Twenty-one-year-old Polish waitress Olga Kozinska is pretty clear on her opinions about the European Union. “I am pro,” she says, without hesitation, as she pours out a cappuccino in the Warsaw cafe where she works. “For me, I don’t see any disadvantages,” she adds.
In May 2004 eight eastern and central European countries and two Mediterranean islands joined the EU, bolstering its population by 20% and adding 5% to GDP. Now a new wave of countries, with Romania and Bulgaria heading the queue, are desperate to get hold of the same treatment, despite a distinctly less hospitable atmosphere from Europe’s biggest players.
Membership of the 25-country union has brought investment, jobs and lower interest rates to the 10 acceding nations. Even though the politicians don’t
always seem to appreciate it, the people clearly do.
new opportunities
Opposition to Europe in all of the new members is below the 15% average for the bloc as a whole. Meanwhile, support for membership, which ebbed around the time of accession on fears that more competitive imports would wipe out domestic businesses, has recovered. In other words, while French and Dutch voters were rejecting the EU constitution, Slovaks and Poles were watching earnings rise and taking out low-cost loans.
“It is a sort of seal of approval. In some ways we take those benefits for granted in western Europe, and in the east they are more aware of the opportunities,” says professor Alan Smith, who teaches eastern European political economics at University College London.
As well as the 2-3% of GDP transferred from old Europe in the form of so-called structural funds, foreign investors have also piled in, modernizing obsolete soviet-era industries and creating bases for mid-tech exports, such as cars and more advanced products like semiconductors. Besides finding more jobs in their own countries, eastern Europeans have also been able to move abroad – although only the UK, Ireland and Sweden immediately gave complete access to migrants from the new members.
Initial concerns about a loss of qualified workers in the east now appear unfounded. The short-term brain drain is likely to transform into long-term gain, as most studies show the majority of migrants are likely to return to their homelands after spending a couple of years acquiring skills and capital in other countries.
More than 400,000 Poles found work abroad in the first year after becoming EU citizens, according to the country’s authorities, most of them taking seasonal work in Germany. Nevertheless, infringements on the freedom to move granted by other EU states have been a major gripe for Poland, Hungary and their acceding neighbours.
Even two years on, Germany, Austria, Denmark, Spain, Belgium and Luxembourg have promised to continue restrictions on eastern workers, despite opposition from Brussels and other national capitals. The European Commission, responsible for implementing EU policies, does its best to play down the tensions. Predicted “doomsday scenarios” have not materialized, enlargement chief Olli Rehn declared in a recent press release.
The commission also denies that farmers in the new member countries have suffered as a result of political decisions. The agricultural labour force in the 10 nations tumbled by 22% between 1999 and 2005 as farms consolidated. And while the chill winds of restructuring were felt early, it will take time for the EU’s legendary handouts to filter through. Agricultural subsidies are being phased in and won’t match payments to EU-15 countries until 2013. By that time, if the UK government gets its way, there will be a much smaller pot to share in.
“They are not full beneficiaries of the Common Agricultural Policy, so they are still facing really subsidized competition in areas where they could have a competitive advantage,” says UCL’s Smith. Still, farmers are a notoriously vocal constituency, and the fact that the streets of Warsaw, Budapest and Prague have been relatively free from tractors and manure trailers suggests they are not too unhappy.
economic success
On the macroeconomic front, the news since enlargement has been generally good. Growth rates are comfortably above those of EU-15 competitors, and employment, which fell for eight straight years prior to 2004, picked up again following accession. Eight years ago the 10 countries had an average inflation rate of 9.1%, now it is a mere 3.1%. A spike in prices as EU rules forced broader application of value added tax and bolstered food costs has proved to be a one off.
“Enlargement seems to have gone well for all sides. I don’t think there is any argument to be made against it,” notes Lloyds TSB chief economist Trevor Williams.
Most of the new members do have significant trade deficits – “as is typical for converging economies”, according to an EU report – but the numbers are going in the right direction. The average deficit is around E5 billion, against a slight surplus for the EU-15. Trade as a whole has risen, with a growing proportion, about two-thirds of exports, heading into the EU.
“When you look at central Europe you see an increase in exports across the board, so all of them are benefiting,” says Agata Urbanska, an analyst at ING.
A big driver of that growth has been foreign direct investment, with Volkswagen, Siemens and other German companies conspicuous in moving factories east. The total stock of FDI, negligible a decade ago, reached k191 billion in 2004, 40% of the EU-10 economy. The danger for the countries which have seen the biggest benefits – Poland, the Czech Republic and Hungary take the lion’s share – is that investors who have moved once to take advantage of cheaper labour may do so again as the EU expands its borders. While wages in the new member countries may be half those of their western counterparts, costs in Romania and Bulgaria are a third lower again. “Out of new investment Bulgaria and Romania will be attracting a bit more” when they join the EU, Urbanska predicts.
pushed aside
In some respects, the sheer success of the project to encourage cross-border investment has served as ammunition for euro-sceptics eager to defend domestic industries. Foreign businesses have swept eastwards, gobbling up local rivals. EU citizens in eastern Europe go shopping at Tesco and Carrefour, call their friends over Vodafone and France Telecom networks, and bank with RZB or ING.
The dominance of foreign businesses in the financial sector is, perhaps, the most marked, accounting for more than 50% of the banking market in Hungary, Poland, the Czech Republic, Slovakia, Lithuania and Estonia. Sparked by the threat of Polish job losses as a result of a merger between Italy’s UniCredito and Germany’s HVB, the country’s parliament initiated an investigation into how domestic players have been pushed aside.
“It is a sort of schizophrenia,” says Krzysztof Bobinski, an analyst at the pro-European Unia & Polska foundation. “They are afraid that Polish sovereignty is being infringed, but at the same time they are very happy that they have got those EU funds coming in,” he adds.
Poland’s euro-sceptic government seems to be an isolated case among the new member states. “Overwhelmingly across the region you don’t get much of what is happening in Poland,” says Gergana Noutcheva, a researcher with the Brussels-based Centre for European Policy Studies.
the wary old guard
It is a much more common phenomenon among the more established EU countries. The issue of enlargement is at the heart of the debate, with many on both sides of the political spectrum arguing that widening of the EU’s coverage has not produced the win-win situation that was promised in the lead up.
“The new EU members are the big winners, jobs are going from west to east,” notes Andrew Clare, professor of finance at London’s Cass Business School. “I see a downside risk for France and a definite downside for Italy.”
While economies such as the UK and Ireland have benefited from an inflow of low-cost workers because of their flexible labour rules, France and Italy haven’t been able to adapt so easily. Persistently high levels of unemployment were one of the key catalysts for the rejection of a proposed EU constitution in France and the Netherlands, and governments have tightened their line on future EU enlargement significantly as a result.
Another proposed expansion, that of the euro area, threatens further complications. Slovenia is likely to become the 13th country to join the monetary union next year, with Lithuania hoping to follow suite. The addition of extra nations, whose economies are still structurally very different from their western counterparts, could make the job of the European Central Bank (ECB) more difficult.
“Inevitably, adding new countries will complicate the issue of monetary policy,” comments Ian Stewart, chief European economist at Merrill Lynch. Stewart says he is “sympathetic” to the difficulties the ECB has already, trying to manage 12 countries. He notes that slower growth in some countries may have been the price paid for currency integration.
The European integration project is by no means complete, but the process so far seems to have been overwhelmingly positive for the 75 million citizens who earned EU status two years ago. They now view the EU framework as more modern, democratic and efficient than do their counterparts in the EU-15. The other side of the coin is that even a concerted PR effort has not been able to win over doubters in “old Europe”.
The European Commission proclaimed in a press release to celebrate the second anniversary that “All win as new member states get richer”. The last part of the statement can claim a reasonable amount of credence; the first is more susceptible to questioning.