Economic improvement beyond enlargement

Date:17/07/03

By David Kernohan

A NUMBER of major challenges confront the EU economies this summer. First, economic growth in the eurozone has recently slowed to a virtual standstill, with domestic productivity falling across almost all sectors, and trade performance suffering as a result of depressed world demand conditions.

Second, on 26 June, EU farm ministers reached a deal on reform of the Common Agricultural Policy (CAP) which may have profound implications, not only for EU farm policy, but also for confidence in world trade generally. Meanwhile, the Union will next year admit ten new member states, in what is its most ambitious single expansion so far.

With a combined population of nearly one hundred million, and a landmass the size of Greece, Portugal and Spain combined, it may be timely to attempt to tease out some of the likely challenges and opportunities that could arise for the EU as a result of adding ten new members. Common to the discussion of agricultural reform, sluggish economic performance and low productivity is the subliminal fear that changes next year may do little in the short-term to improve matters and may even make matters worse over the long-term. Could such fears be justified?

Certainly, the new member countries tend to be poor in absolute terms, and will do little initially to inject much additional demand into the enlarged EU economy. In most cases also, the new member countries have relatively large agricultural sectors and correspondingly less well-developed industrial and service sectors.

For example Poland, with only 3% of its gross domestic product devoted to agriculture, still has more than 25% of its workforce on the land. So, it is certainly possible to interpret the recent CAP reforms, and last year's limit placed on the total CAP budget until 2013, as defensive moves designed to limit any uncontrolled claims on EU funds for agricultural support after accession.

However, a more optimistic interpretation of the present economic situation confronting both old and new EU members is also possible. Firstly, the performance of these countries in readying themselves for EU membership has been fairly heroic - and suggests they may not need excessive handouts to compete in agriculture. If this performance can be generalized to other sectors, it is not unreasonable to suggest that, far from being a drag on progress, expansion eastwards could act as a spur to EU productivity and growth.

Historical growth trends suggest that poorer countries can achieve a fairly rapid growth "catch-up" as slack resources are deployed more profitably in new sectors of activity. Chiefly this transition takes the initial form of a move off the land into industry.

Only later, generally speaking, does the post-industrial shift occur, whereby increased capital investment in industry starts to displace labour which finally arrives in the expanding service sector - so much a feature of many of today's increasingly "weightless" evolved economies. Of course, the crucial ingredient is to encourage and enable a "correct" deployment of national productive resources to emerge - as, for example, has occurred in the Irish economy in the past decade.

Judged this way, the addition of ten new member states is a historic opportunity to raise aggregate EU productivity levels as the "accession ten" shed outmoded practices, increase and attract investment and continue a process of catch-up and convergence with their neighbours that is already well under way. To achieve all this, it will be vital that a confident, progressive, export-oriented and investment-centred view of the national "economic good" takes hold among governing elites and opinion-formers.

The facts on the ground suggest that much of this realignment of economic priorities has already been achieved. Firstly, all the accession countries now have shares of agriculture of under 4% of GDP which approaches and often undercuts the EU-15 norm (Spain has 3% and Greece has 6%). Secondly, when measured by the share in gross total value added, many of these countries already return respectable productivity figures, even in agriculture.

Thirdly, agriculture should matter less and less for these countries as we have witnessed in the economic transition of all advanced economies since the industrial revolution. Here it is key to note that even in Poland, with its large prairies and abundance of agricultural potential, the share of agriculture in GDP is down from more than 8% in 1990 to less than 3% today.

A similar, and often superior, performance has occurred in Hungary and the Czech and Slovak Republics and Slovenia. Only Lithuania keeps company with Poland with figures for agricultural employment above 20%.

So on present trends, the process of the first phase of developmental catch-up is already well under way in the new EU-ten, to the extent that the tantalizing prospect of above-trend productivity gains in these countries in the future. In part this reflects the disciplines of the convergence process as mediated by the EU accession negotiations.

But, inevitably, a great deal of the credit must go to the persistence and hard work of the candidate countries, many of which have made huge strides in also raising productivity levels in manufacturing and enhancing capacity in the services sector.

Judged in this light, the modest stretch of the reformed EU agriculture budgetary arrangements should matter less to the EU-10, while achieving a successful outcome for the current Doha round of WTO talks should matter more.

The facts are that an inexorable historical trend is under way in candidate countries to displace agricultural jobs (via investment in mechanization) with more profitable outlets in industry and services and increased national productivity levels.

This is not to suggest that agriculture does not matter, either to the new members themselves or to the EU at large. It is, however, to point out the great progress that has already been made during the transition process. Hard work will be needed to generate such progressive, continuous productivity improvements across all sectors of economic activity.

However, if the effort can be made - and the focus maintained - it will be to the eventual benefit of both old and new EU economies alike. Who says economists are a gloomy bunch?

• Dr David Kernohan is head of the trade policy unit at the Centre for European Policy Studies, Brussels.

Analysis by the head of the trade policy unit at the Centre for European Policy Studies about the prospects for the EU's economies in the coming months.

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