Topic: Analyse the main advantages and disadvantages of European Union enlargement for a) existing members and b) for applicant countries.
In 2004 we will see the biggest enlargement in the history of the EU. All previous enlargements have significantly impacted on the regional focus of the EU’s external policies. The countries joining the EU in 2004 are Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia and will expand the European Union from currently 15 members to 25.
The question is, whether this enlargement will be beneficial or not. Let us analyse what the main advantages and disadvantages of the EU enlargement could be.
Supporters of enlargement say the process represents a historic opportunity to unite Europe peacefully after generations of division and conflict. They say it will extend the stability and prosperity of current member states to a wider group of countries, and will consolidate the political and economic transition that has been taking place in Central and Eastern Europe since 1989.
It is also argued that enlargement will create the biggest single market in the world, boosting investment and job creation, while increasing the influence of the EU in the wider world.
Accession countries see membership to the EU as a significant economic benefit, because they will be part of a European single market. Being a member of the single market means free trade among all members and therefore the accession countries will get products from EU countries cheaper than before (P instead of P-EU), as they do not have to pay the tariff anymore and are also able to increase their exports to other EU countries. (Graph below)
Furthermore there is the advantage of free movement of capital. This brings potential of huge inflow of foreign direct investments, as the accession countries have significantly low land and labour costs. Foreign companies are more likely to open factories there and that will have positive effects on these countries and therefore productivity and technology will tend to improve. The result in the long run will be improved unit labour cost and better competitiveness.
Regarding trade and FDI it can be expected that EU enlargement entails positive effects on the welfare of all countries involved, due to the reallocation of resources and the restructuring of production and trade.
Unrestricted movement of goods, services, and capital creates a division of labour and provides opportunities for the exploitation of comparative advantages as well as economies of scale. However, in spite of the expected trade creation effects within the enlarged EU (and, in fact, trade diversion outside), it must be acknowledged that during the transition period difficulties may arise in those regions, sectors, and firms that are confronted most directly with the new competitive challenges.
The foreign investments will lead to higher employment in the new EU countries, and as we all know higher employment lead to higher spending and higher spending lead to higher standard of living and will spur more investments into the countries. (Multiplier and Accelerator)
Joining the EU also brings macro economical advantages. It reduces the exchange rate volatility if those countries also join the EMR and many of those countries are very keen to join the EURO in the future (however this is not likely to happen before 2007) to reduce the exchange rate risks and benefit from low interest rates.
Although the sum of joining the European Union is rather positive there are also negative aspects which need to be taken into consideration.
The first and most obvious negative point is that of course joining the European Union is going to cost lots money for each of the new members. New members will need to improve their infrastructure safety standards and environmental standards to EU standards.
Most accession countries also already have big budget deficits which might cause problems of accumulating national debts and higher interest payments.
Joining the EU is going to create Trade Diversion. This occurs when consumption shifts from a lower cost producer outside the trading bloc a higher cost one within it. Assume the most efficient producer of lamb in the world is New Zealand – a country outside of the EU. Assume that before membership Russia for example an identical tariff on lamb from any country, it would therefore import lamb from New Zealand rather than the EU. After joining the EU the removal of the tariff made the EU lamb cheaper as the tariff remains on the New Zealand lamb. The consumption is therefore switched to the higher cost EU lamb.
In the diagram above, before joining the EC the UK was importing lamb from New Zealand at price P1 (the New Zealand price the tariff). At this price the UK consumed Q1, produced Q2 domestically and therefore imported the remainder Q1 – Q2. On joining the EC it is now possible to consume the EC tariff free price of P2 (this is above the New Zealand tariff free price of P3).
It is also questionable whether the joining countries will be able to maintain competitiveness against the more powerful Western EU-countries. If this fails there will be a risk of higher unemployment.
There too, is the fear of richer countries buying the east European countries land to cheap prices and merge inlands companies. Furthermore there is the fear that qualified labour will migrate to Western European countries, where they can earn much more money.
Now you have seen the advantages and disadvantages for the joining counties. Let us now have a closer look at the advantages and disadvantages for already existing members of the EU.
For the already existing members there is the potential of increasing exports, because of an enlargement of the internal market. If the living standard increases in those new member countries, it will bring a huge export potential for the Central EU countries. Recent studies  show that the EU-15 countries are projected to gain about 10Bn Euro in real income from the enlargement, and this gain is likely to be distributed as follows: Germany, France and the UK would together get 70% of the total. The CEE countries’ gain is 3Bn EUR (1.5% of their GDP), but taking into consideration also the investment multiplier, CEE states would gain 30 billion EUR, somewhat over 15% of their base year GDP .
Table: Distribution of trading profits derived from eastward enlargement by EU members (http://education.kulichki.net/mba/enlarg.htm)
Another advantage for the established countries is, to be able to invest in these new countries. Countries like Germany or United Kingdom are now able to just open factories in cheap land and labour countries like Poland or the Czech Republic. The production cost will be reduced significantly.
A further advantage would be that the cheap but still good qualified labour will want to migrate to countries like Germany or United Kingdom, where they are able to earn twice as much as in their home countries. Enlargement also means rising economic growth in the EU. This will make the European’s position stronger against other countries in the world economy, especially against the United States of America.
Everyone will also benefit from cleaner environment, as the joining countries will have to change their environment standards completely. Specialists expect a pollution improvement to a high degree.
However as above for the accession members there are also a few disadvantages for existing countries caused by EU enlargement. EU enlargement always costs a lot of money not only for the joining countries but also for the EU countries. It would be too expensive to let the new members join the CAP (Common Agriculture Policy) to the same conditions as the existing members. Therefore they wont have full access to the Agriculture founds.
There is also the fear that the EU enlargement will lead to enormous migration into the West European countries. Especially concerned are Germany and Austria as they are boarding directly to these new joining countries like Poland and the Czech Republic. High migration would probably lead to higher unemployment in Germany or Austria as these two countries already have difficulties with their unemployment.
There is also the fear of rising crime and violence rate because of migration for those East European countries. Certain policies will be necessary for East European countries to get control of this undoubtedly immense problem.
We have now seen that the EU enlargement not only brings advantages for both parties joining members and existing members but also a few disadvantages. Although there do exist disadvantages but there is no doubt that enlargement will be beneficial for either parties in the long run. Furthermore it is more than necessary to be more competitive against the strong US market.