Economic and social impact of enlargement for the European Union and France

Economic and social impact of enlargement for the European Union and France

In order to assess the costs and economic benefits of Enlargement, a macroeconomic analysis must be carried out in addition to a sufficiently detailed analysis by sector, as this is the level at which the most significant effects are apparent. To do so, models of European economies must be developed in order to take into account the potential repercussions of the shock of accession. The most suitable analytical tools for simulating the impact of trade shocks on the spatial distribution of activities (production, exports and imports as well as employment and wages), while taking into account economic interdependence, are the Computable General Equilibrium Models. The MIRAGE model, applied in this instance and developed at the CEPII, is an example of the latest generation.

CEPII’s research presents scenarios which are a simplified representation of the Enlargement process: the shock of the removal of the last remaining obstacles to trade in the manufacturing sector, the effect of full integration, the effect on growth trends in countries undergoing transition, the impact on agriculture at a constant budget or with an increased budget. This report reaches two conclusions: the trade dimension of enlargement will have limited impact except in the agricultural sector; the main benefits of integration are convergence and industrial restructuring in sectors producing increasing returns. This second set of mechanisms will have an overall positive impact, while reinforcing acquired specialisations, for both Europe and France, even if France suffers losses in the case of a CAP budget freeze.

1 – First, the upheaval for candidate countries

According to the findings of a survey carried out by Eurobaromètre in 1996 in all the countries which signed the Articles of Association, the vast majority (90% of voters) of citizens stated that they would vote, in the event of a referendum, for their country to join the European Union (EU). In 2001, only 79% were in favour of membership. These figures suggest that the enlargement of the EU to the East cannot be postponed too long without the risk of flagging enthusiasm among these populations, already highly affected by the transition shock, or missing the historic opportunity of reconciling the two poles, east and west, of the European continent.

The Enlargement process was prepared by the initial Articles of Association signed in February 1994 with Hungary and Poland, providing for the creation of a free trade zone between the EU and each signatory country by 2002. In 2000 in Nice, the fifteen countries agreed on a minimal institutional reform in order to provide for the integration of the twelve candidate countries. One year later, Laeken set a very tight timetable: just over ten years after the fall of the Berlin wall, the EU is planning for new member countries to participate in the European Parliament elections in 2004.

The following statement was recorded: “In recent months considerable progress has been made in the negotiations and certain delays have been made good. The European Union is determined to bring the accession negotiations with the candidate countries that are ready to a successful conclusion by the end of 2002, so that those countries can take part in the European Parliament elections in 2004 as members. Candidacies will continue to be assessed on their own merits, in accordance with the principle of differentiation. The European Council agrees with the report of the Commission, which considers that, if the present rate of progress of the negotiations and reforms in the candidate States is maintained, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, the Slovak Republic, the Czech Republic and Slovenia could be ready. It appreciates the efforts made by Bulgaria and Romania and would encourage them t o continue on that course. If those countries are to receive specific support, there must be a precise framework with a timetable and an appropriate road-map, the objective being to open negotiations with those countries on all chapters in 2002.”

Despite the tight schedule, Enlargement is not a foregone conclusion. The cumulated delay is considerable. Despite sometimes spectacular efforts, whose economic cost is difficult to imagine for Western European citizens, and significant progress on a number of issues, much remains to be done in order to establish a solid financial system capable of facing competition on the European market and adopt quality, phytosanitary and environmental standards in the pursuit of restructuring the public sector and setting tight budget constraints. This basically involves adopting the Acquis Communautaire (detailed laws and rules) in its entirety. The challenge of Enlargement for both candidate countries and the EU is of an entirely different dimension than previous enlargements.

The clear willingness to gain access to the sphere of European prosperity as quickly as possible is not devoid of risk for Central and Eastern European countries (CEEC), which will have to face direct competition with EU member countries. The changeover to the European currency, currently in preparation, tightens the constraints of their macro-economic management, and monetary policy or currency adjustments can no longer be used to face asymmetrical shocks.

Conversely, the overall effects are likely to be limited for the EU. The relative weight of the geographical areas makes the shock of Enlargement asymmetrical by nature: the EU represents 70% of exports for Eastern European countries, while they represent only 4% for the West. However, for some sectors or certain member countries, the expected impact may be far from negligible. Trade has already experienced major upheavals: trade with Western Europe has become predominant and the type of trade has changed. We are witnessing the emergence of new poles of specialisation such as automobiles, computers and consumer electronics, alongside traditional poles such as textiles, furniture and iron and steel. Furthermore, the type of trade corresponds to the emergence of a vertical division of labour: automobile components are exported by Western Europe, which imports the finished vehicles in exchange. As such, lower labour costs in the East, which are basically a comparative advantage, do not hinder the progress of industrial diversification, which is a sign of success. Lastly, these changes have enabled Eastern currencies to stabilise at more reasonable levels and improve their terms of trade.

2 – A positive but minimal impact for the EU, except in the agricultural sector

Trade liberalisation is a process which is well underway and is likely to be completed this year, except in the agricultural sector. We shall simulate the effects of fuller integration: Eastern European countries become full European Union members in rights as well as obligations. We decided to simulate the process by breaking it down from the easiest to the most sensitive points, while gradually drawing together the various assumptions. It is therefore an educational exercise in which we may glimpse reality through what is inevitably a simplified prism of models and scenarios. Lastly, we chose to distinguish the impact on France from that on the rest of Europe.

2.1 – Integration begins with the elimination of residual protection

The levels of trade restrictions – which include all forms of protection in our calculations (antidumping, price quotas, EVR etc.) and bring them in line with equivalent prices – were still high throughout the agricultural sector in 1999 (and even tended to increase for CEECs). The West protects itself more on meat (44%) and dairy and sugar products (48%), while CEECs protect themselves as much as the West on meats (41%) but much mor e on fruit (29%) and modified foodstuffs (43%). However, Western industry had very little protection except for textiles and the clothing trade, which stood at 7% and 9% respectively.

Industry in Central and Eastern European countries has remained at over 5% and even reached nearly 20% in the automotive industry.

In the simulations, these rates were set at zero. The adoption of the common external tariff by CEECs moderately reduces their protection against the rest of the world as well.

Set against a benchmark in which there is no liberalisation, the ratio of agricultural imports to domestic demand increases by 3% in France, and the ratio of exports to production rises by 0.5%. The impact on total protection is slightly negative, and the remuneration of factors is growing to the detriment of unskilled labour, albeit to a very limited extent.

Throughout the rest of the EU, the import (export) ratios increase by 25% (35%): the impact here is notably higher. Germany and Austria are the countries which absorb most of the integration shock.

2.2 – If integration is successful, it should lead to economic convergence

Full integration is only bearable if it brings poor countries in line with rich ones. There are two possible convergence models: the Irish model, which could be followed by Hungary for example, relying more on the development of “new” industries, and the Spanish model, more traditional in its specialisation strategies, relying on mechanical industries. Both models nevertheless rest on the assumption that foreign investments enable production methods to be modernised, thereby resulting in productivity gains, which are also stimulated by European aid programmes for the development of infrastructures in the poorest regions.

Bringing poor countries in line with rich ones is conveyed by the model as a productivity shock. The model reproduces it by amplifying the results of the previous scenario: production increases in the sectors where France and the EU specialise. However, the negative impact of trade liberalisation on wages disappears due to a sharper increase in production: an enlarged Europe produces an enlarged market, and therefore more choice and more economies of scale. The growth rates which result from this assumption are higher in these countries, and demand in France and the EU also grows more rapidly.

The assumption of integration implies that companies decide to invest based on the size of the European Union enlarged towards the East, and the return on capital in the relevant sector. Insofar as its impact is very strong, the assumption is that the increase in the size of the European market is gradual. In both cases, the same results of western economies specialising in sectors which use comparatively more skilled labour and capital are maintained. However, a richer market (because it converges more quickly or because it attracts more capital) implies a higher increase in production, particularly in areas where returns are growing.

Comparatively, production increases more in sectors characterised by assumptions of monopolistic competition, where changes in wages are smaller.

2.3 – The last two scenarios allow for the simulation of two reforms of the CAP

If the budget does not vary (new distribution on a pro rata basis of national agricultural production), France must share CAP profits with new entrants. Conversely, if the budget is increased to take into account an increased production in an enlarged Europe (subsidy rates determined endogenously by changes in agricultural production), the cost is much more limited for France. In France, agricultural imports (exports respectively) increase (decrease respectively) by 20% (-6%) if the budget is constant, and by 6% (-1%) only if the budget increases. The impact on French agricultural production is significant: -6% with a constant budget and -1% with a variable budget. All variations are positive in the rest of the EU: imports and exports increase in the first scenario by 30% and 40%, and in the second by 35% and 38%.

3 – To conclude

The commitment made by the EU in Nice, and confirmed in Laeken, requires institutional reforms, notably in the CAP. Our simulations probably define the upper limit to the impact of the liberalisation of agricultural trade and the extension of subsidies to Eastern countries.

According to studies on current levels of agricultural competition in CEECs, their growth potential is limited: there was no rise in production between 1993 and 2001, and prices are not always much lower than in the EU (e.g. the price of Polish wheat exceeded European prices). However, as agricultural prices are generally higher in the EU, products from Eastern Europe will be more competitive in the short term when protection is reduced. In the longer term, competition in the Central and Eastern European agricultural sector will depend on the capacity of these countries to carry out structural reforms which encourage productivity gains and help them catch up in this area. The current gap stands at approximately 50%.

For more analyses see the

enlargement website of DREE.