European Affairs

Spring 2004

 

SPECIAL REPORT: The Enlarged European Union
New Members Should Help Spur Economic and Political Reforms
By Philippe de Buck

 

After the fall of the Berlin Wall in 1989, the countries of Central and Eastern Europe began a long process of economic integration with Western Europe by progressively increasing their trade and investment links. The eight new EU member countries from the region have worked hard to adapt their economies to the modern era and to the realities of market economics.

They still have some way to go before they catch up with their Western neighbors in terms of prosperity, but the results of their efforts in such a relatively short time are nevertheless remarkable. Indeed, many of the new member countries compare very favorably with Western Europe in terms of their economic growth rates and fiscal balances. Clearly, there are lessons to be learned on both sides.

The wealth gap between Western and Eastern Europe has prompted a number of often unfounded reservations about the latest round of EU enlargement, the first to include countries from behind the former Iron Curtain. There are fears of mass migration from East to West, possibly placing pressure on social security systems.

These fears are largely misplaced. First of all,Western Europe needs workers in order to respond to demographic changes. Furthermore, enlargement could force Western countries to examine why many of them have unacceptably high levels of unemployment while job vacancies are also at very high levels ˇ with acute labor shortages in some sectors.

High unemployment can be traced back to laws that offer disproportionate protection to those already working while simultaneously discouraging potential employers from taking the expensive risk of expanding their workforces. Labor shortages result, in part, from the failure of education and training systems to provide lifelong learning in an age when skill requirements are rapidly evolving.

Another concern is that production facilities may relocate to Eastern Europe, thereby depressing employment in the West. Again, this is largely exaggerated. It is true that many Western companies have been quick to spot the potential of the well-educated populations to the East. It is a fallacy, however, to believe that the number of potential jobs in Europe is static. Economic growth and demographic changes should be able to create enough new jobs for all Europeans, if companies are given the opportunity to develop in a pro-competitive regulatory framework.

We need to maintain a sense of perspective. It is clear that some companies will want to take advantage of lower costs and expanding markets in the new member states, just as companies in the new member states hope to expand even further into the Western European market. But isn't that what we should be striving for ˇ open competition, expanding markets, and more jobs in a growing EU economy?

In any event, enlargement will enable European-based companies to organize their production on a larger scale and will increase competition on the European market. The economic stimulus this will provide should create a virtuous circle of greater prosperity translating into ˇ among other things ˇ more wealth and jobs.

The enlarged EU market will also offer tremendous opportunities for the European Union's trade and investment partners. Third country exporters have now gained access to a much larger marketof 450 million people. Strong growth in foreign direct investment in the new member countries exemplifies the tremendous potential of the enlarged EU market.Many American companies have already invested in the new member states and I am certain that more will do so in the future when they realize the full economic potential of the enlarged European Union.

Good governance in an enlarged Europe is also important ˇ how will the EU cope with 25 members instead of 15? In order to give the new members a chance to digest the corpus of EU law, UNICE has called for a moratorium on new legislation. It will not be enough, however, to stem the flood of legislative activity in Brussels. The focus must be placed on a thorough assessment of the impact of proposed legislation as early as possible in the legislative process, in order to ensure quality. Well thought-out rules shorn of unnecessary administrative procedures are conducive to a business friendly climate.

To sum up, enlargement will require change, and change creates challenges. On the issues of migration, restructuring and the regulatory environment, enlargement also presents opportunities torethink how our markets and companies are organized and to adopt political and economic reforms aimed at improving competitiveness and well-being in Europe.

Philippe de Buck is Secretary General of UNICE, the Union of Industrial and Employers' Confederations of Europe, which represents more than 16 million small, medium and large companies in Europe. Before his appointment in 2002, he spent 30 years at AGORIA, a Belgian federation for the technology industry, where he served in a number of positions, including Chief Executive Officer, Director General and member of the Board, and Secretary General and member of the General Management.