op. cit.; see lso: H. G brisch: Osterweiterung der EU: Mehr Relismus ist notwendig, in: Wirtschft im Wndel, No.13, 1998, pp See F. Breuss, op. cit.; W. K ohler, op. cit.; Europen Communities: The economic impct of enlrgement, Enlrgement Pper No. 4, Brussels According to Breuss this list lso includes Itly. 137

8 Figure 4 Welfre Effects of Enlrgement for EU-15 Countries 1 Figure 5 Income Effects of Enlrgement for Thirteen EU Countries 1 2,5 2,0 1,5 1,0 0,5 0,0-0,5-1,0-1,5-2,0 A G FIN SE DK NL LUX B UK F E GR IRE PT I 2,5 2,0 1,5 1,0 0,5 0,0-0,5-1,0-1,5-2,0 A G FIN SE DK NL LUX B UK F E GR IRE PT I trde budget migrtion low-skilled migrtion high-skilled totl effect trde budget migrtion low-skilled migrtion high-skilled totl effect 1 In % of GDP. Source: W. Kohler: Estern Enlrgement of the EU: A Comprehensive Welfre Assessment, HWWA Discussion Pper No. 260, Hmburg In % of GDP; Greece nd Luxembourg not included. Source: F. Breuss: EU-Osterweiterung: Ein Wchstumsimpuls für den gesmten Wirtschftsrum?, in: R. C esr, K. Lmmers, H.-E. S chrrer (eds.): eine Zwischenbilnz der Lissbon-Strtegie, HWWA-Studies, (forthcoming in 2004); own grphic representtion.. The lest significnt positive effects 12 or even considerble negtive effects 13 tke plce in countries tht re furthest from the economic region of the ccession countries, i.e. in Spin, Portugl, Greece nd Irelnd. 14 This is prtly due to redirected flows of foreign direct investments into the ccession countries, 15 nd prtly becuse of extremely smll positive trde effects nd bove ll the loss of trnsfer pyments from the EU budget Adjustment Pressure on the Low-skilled The estern enlrgement process nturlly hs different effects on individul industries within the existing EU. In the dvnced countries, the dditionl exports re concentrted on humn cpitl intensive industries. Import pressure in western Europe emnting from the ccession countries increse bove ll in lbour-intensive nd less technology-intensive industries. It should be borne in mind, however, tht in some cses the level of qulifiction mong workers in the ccession countries is high. The competitive dvntge of the ccession countries is minly bsed on their low lbour costs. Consequently, the estern 12 According to Europen Communities, op. cit. 13 According to F. B r euss, op. cit.; nd W. K ohler, op. cit. 14 According to Breuss Irelnd is not one of the countries with the lest significnt positive or considerble negtive effects. Irelnd experiences reltively strong income gins from the relistion of the internl mrket which more thn offsets the losses from trnsfer pyments. F. Breuss, op. cit. 15 According to F. B r euss, ibid. 16 According to W. K ohler, op. cit. enlrgement will bove ll result in n intensifiction of lbour cost competition in the old EU member sttes in more or less every brnch of the economy. The specifics of enlrgement (completion of the internl mrket with its four principle freedoms) s well s the geogrphicl proximity of the ccession countries to western Europe men tht incresing lbour cost competition will not be limited to mnufcturing industry nd trdble goods, but will lso impct the construction industry nd number of services. Incresing pressure on lbour costs is not only the result of more imports. A further contribution is lso mde by direct investments crried out in the ccession countries with the intention of tking dvntge of low-wge loctions in estern Europe. It is true, of course, tht direct investments re mde in the ccession countries not only for cost resons, but lso in order to develop regionl mrkets there. Moreover, ny dditionl potentil for cost-oriented direct investments ppers limited, becuse producers from western Europe hve lredy exploited this potentil to lrge extent prior to ccession. Even so, the competitive pressure on jobs nd wges in the old member sttes generted by the reltively simple option of further cost-oriented direct investments is considerble. Reloctions of this kind re reltively simple due to the short geogrphicl distnces nd minor culturl differences involved. This competitive pressure is exerted on employees in mny industries, lso on those in which the dvnced EU-15 countries, in principle, hve competitive dvntges, such s cr mnufc-

9 Tble 5 Immigrtion from Accession Countries into EU-15 Results of Severl Studies Authors Number of immigrnts per yer over 15 yer period turing. 17 The Germn cr-mker Audi, for exmple, ws very quick to move its entire engine production to Hungry. The competitive pressure on workers is not only generted by incresing import competition nd lbour cost-induced direct investments, but lso through outsourcing wy from the old member sttes nd into the ccession countries. The extension of the Europen economic re offers idel conditions for the ppliction of tody s technicl possibilities to split up vlue-dded chins. In ddition, outsourcing is encourged by the geogrphicl nd culturl proximity of the estern Europen countries to western Europe, in prticulr to Austri nd Germny. Mny compnies, nd incresingly smll nd medium-sized firms, hve lredy tken the opportunity to relocte prts of their vlue chin outside the existing EU boundries. This is prticulrly true of lbour cost-intensive production processes. While lrge compnies cn lso chieve this gol by mens of direct investments, smll nd 17 J. Sptz, P. Nunnenkmp: Globlisierung der Automobilindustrie: Wettbewerbsdruck, Arbeitsmrkteffekte und Anpssungsrektionen, Kiel Studies, No. 317, Berlin Heidelberg 2002, Springer. Totl number of immigrnts fter 15 yers Immigrnts in per cent of popultion in EU-15 b Buer/Zimmermnn 135, , million Boeri/Brücker Sinn et l. 200,000 t the beginning; decresing over time beyond 50, ,000 t the beginning; decresing over time to 125, million million 0.9 Strubhr 74, , million 0.6 Without Cyprus nd M lt; b including those immigrnts who were lredy living in EU-15 before enlrgement. Sources: Deutsche Bnk Reserch: Die deutsche Buwirtschft im Zuge der EU-Osterweiterung, Sonderbericht, 11 October 2002, Frnkfurt m Min; T. B uer, K. F. Zimmermnn: Assessment of possible migrtion pressure nd its lbour mrket impct following EU enlrgement to Centrl nd Estern Europe, Study for the UK deprtment for Eduction nd Employment, IZA (Bonn), London (CEPR) 1999; T. Boeri, H. Brücker: The Impct of Estern Enlrgement on Employment nd Lbour Mrkets in the EU Member Sttes, Europäische Kommission, GD Employment nd Socil Affirs, Brussels 2001; H.-W. Sinn et l.: EU-Erweiterung und Arbeitskräfteemigrtion, ifo Beiträge zur Wirtschftsforschung, Munich 2001; T. S trubhr: Ost-West-Migrtionspotenzil: Wie groß ist es?, in: Jhrbücher für Ntionlökonomie und Sttistik, Stuttgrt 2001, pp. 2241; own ddendum. medium-sized firms prefer to enter into coopertion greements with mnufcturers in the ccession countries. Primrily, lbour cost-intensive intermedite products re first outsourced nd subsequently procured. In this wy it is possible for compnies in the existing EU countries to mintin or to improve their competitiveness. The profits of these compnies increse; the procurement of intermedite products from brod genertes corresponding loss of vlue dded cretion t home, which is suffered in the min by suppliers of lbour. Trditionl import competition, lbour cost orientted FDIs, nd outsourcing ll work in the sme direction: they put pressure on workers wges nd jobs in the old member sttes, prticulrly where qulifictions re low. This pressure would further increse if the free movement of people between the ccession countries nd the existing EU were to be dmitted s of 1 My Studies on potentil migrtion from the estern Europen ccession countries come to the conclusion tht within period of 15 yers, (net) influx of migrnts mounting to 0.5 to 0.9 % of the EU- 15 popultion cn be expected (see Tble 5). This influx does not pper ll tht lrge. However, becuse the competitive pressure on the lbour mrket for low-qulified workers in the existing EU is lredy considered to be very high, nd becuse migrtion would hve been concentrted on certin countries, the old member sttes hve been grnted the right to limit immigrtion from estern Europe for up to mximum of seven yers. This limittion hs been introduced despite the fct tht, s one of the four principle freedoms, the free movement of people is one of the constituent elements of the internl mrket. The instigtors of this trnsitionl rrngement were Austri nd Germny, the two countries tht would be fced with the lrgest inflows of migrnts. With the exception of the United Kingdom nd Irelnd, ll the old member sttes will mke use of the option to limit immigrtion. 18 By limiting immigrtion, the old member sttes re relinquishing some of the potentil welfre benefits nd income gins of the EU enlrgement. For Austri nd Germny in prticulr, immigrtion would, ccording to the studies cited bove, hve been n importnt mens of gining welfre nd income benefits from the enlrgement. 18 Workers from the ccession countries re llowed, initilly, to migrte freely to Irelnd nd the United Kingdom. However, the British government hs nnounced tht it will introduce restrictions should the lbour mrket come under pressure. 139

10 140 The Europen Welfre Stte under Pressure It is doubtful whether the migrtion potentil from estern Europe will hve decresed significntly fter the seven-yer trnsitionl period. Even if the ccession countries continue to ctch up significntly in terms of wges nd living stndrds, the income differentil between western nd estern Europe will still be lrge. Thus, immigrtion limittion will not substntilly remove pressure on wges nd jobs, but will merely hve delying influence. Moreover, given tht competitive pressure exists nywy s result of incresing imports, lbour cost induced FDIs nd outsourcing, extensive djustment mesures will be necessry in the old member sttes. These involve bove ll lbour mrket flexibility, wge settlement procedures nd the socil security systems in s fr s they set minimum wge stndrds. In order to prevent lrge number of workers losing their jobs, mrketoriented wges nd improved incentives to tke on work re required. Income security in cses of need should not thwrt incentives to tke up pid employment in the mrket. This clls the trditionl socil stte in some member countries into question. The lrge continentl Europen countries, Germny, Itly nd Frnce in prticulr, hve problems in this respect. Yet it is precisely in Germny becuse of its proximity to the ccession economies tht the need for djusting the welfre stte is prticulrly pressing. If the necessry policy djustments do not tke plce, then not even the reltively smll welfre gins tht cn be expected ccording to the bove-mentioned studies will mterilise. The discussion on immigrtion from the ccession countries hs lso thrown up questions from nother ngle regrding the future of the socil stte in its continentl Europen form. Immigrtion from the ccession countries does not or does not exclusively tke plce becuse migrnts cn ern higher incomes here tht exceed the costs of migrtion. In fct, the redistribution of welth s prctised by the welfre stte in itself is n incentive to migrte. Since socil services nd lso the free use of public infrstructures is, in some of the existing member sttes t lest, of fr higher stndrd thn in the ccession countries, migrtion is encourged not only by mrket-oriented incentives, but lso by stte-induced enticements. In extreme cses the incentive to mke use of these services is in itself sufficient to induce migrtion, even if there is no prospect of erning higher lbour income thn in the home country. This potentil migrtion plces pressure on the socil stte in those countries of the existing EU chrcterised by extensive redistribution systems. For this reson, the trditionl welfre stte in its western Europen form is considered by some to be incomptible with free workers migrtion in n extended Europe to the extent tht immigrnts re given immedite ccess to the full rnge of stte services nd benefits in the destintion country. If immigrtion is not limited, or if immigrnts re not excluded t lest for certin time from stte services nd benefits, then the socil stte in Europe will not be ble to survive. 19 The United Sttes is cited s evidence for this theory: within the USA, the free movement of people nd unlimited clims on stte services by immigrnts re gurnteed in every federl stte. Since ech federl stte decides by itself to lrge extent which services re provided, so the rgument goes, it would hve been impossible for welfre stte to develop long the lines of those found in western Europen countries. It is reltively unlikely, however, tht the Europen welfre stte would indeed come to n end without restriction on the free movement of people or limittion of ccess to stte services nd benefits for immigrnts in n extended Union. If this theory were correct, then such development should lredy hve tken plce in the existing EU prior to enlrgement. Compred to the USA, the willingness to migrte within Europe is reltively low; this is presumbly due to considerble degree to lnguge brriers. Nonetheless it is true tht the enlrgement of the EU, vi potentil immigrtion together with n increse in import competition, FDI outflows nd outsourcing, will exercise pressure to trim down the welfre stte. Especilly old member sttes with extensive redistribution mechnisms nd superior socil stndrds will be forced to dismntle these t lest in prt. The lterntive solution would be to hrmonise redistribution systems nd socil stndrds cross the whole of Europe or to centrlise them t the EU level. As fr s socil stndrds re concerned, the EU lredy hs the cpcity lthough very limited since the Mstricht Trety (1992), to decide on certin socil stndrds with qulified mjority. Moreover, it hs lredy mde use of this cpcity. 20 The Europen Convention s drft Trety estblishing Constitution for Europe provides for n extension of this cpc- 19 H.-W. Sinn et l.: EU-Erweiterung und Arbeitskräfteemigrtion, ifo Beiträge zur Wirtschftsforschung, Munich R. Vubel: Politicl Integrtion with Mjority Decision: Lessons from the History of Hmburg, the United Sttes nd the Europen Union, pper presented t the regionl meeting of the Mont Pelerin Society, Hmburg, April 2004.

11 Tble 6 The New Finncil EU Frmework Commitment Appropritions Proposl by the EU Commission (in per cent of totl) Competitiveness for growth nd employment Cohesion for growth nd employment Preservtion nd mngement of nturl resources Agriculture: mrket relted expenditure nd direct pyments Citizenship, freedom, security, justice The EU s globl prtner Administrtion Compenstions Totl ( million t 2004 prices) 120, , , ,450 without griculture. Source: Commission of the Europen Communities: Communiction from the Commission to the Council nd the Europen Prliment, Informtion Note Common Finncil Frmework for the Accession Negotitions, Brussels 2004; own clcultions. ity, e.g. regrding protection ginst dismissl from employment. Even though the Convention s drft recognises the member sttes uthority to define the fundmentl principles of their socil security systems, it nonetheless opens up the possibility of hrmonistion s long s the finncil equilibrium of these systems is not significntly disturbed. There will certinly be ttempts mde by those groups in society tht stnd to suffer s result of chnges in the socil stte nd by their politicl representtives to escpe djustment pressures in this wy. Should this pth be tken, however, then the EU would relinquish ll the welfre improvements tht re in principle possible s result of the enlrgement. Conclusion nd Outlook According to vilble empiricl ssessments, ny direct boost to economic growth in the western Europen economic region brought bout by the enlrgement of the EU on 1 My 2004 is only minor nd temporry. However, it will intensify distribution conflicts mong the existing member sttes nd, in prticulr, plce considerble djustment pressure on wges nd jobs mong low-qulified workers. Furthermore, it will necessitte djustments in those member countries with extensive socil services nd welfre benefits. The djustment process will be prticulrly perceptible in countries close to estern Europe. It is up to the politicins in the member sttes to initite the necessry steps. There re considerble differences between the member sttes in their willingness to mke djustments. The three lrge continentl Europen countries of Germny, Frnce nd Itly hve substntil problems in implementing the necessry reforms. Filure to chieve fr-reching reforms in these countries would cll the expected positive effects, which re lredy modest, into question. A similr effect would be chieved by ny steps tken towrds pn-europen hrmonistion of socil policy. As fr s the new member sttes re concerned, enlrgement will fford n dditionl boost to their lredy dynmic ctching-up process. However, the economic momentum of the ccession countries will not be enough to generte perceptible increse in the growth rte of the EU s whole. The new member sttes re economiclly still too insignificnt for their in some cses very good growth performnce to mke significnt impct on the EU s economic growth sttistics. Nor cn EU policies be expected to boost growth in the enlrged Europen economic region. While the Europen Commission plns to strongly increse EU expenditures for competitiveness, growth nd employment in the next budget period, it is doubtful whether these mesures will ctully encourge economic growth. Moreover, the lrgest shres of expenditures re still ermrked for griculture nd cohesion policy (Tble 6). The ltter is imed t promoting regions with development deficits, irrespective of whether or not these regions contribute to the competitiveness of the EU s whole. Even in 2013, ccording to current plns, two thirds of the EU budget will thus continue to be pumped into res tht promise no stimulus to economic growth. There is no bsis for the optimism tht post-enlrgement EU expenditure will be gered more closely to efficiency criteri nd be less driven by ntionl nd sectorl distribution interests. Since the beginning of the 1980s, economic growth in the EU hs remined behind tht of the USA. Enlrgement on 1 My 2004 will do little to chnge this sitution. Neither enlrgement nor ny other foresee ble EU policy inititives will fford Europe n economic boost tht could help it ctch up with the momentum of the US economy for ny significnt length of time. Wht would be needed insted re frreching institutionl reforms to stimulte economic ctivity by the member countries, especilly by the lrge continentl ones. 141