eu enlargement

Prof.: C. San Juan2008

EU Enlargement

Blessing or Curse?

Arne HenningJulia Albrecht Luzi KahnTom van Ommen

EU Enlargement – Blessing or Curse?

Agenda

• Introduction• EU-25: Economic Implications

– Labour Market – Welfare System– Budget

• Further Enlargement EU-27• Conclusion


Historical Overview of the EU


Part 1 of the 5th Enlargement1. Cyprus2. Czech Republic3. Estonia4. Hungary5. Latvia6. Lithuania7. Malta8. Poland9. Slovakia10.Slovenia

EU 25

01. May 2004


Part 2 and Future Enlargement

Acceding Countries 2007:

Bulgaria, Romania EU-27

Candidate Countries:

Croatia, The former Yogoslav Republic of Macedonia, Turkey

Potential Candidate Countries:

Albania, Bosnia and Herzegovina, Serbia and Montenegro, Kosovo


Criticism on Enlargement

• Labour mobility leads to fear of migration

• Unequal distribution of the budget some countries benefit

more than others

• Gaps in National Incomes


National Incomes


Labour Market / Welfare System• Economic Theory

• The Accession Treaty/Transitional Agreements

• Current Situation

• Future Outlook


Labour Market: Economic Theory

The Effects of Labour Mobility: The Three-factor Model


Labour Market: Economic Theory

The Three-factor Model is based on unrealistic assumptions:

• No free movement of labour in the real world• No smooth convergence of wage levels (cost of

adjust)• Problem of unemployment and job replacements

Fears of Migration and generally exploitment of welfare benefits


The Accession Treaty

• Reducing barriers to cross-border migration

• Allowing migrants same rights as domestic citizens

• Member states can make exemptions: Transitional Agreements (2-3-2 model) gives

member states the possibility of restricting the free movement of labour for a transitional period of up to 7 years


Migration Inflow

Stock of CEEC residents in the EU 15 member states


The Accession Treaty

Source: Journal of European Social Policy (2004)

Transitional Agreements:


Current Situation• In general, flow of workers has been rather

limited (Ireland: 3.8%, Austria: 1.4%, remaining

members: below 1% of working age population)

• Workers' mobility has had positive effects• Countries who have not applied any

restrictions (Ireland, UK and Sweden) have experienced high economic growth, a drop of unemployment and a rise of employment


Current Situation/2

• In the other 12 EU member states migrated workers have contributed to a smooth integration into the labour market.

• Nevertheless, some countries faced undesirable side-effects

• The preceding lifting of the mobility restrictions is expected to cause only slight increases in the movement of labour

Still, adjustments on their labour and welfare system are indispensable


Future Outlook

Necessary Reforms:• Labour Market: more labour mobility friendly institutions,

unemployment insurance of short duration, less employment protection

• Welfare System: Raising social welfare standards of new member

states, building up a pan-European safety net• Adoption of a EU-wide migration policy

These measures are essential to successfully integrate the new member states


Current BudgetWhat‘s the budget?

• The EU budget funds

• EU policies

• The expenditure of all the EU institutions

• It is limited

• By agreement of all the Member States Treaties

• Spending is voted by the European Parliament and Council on a Commission proposal

• The European Parliament signs the agreed budget into law

• The revenues come from

• Import duties, VAT (value added tax), and from the Member States (% of GDP with exceptions e.g. British rebate)

The EU budget cannot be in deficit!


Some important Numbers• Amount of money made available to the Union

• Ceiling at 1.24% of the Union‘s gross national income

• Comparison: about 45% of the Union‘s GNI goes to national, regional and local public expenditures in the Member States

• Annual budget for 2006

• 112 billions (1.01% of the GNI of the enlarged EU)

• Expenditures

• € 121 190,91 million (commitment appropriations)

• € 111 989,61 million (payment appropriations)


Expenditure 2006

EU Budget 2006(€ 121 billion)

The EU as a global partner (7%)

Competitiveness and Cohesion (39%)

Natural resources: Agriculture (36%), Rural development and Environment (11%)

Citizenship, freedom, security and justice (1%)

Other expenditure including administrative expenditure (6%)


Change in ExpenditureBudget 2005 2006

Description Budget 2006 Budget 2005 Change (%)

1. Agriculture 50 991 020 000 48 464 850 000 5,212. Structural operations 35 639 599 237 32 396 027 704 10,013. Internal policies 8 889 218 143 8 016 662 269 10,884. External action 5 369 049 920 5 476 162 603 – 1,96 5. Administration 6 656 369 817 6 292 367 368 5,786. Reserves 458 000 000 446 000 000 2,697. Pre-accession strategy 2 892 850 000 3 286 990 000 – 11,99

8. Compensation 1 073 500 332 1 304 988 996 – 17,74

Total Expenditure 111 969 607 449 105 684 048 940 5,95


Pre-accession instrumentsSpecific targeted financial aid

• For Acceding countries

• Candidates

• Potential future members

Objective

• Support efforts to enhance political, economic and institutional reforms


Timeline

1989: Creation of the Phare program

1997: Reorientation of Phare towards a total ‘pre-accession’ focus

1999: Creation of SAPARD and ISPA

Until 2000: Countries of the Western Balkans were also beneficiaries now the CARDS program is providing financial

assistance

July 2000: Turkey receives pre-accession assistance via similar but different instruments, budget lines and procedures

May 2004: New Member State must take over the full responsibility for the management of the Phare program through a process of Extended Decentralization


Phare• Phare funds focus entirely on the pre-accession priorities

• Objectives

• Strengthening public administrations and institutions to function effectively inside the EU

• Promoting convergence with the EU‘s extensive legislation (the acquis communautaire) and reduce the need for transition periods

• Promoting Economic and Social Cohesion

• Coverage

• Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Bulgaria and Romania


ISPA

Instrument for Structural Policies for Pre-Accession

• Aim: Enhance economic and social cohesion in the applicant countries of Central & Eastern Europe

• Main features:

• Only finances major environmental and transport infrastructure projects

• Annual budget for the 10 countries in 2000-2006 was € 1.04 billion

• Beneficiaries:

• Bulgaria, Romania, and Croatia (since 1st January 2005)


SAPARD

Special Accession Programme for Agriculture & Rural Development

• Aim: Help the 10 countries deal with the problems of the structural adjustment in their agricultural sectors and rural areas, as well as in the implementation of the acquis communautaire [set-up the administration to menage the CAP]

• Main features:

• Only finances agricultural and rural development measures

• Overall annual budget of € 560 million


IPA 2007-2013

Instrument for Pre-Accession Assistance

• Aim: Prepare the candidate counries better for the implementation of structural and rural development funds after accession

• Main features:

• It will replace the 2000-6 pre-accession financial instruments Phare, ISPA, SAPARD, the Turkish pre- accession instrument, and CARDS

• Will concern the countries with (potential) candidate status


Future

Draft Council conclusions on the budget guidelines for 2007

• The budgetary procedure for 2007 will be marked by 2 important elements

1. Maintaining a framework of overall budget discipline

• The EU budget for 2007 should provide sufficient resources to implement the various policies effectively and efficiently

2. Good collaboration between the Budgetary Authority and the Commission

• Forthcoming of the IIA (Interinstitutional Agreement)


Future

5. Sufficient margins must be maintained

6. Appropriations for 2007 should reflect real and well-defined needs

7. Improvement of the implementation of the EU budget

• Implementing rules and guidelines (explicit and simple rules)

8. Tight grip on payment appropriations

• Should be sufficient but not overestimated

• Efforts to deliver better forecasts

9. Continued improvement of <<Activity Based Budgeting>>


Future

10. Presentation of information to facilitate the transitions between the Financial Perspective 2000-06 and 2007-13

11. Important elements in preparing the budget

12. Stick to these guidlines!


Future Recent Agreement of Parliament &

Council • Based on the meeting of march 22nd on the financial perspective

• European Parliament

• Wants to add an extra 12 billion euro on top of the 862.4 billion euro budget for the timeframe of 2007-2013 (agreed upon at the EU summit in December 2005)

• Extra 12 billion € are necessary to fund policies with a high community added value like education, research, trans-european networks and crossborder cooperation.

• Additionally, they would like to increase the funds for the flexibility instrument in the budget used for unforeseen eventualities

• Problems to reach definite solution: Austrian finance minister Karl-Heinz Grasser proposes that a number close to 1.5 billion is much more realistic than 12 billion of additional funds


Winners

• The 10 new member countries:

• Will benefit from billions of € of development aid between 2007 and 2013

• However, they will receive less than Luxembourg proposed in June 2005

• The UK sacraficed part of its rebate, but now the UK, France and Italy will be making equivalent net contributions

• In the past, the UK‘s net contributin has been much higher

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Lithuania

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Lithuania

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Czech

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Czech

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Malta

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Malta

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Hungary

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Hungary

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Estonia

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Estonia

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Slovakia

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Slovakia

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Latvia

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Latvia

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Slovenia

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Slovenia

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Cyprus

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Cyprus

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Poland

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm#Poland

http://europa.eu.int/abc/governments/new_eu_members/index_de.htm










http://europa.eu.int/abc/governments/united_kingdom/index_de.htm


Losers• The UK is under pressure to agree to cuts in its

rebate

• When the UK won the rebate in 1984 it was one of the poorest countries in the EU, but now it is one of the richest

• France did not want to allow even the possibility of a change to farm spending before 2014

• Budget review does leave open this possibility (France will have veto power)

• French contributions to the EU budget will rise more sharply than Britain‘s




http://europa.eu.int/abc/governments/france/index_de.htm








Bulgaria-Economic Profile• Functioning market economy since 2002

• Macroeconomic stabilityImplementation of Structural Reform Program

• Improvements made, Challenges remain:– External deficit– Attractiveness of business environment– Completion of privatisation– Flexibility of labour markets


Economic Profile


Steps towards the EUMay 1990: Agreement on Trade and Cooperation; PHARE

Programme

Mar 1993: Europe Agreement for Bulgaria and Interim Agreement on Trade and Related Matters (replacing the Trade and

Cooperation Agreement)

May 1995: The first meeting of the Bulgaria - EU Association Council

Dec 1995: Decision to apply for EU membership – application presented to the European Council in Madrid

Dec 1999: The European Council in Helsinki decision to start negotiations with Bulgaria, Latvia, Lithuania, Slovakia, Romania and Malta

Feb 2000-Jun 2004: Accession negotiations

25 Apr 2005: Accession Treaty signed in Luxembourg

11 May 2005: Bulgaria ratified the Accession Treaty

1 Jan 2007: Accession


Romania – Economic Profile• Functioning market economy since 2004

• Broadly maintained macroeconomic stability Implementation of Structural Reform Program not vigorously

in all fields

• Some progress on critical issues, but further challenges:– Pace of disinflation– Current account deficit– Prudent fiscal policy

Strengthen revenue base– Continuation privatisation


Economic Profile


Steps towards the EU1974 Romania’s inclusion in the Community's Generalised

System of Preferences

1980 signing of the Agreement on Industrial Products

1991 signing of the Trade and Co-operation Agreement

Feb 1993 signing of the Europe Agreement

Feb 1995 entrance into force of the Europe Agreement

Jun 1995 application for EU membership

Dec 1999 Helsinki European Council’s decision to open accession negotiations

Feb 2000 formal beginning of the accession negotiations

Dec 2004 closure of the accession negotiations

25 Apr 2005 signing of the Accession Treaty in Luxembourg

1 Jan 2007 planned accession date; delay by 1 year possible


(Potential) Candidate Countries• Croatia and Turkey:

start of accession negotiations in Oct 2005

• The former Yugoslav Republic of Macedonia: accession negotiations not started; status of candidate country in Dec 2005

• Albania, Bosnia and Herzegovina and Serbia and Montenegro (including Kosovo under UN Security Council Resolution 1244 of 10 June 1999): progress towards being recognised as candidates depends on engagement in Stabilisation and Association Process


Western Balkans:

Main Economic Trends

• Growth in 2004 around 4.5%, following a slowdown in 2002-2003

• Economic stabilisation continued

• High external deficits

• Introduction of market economy Weak institutions


Western Balkans:

Main Economic Trends


The Stabilisation and Association Process (SAP)

• EU’s policy framework for the Western Balkan countries, all the way to their eventual accession

• Three aims:

1. stabilisation and a swift transition to a market economy

2. the promotion of regional cooperation

3. the prospect of EU accession


• Instruments formulated at Zagreb Summit (Nov 2000)

• Thessaloniki Agenda (Jun 2003) introduced new instrumentsEuropean PartnershipsStrengthened political co-operation in Common

Foreign and Security PolicyPromoting economic development Opening of Community programmes to

Western Balkan countries

The Stabilisation and Association Process (SAP)


Conclusion

• Essential reforms concerning the labour market and welfare system need to be implemented in the future

• The new members benefit higher budget allocations which need to be born by the old and wealthy members

• Further enlargement is on its way, delaying the realization of benefits generated by an enlarged market


Conclusion

• Already now their are political, social and cultural benefits for the EU as a whole

• Economic benefits will be reaped in the longer term: enlarged market makes the EU more competitive on a global scale


FDI and Developing Countries• On average, 90% of the stock of capital in developing

countries is self financed, and this fraction was surprisingly stable throughout the 1990s.

• The greater integration of financial markets has not changed the dispersion of self-financing rates, and the correlation between changes in de-facto financial integration and changes in self financing ratios is statistically insignificant.


TOPIC FOR DISCUSSION

•There is no evidence of any "growth bonus" associated with increasing the financing share of foreign savings.

•In fact, the evidence suggests the opposite: throughout the 1990s, countries with higher self-financing ratios grew significantly faster than countries with low self-financing ratios.

•This result persists even after controlling growth for the quality of institutions.

FDI and Developing Countries

Prof.: C. San Juan2008

Questions?


References• The European Commission (2006). Enlargement Process.

http://europa.eu.int/comm/enlargement/index_en.htm• Economic Policy Committee (2004). The Structural

Challenges Facing the Candidate Countries. http://europa.eu.int/comm/economy_finance/epc/documents/2004/candidate_countries_final_en.pdf

• Commission of the European Communities (2005). 2005 enlargement strategy paper. http://europa.eu.int/comm/enlargement/report_2005/pdf/package_v/com_561_final_en_strategy_paper.pdf

• Kvist J. (2004), Does EU Enlargement lead to a race to the bottom? Strategic interaction among EU member states in social policy, Journal of European Social Policy, vol. 14 (3), pp. 301-318.

http://europa.eu.int/comm/enlargement/index_en.htm














References• http://www.euractiv.com/de/agenda2004/eu-budget-parlament-

fordert-12-milliarden-euro-zusaetzlich/article-153635

• http://europa.eu.int/comm/budget/budget_glance/index_en.htm

• http://europa.eu.int/eur-lex/budget/data/D2006_VOL1/EN/nmc-grseq42960935830-3/index.html

• http://europa.eu.int/comm/budget/budget_glance/index_en.htm

• http://news.bbc.co.uk/2/hi/uk_news/politics/4078796.stm

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