Prof.: C. San Juan

1
EU Enlargement

• Blessing or Curse?

Arne Henning Julia Albrecht Luzi Kahn Tom van
Ommen
2
Agenda

• Introduction
• EU-25 Economic Implications
• Labour Market
• Welfare System
• Budget
• Further Enlargement EU-27
• Conclusion

3
Historical Overview of the EU
4
Part 1 of the 5th Enlargement

1. Cyprus
2. Czech Republic
3. Estonia
4. Hungary
5. Latvia
6. Lithuania
7. Malta
8. Poland
9. Slovakia
10. Slovenia

EU 25 01. May 2004
5
Part 2 and Future Enlargement
Acceding Countries 2007 Bulgaria, Romania EU-27
Candidate Countries Croatia, The former Yogoslav
Republic of Macedonia, Turkey
Potential Candidate Countries Albania, Bosnia
and Herzegovina, Serbia and Montenegro, Kosovo
6
Criticism on Enlargement

• Labour mobility leads to fear of migration
• Unequal distribution of the budget ? some
  countries benefit more than others
• Gaps in National Incomes

7
National Incomes
8
Labour Market / Welfare System

• Economic Theory
• The Accession Treaty/Transitional Agreements
• Current Situation
• Future Outlook

9
Labour Market Economic Theory
The Effects of Labour Mobility The Three-factor
Model
10
Labour Market Economic Theory

• The Three-factor Model is based on unrealistic
  assumptions
• No free movement of labour in the real world
• No smooth convergence of wage levels (cost of
  adjust)
• Problem of unemployment and job replacements

Fears of Migration and generally exploitment of
welfare benefits
11
The Accession Treaty

• Reducing barriers to cross-border migration
• Allowing migrants same rights as domestic
  citizens
• Member states can make exemptions
• Transitional Agreements (2-3-2 model) gives
  member states the possibility of restricting the
  free movement of labour for a transitional period
  of up to 7 years

12
Migration Inflow
Stock of CEEC residents in the EU 15 member states
13
The Accession Treaty
Transitional Agreements
Source Journal of European Social Policy (2004)
14
Current Situation

• In general, flow of workers has been rather
  limited
• (Ireland 3.8, Austria 1.4, remaining
  members below 1 of working age population)
• Workers' mobility has had positive effects
• Countries who have not applied any restrictions
  (Ireland, UK and Sweden) have experienced high
  economic growth, a drop of unemployment and a
  rise of employment

15
Current Situation/2

• In the other 12 EU member states migrated workers
  have contributed to a smooth integration into the
  labour market.
• Nevertheless, some countries faced undesirable
  side-effects
• The preceding lifting of the mobility
  restrictions is expected to cause only slight
  increases in the movement of labour
• Still, adjustments on their labour and
  welfare system are indispensable

16
Future Outlook

• Necessary Reforms
• Labour Market
• more labour mobility friendly institutions,
  unemployment insurance of short duration, less
  employment protection
• Welfare System
• Raising social welfare standards of new
  member states, building up a pan-European safety
  net
• Adoption of a EU-wide migration policy

These measures are essential to successfully
integrate the new member states
17
Current Budget
Whats the budget?

• The EU budget funds
• EU policies
• The expenditure of all the EU institutions
• It is limited
• By agreement of all the Member States ? Treaties
• Spending is voted by the European Parliament and
  Council on a Commission proposal
• The European Parliament signs the agreed budget
  into law
• The revenues come from
• Import duties, VAT (value added tax), and from
  the Member States ( of GDP with exceptions e.g.
  British rebate)
• The EU budget cannot be in deficit!

18
Some important Numbers

• Amount of money made available to the Union
• Ceiling at 1.24 of the Unions gross national
  income
• Comparison about 45 of the Unions GNI goes to
  national, regional and local public expenditures
  in the Member States
• Annual budget for 2006
• 112 billions (1.01 of the GNI of the enlarged
  EU)
• Expenditures
• 121 190,91 million (commitment appropriations)
• 111 989,61 million (payment appropriations)

19
Expenditure 2006
EU Budget 2006( 121 billion)
Other expenditure including administrative
expenditure (6)
Competitiveness and Cohesion (39)
Natural resources Agriculture (36), Rural
development and Environment (11)
The EU as a global partner (7)
Citizenship, freedom, security and justice (1)
20
Change in Expenditure
Budget 2005 ? 2006
21
Pre-accession instruments

• Specific targeted financial aid
• For Acceding countries
• Candidates
• Potential future members
• Objective
• Support efforts to enhance political, economic
  and institutional reforms

22
Timeline

• 1989 Creation of the Phare program
• 1997 Reorientation of Phare towards a total
  pre-accession focus
• 1999 Creation of SAPARD and ISPA
• Until 2000 Countries of the Western Balkans
  were also beneficiaries
• ? now the CARDS program is providing financial
  assistance
• July 2000 Turkey receives pre-accession
  assistance via similar but different
  instruments, budget lines and procedures
• May 2004 New Member State must take over the
  full responsibility for the management of the
  Phare program through a process of Extended
  Decentralization

23
Phare

• Phare funds focus entirely on the pre-accession
  priorities
• Objectives
• Strengthening public administrations and
  institutions to function effectively inside the
  EU
• Promoting convergence with the EUs extensive
  legislation (the acquis communautaire) and
  reduce the need for transition periods
• Promoting Economic and Social Cohesion
• Coverage
• Czech Republic, Estonia, Hungary, Latvia,
  Lithuania, Poland, Slovakia, Slovenia, Bulgaria
  and Romania

24
ISPA

• Instrument for Structural Policies for
  Pre-Accession
• Aim Enhance economic and social cohesion
  in the applicant countries of Central
  Eastern Europe
• Main features
• Only finances major environmental and transport
  infrastructure projects
• Annual budget for the 10 countries in
  2000-2006 was 1.04 billion
• Beneficiaries
• Bulgaria, Romania, and Croatia (since 1st
  January 2005)

25
SAPARD

• Special Accession Programme for Agriculture
  Rural Development
• Aim Help the 10 countries deal with the
  problems of the structural adjustment in their
  agricultural sectors and rural areas, as well
  as in the implementation of the acquis
  communautaire set-up the administration to
  menage the CAP
• Main features
• Only finances agricultural and rural
  development measures
• Overall annual budget of 560 million

26
IPA ? 2007-2013

• Instrument for Pre-Accession Assistance
• Aim Prepare the candidate counries better
  for the implementation of structural and
  rural development funds after accession
• Main features
• It will replace the 2000-6 pre-accession
  financial instruments Phare, ISPA, SAPARD,
  the Turkish pre- accession instrument, and
  CARDS
• Will concern the countries with (potential)
  candidate status

27
Future

• Draft Council conclusions on the budget
  guidelines for 2007
• The budgetary procedure for 2007 will be marked
  by 2 important elements
• Maintaining a framework of overall budget
  discipline
• The EU budget for 2007 should provide sufficient
  resources to implement the various policies
  effectively and efficiently
• Good collaboration between the Budgetary
  Authority and the Commission
• Forthcoming of the IIA (Interinstitutional
  Agreement)

28
Future

• Sufficient margins must be maintained
• Appropriations for 2007 should reflect real and
  well-defined needs
• Improvement of the implementation of the EU
  budget
• Implementing rules and guidelines (explicit and
  simple rules)
• Tight grip on payment appropriations
• Should be sufficient but not overestimated
• Efforts to deliver better forecasts
• Continued improvement of ltltActivity Based
  Budgetinggtgt

29
Future

• Presentation of information to facilitate the
  transitions between the Financial Perspective
  2000-06 and 2007-13
• 11. Important elements in preparing the budget
• 12. Stick to these guidlines!

30
Future ? Recent Agreement of Parliament Council

• Based on the meeting of march 22nd on the
  financial perspective
• European Parliament
• Wants to add an extra 12 billion euro on top of
  the 862.4 billion euro budget for the timeframe
  of 2007-2013 (agreed upon at the EU summit in
  December 2005)
• Extra 12 billion are necessary to fund policies
  with a high community added value like education,
  research, trans-european networks and crossborder
  cooperation.
• Additionally, they would like to increase the
  funds for the flexibility instrument in the
  budget ? used for unforeseen eventualities
• Problems to reach definite solution Austrian
  finance minister Karl-Heinz Grasser proposes that
  a number close to 1.5 billion is much more
  realistic than 12 billion of additional funds

31
Winners

• The 10 new member countries
• Will benefit from billions of of development
  aid between 2007 and 2013
• However, they will receive less than Luxembourg
  proposed in June 2005
• The UK sacraficed part of its rebate, but now the
  UK, France and Italy will be making equivalent
  net contributions
• In the past, the UKs net contributin has been
  much higher

32
Losers

• The UK is under pressure to agree to cuts in its
  rebate
• When the UK won the rebate in 1984 it was one of
  the poorest countries in the EU, but now it is
  one of the richest
• France did not want to allow even the possibility
  of a change to farm spending before 2014
• Budget review does leave open this possibility
  (France will have veto power)
• French contributions to the EU budget will rise
  more sharply than Britains

33
Bulgaria-Economic Profile

• Functioning market economy since 2002
• Macroeconomic stability
• ?Implementation of Structural Reform Program
• Improvements made, Challenges remain
• External deficit
• Attractiveness of business environment
• Completion of privatisation
• Flexibility of labour markets

34
Economic Profile
35
Steps towards the EU

• May 1990 Agreement on Trade and Cooperation
  PHARE Programme
• Mar 1993 Europe Agreement for Bulgaria and
  Interim Agreement on Trade and Related Matters
  (replacing the Trade and Cooperation
  Agreement)
• May 1995 The first meeting of the Bulgaria - EU
  Association Council
• Dec 1995 Decision to apply for EU membership
  application presented to the European Council
  in Madrid
• Dec 1999 The European Council in Helsinki
  decision to start negotiations with Bulgaria,
  Latvia, Lithuania, Slovakia, Romania and Malta
• Feb 2000
• -Jun 2004 Accession negotiations
• 25 Apr 2005 Accession Treaty signed in
  Luxembourg
• 11 May 2005 Bulgaria ratified the Accession
  Treaty
• 1 Jan 2007 Accession

36
Romania Economic Profile

• Functioning market economy since 2004
• Broadly maintained macroeconomic stability
• Implementation of Structural Reform Program not
  vigorously in all fields
• Some progress on critical issues, but further
  challenges
• Pace of disinflation
• Current account deficit
• Prudent fiscal policy
• ? Strengthen revenue base
• Continuation privatisation

37
Economic Profile
38
Steps towards the EU

• 1974 Romanias inclusion in the Community's
  Generalised System of Preferences
• 1980 signing of the Agreement on Industrial
  Products
• 1991 signing of the Trade and Co-operation
  Agreement
• Feb 1993 signing of the Europe Agreement
• Feb 1995 entrance into force of the Europe
  Agreement
• Jun 1995 application for EU membership
• Dec 1999 Helsinki European Councils decision to
  open accession negotiations
• Feb 2000 formal beginning of the accession
  negotiations
• Dec 2004 closure of the accession negotiations
• 25 Apr 2005 signing of the Accession Treaty in
  Luxembourg

39
(Potential) Candidate Countries

• Croatia and Turkey
• start of accession negotiations in Oct 2005
• The former Yugoslav Republic of Macedonia
• accession negotiations not started status of
  candidate country in Dec 2005
• Albania, Bosnia and Herzegovina and Serbia and
  Montenegro (including Kosovo under UN Security
  Council Resolution 1244 of 10 June 1999)
• progress towards being recognised as candidates
  depends on engagement in Stabilisation and
  Association Process

40
Western BalkansMain Economic Trends

• Growth in 2004 around 4.5, following a slowdown
  in 2002-2003
• Economic stabilisation continued
• High external deficits
• Introduction of market economy
• ? Weak institutions

41
Western BalkansMain Economic Trends
42
The Stabilisation and Association Process (SAP)

• EUs policy framework for the Western Balkan
  countries, all the way to their eventual
  accession
• Three aims
• stabilisation and a swift transition to a market
  economy
• the promotion of regional cooperation
• the prospect of EU accession

43
The Stabilisation and Association Process (SAP)

• Instruments formulated at Zagreb Summit (Nov
  2000)
• Thessaloniki Agenda (Jun 2003) introduced new
  instruments
• European Partnerships
• Strengthened political co-operation in Common
  Foreign and Security Policy
• Promoting economic development
• Opening of Community programmes to Western Balkan
  countries

44
Conclusion

• Essential reforms concerning the labour market
  and welfare system need to be implemented in the
  future
• The new members benefit higher budget allocations
  which need to be born by the old and wealthy
  members
• Further enlargement is on its way, delaying the
  realization of benefits generated by an enlarged
  market

45
Conclusion

• Already now their are political, social and
  cultural benefits for the EU as a whole
• Economic benefits will be reaped in the longer
  term
• ? enlarged market makes the EU more competitive
  on a global scale

46
FDI and Developing Countries

• On average, 90 of the stock of capital in
  developing countries is self financed, and this
  fraction was surprisingly stable throughout the
  1990s.
• The greater integration of financial markets has
  not changed the dispersion of self-financing
  rates, and the correlation between changes in
  de-facto financial integration and changes in
  self financing ratios is statistically
  insignificant.

47
FDI and Developing Countries

• TOPIC FOR DISCUSSION
• There is no evidence of any "growth bonus"
  associated with increasing the financing share of
  foreign savings.
• In fact, the evidence suggests the opposite
  throughout the 1990s, countries with higher
  self-financing ratios grew significantly faster
  than countries with low self-financing ratios.
• This result persists even after controlling
  growth for the quality of institutions.

48
Questions?
49
References

• The European Commission (2006). Enlargement
  Process. http//europa.eu.int/comm/enlargement/ind
  ex_en.htm
• Economic Policy Committee (2004). The Structural
  Challenges Facing the Candidate Countries.
  http//europa.eu.int/comm/economy_finance/epc/docu
  ments/2004/candidate_countries_final_en.pdf
• Commission of the European Communities (2005).
  2005 enlargement strategy paper.
  http//europa.eu.int/comm/enlargement/report_2005/
  pdf/package_v/com_561_final_en_strategy_paper.pdf
• Kvist J. (2004), Does EU Enlargement lead to a
  race to the bottom? Strategic interaction among
  EU member states in social policy, Journal of
  European Social Policy, vol. 14 (3), pp. 301-318.

50
References

• http//www.euractiv.com/de/agenda2004/eu-budget-pa
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• http//europa.eu.int/comm/budget/budget_glance/ind
  ex_en.htm
• http//europa.eu.int/eur-lex/budget/data/D2006_VOL
  1/EN/nmc-grseq42960935830-3/index.html
• http//europa.eu.int/comm/budget/budget_glance/ind
  ex_en.htm
• http//news.bbc.co.uk/2/hi/uk_news/politics/407879
  6.stm