European Union Enlargement Issues

Publication date
Tuesday, 05.03.2002

Augusto Lopez-Claros

EU Enlargement Issues


The forthcoming accession to the EU of up to ten new member countries raises a number of interesting policy issues, both from the perspective of the countries joining, as well as from that of the existing members. In this article we provide a primer on some of the issues that are likely to arise as we near the date of accession - perhaps as early as 2004. In future articles we will look at several of these and examine them in greater detail, with particular reference to the ways in which these are likely to affect those countries in the emerging Europe region. [1]

Enlargement will involve the integration of two sets of countries with very different levels of per capita GDP. The transition economies of central and eastern Europe have an average per capita GDP of some 35% of the EU average and a level of development - levels of productivity, the underlying stability of the macroeconomic environment, the strength of policies and institutions, the stability of the legal environment - that is seen as being well behind that of the EU's existing members. Convergence to average EU income levels will take time and a combination of sound policies in the countries joining - including a major boost to physical and human capital investment - and the transfer of technology and financial resources from the EU to the new members. How quickly this process moves will be a key indicator of the strength of domestic policies and the ability of the authorities to lay out a credible macroeconomic and legal framework - Ireland has already caught up with the EU average GDP per capita, Greece, on the other hand, more than 20 years after joining, still has not.

On the substance, it is possible to divide the economic reform agenda and the underlying policies for new members into two broad categories. In its Enlargement Papers, the EU Commission identifies those policies that are necessary to facilitate the transformation of new members' economies into "functioning market economies," able to withstand the competitive pressures within a much larger economic area with well-developed private sectors. These would include: greater price flexibility; further progress on trade and capital account liberalization; the removal of barriers to exit/entry; privatisation and industrial restructuring; adequate provision of social services; legal and administrative reforms to underpin the creation of a stable macroeconomic environment characterized by cautious fiscal and monetary policies and an stable exchange rate, among others.

Progress in these areas has been tangible in most of the candidate countries, although there are important differences among them in the speed with which the reform process has moved forward. The second category would include reforms which are not prerequisites for accession per se but that are intended to ease the process of adaptation and convergence. Among them one would include those aimed at modernizing the social protection system, boosting investment in areas likely to enhance the economy's growth potential, the safeguarding of the environment, and so on.

The list below is a brief summary of some of the policy issues which are likely to emerge in the period ahead, as the accession process gains momentum. The list is by no means comprehensive and no attempt is made to rank these by order of priority. Many of these will warrant further elaboration in future issues of our emerging Europe articles.

  • What are likely to be the effects of enlargement on the euro and will the euro, other things being equal, necessarily weaken when new members join? Enlargement will, after all, imply a drop in the average level of income in the euro area and, since none of the candidate countries will have an opt-out from EMU, they will all be adopting the euro in due course. Will enlargement raise concerns about the credibility of the ECB, given the "one-country-one-vote" rule presently in operation in its Governing Council?
  • How will the Stability Pact be applied to candidate countries once they join? This would be a particularly important issue, given the large public sector deficits presently being envisaged in countries such as the Czech Republic and Poland, currently projected to be in the region of 7-9% of GDP in 2003.
  • How will candidate countries cope with the demands being made upon them for a significant boost to infrastructure spending, environmental cleanup, and so on and how will these be reconciled with the requirements for budgetary discipline implicit in participation in EMU? (A related aspect to this question concerns demands being made by Nato on prospective members to boost defense spending.)
  • What about the tax implications of enlargement and the relative distribution of the burden of the costs of convergence between existing members and candidate countries?
  • What are likely to be the economic and social implications of labour mobility for the enlarged EU, particularly given the significant gaps in per capita income and wages between present members and candidates and the remarkable progress already made in the removal of barriers to trade, FDI, and other capital movements?
  • The impact of enlargement on agriculture is likely to figure prominently in policy makers' agendas. Some impact is expected on agricultural prices, on productivity, on the EU budget, on EU commitments to the WTO, on rural employment and migration. In some countries (e.g., Poland) many of these issues could potentially be "deal breakers."
  • Related to the above is the broader issue of the impact of enlargement on the EU budget stemming from the financing needs of the candidate countries, the need to accelerate the catching up process and to boost regional development through the use of structural assistance and Structural and Cohesion Funds.
  • Present EU members' long-standing participation in processes of economic integration and political cooperation have contributed to create a culture of consensus building and a certain willingness to temper the pursuit of national interests within the broader interests of the EU community. These tendencies will have to be nurtured and developed among new members and, in the short term, they could give rise to tensions as the EU moves forward with the formulation of a broad range of policies.

The above list scratches the surface of the long list of questions which are likely to emerge as the enlargement process moves forward and culminates in the transformation of the EU-15 into the EU-25. They suggest that the road ahead may be bumpy, taxing the intellectual and administrative capacities of the authorities on both sides of the table.

[1] Most of these issues have been identified in the Enlargement Papers prepared by the European Commission's Directorate-General for Economic and Financial Affairs.



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