A2 Economics PowerPoint Briefings 2009 European Union Enlargement tutor2u ™ tutor2u ™

A2 EconomicsPowerPoint Briefings 2009PowerPoint Briefings 2009

European Union Enlargement

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The Official EU View on Enlargement

• “Enlargement is one of the EU's most powerful policy tools. It serves the EU's strategic interests in stability, security, and conflict prevention. It has helped to increase prosperity and growth opportunities, to improve links with vital transport and energy routes, and to increase the EU's weight in the world.

• In May 2009, the EU will mark the fifth anniversary of the 2004 enlargement.”

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Some issues to cover and revise

• Has the widening of the EU been a success?

• The benefits and costs of enlargement for

– New member states

– Existing (established) members of the EU

– The EU economy as a whole e.g. in the context of globalisation and other external events

• EU enlargement and immigration policy

• How many more countries will join?

• Will enlargement prevent final economic union?

• How many new states will join the Euro?

• Is enlargement fatigue setting in?

• What of states that remain outside of the EU e.g. Norway and Iceland

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EU Enlargement – A Brief Historical Perspective

• Europe has added new members periodically

• Six Main Waves of EU Enlargement

– 1973 (UK, Ireland and Denmark)

– 1981 (Greece)

– 1986 (Portugal and Spain)

– 1995 (Austria, Finland and Sweden)

– 2004 (Ten new countries)

– 2007 (Bulgaria and Romania)

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Who will be next? Potential members

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Centre for European Reform

• “The objective of joining the EU has helped the Central and East European countries to move from post-Communist upheaval to market economics and pluralist democracies in little more than a decade. Ten countries successfully joined the EU in May 2004, and Bulgaria and Romania followed in January 2007. However, the Union is showing signs of 'enlargement fatigue'. Many politicians worry that an ever larger Union will function badly, and that further widening will come at the expense of deepening. West European workers fear the economic consequences of adding 50 million low-cost workers to the EU single market. Future accession would be very difficult unless public and political support for enlargement revives.”

• www.cer.org.uk/enlargement_new/index_enlargement_new.html

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EU Membership Distribution in Jan 2004

EU MEMBERSHIP (April 2004)

RICH POOR

LARGE UK SPAIN

FRANCE

ITALY

GERMANY

SMALL BELGIUM PORTUGAL

LUXEMBOURG GREECE

NETHERLANDS

IRELAND

DENMARK

SWEDEN

AUSTRIA

FINLAND

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EU Membership in January 2009

EU MEMBERSHIP JANUARY 2009

RICH POOR

LARGE UK SPAIN

FRANCE POLAND

ITALY

GERMANY

SMALL BELGIUM PORTUGAL

LUXEMBOURG GREECE

NETHERLANDS ESTONIA ROMANIA

IRELAND HUNGARY BULGARIA

DENMARK CZECH REPUBLIC

SWEDEN SLOVAKIA

AUSTRIA SLOVENIA

FINLAND CYPRUS

MALTA

LITHUANIA

LATVIA

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The Map of an Enlarged Europe

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Overview of new member states (1)

Per Capita IncomesEU25=100

PPP adjusted

Manufacturing as a % of GDP GDP Growth

1997 2008 % in 2006 Average annual growth (%)

1999-08

Bulgaria 26 39 26 5.3

Cyprus 86 92 11 3.8

Czech Republic 73 82 32 2.8

Estonia 42 67 21 6.4

Hungary 52 63 26 3.8

Latvia 37 56 15 7.3

Lithuania 38 62 23 6.5

Malta 81 76 17 1.9

Poland 47 55 25 4.2

Romania 26 44 27 5.2

Slovakia 51 71 28 4.5

Slovenia 78 91 28 5.2

Turkey 32 42 25 4.2

United Kingdom

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Overview of new member states (2)

Inflation Unemployment Labour productivity Population

% change in consumer prices in 2008

Per cent of the labour force in November 2008

GDP per person employed

EU27=100 in 2008

Thousands – 2008 mid year estimate

Bulgaria 12.0 5.1 36 7 640

Cyprus 4.4 3.9 85 789

Czech Republic 6.3 4.5 73 10 381

Estonia 10.6 8.3 63 1 340

Hungary 6.0 8.3 74 10 045

Latvia 15.3 9.0 51 2 270

Lithuania 11.1 7.0 63 3 366

Malta 4.7 5.8 89 410

Poland 4.2 6.5 62 38 115

Romania 7.9 5.8 45 21 528

Slovakia 3.9 9.1 78 5 401

Slovenia 5.5 4.3 86 2 025

Turkey 10.4 n/a 62 70 586

United Kingdom

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GDP Per Head for selected member states

Index of GDP per head, purchasing power standard, EU25=100, source: Euro

Income convergence for new EU members

Czech Republic Hungary Poland Slovenia

Estonia Slovak Republic Bulgaria Lithuania

Latvia Romania

Source: Reuters EcoWin

00 01 02 03 04 05 06 07 08

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100 Some progress in raising relative living standards

Catching up with Portugal and Greece

Newer nations are considerably poorer

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Unemployment rates for selected countries

Percentage of the labour force, annual average, source: Eurostat

Unemployment in selected New Member States


98 99 00 01 02 03 04 05 06 07

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Lithuania

Slovenia

Estonia

Czech Republic

EU25 average

Hungary

Poland

Slovakia

Strong growth has helped to bring down unemployment

More jobs for domestic workers – reverse migration?

But putting pressure on wages to rise

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Joining the Club – Criterion for EU Entry

• Accession countries have to meet the Copenhagen criterion for joining the European Union

– Stability of political institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities

– A fully functioning market economy that meets the standards required for participation in the single market

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Transition Economies

• Price Liberalisation

– Moving away from state controlled prices to allow the price mechanism greater influence in allocating resources

• Privatisation

– Transfer of ownership

– Development of private sector capital markets

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Transition Economies (2)

• Liberalisation of Trade with other Countries

– Full convertibility of currencies

– Preparation for eventual membership of the Euro

• Reforms of the Financial Sector

– Fully-functioning Central Banks to take control of monetary policy

– Capital markets for corporate and government bond issues

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Potential Gains for Accession Countries

• (1) Membership of the EU Single Market

– Trade:

• Exploiting comparative advantage to increase trade

– Investment

• Free movement of capital – looking for the highest return

• Inward investment to aid transformation of national infrastructure – impact on a country’s LRAS / trend growth

– Competition

• More competition – a boost to labour productivity

• Dynamic efficiency gains e.g. arising from higher capital investment and faster pace of innovation

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Potential Gains for Accession Countries (2)

• Financial Support

– Countries will be net recipients of income from

• Common Agricultural Policy

• EU Structural funds

• Many regions have per capita incomes well below the 75% threshold for Objective 1 funding

• 92% of population of accession countries lives in regions with a GDP/head under 75% of the EU25 average. 61% of the population lives in regions below 50%

• Much of the EU funding will help to finance investment

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Potential Gains for Accession Countries (3)

• Potential macroeconomic advantages

– Reduced exchange rate volatility – many countries are keen to join the Euro to reduce exchange rate risk and benefit from lower interest rates

– Slovenia, Slovakia, Cyprus and Malta have joined the single currency

• Slovenia – January 2007

• Cyprus and Malta – January 2008

• Slovakia – January 2009

– Other countries do not meet the entry requirements or have chosen to remain outside – to retain monetary policy flexibility

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Competitive advantage for new states?

• Central European location for many

• Significantly lower wage costs

• Lower productivity – but unit labour costs still cheaper e.g. for car manufacturers

• Lower land prices

• Attractive corporate tax regime + other incentives

• Success of previous inward investments

• Many new states have highly literate population

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Diagram corner

• Useful diagrams for this topic:

• Trade diagrams – welfare effects from single market, exploitation of comparative advantage

• AD-AS diagrams

– Inward investment effects

– Economic shocks within the enlarged EU economy

• Economies of scale

• Labour market diagrams e.g. impact of migration

A2 EconomicsPowerPoint Briefings 2009PowerPoint Briefings 2009

Competitiveness and Growth in the New Member States

Performance of Europe’s new countries

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Competitiveness

Institute for World Economics of the Hungarian Academy of SciencesComparative Survey of the new Member States

Ranking Country Index value

1. Slovenia 90.6

2. Czech Republic 82.8

3. Lithuania 81.5

4. Hungary 80.5

5. Estonia 80.2

6. Slovakia 74.2

7. Poland 71.9

8. Latvia 71.5

Economic criteria include: real GDP growth, GDP (PPP) per capita, gross investment, productivity, balance of trade, unemployment, and convergence indices of the economic and monetary union

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The Sources of Growth

Productivity

Capital Stock

InventionInnovation

Technology

Labour Inputs

NaturalResources

EconomicGrowth

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Productivity

Capital Stock

InventionInnovation

Technology

Labour Inputs

NaturalResources

EconomicGrowth

Labour Supply

Labour Utilisation

Human Capital

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Productivity

Capital Stock

InventionInnovation

Technology

Labour Inputs

NaturalResources

EconomicGrowth

Labour productivity

Total factor productivity

Labour Supply

Labour Utilisation

Human Capital

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Productivity

Capital Stock

InventionInnovation

Technology

Labour Inputs

NaturalResources

EconomicGrowth

Fixed Capital

Infrastructure

Social Capital

Labour productivity

Total factor productivity

Labour Supply

Labour Utilisation

Human Capital

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Recent growth for selected countries

Annual % change in Real Gross Domestic Product for selected countries

Faster growth for many new member states

Estonia [ar 4 quarters] Lithuania [ar 4 quarters] Latvia [ar 4 quarters]

Hungary [ar 4 quarters] United Kingdom [ar 4 quarters]


96 97 98 99 00 01 02 03 04 05 06 07 08

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15.0

Hungary

Lithuania

Estonia

Latvia

UK

Growth much faster than the UK

But has this been sustainable?

Steep slowdown and now recession for many new EU members

Some of them “over-heated” when they joined the EU

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Latvia – Rampant wage inflation destabilised the economy

Annual % change in money wages and current account balance

Latvia's Booming Economy - Out of Control?

Wages, Average Monthly, Gross [ar 12 months] Current Account, Balance, TotalSource: Reuters EcoWin

03 04 05 06 07 08

LV

L (

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-400

-350

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Current Account Balance

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Wage Inflation

Click here for an article

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Estonia – from boom to deep recession

Annual percentage change in real national income, unemployment rate %

Estonia's GDP Growth and Unemployment


Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q101 02 03 04 05 06 07 08

-5.0

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Estonia

Economic Growth

Unemployment

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Inflation - better control in some new EU countries than others

Annual % change in consumer prices (all items)

Inflation Rates for Selected new EU States

Hungary Czech Republic Poland LatviaSource: Reuters EcoWin

96 97 98 99 00 01 02 03 04 05 06 07 08

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Poland has improved the trade off between jobs and prices

Poland - Unemployment and Inflation

Unemployment, Rate Consumer Prices, By Commodity, Index, 1998=100 [ar 12 months]


02 03 04 05 06 07 08

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5.0

7.5

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Unemployment rate (per cent)

Consumer price inflation (%)

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And a rising employment rate will help to provide jobs at home for younger workers

Per cent of population of working age in a job

Employment Rate for Poland

I.1.1: Total employment rate I.1.2: Employment rate, females

I.1.3: Employment rate, males


97 98 99 00 01 02 03 04 05 06 07

45.0

47.5

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rce

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45.0

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60.0

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65.0

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Potential Gains for Existing EU Countries

• (1) Export potential and exploitation of economies of scale

• (2) Foreign Investment and Incomes and Profits

• (3) More diverse European labour market

• (4) A cleaner environment

• (5) Catalyst for further structural reforms in the EU

– Reforms to the CAP

– Spur to countries to reform their labour markets in the face of lower labour cost competition

– Many countries are already engaging in tax competition

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EU Enlargement – an export opportunity for the UK

Exports of goods and services, annual data, current prices, £ billion

UK Exports to a selection of new EU Member Stat


93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

bill

ion

s

0.0

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1.0

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2.5

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GB

P (

bill

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s)

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Czech Republic

Slovakia

Poland

Hungary

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Main Concerns of Member Nations

• Extra budgetary costs for the EU

• Can accession countries continue to meet stricter EU environmental standards?

• Long-term need for higher regional subsidies – loss of some regional funding for established EU countries

• Social concerns from increased labour migration

• Some Objective 1 regions will now lose some of their funding – including regions in the UK, Spain, Greece and Portugal

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Economic Concerns of Member Nations

• Labour Market Issues

– Fears of higher structural unemployment among accession countries – which might lead to large immigration of labour into higher-income countries + political and social tensions

– Fears of a surge in economic migration from East to West

• Social dumping?

• Concerns about organised crime and illegal immigration from Russia, Belarus and the Ukraine through weak Eastern European borders

• In Germany, Austria and Italy (countries that border accession states) there are intensive debates about controlling the flow of migrants from former Eastern Europe

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What is convergence?

• Income convergence:

• Where the divide in per capita incomes becomes smaller over time

• Requires countries to achieve relatively faster growth over a substantial time period

• Convergence may also happen if other “richer” countries suffer a slowdown

• NMS trade heavily with the established EU – so an EU-wide slowdown is not in their long term interests

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The likely scenario for new member states

• Income convergence is not automatic

• Baltic states and Slovenia appear to have the best growth / convergence potential but Baltic States over-heated

• Convergence will happen but at different speeds

• Is there a new Ireland? A Baltic Tiger? Ireland collapse in 08

• Growth is stimulated by capital investment and productivity

• But in the long term, NMS will need to improve employment rates, and achieve great labour mobility

• Unemployment is a constraint on growth

• Demographics will also play a role

• Will the new members join the Euro? 4 have done so

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Recent articles on EU enlargement

• Financial crisis in Hungary

• http://www.guardian.co.uk/commentisfree/2008/oct/29/creditcrunch-eu

• Reversing Poles: how Poland brought its workers home

• http://www.guardian.co.uk/business/2009/jan/23/poland-reverses-uk-migration

• Will Turkey ever be accepted by the EU?

• http://www.guardian.co.uk/commentisfree/2009/jan/19/turkey-gaza

• Crises test stability of new EU states

• http://www.ft.com/cms/s/0/5f05bd08-e331-11dd-a5cf-0000779fd2ac.html

• Balkan states set to launch EU bids

• http://www.ft.com/cms/s/0/7f38328c-a776-11dd-865e-000077b07658.html

• Crunch time for eastern Europe

• http://www.ft.com/cms/s/0/95f2113e-cb14-11dd-87d7-000077b07658.html

• Turkey tries to revive EU drive

• http://news.bbc.co.uk/1/hi/world/europe/7837145.stm

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Key Unit 4 Tips

• Use the bullet points (reworded) as subheadings

• Ensure you answer all sections

• Answer the question!

• Refer to extracts and articles to support your answer (analysis)

• Use terminology/definitions from the AS/A2 course, theory and diagrams (application)

• Evaluation is crucial (30 marks!) but does not have to take place only in the final section: say which sources are more useful than others, say what other data would have helped you to make a better recommendation, say which sources may be biased. Evaluation is saying what your recommendation is based on!

• Plan your answer to ensure you cover as much relevant material as possible

• Aim to write at least 7 – 8 sides in the time provided (including diagrams – easy application marks)

• Remember that 120/120 is not out of the question – and this is not always the ‘best’ candidates who achieve this

• Source: Andy Threadgould, Dulwich College, Jan 2009

Documents

A2 Economics PowerPoint Briefings 2009 European Union Enlargement tutor2u ™ tutor2u ™