When the EU took in ten more countries in May 2004, many people across Europe
feared that an enlargement of that size would wreak havoc in the European economy
and bring EU decision-making to a halt. One year on, it is clear that enlargement
was a success. It has boosted growth in the new members and spurred economic
reform in the eurozone. Politically, however, the EU has not yet digested enlargement,
and there are worrying signs of widening divisions between 'old' and 'new' Europe.
Most economists expected the actual accession to have little impact on growth
in Central and Eastern Europe. After all, trade integration between East and
West was almost complete by the time the new members joined the EU. Nevertheless,
the newcomers enjoyed an accession boom. In early 2004, East Europeans went
on a shopping spree, fearing that tax rises related to EU entry would soon push
up prices. Foreign direct investment also remained strong, as West European
companies continued taking advantage of low-cost countries such as Slovakia
and Poland. Exports and imports between the new members and the eurozone grew
at double-digit rates in 2004, spurred by the removal of the remaining trade
barriers.
Strong economic growth has alleviated fears that the new members would fare
badly in the EU. Even previously sceptical farmers now seem happy. They have
benefited from EU subsidies and surging EU demand for cheap East European food
products. The most recent opinion polls show growing support for the EU in the
new member-states.
Meanwhile, East European governments have pressed on with economic reforms.
The CER's 2005 Lisbon scorecard classifies several newcomers as 'heroes' in
reform areas ranging from innovation to market opening. The World Bank has singled
out Slovakia as the fastest-reforming country in the world in 2004. It ranks
Slovakia alongside Lithuania as among the top 20 countries for the ease of doing
business.
As expected, enlargement had much less of an impact on the 'old' EU members
- the East European economies are simply too small to influence directly growth
in Germany or Italy. But accession may be delivering what years of anguished
debate failed to achieve, namely faster reforms in the big eurozone countries.
Nowhere is this more obvious than in the area of taxation. Most East European
countries lowered their corporate tax rates in the run-up to accession. Some
countries, such as Slovakia and Lithuania, went further by introducing flat
taxes on any kind of income. These tax reforms are triggering a reaction across
the continent. This year Austria has slashed its corporate tax rate from 34
to 25 per cent, and Germany from 25 to 19 per cent.
Changes in labour markets could prove even more important. Faced with the threat
of their jobs moving eastwards, workers at German companies such as Siemens
and Volkswagen have agreed to wage freezes and longer working hours. France
has loosened the rules of its 35-hour week. Both countries are trying to free
up their labour markets in response to heightened competition in the enlarged
Union.
Such reforms will be good for eurozone growth in the medium to long run. But
in the short run, they have turned many West Europeans against enlargement,
and the EU. There are now as many people in Germany and Austria who think that
EU membership is bad as there are in 'eurosceptic' Sweden and Britain. A solid
majority of Austrians, Germans and French are against any further enlargement.
Some politicians in these countries have started to exploit anti-enlargement
sentiment. The new members are accused of 'social dumping' - a politically charged
word for low-wage competition. In reality, Poland spends as high a share of
its GDP on social security as Germany, while Czech and Slovak payroll taxes
are above the EU average. But many workers sense that competition in the enlarged
EU has somehow become 'unfair'. In March tens of thousands took to the streets
of Brussels to demand the defence of 'social Europe'. The East Europeans suspect
that 'old' Europe is trying to prevent them from reaping the full benefits of
membership. East-West divisions are becoming apparent in EU talks on the services
directives, the EU budget and tax policy.
If such divisions become entrenched, the EU will risk losing many of the benefits
from enlargement. In a divided Europe, 'old' Europe could be slow-growing, reform
resistant and more protectionist. 'New' Europe would be resentful, more eurosceptic
and politically volatile. Politicians on both sides should remind their voters
how much their countries have already gained from enlargement, and continue
to see it as an opportunity, not a threat.
Katinka Barysch is the chief economist at the CER.
