European Enlargement: Benefits and Costs

Introduction

In the year 2004, the European Union carried out the biggest enlargement. This enlargement was big both in scope and diversity. Countries such as the Czech Republic, Estonia, Cyprus, Hungary, Lithuania, Latvia, Poland, Malta, Slovenia, and the Slovak Republic were admitted as new members of the EU. Romania and Bulgaria were also admitted as members in January 2007. This paper discusses the benefits and costs of the enlargement process carried out by the European Union in 2004. It notes the benefits and costs of the enlargement to both the Old EU and the accession countries. The EU enlargement raised the European common market population from about 370 million to around 470 million people (Gupta 2006). It eliminated the majority of the barriers to; trade, investment, and labor mobility. It also facilitated easier exchange of technology, knowledge and modern ideas amongst enlarged EU nations. Foreign competition enhanced transparency in business and accountability in corporate affairs of member countries. Accessibility to the common market enhanced the attractiveness of the 10 new member states as a hub of foreign investment. The enlargement process enabled EU members to enjoy economies of scale which reduced the prices and transactional costs. Capital and labor productivity in the region rose. In addition, consumer goods became diverse, cheaper and of higher quality (Rieger 2005).

The accession countries, that is, the Central and Eastern European Countries (CEEC) enjoyed many benefits of joining the free trade area. Nevertheless, the majority of the CEECs were not allowed the option of joining the EU free trade area apart from Norway, Switzerland, and Iceland. The European Union was ready to admit CEECs as full members only from the beginning. The full EU membership attainment came with considerable costs to economic growth that was optimal. The CSSCs were subjected to stringent European Union rule and regulations of about 97,000 pages (Rieger 2005). These rules and regulations deprived these countries of many of their comparative advantages. Some of the regulations were economical ineffective to the accession countries. For instance, regulation number 2257/94 specified size and shape of bananas that qualifies to be traded in the European Union. The size of bananas is limited by the regulation to at least 14 cm and emphasized that the bananas were without “abnormal curvature”. The European Union did not scrap this regulation despite suffering from ridicule. In addition, the regulation required that the legality of bananas was set “in millimeters, of the thickness of a transverse section of the fruit between the lateral faces and the middle, perpendicularly to the longitudinal axis” (Gupta 2006).

There were many other EU regulations that were economically damaging to some of the accession countries. A state like Estonia was forced to absorb new tariffs numbering about 10, 794 against imports from countries outside EU membership. The country was also obliged to absorb a number of non-barrier tariffs, such as; anti-dumping duties, quotas and subsidies (Gupta 2006). Such protectionism by the EU, unfortunately, led to escalated food prices and lowered living standards among Estonian people. The expenditures of Governments required to mitigate the costs of the European Union regulations necessitated enhanced debt and increased taxes. According to the EU Observer Daily Newspaper in Brussels; “due to the large expenses involved in the accession of new members, governments will have to ask public or private financial institutions for money. Governments may also have to adopt economic measures, such as raising taxes, to finance European Union legislation implementation”. The article further stated that compliance with regulations of the European Union significantly affected the performance of the economies. The European Union Commission then, expected that the European Union environmental law alone to cost between 2 to 3 % of accession countries annual Gross Domestic Product during the transition period of 5 to 7 years (EU Observer 2003).

Economic Benefits and Costs of EU Enlargement

The EU enlargement provided accelerated economic growth and created more employment in both old EU member states and the new member countries. In a speech at the Foreign Affairs Committee to members of EU Parliament, British foreign secretary Geoff Hoon considered EU enlargement as “a reinvigorating force for the economies of Europe” (Hoon 2007). This is because new members joining the EU provided old member states new opportunities in terms of investments, markets, and jobs. According to Hoon (2007), over 100 million consumers were added to the EU as a result of enlargement, turning the EU the largest single market in the world, and the economies and labor force from new member states boosted growth across Europe. Denbigh (2007) reiterated that the creation of a wider single market offered businesses opportunities to make more exports, enhance their competitiveness internationally because available cheaper inputs and a more diverse larger labor market. Denbigh (2007) also stated further possibilities in terms of transfer of technology and gains from larger economies of scale. The UK department of trade and industry also reiterated that EU enlargement would result in increased trade, enhanced specialization and easier access to a bigger market. The report also predicted increased living standards as a result efficient allocation of resources and production (Trade and Investment Implications of EU Enlargement 2004).

The favorable economic expectations of the EU on the enlargement have been realized. Increased trade and investment has been recorded between old European Union member states and new member states, benefiting both sides involved. The European Commission economic evaluation of enlargement after two years revealed an increase from about 56% in 1993 to 62% in 2005 of the old EU member states’ trade share in total new member states. The new member states market share in the old EU member states imports also rose by 8% over the same period (Trade and Investment Implications of EU Enlargement 2004). Poland and the Czech Republic emerged as the largest exporters to the old EU member states according to the report. The report also indicated that the old member states continued to operate trade surplus that was substantial with new member countries. The report further documented a prevailing trend in terms of trade between EU member states. The old EU member states export labor intensive products to the new EU members, while new member states are more specialized in products that need high skills and intensive capital (Enlargement, Two Years After-An Economic Evaluation 2006).

A study carried out by the Centre of Economic Policy Research predicted an economic benefit for the old EU of 10 billion Euros as a result of accession of the 10 countries. These benefits were mainly spread among Germany, UK and France who benefit 70% of the total together (Baldwin 1997). A study by the Directorate General for Economic and Financial Affairs estimated an increase in the level of GDP by 0.7% on a cumulative basis in the old EU member states as a result of enlargement (Trade and Investment Implications of EU Enlargement 2004). The study also indicated Germany as the most significant beneficiary of economic enlargement with accession members. This is because the combined Eastern European markets were important to Germany, than American and other markets. A part from Germany, the other main countries that trade with Eastern Europe which stand to benefit from opportunities of economic growth include the UK, Italy, and France. These countries also had the best opportunities to implement vital structural reforms in the East (The Business Implications of the EU Enlargement 2003).

According to Riley (2003), more emphasis on the important power of enhanced common market was to be stressed. Due to the resultant bigger market because of enlargement, the old European Union members were able to benefit from the economies of scale particularly from supplying to a larger market. Hoon (2003) emphasized on the possibility of Foreign Direct Investment (FDI) into the CEEC; this offered a net flow of interests, profits and dividends, benefiting the countries’ Gross National Products (GNP) and aiding the balance of payments. According to Enlargement, Two Years After – An Economic Evaluation (2006), the enlargement offered the old European Union members’ financial intermediaries with new growth markets and transformed diversifications in terms of portfolio. Majority of banks in old European Union states took advantage of such opportunities. Austrian banks, for instance, invested 25% of their assets to the European Union member states (The Business Implications of the EU Enlargement 2003). The Nordic banks on the hand opened and continued to do business in the Baltic countries.

Whereas the flow of Foreign Direct Investments has been beneficial to the new European Union members, it disadvantaged the old EU members. The EU enlargement enhanced relocation of activities from old EU member states to accession countries leading in job losses. However, Foreign Direct Investment flows to accession countries have been a small part of all Foreign Direct Investment (FDI) outflows of the old EU member states. According to Enlargement, Two Years After-An Economic Evaluation (2006) statistics indicated that in 2004 the share of outflows to new members was 4% only. 53% of the state’s outflows were corresponding to other member countries within the old member states of the European Union (EU-15). The US had 12% inflow from old EU membership. From these figures, it is indicative that the main Foreign Direct Investment outflow of EU-15 was shared among them. This shows that the old European Union members invested in themselves (Trade and Investment Implications of EU Enlargement 2004).

Relocation as a result of enlargement had an impact on unemployment. Estimates show that annual labor turnover of 1-1.5% could be attributed to relocation in general. In addition, only a small part of this ratio specifically concerns relocation to new member countries. Outsourcing part of the production process to new EU member states allowed companies in old EU member states to strengthen their competitive edges with the net positive impact on employment (Trade and Investment Implications of EU Enlargement 2004). The old EU members also benefited from the creation European labor market that was more diverse. Riley (2003) stated that the old EU businesses could then enjoy chances to import labor at lower costs in areas where labor shortages were noticed. Further, Riley (2003) considers labor migration from new members to prevent the long term effects of populations that were aging. Currently, the people of the European Union enjoy increased opportunities to live, travel, and work with Central, Eastern, and Southern Europe (Riley 2003).

The EU enlargement also had implications to business; the firms in the existing member states trusted in the new member states, as they were working at the same level in relation to the EU law (Gupta 2006). Denbigh (2007) admitted that businesses of the EU-15 benefited from a less risky and more familiar functioning environment. For instance, this resulted in reduced costs of compliance concerning import or export regulations.

Cultural Benefits of European Union Enlargement

When initiating the enlargement process, the Europeans were more concerned about the pace of the economic and technological change. Furthermore, the Europeans felt identity loss and often had a sense of disconnect from the EU. In order to overcome these disadvantages, the European Union moved itself closer to the citizens; and culture made a good contribution to this (The 2007 Communication on Culture 2007). The enlargement of EU countries increased cultural diversity, advanced cross cultural communication, and interchange of new ideas. It also contributed to a better understanding of other people (Intercultural Dialogue 2007). The admission of the new EU members broadened and strengthened the European Union. It brought together new languages, and new culture. The contributions of new member states provided assistance to make the EU stronger and broaden its worldview perception.

The EU also helped overcome lack of communication and varying ideological differences among EU countries. The enlargement presented old EU members with the opportunity to rediscover their cultural diversity, artistic activity, cultural heritage, internationalization and flexible of education with the assistance of the joining countries. Hazarbasanova (2005) stated that cultural and educational perspectives contributed by the Eastern European countries joining the EU promoted the identification and discovery of the common roots, history and values. The EC preferred two important principles of cultural policy; highlighting cultural diversity and emphasizing European cultural heritage and cooperation between all members of the EU (Cultural Cooperation in Europe, Forum 2001). The CEEC enlargement promoted networks that generated cooperation projects in forms of work mobility; information exchanges and good practices; and animation in cultural fields (Intercultural Dialogue 2007).

The European Commission in October 2005 made her intension of making the year 2008 European Year of Intercultural Dialogue. It proposed a presentation of various concrete projects aimed at mobilizing civil rights at the national and local levels. The intended implementation field included; through sports, education, culture, youth and citizenship. Both the old and new EU membership benefited immensely fro the project which had a total budget of 10 million Euros.

Political Benefits of EU Enlargement

The European Union enlargement enabled the EU to make substantial contributions to solving outstanding political problems in the region through the stability Act. The pact offered an attempt to enhance stability through promotion of good neighborly relations, concerned with issues relating to frontiers and minorities, as well as regional cooperation and the strengthening of democratic institutions.

The European Union undertook a number of steps to promote interregional cooperation and better neighborly relations in addition to measures under the Stability Pact. These initiatives included increasing financing of; multi-country programs, projects that go across the border and building democratic institutions. The most significant of these projects included the Baltic Sea Cooperation Council, the Barents Sea Initiative, the Central Free Trade Area, and the Black Sea Cooperation project. These initiatives had clear characteristics of security because they dealt with concrete dangers such as storage nuclear materials and reduce tension by encouraging greater transparency and cooperation (Baldwin 1997).

The EU enlargement policy gave the EU the necessary strength to establish a political partnership with countries such as Russia and Ukraine. The developments in Russia, Ukraine and the Commonwealth of Independent States had major implications for the security and prosperity of the EU. Therefore, the EU took keen interest in the success of the Russian and Ukrainian reform processes and in the establishment of stable and prosperous systems throughout the Commonwealth of Independent States. This also opened new prospects for the EU to address a wide range of global and regional issues of security. Furthermore, the EU had an interest in Russia and Ukraine as viable economic partners. Currently, the economic links between the EU and Russia and Ukraine are rather limited, but there is substantial potential for economic relationship that is of mutual benefit (Baldwin 1997).

The enlargement provided the EU strength to respond to Russian and Commonwealth Independent Countries situation by negotiating Partnership and Cooperation Agreements (PCAs) that allowed cooperation on economic, political, and issues of technical nature. The PCA agreement aimed to gradually draw the Russian and EU economies closer by lifting trade bottlenecks, according favorable business environment, and promoting direct investment that the Russian economy needed. It also paved way for a potential free trade area, while opening regular political contacts at all levels and promoting respect for democracy and human rights (Intercultural Dialogue 2007)..

The European Union and its member states have provided 54 billion in OECD aid out of a total of ECU 92 billion. The program concentrated on projects to restructure state enterprises and to promote private sector development, reform the agricultural sector, develop infrastructure, ensure nuclear safety and the environment, reform public administration, education, social services, and democratic institutions. Furthermore, intercultural dialogue assists a number of European Union strategic priorities. Such strategic priorities include respect and promotion of cultural diversity, commitment by the EU to solidarity, social justice and cohesion, realizing efficient partnerships with Partner countries (Intercultural Dialogue 2007). Cultural diversity integrates global strategies of sustainable development. Intercultural dialogue on the on the other hand is a tool that advocates for peace, security and stability at a global level.

Budgetary Costs of European Union Enlargement

The EU enlargement provided a lot of benefits to members of the EU. However, these also presented many challenges to the EU. Riley (2003) in her article showed three important costs of enlargement of the EU; public finance costs, labor market disruption costs, wage competition costs.

The costs of enlargement are mainly influenced by political factors rather than economic factors. For instance, EU politicians make pronouncements in support of the Union enlargement; at the same time they want somebody else to foot the cost of this enlargement (Enlargement, Two Years After – An Economic Evaluation 2006). Enlargement process of the EU increased the budgetary contributions of existing member states. This is because the accession countries advanced about 25 billion euros in form of structural aid over the first three years (Riley 2003). Most accession countries were poor relatively, and therefore claimed more aid, in the end they dominated regional funds. According to the estimates by the EC report, about 28 billion euros had been transferred to the 10 accession countries over the past 15 years. The payments to these countries amount to 6.9% of the European Union budget. This amount was 2.2% higher than the GDP of these states shared in the EU. In this case, the richer members of the EU seem to be committed to assisting their poor neighbors. However, old member states’ financial contributions are limited, representing a paltry 0.1% of their GDP (Enlargement, Two Years After – An Economic Evaluation 2006).

Old member EU countries also suffered due to enlargement as they were obliged to extend Common Agricultural Policy to new member states. The majority of these countries have rural economies. It was not easy for the Common Agriculture Policy to survive the enlargement process. According to Rieger (2005), every moment the issue of admitting a new member state the EU, the more the existing members discover that the joining new member reduces their share e agricultural subsidies, and thus raising market competition. The Common Agricultural Policy offered farmers with varied levels of subsidies and schemes of income guarantees which could be exorbitant and affected the economies of old EU member states (Rieger 2005).

Labor Costs and Issues

The EU enlargement process caused anxiety among old EU members as a result of labor mobility. Workers tended to migrate from low income states of Central and Eastern Central countries to high income countries of the West. Riley (2003) stated a high level of unemployment in new member countries compared to old EU states. He stressed that there was no guarantee that there would be a decrease of unemployment with further enlargement the EU member countries. Old member countries also imposed some barriers on the entry of labor into their territories, in an effort to regulate the migration process (The Business Implications of the EU Enlargement 2003). The migration of workers from Central and Eastern Europe to old EU member states has had some benefits to these countries. These work forces from accession countries have assisted in relieving shortages in labor markets and added to higher economic performance in Europe. Old EU member countries which placed restrictions after May 2004, registered high economic growth, a reduction in unemployment and arise in employment statistics. In addition, old EU member states which relaxed restrictions on free movement of labor, upon admission of the 10 new EU members received concrete benefits. The benefits gained are in terms of raised income levels, shrinking of the internal market and increase in tax revenues (Gupta 2006).

Conclusion

In sum, the EU enlargement presented a stimulant for economic development and modernization of the EU, assisting the economies of both the old and new members of the European Union in facing the challenges of global economies. Moreover, the economic effects occasioned by this enlargement were smoothly absorbed. There were no noticeable impacts of enlargement that were seen to be disruptive on the product or labor markets of the EU. This enlargement helped Europe in a number ways; opened new opportunities for old European member states and new European Union countries; enhanced European competitiveness as a result of economic integration. Europe will also profit from rising internal and external trade; it will also achieve higher growth levels and enhanced employment prospects; it has also enhanced European Unions profile in international affairs at all levels, particularly in international politics and economic paradigms; and has enriched the EU heritage (Gupta 2006).

Reference List

Baldwin, R, Francois, J & Portes, R 1997, The Cost and Benefit of Enlargement, Economic Policy, pp. 127-176.

Denbigh, J 2007, Economic Benefits of Enlargement, The UK Department of Trade. Web.

Enlargement, Two Years After-An Economic Evaluation 2006, Occasional Paper by the Directorate-General for Economic and Financial Affairs and the Bureau of European Policy Advisors, the European Council. Web.

EU Observer 2003, “Billions Needed for Candidates to Implement EU Laws,” EU Observer. Web.

Gupta, E 2006, Studies in World Affairs, New Delhi, Atlantic Publishers.

Hazarbasavanova, E, 2005, The Role of Education in Europe’s Cultural Enlargement. Web.

Hoon, G 2007, Why Enlargement? Speech to the European Parliament at the Meeting of the Foreign Affairs Committee. Web.

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Rieger 2005, Agricultural Policy, Constrained Reforms, Oxford, Oxford University Press.

Riley, G 2003, Enlargement of the European Union, Economics Case Study, Tutor2ulimited.

The Business Implications of the EU Enlargement 2003, An Executive Survey in Cooperation with Accenture, London, Economist Intelligence Unit.

The 2007 Communications on Culture, European Culture Portal. Web.

Trade and Investment Implications of EU Enlargement 2004, The UK Department of Trade. Web.

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