Benefits and Dangers of EU Enlargement

Abstract

A new macroeconomic evaluation of EU enlargement is undertaken with a world macroeconomic model taking into account all possible integration effects: trade effects, Single Market effects, factor movements (FDI, migration) and the costs of enlargement. Due to the differences in size of the regions involved, on average the CEEC - measured in terms of real GDP - will gain around ten times more from enlargement than the EU. Hungary and Poland can increase their real GDP by around 8 to 9 percent over a ten year period, the Czech Republic gains a little bit less (5 to 6 percent). The EU on average would gain around 1/2 percent of real GDP over a six year period. Although, on average enlargement is a win-win game, the impact is quite different in the separate EU member states, with Austria, Germany and Italy gaining the most and losses for Spain, Portugal and Denmark. Hence, EU enlargement may not only be beneficial but might be a risky undertaking. Due to the regional different impact, enlargement acts like an exogenous shock leading to asymmetric disturbances in the EU. This could pause the process of business cycle synchronisation and might impair monetary policy in Euroland at the beginning of the enlargement process. A two-step integration of the CEEC into the EU - first the participation in the Single Market and only later into the EMU - is therefore preferable under the aspect of macroeconomic stability in Euroland.

Keywords: EU enlargement, European integration, model simulations, EMU

JEL Classification: F020, F150, C530