House of Lords - European Union - Fifty-Third Report

Select Committee on European Union Fifty-Third Report

Chapter 3: THE IMPACT OF THE LAST ENLARGEMENT

60. It is very early to evaluate the impact that the last enlargement has had on the Union. It is nevertheless important to try to conduct a more thorough analysis, for at least three reasons. First, such an analysis may provide useful background when trying to evaluate the impact that future enlargements could have on the EU. Second, it will help to assess the changes that are needed in the EU to speed up the digestion of the last enlargement. Third, it is important to counter general fears about the costs of enlargements, both past and future.

61. There is little doubt that the prospect of accession has fundamentally transformed the candidate countries in Central and Eastern Europe. Enlargement Commissioner Olli Rehn pointed out that the process of accession triggered "a major democratic and economic transformation without a single bullet being fired in Central and Eastern Europe" (Q 140). Graham Avery [21]called the eastward enlargement "the most successful example of political and social engineering that Europe has seen for a long time" (Q 54). The Croatian chief negotiator, Vladimir Drobnjak encouraged the doubters to take a walk through the streets of Prague, Budapest or Bratislava and see for themselves how much these countries had changed since the collapse of Communism (Q 127). Tina Fordham[22] argued that any evaluation of the past impact of enlargement has to go beyond quantitative balance sheets and look at the intangible benefits of exporting the EU's "brand value" of democracy, human rights, openness and accountability (p 183).

62. However, such arguments seem to do little to convince the people and politicians in the EU-15 that eastward enlargement was positive for the Union as a whole. In countries where people think that they have been substantially affected by the 2004 enlargement, opposition to future enlargements is particularly strong. This applies particularly to Austria and Germany—which are geographically close to the new Member States and have received a significant share of workers from these countries even ahead of their accession. It also applies to France and the Netherlands, which feared a loss of influence and identity in the enlarged Union (Q 56).

63. While the people in the 'old' EU-15 fear mainly the economic consequences of enlargement, political elites are more concerned with the impact on how an EU of 25 (and soon 27 or 28) Member States functions.

THE ECONOMIC CONSEQUENCES OF ENLARGEMENT

64. The written and oral evidence we have gathered almost unequivocally states that the economic impact of the 2004 enlargement has been positive, both for the old EU-15 countries and for the new Member States. An extensive study conducted by the European Commission on the economic impact two years after accession concludes that "the fifth enlargement has acted as a catalyst of economic dynamism and modernisation for the European Union, helping the economies of old and new Member States to better face the challenges of globalisation. At the same time, the economic changes induced by this enlargement have been absorbed quite smoothly, and there is no evidence of disruptive impacts on the product or labour markets."[23]

65. There are two main conclusions from the analysis of the economic impact of eastward enlargement. First, much of it had taken place by the time the ten new members actually joined the EU in May 2004[24]. Second, the impact has been much bigger for the acceding countries than for the EU-15.

66. Most of the new Member States (with the exception of Poland) are small, and their income levels are much lower than in most of the EU-15 countries. Taken together, their economies have a GDP of €5.6 billion, which is the equivalent of the size of the Dutch economy and accounts for only around 5 per cent of the EU-15 GDP. Therefore, it is clear that the impact has been significantly bigger for the new members than the old ones. While the EU-15 is the destination of 70 per cent or more of the new members' exports, the new members account for only around 4 per cent of EU-15 trade. Total EU-15 exports amount to €2,150 billion, of which €82 billion go to the new Member States. The equivalent figures for imports are €2,070 billion and €59 billion.

67. Similarly, flows of foreign direct investment (FDI) from west to east have been hugely important for the recipient countries, but much less so for the countries where they originate. In 2004 the new Member States accounted for only 4 per cent of the FDI outflows from the EU-15 (53 per cent went to other EU-15 countries, and 12 per cent to the US). Taking these asymmetries into account, it is safe to assume that the impact of enlargement on the new members is roughly 20 times larger than on the old ones.

68. The EU accession process (rather than the actual accession) shaped economic developments in the candidate countries in two ways: first, the process of accession served as an "anchor" for economic and institutional reforms; second, accession entailed the gradual demolition of trade and investment barriers long before the Central and Eastern European countries joined the EU.

69. To prepare for EU accession, the candidates took over the EU's single market acquis—ranging from product standards for chemicals to best practice in public procurement. This led to rapid improvements in their business environments. It also made foreign investors feel more at home in these countries as their business environments began to resemble those found in the EU-15 (and EEA) countries. Moreover, because the Copenhagen economic criteria are rather broad (see Box in Chapter 4) the European Commission's demands extended into many areas not directly related to the acquis, such as banking sector privatisation or the management of public finances.

70. In addition to the direct impact the EU had on policy-making, the accession process also fostered "policy competition" among the candidate countries as they were competing against each other in the race to join the EU in the first wave of eastward enlargement. This competition was most obvious in tax policy, where one candidate country after another moved to simpler and lower corporate taxation (p 187).

71. The EU and the Central and Eastern European countries started to dismantle bilateral trade barriers in the early 1990s, even before they agreed timetables for full liberalisation through the "Europe agreements" in the mid-1990s. By 1997, the EU had abolished all tariffs and quotas for imports from the candidate countries—with the exception of food products, some 'sensitive' items and services. The deadline for the Central and Eastern Europeans to open fully their markets came somewhat later, in 2002.

72. The lowering of mutual trade barriers—alongside rapid industrial restructuring—fuelled an export boom across Central and Eastern Europe that has been instrumental for the region's recovery. In the ten years before accession, Hungarian exports rose by 380 per cent (in dollar terms) and Czech ones by 280 per cent. By 2000, the big Central European countries were already sending 60 to 75 per cent of their exports to the EU. In other words, long before membership, they were trading more with the EU than many of the EU countries were trading with each other.

73. The export success was closely related to large-scale inflows of foreign direct investment (FDI). Foreign investors did not wait until the accession date to acquire newly privatised companies in Eastern Europe and to take advantage of the region's growing markets and low-cost, skilled workers. Companies from the EU-15 countries have invested more than €150 billion into the ten Central and Eastern European accession countries since the early 1990s, accounting for three-quarters of total FDI inflows into these countries. For the recipient countries, FDI inflows from the EU have typically amounted to 20 per cent of total investment and 5 per cent or more of their GDP. FDI has financed the build-up of massive new production capacities across Central and Eastern Europe, in particular in the automotive sector, but also in electronics, furniture, pharmaceuticals and other manufacturing sectors. Furthermore, FDI has helped to create modern services sectors such as retail, banking, telecoms and transport.

74. Overall, gradual economic integration with the EU has been instrumental for the new members' economic success. In the period of 1997 to 2005, the new Member States' economies grew by an average of 3.8 per cent a year, while the old Member States' economies grew by 2.5 per cent.

TABLE 4

Basic indicator for the new Member States 2003

	Population, m	GDP, bn	GDP growth, per cent	Inflation, per cent	GDP per head, per cent EU average at PPP[25]
Poland	38.1	240.5	3.2	2.2	46.2
Czech R.	10.2	98.4	4.9	1.9	65.6
Hungary	10.0	87.8	4.2	3.6	59.2
Slovakia	5.4	37.3	5.5	2.7	56.9
Lithuania	3.4	20.0	6.7	2.7	51.5
Latvia	2.3	12.8	9.8	6.7	46.3
Slovenia	2.0	27.4	3.9	2.5	82.8
Estonia	1.3	10.3	9.1	4.1	58.5
Cyprus	0.8	13.4	3.7	2.6	77.2
Malta	0.4	4.5	1.0	3.0	67.8
EU 25	459.0	10,793.8	1.5	2.1	100.0

Sources: The Economist Intelligence Unit, Eurostat.

75. The economic impact of enlargement cannot be measured directly, since too many other, non-enlargement factors influence trade flows, investment decisions, inflation rates and employment. Instead, there have been various attempts to use macro-economic models to estimate the impact of enlargement on the EU economy as a whole and on individual Member States.

76. Although the available studies have relied on very different assumptions and methodologies, they have come to broadly similar conclusions: First, the impact of eastward enlargement on the EU-15 has been limited. Second, the impact—though small—is positive. Third, as pointed out above, much of the impact has taken place already since economic integration between Eastern and Western Europe has proceeded gradually since the early 1990s. Most studies conclude that the cumulative economic gain for the old EU is below 1 per cent over a period of five to ten years[26].

77. For most of the old EU Member States, trade and investment links with the candidate countries are simply too small to have a direct, measurable impact on their economies. The only exceptions are Germany and Austria, which conduct significant trade with the new members and, alongside France and the Netherlands, account for the biggest share of foreign investment there. These countries are likely to be among the biggest net winners from enlargement.

78. Other countries might be indirectly affected by eastward enlargement, for example because their products can no longer compete in the big eurozone markets or because they may lose EU aid to the poorer East European countries. Portugal or Greece may be among the losers in this respect. For smaller, richer EU countries with limited trade and investment links to the East, the impact is extremely difficult to calculate. Whether the outcome is positive or negative depends entirely on the assumptions used, for example about future migration flows, growth rates in the new members or the distribution of the EU budget[27].

ENLARGEMENT AND GLOBALISATION

79. Most economists assume that the impact of enlargement on the EU-15 was marginally positive. However, eastward enlargement may be changing the EU economy more than macro-economic studies indicate. The eastward enlargement process has taken place at a time when global competition was becoming more intense due to the integration of China and India into the world economy. Western European companies have reacted to heightened global competition by shifting some production processes into Eastern Europe, where wages are cheaper. Moreover, as the European Commission points out: "The fifth enlargement, more than others in the past, has many characteristics that mirror closely the broader features of globalisation, chief among which being the cost differentials in favour of the new member-states […], advantages for enterprises to divide the production chain and engage in vertical specialisation as well as the promise of new markets […]".[28] Therefore, many European citizens find it difficult to disentangle the forces of globalisation from the impact of enlargement. As Valéry Giscard d'Estaing[29] explained, French people see globalisation as an external threat and enlargement as an internal threat to their social model (Q 420).

80. According to the European Commission, hourly labour costs in 2003 (the last year for which comparable data are available) ranged from 12 per cent of the EU-15 average in Latvia to 53 per cent in Slovenia. In the larger countries—Poland, Hungary and the Czech and Slovak Republics—wage levels are 20-30 per cent of the West European level. Although productivity levels also tend to be much lower (most estimates put Eastern Europe's productivity at 35-40 per cent of the EU-15 level), this still leaves the new members with a sizeable advantage in unit labour costs. This advantage is much bigger in export-oriented industries that have attracted substantial foreign direct investment, where productivity is often close to West European levels.

81. The relocation of production facilities to the East has nourished fears of employment losses in the EU-15. However, much of the FDI that has flowed from Western to Eastern Europe has come from sectors that are under growing global competition, such as automotive, pharmaceuticals and information and telecommunications technology (ICT). For the investing companies, the choice was not between producing in their home countries or in a cheaper location. The choice was between cutting costs or losing market shares—and thus reducing employment at home anyway. In other words, FDI from west to east may have caused some employment losses in Western European locations. But by helping Western European companies to stay competitive on a global scale, it has also helped to preserve jobs in Germany, the Netherlands or France. According to one survey, 20 per cent of the German companies with investments in Eastern Europe had shifted jobs eastward, while 60 per cent said their investments had helped to preserve or create jobs at home.[30] The integration of Central and Eastern Europe into the EU's single market has brought about a new European division of labour, which has benefited both sides.[31]

THE MOVEMENT OF LABOUR

82. Fears ahead of eastward enlargements and negative public reactions in its aftermath have often been related to the immigration of workers. EU membership entails the "four freedoms" of the single market: the free movement of goods, services, capital and people. However, in the case of the Mediterranean and eastward enlargements, the EU gave Member States the option to impose temporary restrictions on the workers from the acceding countries. In the case of eastward enlargement, these so-called transition periods were mainly the result of pressure from the German and Austrian governments. Some 60 per cent of the approximately one million East Europeans who had moved to the EU before accession went to Germany, with Austria taking another 5-10 per cent, albeit in a much smaller labour market. Most other EU countries subsequently decided to apply the transition periods too, with only Ireland, Sweden and the UK deciding to keep their labour markets open (although they restricted the access that East European workers would have to their social security systems).

83. In 12 of the EU-15 countries, Poles, Hungarians or Latvians still require work permits, and there are strict quotas for Central and Eastern European immigrants, either for the whole economy or for individual sectors. Existing restrictions remained valid for an initial period of two years. Member States could then decide whether to keep them in place for an additional three years (until 2009). Thereafter, those countries that still fear disruptions in their labour markets from a large influx of Central and Eastern European workers can keep restrictions for an additional two years, until 2011. After that, the free movement of labour will be applied to the ten new Member States that joined in 2004. On the occasion of the first review of the restrictions in May 2006, Spain, Finland and other EU countries decided to follow the example of the UK, Ireland and Sweden and open their labour markets. Other countries, including France and the Netherlands, announced a limited or sector-by-sector loosening of the restrictions. Germany and Austria indicated that they would keep restrictions in place until at least 2009 and probably until 2011.

84. A report from the European Commission, published in February 2006, raised serious doubts on the rationale for continued restrictions[32]. Available national statistics suggest that some 1.7 million people from EU-10 (EU-8 plus Cyprus and Malta, which have no restrictions on free movement) have applied for work in the 'old' EU-15 since enlargement[33]. To circumvent the limitations of statistics on worker registration, the Commission also relies on data from EU-wide labour force surveys. These indicate that the stock of workers from the new Member States in the EU-15 reached 0.4 per cent of the local labour force in 2005. This means that the Central and Eastern Europeans are by far outnumbered by immigrants from other EU-15 countries (2.1 per cent of the EU-15 labour force) and non-EU countries (5.1 per cent of the labour force).

85. The distribution of Central and Eastern European workers suggests that national restrictions have not been very effective. The existence of established immigrant communities and available job opportunities are the main determinants of where workers want to go. Despite strict immigration limits, Germany continued to be the single most important destination of workers from the new Member States: in 2004 and 2005 alone, Germany issued one million work permits to jobseekers from the new members (although the vast majority for seasonal workers in construction and agriculture). Inflows into Austria also rose after enlargement. In 2005 workers from the new Member States accounted for 1.4 per cent of Austria's labour force. In neighbouring Italy, on the other hand, the quota for Central and Eastern European workers remained unfulfilled. Countries that resorted to transition periods did not seek to close off their labour markets altogether but they wanted to keep a high degree of control over who came in, for what purpose and for how long (Q 333)

TABLE 5

Resident working age population by nationality, 2005, in per cent of total

	National	EU-15	EU-10	Non-EU
Belgium	91.3	5.8	0.2	2.8
Denmark	96.4	1.1	N/a*	2.4
Germany	89.5	2.8	0.7	7.0
Greece	94.0	0.3	0.4	5.3
Spain	90.5	1.2	0.2	8.1
France	94.4	1.9	0.1	3.6
Ireland	92.3	3.0	2.0	2.8
Luxembourg	57.9	37.6	0.3	4.2
Netherlands	95.7	1.4	0.1	2.8
Austria	89.2	1.9	1.4	7.5
Portugal	97.0	0.4	N/a[34]	2.6
Finland	98.3	0.4	0.3	1.0
Sweden	94.8	2.3	0.2	2.7
UK	93.8	1.7	0.4	4.1
EU15	92.4	2.1	0.4	5.1

Source: Eurostat, Labour force survey 1st quarter 2005 (Ireland 2nd quarter 2005).

86. Among those countries that had abolished restrictions, the UK received the largest inflows. According to estimates from the Home Office, some 600,000 workers from the new Member States have applied to the new 'workers registration scheme' since May 2004. This is vastly more than the annual inflow of 13,000 that the government had initially forecast. Ireland's fast-growing economy has attracted some 200,000 Central and Eastern Europeans, the highest share if compared with the local labour force. Sweden saw only very limited inflows.

87. In those countries that have retained quotas and work-permit requirements, Central and Eastern Europeans have often found work in the black economy, especially in services jobs such as cleaning, caring or catering. Some have also relied on the EU's more liberal rules for the freedom of establishment and the 'posted workers directive' which allows companies in one country to send workers to another EU country. The number of Central and Eastern Europeans who work in the old EU on the basis of temporary contracts or through setting up their own business is probably limited. But they have caused a disproportionate amount of political upheaval. The alleged job competition from cheap 'Polish plumbers' fuelled anti-EU sentiment during France's referendum on the Constitutional Treaty. In December 2004, 14 Latvian builders were forced to stop working in Sweden for what a local trade union had claimed were 'unfairly' low wages. Similarly, in March 2005 the Danish authorities fined a Polish construction company (owned by a Dane) for undercutting local wages. And Germans were outraged in the autumn of 2004 when about 25,000 abattoir workers lost their jobs to Poles or Czechs willing to work for €5 an hour or less.

88. A study, commissioned by the British Department for Work and Pensions found that there was "no discernible statistical evidence" that migrant workers from the new Member States had contributed to a rise in those applying for social benefits. It concluded: "Overall, the economic impact of migration from the new EU Member States has been modest, but broadly positive."[35] However, faced with signs of public unease about the free-movement policy, the Home Office announced in October 2006 that restrictions would be applied to workers from Bulgaria and Romania after these two countries joined in January 2007.

89. On the basis of the foregoing analysis, it is clear that in economic terms, eastward enlargement has been—and continues to be—beneficial for both the old and the new Member States. Because of the much larger size of the EU-15 economy and the need for catch-up in Central and Eastern Europe, the benefits were vastly greater for the new Member States. However, with their fast-growing economies and large pool of highly-skilled, low-cost workers, the new Member States have helped West European companies to cope better with the competitive pressures coming from emerging Asia and elsewhere. Therefore, enlargement has left the EU economy as a whole better prepared to cope with globalisation.

THE POLITICAL IMPACT OF ENLARGEMENT

90. Before the 2004 enlargement, there were widespread fears that the increase in the number of Member States from 15 to 25 would lead to gridlock in EU decision-making. For some, such fears were exacerbated by the rejection of the Constitutional Treaty in mid-2005 because it seemed to indicate the EU's inability to move forward with integration and reform, and it left it with the often cumbersome provisions of the Nice Treaty.[36]

91. Some witnesses argued that the large number of countries that joined in 2004 represented a particular challenge for the EU: Eastward enlargement was "like a 12 course meal and not the usual three course meal which we have digested in previous enlargements". (Q 324). Most witnesses however thought that, by and large, the enlarged EU functioned rather smoothly (Q 89, Q 54, Q 74). One of the best examples of its ability to reach agreement was the compromise on the new financial perspective in December 2005.

92. Some suspect that there has been a slowdown in decision-making, and the EU seems less able to deliver even in areas where joint action would have broad public and political backing, such as justice and home affairs (Q 74). However, this perceived slowdown in decision-making could be related as much to the general difficulties that the EU is facing at the moment (slow growth, lack of public support, weak governments) as to enlargement per se. Moreover, some of the decisions that have been on the agenda since May 2004, such as the Services Directive, have caused divisions as much among the old Member States as between the old and the new members.

THE COUNCIL OF MINISTERS

93. Witnesses were divided on whether and to what extent the effectiveness of decision-making in the Council of Ministers has suffered from the increase in membership.[37] Some pointed out that gridlock is no more likely with 25 members than it was with 15 (Q 76). However experience of decision-making with 25 members is limited and we cannot be sure that no problems will be encountered in forthcoming years. The Council still predominantly relies on consensus-building, with formal votes taking place in only 8 per cent of the decisions taken (Q 199).

94. In those areas of EU policy-making where unanimity is required, it is not the number of members that is the key factor but whether individual countries are using (or threatening to use) their national veto. It appears that so far, the new members have used their veto sparingly. Notable exceptions are Poland's attempt to bloc an EU decision on value-added tax (from which it eventually climbed down) and Cyprus' use of its vote to block the EU from freeing up trade between Northern Cyprus and the rest of the EU. However, such incidences of national interests blocking EU action did occur even when the EU had six, 12 or 15 Member States (Q 109).

95. In many areas the new members are still finding their feet and they have been cautious in adopting positions or wielding their veto. This could change, however, once the new members have settled into the EU, in which case decision making would become more complicated (Q 200).

96. The larger size of the Council has undoubtedly rendered meetings more time-consuming. The Council has taken a decision not to insist on a full tour de table for 25 ministers in every meeting. However, on important questions, all or most countries still want to present their positions, leading to lengthy introductions and less time for real discussions and compromise-seeking. The same applies to Coreper (the Committee of Permanent Representatives), where the prevalence of prepared statements has made representatives stick more closely to their governments' position and reduced the room for manoeuvre and informal compromises (Q 199).

97. As a result, some EU countries (the larger ones in particular) are said no longer to regard the Council as an effective decision-making forum. They are more likely to co-ordinate their positions ahead of Council meetings in informal meetings and sometimes dispatch the minister's deputy or another representative to Council meetings (Q 96). The problem appears to be particularly acute in foreign policy, where the large countries no longer rely on a forum of 25 predominantly smaller Member States. Instead, foreign policy-making is increasingly moving to smaller groups. Moreover, the larger size of the Council forces Member State governments to invest more time and effort to explore possible coalitions well ahead of the actual meetings (Q 204).

THE EUROPEAN COMMISSION

98. Opinions are equally divided on the functioning and weight of the enlarged European Commission. On the one hand, the Commission should have gained in influence because smaller Member States (as most of the new members are) tend to support a strong Commission. And in an EU with 25 members, the proposals from the Commission should have become more important. On the other hand, the new members are said to have a preference for intergovernmental co-operation over supra-national decision-making (the Community method). They prefer a "Europe of nations" because they fear that in a federal Europe "their voices would be lost". (p 200).

99. As to the Commission's effectiveness, some observers suggested that the current college of 25 Commissioners is too large to work effectively. Others were concerned that the current system of one Commissioner per country has reinforced a tendency among Commissioners to act as representatives of their country rather than in the name of the EU as a whole, which is their official mandate (Q 68, Q 241).

100. The size of the Commission will in any case have to be adjusted when the number of Member States reaches 27. However, experts point out that the rotation principle foreseen in the Constitutional Treaty would not be workable. First, the legitimacy of the EU could suffer further if each Member State no longer has its "own" Commissioner. Second, the rotation system could lead to a scenario where there is a five-year term during which small countries are severely over-represented. For example, the college could theoretically include Commissioners from seven small Balkan countries but no German, French or British Commissioner (Q 416). When the EU decides on this matter, it may find it preferable to move to a system where there is still one Commissioner per country, but they divide into senior Commissioners and junior Commissioners (Q 90, Q 93, Q 267).

THE EUROPEAN PARLIAMENT

101. British members of the European Parliament were predominantly positive on the arrival of the new members. Richard Howitt MEP, Charles Tannock MEP and Baroness Nicholson reported that the Parliament's work has become "richer, more interesting, more diverse but ultimately just as effective" (Q 160 Q 275, p 185). The representatives from the new Member States are said to have brought new perspectives and fresh enthusiasm to the Parliament.

102. However, some of the MEPs who spoke to us also suspect many of the parties from the new Member States do not fit well into the European Parliament's traditional left-right divisions. Andrew Duff MEP noted that enlargement has brought some "fairly curious political parties, especially on the right" (Q 240). As a result, the cohesion of the main political groupings may have been weakened and decision-making may have become more complicated and less predictable.

THE QUALITY OF DECISION-MAKING

103. As Frank Vibert[38] pointed out, it is not only or even primarily the ability of the EU institutions to act that is at stake (p 178). It is the quality of decisions, rather than their quantity that matters for progress in the EU, as well as the Union's legitimacy. The EU's acquis already spans 97,000 pages so the real challenge of the EU is not only to add more laws but also to purge its existing rulebook of superfluous or cumbersome laws, and to apply the principle of subsidiarity more rigorously.

104. Mr Vibert does not find clear evidence of the impact of enlargement on the quality of EU decisions or the Member States' commitment to better regulation. But he suspects that enlargement reinforces the need for higher-quality decision making and subsidiarity and therefore will be beneficial for the Union in the long term (p 179).

105. The increase in the number of Member States and the concomitant wider spread of interests and positions has made aspects of EU decision-making more laborious. But suggestions that enlargement could lead to gridlock in the EU institutions are not borne out by evidence.

THE IMPACT ON EU POLICIES

106. It is too early to evaluate the impact of enlargement on individual EU policies. Among the general impressions that we have heard were that the new Member States tend to be: in favour of open markets and economic reform; sceptical about the harmonisation of taxes and social standards; in favour of a larger EU budget (but divided on the merits of the current common agricultural policy); more transatlantic in their foreign policy, and more critical towards Russia.

107. When it comes to the single market, the new members tend to be in favour of taking the steps needed to complete it. For example, they have been calling for all EU countries to uphold the principle of the free movement of labour and most of them supported the adoption of a more ambitious draft of the Services Directive. The European Commission points out that the new Member States have in many cases been more studious in adopting and implementing the acquis than the old members. By March 2006 the new members had transposed 99 per cent of all EU directives into national law. The only area where the new members lag behind the EU-15 is competition policy.

108. Generally, the new members tend to be in favour of a larger EU budget since they are all net beneficiaries, in particular through their sizeable expected receipts of structural funds. On the CAP, the arrival of the Central and Eastern European countries has weakened or even dissolved the established blocs of interests (producers vs non-producers, north vs south) and the situation now appears much more fluid (Q 200). Since the new members are still struggling with the costs of implementing existing EU environmental rules, they are less keen on the EU adopting new environmental standards.

109. Opinions on the impact of enlargement on EU foreign policy were mixed. On the one hand, the arrival of ten new members has given the EU more weight in world politics. It has also brought considerable expertise on and close ties with the countries along the EU's new eastern border, such as Ukraine and the Western Balkans. The pro-American stance taken by most of the new members may have helped the EU to strengthen transatlantic ties, but it may also have exacerbated intra-EU divisions over such issues as the intervention in Iraq.

110. On the other hand, with 25 members the EU could be finding it more difficult to agree on common foreign policy decisions, which could weaken its ability to act. Historical grievances between some of the new members and Russia may have complicated the EU's attempt to find a coherent and cohesive policy vis-à-vis its biggest neighbour—although experts pointed out that it is the larger Member States that mostly shape the EU's foreign policy, which implies that the new members only have limited influence (Q 88, Q 200).

THE BALANCE BETWEEN SMALL AND LARGE COUNTRIES

111. Beyond the immediate impact on decision-making and policies, the growth in the number of Member States may reinforce a broader trend in the EU towards 'variable geometry', where smaller groups of Member States agree to pursue or implement a policy without seeking to get all 25 members on board. There are already signs of this happening in justice and home affairs and foreign policy (Q 75). This trend is explored further later in this Chapter.

112. The last enlargement has also further skewed the balance between large and small Member States since all the new members, with the exception of Poland, are small countries. Valéry Giscard d'Estaing described as "grotesque" the current state of affairs where a large country such as Germany only assumes the EU presidency every thirteen and a half years and has the same representation in the European Commission as a small Baltic nation (Q 416). Édouard Balladur thought that the situation in which a German MEP represents 800,000 people whereas an MEP from a small Member State represents 30,000-40,000 was unsustainable (Q 428).

113. The Constitutional Treaty would have gone some way in redressing the disproportionate representation of smaller Member States (in terms of their weight in decisions in the Council of Ministers, the European Commission and the Parliament). The danger is that in a Union with so many small Member States, the larger ones may regard the EU institutions as working mainly in the interest of the smaller ones. The big EU countries could therefore move increasingly towards a system of informal decision-making outside the EU institutions (Q 105). The small countries, on the other hand, could lose confidence in the system (Q 68). In the absence of continuing institutional reform, this risk will be reinforced if and when the Western Balkan countries join the Union. The accession of very small countries has also raised concerns in the German Länder, some of which are several times larger (both in terms of population and GDP) than the Baltic states or potential future members such as Montenegro or Kosovo. Karl-Theodor Freiherr zu Guttenberg[39] raised the question why these very small countries should have direct representation in the Council of Ministers and their own Commissioner while Bavaria, with 10 million people, did not (Q 353).

LESSONS FOR FUTURE ENLARGEMENTS

114. If the EU is to continue to enlarge, it is important that it must learn from previous accessions. Overall, our witnesses deemed the 2004 enlargement a success. However, they also pointed out that the EU should be mindful of the following lessons to guarantee that future enlargements proceed smoothly and do not disrupt the functioning of the Union:

115. As a first lesson, witnesses pointed out that an official target date for accession did not—as some may have hoped—help to sustain momentum for reform in the candidate countries. On the contrary, target dates seem to diminish the leverage the EU has over acceding countries: "It is as if you have a boy in school who is told: 'You will not graduate this year if you fail your courses, but you will certainly graduate next year. Will you work?' No, he will clearly not work." (Q 325).

116. The EU set a 'target date' for the accession of Bulgaria and Romania of January 1^st 2007, partly to console them over the fact that they were not included in the first wave of enlargement in 2004 and, in the view of some, to compensate them for the economic losses they suffered as a result of the NATO bombing of Belgrade and the action in Kosovo (Q 54). There are now widespread concerns that these two candidate countries are not sufficiently prepared for EU entry, most notably due to widespread corruption, a high incidence of organised crime and ineffectiveness in their judicial systems. Some experts pointed out that by giving Bulgaria and Romania a date for accession, it had weakened its own leverage over these countries.

117. The EU subsequently sought to rectify this situation by providing for a possible one-year delay in their accession, unless they rapidly addressed Brussels' remaining concerns. However, while Romania made notable progress in improving the working of its judiciary, Bulgaria continued to lag behind (Q 140). Threat of a one-year delay proved ineffective in encouraging reform since the governments in Sofia and Bucharest knew that they would join in 2008 at the latest, even if reforms continue to stall. Although Croatia has set itself a target date of 2009 to join the Union, the EU has been very careful not to officially endorse such a date (Q 325). Similarly, politicians from EU countries have rebuffed requests from Macedonia to be given a date for accession (Q 345).

118. We recommend that in future the EU does not endorse target dates for EU entry until the accession negotiations with the candidate in question are almost complete and the EU is fully satisfied that the candidate can assume the obligations of membership.

119. Witnesses warned that the EU should not admit countries that have outstanding questions of border delineation, separatism or the integration of ethnic minorities. This was particularly important with a view to the potential accession of the Western Balkan countries (Q 222, Q 277).

120. The EU had hoped that the two parties in Cyprus would have reached a sustainable political solution to the island's division before Cyprus entered the Union. The Annan Plan (a UN-sponsored plan to reunify the island as a federation) was put to a referendum in both parts of the island just before Cyprus was scheduled to join the Union in 2004. The Greek Cypriots rejected the plan while the Turkish Cypriots accepted it. As a result, a divided island joined the EU shortly afterwards (officially, the divided island is now a member, but the acquis is suspended in the Northern part of the island).

121. Since Cyprus has joined the EU, its motivation and willingness to seek a political solution to the problem or help alleviate the economic isolation of the Turkish Cypriots in the north of the island appears to have been low. Turkish officials also accuse the Greek Cypriots of using their status of an EU Member State to complicate Turkey's EU accession process and so force compromises that are more in Cyprus's interest.

122. Some witnesses pointed out that the EU should not admit the countries of the Western Balkans before outstanding issues—such as the 'final status' of Kosovo or the divisions of power in Bosnia—have been settled on a sustainable basis (Q 61). If the EU admitted Bosnia before a sustainable solution was found to its statehood and governance, this could cause "absolute mayhem" in the EU (Q 61).

123. It is essential that future enlargements do not import existing disputes about borders, the treatment of minorities and recognition into the Union. At the same time, however, the EU must be careful not to allow third countries to effectively gain a veto over the accession of a candidate by preventing the settlement of an existing dispute.

124. Witnesses agreed that the EU has transformative powers over countries that wish to accede. However, it risks squandering this leverage unless it uses conditionality in a consistent and credible manner.

125. As Graham Avery pointed out (Q 54) the real novelty of the last enlargement round was not the state of preparedness of the candidates (similar concerns had been voiced about the Mediterranean candidates in the 1980s). It was the use of conditionality. The EU used both the "carrot" of membership and the "stick" of exclusion to drive economic and political reforms in the candidate countries. The EU devised the "regatta principle" according to which each candidate progresses towards accession as fast as its own pre-accession preparations allow. Each country joins if and when it fully complies with the Copenhagen criteria. The main incentive for candidates to keep up the pace of change was the threat of exclusion from the first round of accession. However, by admitting ten candidates in a "big bang" enlargement (and promising the remaining two to join shortly thereafter), the EU to some extent undermined the credibility of its own conditionality, since not all of them were at the same level of preparedness (pp 194-195). If there are doubts about the EU's willingness to use conditionality, its leverage over current candidates, both the countries of the Western Balkans and Turkey, will be reduced. Witnesses therefore urged the EU to apply the regatta principle more rigorously, and not aim for another big bang enlargement, especially in the case of the Western Balkans: "Regarding the Western Balkans, [accession] will be a long process to which the roads for Croatia and Albania cannot be compared" (Q 324).

126. Several of our witnesses encouraged the EU to be "tough" on current and future candidates and to enforce conditionality rigorously. They pointed out that by letting standards slip, the EU risks harming not only the credibility of the accession process but also the candidate countries, which are the main beneficiaries from the reforms the EU is demanding. The worst thing, in the opinion of Lord Patten of Barnes, the former Commissioner for external relations, would be for them to pretend they are reaching the standards and for us to pretend we believe them.[40]

127. In its monitoring of the accession preparations the European Commission has increasingly shifted its emphasis from the adoption of EU-conforming laws to their implementation and enforcement. In the current round of negotiations, the conditions for progress have become even stricter. The EU now sets "benchmarks" for the opening and closing of each chapter (see box in Chapter 1).[41] This means that the EU can require a candidate country to provide evidence that it is applying EU law in a certain area before negotiations in this area are closed, or even opened.

128. The Croatian chief negotiator, Vladimir Drobnjak, who described his country as the "guinea pig" for the stricter monitoring regime, said that benchmarking added a degree of uncertainty to the accession process because individual member-states could block the negotiations at any stage. There are also suspicions that existing EU members could use the benchmarking process to hold up the negotiations with a country with which it has a particular political problem (such as Cyprus with Turkey or Italy with Croatia over the restoration of property).

129. Mr Drobnjak acknowledged, however, that the EU's more rigorous approach to accession negotiations could in the end work in a candidates favour. Since the public and national governments will be reassured that candidates are well prepared, the ratification of the accession treaty should proceed smoothly (Q 123).

130. The EU must use conditionality in a consistent and credible manner. Rather than aiming for a "big bang" enlargement of the Western Balkans, the EU should stick to a system under which each country progresses towards membership as fast as its pre-accession preparations allow.

21 Oxford University, European Studies Centre Back

22 Director, Economic Political Strategies, Citigroup Global Banking Back

23 European Commission, Bureau of European Policy Advisors and the Directorate-General for Economic and Financial Affairs, 'Enlargement, Two Years After-An Economic Success', European Economy Occasional Papers No 24, May 2006. Back

24 Katinka Barysch, 'Enlargement two years on: Economic success or political failure?', Briefing paper for the Confederation of Danish Industries and the Central Organization of Industrial Employees in Denmark, April 2006. Back

25 PPP stands for purchasing power parity. Back

26 Katinka Barysch, 'Does enlargement matter for the EU economy?' CER policy brief, May 2003. Back

27 Wilhem Kohler, 'Eastern enlargement of the EU: A comprehensive welfare assessment', HWWA discussion paper 260, 2004. Back

28 European Commission, Bureau of European Policy Advisors and the Directorate-General for Economic and Financial Affairs, 'Enlargement, Two Years After: An Economic Success', European Economy Occasional Papers No 24, May 2006, Chapter 5. Back

29 Former President of France Back

30 IKB and KfW, Studie zu den Auslandsaktivitäten deutscher Unternehmen: Beschäftigungseffekte und Folgen für den Standort Deutschland, preliminary version. Cited in Michael Knogler, Auswirkungen der EU-Osterweiterung auf die Arbeitsmärkte der neuen Mitgliedstaaten und der EU-15, insbesondere Deutschland, Working Paper 257 (Munich: Osteuropa-Institut, January 2005). Back

31 Katinka Barysch, 'Europe's new division of labour', CER bulletin Issue 48, June-July 2006. Back

32 European Commission, 'Report on the functioning of the transitional arrangements set out in the 2003 accession treaty', February 2006. Back