EU Enlargement in Eastern Europe

1
EU Enlargement in Eastern Europe

• Week 15

2
Enlargement costs benefits

• More benefits than costs
• Reliance on anticipated benefits
• Has the case for Enlargement been er, sexed up?

3
The official benefits stance

• Commission financed study (Baldwin, Francois
  Portes 1997)
• Accounts for
• Allocation Effects
• Trade creation
• Trade diversion
• Single Market effect (reduction in trade costs)
• Accumulation Effects
• Change in risk premiums for investment in CEEC

4
Monetary benefits

• Estimated real income effect 11bn
• Or 0.2 of EU-15 GDP
• Real income effect for CEECs
• 2.5bn (1.5 GDP) or
• 30bn (19 GDP)

5
Who gets the benefits?

• Distribution effects
• Benefits
• Germany 34
• France 19
• UK 14
• Ireland Greece 0
• Portugal slight loss

6
Assumptions

• Full mobility of factors of production
• CEECs benefits flow from radical restructuring of
  industry
• Distribution benefits based on existing
  production structures
• (labour intensive worse off high-tech better
  off)
• Ignores effects of geographical proximity

7
The curious case of Austria

• CEPR study Austria
• Estimated gain 0.8 GDP
• Labour intensive better off high-tech worse off
• Assumes full mobility of labour

8
The Commission investigates

• What is the ultimate effect on national budgets?
• Quite clearly, if enlargement reduces transaction
  costs of east-west trade and enhances economic
  efficiency through the reduction of distortions,
  this may more than offset the fiscal burden and
  leave a net gain in terms of aggregate national
  welfare.
• From a national budget point of view, then,
  enlargement might even turn out as a
  self-financing policy step.

9
Trade increases

• Throughout the 1990s year-on-year presented
  trade increases between EU and accession
  countries
• Trade is very dynamic
• Exports from EU are higher than imports
• Argument that almost full levels of trade
  integration have already taken place
• Further benefits are likely to be marginal

10
Potential costs
11
The Agenda 2000 special offer

• Agenda 2000 proposes a framework for enlargement
  which
• Keeps the ceiling of EUs own resources constant
  as a proportion of EU GDP at 1.27
• Maintains existing levels of support to the
  present member states
• Especially the less developed ones
• Maintains a single conceptual framework for EU
  policies
• The Commissions estimate is then for 2000-2006
  80bn
• 22bn pre-accession aid
• 58bn for new member states

12
Everyones a winner
13
The underlying assumptions

• Key points
• Accession countries must start contributions to
  the EU at once
• These are netted off against Enlargement
  expenditure
• To maintain costs within own resources ceiling
  the assumption is that the EU will gain revenues
  proportional to EU GDP growth.
• The estimate is that growth alone should generate
  approx 73bn 2000-2006
• Pretty close to estimated cost of Enlargement

14
The sales pitch

• So where does this growth come from
• Agenda 2000 assumptions
• Annual economic growth for 2000-2006 will be
• 2.5 for EU-15
• 4.0 for applicant countries
• First new members will join in 2002

15
The proof and
16
Autumn 2003 Forecasts

• The weak economic performance observed in the
  euro area and EU economies at the end of 2002
  continued throughout the first half of this year.
  
• Consequently, for a third consecutive year,
  growth is likely to disappoint the average
  growth rate is expected to be a mere 0.4 in 2003
  in the euro area (0.8 in the EU).
• A rebound to average growth rates of 2 for the
  EU is projected next year, approaching 2.5 in
  2005.

17
Autumn 2003 Forecasts

• In the acceding countries, growth remained solid
  at the end of 2002 and in the beginning of 2003.
• Average GDP growth is forecast to be 3.1 in
  2003, unchanged compared to the Commission Spring
  Forecasts and representing an acceleration from
  last years 2.3.
• Stimulated by the recovery in the EU and the
  prospect of enlargement, average growth in the
  acceding countries is expected to accelerate to
  3.8 in 2004 and to 4.2 in the following year.

18
The history
19
And more history
20
The hard sell

• The enlargement-related financing package
  remained a bone of contention between the
  candidates and the current members up to the very
  end, even though the members had sweetened
  their offer several times. The compromise
  provides for a total of EUR 40.85 bn for
  2004-2006, i.e. a roughly EUR 1.5 bn increase
  over the sum resolved at the Brussels summit in
  October.