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European Enlargement - advantages for accession countries Introduction It should be remembered that the degree of integration between accession countries and existing EU(15) countries has increased substantially over the last decade. In this sense, many of the static and dynamic effects of increased trade and competition between the 25 nations have already occurred – the actual step of joining the EU is probably not as significant for the EU economy as a whole (at least in the short term). Trade integration between accession and EU (15) countries has been growing at double-digit rates for over ten years. The accession countries add only 5% total EU GDP – equivalent to adding to the EU a country of the size of the Netherlands Accession countries see membership of the EU as opening up significant economic benefits (1) Membership of the Single Market Benefits arising from free trade within the Single Market - Opportunity to exploit their comparative advantage in many industries and increase exports to “richer nations” as a source of further economic development - Enlargement will eventually create a Single Market of over 500m consumers (2) Free movement of capital – opportunities from foreign direct investment (FDI) - Potential for large inflows of foreign direct investment into accession countries (previous EU enlargement has seen a boost to FDI flows) - Most accession countries have significantly lower unit labour costs and very low land costs which will be a spur to inward investment - Technology transfers and investment in training and skills from FDI flows will have a positive effect on productive capacity / long run aggregate supply - Western investment will boost productivity and thereby improve unit labour costs / competitiveness A virtuous circle of investment? Higher output, productivity and employment Increases incomes, spending and saving Raises profits and spurs further investment (3) Competitive pressures of being within the Single Market Increasing competition should act to boost to productivity – under-performing businesses not meeting consumer needs and wants will lose market share Dynamic efficiency gains e.g. arising from higher investment and a higher rate of innovation (4) Most accession countries stand to be net recipients of income from EU programmes - Common Agricultural Policy - Social Cohesion and Regional Funds - However …. The receipt of EU funds is not the main reason why these countries want to join the EU! (5) Potential macroeconomic advantage a. Reduced exchange rate volatility if accession countries join the ERM – many countries are keen to join the Euro to reduce exchange rate risk and benefit from lower interest rates. Financial markets expect the new members to join, although not before 2007 b. Monetary policy coordination with the European Central Bank - Lower inflation will help bring down long term interest rates (this is good for investment) The main aims of joining the EU for the accession countries are to a. Increase economic integration with Western Europe b. Provide a catalyst to long term economic growth c. Raise relative living standards closer to the EU average |