Enlargement, two years after - an economic success

The 2004 enlargement of the European Union (EU) has been an economic success for all European countries. In this Communication, the Commission takes stock of the economic impact of the 2004 enlargement, which extended Europe's political and economic area to include ten new Member States. Today, their economies have made substantial progress on the pathway to integration and have become more dynamic and competitive. The old Member States, in turn, have benefited from the new opportunities which have opened up in the new Member States without experiencing significant repercussions.

ACT

Communication from the Commission to the Council of 3 May 2006 - Enlargement, Two Years After - An Economic Success [COM (2006) 200 final - Not published in the Official Journal].

SUMMARY

The 2004 enlargement has led to considerably more diversity and a significant increase in the number of citizens and Member States of the European Union (EU). This ambitious step in the history of Europe was marked by the integration of ten new countries (EU-10): Cyprus, the Czech Republic, Estonia, Hungry, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia) with different economic, political and social roots.

The economic forecasts made prior to accession were generally positive. On the one hand, they predicted economic growth for the new Member States and benefits, although more limited, for the old Member States (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom). On the other hand, they defused the fears relating to the costs of enlargement for the new Member States and the repercussions for the old Member States.

The objective of this Communication is to check whether, two years after the enlargement, these economic forecasts have proved correct and to identify the advantages and the challenges which remain on the pathway towards European integration.

GROWTH AND STABILITY

The period 1997-2005 was marked by strong economic growth in the new Member States (3.75% on average, as against 2.5% in the EU-15). The income of the new Member States, whilst being substantially lower than that of the old Member States, has put on a spurt, rising from 44% to 50% of the EU-15 average in 1997. In general, their growth rate has continued in line with the forecasts and has been particularly fast in countries with the lowest income to start with. The employment market has also benefited from this phenomenon, with an upturn in 2005.

This new growth has contributed to the macroeconomic stability of the new Member States, with positive repercussions for their economic policies and their public finances. The integration currently under way and the strengthening of the coordination procedures have contributed to economic policy discipline. In addition, the credibility of economic policy is enhanced, which is confirmed by interest rates which are now closer to those of the EU. Developments in public finances have been less uniform on account of the transition-related reforms. The excessive government deficits, still characteristic of some of the EU-15 economies, have been corrected in most of the new Member States. Public debt is higher in the EU-15.

INCREASING ECONOMIC INTEGRATION

As regards trade, integration with the new Member States started in the early 1990s with bilateral agreements which liberalised 85% of trade between the two blocs. Between 1993 and 2005, the opening of these economies led to a considerable increase in trade on both sides. During this period, the old Member States increased their trade with the EU-10 countries by 6 percentage points, whilst their imports from the new Member States rose by 13 percentage points. These trade flows are characterised by more labour-intensive products from the EU-10 countries, in exchange for goods with greater technology content from the EU-15.

The old Member States continue to run a trade surplus with the EU-10 countries, which benefit from lower production costs. The trade deficit of the EU-10 countries has declined drastically in recent years and is not considered to be alarming in relation to the economic catching-up needed in these countries. However, the Commission considers that this imbalance must be the subject of close political surveillance, especially in the countries which are also recording high inflation.

Since the mid-1990s, the number of foreign firms and the stock of foreign direct investment (FDI) have risen sharply in the new Member States, which is further evidence of the increasing openness of their economies and their integration in the EU. Specifically, FDI in the new Member States exceeded EUR 190 billion in 2004, most of which was financed by the old Member States. Germany is the leading investor, especially in Hungary, Poland and Slovakia, while the Nordic countries are the main investors in the Baltic States. The services sector receives the lion's share of FDI (55%), followed by traditional manufacturing (37%), although modern manufacturing is becoming an increasing focus of attention.

The new Member States, especially those of Central and Eastern Europe, have recorded substantial progress in the financial sector. The surge in credit growth confirms this development, although loans outstanding and stock market capitalisation remain below the average levels in the euro area.

Cross-border investment and the penetration rate of foreign banks have exceeded the levels in the old Member States. Keener competition has cut the cost of borrowing (especially mortgages) and narrowed net interest margins, although differences are still obvious depending on the country (around 0.5% in Hungary, Latvia and Slovakia; about 3% in Poland and Slovenia).

Banks in the old Member States have benefited from accession as it has enabled them to gain access to these new growth markets and to diversify their portfolios. The investments of Austrian banks in Central and Eastern Europe and of Nordic banks in the Baltic States confirm this trend.

GRADUAL ADJUSTMENT

FDI and relocation

The concerns about relocation have proved to be unfounded: the outflows of FDI and their impact on employment are not significant.

The Commission considers that the new Member States only receive a small proportion (4%) of FDI outflows from the EU-15. The bulk of FDI outflows are destined for the other Member States (53%) and the United States (12%). In addition, since the outflows of FDI to the new Member States largely come under privatisation programmes, they would not bring about replacement of existing activities.

Different studies have shown that the annual job turnover attributed to relocation comes to 1%-1.5%. Relocation has in fact allowed an increase in the competitiveness of the firms of the EU-15 by leading to lower job creation (estimated at between 0.3% and 0.7% in Germany and Austria, which are among the largest investors in the EU-10 countries).

Nevertheless, through its Communication on restructuring and employment, the Commission encouraged Member States to make best use of the Community instruments (including the Structural Funds) to offset any repercussions on certain sectors or in certain regions.

Relocation is influenced only to a lesser extent by corporate tax rates. The factors which prompt the transfer of business activities, capital and jobs to the new Member States include cheaper labour costs and economies of scale. The impact of taxation should be assessed, considering all the aspects involved (including labour taxation, the tax base, overall transparency and integration of the corporate tax system). However, the taxes paid by companies as a share of GDP have remained fairly stable in the past decade.

The opening of the borders of the old Member States to nationals of the EU-10 was one of the most significant and sensitive issues of the 2004 enlargement. Nevertheless, the fear of migratory flows on a massive scale and significant distortions on the labour market now appear to be unwarranted.

Initially, all the Member States of the EU-15, except Ireland, the United Kingdom and Sweden, introduced forms of derogation from the principle of the free movement of persons and workers that had been authorised by the Accession Treaties for the transitional period (7 years). In the EU-10, only Poland, Slovenia and Hungary adopted national restrictions for EU-15 nationals. In 2006 four Member States of the EU-15 (Greece, Spain, Portugal and Finland) lifted these restrictions (which comprised quota systems and work permit schemes) and six others (Belgium, Denmark, France, Italy, the Netherlands and Luxembourg) eased them.

In general, the presence of citizens from the new Member States in the migratory flows was distinctly less than that of citizens from third countries. This phenomenon also arose in Austria and Germany, which have become the preferred destinations of EU-10 nationals. The highest percentage of EU-10 nationals is to be found in Ireland, where they account for 2% of the total population.

The Member States which did not introduce restrictions for EU-10 workers also put up the best performance in terms of employment.

Body of EU law and challenges to be met

There are still challenges to be taken up in the following fields, in which in general there is a considerable degree of integration:

• Internal market: The new Member States have integrated most of the European legislation on the internal market, lagging behind only in respect of competition. Transposition facilitates trade, investment and the development of the financial sector in the EU-10 Member States.
• Agriculture: The enlargement has brought progress to the agricultural sector of all the Member States, facilitating trade within the EU and supporting the modernisation of agriculture in the new Member States. As a result of the contribution of the members of the EU-10, European agriculture has grown in importance in terms of area, production and number of farmers. The fears regarding the negative effects of the enlargement on the agricultural sector have proved to be unfounded. Nevertheless, the productivity of the members of the EU-10 remains distinctly lower than that of the rest of the EU. There is still a significant difference in terms of employment: in Slovakia and the Czech Republic, 4% of the population work in agriculture, compared with 19% in Poland.
• Employment and social cohesion: The new Member States have not experienced problems in integrating EU legislation in employment and social policy, as far as labour law, health and safety at work, equal opportunities and anti-discrimination are concerned. However, major challenges remain in the new Member States in terms of combating unemployment, promoting social dialogue and ensuring social protection. The employment situation, which has improved since the 1990s, still features a high unemployment rate (13.4%), although the seriousness of the problem varies considerably from country to country. The schemes of the new Member States, which are supported by the European Social Fund, must make a considerable effort to achieve the targets set out in the Lisbon Strategy for growth and employment.

LIMITED BUDGETARY IMPACT

The budget of the Member States has been affected only to a limited extent by the enlargement. The financial support of the EU for the new member countries started fifteen years before their accession and gathered pace in 2004 and 2005. Today, the contribution of the EU-10 Member States to the European budget remains below the amounts they receive in terms of aid. On the other hand, the contribution of the old Member States to improving the well-being of the EU-10 countries represents only 0.1% of their GDP. In the financial framework 2007-2013, this level of assistance is set to increase substantially, while remaining limited in relation to the GDP of the EU-15. Moreover, the Schengen facility and the compensation facility have contributed to avoiding pressure on the national budgets of the new Member States.

In conclusion, thanks to the 2004 enlargement, the EU economy has become more dynamic and ready to take up the challenges of globalisation. This enlargement has extended the internal market and increased the benefits for European companies and consumers without causing any significant distortion on the product or labour markets. Careful preparation over the decade preceding access played an important role.

Last updated: 26.04.2007