ECONOMIC IMPACTS OF ENLARGEMENT Myths, Realities and Surprises

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ECONOMIC IMPACTS OF ENLARGEMENT Myths, Realities
and Surprises

• Iain Begg
• European Institute
• London School of Economics Political Science

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THE FEARS

• A vast wave of migration
• Basis for derogations on free movement
• Yet often about union interests
• Relocation of economic activity
• Race to the bottom in welfare standards
• Tax competition
• General undermining of social model

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CUMULATIVE GDP GROWTH 2000-06,
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FOREIGN DIRECT INVESTMENT

• Tends to be highly pro-cyclical
• Upsurge in late 1990s
• Big fall 2001-3
• Now recovering
• Has been important contributor to growth
• Inflows per capita 2001-2004, per annum
• To EU-15 840
• To EU-10 252
• But still fears of delocalisation persist

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MARKET ACCESS EFFECTSRecently acceded members

• All RAMs except CZ net importers of goods

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TRADE BALANCESAverage 2004-2006(f), of GDP
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MARKET ACCESS EFFECTS

• All RAMs except CZ net importers of goods

• And all, including CZ have current deficits
• From 1.8 of GDP in Slovenia (2004-2006)
• To around 11 in Estonia and Latvia
• Corresponding figure for Croatia 5.8
• Hence source of net demand for EU-15
• Underpins economic activity in EU-15
• Typically 2/3 of exports
• Linked to major investment and growth
• May not continue indefinitely

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The economic impact of migration from the new EU
Member States has been modest, but broadly
positive, reflecting the flexibility and speed of
adjustment of the UK labour market

• Study on the impact of free movement of workers
  from central and eastern Europe on the UK
• UK Department of Work and Pensions, 2006

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EXPERIENCE OF REFORM

• The long transitions
• Points to new solutions
• In labour market regulation
• In knowledge economy
• Creates experience relevant to Lisbon strategy
• But also demonstrates need for patience
• as well as necessary conditions
• Backs to the wall or favourable economy

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STRUCTURAL REFORMSThe latest in U-shaped curves?
? Sense of crisis in economy
ESTONIA 1992-94
SPAIN
Intensity of reforms
Political support for reforms
ITALY
Performance of economy ?
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IDEAS TO SHARE

• Greater impetus to economic liberalism
• Reform of tax systems
• Simplification
• The flat tax(es) and their rationale
• What sort of stabilisation policy
• Balanced budgets by law?
• Emerging reinvention of the welfare state
• Distinct from familiar Esping Andersen models

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SHAPING ECONOMIC POLICY

• The settlement on the EU budget
• Key deal still CAP lt gt UK rebate
• But RAM demands restricted scope for change
• Result an even messier compromise
• Variety of side payments 75 million for Bavaria
• Still more variants on paying-in Austrian VAT
• The re-launch of the Lisbon strategy
• Has tilted more towards business orientation
• Yet doubts about governance remain

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WHAT NEXT?

• Enlargement of euro area
• Slovenia 2007?
• The Estonian paradox
• Financial stability challenges
• Impact of growth rates on convergence
• Portugal risks being overtaken
• Sustainable development strategy II
• Reinvention of European social model

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ECONOMIC IMPACTS OF ENLARGEMENT Myths, Realities
and Surprises

• Iain Begg
• European Institute
• London School of Economics Political Science