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Economic conditions

EU Enlargement: A New Era of Opportunity and Challenge

Strategic Insights

— 2 min read

The European Union's eastward enlargement comes into effect on May 1, welcoming 10 new countries with 75 million people into the union. This brings with it a wave of economic change, increased growth, and new challenges for both the new member states and the existing EU. The eight accession countries that emerged from communism in 1989 have achieved significant economic progress, with GDP growth rates exceeding 3.5 percent last year and forecast to increase by over 4 percent in 2004.

Key Takeaways:

  • The EU enlargement is expected to increase the union's GDP by 5 percent, but its impact on the union's economic life will be much greater due to the rapid growth of the accession states.
  • Incomes per head in the accession states are half those of the current EU, but for entrepreneurs, this indicates significant market potential.
  • Labour productivity in the accession states is one-third of EU levels, but hourly wage costs are about one-fifth of the EU average, creating opportunities for investors in low-cost labour.
  • The accession states offer a large pool of reasonably well-educated low-cost labour, promoting other improvements in the business environment in the EU-15, such as tax policies.
  • Existing investors will invest in expansions and modernisations, and the flow of capital from second- and third-tier component makers and service providers will grow.
  • Multinational companies will increase the outsourcing of services to eastern Europe, and investment in farming could increase once the uncertainty surrounding the Common Agricultural Policy's effects on eastern Europe lifts.
  • EU aid to the accession states will increase by threefold to about €14 billion annually in 2004-6, mainly in agricultural subsidies and regional development.
  • The accession states face important challenges, including bloated welfare budgets, public debt, and widespread corruption.

Statistics:

  • GDP growth rates in the accession states : 3.5% (2003) to 4% (2004)
  • Incomes per head in the accession states: half of the current EU
  • Labour productivity in the accession states: one-third of EU levels
  • Hourly wage costs in the accession states: about one-fifth of the EU average
  • Foreign direct investment in the accession states: over $20 billion (2002), dipping to under $8 billion (2003), but forecast to recover to over $15 billion and then maintain that level for some time

Sources:

  • The European Commissioner, Gunter Verheugen
  • The European Bank for Reconstruction and Development, Eastern Europe's multilateral bank
  • McKinsey, the management consultancy
  • Andreas Treichl, Chairman of Austria's Erste Bank
  • Ivan Miklos, Slovak Deputy Prime Minister
  • Andrzej Lepper, Head of the Polish Self-Defence grouping
  • Various unnamed sources within the EU and accession states.

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