Eurozone enlargement: exploring uncharted waters

Abstract:

The paper summarises the outcomes of a research project on 'The Eastward Enlargement of the Eurozone' that has been, since 2001, conducted by leading research institutions from Estonia, Finland, Italy, Poland, Portugal and Slovenia, co-ordinated by the Freie Universität Berlin's Jean Monnet Centre of Excellence. The project was supported by the European Commission's 5th Framework Programme. The report draws on the research that has been laid down in a set of working papers and several books, analyses impacts on markets and policies, and assesses the changes that have occurred so far. It also discusses what impact enlargement will have on the eurozone as a whole, its capacity to act, and on institutional consequences. On 1 May 2004, ten countries joined the European Union. The new members are Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. Enlargement increased the EU population to 450 million, making the EU the world's largest single market in population terms. A market of this size can be expected to give a boost to investment and job creation, raising levels of prosperity throughout Europe. Enlargement will, however, create new challenges: the Central and East European countries (CEEC) may take decades to catch up economically with their western neighbours unless adequate assistance from the old member countries is being provided. Thus, the success of enlargement depends both on the speed of the process and on the procedure how to implement the right political and economic mechanisms towards sustainable self-financed growth. This process may even be aggravated by the eurozone's eastward enlargement which strips the CEEC of monetary policy independence and the application of traditional economic instruments.