© economics department, king’s school, chester enlargement of the eu: investigating the issues

© Economics Department, King’s School, Chester

Enlargement of the EU: Enlargement of the EU: investigating the issuesinvestigating the issues


December 2002: A ‘New’ EuropeDecember 2002: A ‘New’ Europe

Ten new members of the EU from May 2004 Eight of these are from Central and Eastern Europe

Poland, Hungary, the Czech Republic, Slovenia, Slovakia, Estonian, Latvia and Lithunia

The route to membership has been long and frustrating early hopes have been continually postponed costs of meeting Copenhagen Criteria have been high much hard work but only the promise of a return Europe Agreements somewhat one-sided


Of particular interest ...Of particular interest ...

How do these new members compare with the current EU15?

What benefits are CEE economies likely to gain from EU membership?

What are the costs for CEE economies of EU membership?

What does the current EU15 stand to gain? What threats might they pose for the current EU15?


Comparing ‘new’ and ‘old’Comparing ‘new’ and ‘old’

Data sources: www.economist.com www.oecd.org www.eurostat.eu.int www.cia.us

Health warning mass of statistics multiplicity of sources keep it simple!


Some basic dataSome basic data

Hungary Czechrepublic

Slovakia Poland Greece I reland

2001 2001 2001 2001 2001 2001GDP per head ($ atPPP)

9,470 14,586 9,060 9,280 18,460 31,593

GDP (% real changepa)

3.8 3.26 3.29 1.00 4.1 5.85

Governmentconsumption (% ofGDP)

11 19.23 19.97 16.59 15.5 12.4

Budget balance (% ofGDP)

-2.52 -3.14 -4.4 -4.60 0 1.35

Consumer prices (%change pa; av)

9.16 4.68 7.12 5.50 3.36 4.88

Public debt (% ofGDP)

50.9 22.97 41.8 39.90 101.6 36.47

Labour costs per hour(US$)

2.01 2.16 1.42 2.80 7.93 13.31

Recordedunemployment (%)

5.69 8.55 18.62 16.22 10.5 3.76

Current-accountbalance/GDP

-2.11 -4.65 -8.58 -4.05 -5.1 -1.01


How do they compare?How do they compare?

Low living standards GDP per head, US$, PPP Slovakia’s GDP per head

– 50% of that in Greece (EU15 poorest)– <30% of that in Ireland

Solid economic growth Inflation rates generally higher Significantly higher unemployment in some countries Budget deficits well above SGP limit (3% GDP) High government expenditure as % GDO Lower unit labour costs


Benefits for all ...Benefits for all ...

Economic theory predicts benefits in terms of a larger market and economic integration 100 million extra consumers, bringing total to 455 million static and dynamic efficiency gains from trade economies of scale greater competition more product and process innovation increased levels of cross border investment

Higher GDP, increased rate of growth, lower inflation, lower unemployment … apply simple AD / AS analysis to these issues


The benefits explained ...The benefits explained ...

Price level

Real GDP

Labour

AD0

LRAS0

Employment

AD1

LRAS1


No such thing as a free lunch ...No such thing as a free lunch ...

For CEE firms the benefits are not universal competition brings with it a need to restructure benefits only possible where comparative advantage exists low labour costs are no guarantee of success productive inefficiencies will be exposed risk of structural and technological unemployment

For EU15 firms there are risks too especially in low-tech, labour intensive industries loss of FDI need to increase knowledge and skills base to compete


Labour market concernsLabour market concerns

CEE economies need to increase labour supply increase employment rates encourage greater labour market flexibility increase skill levels

Fears of mass migration probably emotional rather than economic EU15 is actually short of labour immigration not necessarily undesirable impact on the EU15 labour market impact on EU15 AS


The issue of agricultureThe issue of agriculture

Three main features of EU15 CAP price support direct payments rural development

Importance of agriculture in CEE economies 27% of Polish population engaged in agriculture

Cost of extending CAP CAP currently 45% of EU budget = €40.5 billion additional expenditure significant

– 2004 = extra €9.9 billion– 2006 = extra €14.9 billion


ConclusionsConclusions

Enlargement raises important economic issues it could weaken economic coherence there will be big pressures on the EU budget there are unresolved questions regarding agriculture and regional

policies pace of economic integration could be threatened within current EU

The potential benefits could, however, be significant equivalent to a second harvest especially for the CEE economies

As with all EU projects, enlargement is as much political as it is economic ‘Old Europe’ and ‘New Europe’

© economics department, king’s school, chester enlargement of the eu: investigating the issues

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