No. 43, 1996 - Enlargement of the EU: Dynamics and Problems

The Madrid Council of December 1995 made it explicit: the European Union is definitely going to enlarge Eastward. This is going to be the fourth enlargement of the EU. As it was documented in the previous cases, any such step has invariably been an act of high policy, although the economic considerations have not been negligible either. The primacy of security and strategic considerations deserve mentioning insofar as discussion in the first half of the 1990s tended to be dominated by trade and financial issues, reducing a comprehensive matter to simplistic cost-benefit analysis of a microeconomic type. This seems fundamentally wrong on the base of everything what we know about the history as well as the present nature of the three pillar post-Maastricht EU. Moreover, even allowing for a micro-approach, it is more often than not hard to delineate costs from benefits, especially if dynamic considerations are not neglected. For instance, abolition of quantitative restrictions or prohibitive duties on agricultural imports, or abolition of procedural protectionism may hurt producer and employment interest in some region, whereas it immediately results in consumer surplus, lower prices, i.e. across-the-board anti-inflationary impacts, and improved competitiveness in all areas using these imports as their inputs. Thus applying even the simplest categories of standard economics requires caution, as elementary facts and categories are open to interpretation, or are at least less than trivial.
Then why to enlarge? A Commissioner van den Broak (1996) put it recently, there are basically selfish interests of the current EU members, which are at stake. First, this is the cheapest, far the cheapest way of stabilising a neighbouring region. Keeping people from migrating, capitalising on the natural propensity to stay at home unless dislocated by war or extreme economic hardship, is of course, the trivially lowest cost profilactic strategy for the welfare states of Europe.
A second consideration is the changing economic health of the transforming countries. The Central European Visegrád Fie already constitute a market of 80 mn people, or more realistically, judged by their import volumes, a market nearly twice the size of Russia. Given these countries’ remarkable success in reorienting their trade from East to West, following standard integration theory, microeconomic integration is already in well advanced stage. In other words, accession would only mean a mere institutionalisation of an already well established liaison.
Third, the geographical factor should not be underestimated. With the decay of the Yalta order, Central Europe returns to its place determined not only by its economic fundamentals, but at lest as significantly, also by its historic and cultural heritage. Last but not least, Eastward enlargement puts the issue of systemic change on the agenda of the EU. The most obvious is this in the case of decision-making, but also financing of such established and fundamental arrangement, as the CAP and the welfare state, including regional and cohesion funds at the Union level, render major overhauls imperative. The challenge from the East thus may accelerate changes that are long overdue anyway.
Why to join the EU? This question is normally discussed in term of financial transfers, basically focusing on the numbers generated by official channels. This is fundamentally wrong. First, economic history in this and the last century equally evidences that any society, succeeding in catching up, has to rely basically on its own savings and investment capacity. Second, in contemporary economy foreign direct investment, i.e. typically private rather than official involvement which really matters.
Then what, if not assistance and transfers, is the point in joining the complex machinery of the EU? First and foremost, the EU is an anchor of democracy and also of the European-type of social market economy, which is the target model for which the vast majority of the electorate in Central Europe has repeatedly voted for. By having launched a lengthy process of law harmonisation to the EU, the transforming countries have gained a point of orientation that might be quite helpful in deciding over the details of “which capitalism”.

This paper is available here.