European Union Enlargement - Challenges to the Members - Case Study Example

European Union Enlargement Name Institution Course Unit Instructor Date Introduction There are seven countries including Kosovo and Bosnia waiting approval to join the EU. These countries add up to a growing economic bloc that was previously a preserve of traditional European countries. Some parts of eastern European and Balkan countries have been traditional viewed as non-European (Vachudova, 2012). Their entrance into the EU market is bound to have far-reaching impact on the existing members, the new members and even nonmembers. However, it must be noted that it is not an issue of the EU not having an expansion agenda but rather the economic viabilities of such expansion given the policies that guide the EU and its core functions. This paper seeks to show that although the enlargement will present new challenges to the members, there will be net positive impact on the long run amongst members. Background and History The European Union is an economic and political grouping of 28 member-states in Europe that forms a common market. The market has a population of around 509 million people with a GDP of $16.69 trillion (2012) accounting for 23% of global GDP and 20% of the world's imports and exports (EU, 2013). The union has its origins in 1958 through its predecessor European Economic Community, which had six members (EU 2014). The current name was adapted in 1993 and ever since membership has increased to include newer member states such as Slovakia and other Scandinavian states (EU 2014). In 1999, the union established the Eurozone as a monetary zone and was enacted in 2002 with the currency of choice named as the Euro. Of the 28 EU members, 18 members belong to Eurozone. The European Central Bank (ECB) was established to regulate the currency as a recognized legal tender in the market (EU, 2014,). This move to establish a common currency indicates the direction in which the bloc is headed to. Furthermore, the EU has been admitting new members in an enlargement drive. This enlargement has been praised and criticized in equal measure. The first expansion move taken by the EU since the adoption of the name EU was in 1995. Austria, Finland and Sweden were accessioned to the body. Other than enlargement, the EU pursued other developments such as the introduction of the Euro as a currency in 2002 in which only 18 members joined the common currency zone, Eurozone. In 2004, the union experienced the most significant with accession of ten new member countries. These countries included Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. This move was widely debated by political and economic scholars to a die extent exploring the impacts of the union’s enlargement. Studies by the European Policies Research Centre show that previous enlargement exercises have given mixed results depending on the unique abilities of the individual countries that join the EU (Weise et al., 2001). This can also vary with the programs initiated by the EU such as new regulations or policies. The main agenda of the EU is to shift from an economic grouping to a political one. The EU has shifted from being an economic entity where economic policies dominated to one where political policies have been included. For instance, the union seeks to adapt common laws in environment, rule of law immigration among other. The second agenda of the EU is to promote socioeconomic growth of member countries through stable economic climate under a single currency. The third agenda is promotion of human rights and equality among members sates. The Treaty of Lisbon in 2009 bound members to uphold these human rights as recognized by the EU. Fourth agenda is promotion of transparent democratic institutions at both the EU and national level. The EU aspires to have its members as model countries on democratic and transparent institutions in government (EU, 2014). Benefits of enlargement to members Technology transfer From a PPP perspective, it is clear that new members to the EU, mainly from the less developed eastern and Balkan Europe, are developing faster the cost of declining economies in older member states. A study by Sevenic and Civan (2013) show that this trend in PPP has far reaching effect on the respective countries in terms of welfare of the people and the ability of the country to attract FDI which facilitate technology transfer. Ireland is one of the largest beneficiaries of technology transfer as a result of its membership to the EU. Beneficiaries of technology transfer also benefit not only through employment opportunities but also learn and copy some of the technologies used by foreign firms and are applied in local firms. The cost of living is lower in such countries hence they are able to produce goods locally and export to the developed countries and compete with the foreign firms operating in their market. GDP growth and welfare improvement From a welfare perspective, majority of the less developed economies from eastern and central Europe have been the greatest beneficiaries. A study by Xheneti (2012) and colleagues assessed the impact of EU enlargement in the informal entrepreneurial activities on the border regions between member countries. The results indicated that the people had benefited immensely in terms of increased business opportunities ranging from tourism, hospitality etc. In Bulgaria, the researchers noted some entrepreneurs benefitted from the opening of the border between Bulgaria and Greece. One respondent indicated ease of doing business across the borders and the ability to access cheaper goods from Greece and sell in Bulgaria. In contrast, entrepreneurs in the German and Greek side on the border to Bulgaria reported disappointment over the EU enlargement. The researchers noted that petty business among Germans and Greeks was fading away quickly because of competition from Bulgarians. Although some of the more developed countries in EU such as the UK have reported, declined GDP but studies suggest an improved economic environment generally. The UK governments commissioned by a study called the Review of the Balance of Competences” to understand the effect of its membership in the EU. The results are expected to be published autumn 2014. Other independent studies similar to these have revealed that despite the drop in PPP, the UK has experienced an overall net positive effect from its membership to the EU (Nicolaides, 2013). Other factors that have been measured to show the improvements in the economy include the budgetary payments and receipts, burden of regulation from the EU and consequences of making laws, removal of vestigial barriers to internal trader, healthy competition, investment and increased market. Nicolaides note that besides these benefits, member countries of the EU benefit from protection policy which enables member countries to access foreign markets, specifically those within the EU without flouting industry regulations which would otherwise apply if the two countries were not members of the EU. One way that members have managed to achieve this is through harmonization of trade laws governing members. FDI flow The move to have a common currency among Eurozone members as part of the EU common market eliminates the costs of currency conversion and fluctuation of prices owing to nominal exchange rate fluctuations. Differences in currencies have been noted as one of the most prominent hindrances to FDI and cross border trade. Economist John Stuart Mill even once observed that “So much of barbarism, however, still remains in the transactions of the most civilized nations, that almost all independent countries choose to assert their nationality by having, to their own inconvenience and that of their neighbors, a peculiar currency of their own” Angyal 109). The move to have the Euro was thus intended to address this barbarism noted by Mill and enhance trade among EU members through reduced costs. The removal of these foreign exchange challenges has increased foreign direct investment activity in Europe. According to the World Bank (2014), FDI flow in and out of the EU has increased impressively. In fact, the rate increased by 20% between 1998 and 2001 compared to the period between 1995 and 1998 (EU 2014). In terms of intra country trade, UK exports to Poland increased by over 50% since 2004. The new members have also increased their exports to the other European countries due to the larger market. Bulgaria for instance, has recorded impressive growth in exports to EU and non-EU member countries since accession. For the period starting January 2013 to September 2013, exports to EU increased by 9% from the previous year’s figure. Imports also grew by 2.5% meaning the country has also spurred growth in other countries (Eurostat, 2014). FDI flow among Eurozone members is easier than among non-Eurozone members. Bancevicˇius (20101) estimates that the common currency saves about 0.05% of total trade between a country and a non-Eurozone member. However, the cost of forex to international business ranges from 0.06% to 0.1% of the GDP (ibid). Majority of this growth is attributed to intra-EU investments, removal of pricing challenges using different currencies across international borders, ease in meeting in house cost calculations and financial reporting requirements, and exchange rate volatility (Sousa and Lochard 569; Beetsma and Giulodori 606). However, the authors note that a model developed by Head and Ries (2008) shows that firms consider more about the possibilities of mergers and acquisitions in foreign countries as opposed to other factors such as currency. Data from the field also indicates that the Eurozone countries invest more in non-Eurozone countries than in Eurozone countries (EU 2014). The optimum currency area theory predicts that regional markets that adopt a common currency register increased economic activity. This theory predicts adaption of a common market, specifically in the Eurozone contributes to 0.08-0.012% growth in the GDP (Bancevicˇius, 2010). This theory is based on the assumption that the adoption of a common market allows easier flow of factors of production. Beetsma and Giulodori (2010) note capital mobility in form of FDI in the EU has increased. However, in the case of the EU, Bancevicˇius reports that the flow of labor as a key factor in production has not achieved full mobility in the region as a result of strict immigration laws. Lack of harmonization of such laws which Christiansen and Neuhold (1198) term as ‘informal relations’ result in varied on outcomes for individual members. The other benefit is better discipline in economic policies to address inflation. This is based on the fact that the European Central Bank (ECB) harmonizes monetary policies of individual members to control inflation. Consequently, the Eurozone records comparatively lower inflation rates compared to the larger EU as recorded in the last five years (Global finance 2012). A harmonized monetary policy benefits all given that individual countries which seek to position their currencies in a way that benefits them but likely to hurt other members of the union or its trading partners (Bancevicˇius, 467). Detriments Declining GDP Several member countries of the EU have made news headlines of the wrong reasons in the recent past. During the 2008/2010 global recessions, Greece and Spain were the most affected by the recession that they had to extensively borrow from the EU. About 400 billion euros was given out as rescue packages over a four-year period (Joy 2013). Some scholars attributed this instability and falling economic productivity in some countries to membership to the EU. Consequently, some countries have been forced to reconsider their membership to the EU. Iceland for instance had applied for accession but later on rescinded on this move after a new government came into power (Iceland walks out, 2014). The UK is also planning to carry out a referendum for the public to decide whether to continue being part of the EU or withdraw its membership (Joy, 2013). This is very strange given that UK is one of the core members. To answer such questions, there is need to look at the history of economic performance of EU member countries over different levels of membership. A comparison of the purchasing power parity of individual members and the union on average shows it has minimally changed for some countries while for others it has significantly improved. Germanys PPP improved from 116 to 123 in 2012. However, it is interesting to note that Germany’s PPP stagnated between 2001 and 2009 and only recorded significant growth after 2009 (Eurostat). Interestingly, this stagnation happened just after the introduction of the Euro as a common currency among Eurozone members. These members were Belgium, Germany, Greece, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland who were later joined by Greece in 2001. This shows that the common currency was not favorable to Germany in the short term. This situation was not unique to Germany, other EU members who adopted the Euro including recorded dismal PPP performance. Netherlands PPP dropped from a high of 134 in 2001 to 129 by 2004 before picking up to hit 134 in 2008 before slipping further down to 128 as of 2008. The largest enlargement which took place in 2004 had mixed results. During this enlargement, Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovakia and Slovenia were accessioned. This enlargement had a very negative effect on UK’ economy as indicated by the drop in PPP from 124 in 2004 to 106 in 2012. Spain’s PPP also dropped from 101 in 2004 to 96 as of 2012. Greece dropped from 94PPP as of 2004 to just 75 as of 2012. Some experts have attributed this economic decline in these economies to other factors than the entry of new members into the common market. -extra costs for financing E programs The EU started out as economic bloc but has increased its functions to incorporate political and military relationships. This has increased the mandate of the EU and the number of programs that it oversees. One of the most conspicuous programs is the competition law where global brands have fought for supremacy in this market. The EU is tasked with promoting local firms as well as promoting the welfare of the more than 500 million people by giving them access to the global market and global products and services. Furthermore, the EU has initiated a program that calls for a common approach to human rights and media freedom protection. Another key program the bloc has implemented pertains to global warming and climate change policies. All these activities have increased the budget for the EU and consequently increased the financial burden to members states. This happens despite that individual members have their own parallel programs Immigration pressures EU enlargement has increased immigration problems for some members countries. Increased mobility of labor as a production factors especially from new members into the more established members of the EU have led to oversupply in the developed markets. For instance, UK citizens have expressed their opposition to the EU as a result of influx of immigrants who provide competition to the few job opportunities in the country. Another issue that has been raised by increased immigration is dilution of cultures. Some citizens in specific countries have expressed fear over loss of identity following as members of certain nationalities. Michal (2012) says that enlargement of the EU to some extent has informalized this institution by accession nontraditional European countries. Eastern Europe member countries may suffer from depopulation as a result of EU enlargement. Western and Northern Europe is viewed as the economic hub of the EU. The promises provided by these countries can result in youthful workforce immigrating into the more developed countries in search of greener pastures and better lifestyle. This means that countries such as Bulgaria and Slovakia will lose their young and energetic workforce to countries such as the UK and Germany, which will negatively affect the productivity of these countries. Conclusion Enlargement of the EU increases the mandate of the EU secretariat. It also increases the size of the market for investors and marketers and dilutes the importance of membership. Nonetheless, the benefits of membership are evident especially among the new members. However, the public in some countries such as Iceland and the UK has shown disapproval of membership to the EU. Countries in the Eurozone will benefit in the medium term. However, extensive enlargement pf the common market will dilute the privileges of operating under the common market as it will have achieved the almost the same level as the WTO. Nonetheless, recent enlargements in the union has benefited members more so the less developed members who joined recently than the traditional European powerhouses. It can thus be concluded that enlargement follows the marginal utility principle which implies that further enlargement will not achieve much benefits as earlier enlargements have done. It is thus advisable to halt further enlargement despite the perceived benefits of expansion. References Angyal, Z. (2009). Monetary sovereignty and the European economic and monetary union. European Integration Studies, 7(1); 109-119. Bancevicˇius, R. (2010). 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