EU Enlargement

1. EU Enlargement Blessing or Curse? Arne Henning Julia Albrecht Luzi Kahn Tom van Ommen Prof.: C. San Juan 2008

2. Agenda • Introduction • EU-25: Economic Implications • Labour Market • Welfare System • Budget • Further Enlargement EU-27 • Conclusion EU Enlargement – Blessing or Curse?

3. Historical Overview of the EU EU Enlargement – Blessing or Curse?

4. Part 1 of the 5th Enlargement • Cyprus • Czech Republic • Estonia • Hungary • Latvia • Lithuania • Malta • Poland • Slovakia • Slovenia EU 25 01. May 2004 EU Enlargement – Blessing or Curse?

5. Part 2 and Future Enlargement Acceding Countries 2007: Bulgaria, Romania EU-27 Candidate Countries: Croatia, The former Yogoslav Republic of Macedonia, Turkey Potential Candidate Countries: Albania, Bosnia and Herzegovina, Serbia and Montenegro, Kosovo EU Enlargement – Blessing or Curse?

6. Criticism on Enlargement • Labour mobility leads to fear of migration • Unequal distribution of the budget  some countries benefit more than others • Gaps in National Incomes EU Enlargement – Blessing or Curse?

7. National Incomes EU Enlargement – Blessing or Curse?

8. Labour Market / Welfare System • Economic Theory • The Accession Treaty/Transitional Agreements • Current Situation • Future Outlook EU Enlargement – Blessing or Curse?

9. Labour Market: Economic Theory The Effects of Labour Mobility: The Three-factor Model EU Enlargement – Blessing or Curse?

10. Labour Market: Economic Theory The Three-factor Model is based on unrealistic assumptions: • No free movement of labour in the real world • No smooth convergence of wage levels (cost of adjust) • Problem of unemployment and job replacements Fears of Migration and generally exploitment of welfare benefits EU Enlargement – Blessing or Curse?

11. The Accession Treaty • Reducing barriers to cross-border migration • Allowing migrants same rights as domestic citizens • Member states can make exemptions: Transitional Agreements (2-3-2 model) gives member states the possibility of restricting the free movement of labour for a transitional period of up to 7 years EU Enlargement – Blessing or Curse?

12. Migration Inflow Stock of CEEC residents in the EU 15 member states EU Enlargement – Blessing or Curse?

13. The Accession Treaty Transitional Agreements: Source: Journal of European Social Policy (2004) EU Enlargement – Blessing or Curse?

14. Current Situation • In general, flow of workers has been rather limited (Ireland: 3.8%, Austria: 1.4%, remaining members: below 1% of working age population) • Workers' mobility has had positive effects • Countries who have not applied any restrictions (Ireland, UK and Sweden) have experienced high economic growth, a drop of unemployment and a rise of employment EU Enlargement – Blessing or Curse?

15. Current Situation/2 • In the other 12 EU member states migrated workers have contributed to a smooth integration into the labour market. • Nevertheless, some countries faced undesirable side-effects • The preceding lifting of the mobility restrictions is expected to cause only slight increases in the movement of labour Still, adjustments on their labour and welfare system are indispensable EU Enlargement – Blessing or Curse?

16. Future Outlook Necessary Reforms: • Labour Market: more labour mobility friendly institutions, unemployment insurance of short duration, less employment protection • Welfare System: Raising social welfare standards of new member states, building up a pan-European safety net • Adoption of a EU-wide migration policy These measures are essential to successfully integrate the new member states EU Enlargement – Blessing or Curse?

17. Current Budget What‘s the budget? • The EU budget funds • EU policies • The expenditure of all the EU institutions • It is limited • By agreement of all the Member States  Treaties • Spending is voted by the European Parliament and Council on a Commission proposal • The European Parliament signs the agreed budget into law • The revenues come from • Import duties, VAT (value added tax), and from the Member States (% of GDP with exceptions e.g. British rebate) • The EU budget cannot be in deficit! EU Enlargement – Blessing or Curse?

18. Some important Numbers • Amount of money made available to the Union • Ceiling at 1.24% of the Union‘s gross national income • Comparison: about 45% of the Union‘s GNI goes to national, regional and local public expenditures in the Member States • Annual budget for 2006 • 112 billions (1.01% of the GNI of the enlarged EU) • Expenditures • € 121 190,91 million (commitment appropriations) • € 111 989,61 million (payment appropriations) EU Enlargement – Blessing or Curse?

19. Expenditure 2006 EU Budget 2006(€ 121 billion) Other expenditure including administrative expenditure (6%) Competitiveness and Cohesion (39%) Natural resources: Agriculture (36%), Rural development and Environment (11%) The EU as a global partner (7%) Citizenship, freedom, security and justice (1%) EU Enlargement – Blessing or Curse?

20. Change in Expenditure Budget 2005  2006 EU Enlargement – Blessing or Curse?

21. Pre-accession instruments Specific targeted financial aid • For Acceding countries • Candidates • Potential future members Objective • Support efforts to enhance political, economic and institutional reforms EU Enlargement – Blessing or Curse?

22. Timeline 1989: Creation of the Phare program 1997: Reorientation of Phare towards a total ‘pre-accession’ focus 1999: Creation of SAPARD and ISPA Until 2000: Countries of the Western Balkans were also beneficiaries  now the CARDS program is providing financial assistance July 2000: Turkey receives pre-accession assistance via similar but different instruments, budget lines and procedures May 2004: New Member State must take over the full responsibility for the management of the Phare program through a process of Extended Decentralization EU Enlargement – Blessing or Curse?

23. Phare • Phare funds focus entirely on the pre-accession priorities • Objectives • Strengthening public administrations and institutions to function effectively inside the EU • Promoting convergence with the EU‘s extensive legislation (the acquis communautaire) and reduce the need for transition periods • Promoting Economic and Social Cohesion • Coverage • Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Bulgaria and Romania EU Enlargement – Blessing or Curse?

24. ISPA • Instrument for Structural Policies for Pre-Accession • Aim: Enhance economic and social cohesion in the applicant countries of Central & Eastern Europe • Main features: • Only finances major environmental and transport infrastructure projects • Annual budget for the 10 countries in 2000-2006 was € 1.04 billion • Beneficiaries: • Bulgaria, Romania, and Croatia (since 1st January 2005) EU Enlargement – Blessing or Curse?

25. SAPARD Special Accession Programme for Agriculture & Rural Development • Aim: Help the 10 countries deal with the problems of the structural adjustment in their agricultural sectors and rural areas, as well as in the implementation of the acquis communautaire [set-up the administration to menage the CAP] • Main features: • Only finances agricultural and rural development measures • Overall annual budget of € 560 million EU Enlargement – Blessing or Curse?

26. IPA  2007-2013 • Instrument for Pre-Accession Assistance • Aim: Prepare the candidate counries better for the implementation of structural and rural development funds after accession • Main features: • It will replace the 2000-6 pre-accession financial instruments Phare, ISPA, SAPARD, the Turkish pre- accession instrument, and CARDS • Will concern the countries with (potential) candidate status EU Enlargement – Blessing or Curse?

27. Future • Draft Council conclusions on the budget guidelines for 2007 • The budgetary procedure for 2007 will be marked by 2 important elements • Maintaining a framework of overall budget discipline • The EU budget for 2007 should provide sufficient resources to implement the various policies effectively and efficiently • Good collaboration between the Budgetary Authority and the Commission • Forthcoming of the IIA (Interinstitutional Agreement) EU Enlargement – Blessing or Curse?

28. Future • Sufficient margins must be maintained • Appropriations for 2007 should reflect real and well-defined needs • Improvement of the implementation of the EU budget • Implementing rules and guidelines (explicit and simple rules) • Tight grip on payment appropriations • Should be sufficient but not overestimated • Efforts to deliver better forecasts • Continued improvement of <<Activity Based Budgeting>> EU Enlargement – Blessing or Curse?

29. Future • Presentation of information to facilitate the transitions between the Financial Perspective 2000-06 and 2007-13 • 11. Important elements in preparing the budget • 12. Stick to these guidlines! EU Enlargement – Blessing or Curse?

30. Future Recent Agreement of Parliament & Council • Based on the meeting of march 22nd on the financial perspective • European Parliament • Wants to add an extra 12 billion euro on top of the 862.4 billion euro budget for the timeframe of 2007-2013 (agreed upon at the EU summit in December 2005) • Extra 12 billion € are necessary to fund policies with a high community added value like education, research, trans-european networks and crossborder cooperation. • Additionally, they would like to increase the funds for the flexibility instrument in the budget  used for unforeseen eventualities • Problems to reach definite solution: Austrian finance minister Karl-Heinz Grasser proposes that a number close to 1.5 billion is much more realistic than 12 billion of additional funds EU Enlargement – Blessing or Curse?

31. Winners • The 10 new member countries: • Will benefit from billions of € of development aid between 2007 and 2013 • However, they will receive less than Luxembourg proposed in June 2005 • The UK sacraficed part of its rebate, but now the UK, France and Italy will be making equivalent net contributions • In the past, the UK‘s net contributin has been much higher EU Enlargement – Blessing or Curse?

32. Losers • The UK is under pressure to agree to cuts in its rebate • When the UK won the rebate in 1984 it was one of the poorest countries in the EU, but now it is one of the richest • France did not want to allow even the possibility of a change to farm spending before 2014 • Budget review does leave open this possibility (France will have veto power) • French contributions to the EU budget will rise more sharply than Britain‘s EU Enlargement – Blessing or Curse?

33. Bulgaria-Economic Profile • Functioning market economy since 2002 • Macroeconomic stability Implementation of Structural Reform Program • Improvements made, Challenges remain: • External deficit • Attractiveness of business environment • Completion of privatisation • Flexibility of labour markets EU Enlargement – Blessing or Curse?

34. Economic Profile EU Enlargement – Blessing or Curse?

35. Steps towards the EU May 1990: Agreement on Trade and Cooperation; PHARE Programme Mar 1993: Europe Agreement for Bulgaria and Interim Agreement on Trade and Related Matters (replacing the Trade and Cooperation Agreement) May 1995: The first meeting of the Bulgaria - EU Association Council Dec 1995: Decision to apply for EU membership – application presented to the European Council in Madrid Dec 1999: The European Council in Helsinki decision to start negotiations with Bulgaria, Latvia, Lithuania, Slovakia, Romania and Malta Feb 2000 -Jun 2004: Accession negotiations 25 Apr 2005: Accession Treaty signed in Luxembourg 11 May 2005: Bulgaria ratified the Accession Treaty 1 Jan 2007: Accession EU Enlargement – Blessing or Curse?

36. Romania – Economic Profile • Functioning market economy since 2004 • Broadly maintained macroeconomic stability • Implementation of Structural Reform Program not vigorously in all fields • Some progress on critical issues, but further challenges: • Pace of disinflation • Current account deficit • Prudent fiscal policy  Strengthen revenue base • Continuation privatisation EU Enlargement – Blessing or Curse?

37. Economic Profile EU Enlargement – Blessing or Curse?

38. Steps towards the EU 1974 Romania’s inclusion in the Community's Generalised System of Preferences 1980 signing of the Agreement on Industrial Products 1991 signing of the Trade and Co-operation Agreement Feb 1993signing of the Europe Agreement Feb 1995 entrance into force of the Europe Agreement Jun 1995 application for EU membership Dec 1999 Helsinki European Council’s decision to open accession negotiations Feb 2000 formal beginning of the accession negotiations Dec 2004closure of the accession negotiations 25 Apr 2005signing of the Accession Treaty in Luxembourg 1 Jan 2007planned accession date; delay by 1 year possible EU Enlargement – Blessing or Curse?

39. (Potential) Candidate Countries • Croatia and Turkey: start of accession negotiations in Oct 2005 • The former Yugoslav Republic of Macedonia: accession negotiations not started; status of candidate country in Dec 2005 • Albania, Bosnia and Herzegovina and Serbia and Montenegro (including Kosovo under UN Security Council Resolution 1244 of 10 June 1999): progress towards being recognised as candidates depends on engagement in Stabilisation and Association Process EU Enlargement – Blessing or Curse?

40. Western Balkans:Main Economic Trends • Growth in 2004 around 4.5%, following a slowdown in 2002-2003 • Economic stabilisation continued • High external deficits • Introduction of market economy  Weak institutions EU Enlargement – Blessing or Curse?

41. Western Balkans:Main Economic Trends EU Enlargement – Blessing or Curse?

42. The Stabilisation and Association Process (SAP) • EU’s policy framework for the Western Balkan countries, all the way to their eventual accession • Three aims: • stabilisation and a swift transition to a market economy • the promotion of regional cooperation • the prospect of EU accession EU Enlargement – Blessing or Curse?

43. The Stabilisation and Association Process (SAP) • Instruments formulated at Zagreb Summit (Nov 2000) • Thessaloniki Agenda (Jun 2003) introduced new instruments • European Partnerships • Strengthened political co-operation in Common Foreign and Security Policy • Promoting economic development • Opening of Community programmes to Western Balkan countries EU Enlargement – Blessing or Curse?

44. Conclusion • Essential reforms concerning the labour market and welfare system need to be implemented in the future • The new members benefit higher budget allocations which need to be born by the old and wealthy members • Further enlargement is on its way, delaying the realization of benefits generated by an enlarged market EU Enlargement – Blessing or Curse?

45. Conclusion • Already now their are political, social and cultural benefits for the EU as a whole • Economic benefits will be reaped in the longer term:  enlarged market makes the EU more competitive on a global scale EU Enlargement – Blessing or Curse?

46. FDI and Developing Countries • On average, 90% of the stock of capital indeveloping countries is self financed,and this fraction was surprisingly stablethroughout the 1990s. • The greater integration of financial markets hasnot changed the dispersion of self-financing rates, and the correlationbetween changes in de-facto financial integration and changes in selffinancingratios is statistically insignificant. EU Enlargement – Blessing or Curse?

47. FDI and Developing Countries • TOPIC FOR DISCUSSION • There is no evidence of any "growth bonus" associated with increasing the financing share of foreign savings. • In fact, the evidence suggests the opposite: throughout the 1990s, countries with higher self-financing ratios grew significantly faster than countries with low self-financing ratios. • This result persists even after controlling growth for the quality of institutions. EU Enlargement – Blessing or Curse?

48. Questions? Prof.: C. San Juan 2008

49. References • The European Commission (2006). Enlargement Process. http://europa.eu.int/comm/enlargement/index_en.htm • Economic Policy Committee (2004). The Structural Challenges Facing the Candidate Countries.http://europa.eu.int/comm/economy_finance/epc/documents/2004/candidate_countries_final_en.pdf • Commission of the European Communities (2005). 2005 enlargement strategy paper. http://europa.eu.int/comm/enlargement/report_2005/pdf/package_v/com_561_final_en_strategy_paper.pdf • Kvist J. (2004), Does EU Enlargement lead to a race to the bottom? Strategic interaction among EU member states in social policy, Journal of European Social Policy, vol. 14 (3), pp. 301-318. EU Enlargement – Blessing or Curse?

50. References • http://www.euractiv.com/de/agenda2004/eu-budget-parlament-fordert-12-milliarden-euro-zusaetzlich/article-153635 • http://europa.eu.int/comm/budget/budget_glance/index_en.htm • http://europa.eu.int/eur-lex/budget/data/D2006_VOL1/EN/nmc-grseq42960935830-3/index.html • http://europa.eu.int/comm/budget/budget_glance/index_en.htm • http://news.bbc.co.uk/2/hi/uk_news/politics/4078796.stm EU Enlargement – Blessing or Curse?