European Union Enlargement - Essay Example

"The greatest economic problems of enlargement for the EU are caused by the largest of the new East European Member s". 2,106Words By "Customers Name" "Name of Institution" Date Insert Your Details Here Abstract Much of the attention on the economic aspects of the enlargement of the EU have concentrated upon the high-profile issues which are linked to the level of relative economic development in these countries; the perceived threat of large-scale migration and the budgetary costs arising from implementation of EU agricultural and regional policies. This piece discusses that these are not insurmountable problems and stresses that the main difficulties from the enlargement may have arisen from the effective inclusion of the Eastern European countries into the Single Market, the microeconomic hub of the EU. It will also discuss that the process of regulatory management has become more difficult, which entails greater emphasis on the principle of mutual recognition as the main tool for ensuring freedom of movement of goods and services. However, mutual recognition has its limits and is likely to be less effective the more diverse the countries involved. Introduction The challenge facing the Union with the start of the eastern enlargement, the first wave of which was decided at the end of 2002 and implemented during 2004-2006, cannot be underestimated. A region of about 100 million inhabitants was integrated into the EU. Populations deeply rooted in European history had become part of the continental polis, yet these same populations emerged from almost half a century of Soviet domination and planned economy only just over ten years ago. A complex net of similarities and differences make the eastern enlargement something quite different compared to previous episodes of EU expansion. There are four key differences between this and previous enlargements that have an important bearing upon the way in which the economic impact of the next enlargement should be analysed: The level of income in many of the applicant countries is considerably lower than that of existing members. The Eastern nations were in the process of transition from a centrally planned to a market economy. The first point relates to the relative level of economic development in the Eastern European countries. The second point is a reflection of the particular historical circumstances of these countries. The second, third and fourth features are very much linked to the necessary conditions for successful re building of the EU and the steps that have been taken to meet those requirements. Enlargement and the Level of Income in the Applicant Countries The previous two enlargements were, first, to the South, and then, to the North. The accession of Greece, Portugal and Spain in the 1980s brought relatively low-income partners in the Union, and this changed the economic geography and the budgetary structure of the EU. However, both the population dimension and the average income gap of the countries then involved in the southern enlargement were about half those relating to the newest members. The Northern Enlargement of the 1990s actually raised the average per capita income of the EU, and the accession of Austria, Finland and Sweden brought a net positive contribution to the Union's budget. This time the picture is completely different. The incoming members of the EU are, and will be for quite a few years, significantly poorer than the existing members. Their average wages are lower than in the incumbents; hence there could be an incentive for workers to move westward, and for capital to go eastward. Their core inflation rates will be higher due to structural transformation and their net contribution to the EU budget will be persistently negative. Of course, all this will impact on a number of EU policies and institutions, in the fields of migration and border flows, financial and budgetary provisions, monetary policy and the working of the ECB and trade and investment flows. Migration This is perhaps the most widely discussed of the current problems of the enlargement but which in practice is likely to be of minor significance for the Union as a whole. Migration is seen to be an important problem because the very large income gap and the relative proximity of the Eastern countries appear to convince many of the scope for substantial flows of workers from the east to the west of Europe. It is worth noting that as economic integration between the EU and the CEECs intensified during the 1990s, the number of migrants from the east declined. According to the University of Kent, while 330,000 moved to the EU in 1990, by 1997 the total was less than 14,000. Although, the aggregate effects will be small they will be concentrated on particular countries and regions, especially, Germany and Austria. Thus, for example, in 1998 for the EU as a whole, (legal) immigrant workers from the CEECs accounted for 0.2% of total EU employment. However, around 80% of such migrants reside in Germany and Austria, accounting for 0.5% and 1.1% respectively of national labour forces, with even higher concentrations in particular regions (CEC (2001)). This is the problem that is faced by the EU, how to adjust to regionally concentrated problems to maintain general support. Enlargement and the Cohesion of the Single Market Many of the direct economic benefits of EU membership, in terms of enhanced trade and Investment relations had already been reaped before the Eastern European nations even joined the EU. This reflects that a range of barriers to trade and investment between the EU and applicant countries has already been removed in the context of the free trade (Europe) agreements that were signed in the early and mid-1990s. Formal trade barriers (tariffs and quantitative restrictions) in the EU to imports of industrial products from the CEECs have now been completely dismantled. As Brenton and Manzocchi (2002) argue to all intents and purposes the transition with regard to trade and investment is over in those countries that have joined the EU. If one examines the trade and foreign investment features of these countries in ignorance of history then there is nothing that identifies them as being different from market economies. The key feature of the Single Market is its attention to non-border regulatory policies which, although not necessarily their primary intent, may act as a substantial impediment to trade. For trade in goods the principal issue and the main remaining obstacles to trade are technical barriers, which arise from the implementation of regulatory policies by governments, concerning for example, safety and health issues and from voluntary standards adopted by domestic industries. Similarly, for services the key issues relate to differences in regulatory regimes across countries which constrain the ability of firms to effectively operate on a European-wide basis. In this section we examine the impact of the accession of the Central and Eastern European Countries on the operation of the Single Market. Since the implementation of regulatory policies lie at the heart of the Single Market effective participation requires a certain level of suitable infrastructure and administrative and legal capacity to implement the range of regulatory instruments that are necessary to support markets for goods and services. In terms of the enlargement and the effective operation of the Single Market, this was the key dimension of the transition that needs to be addressed. To what extent will the application of regulatory policies in the enlarged Union act to segment markets and constrain and compromise the level of economic integration that has been achieved between the other members The Single Market is the microeconomic core of the Union, if the enlargement were to seriously undermine or weaken the Single Market then this would constitute a substantial, but unquantifiable, cost of enlargement. At the same time the EU is placing greater emphasis on enhancing the Single Market and increasing further the degree of integration in Europe. A completely integrated market is seen as essential in enhancing the competitiveness of the EU relative to the US. We now proceed to describe the key mechanisms by which the EU has sought to create a Single Market and then briefly examine why there is a belief that the Single Market programme can be more effectively implemented. The Single Market and Trade in Goods Despite the basic principles of non-discrimination and free circulation of goods, services people and capital, the EU has always permitted what are deemed as legitimate restrictions on trade. Article 36 of the Treaty of Rome provides for restrictions on imports for reasons of 'public policy or public security' and protection of health as long as such restrictions are not a disguised restriction on trade. In such cases the pressure is on the importing country to demonstrate that lack of equivalence of regulations is undermining public policies towards, for example, human health. In practice the European Court of Justice has accepted lack of equivalence on many occasions and, significantly, has not required conclusive proof of a threat to human health or other public policies for the refusal to accept a product legally available elsewhere in the community, accepting in effect that the precautionary principle is sufficient (Holmes and Young (2001). A key element in the application of the principle of mutual recognition has been the development of mechanisms at the EU level for disciplining national regulations and interventions into product markets. There are three means by which the EU can affect national regulations (Pelkmans et al (2000): Infringement procedures whereby the Commission acts to enforce Community law are important provisions whose existence can have important disciplinary effects and where case law can establish clear interpretations of relevant statutes. Nevertheless, such procedures are very time consuming and costly, and have an impact only after the event. As such they are insufficient to prevent the creation of barriers to free movement of goods (Pelkmans et al (2000). Notification procedures whereby member states are required to notify all draft technical regulations for scrutiny by the 94/34 Committee, whose objective is to prevent new regulatory barriers to trade. In practice all new national regulations of EU member's states have to pass an EU test regarding their impact on the free movement of goods. Notification of derogation procedures that require member states to notify cases in which they wish to prevent the sale of goods lawfully produced or marketed in another Member State on the grounds of non-conformity and non-equivalence with domestic requirements. This seeks to ensure that any derogation from the principle of mutual recognition is transparent and subject to scrutiny. The Single Market in Practice It is useful to examine the goods and services sectors separately. For goods, the New Approach to harmonise standards at the European level has been undermined by the slow development and adoption of European standards implementing the agreed minimum standards under New Approach directives. Between April 1998 and May 1999, the European standards bodies ratified only 40% of the mandated standards and nearly five times as many national standards were adopted (Holmes and Young (2001)). Some researchers detect a fundamental change in the nature of European investment Portfolio's with an increasing share of foreign equities (Danthine et al (2000), whilst others find little evidence that country specific factors have declined in importance in defining European portfolios (Rouwenhorst (1998)). Heinemann (2002), notes that whilst the market for investment funds in the EU has been growing strongly national markets remain dominated by domestic fund companies. Wojcik (2001) looks at the extent and nature of cross-border corporate ownership in Europe and concludes that the level of capital market integration in Europe remains low and that 'the contours of national borders on the map of the European capital markets are still very sharp'. These border effects reflect that the conditions of foreign ownership differ between countries with particular emphasis being placed on the role of corporate governance. Conclusion The EU is one of the most integrated groupings of countries in the World. From the outset, and recently enhanced by the completion of the Single Market, the EU has gone beyond the simple removal of commercial policy instruments that constrain trade at the border, such as tariffs and quotas, to address behind the border barriers to trade resulting from the application of regulatory policies, such as product regulations, environmental regulations, sanitary and various other standards, state aids, the protection of intellectual property, and so on. Nevertheless, the EU is far from a perfectly integrated economic area. For both goods and services, and financial flows, trade between European countries is quantitatively small relative to similar exchanges within national boundaries. In highly integrated markets we should not be able to detect any impact from national borders the propensity to trade internationally with citizens of other countries should be the same as that to trade internally with citizens of the same country of residence. This is the benchmark of perfect integration. However, in practice it appears that borders still loom very large (Brenton (2002)). REFERENCES Brenton, P (2002), 'The Limits to international Trade and Economic Integration', Journal of World Investment, No. 3, pp. 83-95. Brenton, P and Manzocchi, S (eds), Enlargement, Trade and Investment: The Impact of Barriers to Trade in Europe, Edward Elgar, Cheltenham, forthcoming November 2002. CEC (2000), 'Economic Reform: Report on the Functioning of Community Product and Capital Markets'. CEC (2001), 'The Economic Impact of Enlargement', Enlargement Papers No. 4, DG ECFIN. Heinemann, F. (2002), 'The Benefits of Creating a Real EU Market for Investment Funds', Working Paper, ZEW, Mannheim. Holmes, P and Young, A (2001), 'Emerging Regulatory Challenges to the EU's External Economic Relations', SEE Working Paper No. 42, Sussex European Institute, University of Sussex. Pelkmans, J, Vos, E and Di Mauro, L (2000), 'Reforming Product Regulation in the EU: A Painstaking, Iterative Two-Level Game', in Galli, G and Plekmans, J (eds) Regulatory Reform and Competitiveness in Europe; Volume 1, Edward Elgar, Cheltenham. Rouwenhorst, K.G (1998), 'European Equity Markets and EMU: Are the Differences Between Countries Slowly Disappearing', Mimeo, Yale School of Management, New Haven CT. Wojcik, D (2001), 'Cross-border Corporate Ownership in Europe is not Consistent with an Integrated Capital Market: Evidence from Portfolio and Industrial Holdings', WPG 01- 06, School of Geography and the Environment, University of Oxford, Oxford. Read More