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The economics of enlargement

Enlargement is a mutually beneficial process for the EU and its new members.

This has been confirmed by the results of the largest ever enlargement of the European Union: the economies of the ten countries which joined the EU on 1 May 2004 are growing at a rapid pace, enabling them progressively to bridge the economic and social gaps with their richer neighbours. But the latter also win, as the increased population of the EU single market by 75 million inhabitants, to over 490 million in total, brings a wealth of trade and investment opportunities. Enlargement is acting as a force for modernisation in the EU as a whole.

The latest evaluation

On 3 May 2006 – the second anniversary of ten new countries joining the European Union – the Commission adopted a Communication, 'Enlargement, Two Years After – An Economic Success', which covers the economic aspects of enlargement. It is accompanied by a more detailed and general assessment by the Bureau of Policy Advisers and the Directorate-General for Economic and Financial Affairs.

Main findings

Integration with the European Union brought about stronger economic growth in the ten new Member States (EU-10). This was particularly welcome as they had, in the early phases of economic transition, experienced sharp increases in unemployment due to the massive structural adjustments they made to establish the market economy.

With an average annual economic growth of 3.75% between 1997 and 2005, the new Member States have performed better than the old Member States (EU-15) which achieved 2.5% on average in the same period. This strong economic growth went hand in hand with increasing macroeconomic stability. Ongoing economic integration and the extension of EU-wide economic policy coordination and budgetary surveillance procedures to the new Member States have reinforced economic policy discipline. And inflation and interest rates in the new Member States have come closer to those of the EU-15, reflecting the overall credibility of economic policies. Developments in public finances, however, have been less uniform, reflecting the continuing impact of earlier transition-related reforms.

The adoption of the EU body of legislation and rules – the so-called acquis – helped reform these previously centrally planned economies, brought about macroeconomic stability and stable financial markets, and provided huge opportunities for businesses – in particular as the EU-10 are very open economies. Their trade (exports plus imports) represents 93% of their GDP on average, compared with an EU-15 average of 55%.

The EU-10 also attracted a lot of foreign direct investment (FDI), reaching an overall stock of €191 billion in 2004, or 40% of their total GDP, while it had been virtually non-existent some ten years earlier. Albeit impressive from the point of view of the EU-10, the amount is only 4% of the EU-25 overall investment stock in the same year and does not reflect major delocalisation.

While still in a catching-up process, the EU-10 have helped foster structural change throughout the Union at a time which coincided with accelerating globalisation and the emergence of China and India as formidable competitors, i.e. when it was most needed. Implementing the Lisbon agenda of reforms to raise the EU’s potential growth will sustain this process of increased competitiveness and job creation.

Enlargement did not trigger massive migration flows from the new Member States into the EU-15 markets, but it did enable the rapid economic development of the EU-10.

The new Member States are net beneficiaries of the EU budget. Even before the May 2004 accession, the Union was supporting their preparations for accession with financial programmes. Funding for the EU-10 has further increased over time, reaching just over 2% of EU-10 GDP in 2005. For the group as a whole, average net EU transfers amounted to 0.6% of gross national income (GNI) in 2004, ranging from 0.25% of GNI for Hungary to 2.1% of GNI for Lithuania. Under the new financial framework 2007-2013, net transfers to the new Member States are expected to almost triple from an average of 1% of GDP in 2004-2006.

Previous experience

These findings are broadly in line with previous analytical work – in particular, a 2001 study from the Directorate-General for Economic and Financial Affairs – according to which enlargement could increase the GDP growth of the new Member States by between 1.3% and 2.1% annually over the 2000-2009 decade. For the old Member States, enlargement could increase the level of GDP by 0.7% on a cumulative basis in this same decade. The main transmission mechanisms through which these gains for the new Member States will be achieved are trade, FDI, financial integration and economic policy coordination.

Following enlargement rounds

The following rounds of enlargement – including the latest one with the accession of Bulgaria and Romania on 1 January 2007 – are expected to yield similar qualitative effects. Given the sizes of the economies involved, the quantitative impact on the EU will probably be more limited than was seen in the fifth wave of enlargement. With the exception of Turkey, the economies of candidate and potential candidate countries are small, even in comparison to the aggregate of the ten Member States which acceded on 1 May 2004.