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Banned
Is EU expansion at an end?
Short Take - October 18, 2006
Anne D. Picker, Chief Economist, Econoday
Bulgaria and Romania become the 26th and 27th members of the European Union on January 1, 2007. With their accession the "big bang" expansion, which began in 2004, comes to an end. It was relatively easy to sell the idea that the expansion should include Eastern European countries including former Soviet states. But as the EU became larger, each new round of enlargement was more difficult. Enlargement fatigue became glaringly obvious last year when French and Dutch voters rejected the EU constitution with 'No' voters citing eastward expansion as a prime reason for their dissatisfaction. In France, expansion has diluted its dominating EU presence, while in the Netherlands, migration was a big stumbling block. Others simply think expansion has occurred too fast, making the EU too big.
Concerns have surfaced over recent political developments among central and eastern European members despite their enormous strides since the fall of communism. Poland's ruling party has been accused of populist nationalism while Slovakia's new coalition has been criticized for fanning xenophobia. Hungary's prime minister faced demonstrations after he admitted he had lied about the state of the economy to win a general election. Bulgaria's and Romania's failure to tackle organized crime and corruption or to prepare their administrative systems to handle billions of euros of EU aid has done little to build confidence.
Background
There were 15 EU Members States with an estimated total of 380 million citizens until May 1, 2004 when ten countries, mainly from Central and Eastern Europe, joined the EU. The original 15 EU members are Germany, France, Italy, Spain, Portugal, Sweden, Belgium, Denmark, Austria, UK, Ireland, the Netherlands, Finland, Greece and Luxembourg. They were joined by Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia to make up the EU 25. Bulgaria and Romania will join in January 2007 bringing the EU's total population to nearly 500 million. Turkey and Croatia are also candidate countries and could join later, when all the conditions for membership are met.
Within the EU, the euro replaced the old national currencies in 12 EU member countries on January 1, 2002: Austria (schilling), Belgium/Luxembourg (franc), Finland (Markka), France (franc), Germany (deutschemark), Greece (drachma), Ireland (pound), Italy (lira), the Netherlands (guilder), Portugal (escudo) and Spain (peseta). And Slovenia becomes the 13th country to join the European Monetary Union on January 1, 2007.
The EU had expanded gradually prior to 2004. It had never absorbed so many new countries with their different histories and cultures at the same time. In order to become a member, a country must have a stable democracy that guarantees the rule of law, human rights and protection of minorities, and it must have a functioning market economy as well as a civil service capable of applying and managing EU laws. Although the EU population increased and consumers grew by 20 percent, the 10 new members only added 5 percent to the EU's total gross domestic product at the time of accession. However, these economies were growing faster than the EU average and were boosted further by reduced tariffs, increased inward investment and EU subsidies.
Enlargement has raised a lot of thorny issues, including migration, agriculture, eastern borders that leak like a sieve, and of course the timeframe for joining the euro. Expansion also highlights the need to restructure the EU itself, which was partly addressed by the Treaty of Nice in 2000 and is at the center of the EU's attempt to adopt a new constitution that seeks to streamline its operational apparatus. The cost of enlargement worries the original 15 EU members as well. These costs were a major issue in the 'No' vote cast in the Netherlands against the Constitution in 2005. (France voted 'No' also, but for different reasons.)
Rules differ for new members
Only the UK, Sweden and Denmark of the original group were able to retain their national currencies. But unlike the original EU 15, new members do not have a choice and cannot opt out of adopting the euro as their national currency. The new countries, in order to join the EMU, must fulfill strict criteria on inflation, budget deficits and public debt. Several new members have already breached the mandated budget deficit ceiling of 3 percent of GDP as stipulated by the Growth and Stability Pact - but then many of the original members have also.
Several new members, Cyprus, Estonia, Lithuania and Slovenia have started the process of becoming full EMU members. Estonia, Lithuania, Slovenia, Latvia and Slovakia already have joined the Exchange Rate Mechanism 2 - the waiting room for the single currency - and are candidates for eurozone membership. Estonia, Lithuania and Slovenia had all hoped to join on January 2007 but only Slovenia has been approved to enter the EMU on January 1, 2007. Latvia hopes to join in 2008 and Slovakia in 2009. Estonia opted to wait while Lithuania's bid was rejected. This rejection raised bitter objections to the entry criteria used to judge eligibility. Lithuania's budget deficit is below the 3 percent of GDP limit and has a healthy and growing economy. However, its inflation rate was slightly above the average of the three current EU members with the lowest inflation rate, and the one with the lowest rate, Sweden, is not a member of the EMU. It has been pointed out that many of the current 12 members could not currently pass the tests. The applicants also have to comply with the other membership criteria, including cutting national debt, controlling deficits and inflation and giving full independence to their national central banks.
Expansion pros and cons
Expansion's proponents view an ever larger EU as the best way of building economic and political bonds between countries in order to end the fissures of the past. They look forward to sharing the world's largest single market and in the process to expand and consolidate stability and prosperity. However, critics say the fact that the new Member State average per capita GDP is only 40 percent of the average for existing EU countries has made the new members an economic burden on the older and richer members. Some critics contend that the EU decision-making process (which is already cumbersome) will become bogged down as the number of countries increases. Some are fearful that established EU members will see a huge influx of immigrants from former communist states seeking better job and benefit prospects.
The main concerns about the newcomers swirl around their impact on the original 15 members. Some questions are purely pragmatic. How long will EU meetings take if 25 (and soon 27) countries have to have their say? Can the translation system cope? But for the investor in European equities, the accession has had a less dramatic impact. The combined economies of the 10 new member countries are only the size of the Netherlands and their stock markets are even smaller. If Hungary and the Czech Republic were included today in the West European indexes (including the UK), they would be a mere 0.1 percent of the total by market capitalization. The newcomers are considered to be emerging markets in the eyes of most market makers. And clearly risk will weigh heavily in investor decision making!
Bottom Line
At this writing, we don't know how far to the east the EU will ultimately reach. Romania and Bulgaria are European by any definition. Yet their accession was greeted with dismay in some European capitals and with a warning by the European Commission president who said that the EU cannot absorb more members without reforming its institutions. In short, this was a request to revive some or all of the constitution that was rejected last year by French and Dutch voters (but approved by nine other Member States).
The accession of Bulgaria and Romania appears to be a natural break point. Only Croatia and Turkey have already started membership talks. Both Bulgaria and Romania are poor (both had GDPs of 31 percent the EU average in 2004) but other potential newcomers in the western Balkans such as Serbia, Montenegro, Bosnia-Herzegovina, Kosovo, Albania or Macedonia would be even more costly to absorb. And, like Turkey, they carry heavy political baggage. While all of those countries have at least had their membership perspective recognized by the EU, others on the fringes such as Ukraine, Moldova, Georgia and Armenia may have to wait many years before the symptoms of enlargement fatigue start to ease.
Anne D Picker is the author of International Indicators and Central Banks, which will be published by John Wiley and Sons in January 2007.
Short Take - October 18, 2006
Anne D. Picker, Chief Economist, Econoday
Bulgaria and Romania become the 26th and 27th members of the European Union on January 1, 2007. With their accession the "big bang" expansion, which began in 2004, comes to an end. It was relatively easy to sell the idea that the expansion should include Eastern European countries including former Soviet states. But as the EU became larger, each new round of enlargement was more difficult. Enlargement fatigue became glaringly obvious last year when French and Dutch voters rejected the EU constitution with 'No' voters citing eastward expansion as a prime reason for their dissatisfaction. In France, expansion has diluted its dominating EU presence, while in the Netherlands, migration was a big stumbling block. Others simply think expansion has occurred too fast, making the EU too big.
Concerns have surfaced over recent political developments among central and eastern European members despite their enormous strides since the fall of communism. Poland's ruling party has been accused of populist nationalism while Slovakia's new coalition has been criticized for fanning xenophobia. Hungary's prime minister faced demonstrations after he admitted he had lied about the state of the economy to win a general election. Bulgaria's and Romania's failure to tackle organized crime and corruption or to prepare their administrative systems to handle billions of euros of EU aid has done little to build confidence.
Background
There were 15 EU Members States with an estimated total of 380 million citizens until May 1, 2004 when ten countries, mainly from Central and Eastern Europe, joined the EU. The original 15 EU members are Germany, France, Italy, Spain, Portugal, Sweden, Belgium, Denmark, Austria, UK, Ireland, the Netherlands, Finland, Greece and Luxembourg. They were joined by Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia to make up the EU 25. Bulgaria and Romania will join in January 2007 bringing the EU's total population to nearly 500 million. Turkey and Croatia are also candidate countries and could join later, when all the conditions for membership are met.
Within the EU, the euro replaced the old national currencies in 12 EU member countries on January 1, 2002: Austria (schilling), Belgium/Luxembourg (franc), Finland (Markka), France (franc), Germany (deutschemark), Greece (drachma), Ireland (pound), Italy (lira), the Netherlands (guilder), Portugal (escudo) and Spain (peseta). And Slovenia becomes the 13th country to join the European Monetary Union on January 1, 2007.
The EU had expanded gradually prior to 2004. It had never absorbed so many new countries with their different histories and cultures at the same time. In order to become a member, a country must have a stable democracy that guarantees the rule of law, human rights and protection of minorities, and it must have a functioning market economy as well as a civil service capable of applying and managing EU laws. Although the EU population increased and consumers grew by 20 percent, the 10 new members only added 5 percent to the EU's total gross domestic product at the time of accession. However, these economies were growing faster than the EU average and were boosted further by reduced tariffs, increased inward investment and EU subsidies.
Enlargement has raised a lot of thorny issues, including migration, agriculture, eastern borders that leak like a sieve, and of course the timeframe for joining the euro. Expansion also highlights the need to restructure the EU itself, which was partly addressed by the Treaty of Nice in 2000 and is at the center of the EU's attempt to adopt a new constitution that seeks to streamline its operational apparatus. The cost of enlargement worries the original 15 EU members as well. These costs were a major issue in the 'No' vote cast in the Netherlands against the Constitution in 2005. (France voted 'No' also, but for different reasons.)
Rules differ for new members
Only the UK, Sweden and Denmark of the original group were able to retain their national currencies. But unlike the original EU 15, new members do not have a choice and cannot opt out of adopting the euro as their national currency. The new countries, in order to join the EMU, must fulfill strict criteria on inflation, budget deficits and public debt. Several new members have already breached the mandated budget deficit ceiling of 3 percent of GDP as stipulated by the Growth and Stability Pact - but then many of the original members have also.
Several new members, Cyprus, Estonia, Lithuania and Slovenia have started the process of becoming full EMU members. Estonia, Lithuania, Slovenia, Latvia and Slovakia already have joined the Exchange Rate Mechanism 2 - the waiting room for the single currency - and are candidates for eurozone membership. Estonia, Lithuania and Slovenia had all hoped to join on January 2007 but only Slovenia has been approved to enter the EMU on January 1, 2007. Latvia hopes to join in 2008 and Slovakia in 2009. Estonia opted to wait while Lithuania's bid was rejected. This rejection raised bitter objections to the entry criteria used to judge eligibility. Lithuania's budget deficit is below the 3 percent of GDP limit and has a healthy and growing economy. However, its inflation rate was slightly above the average of the three current EU members with the lowest inflation rate, and the one with the lowest rate, Sweden, is not a member of the EMU. It has been pointed out that many of the current 12 members could not currently pass the tests. The applicants also have to comply with the other membership criteria, including cutting national debt, controlling deficits and inflation and giving full independence to their national central banks.
Expansion pros and cons
Expansion's proponents view an ever larger EU as the best way of building economic and political bonds between countries in order to end the fissures of the past. They look forward to sharing the world's largest single market and in the process to expand and consolidate stability and prosperity. However, critics say the fact that the new Member State average per capita GDP is only 40 percent of the average for existing EU countries has made the new members an economic burden on the older and richer members. Some critics contend that the EU decision-making process (which is already cumbersome) will become bogged down as the number of countries increases. Some are fearful that established EU members will see a huge influx of immigrants from former communist states seeking better job and benefit prospects.
The main concerns about the newcomers swirl around their impact on the original 15 members. Some questions are purely pragmatic. How long will EU meetings take if 25 (and soon 27) countries have to have their say? Can the translation system cope? But for the investor in European equities, the accession has had a less dramatic impact. The combined economies of the 10 new member countries are only the size of the Netherlands and their stock markets are even smaller. If Hungary and the Czech Republic were included today in the West European indexes (including the UK), they would be a mere 0.1 percent of the total by market capitalization. The newcomers are considered to be emerging markets in the eyes of most market makers. And clearly risk will weigh heavily in investor decision making!
Bottom Line
At this writing, we don't know how far to the east the EU will ultimately reach. Romania and Bulgaria are European by any definition. Yet their accession was greeted with dismay in some European capitals and with a warning by the European Commission president who said that the EU cannot absorb more members without reforming its institutions. In short, this was a request to revive some or all of the constitution that was rejected last year by French and Dutch voters (but approved by nine other Member States).
The accession of Bulgaria and Romania appears to be a natural break point. Only Croatia and Turkey have already started membership talks. Both Bulgaria and Romania are poor (both had GDPs of 31 percent the EU average in 2004) but other potential newcomers in the western Balkans such as Serbia, Montenegro, Bosnia-Herzegovina, Kosovo, Albania or Macedonia would be even more costly to absorb. And, like Turkey, they carry heavy political baggage. While all of those countries have at least had their membership perspective recognized by the EU, others on the fringes such as Ukraine, Moldova, Georgia and Armenia may have to wait many years before the symptoms of enlargement fatigue start to ease.
Anne D Picker is the author of International Indicators and Central Banks, which will be published by John Wiley and Sons in January 2007.