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Economic overviews

[Trends and indicators] [Introduction and progress] [Whats expected medium-long term]

What should be expected in the medium-long term?

The 2004 enlargement is the most ambitious project that the European Union has ever undertaken. However, it must be borne in mind that enlargement does not start in May 2004. It is a long process that has already started with a huge number of measures and reforms. Those measures encompass a wide range of actions, from budgetary to environmental, and many results have already become visual and measurable.

Studies agree that the overall impact of enlargement will be positive in the long run, although this does not necessarily hold for all sectors, regions and types of enterprises, especially during the initial phase of integrating new members into the EU.

Economic effects:

There are plenty of economic analyses stressing that the benefits of enlargement outweigh the costs. Although the benefits are greater for the accession countries, because they start from a lower economic base (their economies represent only about 6% of the GDP of the EU-15), there are gains for both sides. The macroeconomic consequences of enlargement for the EU will be modest, but positive. Several simulations suggest that it will add about 0.2% to overall GDP growth. The economic environment for SMEs will improve, therefore, but the impact may not be dramatic. In this sense, competition is the key to realising the growth potential of enlargement. This necessarily means that the adjustment to the new integrated area and the new division of labour will bring winners as well as losers.

Budgetary reform:

Budgetary reform is considered one of the most challenging aspects of this enlargement. It has been estimated that in the enlarged EU there will be a doubling of the income gaps between the richest and poorest countries and regions. Given their lower level of development, the new member states will be beneficiaries from the EU budget. However, enlargement will not lead to unmanageable financial burdens. The EU budget is capped at 1.27% of its GDP, and that will be difficult to modify, as it requires a unanimous decision by Member States. Amounts have also been set aside for spending (particularly on structural and agricultural policy) after the new members join, to help their economic development.

In short, EU financial planning for 2000 to 2006, adopted by the Berlin European Council in March 1999, includes €22 billion devoted to 'pre-accession assistance' for infrastructure and institution-building (PHARE), environmental and transport infrastructure (ISPA), rural development (SAPARD) in the applicant countries, and post-accession aid in the period to 2006. Nevertheless, it has to be considered that these budgetary changes will be offset by the general economic benefits of the expansion of the Single Market to almost 500 million people. This will also be accompanied by substantial gains in terms of security and stability across the continent, which in turn is expected to bring greater prosperity.

Labour markets and immigration issues:

Potential inflows of workers from the new members after accession are one of the most sensitive issues in the enlargement process. A series of studies of likely immigration from Central and Eastern Europe suggests that it will be on a limited scale, and mostly confined to regions bordering the new member states. The more economic growth is secured in those countries, the less attractive it will be for workers to seek employment in the other EU member states.

In the present EU, only 2% of the population live and work in a country other than their home country. In the opinion of Tito Boeri and Herbert Brucker [1],  people are reluctant to leave their home country, family and friends unless they have special reasons or are forced by circumstances. The crucial factors are individual prospects, political stability and the outlook for economic growth and better living conditions in the home country. Moreover, the demographic trends in many EU countries, where society is ageing and there is a need for skilled labour in certain sectors, will make free movement of workers increasingly desirable in the future to ensure that the economy continues to perform well.

However, abolition of all controls on persons at the 'internal borders' between existing member states and new members is a further step, which will require a subsequent decision by the EU Council of Ministers. It will not take place at the time of enlargement. The EU has established a set of conditions for membership that new member states must fulfil. They include the requirement that each new member must implement and enforce EU law, which includes key areas of social policy such as limits on working time, minimum standards of safety in the workplace, gender equality and other measures to combat discrimination. In this sense, the risk of ‘social dumping’ will be avoided.

Sectoral issues:

There are both opportunity and risk sectors. In manufacturing, both types of sectors overlap to a large extent when looking at broad industrial classifications. Going more into detail, risk sectors are characterised above all by high labour intensity, as the availability of cheap labour continues to be the main source of comparative advantage for the accession countries. In any case, the labour force in the accession countries is well educated as a rule, so that in addition, some more ‘skill-intensive’ sectors might come under pressure in the EU as well. In the service sectors, the figures available suggest that advantages enjoyed by the EU can be found principally in the fields of business and financial services, whereas among the accession countries’ exports, tourism and transportation services are dominant.

Uneven distribution of effects:

One of the clear characteristics of enlargement is the uneven regional distribution of the effects. On a regional level, those countries that don´t have a border with the New Member States – while taking advantage of the new markets – might be affected more heavily by the increase of competition from the accession countries. In contrast, those bordering the new members – are likely to benefit more from the demand for investment in the accession countries, as well as from the more intensive division of labour. On the other hand, the increase in competition from the accession countries will be felt more strongly there. All in all, the number of sectors affected will be larger in border regions, along with parts of the service sector such as retail trade or personal services, which are insulated from a direct impact of enlargement otherwise. Nevertheless, in the neighboring regions, a strong influence from the accession countries has already been experienced in recent years, and the overall balance has been positive (though not for all sectors).

Effects on business:

Expansion of the internal market to nearly 500 million consumers offers major growth opportunities for all Member States. In addition to the gains from trade and investment already benefiting EU Member States, the accession countries have the potential to boost economic growth with at least €60-80 billion. It is estimated that existing Member States will gain around 300,000 new jobs following enlargement.

Gains will be driven by four factors:

  • A strong boost to foreign direct investment will give a further stimulus to capital flows by encouraging business confidence in a predictable political and regulatory framework.
  • Raising training and skills standards, as well as productivity improvements, technology transfers, modernised plant and equipment, and better environment and social standards.
  • Higher levels of international competitiveness in both the new and the old Member States.
  • Increased cross-border trade between the new and the old Member States.

General impact on SMEs:

Taking together the importance of SMEs in sectors and regions on the one hand, and the expected impact of enlargement on the other, the following conclusions for SMEs can be drawn. In a study[2]  written for the European Commission in the year 2000, conclusions on SMEs are as follows:

  • The general impact of enlargement on SMEs will be small. The current scope and focus of EU policies for SMEs should be able to accommodate the anticipated changes to SMEs. In this sense, SMEs are unlikely to experience impacts from enlargement, which will be distinctive in their nature, and scale from the effects of wider global changes in international market opportunities and increased competition from lower-cost producers.
  • In many sectors, the impact of enlargement will be restricted to regions close to the potential new EU members. EU policy is likely to address specific areas of international market failure and, in this line, improve the effectiveness of national and regional policy.
  • Concerning market failures, policies destined to increase the knowledge and skill base of SMEs make risk sectors stronger and help opportunity sectors to utilise the chance enlargement offers.
  • Micro and small enterprises tend to serve local needs, so that the influence of enlargement on them is likely to be more moderate. Medium-sized companies, on the other hand, often are hampered in their international activities by transaction costs. Transaction costs will decline because of enlargement, and this will tend to be very beneficial to SMEs, especially to those located in “arms’ length reach” of the borders.

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[Trends and indicators] [Introduction and progress] [Whats expected medium-long term]
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