© Economics Department, King’s School, Chester Enlargement of the EU: investigating the issues

© Economics Department, King’s School, Chester December 2002: A ‘New’ Europe  Ten new members of the EU from May 2004  Eight of these are from Central and Eastern Europe  Poland, Hungary, the Czech Republic, Slovenia, Slovakia, Estonian, Latvia and Lithunia  The route to membership has been long and frustrating  early hopes have been continually postponed  costs of meeting Copenhagen Criteria have been high  much hard work but only the promise of a return  Europe Agreements somewhat one-sided

© Economics Department, King’s School, Chester Of particular interest...  How do these new members compare with the current EU15?  What benefits are CEE economies likely to gain from EU membership?  What are the costs for CEE economies of EU membership?  What does the current EU15 stand to gain?  What threats might they pose for the current EU15?

© Economics Department, King’s School, Chester Comparing ‘new’ and ‘old’  Data sources:      Health warning  mass of statistics  multiplicity of sources  keep it simple!

© Economics Department, King’s School, Chester Some basic data

© Economics Department, King’s School, Chester How do they compare?  Low living standards  GDP per head, US$, PPP  Slovakia’s GDP per head –50% of that in Greece (EU15 poorest) –<30% of that in Ireland  Solid economic growth  Inflation rates generally higher  Significantly higher unemployment in some countries  Budget deficits well above SGP limit (3% GDP)  High government expenditure as % GDO  Lower unit labour costs

© Economics Department, King’s School, Chester Benefits for all...  Economic theory predicts benefits in terms of a larger market and economic integration  100 million extra consumers, bringing total to 455 million  static and dynamic efficiency gains from trade  economies of scale  greater competition  more product and process innovation  increased levels of cross border investment  Higher GDP, increased rate of growth, lower inflation, lower unemployment …  apply simple AD / AS analysis to these issues

© Economics Department, King’s School, Chester The benefits explained... Price level Real GDP Labour AD 0 LRAS 0 Employment AD 1 LRAS 1

© Economics Department, King’s School, Chester No such thing as a free lunch...  For CEE firms the benefits are not universal  competition brings with it a need to restructure  benefits only possible where comparative advantage exists  low labour costs are no guarantee of success  productive inefficiencies will be exposed  risk of structural and technological unemployment  For EU15 firms there are risks too  especially in low-tech, labour intensive industries  loss of FDI  need to increase knowledge and skills base to compete

© Economics Department, King’s School, Chester Labour market concerns  CEE economies need to  increase labour supply  increase employment rates  encourage greater labour market flexibility  increase skill levels  Fears of mass migration probably emotional rather than economic  EU15 is actually short of labour  immigration not necessarily undesirable  impact on the EU15 labour market  impact on EU15 AS

© Economics Department, King’s School, Chester The issue of agriculture  Three main features of EU15 CAP  price support  direct payments  rural development  Importance of agriculture in CEE economies  27% of Polish population engaged in agriculture  Cost of extending CAP  CAP currently 45% of EU budget = €40.5 billion  additional expenditure significant –2004 = extra €9.9 billion –2006 = extra €14.9 billion

© Economics Department, King’s School, Chester Conclusions  Enlargement raises important economic issues  it could weaken economic coherence  there will be big pressures on the EU budget  there are unresolved questions regarding agriculture and regional policies  pace of economic integration could be threatened within current EU  The potential benefits could, however, be significant  equivalent to a second harvest  especially for the CEE economies  As with all EU projects, enlargement is as much political as it is economic  ‘Old Europe’ and ‘New Europe’