Select Committee on European Scrutiny Thirty-First Report


29 EU Enlargement

(27478)

9051/06

COM(06) 200

Commission Communication: Enlargement, Two Years After — An Economic Success

Legal base
Document originated3 May 2006
Deposited in Parliament11 May 2006
DepartmentForeign and Commonwealth Office
Basis of considerationEM of 22 May 2006
Previous Committee ReportNone
To be discussed in CouncilTo be determined
Committee's assessmentPolitically important
Committee's decisionCleared

Background

29.1 In the introduction to the Communication, the Commission describes the fifth enlargement of the EU on 1 May 2004 as: "the most ambitious in the history of the European Union: the largest ever in terms of number of countries and population acceding to the EU; the most complex, as it brought in the EU ten countries which had experienced very diverse economic, social and political developments". It notes that: studies ahead of accession predicted a significant boost of economic growth for the new Member States (1.3-2.1% additional GDP growth per year); the old Member States were also expected to benefit "but due to the relatively limited economic size of the newcomers — less than 5% of total EU-25 GDP — the impact was estimated to be marginal"; and that "consequences such as migration flows, relocation of activity, downward pressure on wages in the old Member States and adjustment costs in the new Member States were expected to be contained and transitory".

The Commission Communication

29.2 Two years after, the Commission says it is time to review the experience: "The lessons from the fifth enlargement can be useful to understand the benefits and challenges of European integration. Further enlargement steps can take such lessons into account. While the accession which took place in 2004 has first and foremost a political and strategic dimension for its importance in reunifying Europe, this Communication, and the study on which it is based,[103] focuses on the economic dimension of enlargement. It assesses whether the expectations of a positive economic impact prevailing in the run-up to the enlargement, in spite of some concerns in both the existing and acceding countries, have been fulfilled."

29.3 In a nutshell, the Commission says that the favourable economic expectations have been fulfilled:

    "The new Member States have undertaken extensive reforms to modernise and are now dynamic market economies. The stability provided by accession has helped to multiply trade and investment between EU-15 and EU-10 as well as within EU-10, creating a win/win situation for all involved: contributing to growth and employment in the EU-10; opening new opportunities for firms in the EU-15, thereby helping them stay competitive in the face of a ever more challenging global environment; and having a favourable impact on consumers across the EU, who can benefit from a wider choice. Overall, the fifth enlargement, by leading to a larger, more integrated internal market, has created the conditions for the whole European economy to become stronger and more dynamic, hence to be better equipped to face increased global competition. More broadly, and fundamentally, by enhancing peace, stability, security, prosperity, democracy, human rights and the rule of law across Europe, it is clear that the fifth enlargement, as the previous ones, has been a success for all its Member States."

29.4 Looking ahead, the Commission says that careful preparation of the enlargement over the previous decade was been key to achieving this outcome and that, while the experience so far suggests that optimism is in order, the remaining challenges should not be underestimated:

    "Both new and old Member States face ageing populations and related budgetary strains, global competition increasing pressure on their economies, and a need to adapt to these realities, including by modernising their welfare systems and becoming knowledge-based and innovative societies. Further convergence of the economies, itself a long-term challenge, would contribute significantly to this end.

    "In a world marked by global competition, not least from Asia, economic dynamism is essential. The fifth enlargement has offered new opportunities for both the old and the new Member States to undertake important steps in this direction. Further European economic integration will help Europe to stay competitive and gain from increasing internal and external trade, and better growth and employment prospects. Both companies and consumers will benefit from a larger internal market, technological innovation, lower prices, and hence will be in a better position to fully reap the opportunities of the new division of labour that is emerging at global level. The Lisbon strategy for growth and jobs and the path to the euro offer a framework in which to pursue the necessary structural change. Taking with determination this road leading to a dynamic European Union on the world scene will yield further substantial benefits to all parties involved in the EU and beyond."

29.5 The substance of this assessment is helpfully summarised in his 22 May 2006 Explanatory Memorandum by the Minister for Europe (Mr Geoffrey Hoon) as follows:

    "The report observes that on average, growth in the EU10 has been greater than that of the existing member states (EU15), and that average incomes in the EU10 have moved closer to those of the EU15. It also notes the increased income disparity within the EU due to the accession of poorer Member States when measured against the EU15 average. Trade between the EU15 and the EU10 has increased substantially since the establishment of a free trade zone in the early 1990s. While the new member states have undoubtedly increased their market share since then, the EU15 continue to run a substantial trade surplus with the EU10.

    "Foreign Direct Investment (FDI) in the EU10 has increased substantially, with the EU15 as the top investor. 55% of this FDI is invested in services, while 37% is in manufacture. This growth in FDI has fuelled concerns that jobs are being relocated from the EU15 to the EU10. Responding to these concerns, the paper notes that FDI outflows to the EU10 are relatively minor in comparison to FDI outflows to other EU15 states, and that much of the FDI in the EU10 is in the service sector, which does not involve the substitution of activities previously carried out in the home country. However, the paper does acknowledge that the relocation of jobs and activities can be substantial in certain industries. It notes that the Commission is currently looking at ways to mitigate these difficulties through its Communication on restructuring. The employment rate in the EU10 remains lower than that in the EU15, with unemployment around 5.5% above the EU15 average.

    "The migratory flows from the EU10 have in general been small, even towards the countries which did not apply restrictions to the free movement of workers, such as the UK and Ireland. There has been no substantial disruption to national labour markets as a result of free movement of workers, and the report notes that it may even have complemented that existing skill base of the EU15 labour markets.

    "The report commends the EU10's efforts to reform their legislation in line with the EU acquis, 99% of which had been completed by May 2006, and notes that the safeguard clause provided for in the Accession Treaties has never been triggered. The report also covers the development of the agricultural sector in the enlarged EU. The area of agricultural land has increased by 25%. EU membership has benefited the agricultural sector in the new member states, encouraging modernisation and increasing incomes for farmers. This increased income for farmers in the EU10 has not had an adverse effect on farmers in the EU15. The report also claims that the continuing presence of CAP within the EU budget also shows the importance of agriculture to the enlargement process. The EU10 will receive less than 10% of the CAP Pillar 1 budget over 2007-13.

    "The budgetary impact of enlargement has been manageable. About €28bn (£19.4bn) has been transferred to the EU10 from the EU15 over the past 15 years. This reached just over 2% of EU10 GDP in 2005. The disbursements to the new member states represent 6.9% of the EU budget (according to figures for the 2004 budget). For the EU10, net EU transfers accounted for an average of 0.6% of Gross National Income (GNI) in 2004."

The Government's view

29.6 The Minister comments as follows:

    "We agree with the Commission's analysis that this fifth enlargement has been a success for old and new member states. The paper highlights the transformative effect that enlargement has had on the economies of the EU10, and also the effects that accession has had on the economies of the EU15. Thus far, it has brought increased prosperity to the whole of the EU and has helped the EU to meet the challenges of globalisation. The extension of the EU to encompass 450 million people has created the largest single market in the world. Increasing mobility of workers and enterprises within that market is central to meeting the twin challenges of an increasingly globalised world economy and changing European demographics.

    "The report argues that careful preparation for enlargement was key to the successful economic outcomes of the enlargement to the EU10. The UK supports an enlargement process based on strict conditionality — where each country's progress depends on meeting EU standards.

    "The report mentions the decision of the UK, Ireland and Sweden to open their labour markets to workers from the new member states in 2004. It points out that the economic benefits of opening up the labour market — addressing skills shortages, filling vacancies that would otherwise not be filled thus fuelling economic growth — have been matched by the political benefits: encouraging legal working and therefore better integration and use of immigrant skills. The UK experience bears this positive message out. Employment rates remain high, unemployment is low and there has been no evidence of benefit tourism or added burdens on our social security systems.

    "The agreement to the 2007-13 Financial Perspective, reached at the December 2005 European Council, and confirmed by the May 2006 Inter-Institutional Agreement, ensures that the EU will continue to provide substantial resources for cohesion and growth expenditure in the EU10. Overall, EU regional spending in these countries will increase sevenfold from €24 billion in the 2000-2006 Financial Perspective to €174 billion in the next. These transfers will provide the basis for economic development in these Member States, making them and the EU more prosperous.

    "The report suggests that the real incidence of relocation due to enlargement is economically negligible. However, the UK recognises the real fears of delocalisation and relocation in the face of a increasingly globalised economy that exist in some parts of Europe. We hope that the Commission's forthcoming Communication on restructuring will recognise that merely producing more legislation would limit our ability to respond effectively to the global challenges or take advantage of the opportunities that an increasingly open world economy offers. The Lisbon strategy of jobs and growth remains the key to improving Europe's competitiveness, ensuring that we invest in Research and Development, raise skills and improve labour market responsiveness to the new economy.

    "The paper notes the importance of agriculture in the enlargement process. It notes that enlargement has not had the feared adverse impact on farm income in either the new or old Member States. It also notes that despite increased trade integration, an inflow of foreign direct investment and direct income payments, there is ample room for further rationalisation and increase in productivity in the new Member States. The UK's 'Vision for the Common Agricultural Policy', published in December 2005, notes the considerable gap in many of the new Member States between the share of the population working in agriculture and the share of agriculture in GDP and advocates redirecting agricultural expenditure towards rural development."

Conclusion

29.7 Despite the evidence adduced by the Commission, it is plain that far from all Europe's citizens, both old and new, are as upbeat as the Minister notes in his comments. Although the UK continues to champion enlargement, some other Member States' enthusiasm is more qualified. Allied to the fears to which the Minister refers, there is much talk among the political elites and media commentators of "enlargement fatigue" and debate as to the need for and nature of the changes that may be required to make an EU of 27+ operate in such a way as to fulfil its potential. New ideas are in play: a "privileged partnership" for some prospective members, and calls by the European Parliament for a clearer definition of the EU's "absorption capacity", with some MEPs favouring the inclusion in the EU enlargement strategy of a "multi-lateral framework" — for some, a step towards accession, for others an alternative. More immediately, the final stages of Bulgarian and Romanian accession has prompted considerable angst regarding the ability of the Union to make a reality of the strict conditionality to which the Minister refers.

29.8 There will no doubt be many future occasions upon which these issues will be revisited, not least when the Commission Communication on Restructuring appears, and upon which the Minister comments appositely.

29.9 For now, we are clearing this Communication with a Report to the House because of its intrinsic importance.


103   "Enlargement, Two Years After", a study by the Bureau of European Policy Advisers and the Directorate General for Economic and Financial Affairs, Occasional Paper, No. 24, 2006, European Commission, Directorate General for Economic and Financial Affairs, available at: http://europa.eu.int/comm/economy_finance/publications/occasionalpapers_en.htm. Back


 
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