EU extension to the East and exporting jobs: Tax harmonisation may hurt more and benefit less

Abstract:

This paper deals with the discussion in Germany about job exports to the low-cost Eastern European members of the EU. It states that the critics of EU enlargement in Germany have overlooked that Eastern and Western Europe strongly differ in their capital formation and productivity levels. The result is a slight re-orientation of German capital exports towards the new member states.

The paper argues that this should be accepted, not prevented by means of tax harmonisation, which would reduce growth rates in the new member states. This, in turn, would simply increase the cost of EU enlargement to the West in the form of higher transfers.

The paper concludes that tax harmonisation in the Union could hardly cure Germany's problems of sluggish growth and a high unemployment rate. Instead of calling for a reversal of growth-friendly policies in the East, it would be better to examine where Germany's net contribution to the EU budget could be reduced. The greatest potential to cut spending lies in the area of the Common Agricultural Policy.