The Tension between Economic and Political Costs And Benefits of the Eastern Enlargement of the EU - Term Paper Example

Analyse the tension between the economic and political costs and benefits of the Eastern enlargement of the EU. The essay discusses the gains and pains that eventually result as EU enlargement of the east and the economic transitions from it. The essay discuses how and when the eastern and western countries would benefit from the EU enlargement and what would be the gains and pains arising as a result of this. It also discusses whether the new members of the EU would enjoy more benefits or the existing 15 ones would do it better. The results of the enlargement depend on some scenario building, the conservative one with less optimism may lead to less risk premiums. Furthermore, the aggressive models may also lead to huge benefits for both the zones. The literature analysis gives a better view of the EU and new members’ budget constraints and better investment opportunities for the regions (O’Brennan 2006, p.23-26). Currently, EU comes under the triad region i.e. US, Japan and EU form a triad. Some experts may look atteh convergence of many states into the EU as a progressive development for the allied future of the region- especially after the adoption of many central and eastern states as a part of the EU. Along with the existing members of EU, in line with accession are Croatia, republic of Macedonia and Turkey. The western countries political figures have due power to meet the magnification criteria, but have adjourned the decision, when a real financial cost and benefit analysis comes. In other words, the contemplation is supported by the geo-political elements, but doesn’t get any support from economic and financial considerations. The catch-22 poses different impacts, whether the benefits exceed the magnification costs, leave complicated question. The cost benefits matrix is not that straightforward and trouble free to solve. The costs posed to east are of a different nature, the EU basic structure and architecture was primarily designed for nations with high Human development Indices (HDI), the lowered HDI rated nations may not find themselves very compatible with EU social security network systems and prosperous social democracies. The relatively poor and much shoddier countries can benefit from “acquis”, the new set of regulations for swiftly flourishing nations (Vachudova, 2005, p.4-9). The different size and economic structures of the front contestants for EU enlargement even differs a lot from fifteen standard members of EU. Even Czech Republic, Hungary, Poland, Slovenia and Slovak Republic may qualify at an initial stage, but some later complicated conditions may rate them as disqualified candidates. One of the foremost important factors is the technological conditions, employment level and education level prevailing there. Second, the primary and secondary markets state of affairs and utensils may make the enlargement a bit trickier (Vachudova, 2005). The economic conditions like lower per capita income, low Gross Domestic Product (GDP), low employment or high unemployment cause the cost-benefit matrix to deviate from anticipations. The contemplation is further supported by intangible factors like communication networks, the road and government infrastructure, level of skilled labour and well-functioning administrative bodies. The factors are better in some Central and East European Countries (CEECs), but found in appalling form in other CEECs. Not only this, the income levels and consumer financing opportunities are diverse in EU and CEEC. The table below illustrates the following framework more objectively (Menil 2005, p.321-330). Country Population Per capita in USD Czech Republic 10 8990 Hungary 10 6080 Poland 10 5480 Slovak Republic 38 6290 Slovenia 5 6230 Visegrad-5 66 6207 Bulgaria 9 4380 Romania 23 4490 CEEC7 98 5547 Greece 10 10930 Portugal 10 11970 Ireland 4 13550 Spain 39 13740 UK 58 17970 Finland 5 16750 Italy 57 18460 Netherlands 15 18750 Belgium 10 20270 France 58 19760 Austria 8 19560 Germany 82 19480 Sweden 9 17130 Denmark 5 19880 Luxembourg 0.4 35860 EU15 369 16164 (Source: Petrakos 2000, p.79) The inter-trade between the EU and CEEC doesn’t offset the trading partners with the same trading balance. EU is a main exporter, with Germany constituting a large percentage of GDP towards the entire budget of EU The unbalanced trade nature often raises a big complicated question for EU magnification. The inter-trade between the EU and CEEC is balanced product by product, whereas CEEC to EU leaves a much disproportionate trading balance in the two zones. The following figure illustrates the capital goods trade visually (Menil, 2005). The EU data for the trade sector in 2006 is represented in the chart below: Source (O’Brennan 2006, p. 126) The table well analyzes the importance of EU exports to CEEC partners, but also reflects less significance for CEEC partners. EU definitely has trade gains from inter- or intra-trade exports. Some trade barriers and trade theories also put a break to enlargement contemplation. The fact is further evidenced by presence of strong and ever lasting product markets for EU capital products. One of the most illustrious industrial sectors is car-making, in which Germany excels. The greatest GDP of EU comes from Germany (Menil 2005, 340-350). Furthermore, these trade barriers like tariffs, quotas and taxes differ for the two zones- EU has staged out taxes on CEEC industrial goods- CEEC is still in process of eliminating the taxes. The duty-free goods treatment is nothing new for Europe, since most of countries face this tax treatment. On the other hand, the anti-dumping EU laws and regulation would restrict CEEC in expanding further in their specialized areas. The statistics literature supports this view. The asymmetric trade protection laws and anti- dumping practices restrict CEEC specialized expansion in areas like steel and iron (Menil 2005, p,320-330). The implication from the above discussion is impact on joining EU. The enlargement requires a big tariff cut in CEEC and little in the EU. The anticipated gains would be enjoyed by CEEC more after enlargement. Looking at the other side of the mirror, what would be the economic costs and financial benefits that result after enlargement. The integration of the two zones could result in economic benefits for the future that may have been seen in the past. With these additional benefits, the stronger development and trade benefits may be shared by both the zones-however, different policy frameworks may bias our perceptions. A conservative versus aggressive scenario-building presents unusual fallouts (Menil 2005, p.330-337). The post-integration benefits could exceed the pre-integration ones, if an aggressive scenario model is used. The highly aggressive model would take a better investment climate for the foreign investors and lower risk premiums, with improved country risks too. A conservative framework may result in higher post-integration costs. The economies of scale and theories of imperfect competition, keeping all other factors constant would induce changes in economic efficiency through resource allocation. The conservative policy estimates in the model would be to reduce the trade barriers between the two trading zones and adopting a common tariff policy. It should further allow the free movements of goods, capital and people between the two zones. Both the zones need to have common competition policies and same level of access to product markets (Petrakos 2000, p.38-45). As the case of turkey is there, Turkey signed a custom union agreement and was an accession candidate. The expected EU path is still questionable for Turkey. The role of Greece in supporting and developing the stabilization and association process (SAP) may never be forgotten towards the objective of policy is future accession to EU. FYROM has concluded SAP agreement lie within the framework of this process. In all, the budgetary calculations may not make us reach an exact model, but benefits can be felt and seen. The main problem in the variable identification is exact estimate of EU budget constraints. The benefits are somewhat more fabricated and some true financial and opportunity costs are ignored in the enlargement analysis. The opportunity costs would certainly pose some investments that are irrecoverable. Though, the main advantage would come in the form of investment improvement in the region. The returns from the investments are computed without taking any opportunity cost into account. This biases the enlargement model. The enlargement model should be calculating effectively the increments in future and present consumption possibilities by risk reduction premium, rather than going for long-term income gains (Petrakos 2000, p. 45-60). Even the improvement in investment doesn’t come very quickly-but is conditional to the domestic political figures choices. Some other overhead costs like bureaucratic costs are also associated with the EU magnification. The common currency is EURO and there is no such problem as “translation costs” or “transaction costs”. The “transaction exposures” may record on the balance sheets of subsidiaries. For example, if a document is prepared in one language: imagine the costs associated with preparing the same document in seven languages. The famous county websites could have this translation problem (Petrakos 2000, p.62-70). The great tension lies between the benefits and costs of the EU amplification. The theoretical framework is even missing some vital variables like “add-up” costs and opportunity costs, which leave the discussion as such. The marginal anticipated investment horizon may perk up, but it depends on the political figures resolutions. The investment climate doesn’t show enhancement overnight, but requires decades for full integration (Richardson 2005, p.207-210, 213-220). Also the gross costs of enlargement as discussed by some authors, the net costs may be higher;one never knows where the cost-benefit analysis would end for eastern and western countries. The enlargement initial cost seems small but some over all costs may be higher than the estimated benefits. A sovereign risk factor is missing from the enlargement framework. The foreign direct investment concentrates on few industrial sectors like steel, cars, and services. The labour mobility and capital differential costs are even slightly dissimilar in the two zones. Richard Portes speaks on the labor mobility issues and signifies the effects of long wage transition periods in between (Richardson 2005, 187-192, 100-104). The enlargement tensions and costs provide mixed results and outcomes. Portes felt the post-enlargement expansion and its positive impact on the EU and CEEC economy. The synergies may result after enlargement, but the costs may be heavy too. Some stagnant economies and switching investment attitude may change theestimated benefits of enlargement in the coming years. West could be threatened by political tensions and risks prevailing in the eastern countries. Foster holds a view that EU amplification would result in reducing risk and increased prosperity. The EU membership restrains trade and tax policy changes; it further locks property rights and competition policy (Rosecrance 2002, p.135-142). The micro-economic side of the enlargement looks great, but the macro-economic level study shows increased unemployment or reduced employment. Macro-economic tools like monetary policy would be straightforward. These would work as a superb solid hedge against inflationary pressures. These two positive macro-economic forces would boost investor confidence. The conservative scenario model gives single market access and common tariff policy. The less conservative model results in stabilized political condition, which helps decrease the sovereign risk premium (Rosecrance 2002, p.159-162). Even the budgetary costs approaches are different and pose mixed outcomes. Combining the costs and benefits, the argument supports the EU enlargement process. Some secondary benefits like gaining control over Russia and ex-USSR. The Czech Republic membership in the EU would result in control. The bargain chaos is still there. The stability contemplation and prospects of long-term security are the initial reasons for EU wishing to include eastern countries in its membership. Some EU special political groups do not favour the process and promise its delay for many years. A series of incremental steps ought to be issued by the EU that permit re-integration of Europe to move. The rapid enlargement would also complicate the EU politics and the voting rights may not favour integration of the EU (Rosecrance 2002, p.140-150). The partial or individual enlargement benefits could be analysed, but it’s difficult to measure and forecast the integrated ones. The overall combined impact may be smaller than the individual one. A majority of the member states have beein in favour 42 %uof the EU integration and welcomed the newcomers. 39 %However, there has been a strong opposition and many other states have spoken against the integration. The enthusiastic supporters present papers that have more weightage towards benefits. The non-supporters claim a slow and stagnant country economy after the enlargement. The overall impact of the integration is meagre, but still positive and fruitful, with the benefits being long-term and nebulous and the costs immediate. Some job losses may result as integration comes (Menil 2005, p.321-330). In the end, it can be concluded that the enlargement is a story of the past. The long-term budgetary costs are estimated under the two scenarios. The conclusion is that new member’s risk ratings would improve and the country risk premium too, would be lowered. The costs are immediate-but the benefits are long-term and everlasting. The gain arising as a result of enlargement would be great, but also be unevenly distributed among the top countries-Germany, France and the UK. The enlargement would definitely be a bargain for the EU15, though net costs may exceed the desired benefits. The countries like Germany, France and the UK would pay the most, leaving Greece paying nothing. The CEEC economies would have the maximum gains resulting from enlargement. The most important impact on the countries is lowered risk premiums and better investment opportunities for the investors. Works Cited:  Menil. G. et al. 2005. Economic Policy. U.K. Wiley-Blackwell. Pages: 321-350, O’Brennan, J. 2006. The Eastern Enlargement of the European Union An Empirical, Conceptual and Institutional Analysis, U.K. Routledge. Pages: 20-49, 119-134, 240-289. Petrakos, G. 2000. Integration and Transition in Europe: Economic Geography of Interaction, U.K., Routledge. Pages: 38-70, 76-80. Richardson, J. 2005. European Union: Power and Policy-Making. U.K., Routledge. Pages: 100-104, 187-200, 207-230 Rosecrance, R. N. 2002. Great Power Coalition: Toward a World Concert of Nations, USA, Rowman & Littlefield Publishers, Inc. Pages: 135-150, 159-162, Vachudova, M. A. 2005. Europe Undivided: Democracy, Leverage, and Integration after Communism, USA, Oxford University Press. Pages: 1-19, 63-69, 82-100) Read More