European Union Enlargement

1. European Union Enlargement tutor2u™

2. The Official EU View on Enlargement • “Enlargement is one of the EU's most powerful policy tools. It serves the EU's strategic interests in stability, security, and conflict prevention. It has helped to increase prosperity and growth opportunities, to improve links with vital transport and energy routes, and to increase the EU's weight in the world. • In May 2009, the EU will mark the fifth anniversary of the 2004 enlargement.”

3. Some issues to cover and revise • Has the widening of the EU been a success? • The benefits and costs of enlargement for • New member states • Existing (established) members of the EU • The EU economy as a whole e.g. in the context of globalisation and other external events • EU enlargement and immigration policy • How many more countries will join? • Will enlargement prevent final economic union? • How many new states will join the Euro? • Is enlargement fatigue setting in? • What of states that remain outside of the EU e.g. Norway and Iceland

4. EU Enlargement – A Brief Historical Perspective • Europe has added new members periodically • Six Main Waves of EU Enlargement • 1973 (UK, Ireland and Denmark) • 1981 (Greece) • 1986 (Portugal and Spain) • 1995 (Austria, Finland and Sweden) • 2004 (Ten new countries) • 2007 (Bulgaria and Romania)

5. Who will be next? Potential members

6. Centre for European Reform • “The objective of joining the EU has helped the Central and East European countries to move from post-Communist upheaval to market economics and pluralist democracies in little more than a decade. Ten countries successfully joined the EU in May 2004, and Bulgaria and Romania followed in January 2007. However, the Union is showing signs of 'enlargement fatigue'. Many politicians worry that an ever larger Union will function badly, and that further widening will come at the expense of deepening. West European workers fear the economic consequences of adding 50 million low-cost workers to the EU single market. Future accession would be very difficult unless public and political support for enlargement revives.” • www.cer.org.uk/enlargement_new/index_enlargement_new.html

7. EU Membership Distribution in Jan 2004

8. EU Membership in January 2009

9. The Map of an Enlarged Europe

10. Overview of new member states (1)

11. Overview of new member states (2)

12. GDP Per Head for selected member states Some progress in raising relative living standards Catching up with Portugal and Greece Newer nations are considerably poorer

13. Unemployment rates for selected countries Strong growth has helped to bring down unemployment More jobs for domestic workers – reverse migration? But putting pressure on wages to rise

14. Joining the Club – Criterion for EU Entry • Accession countries have to meet the Copenhagen criterion for joining the European Union • Stability of political institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities • A fully functioning market economy that meets the standards required for participation in the single market

15. Transition Economies • Price Liberalisation • Moving away from state controlled prices to allow the price mechanism greater influence in allocating resources • Privatisation • Transfer of ownership • Development of private sector capital markets

16. Transition Economies (2) • Liberalisation of Trade with other Countries • Full convertibility of currencies • Preparation for eventual membership of the Euro • Reforms of the Financial Sector • Fully-functioning Central Banks to take control of monetary policy • Capital markets for corporate and government bond issues

17. Potential Gains for Accession Countries • (1) Membership of the EU Single Market • Trade: • Exploiting comparative advantage to increase trade • Investment • Free movement of capital – looking for the highest return • Inward investment to aid transformation of national infrastructure – impact on a country’s LRAS / trend growth • Competition • More competition – a boost to labour productivity • Dynamic efficiency gains e.g. arising from higher capital investment and faster pace of innovation

18. Potential Gains for Accession Countries (2) • Financial Support • Countries will be net recipients of income from • Common Agricultural Policy • EU Structural funds • Many regions have per capita incomes well below the 75% threshold for Objective 1 funding • 92% of population of accession countries lives in regions with a GDP/head under 75% of the EU25 average. 61% of the population lives in regions below 50% • Much of the EU funding will help to finance investment

19. Potential Gains for Accession Countries (3) • Potential macroeconomic advantages • Reduced exchange rate volatility – many countries are keen to join the Euro to reduce exchange rate risk and benefit from lower interest rates • Slovenia, Slovakia, Cyprus and Malta have joined the single currency • Slovenia – January 2007 • Cyprus and Malta – January 2008 • Slovakia – January 2009 • Other countries do not meet the entry requirements or have chosen to remain outside – to retain monetary policy flexibility

20. Competitive advantage for new states? • Central European location for many • Significantly lower wage costs • Lower productivity – but unit labour costs still cheaper e.g. for car manufacturers • Lower land prices • Attractive corporate tax regime + other incentives • Success of previous inward investments • Many new states have highly literate population

21. Diagram corner • Useful diagrams for this topic: • Trade diagrams – welfare effects from single market, exploitation of comparative advantage • AD-AS diagrams • Inward investment effects • Economic shocks within the enlarged EU economy • Economies of scale • Labour market diagrams e.g. impact of migration

22. Competitiveness and Growth in the New Member States Performance of Europe’s new countries

23. Competitiveness

24. The Sources of Growth

25. The Sources of Growth Labour Supply Labour Utilisation Human Capital

26. The Sources of Growth Labour Supply Labour Utilisation Human Capital

27. The Sources of Growth Labour Supply Labour Utilisation Human Capital

28. Recent growth for selected countries Growth much faster than the UK But has this been sustainable? Steep slowdown and now recession for many new EU members Some of them “over-heated” when they joined the EU

29. Latvia – Rampant wage inflation destabilised the economy Click here for an article

30. Estonia – from boom to deep recession

31. Inflation - better control in some new EU countries than others

32. Poland has improved the trade off between jobs and prices

33. And a rising employment rate will help to provide jobs at home for younger workers

34. Potential Gains for Existing EU Countries • (1) Export potential and exploitation of economies of scale • (2) Foreign Investment and Incomes and Profits • (3) More diverse European labour market • (4) A cleaner environment • (5) Catalyst for further structural reforms in the EU • Reforms to the CAP • Spur to countries to reform their labour markets in the face of lower labour cost competition • Many countries are already engaging in tax competition

35. EU Enlargement – an export opportunity for the UK

36. Main Concerns of Member Nations • Extra budgetary costs for the EU • Can accession countries continue to meet stricter EU environmental standards? • Long-term need for higher regional subsidies – loss of some regional funding for established EU countries • Social concerns from increased labour migration • Some Objective 1 regions will now lose some of their funding – including regions in the UK, Spain, Greece and Portugal

37. Economic Concerns of Member Nations • Labour Market Issues • Fears of higher structural unemployment among accession countries – which might lead to large immigration of labour into higher-income countries + political and social tensions • Fears of a surge in economic migration from East to West • Social dumping? • Concerns about organised crime and illegal immigration from Russia, Belarus and the Ukraine through weak Eastern European borders • In Germany, Austria and Italy (countries that border accession states) there are intensive debates about controlling the flow of migrants from former Eastern Europe

38. What is convergence? • Income convergence: • Where the divide in per capita incomes becomes smaller over time • Requires countries to achieve relatively faster growth over a substantial time period • Convergence may also happen if other “richer” countries suffer a slowdown • NMS trade heavily with the established EU – so an EU-wide slowdown is not in their long term interests

39. The likely scenario for new member states • Income convergence is not automatic • Baltic states and Slovenia appear to have the best growth / convergence potential but Baltic States over-heated • Convergence will happen but at different speeds • Is there a new Ireland? A Baltic Tiger? Ireland collapse in 08 • Growth is stimulated by capital investment and productivity • But in the long term, NMS will need to improve employment rates, and achieve great labour mobility • Unemployment is a constraint on growth • Demographics will also play a role • Will the new members join the Euro? 4 have done so

40. Recent articles on EU enlargement • Financial crisis in Hungary • http://www.guardian.co.uk/commentisfree/2008/oct/29/creditcrunch-eu • Reversing Poles: how Poland brought its workers home • http://www.guardian.co.uk/business/2009/jan/23/poland-reverses-uk-migration • Will Turkey ever be accepted by the EU? • http://www.guardian.co.uk/commentisfree/2009/jan/19/turkey-gaza • Crises test stability of new EU states • http://www.ft.com/cms/s/0/5f05bd08-e331-11dd-a5cf-0000779fd2ac.html • Balkan states set to launch EU bids • http://www.ft.com/cms/s/0/7f38328c-a776-11dd-865e-000077b07658.html • Crunch time for eastern Europe • http://www.ft.com/cms/s/0/95f2113e-cb14-11dd-87d7-000077b07658.html • Turkey tries to revive EU drive • http://news.bbc.co.uk/1/hi/world/europe/7837145.stm

41. Key Unit 4 Tips • Use the bullet points (reworded) as subheadings • Ensure you answer all sections • Answer the question! • Refer to extracts and articles to support your answer (analysis) • Use terminology/definitions from the AS/A2 course, theory and diagrams (application) • Evaluation is crucial (30 marks!) but does not have to take place only in the final section: say which sources are more useful than others, say what other data would have helped you to make a better recommendation, say which sources may be biased. Evaluation is saying what your recommendation is based on! • Plan your answer to ensure you cover as much relevant material as possible • Aim to write at least 7 – 8 sides in the time provided (including diagrams – easy application marks) • Remember that 120/120 is not out of the question – and this is not always the ‘best’ candidates who achieve this • Source: Andy Threadgould, Dulwich College, Jan 2009