Macroeconomic Impacts of European Union Membership of Central and Eastern European Economies

Article excerpt

REINHARD NECK, [*]

GOTTFRIED HABER, [*]

WARWICK J. MCKIBBIN [**]

This paper examines the impact of an eastern enlargement of the European Union. This is modeled as an increase in total factor productivity and a decrease in the risk premium for the central and eastern European countries (CEECs). In particular, a multicountry model of the world economy is used to assess the direct effects and spillovers of these changes. Inflation targeting for the euro zone by the European Central Bank and alternative scenarios with respect to fiscal policy behavior in the CEECs are considered. According to these simulations, productivity effects are stronger than risk premium effects, and spillovers are small. (JEL E6, F4, O4, CO)

Introduction

After entering Stage Three of the European Monetary Union (EMU) at the beginning of 1999, the next big challenge to the European Union (EU) will be posed by its eastern enlargement, that is, the prospective membership of some or all central and eastern European transition countries in the EU. At present, an exact time schedule for the accession of these countries has not yet been fixed. However, plans are on the way and negotiations have started toward an EU membership of at least the politically and economically most advanced reform countries of central and eastern Europe within the next decade.

This paper attempts to quantify the macroeconomic consequences of an EU membership for the central and eastern European countries (CEECs) in transition within a global context. The second section outlines the economic issues to be analyzed and the scope of this present study. The MSG2 model, which is used to simulate the effects of an EU accession of central and eastern European economies, is described in the third section. The fourth section discusses the assumptions used in the simulations. The most interesting simulation results are shown in the fifth section, and the sixth section concludes.

Scope of the Analysis

The collapse of the Communist regimes in central and eastern Europe and the breakdown of the Soviet Union brought about the most significant change in the political and economic architecture of the global system since World War II. The last decade of the twentieth century was to a considerable extent characterized by endeavors of both the reform countries and the western countries to integrate the former Communist states into a global political and economic system characterized by democracy and market economy. For some reform countries, this process has been much more successful than for others. Some countries have already achieved membership with the North Atlantic Treaty Organization and are negotiating about membership with the EU.

From an economic point of view, it is of utmost importance to assess the effects of these changes in the political and economic structures of the reform countries on their economies, but also on the global economy. A comprehensive evaluation of all aspects of the transition process that have taken place so far and are expected in the near future is a task that would go far beyond the possibilities of a single study. Obviously, the biggest transformations occurred in restructuring former command economies to market economies. This implied, among other changes, an increase in productivity, which was mostly preceded by a severe transformational recession. Quantitative estimates of the effects of these processes are available mostly as country studies, differing widely, depending on the assumptions made and the methodologies used.

The aim of this paper is more modest, namely to provide an attempt to quantitatively assess the macroeconomic effects of an EU accession of the central and eastern European economies in transition. This is a politically interesting question because the EU has already started negotiations about EU membership with 5 of these countries (Czech Republic, Estonia, Hungary, Poland, and Slovenia) and has indicated intentions to start a second round with countries like the Slovak Republic, Lithuania, Latvia, Bulgaria, and Romania. …