EU enlargement: a process rather than a point in time

The new EU member states have educational standards that are in line with those in the EU-15, but still need to close the gap on governance, explains Daniel Gros, director of the Centre for European Policy Studies in Brussels

  • 21 May 2007
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Dates play an important role in political life. May 1, 2004 and January 1, 2007 were thus marked by numerous political events, speeches and festivities. However, “all” that happened on these two dates was that the EU’s “acquis communautaire” became the law in the new member states which joined then (10 in 2004 and 2 in 2007). In order to make this happen a decade of intense preparations on both sides was necessary. Moreover, this enlargement is so far “incomplete”.

The new member states do not yet participate in three key elements of integration, namely labour mobility, the Schengen area and the euro. But on all three counts progress is quietly being made:
• Integration of labour markets: the number of old member countries retaining restrictions on the access of workers from the new member states to their national labour markets is slowly diminishing and these restrictions are anyway set to disappear at the latest in 2011.
• Schengen: The new member countries are making good progress in ensuring control over their borders so that it is likely that next year ten of them will be able to join the passport-free area.
• Common currency: More and more of the new member countries are also close to satisfying the Maastricht conditions, thus qualifying for membership of the euro area, whose membership might increase from 13 to over 20.

But all this takes time. It might thus take almost another decade before the last enlargement will be “completed”. Enlargement should thus be viewed as a process of integration, not a single event taking place on one day.

Is there any reason to believe the EU cannot manage this continuing integration process? The main reason why there is a wide perception that this enlargement is particularly difficult to digest is that with the 2004/2007 enlargement, diversity among member countries increased considerably. However, from an economic point of view an increase in diversity is good news since it should mean more opportunities for, and thus higher gains from, trade. The reason why there are political problems is that more diversity also implies that there will be more winners and more losers (and in general higher adjustment costs). This is not a new experience for the EU. Already 20 years ago, when Spain and Portugal (which were then relatively poor) joined the EU, a well known economist (Paul Krugman) predicted that it would be much more difficult for the EU to adjust to their membership than to the previous enlargements. This prediction, shared by many at the time, turned out to be wrong. The massive movements of labour towards the richer member countries did not materialise as the Iberian economies started to grow quickly, diminishing the income gap.

Theory and experience so far suggests that the new, poorer, member states should do well, but the increase in diversity might be more difficult to manage by those of the old that have less flexible economies. The increase in diversity might thus also lead to tensions.

But what kind of increases in diversity have there been? A closer look at three key variables shows that the picture is much more nuanced than the usual old/new dialectic presupposes:
• GDP per capita: a clearer divide between old and new members.
• Human capital: little or no difference between old and new, no increase in diversity.
• Quality of (national) institutions: more diversity, but more graduated.

The following table documents all three facets with some numbers.

GDP per capita
(thousand $s)
Upper secondary
Measure of government
efficiency (World Bank
EU-1533.1  75.962.6 1.64
EU-2823.3 78.6 57.2 1.12
Source: Eurostat and World Bank. EU-28 consists of the EU-27 plus Croatia.

It is apparent that, at least upon entry, the enlarged EU has a much lower income level (only about two-thirds of the EU-15). There is a clear East-West divide in this sense.

However, in terms of human capital levels the picture is completely different. In this area there is very little difference between the EU-15 and the new members. The second column in Table 1 shows that on one indicator, (the share of the population aged 18-24 with complete secondary education or in training) the average for the enlarged EU is actually better (at close to 80%) than that for the EU-15 (77%). In terms of enrolment rates in tertiary education, the EU-15 is ahead, but only just.

The similarity of (at least formal) education levels implies that one can consider labour as homogenous in the old and new member countries. The main difference between the old and the new is the difference in the capital-labour ratio. This then implies that convergence would require essentially a huge transfer of physical capital (plus technology) to the new members. This is already happening on a large scale, but it requires time. In the meantime, large differences in wages remain, but, with the exception of Poland (and to a lesser degree the Baltic states), the populations of the new member states seem to prefer to stay at home. This applies in particular to the young, who benefit more than the elderly from the transformation of their economies under the impact of massive flows of FDI from the old member countries.

Another aspect of diversity that has so far not received enough attention stems from the large differences in the quality of national governance. This might lead to a reappraisal of the basic model of management of the EU. Europe can function with a very small supranational bureaucracy because the EU level sets only general rules, leaving implementation to the national level with minimal supervision. Enforcement is left to the initiative of the private sector via the Court system (first recourse to national courts, under the supervision of the European Court of Justice). This model will come under increasing strain as the private sector encounters public administrations of very uneven quality and inclination to implement not only the letter, but also the spirit of the Acquis Communautaire.

The EU-27 cannot thus be divided neatly into two classes, with the old clearly stronger on all counts. The old might be richer, but in terms of human capital, which indicates their strength to withstand the challenges of globalisation, the new member states are at least at the same level and in terms of the quality of their public administration, even some of the old member states have serious problems. But still the EU-27 contains more diversity than the old EU-15.

There is one force that will tend to counteract the centrifugal tendencies that might result from a more diverse membership. This is the increased integration among member states through intra-area trade and investment. Economic integration already provides a very strong glue to keep member states together. Moreover, it is likely that this glue will actually become stronger over time. Over the last five years, the weight of intra-EU exports (of goods and services) in GDP has increased by 4 percentage points, from 36% to close to 40% of GDP, on average across all 27 member countries. If this trend continues, the average should be close to 50% of GDP within the next decade, thus forcing most member countries to behave like open economies. This applies in particular to most of the new member countries which are rather small and very open economies. They will be interested in keeping the internal market as open as possible. In this sense, enlargement should strengthen integration, not weaken it.

As the economies of the continental old member countries finally start to accelerate, the sense of paralysis created by the 2005 “no” votes in France and the Netherlands on the draft constitutional treaty is slowly receding. It is likely that some modest reform of the institutions will be agreed soon, thus paving the way for the EU to concentrate on the mundane task of completing the process of integration which started with the formal accession of new members in 2004 and 2007. This process will not be completed until well into the next decade, but experience so far suggests that it will be successful.

The challenge of further enlargement, which looks so difficult and divisive today, might then present itself again, in very different terms. The EU of the next decade should be much more confident in its ability to take on new applicants, such as Turkey or Ukraine, because it will have probably by then successfully integrated the class of 2004/2007, creating a continent-wide area inside which people can move at will, sharing not only an integrated market, but also a common currency. When experience will have shown that diversity means more opportunities for the people of Europe, the organization might welcome another wave of newcomers.

  • 21 May 2007

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
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1 JPMorgan 268,483.43 1096 8.71%
2 Citi 246,887.13 889 8.01%
3 Barclays 232,454.96 721 7.54%
4 Bank of America Merrill Lynch 219,007.69 764 7.10%
5 HSBC 187,245.69 759 6.07%

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1 BNP Paribas 25,880.49 114 6.73%
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3 JPMorgan 24,287.96 45 6.32%
4 HSBC 20,765.28 102 5.40%
5 ING 17,698.87 110 4.60%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 12,228.29 67 10.51%
2 Goldman Sachs 10,054.63 54 8.64%
3 Morgan Stanley 7,741.62 42 6.65%
4 Bank of America Merrill Lynch 7,346.61 35 6.31%
5 Citi 7,299.47 39 6.27%