European Union

The forgotten economics of EU enlargement

Beyond geopolitical arguments for EU enlargement lurks a question seldom asked: is there an economic case for enlargement and for whom?

Beyond geopolitical arguments for EU enlargement lurks a question seldom asked: is there an economic case for enlargement and for whom? Image: Getty Images

Mirek Dušek
Managing Director, World Economic Forum
Andrew Caruana Galizia
Deputy Head of Europe and Eurasia, World Economic Forum
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European Union

This article is part of: World Economic Forum Annual Meeting
  • Beyond geopolitical arguments for EU enlargement lurks a question seldom asked: is there an economic case for enlargement and for whom?
  • For candidate countries there is an unequivocal economic case to be made to join the EU.
  • To flesh out the business case for enlargement, we need an analysis now of how enlargement fits into the EU’s trade and growth strategy.

Two decades since the European Union’s “big bang” enlargement in 2004, the bloc's long-stalled ambition to accept new members has experienced a striking revival. Yet beyond the moral and geopolitical arguments for the EU to embrace its eastern neighbours lurks a question that is seldom asked: is there an economic case for enlargement and if so, for whom?

For candidate countries there is an unequivocal economic case to be made to join the EU. Trade linkages are reinforced, there is improved monetary stability, increased capital inflows, deeper capital markets and lower risk premiums on borrowing. Studies also show that, on aggregate, market integration leads to a permanent increase in the stock market indices of new members.

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EU enlargement: history lessons

While there are no forecasts of what the economic impact of the next round of enlargement will be, we can learn from the past. Trade between old and new member states grew almost threefold during the formal pre-accession process from 1994 to 2004, and fivefold among the new members themselves. The CEE countries grew on average by 4% annually from the start of the accession process to 2008, and the accession process itself is found to have contributed half of this growth, generating 3 million new jobs between 2002 and 2008.

Pre-accession, there were fears that enlargement would lead to an unmanageable inflow of migrant workers from new to old member states, as income levels in the CEE-8 countries were on average 40% lower than in the EU. In the end, the cumulative impact of migration on the working age population in old member states was subdued, at 0.37% between 2004 and 2007. The impact was higher for early openers (Ireland, for example saw an annual increase of 1.25% in its working age population over the same period). On the negative side, new members recorded significant brain drain, which in turn contributed to deepening regional disparities within the EU.

The per-capita income levels in CEE countries have closed in on EU levels but are still roughly 20% lower on average, which means most 2004 accession countries remain net recipients of EU funds – something that would have to change with the entry of the current slate of candidate countries.

While the new member states with the highest income levels in 2004 remain the wealthiest within their cohort today, these also correspond to the economies where democracy is most sound, the perception of corruption comparatively low, and the Gini coefficient below the other accession countries. And the reverse tends to be true: the countries that still report incomes below the regional average also correspond to countries where the level of corruption is higher, press freedom lower and measures of democracy weaker.

Sizing up Ukraine

Returning to the present, a handful of data points illustrates powerfully how much positive impact Ukraine – the largest and most populous of the current tranche of accession countries – could have on the EU economy, but also how little we know about how the economic gains of enlargement will be distributed.

The data for educational attainment for both secondary and tertiary education levels show Ukraine to enjoy higher levels than the current EU-wide average and far higher than the eight CEE countries before their accession in 2004. This is important, because while these countries were hailed as the answer to European companies’ demand for cheap and educated labour in the 90s and early 00s, it is crucial to ask how the available skills in the accession countries would fit the structural demands of the EU’s labour market today.

When it comes to natural resources, Ukraine holds the largest gas reserves in Europe after Norway, which remain largely untapped. If fully exploited, Ukraine could contribute significantly to Europe’s energy security and the phasing out of oil and coal in electricity production and industry.

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Ukraine also has over 42.5 million hectares in agricultural land and the country relies heavily on its agriculture as a major source of export revenues. Ukraine produces an average of 27 million tonnes of wheat a year, equivalent to about 20% of EU production. Ukraine produces 34 million tonnes a year of corn compared to the EU’s 52 million, and Ukrainian sunflower seed production is almost twice as much as the EU’s. This means that while European farmers might have to step up productivity, EU households would benefit significantly.

Clearly, to flush out the business case for EU enlargement for both new and old member states we need a serious analysis of how it fits into the EU’s trade and growth strategy – and this analysis is needed before public opinion hardens. While today’s case for enlargement, just as yesterday’s, is driven by factors that transcend material considerations, transparency about its economic impact would help us understand how to get the key stakeholders on board – both businesses and households.

At the same time, enlargement cannot distract us from the structural reforms needed to ensure a well-functioning Union. European values such as strong governance, media freedom, and transparent and democratic institutions have been determining factors in the success of some candidate countries and the reason others have languished in the waiting room or stagnated economically once inside the club.

This article was published as part of the World Economic Forum Annual Meeting 2024 discussions and was also published here.

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Related topics:
European UnionGeopoliticsDavos AgendaGeo-economics
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