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ENLARGEMENT: THE NEW FACE OF THE EU Trends in Economic Growth General Remarks On paper, it is widely agreed that enlargement is a win-win situation. Nevertheless the economic opportunities and risks of enlargement will have to be managed, just like any other political matter, and this is what will ultimately define the success or failure of the process. Despite the importance of EU policies, the success or failure of the EU’s future economic development will continue to be in the hands of the countries, companies and people in general. In simple economic terms, the coming enlargement is about the combining of a group of countries forming a large wealthy economy of 375 million of people, with a group of countries of 75 million people that are much less wealthy. It is important to stress that the increase in population (20%) and area (23%) resulting from this enlargement is not larger than previous enlargements. In 1973, with Britain, Denmark and Ireland, the Community increased more in terms of population. The 1995 enlargement, adding Austria, Sweden and Finland was proportionately larger in terms of land area gained. Then, why is this enlargement different? Firstly, the most relevant difference is that most of the new members come from formerly centrally planned economies and are completing their transition to market-based systems. They have been undergoing difficult economic reforms in addition to their efforts to join the EU. Secondly this enlargement constitutes a challenging process in economic terms because the new Members States have an average GDP per capita of approximately 40% of the existing Member States. Macroeconomic estimates As mentioned previously, enlargement is considered to be a win-win situation for the economies involved. Enlargement is expected to boost economic growth in both the candidate countries and the EU, although to a different extent. According to the European Commission1, over the period 1997-2001, most candidate countries registered average rates of economic growth well above the EU average of 2.6%. The global slowdown that started in late 2000 also affected the EU, and with it, the candidates. As a result, growth slowed down in a number of candidate countries in 2001, but over the first half of 2002, the aggregate economic development has been fairly stable. Economic growth after Enlargement According to recent studies, enlargement is likely to boost economic growth and income substantially in the candidate countries over the period 2000-2009. For example, according to the European Commission2, overall economic growth in eight of the new Member States 1 2 Progress Report towards accession, DG Enlargement, European Commission, 2002 European Commission: The economic impact of enlargement, Enlargement Papers Nº4, June 2001 (excluding Malta and Cyprus) may be between 1.3 and 2.1% higher per year than in a situation without enlargement, depending on the intensity of structural reforms undertaken. Other studies3 project additional growth rates of up to 1% per annum, over and above the growth rate without enlargement, but only for the most open economies of the new Member States such as Hungary and Poland. However, all candidate countries will benefit from improved prospects in the long-term by joining the EU and the Internal Market. In general, it is considered that the economic impact of enlargement on the current Member States will be much more limited, with additional economic growth reaching 0.1% per year. (Austria is a special case and GDP growth may increase by an extra 0.15%) Income issues The limited economic impact in the current Member States is not surprising taking into account the, in general, small size of the new Member States’ economies and the current low level of income: the GDP of the accession countries amounted to less than 5% of the EU´s GDP in 2000 and the average per capita GDP of the accession countries stood in 2000 at approximately 40% of the level in the current Member States. As in the accession countries, there will be big differences between the Member States in terms of the benefits of enlargement. Those countries that already have the biggest trade links with the accession countries will benefit most, notably Austria and Germany. GDP volume growth rates - % change on previous year 12 10 9.6 8 EU ACC 6 4 2 3.8 2.9 3.2 3.5 2.8 2.3 2.4 1.6 1 2.7 1.2 2002 1Q 2003 0 1998 1999 2000 2001 Source: Eurostat, European Commission Why is enlargement beneficial for the EU economy? Increased levels of economic growth and social welfare should be the logical outcome of enlargement for the following reasons: 1. Increased levels of trade: This will be the immediate consequence of two trends: 3 CPB Netherlands Bureau for Economic Policy Analysis: EU Enlargement-Economic implications for countries and industries, September 2001 The removal of the remaining barriers to trade (non-trade barriers) The enlargement of the Internal Market, with approximation of rules and standards, etc. 2. Rising foreign direct investment: the current trend will continue with greater flows to the new Member States, essentially due to an improved investment climate in those countries. 3. Movement of workers within the widened Union, that will be beneficial to current Member States, notably those not applying any restrictions to the free movement of labour from the new Member States. It will add to their labour force growth and increase their long-term growth potential. 4. The enlarged internal market will provide positive medium to long-term effects linked such as economies of scale, productivity gains, cost reductions resulting from increased competition, restructuring, more efficient organisation of supply chains, etc For more information: - European Commission: http://www.europa.eu.int/comm/enlargement/index.htm European Parliament: http://www.europarl.eu.int/enlargement/default_en.htm Economic and Social Committee: http://www.ces.eu.int/sections/enlargement/index_en.htm Towards the Enlarged Union Strategy Paper and Report of the European Commission on the progress towards accession of the candidate countries 2002, The Economic Impact of Enlargement, Directorate General for Economic and Financial Affairs, European Commission, May 2001 Profiting from Enlargement, Heather Grabbe, Centre for European Reform, 2002 Enlargement 2004: Big Bang and Aftershocks. Burson Marsteller/BKSH, Brussels