Enlargement of the European Union

1. Enlargement of the European Union Ref: EUenlargement332cbs2010 Feb10

2. Introduction • Any European country can join • Treaty of Rome art 232 • First 4 enlargements • 5th enlargement issues • central and eastern European countries (CEECs), plus Malta & Cyprus • optimum size of EU? • Enlargement and business

3. Candidates for EU membership • Accession countries assessed by EU • must be able to operate within the EU framework • Pre-accession agreements • 5th enlargement - a new challenge • CEECs • former centrally planned economies (CPEs) in transition to market economies • significantly changing the nature of EU • generally small, poor countries p 87

4. Copenhagen Summit 1993 set out criteria, • functioning market economy • democratic political system • acceptance of acquis communautaire

5. Forces behind enlargement • Benefits of economic integration incl. • comparative advantage • trade creation ( but possibly trade diversion) • investment & other dynamic economic benefits from integration • Papazoglou et al (2006): • Gravity models suggests New 10 increased imports from EU15 > rise exports to EU15 • Reorientation of trade to EU15 • Papazoglou, Pentecost, Marques, ‘A gravity model forecast of the potential trade effects of EU enlargement: Lessons from 2004 and path-dependency in integration’. The World Economy(2006)

6. REVIEW: Competitive pressures & efficiency in the single market (note: you can use other theories) euros price Home market only Mark-up BE D BEFT E’ 1 E’ E’ m' p’ p’ E” W E” E” p” p” A A mA pA AC COMP MC Number of firms n’ n” 2n’ Sales per firm x” Total sales C’ C” x’

7. Review: Growth effects of integration in the single market Euro/L Y/L1 GDP/L 1 Medium term growth bonus E Y/Lc C Allocation effect B Y/L* Depreciation / worker d (K/L) D s(GDP/L)1 A K/L K/L* K/L1

8. Political benefits

9. Widening v deepening debate • Since 1st enlargement • EU15 optimum size? EU27 beyond optimum size? THEORY OF CLUBS – see later • Two approaches to enlargement • traditional ‘classical’ method • adaptive method • Can widening & deepening be mutually complementary?

10. p7a • 5th enlargement - adaptive perspective • Is EU currently progressing at 1 rate? • Schengen Agreement / EMU/ Tax ? • Variable geometry • multi-speed EU • Multi-tier EU • EU of concentric circles

11. Enlargement - even more variable geometry • Widening v deepening debate outdated???

12. Theory of Clubs: summary • See handout & references • Assume M* optimal size of EU • Was EU 15 optimal? • Institutional changes (eg move to QMV) can shift MC & increase optimal size (to Mx) • Consequences for enlargement & Depth of integration

13. Theory of Clubs Benefits and costs MC MB M* No. of members

14. Theory of Clubs Benefits and costs MC MC1 MB No. of members M* Mx

15. Subsidiarity principle • Subsidiarity important • Task allocation in EU guided by subsidiarity principle (Maastricht Treaty) • Decisions should be made as close to the people as possible, • EU should not take action unless doing so is more effective than action taken at national, regional or local level. • Background: “creeping compentencies” • Range of tasks where EU policy matters was expanding. • Some Member States wanted to limit this spread.

16. Similar analysis for Depth of integration • see handout

17. Enlargement issues for the EU • Agriculture • Structural funds • Budget • Migration • Voting – see later • Poor new members • 20% rise in EU population, BUT • New 10’s GDP equivalent to Netherlands Sources: Eurostat and EU Commission 2003.

18. Voting rules • Since 1993 Eastern enlargement was inevitable & EU institutional reform required. • 3 C’s: CAP, Cohesion & Control. • Here the focus is on Control, i.e. decision making. • Nice Treaty (2000)and & LISBON (Reform) TREATY 2007 (in force 1 Dec 2009) • Nice Treaty; temporary until new Treaty was ratified • No final decision made re: voting after enlargement • Focus on Council of Ministers voting rules.

19. Voting rules • Voting rules can be complex, especially as number of voters rises. • Number of yes-no coalitions is 2n. • EU9 • 512 possible coalitions. • EU 27 • 134 million coalitions.

20. Voting rules over time Pre-Nice rules (from the SEA) • Council of Ministers voting rule changes Nice rules (1Nov 2004) Lisbon Reform Treaty Rules (1 Dec 2009)

21. Pre-Nice Treaty Voting Rules • No longer used since 1 November 2004, but important as a basis of comparison. • “Qualified Majority Voting” (QMV): • ‘weighted voting’ in place since 1958, • Each member has number of votes, • Populous members more votes, but far less than population-proportional. • e.g. Germany 10, Luxembourg 2 • Majority threshold about 71% of votes to win.

22. Nice Treaty Voting Rules • 3 main changes for Council of Ministers: • Majority threshold raised • Votes re-weighted. • Big & ‘near-big’ members gain a lot of weight. • Added 2 new majority criteria: • Population (62%) and members (50%).

23. Winners & Losers from Nice “Aznar bonus” Poland Spain Italy France UK Germany • Source: Baldwin & Widgren (2005)

24. Nice reforms: 1 step forward, 2 steps backward • Step Forward: • Re-weighting improves decision-making efficiency. • 2 Steps Backwards: EU decision-making extremely difficult. • 2 new majority criteria worsens efficiency. • raising vote threshold worsens efficiency. • Main point is Vote Threshold raised. • Pop & member criteria almost never matter. • About 20 times out of 2.7 million winning coalitions. • Even small increases in threshold around 70% lowers passage probability • The number of blocking coalitions expands rapidly compared to the number of winning coalitions.

25. Lisbon Treaty rules • Lisbon Reform : Double Majority. • Approve requires ‘yes’ votes of a coalition of members that represent at least: • 55% of members, • 65% of EU population.

26. Lisbon Treaty rules very efficient 25 20 15 Passage probability 10 5 0 EU6 EU9 EU10 EU12 EU15 EU25 EU27 EU29 21.9 14.7 13.7 9.8 7.8 Historical 2.8 Status quo: May 04 to Nov 04 3.6 2.8 2.3 Nice rules: Nov 04 to Nov 09 10.1 12.9 12.2 Lisbon rules Dec’09 onwards • Source: Baldwin & Widgren (2005)

27. Do power measures matter?

28. 5th enlargement and business • Increased trade • Larger internal (single) market • Opportunites and threats • Does this impact on certain EU15 States? • Pre-accession benefits may ‘reduce’ initial impact of enlargement

29. Other European countries • EEA - includes Norway • Switzerland • Will Turkey ever join? • Further eastern enlargement?

30. Conclusion • Economic and political motivations for enlargement • Has the EU exceeded its optimum size? • Are reforms sufficient to accommodate the 5th enlargement? • Implications for business must be considered