EUROPE'S BIG BANG AT TEN / PROJECT SYNDICATE

Europe’s Big Bang at Ten

DANIEL GROS

MAY 8, 2014

BRUSSELS – Ten years ago, eight countries from the former Soviet bloc, together with the island states of Malta and Cyprus, joined the European Union, bringing its membership from 15 to 25. At the time, it was feared that this eastern enlargement would create tensions within the EU because new members from Central and Eastern Europe were poor and some had large agricultural sectors. Because the EU spends mainly on poor regions and on farmers, many worried that enlargement would overburden its budget.

In the end, this problem was resolved through a typical European compromise that allowed enlargement to proceed, even though the budget, as a proportion of Europe’s GDP, was reduced. Agriculture has now largely disappeared as a major item on the EU agenda. Moreover, the planning horizon under the EU’s Multi-Annual Financial Framework implies that the issue of who pays for whom has to be addressed only once every seven years.

The purpose of economic integration is ultimately to boost GDP growth and improve living standards. Judged from this perspective, enlargement has worked well. The transition countries have caught up considerably over the last decade.

In the mid-1990’s, many transition countries’ per capita GDP was only about one-quarter to one-third of that of the old EU-15 (in purchasing-power-parity terms). Some of the distance had already been covered when the new member states finally joined the EU, but the process of convergence has continued, even through the financial crisis.

The new members’ income has reached about two-thirds the level of the EU-15. Moreover, the poorest new members gained the most (in contrast to the poorest members of the EU-15, like Portugal and Greece, which are now back to income levels last seen in the 1990’s). This convergence is the reason why job seekers from the eastern member states are not overwhelming the richer EU-15 countries’ labor markets.

The fact that the new members were initially so much poorer, initially a source of tension, turned out to be a source of economic advantage for both sides, as EU-15 firms (especially German companies) could outsource labor-intensive tasks. They gained in terms of global competitive, while the target countries gained much-needed direct investment, jobs, and knowledge transfer. In purely economic terms, enlargement was clearly a mutually beneficial proposition.

Of course, other aspects of enlargement have worked less well. A large part of the aid that has flowed from the EU budget to the new member states has been used for prestige projects that enriched local construction companies. And, though this problem is not specific to the new member states – the same thing happens in countries like Italy or Greece, with their slow and inefficient administrative systems and extensive corruption – it was rendered more acute by enlargement; indeed, many of the eastern members still have lower-quality public administrations than one finds in the EU core.

Thus, enlargement should be viewed as a qualified success. One of the biggest fears, namely that EU institutions would be overwhelmed by the simultaneous absorption of ten new members, also never materialized. The new member states have integrated smoothly into the EU institutions, where they defend their national interests in much the same way as the older members. The difficulties that the EU has experienced in the last years have little to do with the increase in the number of member states, which has now reached 28.

The most important consequence of the EU’s eastern enlargement has turned out to be one that few thought about at the time: it brought the Union much closer to Russia. And, for a Russia that has become authoritarian and has seen how the EU can transform struggling transition countries into increasingly prosperous (albeit imperfect) democracies, Europe is too close for comfort. The prospect of relative prosperity and freedom proved so attractive to the people of Ukraine that they toppled a president who preferred a Russian-led “Eurasian Union” to an EU association agreement.

Unfortunately, a significant minority in eastern Ukraine does not share this “European vocation” and feels threatened by the recent turn of events. Russia supports these tendencies and has used military and other hard-power tools to stoke tensions, because its regime would be threatened by the living example of a “European” Ukraine that is democratic and prosperous.

So, ten years on, enlargement is turning out differently than expected. The internal challenges have proved manageable, but now the EU needs to confront an external challenge for which it is ill prepared. We will not have to wait a decade to find out whether the EU can help to stabilize Ukraine while confronting a Russia whose leadership feels threatened by its fundamental values of democracy and the rule of law.

Read more at http://www.project-syndicate.org/commentary/daniel-gros-assesses-the-surprises--both-good-and-bad--in-the-decade-since-the-eu-admitted-ten-new-members#hxCKubyAYo7aEpBc.99

Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie Internationale and International Finance.