European Union Enlargement Tutor

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					                 A2 Economics
         PowerPoint Briefings 2009




European Union
Enlargement




                       tutor2u™
             The Official EU View on Enlargement

• “Enlargement is one of the EU's most powerful
  policy tools. It serves the EU's strategic interests
  in stability, security, and conflict prevention. It has
  helped to increase prosperity and growth
  opportunities, to improve links with vital transport
  and energy routes, and to increase the EU's weight
  in the world.
• In May 2009, the EU will mark the fifth anniversary
  of the 2004 enlargement.”


                                                    tutor2u™
                        Some issues to cover and revise

• Has the widening of the EU been a success?
• The benefits and costs of enlargement for
    – New member states
    – Existing (established) members of the EU
    – The EU economy as a whole e.g. in the context of globalisation and other
      external events
• EU enlargement and immigration policy
• How many more countries will join?
• Will enlargement prevent final economic union?
• How many new states will join the Euro?
• Is enlargement fatigue setting in?
• What of states that remain outside of the EU e.g. Norway and Iceland

                                                                      tutor2u™
             EU Enlargement – A Brief Historical
                                   Perspective
• Europe has added new members periodically
• Six Main Waves of EU Enlargement
  – 1973 (UK, Ireland and Denmark)
  – 1981 (Greece)
  – 1986 (Portugal and Spain)
  – 1995 (Austria, Finland and Sweden)
  – 2004 (Ten new countries)
  – 2007 (Bulgaria and Romania)

                                              tutor2u™
Who will be next? Potential members




                              tutor2u™
                            Centre for European Reform

• “The objective of joining the EU has helped the Central and
  East European countries to move from post-Communist
  upheaval to market economics and pluralist democracies in
  little more than a decade. Ten countries successfully joined
  the EU in May 2004, and Bulgaria and Romania followed in
  January 2007. However, the Union is showing signs of
  'enlargement fatigue'. Many politicians worry that an ever
  larger Union will function badly, and that further widening will
  come at the expense of deepening. West European workers
  fear the economic consequences of adding 50 million low-
  cost workers to the EU single market. Future accession
  would be very difficult unless public and political support for
  enlargement revives.”
•   www.cer.org.uk/enlargement_new/index_enlargement_new.html
                                                                tutor2u™
EU Membership Distribution in Jan 2004

    EU MEMBERSHIP (April 2004)
          RICH          POOR
  LARGE   UK            SPAIN
          FRANCE
          ITALY
          GERMANY
  SMALL   BELGIUM       PORTUGAL
          LUXEMBOURG    GREECE
          NETHERLANDS
          IRELAND
          DENMARK
          SWEDEN
          AUSTRIA
          FINLAND




                                   tutor2u™
        EU Membership in January 2009

  EU MEMBERSHIP JANUARY 2009
         RICH          POOR
LARGE    UK            SPAIN
         FRANCE        POLAND
         ITALY
         GERMANY

SMALL    BELGIUM       PORTUGAL
         LUXEMBOURG    GREECE
         NETHERLANDS   ESTONIA          ROMANIA
         IRELAND       HUNGARY          BULGARIA
         DENMARK       CZECH REPUBLIC
         SWEDEN        SLOVAKIA
         AUSTRIA       SLOVENIA
         FINLAND       CYPRUS
                       MALTA
                       LITHUANIA
                       LATVIA
                                                   tutor2u™
The Map of an Enlarged Europe




                        tutor2u™
                 Overview of new member states (1)
                             Per Capita Incomes   Manufacturing as a % of GDP            GDP Growth
                                     EU25=100
                                   PPP adjusted

                      1997                2008                     % in 2006    Average annual growth
                                                                                                  (%)
                                                                                             1999-08

Bulgaria                26                  39                            26                      5.3
Cyprus                  86                  92                            11                      3.8
Czech Republic          73                  82                            32                      2.8
Estonia                 42                  67                            21                      6.4
Hungary                 52                  63                            26                      3.8
Latvia                  37                  56                            15                      7.3
Lithuania               38                  62                            23                      6.5
Malta                   81                  76                            17                      1.9
Poland                  47                  55                            25                      4.2
Romania                 26                  44                            27                      5.2
Slovakia                51                  71                            28                      4.5
Slovenia                78                  91                            28                      5.2
Turkey                  32                  42                            25                      4.2
United Kingdom

                                                                                      tutor2u™
                 Overview of new member states (2)
                             Inflation                 Unemployment        Labour productivity             Population


                 % change in consumer    Per cent of the labour force in     GDP per person      Thousands – 2008 mid
                        prices in 2008                 November 2008              employed               year estimate
                                                                           EU27=100 in 2008


Bulgaria                         12.0                               5.1                    36                   7 640
Cyprus                             4.4                              3.9                    85                     789
Czech Republic                     6.3                              4.5                    73                  10 381

Estonia                          10.6                               8.3                    63                   1 340
Hungary                            6.0                              8.3                    74                  10 045
Latvia                           15.3                               9.0                    51                   2 270
Lithuania                        11.1                               7.0                    63                   3 366
Malta                              4.7                              5.8                    89                     410
Poland                             4.2                              6.5                    62                  38 115
Romania                            7.9                              5.8                    45                  21 528
Slovakia                           3.9                              9.1                    78                   5 401
Slovenia                           5.5                              4.3                    86                   2 025
Turkey                           10.4                               n/a                    62                  70 586
United Kingdom
                                                                                                       tutor2u™
                       GDP Per Head for selected member states
                       Income convergence for new EU members
                 Index of GDP per head, purchasing power standard, EU25=100, source: Euro
           100                                                                                100   Some progress
           90                                                                                  90
                                                                                                    in raising relative
                                                                                                    living standards
           80                                                                                  80


           70                                                                                  70
                                                                                                    Catching up with
                                                                                                    Portugal and
EU27=100




           60                                                                                  60
                                                                                                    Greece
           50                                                                                  50


           40                                                                                  40
                                                                                                    Newer nations
                                                                                                    are considerably
           30                                                                                  30
                                                                                                    poorer
           20                                                                                  20
                  00       01      02      03       04      05        06     07         08

                          Czech Republic            Estonia                       Latvia
                          Hungary                   Slovak Republic               Romania
                          Poland                    Bulgaria
                          Slovenia                  Lithuania
                                                                           Source: Reuters EcoWin


                                                                                                                tutor2u™
                 Unemployment rates for selected countries

                 Unemployment in selected New Member States
                      Percentage of the labour force, annual average, source: Eurostat                   Strong growth has
          20.0                                                                                    20.0
                                                                  Poland
                                                                                                         helped to bring
          18.0                                                                                    18.0
                                                                                                         down
          16.0                                                    Slovakia                        16.0
                                                                                                         unemployment
          14.0                      Estonia       Lithuania                                       14.0


          12.0                                                                                    12.0
                                                                                                         More jobs for
                                                                                                         domestic workers
Percent




          10.0            EU25 average                                                            10.0
                                                                                                         – reverse
           8.0                                                                                     8.0
                                                                                                         migration?
           6.0                                                                                     6.0
                  Czech Republic
           4.0
                                                  Hungary         Slovenia
                                                                                                   4.0
                                                                                                         But putting
           2.0                                                                                     2.0
                                                                                                         pressure on
                                                                                                         wages to rise
           0.0                                                                                     0.0
                 98      99        00     01     02      03     04         05      06      07

                                                                                Source: Reuters EcoWin


                                                                                                                     tutor2u™
        Joining the Club – Criterion for EU Entry

• Accession countries have to meet the Copenhagen
  criterion for joining the European Union
  – Stability of political institutions guaranteeing
    democracy, the rule of law, human rights and respect
    for and protection of minorities
  – A fully functioning market economy that meets the
    standards required for participation in the single market




                                                       tutor2u™
                                Transition Economies

• Price Liberalisation
   – Moving away from state controlled prices to allow the
     price mechanism greater influence in allocating
     resources
• Privatisation
   – Transfer of ownership
   – Development of private sector capital markets




                                                      tutor2u™
                             Transition Economies (2)

• Liberalisation of Trade with other Countries
  – Full convertibility of currencies
  – Preparation for eventual membership of the Euro
• Reforms of the Financial Sector
  – Fully-functioning Central Banks to take control of
    monetary policy
  – Capital markets for corporate and government bond
    issues


                                                         tutor2u™
         Potential Gains for Accession Countries

• (1) Membership of the EU Single Market
   – Trade:
      • Exploiting comparative advantage to increase trade
   – Investment
      • Free movement of capital – looking for the highest return
      • Inward investment to aid transformation of national
        infrastructure – impact on a country’s LRAS / trend growth
   – Competition
      • More competition – a boost to labour productivity
      • Dynamic efficiency gains e.g. arising from higher capital
        investment and faster pace of innovation
                                                                    tutor2u™
    Potential Gains for Accession Countries (2)

• Financial Support
  – Countries will be net recipients of income from
     • Common Agricultural Policy
     • EU Structural funds
     • Many regions have per capita incomes well below the
       75% threshold for Objective 1 funding
     • 92% of population of accession countries lives in regions
       with a GDP/head under 75% of the EU25 average. 61%
       of the population lives in regions below 50%
     • Much of the EU funding will help to finance investment

                                                          tutor2u™
     Potential Gains for Accession Countries (3)

• Potential macroeconomic advantages
   – Reduced exchange rate volatility – many countries are keen to join
     the Euro to reduce exchange rate risk and benefit from lower
     interest rates
   – Slovenia, Slovakia, Cyprus and Malta have joined the single
     currency
       • Slovenia – January 2007
       • Cyprus and Malta – January 2008
       • Slovakia – January 2009
   – Other countries do not meet the entry requirements or have
     chosen to remain outside – to retain monetary policy flexibility

                                                                  tutor2u™
          Competitive advantage for new states?

• Central European location for many
• Significantly lower wage costs
• Lower productivity – but unit labour costs still
  cheaper e.g. for car manufacturers
• Lower land prices
• Attractive corporate tax regime + other incentives
• Success of previous inward investments
• Many new states have highly literate population
                                                     tutor2u™
                                    Diagram corner

• Useful diagrams for this topic:
• Trade diagrams – welfare effects from single
  market, exploitation of comparative advantage
• AD-AS diagrams
  – Inward investment effects
  – Economic shocks within the enlarged EU economy
• Economies of scale
• Labour market diagrams e.g. impact of migration

                                                  tutor2u™
                         A2 Economics
                 PowerPoint Briefings 2009




Competitiveness and Growth
 in the New Member States

Performance of Europe’s new countries
                                                  Competitiveness

  Institute for World Economics of the Hungarian Academy of Sciences
               Comparative Survey of the new Member States
     Ranking                   Country                     Index value
        1.                     Slovenia                        90.6
        2.                  Czech Republic                     82.8
        3.                     Lithuania                       81.5
        4.                     Hungary                         80.5
        5.                      Estonia                        80.2
        6.                     Slovakia                        74.2
        7.                      Poland                         71.9
        8.                      Latvia                         71.5
Economic criteria include: real GDP growth, GDP (PPP) per capita, gross
investment, productivity, balance of trade, unemployment, and convergence
indices of the economic and monetary union
                                                                      tutor2u™
                  The Sources of Growth


            Productivity


 Natural                    Capital
Resources                    Stock

             Economic
              Growth

 Labour                     Invention
  Inputs                   Innovation


            Technology



                                        tutor2u™
                                  The Sources of Growth


                            Productivity


                 Natural                    Capital
                Resources                    Stock

                             Economic
                              Growth

                 Labour                     Invention
Labour Supply     Inputs                   Innovation

Labour
Utilisation                 Technology
Human Capital

                                                        tutor2u™
                                  The Sources of Growth

Labour
productivity
                            Productivity
Total factor
productivity
                 Natural                    Capital
                Resources                    Stock

                             Economic
                              Growth

                 Labour                     Invention
Labour Supply     Inputs                   Innovation

Labour
Utilisation                 Technology
Human Capital

                                                        tutor2u™
                                  The Sources of Growth

Labour
productivity
                            Productivity
Total factor
productivity                                            Fixed Capital
                 Natural                    Capital
                Resources                    Stock      Infrastructure
                                                        Social Capital
                             Economic
                              Growth

                 Labour                     Invention
Labour Supply     Inputs                   Innovation

Labour
Utilisation                 Technology
Human Capital

                                                               tutor2u™
                                      Recent growth for selected countries
                      Faster growth for many new member states
                  Annual % change in Real Gross Domestic Product for selected countries
          15.0                                                                                             15.0   Growth much
          12.5
                           Latvia
                                                                                                           12.5
                                                                                                                  faster than the UK
                                                 Estonia
          10.0                                                                                             10.0   But has this been
           7.5                                                                                              7.5
                                                                                                                  sustainable?
Percent




           5.0                                                                   Hungary                    5.0   Steep slowdown
           2.5                                                                                              2.5
                                                                                                                  and now recession
                                                           UK                                                     for many new EU
           0.0                                                                                              0.0
                                                                                                                  members
          -2.5                                                                                             -2.5


          -5.0
                                           Lithuania
                                                                                                           -5.0
                                                                                                                  Some of them
                 96   97     98     99      00     01      02   03      04     05     06    07        08          “over-heated”
                           Estonia [ar 4 quarters]
                           Lithuania [ar 4 quarters]
                                                                     Hungary [ar 4 quarters]
                                                                     United Kingdom [ar 4 quarters]
                                                                                                                  when they joined
                           Latvia [ar 4 quarters]
                                                                                       Source: Reuters EcoWin
                                                                                                                  the EU

                                                                                                                            tutor2u™
                                                              Latvia – Rampant wage inflation
                                                                    destabilised the economy
                                 Latvia's Booming Economy - Out of Control?
                                       Annual % change in money wages and current account balance
                       35

                       30                                                                                               Click here for
                       25
                                                                                                                        an article
             Percent




                       20
                             Wage Inflation
                       15

                       10

                        5

                        0
                       -50
                 -100
LVL (millions)




                 -150
                 -200         Current Account Balance
                 -250
                 -300
                 -350
                 -400
                                  03             04             05              06           07             08

                                 Wages, Average Monthly, Gross [ar 12 months]        Current Account, Balance, Total
                                                                                               Source: Reuters EcoWin
                                                                                                                                tutor2u™
                               Estonia – from boom to deep recession
                       Estonia's GDP Growth and Unemployment
                      Annual percentage change in real national income, unemployment rate %
          15.0                                                                                           15.0

                         Unemployment
          12.5                                                                                           12.5

    Estonia
     10.0                                                                                                10.0


           7.5                                                                                             7.5
Percent




           5.0                                                                                             5.0

                            Economic Growth
           2.5                                                                                             2.5


           0.0                                                                                             0.0


          -2.5                                                                                            -2.5


          -5.0                                                                                            -5.0
                 Q1    Q3   Q1    Q3   Q1    Q3   Q1    Q3   Q1    Q3   Q1    Q3   Q1    Q3   Q1
                      01         02         03         04         05         06         07         08
                                                                                        Source: Reuters EcoWin
                                                                                                                 tutor2u™
                         Inflation - better control in some new EU
                                              countries than others
                       Inflation Rates for Selected new EU States
                               Annual % change in consumer prices (all items)
          30                                                                                                 30



          25                                                                                                 25



          20                                                                                                 20



          15                                                                                                 15
Percent




          10                                                                                                 10



           5                                                                                                   5



           0                                                                                                   0



          -5                                                                                                  -5
               96      97     98     99    00       01   02       03   04       05   06      07     08

                    Hungary        Czech Republic        Poland        Latvia
                                                                                          Source: Reuters EcoWin


                                                                                                                   tutor2u™
                 Poland has improved the trade off between
                                           jobs and prices
                         Poland - Unemployment and Inflation
          22.5                                                                                        22.5


          20.0                                                                                        20.0

                  Unemployment rate (per cent)
          17.5                                                                                        17.5


          15.0                                                                                        15.0


          12.5                                                                                        12.5
Percent




          10.0                                                                                        10.0


           7.5                                                                                         7.5


           5.0   Consumer price inflation (%)                                                          5.0


           2.5                                                                                         2.5


           0.0                                                                                         0.0
                   02           03              04     05          06          07            08

                   Unemployment, Rate
                   Consumer Prices, By Commodity, Index, 1998=100 [ar 12 months]
                                                                                    Source: Reuters EcoWin
                                                                                                             tutor2u™
                  And a rising employment rate will help to
                 provide jobs at home for younger workers
                                Employment Rate for Poland
                               Per cent of population of working age in a job
          67.5                                                                                       67.5


          65.0                                                                                       65.0


          62.5                                                                                       62.5


          60.0                                                                                       60.0


          57.5                                                                                       57.5
Percent




          55.0                                                                                       55.0


          52.5                                                                                       52.5


          50.0                                                                                       50.0


          47.5                                                                                       47.5


          45.0                                                                                       45.0
                 97     98      99      00      01    02     03      04       05       06      07

                  I.1.1: Total employment rate        I.1.3: Employment rate, males
                  I.1.2: Employment rate, females
                                                                                   Source: Reuters EcoWin

                                                                                                            tutor2u™
        Potential Gains for Existing EU Countries

• (1) Export potential and exploitation of economies of scale
• (2) Foreign Investment and Incomes and Profits
• (3) More diverse European labour market
• (4) A cleaner environment
• (5) Catalyst for further structural reforms in the EU
   – Reforms to the CAP
   – Spur to countries to reform their labour markets in the face of
     lower labour cost competition
   – Many countries are already engaging in tax competition


                                                                  tutor2u™
                       EU Enlargement – an export opportunity for
                                                         the UK
                       UK Exports to a selection of new EU Member Stat
                            Exports of goods and services, annual data, current prices, £ billion
                 4.0                                                                                      4.0


                 3.5                                                                                      3.5


                 3.0                                                                                      3.0


                 2.5                                                                                      2.5
GBP (billions)




                                                                                                                billions
                 2.0                                                                                      2.0


                 1.5                                                                                      1.5


                 1.0    Poland           Czech Republic                                                   1.0


                 0.5                          Hungary                                                     0.5

                                                                          Slovakia
                 0.0                                                                                      0.0
                       93   94    95   96    97   98      99   00   01   02   03     04   05   06    07

                                                                                          Source: Reuters EcoWin


                                                                                                                           tutor2u™
               Main Concerns of Member Nations

• Extra budgetary costs for the EU
• Can accession countries continue to meet stricter
  EU environmental standards?
• Long-term need for higher regional subsidies – loss
  of some regional funding for established EU
  countries
• Social concerns from increased labour migration
• Some Objective 1 regions will now lose some of
  their funding – including regions in the UK, Spain,
  Greece and Portugal
                                                  tutor2u™
          Economic Concerns of Member Nations

• Labour Market Issues
   – Fears of higher structural unemployment among accession
     countries – which might lead to large immigration of labour into
     higher-income countries + political and social tensions
   – Fears of a surge in economic migration from East to West
      • Social dumping?
      • Concerns about organised crime and illegal immigration from
        Russia, Belarus and the Ukraine through weak Eastern
        European borders
      • In Germany, Austria and Italy (countries that border accession
        states) there are intensive debates about controlling the flow of
        migrants from former Eastern Europe

                                                                 tutor2u™
                             What is convergence?

• Income convergence:
• Where the divide in per capita incomes becomes
  smaller over time
• Requires countries to achieve relatively faster
  growth over a substantial time period
• Convergence may also happen if other “richer”
  countries suffer a slowdown
• NMS trade heavily with the established EU – so an
  EU-wide slowdown is not in their long term interests
                                                    tutor2u™
       The likely scenario for new member states

• Income convergence is not automatic
• Baltic states and Slovenia appear to have the best growth /
  convergence potential but Baltic States over-heated
• Convergence will happen but at different speeds
• Is there a new Ireland? A Baltic Tiger? Ireland collapse in 08
• Growth is stimulated by capital investment and productivity
• But in the long term, NMS will need to improve employment
  rates, and achieve great labour mobility
• Unemployment is a constraint on growth
• Demographics will also play a role
• Will the new members join the Euro? 4 have done so
                                                          tutor2u™
                        Recent articles on EU enlargement

•   Financial crisis in Hungary
•   http://www.guardian.co.uk/commentisfree/2008/oct/29/creditcrunch-eu
•   Reversing Poles: how Poland brought its workers home
•   http://www.guardian.co.uk/business/2009/jan/23/poland-reverses-uk-migration
•   Will Turkey ever be accepted by the EU?
•   http://www.guardian.co.uk/commentisfree/2009/jan/19/turkey-gaza
•   Crises test stability of new EU states
•   http://www.ft.com/cms/s/0/5f05bd08-e331-11dd-a5cf-0000779fd2ac.html
•   Balkan states set to launch EU bids
•   http://www.ft.com/cms/s/0/7f38328c-a776-11dd-865e-000077b07658.html
•   Crunch time for eastern Europe
•   http://www.ft.com/cms/s/0/95f2113e-cb14-11dd-87d7-000077b07658.html
•   Turkey tries to revive EU drive
•   http://news.bbc.co.uk/1/hi/world/europe/7837145.stm
                                                                          tutor2u™
                                                            Key Unit 4 Tips

•   Use the bullet points (reworded) as subheadings
•   Ensure you answer all sections
•   Answer the question!
•   Refer to extracts and articles to support your answer (analysis)
•   Use terminology/definitions from the AS/A2 course, theory and diagrams
    (application)
•   Evaluation is crucial (30 marks!) but does not have to take place only in the final
    section: say which sources are more useful than others, say what other data
    would have helped you to make a better recommendation, say which sources
    may be biased. Evaluation is saying what your recommendation is based on!
•   Plan your answer to ensure you cover as much relevant material as possible
•   Aim to write at least 7 – 8 sides in the time provided (including diagrams – easy
    application marks)
•   Remember that 120/120 is not out of the question – and this is not always the
    ‘best’ candidates who achieve this
•   Source: Andy Threadgould, Dulwich College, Jan 2009

                                                                                tutor2u™

				
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