Transcript benefits to current eu15 member countries

Francesca Pissarides
Senior Economist
EU Enlargement - Implications for
existing and future EU member countries
London, December 5th, 2002
TIMEFRAME

The commission recommends to conclude
negotiations with 8 transition countries (Baltics, Cz.
& Slov. Rep, Hun. Pol., Slovenia) at the end of 2002
for accession in 2004.

Bulgaria and Romania have been negotiating with
the EU on the technical assumption to conclude in
2007. This date has not yet been accepted
politically as a target date by the EU.
2
GDP PER CAPITA IN PPP TERMS, POPULATION AND
GDP IN EU15 AND CANDIDATE COUNTRIES, YEAR 2000
140
120
100
80
GDP per capita in PPP
in % of EU15 average
60
population in % of
EU15
40
GDP in % of EU15
20
0
3
IMPLICATIONS OF ACCESSION FOR CURRENT
MEMBER COUNTRIES

Growth, trade expansion, job creation, capital flows,
but mainly lower risk perception

Short to Medium - term small positive impact

Long Term - larger impact mainly through capital
flows but uneven distribution
4
BENEFITS TO CURRENT EU15 MEMBER COUNTRIES
(1)

Major growth opportunities in the long term, thanks to
expansion of internal market to nearly 500m
consumers.

A EC study (2001) estimates that enlargement could
increase the level of GDP of current EU15 members by
0.7% on a cumulative basis.

A CEPR study (Baldwin, Francois, Portes) estimates
benefits to existing member countries at Euro 10bn in
the long run, but unevenly distributed (1/3 to Germany)
5
BENEFITS TO CURRENT EU15 MEMBER COUNTRIES
(2)

EU has a consistent trade surplus with candidate
countries. In 2000 > Euro 17bn.

The share of EU exports directed to candidate countries
is small at 9% of total, but growing as accession
countries GDP grows faster than rest of the world’s.

Over past decade CEEC -10 showed fastest growth in
trade with EU15. In 2000 CEEC-10 accounted for 11%
of total EU trade with third countries, up from 6% in
1992.
6
BENEFITS TO CURRENT EU15 MEMBER COUNTRIES
(3)

Same CEPR study estimated that enlargement would
result in 300,000 more jobs for the current EU15
members, on the assumptions that EU15 GDP would be
boosted by 0.2% from enlargement and that L/Y is
unchanged.

Stimulus to capital flows by encouraging business
confidence, the harmonisation and stabilisation of
regulatory system and business environment,
productivity improvements, raising skills and standards,
technology transfers.
7
BENEFITS TO CURRENT EU15 MEMBER COUNTRIES
(4)

Lower risk perception. Impact on capital flows.

Net annual capital flows into the ten CEECs fluctuated
during the past ten years between
$ –3bn and
28bn. On a cumulative basis they amounted to $150bn
in the period 1991-2001. More than half of these
amounts originated from the EU. Stocks of FDI in the
1991-2001 period reached $110bn.
8
NET CAPITAL FLOWS CEEC-10, 1991-2001
$ MILLIONS
30000
25000
20000
net capital inflows
15000
net FDI inflows
Portfolio inflows net
10000
5000
0
-5000
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
9
LARGE CURRENT INVESTMENT RATIOS TO BE
FURTHER BOOSTED BY “ACCESSION NEEDS”

Currently investment ratios are large due to catch-up
effect and to need for renewal of obsolete capital
stock

Implementation of ‘acquis’ also requires large public
sector investments

Assuming long transition periods for investments in
transport and agriculture, ‘acquis’-related public
sector investment could amount to 4-6% of the
countries’ GDP. (current EU average for total public
investment is 2.5% of GDP).
10
CUMULATIVE NET CAPITAL INFLOWS 1991-2001
Slovenia
Slovak Republic
Romania
Bulgaria
3% 2%
8%
24%
10%
2%
Poland
Estonia
25%
19%
Lithuania
Czech Republic
4%
3%
Hungary
Latvia
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PROSPECTS FOR CAPITAL INFLOWS

These amounts are virtually insignificant for the current EU
members. In 2000 net capital flows amounted to 0.3 % of
EU15 GDP and about 1 % of gross fixed investment.

Although in the CEEC significant progress has already been
achieved in the removal of barriers to capital flows, accession
will imply increased credibility of economic reforms and will
increase investment in an irreversible way.

In particular harmonisation of capital market regulations and of
taxation and business accounting rules will improve conditions
for attracting increased capital flows.

Unpredictability: During previous enlargements FDI and other
capital flows increased initially, but subsided later to preaccession levels.
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PROSPECTS FOR PORTFOLIO INFLOWS

It is foreseen that the full exploitation of the trade
potential between CEEC and EU15 will lead to a large
(maybe double) increase of the CEEC trade deficit.

On this basis, as this will be matched by increasing
capital transfers, capital flows to the CEEC will increase
significantly too.

As portfolio investment is well below the level of
countries with comparable income, it may increase more
than proportionately to the increase of the capital
inflows.
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BENEFITS FOR CANDIDATE COUNTRIES

Accession is main goal driving reforms in the CEECs

Expectations are political stability and economic
prosperity

Not first attempt to catch up with west (socialist
industrialisation after WWII, and breakdown of
socialist regimes in early 1990s)
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SHORT TERM
Resilience in 2001-2002
 fall in export growth
 but domestic demand strong with exception of
Poland
 FDI holds up
 Portfolio inflows in 2002 three times larger than
in 2001
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MACRO-OUTLOOK
Main Forecasts
Bulgaria
Growth
2001
4.0
Inflation
2002
4.0
2001
7.4
2002
6.1
Czech Republic
3.3
2.5
4.7
2.3
Estonia
5.4
4.0
5.8
3.8
Hungary
3.8
3.5
9.2
4.9
Latvia
7.7
4.5
2.5
2.3
Lithuania
5.9
5.2
1.3
0.9
Poland
1.0
1.0
5.5
2.1
Romania
5.3
3.5
34.5
22.7
Slovak
3.3
3.5
7.3
3.1
Slovenia
3.0
2.7
8.4
7.5
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PER CAPITA GDP IN PPP AS % OF EU GDP, 2001
100
100
90
80
69
70
57
60
51
50
48
42
40
40
38
28
27
Romania
30
Bulgaria
33
20
10
0
Latvia
Lithuania
Poland
Estonia
Slovak
Hungary
Czech
Slovenia
EU
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HOW LONG WILL IT TAKE FOR CEEC TO
CONVERGE TO EU IF GROWTH DIFFERENTIAL IS
3% PA ?
50%
75%
100%
na
9
19
6
20
30
Hungary
na
13
23
Latvia
14
28
38
Lithuania
10
24
34
Poland
8
22
32
Slovak Rep
2
16
26
Slovenia
na
3
13
Romania
24
37
43
Bulgaria
20
34
41
Czech Rep
Estonia
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BY WHAT RATE DO CEEC NEED TO GROW FOR
CONVERGENCE TO OCCUR IN 20/30 YEARS,
ASSUMING EU15 GROWS AT 2% PA ?
100% target
75% target
50% target
20
30
20
30
20
30
Czech Rep
4.9
3.9
3.4
2.9
na
na
Estonia
6.5
5.0
5.0
4.0
2.9
2.6
Hungary
5.5
4.3
3.9
3.3
na
na
Latvia
7.8
5.8
6.2
4.8
4.1
3.4
Lithuania
7.1
5.4
5.6
4.4
3.5
3.0
Poland
6.8
5.2
5.3
4.2
3.2
2.8
Slovak Rep
5.8
4.5
4.3
3.5
2.2
2.1
Slovenia
3.9
3.3
2.4
2.3
na
na
Romania
9.1
6.8
7.7
5.7
5.5
4.3
Bulgaria
9.7
6.4
7.1
5.4
5.0
4.0
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ACCESSION COSTS

Budgeted transfers (EU budget framework until 2006)
from the EU for structural operations should cover about
3% of GDP until 2006 (incl).

This is equivalent to less than 10% of total EU budget.
The Euro 67bn allocated to candidate countries in the
current budget is about one tenth of funds given to east
Germany after unification. Vast majority of EU budgetary
funds will go to current members even after accession.

Funding after 2006 less clear, since rules for structural
operations might be adjusted.
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NEED FOR INTERNAL REFORM OF EU

Voting mechanism in the EU: Widespread belief that the
reforms in Nice don’t go far enough.

CAP reform will be necessary in the long run when
accession countries are granted equal treatment, unless
the EU total budget is increased.

Rules for allocation of structural funds might change as
well, such that poorer existing member countries can
keep more of their current transfers.
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CONCLUSION

Main risks to EU accession:
 Inadequate internal EU reform.
 Weakening political support in EU15 and candidate
countries.
 Incomplete transition in many candidate countries
(incl. governance and public administration). Much
serious restructuring and reform remains to be done.

Financing might become a problem after 2006
(Finland-Germany Presidency swap).
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CONCLUSION, CTD.

Hopes:
 Ease into EU by 2004.
 Ease into EMU asp after EU accession.
 Fiscal restraint + aid from Brussels make public
finances sustainable.
 Steady real convergence (real GDP per capita,
economic structure, relative prices).
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