EU Enlargement - Evaluating the Impact

Many of Europe's newer member states have outperformed established EU countries since they joined the single market in 2004 and 2007. And as a result there has been a process of convergence in average living standards and improved employment opportunities. Europe's new nations have injected extra dynamism into the region despite inevitable teething problems along the way.For students revising aspects of EU enlargement here is a streamed version of a presentation I gave to a Tutor2u event in London a few weeks agoA streamed version of the presentation is available herePDF Handout of the presentationRelated news issues Germany expects influx of Polish workers (BBC news, April 2011)

Enlargement and the UK Economy

The UK government has for many years championed the further expansion of the EU single market. It favours bringing more countries into the EU partly because of a belief that the UK's own macroeconomic performance can improve as a result (economists term this a “positive-sum game"). Among the benefits cited from having more countries within the market here are four key ones:

(1) Export Potential: There are trade creation effects from increasing the size of a customs union. Britain can now source some of her imports of goods and services more cheaply leading to an improvement in her terms of trade. The efficiency of the economy should increase as resources are diverted to areas of the UK's comparative advantage.

(2) Exploitation of economies of scale from supplying to a larger market: As the size of the European market increases and accession countries become richer creating new demand for goods and services. For example, the value of British exports to Poland (at current prices) has more than doubled since Poland's accession to the EU in 2004.

(3) Foreign Investment and Incomes and Profits: Foreign investment by British firms into Europe's newest states will provide a flow of interest profits and dividends thereby boosting our GNP and supporting the current account of the balance of payments. FDI will also help to speed up the economic transformation of Europe's new countries.

(4) A more diverse European labour market: There are now greater opportunities for British businesses to import lower-cost skilled labour in areas where there are labour shortages. The migration of labour from accession countries was larger than many economists predicted in 2004 but during the strong growth years of 2005-2008, inward migration into the UK helped to offset some of the longer-term effects of ageing populations and the slow growth of the population of working age. It kept wage inflation and consumer price inflation lower than would otherwise be the case and may have contributed to a higher level of potential national income.

Unemployment rates in Europe's newer member states (% of the labour force)

Risks of EU Enlargement for the UK

(1) Extra budgetary costs for financing EU programmes – most of the new member states of the EU are relatively poor in terms of real GDP per capita and the EU has raised the size of their spending on cohesion funds much of which has been targeted at relatively poorer countries and regions.

(2) Social and economic pressures from inward labour migration – this is covered in a separate chapter

(3) A shift of foreign direct investment and jobs to Eastern Europe – partly driven by tax competition and by lower unit labour costs.

Next Steps

The EU will enlarge further in future years but the pace of this is open to question in the wake of the global financial crisis. There are numerous pre-entry conditions that have to be met by any country seeking EU membership, but it seems that Croatia's entry into the EU will pass through relatively untroubled. And there have been some suggestions that Iceland might seek entry to the single market. In July 2009 Iceland formally submitted an EU membership application. Effectively it is already part of the single market and over seventy per cent of its trade is with other EU countries. Serbia, Albania and Montenegro are also candidate countries to expand the single market to thirty countries or more.

But the biggest and most controversial enlargement would be that of Turkey. After several years of discussion, negotiations between the EU and Turkey seem to have stalled for the time being. Turkey does not recognise the legitimacy of the Greek Cypriot government but the EU insists that Turkey opens its ports and airports to ships and planes coming from Cyprus. Turkey is insisting that EU takes steps to end the isolation of the Turkish Cypriots, such as allowing them to trade freely with EU countries. Human rights remain an intractable issue between the politicians. Finland, Italy, Sweden, Spain and the UK, remain strongly in favour of Turkish membership. The Dutch, Austrians and Germans are more sceptical. Although Turkey remains outside of the EU – it does share with them a common external tariff arrangement.