European Affairs

Summer 2005

 

The Effects of Enlargement

New Members Help EU, but Add to Management Problems

By Jaroslaw Pietras

 

The impact of the entry of ten new member states into the European Union in May 2004 depends on how you look at it. From a statistical perspective, the new members increase the number of EU countries by a large proportion, 66 percent, whereas they increase the European Union's population by only about 20 percent. This means that the population of the European Union is increasing, but not as fast as the number of countries that are part of it.

In terms of GDP, the contribution is even smaller. From an economic point of view, this was not a meaningful enlargement. When you look at how much new member states contribute to EU external trade, their influence is even smaller, and even less in terms of investments. Bulgaria and Romania, which are due to join in 2007, will only exacerbate these proportions.

What this means is that Europe is changing most fundamentally in its institutional composition, rather than in its economic structure. Economically, however, it is very visible that there are now new regions within the European Union that are much poorer than ever before. The wealthiest regions of the Union are now ten times richer than the poorest. This implies significant changes in EU policies, because there is a greater need than before to narrow the disparities between member states.

Enlargement is also changing the focus of the Common Agricultural Policy. Until now, among the 15 older member states, agricultural policy was aimed mostly at maintaining the stability of farm incomes. In the 25-nation European Union, agriculture in the new member states has to be modernized, meaning that agricultural policy remains a valid and important policy of the Union.

There is also a much greater need for a strong competition policy, and for the fulfillment of commitments made by EU leaders in their Lisbon Agenda to make the Union the most dynamic and competitive region in the world. With the inclusion of the new member states, it becomes even more important to liberalize and deregulate the European economy if that objective is to be met.

For the EU institutions, the major consequence is that enlargement has reallocated power among the member states. Under the voting system established by the Nice Treaty, Poland has 27 votes, the same as Spain, which is just two fewer than Germany, with 29, and about twice as many as the Netherlands. Under the current decision-making system, the increased number of small states diminishes the importance of larger members.

Enlargement has thus multiplied the tasks of the EU institutions, but it has also made the Union much more difficult to manage and added to the complexity of the system. The situation will become even more complicated when Romania and Bulgaria increase the number of members to 27. All this, of course, is one of the main reasons why a streamlined and re-balanced voting system was included in the proposed new EU constitution.

Economically speaking, however, the first year of membership has proved very successful for the new member states. In a nutshell, accession contributed to a return to high economic growth. Poland achieved a relatively high growth rate of five percent; Polish trade expanded by more than 20 percent; flows of foreign direct investments increased and the Polish currency appreciated. Many of these achievements can be attributed to EU entry.

Expectations that enlargement would create problems for Poland and the other new member states were largely unfulfilled. It is true that there was a short, temporary increase in inflation, which rose from one percent to more than four percent, mostly owing to the adjustment of agricultural prices. But that is not too serious, considering that EU entry has created quite good long-term prospects for economic growth in the acceding countries. During the years from 2007 to 2013, the period to be covered by the new EU budgetary perspective, economic growth in all ten new member states is projected at just over four percent.

"The deeper debate is over the future direction of the EU"

This brings us to the important question of financial transfers within the European Union, which is a source of great controversy. We in Poland believe that Europe is not only about money; it is about the construction of a united European continent. Of course, greater Europe cannot be achieved just by adding a few more funds to the budget, but it is obvious that in reality the EU budget will be bigger and will provide for a greater reallocation of resources.

There is a quarrel among member states and the European Commission over the size of the budget - with the proposed figures ranging from one percent to 1.24 percent of the GNI (gross national income) of all member states. That is not a large budget; it represents only a small fraction of EU income. But the difference between one percent and 1.24 percent is definitely significant in relative terms.

The arguments that we are seeing over the budget are not only about money. They are about the need to reallocate funds previously used for different policies. To a large extent, the differences are between countries that are becoming increasingly big contributors to the budget and those that are largely its beneficiaries. The discussion has been especially between major countries, which are also big contributors.

The total budget for 2005 is over £100 billion, and the biggest contributions are made by Germany, followed by France, Italy, and the UK. Spain, which has been substantially benefiting for many years, and will continue to benefit, is also becoming a significant contributor. The Netherlands is also a big contributor, especially in per capita terms. Countries look not only at how much they contribute, but also at their net contributions, taking into account how much they receive. The root of many of the quarrels is that countries pay to the central European budget, but the money from the budget is spent to finance policies, which are shaped in a way that some countries benefit from them more than others.

The failure of EU leaders to agree on a budget at the European Council in Brussels in June reflects the fact that the discussion was not only about money. The deeper debate is over the reforms that Europe needs and the different visions of the future direction that the Union should take. If the final outcome of this debate is not clear, one might conclude that it will be difficult to agree on the financial framework within which the reforms should be undertaken.

One could equally, however, argue the opposite - that if we do not have a stable financial framework for the next few years, it will be much more difficult to agree on the reforms. In agriculture, for example, reforms never take place over night. They need to be prepared, scheduled and implemented, and it takes time. It is much easier to decide such reforms once a framework has been established.

The current situation is that all countries, including the older members, are potential beneficiaries of enlargement. As the European Union expands, it offers a bigger market and thus more opportunity for everyone - even if those opportunities may be quite small. We have, however, a problem of managing the enlarged Union, which is symbolized by the rejection of the Constitution. We must hope that the problem is temporary.

Jaroslaw Pietras is Secretary of State for European Affairs, Secretary of the Committee for European Integration of Poland, Deputy Chairman of the European Committee of the Council of Ministers and the Head of the Office of the Committee for European Integration. He was previously Deputy Chairman of the inter-ministerial team for the new round of multilateral WTO negotiations, Deputy Director of the Department for Coordination and Monitoring of Foreign Assistance in the Office of the Committee for European Integration, Director of the Economic Team and Deputy Director of the European Integration Department in the Office of the Council of Ministers.