Monday, March 15, 2004
Europe's growing pains
Posted by David Smith at 03:27 PM
Category: David Smith' s magazine articles

On May 1, as everybody knows, the European Union will undertake its biggest ever enlargement – in terms of the number of new members – in its near 50-year history.

The 10 joiners – Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia – will for the most part be completing a journey that began only 15 years ago under the yoke of Soviet rule and Communist central planning.

While large in terms of numbers, and to a lesser extent population – the addition of around 75 million people is equivalent to adding almost another Germany, or 20%, to the EU’s citizenry – the initial economic impact is rather smaller than might be expected. Because these economies lag well behind the existing EU members in terms of per capita incomes, with crude comparisons showing some to be only a fifth as well off as their wealthier neighbours, it will be some time before they punch their full economic weight. Thus, a 20% increase in EU population, courtesy of the new members, will result in only a 5% boost to EU gross domestic product.

Even so, adding these new members to the existing 15 is proving to more complicated than anticipated. If the new boys thought they were going to be welcomed with open arms, they were in for a rude awakening.

The first problem area has been the status of the EU’s 75 million new citizens. High employment economies such as Germany and France, alarmed by the prospect that workers from the accession countries would be drawn into them by the lure of gold, took steps to impose transitional arrangements. People from the new member countries will be entitled to work anywhere in the EU, but not for a while.

This left Britain in a minority of countries offering an open door policy. That has now changed. The door is still open, it seems, for genuine workers with job offers but not for those seeking to come purely to claim benefit. The government is torn between the Treasury’s diagnosis that Britain needs and will benefit from skilled migrants, and the political fear that this will be seen as too liberal for the likes of voters, Squaring the two looks fiendishly complicated.

The second problem area has arisen over the running of the EU itself. On the one hand it was perfectly sensible to use the opportunity of enlargement to streamline the running of the EU by cutting down on the number of commissioners and making decision-making by the council of ministers easier.

On the other, it was hardly the most intelligent move to hand over the project to Valery Giscard D’Estaing, the former French president, to draw up a grant EU constitution that some members were bound to find objectionable. Nor was it sensible to try to take away voting rights from Poland and Spain that had already been agreed. Thus, talks over the proposed new EU constitution in Brussels last December collapsed in abject failure, and probably will not be revived for two years, well after the enlargement has taken place.

Clumsiness also appears to be the order to the day when it comes to the EU budget. One of the big stories of recent months has been the effective collapse of the euro stability and growth pact, under which members of the single currency were required to keep their budget deficits below 3% of gross domestic product or face hefty fines.

Late last year, when it became clear that France and Germany were heading for such fines under the rules, both countries pressured other European finance ministers into suspending sanctions under the pact, in other words extracting its teeth. The European Commission has thus embarked on legal action against the finance ministers. One bit of the EU is suing another.

That is bad enough, but to add insult to injury Romano Prodi, the Commission president, also wants existing member countries to dig into their pockets to fund an increase in the EU’s central budget because, as he has put it, “we are on the eve of the biggest enlargement in the EU’s history”. The budget is currently 1% of GDP, or gross national income to use the definition preferred by Brussels.

The aim is to increase it to nearly 1.25% for the 2007-13 period. This may not sound like very much but it is equivalent to adding 30 billion a year to the existing budget of just under 70 billion.

The proposal, unsurprisingly, has gone down like a lead balloon. Hans Eichel, Germany’s finance minister, has said: “You cant say on one hand, you in Germany you have to save money and cut down expenditures, and demand at the same time: you have to pay more money to Brussels.”

Gordon Brown has also made clear his outright opposition, not just to any increase in the EU budget, but to any suggestion that the budget rebate famously secured by Margaret Thatcher should be revisited. Opposition to the budget increase is led by Germany, Britain, France, Austria, Sweden and the Netherlands.

It all looks like a bit of a mess. Few doubt the economic benefits that EU enlargement will bring. Accommodating the new arrivals, however, is proving to be far from easy. The spirit of EU co-operation looks under strain.

From British Industry (formerly Industry), March 2004