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Francesca Pissarides Senior Economist EU Enlargement - Implications for existing and future EU member countries London, December 5th, 2002 TIMEFRAME The commission recommends to conclude negotiations with 8 transition countries (Baltics, Cz. & Slov. Rep, Hun. Pol., Slovenia) at the end of 2002 for accession in 2004. Bulgaria and Romania have been negotiating with the EU on the technical assumption to conclude in 2007. This date has not yet been accepted politically as a target date by the EU. 2 GDP PER CAPITA IN PPP TERMS, POPULATION AND GDP IN EU15 AND CANDIDATE COUNTRIES, YEAR 2000 140 120 100 80 GDP per capita in PPP in % of EU15 average 60 population in % of EU15 40 GDP in % of EU15 20 0 3 IMPLICATIONS OF ACCESSION FOR CURRENT MEMBER COUNTRIES Growth, trade expansion, job creation, capital flows, but mainly lower risk perception Short to Medium - term small positive impact Long Term - larger impact mainly through capital flows but uneven distribution 4 BENEFITS TO CURRENT EU15 MEMBER COUNTRIES (1) Major growth opportunities in the long term, thanks to expansion of internal market to nearly 500m consumers. A EC study (2001) estimates that enlargement could increase the level of GDP of current EU15 members by 0.7% on a cumulative basis. A CEPR study (Baldwin, Francois, Portes) estimates benefits to existing member countries at Euro 10bn in the long run, but unevenly distributed (1/3 to Germany) 5 BENEFITS TO CURRENT EU15 MEMBER COUNTRIES (2) EU has a consistent trade surplus with candidate countries. In 2000 > Euro 17bn. The share of EU exports directed to candidate countries is small at 9% of total, but growing as accession countries GDP grows faster than rest of the world’s. Over past decade CEEC -10 showed fastest growth in trade with EU15. In 2000 CEEC-10 accounted for 11% of total EU trade with third countries, up from 6% in 1992. 6 BENEFITS TO CURRENT EU15 MEMBER COUNTRIES (3) Same CEPR study estimated that enlargement would result in 300,000 more jobs for the current EU15 members, on the assumptions that EU15 GDP would be boosted by 0.2% from enlargement and that L/Y is unchanged. Stimulus to capital flows by encouraging business confidence, the harmonisation and stabilisation of regulatory system and business environment, productivity improvements, raising skills and standards, technology transfers. 7 BENEFITS TO CURRENT EU15 MEMBER COUNTRIES (4) Lower risk perception. Impact on capital flows. Net annual capital flows into the ten CEECs fluctuated during the past ten years between $ –3bn and 28bn. On a cumulative basis they amounted to $150bn in the period 1991-2001. More than half of these amounts originated from the EU. Stocks of FDI in the 1991-2001 period reached $110bn. 8 NET CAPITAL FLOWS CEEC-10, 1991-2001 $ MILLIONS 30000 25000 20000 net capital inflows 15000 net FDI inflows Portfolio inflows net 10000 5000 0 -5000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 9 LARGE CURRENT INVESTMENT RATIOS TO BE FURTHER BOOSTED BY “ACCESSION NEEDS” Currently investment ratios are large due to catch-up effect and to need for renewal of obsolete capital stock Implementation of ‘acquis’ also requires large public sector investments Assuming long transition periods for investments in transport and agriculture, ‘acquis’-related public sector investment could amount to 4-6% of the countries’ GDP. (current EU average for total public investment is 2.5% of GDP). 10 CUMULATIVE NET CAPITAL INFLOWS 1991-2001 Slovenia Slovak Republic Romania Bulgaria 3% 2% 8% 24% 10% 2% Poland Estonia 25% 19% Lithuania Czech Republic 4% 3% Hungary Latvia 11 PROSPECTS FOR CAPITAL INFLOWS These amounts are virtually insignificant for the current EU members. In 2000 net capital flows amounted to 0.3 % of EU15 GDP and about 1 % of gross fixed investment. Although in the CEEC significant progress has already been achieved in the removal of barriers to capital flows, accession will imply increased credibility of economic reforms and will increase investment in an irreversible way. In particular harmonisation of capital market regulations and of taxation and business accounting rules will improve conditions for attracting increased capital flows. Unpredictability: During previous enlargements FDI and other capital flows increased initially, but subsided later to preaccession levels. 12 PROSPECTS FOR PORTFOLIO INFLOWS It is foreseen that the full exploitation of the trade potential between CEEC and EU15 will lead to a large (maybe double) increase of the CEEC trade deficit. On this basis, as this will be matched by increasing capital transfers, capital flows to the CEEC will increase significantly too. As portfolio investment is well below the level of countries with comparable income, it may increase more than proportionately to the increase of the capital inflows. 13 BENEFITS FOR CANDIDATE COUNTRIES Accession is main goal driving reforms in the CEECs Expectations are political stability and economic prosperity Not first attempt to catch up with west (socialist industrialisation after WWII, and breakdown of socialist regimes in early 1990s) 14 SHORT TERM Resilience in 2001-2002 fall in export growth but domestic demand strong with exception of Poland FDI holds up Portfolio inflows in 2002 three times larger than in 2001 15 MACRO-OUTLOOK Main Forecasts Bulgaria Growth 2001 4.0 Inflation 2002 4.0 2001 7.4 2002 6.1 Czech Republic 3.3 2.5 4.7 2.3 Estonia 5.4 4.0 5.8 3.8 Hungary 3.8 3.5 9.2 4.9 Latvia 7.7 4.5 2.5 2.3 Lithuania 5.9 5.2 1.3 0.9 Poland 1.0 1.0 5.5 2.1 Romania 5.3 3.5 34.5 22.7 Slovak 3.3 3.5 7.3 3.1 Slovenia 3.0 2.7 8.4 7.5 16 PER CAPITA GDP IN PPP AS % OF EU GDP, 2001 100 100 90 80 69 70 57 60 51 50 48 42 40 40 38 28 27 Romania 30 Bulgaria 33 20 10 0 Latvia Lithuania Poland Estonia Slovak Hungary Czech Slovenia EU 17 HOW LONG WILL IT TAKE FOR CEEC TO CONVERGE TO EU IF GROWTH DIFFERENTIAL IS 3% PA ? 50% 75% 100% na 9 19 6 20 30 Hungary na 13 23 Latvia 14 28 38 Lithuania 10 24 34 Poland 8 22 32 Slovak Rep 2 16 26 Slovenia na 3 13 Romania 24 37 43 Bulgaria 20 34 41 Czech Rep Estonia 18 BY WHAT RATE DO CEEC NEED TO GROW FOR CONVERGENCE TO OCCUR IN 20/30 YEARS, ASSUMING EU15 GROWS AT 2% PA ? 100% target 75% target 50% target 20 30 20 30 20 30 Czech Rep 4.9 3.9 3.4 2.9 na na Estonia 6.5 5.0 5.0 4.0 2.9 2.6 Hungary 5.5 4.3 3.9 3.3 na na Latvia 7.8 5.8 6.2 4.8 4.1 3.4 Lithuania 7.1 5.4 5.6 4.4 3.5 3.0 Poland 6.8 5.2 5.3 4.2 3.2 2.8 Slovak Rep 5.8 4.5 4.3 3.5 2.2 2.1 Slovenia 3.9 3.3 2.4 2.3 na na Romania 9.1 6.8 7.7 5.7 5.5 4.3 Bulgaria 9.7 6.4 7.1 5.4 5.0 4.0 19 ACCESSION COSTS Budgeted transfers (EU budget framework until 2006) from the EU for structural operations should cover about 3% of GDP until 2006 (incl). This is equivalent to less than 10% of total EU budget. The Euro 67bn allocated to candidate countries in the current budget is about one tenth of funds given to east Germany after unification. Vast majority of EU budgetary funds will go to current members even after accession. Funding after 2006 less clear, since rules for structural operations might be adjusted. 20 NEED FOR INTERNAL REFORM OF EU Voting mechanism in the EU: Widespread belief that the reforms in Nice don’t go far enough. CAP reform will be necessary in the long run when accession countries are granted equal treatment, unless the EU total budget is increased. Rules for allocation of structural funds might change as well, such that poorer existing member countries can keep more of their current transfers. 21 CONCLUSION Main risks to EU accession: Inadequate internal EU reform. Weakening political support in EU15 and candidate countries. Incomplete transition in many candidate countries (incl. governance and public administration). Much serious restructuring and reform remains to be done. Financing might become a problem after 2006 (Finland-Germany Presidency swap). 22 CONCLUSION, CTD. Hopes: Ease into EU by 2004. Ease into EMU asp after EU accession. Fiscal restraint + aid from Brussels make public finances sustainable. Steady real convergence (real GDP per capita, economic structure, relative prices). 23