Economics: More Pillars Needed to Build a United Europe

Article excerpt

Eastern enlargement of the EU is a central pillar in Europe's post-Cold War architecture. Keeping the eastern countries out seriously endangers their economic transition, and economic failure in the east could threaten peace and prosperity in western Europe. The perceived economic costs and benefits will dictate the enlargement's timing.

In new research, we have examined the economics of EU enlargement as a solution to the increasing instability of the central and east European region and a means of ensuring its future prosperity. We have estimated the benefits for both east and west. Eastern enlargement will be an excellent bargain for all the incumbent EU15 members and enormously beneficial to the central and east European economies.

Less than a decade ago, millions of men and trillions of dollars' worth of equipment stood ready for combat in Europe. The demise of the political systems of eastern Europe and the Soviet Union defused that situation and the political "creative destruction" in the revolutions of 1989 offered great opportunities, but also great dangers. Success in CEE will lock in democracy and pro-market reforms. Moreover, 100 million eastern consumers with rising incomes will be a boon for west European businesses. Sustained economic success in the east will foster prosperity and peace. But stagnant or falling incomes and the impoverishment of a large slice of the population of CEE could foster disillusion with market economics and democracy. This may occur while a power vacuum exists in central Europe. Geography and history make these continent-wide problems. Any serious unrest or conflict could harm western Europe via surging migration, increased defence expenditure and changes in investors' attitudes. Stability and prosperity in CEE could come from incorporating the region into the EU. We examine the economics of this strategy. There are four parts - the costs and the benefits in the east and the costs and the benefits in the west. Discussion so far has been concerned with the costs to the EU budget of an eastern enlargement. We attempt to fill in two more parts of the calculus - the economic benefits for the east and the west. The final part - the cost of enlargement for the east - seems to defy calculation, especially the extent to which adoption of the EU's social and economic regulations (including rules relating to employment rights and social insurance) will stunt eastern growth and raise unemployment. We believe - with supporting evidence from previous EU accessions (Portugal and Spain) - that joining the EU will make the region substantially less risky from the point of view of domestic and foreign investors. EU membership constrains arbitrary trade and indirect tax policy changes. It locks in well-defined property rights, competition policy and state-aids policy. By securing open capital markets and rights of establishment, membership assures investors that they can put in and take out money. EU membership guarantees that regional products have access to the EU's 15 markets (accounting for almost 30 per cent of world income). …