The 2004 EU enlargement: Key economic issues

Abstract:

The 2004 EU enlargement will most likely yield major benefits to the new member countries in the long run. The new members will be able to capture gains from trade in goods and services and will moreover benefit from a continued inflow of financial and real capital. Without doubt, these processes will significantly accelerate the economic growth in east Europe. However, even under optimistic assumptions, catching-up with the EU-15 countries will be a time-consuming process that will take several decades in most cases. The entering countries currently have fairly fragile macroeconomic situations. Sustainability of public finances can become a major policy concern for several of the new member countries. Significant transfers from the EU notwithstanding, the new members will face pressures on public spending after enlargement. The countries will have to co-finance EU-funded projects, and implementation of EU regulations will entail fiscal costs. In total, the fiscal effects are not straightforward and there can be small gains or losses for the different new members. EU membership and fully open borders will gradually lead to changes in industrial structure as well. Significant amounts of fairly low-skill manufacturing industry and services may gradually shift from EU-15 to new member countries. Agricultural productivity is evidently quite low in the new Member States with significant potential for improvement. This can lead to increased agricultural and food production in some of these countries, though food safety and CAP regulations imply limitations in this respect. The future of international WTO negotiations will also play an important role for the development of agriculture and the food processing industry in the new member countries.