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EU Enlargement: Three Years of Success and Challenges

This article analyzes the success of EU enlargement in three areas: absorption of EU transfers, high and steady trade growth, and financial market integration. It also examines the impact of "fundamentals" on market differentiation and the prospects of real convergence and foreign investment. The article further discusses the rise in external debt spreads and its implications for emerging markets.

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EU Enlargement: Three Years of Success and Challenges

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  1. Enlargement of the European Union: Three Years LaterSusan SchadlerEuropean DepartmentInternational Monetary Fund

  2. EU enlargement has succeeded on three fronts 1. Absorption of EU transfers

  3. Rising use of EU Funds helps sustain consumption, investment in new members CE4: Gross Inflow of EU Funds 2004-06 (percent of GDP) Source: National authorities, European Commission, IMF staff estimates.

  4. EU enlargement has succeeded on three fronts 1. Rising use of EU funds 2. High and steady trade growth

  5. Sustained high export growth from CE8 to EU15

  6. …and from EU15 to CE8.

  7. EU enlargement has succeeded on three fronts 1. Rising use of EU funds 2. High and steady trade growth 3. Financial market integration

  8. Spreads show falling risk premia in New Members Source: Bloomberg

  9. Do markets differentiate CECs because of “fundamentals”? What are “fundamentals”? EconomicRisk PoliticalRisk • Index based on 12 political and socio-economic conditions • GDP per capita • Real GDP Growth • Inflation • Budget Balance • Current Account deficit Global Financial Conditions Financial Risk • External debt/GDP • External debt service ratio • Current account/ exports • Official reserves/ imports • Exchange rate stability • Implied volatility index • 30-day Fed Fund futures rate • Volatility of Fed Fund futures

  10. CEC spreads 50-100 bps lower than fundamentals explain

  11. All CECs enjoy the “EU halo”

  12. Real convergence is picking up

  13. FDI

  14. Investment

  15. Title

  16. Title

  17. comment

  18. …and from EU15 to CE8

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  21. External debt spreads fell especially rapidly during 2004, but then rose relative to other EMs Source: Bloomberg

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