Enlargement’s positive impact

By Sybille Regout

Date: 27/04/06

Contrary to popular fears, the 2004 enlargement of the EU had a positive, albeit limited, impact on western European economies, according to a study published today (27 April).

The study, carried out by Katinka Barysch, chief economist at the Centre for European Reform, for the Central Organisation of Industrial Employees in Denmark and the Confederation of Danish Industries, argues that the most positive outcome of the 2004 enlargement is that it led to reforms across central and eastern Europe. Barysch points out that the new member states' transformation "from post-Communist chaos to orderly EU membership" in less than 15 years was "one of the most impressive examples of regime changes ever recorded".

The central and eastern European countries benefited from integrating with the bigger and wealthier economies of western Europe, the study argues.

The consequences of trade created an export boom and healthy economic growth rates in the accession countries, the study says. The export boom was closely linked to large-scale inflows of foreign direct investment. Since the early 1990s, Western companies invested EUR 150 billion in the now new member states.

But a growing number of citizens in the old EU member states suspect that the new member states' economic success has come at their expense.

Barysch argues that "many west Europeans misunderstand the way in which enlargement has impacted on their country". She points out that enlargement had a positive economic impact on older member states, though limited, because of the small size of the new members' economies.

Many western European companies invested in retail, telecoms, energy or media in the new EU states, she points out, adding that firms in older EU member states such as Austria, France, Germany and the Netherlands made substantial profits by trading and investing there.

Public hostility to enlargement in western Europe is largely caused by fears of unemployment following the relocation of industries to new member states and immigration of workers from the poorer new members.

But Barysch points out that relocation, which started long before the enlargement eastwards, helped western EU companies stay competitive in the face of globalisation by allowing them to employ skilled and lower-cost workers. "This has to be seen in the wider context of globalisation," she says.

"Competition with India or China forced the old EU countries to adjust. Companies needed to cut their costs or they would run out of business."

The European Commission reported in February that countries which opened their labour market to east European workers in 2004 were "upbeat about the outcome of this decision". Immigrants helped to fill the gaps in national labour markets and enlargement "has helped to formalise the underground economy constituted by previously undocumented workers", it explained.

Barysch denounces the myth of eastern Europe being a "low-tax paradise that flourishes at the expense of high-tax neighbours". Taxation levels in new member states are not much lower than in older EU countries, she says. In 2003, the ten accession countries collected 36% of their gross domestic product (GDP) in taxes, as opposed to 40% by the older member states, she points out.

She also argues that the EU's biggest enlargement ever has not been a burden for the Union's budget, with the 2003-06 costs amounting to 0.1% of EU GDP.

Barysch concludes that while the EU's enlargement east was "one of the Union's greatest ever successes", "the main reason why the political atmosphere in the EU has become somewhat antagonistic is that politicians and the media in some eurozone countries have exploited populist fears of low-cost competition from the east".

Contrary to popular fears, the 2004 enlargement of the EU had a positive, albeit limited, impact on western European economies, according to a study carried out by Katinka Barysch, Chief Economist at the Centre for European Reform, for the Central Organisation of Industrial Employees in Denmark and the Confederation of Danish Industries. In this study, published on 27 April 2006, it is argued that the most positive outcome of the 2004 enlargement was that it had led to reforms across central and eastern Europe.

Centre for European Reform: Enlargement two years on: Economic success or political failure? Briefing paper for the Confederation of Danish Industries and the Central Organization of Industrial Employees in Denmark, April 2006 http://www.sa.is/files/Enlargement%20two%20years%20on_291053624.pdf

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