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ELSEVIER European Economic Review 39 (1995) 474-481

The Eastern enlargement of the European UnionRichard E. Baldwin *

Graduate Institute of International Studies, Uniaersity of Geneva, I IA, avenue de la Paix,1202 Genera. Switzerland

AbstractThis paper examines the prospects and problems of Eastern enlargement. It argues that

considerations of stability and long run prosperity are the primary reasons why the EU haspromised to enlarge eastward and why the Central and Eastern European nations wish tojoin. While high politics prompted this promise, opposition from EU special interest groupsis likely to delay fulfilment of the promise for many years. If this is the case, Europe shouldcreate a series of intermediate steps that would permit the reintegration of Europe toproceed apace. If a quick enlargement does occur, EU politics is likely to become muchmore complicated. The CEECs would have many votes in the Council of Ministers yet theywould be very different economically to the average EU incumbent.Keywords: European Union enlargement; Eastern EuropeJEL classification: F14

1. I ntroduction

At its 1993 meeting in Copenhagen, the European Council declared its intentionto eventually enlarge the EU eastward. The promise was extended to any Centraland Eastern European country (CEEC) with a Europe Agreement. Six EuropeAgreements have been signed and four more are under negotiation. Thus, ifFinland, Norway and Sweden decide to join Austria in acceding to the EU, we will

* I thank my co-authors of CEPR (1992), Joan Pearce, Per Wijkman and Mario Gehring. Poland, Hungary, the Czech Republic, Slovakia, Bulgaria and Rumania have signed. Talks with

Estonia, Latvia, Lithuania and Slovenia seem to be making progress.0014-2921/95/$09,50 0 1995 Elsevier Science B.V. All rights reservedSSDI 0014-2921(94)00053-O


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R.E. Baldw in /European Econom ic Review 39 (1995) 474-481 475

have the EU16. The Copenhagen declaration indicates that this could eventuallyrise to the EU26.

The gains from enlarging the EU eastward are potentially enormous. Indeed, itis easy to forget what is at stake. Until recently, millions of men and billions ofdollars of equipment stood poised for combat in Europe. Communisms demisedefused this situation by destroying the existing political and economic structuresin the East. However, the outcome of this political creative destruction is stilluncertain. If all goes right, rapid Eastern growth would lock in democratic andpro-market reforms, fostering peace and stability throughout the continent. Inparticular, expanding the market to another 100 million consumers, would be abonanza for West European exporters. 2 However, if all goes wrong, widespreadeconomic failure in the East could have serious consequences for all of Europe.Even if this did not provoke a return to authoritarianism, serious political oreconomic turmoil in the East could lead to mass migrations and harm theconfidence of investors throughout Europe. An intermediate outcome is the mostlikely, but these two extreme scenarios serve to illustrate an important fact. Europeis at a turning point in its history. 3

The EU is a club in which every incumbent has a veto over every new member.To understand an EU enlargement, one must therefore consider why the entrantswish to join and why the incumbents wish to have them. Three types of concernsinfluence the positions of both sides: economics, low and high politics.Economics is taken to mean the standard aggregate welfare gain or loss, typicallyexpressed in percent of GDP. Low politics refers to the manner in which anenlargements impact on certain special interest groups can take on an importancethat far exceeds the groups electoral or economic weight. High politics concerns,for instance, the role of European integration in maintaining peace and democracy.The timing and size of Eastern enlargement is uncertain. Perhaps the mostcommon scenario is that the Visegrad (Czech Republic, Hungary, Poland andSlovakia) and perhaps Slovenia would be in the first enlargement, with otherCEECs joining later. The most optimistic scenario for the first enlargementassumes that talks begin after the 1996 Inter-Government Conference with acces-sion occurring at the turn of the century.

2. Why the EU wants to enlarge eastwardHigh politics is clearly the strongest force behind the EUs decision to enlarge

eastward. While the path that each CEEC takes depends mainly on the daily

2 This population figure includes the Visegrad4, Slovenia, the Baltic States, Albania, Bulgaria andRumania.

Jacques Attali expressed this more eloquently in his 3 December 1992 speech.


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476 R.E. Baldwin /European Economic Review 39 (1995) 474-481

actions of its own government and citizens, the promise or denial of EU member-ship could influence long run expectations. Closing the door on Eastern enlarge-ment would have dimmed the CEECs prospects of participating in the wealth andsecurity of a united Europe. This might have discouraged faith in the painfulreform process and made Western firms more hesitant to invest in the region. Bypromising eventual membership and simultaneously liberalizing trade, the EU isplaying a familiar role. After all, vague promises of an ever-closer union togetherwith rapid expansion of intra-regional commerce fostered peace, prosperity andunderstanding among former West European combatants. By taking steps tointegrate East and West Europe - starting with free trade and ending in Easternenlargement - the EU may replay this role in the post-Berlin Wall era.

The promise to eventually enlarge eastward was extended by a unanimousdecision, however there are important differences among the member states. It iseasy to understand that the spectre of Eastern economic and political turmoil looksworse in Berlin than in Madrid. Moreover, the commercial gains from closerintegration also look more attractive to incumbents that are historically andgeographically the CEECs natural trading partners. These differences amongincumbent member states will amplify the difficulties of taking the final decisionto admit new Central and Eastern members. This is especially true since, as weshall see below, these divisions line up roughly with concerns about the lowpolitics of enlargement.Economics. The EUs economic interest in an Eastern enlargement is probablyquite minor. I know of no systematic evaluations of the welfare effects of anEastern enlargement, however studies of NAFTAs impact on Mexico and the US(see Francois and Shiells, 1992) allow some tentative analysis-by-analogy. Whenan economically small region integrates with an economically large region, bothgain but the small region gains much more. Moreover, when a low-wage/low-productivity region and a high-wage/ high-productivity region integrate, most ofthe large regions gains come from cheaper imports of labour intense goods suchas clothes and shoes. This suggests that the aggregate economic gains to the EUincumbents are likely to be small and may cause problems (see Neven, 1994;Rollo and Smith, 19931 of a low politics nature.

Calculating the aggregate welfare effects of enlarging eastward is hard, butcalculating the trade effects is not. Using a gravity model, Baldwin (1994) projectsthat the CEECs could in the long run account for 5%-10% of most incumbentsexports; for Austria, Finland, Greece, Italy and Sweden the figure is over 20%. 4This would imply double digit growth in EU exports to the CEECs for decades.

4 This assumes the CEECs incomes catch up to those of the poorer incumbents. The appendix tablesin Baldwin (1994) contain typographical errors. The original gravity model is available on diskettefrom the author.


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R.E. Baldwin/European Economic Review 39 (1995) 474-481 477

2.1. The low politics of Eastern enlargement

While high politics prompted the promise of membership, low politics willlikely determine when the promise is fulfilled. Economic change is usually painfulfor certain groups in the economy, the magnitude of the pain increasing with thesize and differentness of the region to be integrated. On both counts, anysubstantial Eastern enlargement is likely to be very difficult for certain groups inthe EU. The simple fact is that the CEEC economies are now very different to theaverage EU economy. For instance, the 64 million Visegrad citizens are now 2.5times more agricultural and only 30% as rich as the EU12 average. This makesthem more populous, poorer and more agricultural than the incumbent poor four(Ireland, Greece, Portugal and Spain) put together.To the extent that these painful readjustments fall on politically powerfulgroups in the EU, enlargement will be politically difficult. My book, Baldwin(19941, discusses these difficulties at length (and provides references to otherstudies). The main difficulties concern: budget and voting issues and the big stepfactor.Budget issues. Here I focus on the optimistic scenario of a Visegrad enlargementin 2000. The extra budget outlays of this can be roughly estimated by combiningthe findings of two studies. A careful study by Anderson and Tyers (1993)estimates that a Visegrad enlargement would raise the cost of the McSharry-re-formed CAP by $47 billion annually. Courchene et al. (1993, p. 114) estimate thatit would cost ECU 26 billion to extend the Structural Funds to Visegraders undercurrent rules. Adding these up with a rough guess on Visegrad contributionsimplies that admitting the Visegraders in 2000 would increase annual EU spendingby 58 billion ECU. This is 60% of the EUs projected budget in 2000.

Financing this extra cost would require a drastic cut in EU spending and/or anincrease in incumbent contributions. Raising taxes or deficits to cover this costwould be unpopular with EU voters, especially since citizens in northern EUnations would probably be asked to pay for most of it. The low politics of cuttingspending is even more difficult. Since EU farmers and poor regions currentlyreceive 80% of all EU spending, most of the spending cuts would inevitable fallon these two extremely powerful interest groups.

The budget problems are likely to remain for decades. Under current rules, aregion is eligible for the biggest slice of EU structural spending as long as itsaverage income is less than 75% of the EU average. If the EU income averagegrows at 2% and Visegraders averaged three times that pace, two decades wouldpass before they reached the 75% cutoff. If the Visegraders managed to grow

5 This takes 1991 data as a base year from which the twenty years is applied.


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only twice as fast as the EU, it would take three decades. Rising CEEC incomesmight never change the cost of extending the CAP. Visegrad countries are blessedwith fertile land (well suited to the products most heavily protected by the CAP)and there is no reason Visegrad farmers could not be as productive as Germanfarmers in 20 years. Thus, any substantial Eastern enlargement is likely tobankrupt the CAP. Of course, further liberalization of the CAP is inevitable. Butthe size and urgency of reform will be magnified by Eastern enlargement.

The low politics of all this is obvious, As a matter of self-defense, coalitions offarmers and poor regions are likely to veto an Eastern enlargement until CEECsget much richer and much less agricultural. This could take at least two decades.Voting issues. Previous EU enlargements have sharply altered the EUs politicallandscape. Just think of how the Iberian enlargement modified the balance ofvoting power between rich and poor members and shifted EU spending prioritiestowards transfers to poor regions. Under current practices Visegraders wouldreceive more Council of Minister votes than Spain, Portugal, Ireland and Greeceput together. Surely this would transform EU politics. It is impossible, however, tosay exactly how. Fears of what might happen may lead special interest groupscurrently receiving EU funding to push for a delay in Eastern enlargement.

A related issue is the reform of EU voting procedures foreseen for the 1996Inter-Governmental Conference. It is often asserted that EU decision makingshould be streamlined. The need for streamlining, and therefore the extent of the1996 reforms, critically depends on how soon and how far the EU plans to enlargeeastward. Since a likely target of this streamlining is the disproportional represen-tation of EU citizens living in small countries, small EU nations may face atradeoff in 1996 between preserving their power and supporting an early Easternenlargement.

All this suggests that powerful coalitions of incumbent farmers and poorregions (and perhaps small countries) are likely to delay the Eastern enlargementfor a very long time. Of course, the future is full of surprises and extreme politicalevents could convince West European voters to open their pocket books and admitsome CEECs.Enlargement on the cheap. One solution to early-enlargement budget costs wouldbe to exclude entrants from structural spending until they were too rich to need it,and from the CAP and food trade for however long incumbent EU farmers wanted.This solution, however, is likely to cause enormous political complications.Excluding entrants from 80% of EU spending, but giving them voting rights, couldbe very disruptive to EU decision making. To put it colloquially, unpleasantness isunavoidable, if second-class ticket holders can vote on what first-class passengerswill have for dinner. If the new members were also excluded from voting on mostissues, the result would be a second-class status for CEECs. This would be EUmembership in name only.


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R.E. Baldwin/European Economic Review 39 (199.5)474-481 479

The big step problem. A more abstract problem concerns the ability of CEECgovernments and businesses to deal with all the obligations of EU membership.Assuming the obligations of EU membership requires more than passing the rightsort of laws. It requires a great deal of human capital. Government departments inWest Europe are run by officials who have decades of experience in regulating amarket economy without stifling it. Western corporations have managers withdecades of experience in complying with government regulations while stillmaking a profit. The CEECs have very few such people in government or theprivate sector. Training programmes can help, but as we all know there is nosubstitute for experience. Gaining the necessary on-the-job experience to run amarket-based economy at the level needed to meet EU obligations will take years,if not decades.

Another way to look at the big step problem is to compare the optimisticscenario of Visegrad enlargement in 2000 with how long it took EU incumbents toarrive at their current level of integration. It is useful to distinguish four steps inEuropean integration: bilateral free trade agreements (FTAs) with the EU, theCommon Market, the Single Market and Economic and Monetary Union (EMU).Plainly not all steps are relevant to each nation. Table 1 shows the number of yearsthe various EU entrants spent at each stage (including transitional periods). Noticethat it took the EFTA4 only 20 years to achieve the Single-Market level ofintegration, while it took the original 6 members 28 years. Under the optimisticscenario, the Visegraders would skip over this step entirely, jumping directly tothe EMU; All this, just 8 to 10 years after they signed bilateral FTAs the EU

Table 1Years spent at each integration step (including transition periods) a

BilateralFTA

Common market1958-86

Single market EMU Total years1993-99?

Austria, Sweden,Finland, NorwaySpainPortugalGreeceIreland, Denmark,Great BritainOriginal 6

20 skip 2 4 2616 skip 7 6 2913 skip I 6 2620 5 7 6 38skip 13 7 6 26

skip 28 7 6 41CEECs (optimisticscenario)

8-10 skip skip skip 8-10

a Table assumes (1) EMU occurs in 1999 for all members; (2) the 1993 EEA was the Single Marketstage for EFTM; and (3) EFTA4 all accede in 1995.


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(some were signed in 1991, others in 1993). Of course, the Visegrad nations arealready adopting Single Market legislation, but passing laws and having the humancapital to enforce them are quite different things.

The lessons of history are vague and there is no hard reason to think that thenumber of years taken by previous EU entrants has any implications for how longit will take the CEECs to get in. One point, however, is indisputable. If theVisegrad nations manage to take the very large step to membership within adecade, they will be breaking all historical speed records. Of course the currentleaders of the CEECs are accustomed to breaking records. In a few short yearsthey saw their entire political and economic structures demolished. It might beworth recalling, however, that it is much easier to set speed records in pullingdown old structures than it is in building new ones.

3. Why the CEECS want to joinAs argued above, the economic gains from EU membership are likely to be

large for the CEECs. Note, however, that full membership is not necessary toattain most of these economic benefits. The Europe Agreements promise to phaseout all regular EU trade barriers against CEEC industrial products. An EEA-likearrangement that extended the Single Market eastward would permit the CEECs tosecure most of the economic benefits of membership. Such access would alsomake the CEECs very attractive to foreign investors, just as membership did forSpain in the mid-1980s. The only big economic gains that would require fullmembership are exactly those that create the most political problems in the EU:participation in the CAP and transfers to poor regions.

These economic benefits, however, are overshadowed by high politics. For theCentral European countries, EU membership would symbolically restore them totheir historical positions among the advanced industrial economies of continentalEurope. More importantly, membership would have a decisive impact on thedomestic political scenes of all CEECs by firmly closing the book on authoritari-anism - just as it did in Greece, Portugal and Spain. Membership would also lockin existing pro-market reforms and facilitate further reforms. It is important tonote, however, that EU membership is neither necessary nor sufficient for suchreforms to occur. Finally, EU membership might be a critical factor in assuringthat any resurgence of authoritarianism in the former USSR (should it occur)would not lead to a Finlandization of the CEECs.

4. Concluding remarksI have argued that Eastern enlargement is likely to be delayed for many years

due to pressure from special interest groups in incumbent nations. If this is the


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R.E. Baldwin/European Economic Review 39 (1995) 474-481 481

case, then Europe should create a series of intermediate steps that would permitthe reintegration of East and West Europe to proceed apace. 6 If a quickenlargement does occur, EU politics is likely to become very much morecomplicated.

ReferencesAnderson, K. and R. Tyers, 1993, implications of EC expansion for European agricultural policies,

trade and welfare, Discussion paper no. 829 (CEPR, London).Attali, J., 1992, A global European initiative, Speech to European Policy Forum, London.Baldwin, R., 1994, Towards an integrated Europe (CEPR, London).CEPR, 1992, Is bigger better? The economics of EC enlargement, Monitoring European Integration 3(CEPR, London).Courchene, T. et al., 1993, Stable money - sound finances, European Economy, No. 53.Francois, J. and C. Shiells, eds., 1994, Modeling trade policy: Applied general equilibrium assessments

of North American free trade (Cambridge University Press, Cambridge).Rollo, J.M. and M.A.M. Smith, 1993, The political economy of central European trade with the

European Community: Why so sensitive?, Economic Policy 16.Neven, D., 1994, Trade liberalization with Eastern nations: How sensitive?, Working paper (University

of Lausanne, Lausannel July.

Baldwin (1994) considers several intermediate steps,

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