A2 Economics
PowerPoint Briefings 2009
European Union
Enlargement
tutor2u™
The Official EU View on Enlargement
• “Enlargement is one of the EU's most powerful
policy tools. It serves the EU's strategic interests
in stability, security, and conflict prevention. It has
helped to increase prosperity and growth
opportunities, to improve links with vital transport
and energy routes, and to increase the EU's weight
in the world.
• In May 2009, the EU will mark the fifth anniversary
of the 2004 enlargement.”
tutor2u™
Some issues to cover and revise
• Has the widening of the EU been a success?
• The benefits and costs of enlargement for
– New member states
– Existing (established) members of the EU
– The EU economy as a whole e.g. in the context of globalisation and other
external events
• EU enlargement and immigration policy
• How many more countries will join?
• Will enlargement prevent final economic union?
• How many new states will join the Euro?
• Is enlargement fatigue setting in?
• What of states that remain outside of the EU e.g. Norway and Iceland
tutor2u™
EU Enlargement – A Brief Historical
Perspective
• Europe has added new members periodically
• Six Main Waves of EU Enlargement
– 1973 (UK, Ireland and Denmark)
– 1981 (Greece)
– 1986 (Portugal and Spain)
– 1995 (Austria, Finland and Sweden)
– 2004 (Ten new countries)
– 2007 (Bulgaria and Romania)
tutor2u™
Who will be next? Potential members
tutor2u™
Centre for European Reform
• “The objective of joining the EU has helped the Central and
East European countries to move from post-Communist
upheaval to market economics and pluralist democracies in
little more than a decade. Ten countries successfully joined
the EU in May 2004, and Bulgaria and Romania followed in
January 2007. However, the Union is showing signs of
'enlargement fatigue'. Many politicians worry that an ever
larger Union will function badly, and that further widening will
come at the expense of deepening. West European workers
fear the economic consequences of adding 50 million lowcost workers to the EU single market. Future accession
would be very difficult unless public and political support for
enlargement revives.”
•
www.cer.org.uk/enlargement_new/index_enlargement_new.html
tutor2u™
EU Membership Distribution in Jan 2004
EU MEMBERSHIP (April 2004)
LARGE
RICH
POOR
UK
SPAIN
FRANCE
ITALY
GERMANY
SMALL
BELGIUM
PORTUGAL
LUXEMBOURG
GREECE
NETHERLANDS
IRELAND
DENMARK
SWEDEN
AUSTRIA
FINLAND
tutor2u™
EU Membership in January 2009
EU MEMBERSHIP JANUARY 2009
LARGE
RICH
POOR
UK
SPAIN
FRANCE
POLAND
ITALY
GERMANY
SMALL
BELGIUM
PORTUGAL
LUXEMBOURG
GREECE
NETHERLANDS
ESTONIA
ROMANIA
IRELAND
HUNGARY
BULGARIA
DENMARK
CZECH REPUBLIC
SWEDEN
SLOVAKIA
AUSTRIA
SLOVENIA
FINLAND
CYPRUS
MALTA
LITHUANIA
LATVIA
tutor2u™
The Map of an Enlarged Europe
tutor2u™
Overview of new member states (1)
Per Capita Incomes
EU25=100
PPP adjusted
Manufacturing as a % of GDP
GDP Growth
1997
2008
% in 2006
Average annual growth
(%)
1999-08
Bulgaria
26
39
26
5.3
Cyprus
86
92
11
3.8
Czech Republic
73
82
32
2.8
Estonia
42
67
21
6.4
Hungary
52
63
26
3.8
Latvia
37
56
15
7.3
Lithuania
38
62
23
6.5
Malta
81
76
17
1.9
Poland
47
55
25
4.2
Romania
26
44
27
5.2
Slovakia
51
71
28
4.5
Slovenia
78
91
28
5.2
Turkey
32
42
25
4.2
United Kingdom
tutor2u™
Overview of new member states (2)
Inflation
Unemployment
Labour productivity
Population
% change in consumer
prices in 2008
Per cent of the labour force in
November 2008
GDP per person
employed
EU27=100 in 2008
Thousands – 2008 mid
year estimate
Bulgaria
12.0
5.1
36
7 640
Cyprus
4.4
3.9
85
789
Czech Republic
6.3
4.5
73
10 381
Estonia
10.6
8.3
63
1 340
Hungary
6.0
8.3
74
10 045
Latvia
15.3
9.0
51
2 270
Lithuania
11.1
7.0
63
3 366
Malta
4.7
5.8
89
410
Poland
4.2
6.5
62
38 115
Romania
7.9
5.8
45
21 528
Slovakia
3.9
9.1
78
5 401
Slovenia
5.5
4.3
86
2 025
10.4
n/a
62
70 586
Turkey
United Kingdom
tutor2u™
GDP Per Head for selected member states
Income convergence for new EU members
EU27=100
Index of GDP per head, purchasing power standard, EU25=100, source: Euro
100
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
00
01
02
Czech Republic
Hungary
Poland
Slovenia
03
04
05
Estonia
Slovak Republic
Bulgaria
Lithuania
06
07
Some progress
in raising relative
living standards
Catching up with
Portugal and
Greece
Newer nations
are considerably
poorer
08
Latvia
Romania
Source: Reuters EcoWin
tutor2u™
Unemployment rates for selected countries
Unemployment in selected New Member States
Percentage of the labour force, annual average, source: Eurostat
20.0
20.0
Poland
18.0
18.0
Slovakia
16.0
14.0
Estonia
16.0
Lithuania
14.0
Percent
12.0
12.0
EU25 average
10.0
Strong growth has
helped to bring
down
unemployment
10.0
8.0
8.0
6.0
More jobs for
domestic workers
– reverse
migration?
6.0
Czech Republic
Hungary
Slovenia
4.0
4.0
2.0
2.0
0.0
0.0
98
99
00
01
02
03
04
05
06
But putting
pressure on
wages to rise
07
Source: Reuters EcoWin
tutor2u™
Joining the Club – Criterion for EU Entry
• Accession countries have to meet the Copenhagen
criterion for joining the European Union
– Stability of political institutions guaranteeing democracy,
the rule of law, human rights and respect for and
protection of minorities
– A fully functioning market economy that meets the
standards required for participation in the single market
tutor2u™
Transition Economies
• Price Liberalisation
– Moving away from state controlled prices to allow the
price mechanism greater influence in allocating
resources
• Privatisation
– Transfer of ownership
– Development of private sector capital markets
tutor2u™
Transition Economies (2)
• Liberalisation of Trade with other Countries
– Full convertibility of currencies
– Preparation for eventual membership of the Euro
• Reforms of the Financial Sector
– Fully-functioning Central Banks to take control of
monetary policy
– Capital markets for corporate and government bond
issues
tutor2u™
Potential Gains for Accession Countries
• (1) Membership of the EU Single Market
– Trade:
• Exploiting comparative advantage to increase trade
– Investment
• Free movement of capital – looking for the highest return
• Inward investment to aid transformation of national
infrastructure – impact on a country’s LRAS / trend growth
– Competition
• More competition – a boost to labour productivity
• Dynamic efficiency gains e.g. arising from higher capital
investment and faster pace of innovation
tutor2u™
Potential Gains for Accession Countries (2)
• Financial Support
– Countries will be net recipients of income from
• Common Agricultural Policy
• EU Structural funds
• Many regions have per capita incomes well below the
75% threshold for Objective 1 funding
• 92% of population of accession countries lives in regions
with a GDP/head under 75% of the EU25 average. 61%
of the population lives in regions below 50%
• Much of the EU funding will help to finance investment
tutor2u™
Potential Gains for Accession Countries (3)
• Potential macroeconomic advantages
– Reduced exchange rate volatility – many countries are keen to join
the Euro to reduce exchange rate risk and benefit from lower
interest rates
– Slovenia, Slovakia, Cyprus and Malta have joined the single
currency
• Slovenia – January 2007
• Cyprus and Malta – January 2008
• Slovakia – January 2009
– Other countries do not meet the entry requirements or have
chosen to remain outside – to retain monetary policy flexibility
tutor2u™
Competitive advantage for new states?
• Central European location for many
• Significantly lower wage costs
• Lower productivity – but unit labour costs still
cheaper e.g. for car manufacturers
• Lower land prices
• Attractive corporate tax regime + other incentives
• Success of previous inward investments
• Many new states have highly literate population
tutor2u™
Diagram corner
• Useful diagrams for this topic:
• Trade diagrams – welfare effects from single
market, exploitation of comparative advantage
• AD-AS diagrams
– Inward investment effects
– Economic shocks within the enlarged EU economy
• Economies of scale
• Labour market diagrams e.g. impact of migration
tutor2u™
A2 Economics
PowerPoint Briefings 2009
Competitiveness and Growth
in the New Member States
Performance of Europe’s new countries
Competitiveness
Institute for World Economics of the Hungarian Academy of Sciences
Comparative Survey of the new Member States
Ranking
Country
Index value
1.
Slovenia
90.6
2.
Czech Republic
82.8
3.
Lithuania
81.5
4.
Hungary
80.5
5.
Estonia
80.2
6.
Slovakia
74.2
7.
Poland
71.9
8.
Latvia
71.5
Economic criteria include: real GDP growth, GDP (PPP) per capita, gross
investment, productivity, balance of trade, unemployment, and convergence
indices of the economic and monetary union
tutor2u™
The Sources of Growth
Productivity
Capital
Stock
Natural
Resources
Economic
Growth
Invention
Innovation
Labour
Inputs
Technology
tutor2u™
The Sources of Growth
Productivity
Capital
Stock
Natural
Resources
Economic
Growth
Labour Supply
Labour
Utilisation
Invention
Innovation
Labour
Inputs
Technology
Human Capital
tutor2u™
The Sources of Growth
Labour
productivity
Total factor
productivity
Productivity
Capital
Stock
Natural
Resources
Economic
Growth
Labour Supply
Labour
Utilisation
Invention
Innovation
Labour
Inputs
Technology
Human Capital
tutor2u™
The Sources of Growth
Labour
productivity
Total factor
productivity
Productivity
Fixed Capital
Capital
Stock
Natural
Resources
Infrastructure
Social Capital
Economic
Growth
Labour Supply
Labour
Utilisation
Invention
Innovation
Labour
Inputs
Technology
Human Capital
tutor2u™
Recent growth for selected countries
Faster growth for many new member states
Annual % change in Real Gross Domestic Product for selected countries
15.0
15.0
Latvia
12.5
12.5
Percent
Estonia
10.0
10.0
7.5
7.5
Hungary
5.0
5.0
2.5
2.5
UK
0.0
0.0
-2.5
Growth much
faster than the UK
But has this been
sustainable?
Steep slowdown
and now recession
for many new EU
members
-2.5
Lithuania
-5.0
-5.0
96
97
98
99
00
01
Estonia [ar 4 quarters]
Lithuania [ar 4 quarters]
Latvia [ar 4 quarters]
02
03
04
05
06
07
08
Hungary [ar 4 quarters]
United Kingdom [ar 4 quarters]
Source: Reuters EcoWin
Some of them
“over-heated”
when they joined
the EU
tutor2u™
Latvia – Rampant wage inflation
destabilised the economy
Latvia's Booming Economy - Out of Control?
Annual % change in money wages and current account balance
35
Click here for
an article
Percent
30
25
20
Wage Inflation
15
10
5
0
LVL (millions)
-50
-100
-150
-200
Current Account Balance
-250
-300
-350
-400
03
04
05
Wages, Average Monthly, Gross [ar 12 months]
06
07
08
Current Account, Balance, Total
Source: Reuters EcoWin
tutor2u™
Estonia – from boom to deep recession
Estonia's GDP Growth and Unemployment
Annual percentage change in real national income, unemployment rate %
15.0
15.0
Unemployment
12.5
Estonia
10.0
10.0
Percent
12.5
7.5
7.5
5.0
5.0
Economic Growth
2.5
2.5
0.0
0.0
-2.5
-2.5
-5.0
-5.0
Q1
Q3
01
Q1
Q3
02
Q1
Q3
03
Q1
Q3
04
Q1
Q3
05
Q1
Q3
06
Q1
Q3
07
Q1
08
Source: Reuters EcoWin
tutor2u™
Inflation - better control in some new EU
countries than others
Inflation Rates for Selected new EU States
Percent
Annual % change in consumer prices (all items)
30
30
25
25
20
20
15
15
10
10
5
5
0
0
-5
-5
96
97
Hungary
98
99
00
Czech Republic
01
02
Poland
03
04
05
06
07
08
Latvia
Source: Reuters EcoWin
tutor2u™
Poland has improved the trade off between
jobs and prices
Poland - Unemployment and Inflation
22.5
22.5
20.0
20.0
Percent
17.5
Unemployment rate (per cent)
17.5
15.0
15.0
12.5
12.5
10.0
10.0
7.5
7.5
5.0
Consumer price inflation (%)
5.0
2.5
2.5
0.0
0.0
02
03
04
05
06
07
08
Unemployment, Rate
Consumer Prices, By Commodity, Index, 1998=100 [ar 12 months]
Source: Reuters EcoWin
tutor2u™
And a rising employment rate will help to
provide jobs at home for younger workers
Employment Rate for Poland
Percent
Per cent of population of working age in a job
67.5
67.5
65.0
65.0
62.5
62.5
60.0
60.0
57.5
57.5
55.0
55.0
52.5
52.5
50.0
50.0
47.5
47.5
45.0
45.0
97
98
99
00
01
I.1.1: Total employment rate
I.1.2: Employment rate, females
02
03
04
05
06
07
I.1.3: Employment rate, males
Source: Reuters EcoWin
tutor2u™
Potential Gains for Existing EU Countries
• (1) Export potential and exploitation of economies of scale
• (2) Foreign Investment and Incomes and Profits
• (3) More diverse European labour market
• (4) A cleaner environment
• (5) Catalyst for further structural reforms in the EU
– Reforms to the CAP
– Spur to countries to reform their labour markets in the face of
lower labour cost competition
– Many countries are already engaging in tax competition
tutor2u™
EU Enlargement – an export opportunity for
the UK
UK Exports to a selection of new EU Member Stat
4.0
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
Poland
Czech Republic
0.5
billions
GBP (billions)
Exports of goods and services, annual data, current prices, £ billion
1.0
0.5
Hungary
Slovakia
0.0
0.0
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
Source: Reuters EcoWin
tutor2u™
Main Concerns of Member Nations
• Extra budgetary costs for the EU
• Can accession countries continue to meet stricter
EU environmental standards?
• Long-term need for higher regional subsidies – loss
of some regional funding for established EU
countries
• Social concerns from increased labour migration
• Some Objective 1 regions will now lose some of
their funding – including regions in the UK, Spain,
Greece and Portugal
tutor2u™
Economic Concerns of Member Nations
• Labour Market Issues
– Fears of higher structural unemployment among accession
countries – which might lead to large immigration of labour into
higher-income countries + political and social tensions
– Fears of a surge in economic migration from East to West
• Social dumping?
• Concerns about organised crime and illegal immigration from
Russia, Belarus and the Ukraine through weak Eastern
European borders
• In Germany, Austria and Italy (countries that border accession
states) there are intensive debates about controlling the flow of
migrants from former Eastern Europe
tutor2u™
What is convergence?
• Income convergence:
• Where the divide in per capita incomes becomes
smaller over time
• Requires countries to achieve relatively faster
growth over a substantial time period
• Convergence may also happen if other “richer”
countries suffer a slowdown
• NMS trade heavily with the established EU – so an
EU-wide slowdown is not in their long term interests
tutor2u™
The likely scenario for new member states
• Income convergence is not automatic
• Baltic states and Slovenia appear to have the best growth /
convergence potential but Baltic States over-heated
• Convergence will happen but at different speeds
• Is there a new Ireland? A Baltic Tiger? Ireland collapse in 08
• Growth is stimulated by capital investment and productivity
• But in the long term, NMS will need to improve employment
rates, and achieve great labour mobility
• Unemployment is a constraint on growth
• Demographics will also play a role
• Will the new members join the Euro? 4 have done so
tutor2u™
Recent articles on EU enlargement
•
Financial crisis in Hungary
•
http://www.guardian.co.uk/commentisfree/2008/oct/29/creditcrunch-eu
•
Reversing Poles: how Poland brought its workers home
•
http://www.guardian.co.uk/business/2009/jan/23/poland-reverses-uk-migration
•
Will Turkey ever be accepted by the EU?
•
http://www.guardian.co.uk/commentisfree/2009/jan/19/turkey-gaza
•
Crises test stability of new EU states
•
http://www.ft.com/cms/s/0/5f05bd08-e331-11dd-a5cf-0000779fd2ac.html
•
Balkan states set to launch EU bids
•
http://www.ft.com/cms/s/0/7f38328c-a776-11dd-865e-000077b07658.html
•
Crunch time for eastern Europe
•
http://www.ft.com/cms/s/0/95f2113e-cb14-11dd-87d7-000077b07658.html
•
Turkey tries to revive EU drive
•
http://news.bbc.co.uk/1/hi/world/europe/7837145.stm
tutor2u™
Key Unit 4 Tips
•
Use the bullet points (reworded) as subheadings
•
Ensure you answer all sections
•
Answer the question!
•
Refer to extracts and articles to support your answer (analysis)
•
Use terminology/definitions from the AS/A2 course, theory and diagrams
(application)
•
Evaluation is crucial (30 marks!) but does not have to take place only in the final
section: say which sources are more useful than others, say what other data
would have helped you to make a better recommendation, say which sources
may be biased. Evaluation is saying what your recommendation is based on!
•
Plan your answer to ensure you cover as much relevant material as possible
•
Aim to write at least 7 – 8 sides in the time provided (including diagrams – easy
application marks)
•
Remember that 120/120 is not out of the question – and this is not always the
‘best’ candidates who achieve this
•
Source: Andy Threadgould, Dulwich College, Jan 2009
tutor2u™