| Exports to future eu-25, percentage of total exports 2002 |
Chart 2
|
 |
|
| Source: IMF Direction of Trade Statistics yearbook 2003. | |
On average, 80 per cent of the exports of the new member states go to EU-25. This percentage is considerably higher than that of EU-15. The new member states' strong trade integration with the EU should be viewed in the light of their reorientation of trade away from their former trading partners to the east towards the EU member states after the changes in Eastern Europe (as opposed to the existing EU member states which did not in this way skip their trade with neighbouring countries outside the EU).
An important economic-policy challenge for the new member states after joining the EU will be participation – soon or in the longer term – in the EU's exchange rate mechanism, ERM II, and then qualification for euro area membership. Some of the new member states have declared their intention of joining ERM II immediately after joining the EU, while others have announced that they will wait for a while.
Some of the new member states already pursue a fixed-exchange-rate policy, while others apply a floating-exchange-rate regime[2]. Even though there are no formal access requirements for participation in ERM II, except that a central rate must be agreed on, the need for stability-oriented economic policy will be reinforced when the new member states join ERM II, especially for the member states that do not already pursue a fixed-exchange-rate policy. When the new member states join ERM II monetary policy will be reserved for stabilising the exchange rate, while fiscal policy will be the most important economic-policy instrument for tackling imbalances in the economy. A government budget under control is thus an important precondition for successful ERM II participation – and subsequent qualification for euro area membership. In its policy position on exchange rate issuses relating to the new EU member states, the European Central Bank says: "Entry into ERM II is not subject to a set of pre-established criteria, and there are no preconditions to be fulfilled to join the mechanism. To ensure a smooth participation in ERM II, however, it would be necessary that major policy adjustments – for example with regard to price liberalisation and fiscal policy – are undertaken prior to participation in the mechanism and that a credible fiscal consolidation path is being followed." (ECB 2003, p. 3). Chart 3 shows the status of the government budgets in 2003.
| Government budget balance, per cent of GDP 2003 |
Chart 3
|
 |
|
| Source: European Commission Spring Economic Forecast 2004-05. | |
In 2003 six of the 10 new EU member states reported budget deficits exceeding the limit of 3 per cent of GDP stipulated in the Treaty. These deficits are thus "excessive" in terms of the Treaty. This will no doubt be pointed out by the Council of Ministers, but no sanctions can be imposed on the new member states as long as they are outside the euro area.
On the other hand, the government debt is generally modest in the 10 member states, cf. Chart 4. The limit of 60 per cent of GDP stipulated in the Treaty is exceeded by only two countries, Cyprus and Malta, and only by a small margin.
| Government debt, per cent of GDP 2003 |
Chart 4
|
 |
|
| Source: European Commission Spring Economic Forecast 2004-05. | |
Entry into the EU will initially lead to increased pressure on the government budgets in the new member states. The reason is partly that a number of EU-funded infrastructure projects will require national co-financing, and partly that EU membership in general will make increased demands of the administrative capacity of the public sector, cf. Banque de France (2003).
The European Bank for Reconstruction and Development, EBRD, furthermore finds that inefficient public administration at local level will impede smooth implementation of the very extensive EU legislation that the new member states have adopted or that they will be covered by on entry into the EU (EBRD 2002, p. 7).
The new member states' "catching up" with the eu-15 level
Several factors will contribute to enhancing growth in the new member states due to their entry into the EU. These factors include stimuli from increased trade, more investments from abroad and funding via the EU budget. The extent of these effects remains to be seen, as does the extent to which they have already outplayed their role in the accession process. Academic studies of the effect of full integration into the single market on the new EU member states indicate an acceleration of growth by 1-2 percentage points annually, cf. EEAG (2004). Subsequent adoption of the euro is estimated to have a further positive impact on growth, cf. e.g. Köhler (2004) and IMF (2004)[3].
Four of the EU-15 member states entered the EU with a considerably lower GDP level than the rest of the EU. In 1973 Ireland joined with a GDP per capita of approximately 61 per cent of the average for EU-15[4]. In 1981 Greece joined with a corresponding ratio of 68. In 1986 Portugal and Spain joined with a GDP per capita of 54 and 71 per cent, respectively, of the ratio for EU-15.
These four member states have had very different experience concerning the effect on growth and "catching up" with the rest of the EU, cf. Chart 5. However, after 15-16 years' membership all of them except Greece had narrowed the GDP gap to the EU average by 13-15 percentage points in total. Roughly, these member states on average thus gained just under 1 per cent annually. The experience of Greece was far more negative since the gap to the EU average actually widened by around 1 per cent annually during the first 10 years of EU membership. In the period 1981-95 Greece experienced considerable macroeconomic imbalances with high inflation and large government budget deficits. Furthermore, in 1981 the country joined the EC with a strongly regulated economy that was poorly equipped for EC membership. For example, it was unable to attract foreign direct investments to any notable degree, cf. e.g. Bosworth and Kollintzas (2001).
| Catching-up for Ireland, Greece, Portugal and Spain |
Chart 5
|
 |
|
| Note: The Chart shows the catching-up for each country relative to the EU average of GDP per capita (PPP), x years after joining the EU. | |
| Source: European Commission. | |
Ireland is so far the most successful example of "catching-up" within the EU. In the period covered by Chart 5, i.e. 1973-90 for Ireland, GDP per capita increased "merely" from 61 to 73 per cent of EU-15. However, growth accelerated strongly in the following 10 years. As from 2001 Ireland has had the second-highest output per capita in the EU at approximately 120 per cent of the EU-15 average, exceeded only by Luxembourg. The example of Ireland shows that it is actually possible to gain on average 4 percentage points of the differential to the EU-15 average each year for a number of years.
The example of Ireland could give rise to optimism in the new EU member states, but perhaps also to unrealistic expectations of welfare improvements after their entry into the EU.
All in all, the experience of countries that joined the EU with a relatively low level of national income gives a rather mixed picture. Greece's negative experience until 1995 demonstrated the importance of macroeconomic stability and the ability to attract foreign investments. Ireland's positive experience in the 1990s was an example of success in this respect, to some extent because the disbursements from the EU's structural funds – which will to a large extent be channelled to the new member states in future – were employed very efficiently. In more general terms the path of growth in the new member states will depend strongly on the level of investment and the course of productivity, which are in turn also closely associated with factors such as technological progress and education.
The outlook for the new member states catching up with EU-15 is illustrated in Chart 6.
| GDP/capita under various assumptions regarding annual growth differential to EU-15 |
Chart 6
|
 |
|
| Note: AC-10 is the average for the 10 new EU member states. The x values of the intersecting points show when the AC-10 countries will have caught up with GDP/capita 2003 for EU-15, Spain, Portugal and Greece, respectively. | |
| Source: European Commission. | |
In an extremely positive growth scenario with a growth differential of 4 percentage points annually – as in Ireland in the 1990s – the new member states will on average catch up with Portugal's 2003 level of GDP per capita around 2011. In a more moderate, but still optimistic growth scenario with a growth differential of 2 percentage points annually – as in Portugal in the first 10 years after entry into the EU – the new member states will not reach Portugal's current relative level until around 2020.
The economic development will naturally vary considerably among the new EU member states. Some will follow a strong catching-up path in the coming years, while others will see more modest growth rates. The entry into the EU will undoubtedly have a positive impact on living standards in the new member states, but many of them will nevertheless find it difficult to meet the citizens' expectations of quick and substantial welfare improvements.
Outlook for further enlargements of the EU
It is already on the cards that further enlargements of the EU will follow in the coming years.
At the EU summit in December 2003 the European Council confirmed its objective of welcoming Bulgaria and Romania as EU member states in January 2007, provided that they meet the conditions. At the same summit the EU heads of state or government confirmed that in December 2004 the European Council must decide whether accession negotiations with Turkey should be initiated. For all three countries EU accession will ultimately depend on their compliance with the "Copenhagen criteria" concerning democracy, respect for human rights, a well-functioning market economy, etc.
| Key indicators for european countries outside the EU |
Table 3
|
||||
|
Area
|
Popula-
tion million 2002 |
GDP per
capita (PPP) Euro area member states=100 2002 |
Real
growth 2002 |
Inflation
per cent 2002 |
|
| EU candidate countries | |||||
| Bulgaria |
110.9
|
7.9
|
27
|
4.8
|
5.8
|
| Rumania |
237.5
|
22.4
|
25
|
4.3
|
22.5
|
| Turkey |
774.8
|
69.6
|
25
|
7.8
|
45.0
|
| Western Balkans | |||||
| Croatia |
56.5
|
4.4
|
39
|
5.2
|
2.0
|
| Macedonia |
25.3
|
2.0
|
25
|
0.7
|
0.1
|
| Serbia and Montenegro |
102.4
|
10.7
|
n.a.
|
4.0
|
n.a.
|
| Bosnia and Herzegovina |
50.7
|
4.1
|
22
|
3.9
|
n.a.
|
| Albania |
28.8
|
3.2
|
19
|
4.7
|
7.8
|
| EEA countries1 | |||||
| Norway |
324.2
|
4.5
|
141
|
1.0
|
1.3
|
| Iceland |
103.0
|
0.3
|
115
|
-0.5
|
5.2
|
| Others | |||||
| Switzerland |
41.3
|
7.3
|
116
|
0.1
|
0.6
|
| Russia |
17.075.4
|
144.1
|
32
|
4.3
|
15.8
|
| Ukraine |
603.7
|
48.7
|
19
|
4.8
|
0.8
|
| Belarus |
207.6
|
9.9
|
21
|
4.7
|
42.5
|
| Moldova |
33.9
|
4.3
|
6
|
7.2
|
5.1
|
| Source: World Bank, World Development Indicators and CIA, World Factbook. 1 The European Economic Area, also including Liechtenstein. |
|||||
As regards the five countries in the Western Balkans, cf. Table 3, the European Council most recently in December 2003 confirmed its objective for these countries to be gradually integrated and ultimately included in the EU. The so-called stabilisation and association process for this region has been established as an element of these efforts. The process aims to e.g. conclude stabilisation and association agreements with each of the five countries. In February 2004 Macedonia was the first of the five to conclude such an agreement, and Croatia only needs to ratify its agreement. Both Croatia and Macedonia have submitted formal applications for EU membership. In April 2004 the Commission stated an opinion on Croatia's application, recommending that accession negotiations be initiated with Croatia. For the other three countries the work to prepare stabilisation and association agreements is in the preparation or the negotiation phase.
For the other countries in the Table there are no immediate prospects of negotiations on EU accession.
Literature:
Banque de France (2003), The Impact of Enlargement on Convergence in the European Union, Banque de France Bulletin Digest, no. 119, November 2003.
Bosworth, Barry and Tryphon Kollintzas (2001), Economic Growth in Greece: Past Performance and Future Prospects, in R.C. Bryant, N.C. Garganas and G.S. Tavlas (ed.): Greece's Economic Performance and Prospects, Bank of Greece and The Brookings Institutions, 2001.
EEAG (The European Economic Advisory Group) at CESifo (2004), The 2004 Enlargement: Key Economic Issues, Report on the European Economy 2004.
European Commission, Various statistical publications.
European Bank for Reconstruction and Development (2003), Transition Report 2003.
European Commission (2004), The Stabilisation and Association process for South East Europe, Third Annual Report, 30.3.2004 COM(2004) 202/2 final.
European Central Bank (2003), Policy position of the Governing Council of the European Central Bank on exchange rate issues relating to the acceding countries, 18 December 2003.
European Council, Conclusions of the Presidency from meetings in 2002-04.
Hahnemann, Niels Peter, and Jens Anton Kjærgaard Larsen (2003), The Accession Countries and the Convergence Criteria, Danmarks Nationalbank, Monetary Review, 1st Quarter.
International Monetary Fund (2004), Adopting the Euro in Central Europe – Challenges of the Next Step in European Integration, January 2004 (published in April 2004, to be issued later as an Occasional Paper).
Köhler, Horst (2004), The Euro – Towards Adopting the Common Currency in Central Europe, Keynote Address at a conference on Euro Adoption in the Accession Countries – Opportunities and Challenges, Prague, 2 February, 2004.
Pedersen, Anders Mølgaard (2004), Currency Unions and Foreign Trade, Danmarks Nationalbank, Monetary Review, 2nd Quarter.
Danmarks Nationalbank (2003), Report and Accounts.
[1] The economic situation of the new member states and their possible compliance with the EMU convergence criteria are described in further detail in Hahnemann and Larsen (2003).
[2] See Danmarks Nationalbank (2003), p. 75, for an overview of the accession countries' exchange-rate regimes.
[3]See also Pedersen (2004) in this Monetary Review.
[4]Adjusted for differences in purchasing power. It should be noted that such adjustment is subject to considerable uncertainty.