East versus West? The EU economy after enlargement By Katinka Barysch INTRODUCTION The EU’s enlargement to the East has been an economic success. Trade between the old and the new members is thriving. Foreign investment by West European companies has helped to create hundreds of thousands of jobs in Central and Eastern Europe, and it has generated multi-billion euro profits for the investing companies. Workers from Poland, Hungary and elsewhere have plugged skills gaps in those EU countries that have opened their labour markets. Money from the EU budget is flowing into the East’s poorest areas. Even East Euro p e a n f a rmers – previously the region’s most ardent eurosceptics – are much happier now that they can sell their goods to the whole EU, and have at least some access to EU farm subsidies. Politically, however, the EU has not digested the accession of the ten new members. Voters and some politicians in Germany, Austria and elsewhere believe that enlargement has damaged their economies. Many people in the ‘old’ EU think that competition in the enlarged single market has somehow become ‘unfair’. In March 2005, thousands marched in the streets of Brussels to protest against the erosion of the ‘European social model’ after e n l a rgement. In France, opposition to enlargement was one of the reasons why so many people voted against the EU’s constitutional tre a t y. Only a minority of people now support further enlargement – not only in France, but also in Austria, Denmark, Finland, Germ a n y, the Netherlands and the UK. Much of the resentment that has been building up in the old EU is fuelled by false perceptions about cheap Polish plumbers and Latvian builders ‘stealing’ West European jobs by undercutting local wages and d i s re g a rding social standards. Workers in slow-growing Germany and Italy may be jealous of the new members’ apparent economic success. Many think that this success has been achieved by luring investment and jobs e a s t w a rds with the help of ‘unfair’ tax competition and ‘social dumping’. Some West 1 Marjorie Jouen and Catherine Europeans worry that enlargement has forced the EU into a ‘race to the bottom’ in Papant, ‘Social Europe in the wages, taxes and social standards. The East Europeans, it is said, are “unfamiliar throes of enlargement’, Notre with the solidarity of the European social model”.1 Most people in Germ a n y, France Europe policy papers, No 15, and Italy would place the new members firmly in the ‘Anglo-Saxon’ camp of liberal July 2005. capitalist economies – an impression that has been re i n f o rced by Eastern Europe’s close political ties with the UK and the US. The reality, however, is very different. There is no doubt that eastward enlargement is changing the European economy. But much of the impact has already taken place since economic integration has been going on for well over a decade. Undoubtedly, further changes will be required on both sides as single market integration deepens. And some eurozone countries would be well-advised to increase the flexibility of their labour markets before the East Europeans gain the right to apply for jobs across the whole EU in 2011 (and perhaps earlier in some countries). But the widespread perception that the new members are ultra-liberal, low-tax economies that are damaging Western Europe’s social systems is wrong. There are big diff e rences between the individual East Euro p e a n countries. But generally, their levels of taxation and budget spending are only marginally lower than in most West European countries. They tend to have generous social security systems that are under severe strain fro m
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