Enlargement of the European Union

Ref: EUenlargement332cbs2010

Feb10

Introduction• Any European country can join

– Treaty of Rome art 232

• First 4 enlargements

• 5th enlargement issues– central and eastern European countries (CEECs),

plus Malta & Cyprus– optimum size of EU?

• Enlargement and business

Candidates for EU membership

• Accession countries assessed by EU– must be able to operate within the EU framework

• Pre-accession agreements

• 5th enlargement - a new challenge– CEECs

• former centrally planned economies (CPEs) in transition to market economies

– significantly changing the nature of EU • generally small, poor countries p 87

• Copenhagen Summit 1993 set out criteria, – functioning market economy– democratic political system– acceptance of acquis communautaire

Forces behind enlargement• Benefits of economic integration incl.

– comparative advantage– trade creation ( but possibly trade diversion)– investment & other dynamic economic benefits

from integration– Papazoglou et al (2006):

• Gravity models suggests New 10 increased imports from EU15 > rise exports to EU15

• Reorientation of trade to EU15• Papazoglou, Pentecost, Marques, ‘A gravity model forecast of the potential trade effects of EU enlargement:

Lessons from 2004 and path-dependency in integration’. The World Economy(2006)

REVIEW: Competitive pressures & efficiency in the single market (note: you can use other theories)

Sales per firm

AC

price

Totalsales

D

Number of firms

Mark-up

euros

x’

COMP

BEFT

BE

2n’

x”

n” n’

E’

E”

C’ C”

E’

A

1

E”

A

MC

p”

p’

pA

'

A

p”

p’

Home market only

E”

E’

W

Depreciation / workerd (K/L)

K/L* K/L

Euro/L

A

BY/L*

GDP/L 1Y/Lc C

s(GDP/L)1D

EY/L1

K/L1

Allocation effect

Medium term growth bonus

Review: Growth effects of integration in the single market

• Political benefits

Widening v deepening debate

• Since 1st enlargement

• EU15 optimum size? EU27 beyond optimum size? THEORY OF CLUBS – see later

• Two approaches to enlargement– traditional ‘classical’ method– adaptive method

• Can widening & deepening be mutually complementary?

p7a

• 5th enlargement - adaptive perspective

• Is EU currently progressing at 1 rate?– Schengen Agreement / EMU/ Tax ?

• Variable geometry– multi-speed EU– Multi-tier EU

• EU of concentric circles

• Enlargement - even more variable geometry

• Widening v deepening debate outdated???

Theory of Clubs: summary

• See handout & references• Assume M* optimal size of EU

– Was EU 15 optimal?

• Institutional changes (eg move to QMV) can shift MC & increase optimal size (to Mx)

• Consequences for enlargement & Depth of integration

Theory of Clubs

No. of members

Benefits and costs

MC

MB

M*

Theory of Clubs

No. of members

Benefits and costs

MC

MB

M*

MC1

Mx

Subsidiarity principle

• Subsidiarity important• Task allocation in EU guided by subsidiarity principle

(Maastricht Treaty)– Decisions should be made as close to the people as possible, – EU should not take action unless doing so is more effective

than action taken at national, regional or local level. – Background: “creeping compentencies”

• Range of tasks where EU policy matters was expanding. • Some Member States wanted to limit this spread.

• Similar analysis for Depth of integration

– see handout

Enlargement issues for the EU• Agriculture• Structural funds• Budget• Migration• Voting – see later• Poor new members

– 20% rise in EU population, BUT– New 10’s GDP equivalent to Netherlands

Sources: Eurostat and EU Commission 2003.

Voting rules• Since 1993 Eastern enlargement was inevitable &

EU institutional reform required.– 3 C’s: CAP, Cohesion & Control.

– Here the focus is on Control, i.e. decision making.

• Nice Treaty (2000) and & LISBON (Reform) TREATY 2007 (in force 1 Dec 2009)– Nice Treaty; temporary until new Treaty was ratified

• No final decision made re: voting after enlargement

• Focus on Council of Ministers voting rules.

Voting rules• Voting rules can be complex, especially as number of

voters rises.• Number of yes-no coalitions is 2n.• EU9

– 512 possible coalitions.

• EU 27 – 134 million coalitions.

Voting rules over time• Council of Ministers voting rule changes

Lisbon Reform Treaty Rules (1 Dec 2009)

Pre-Nice rules (from the SEA)

Nice rules (1Nov 2004)

Pre-Nice Treaty Voting Rules

• No longer used since 1 November 2004, but important as a basis of comparison.

• “Qualified Majority Voting” (QMV):– ‘weighted voting’ in place since 1958, – Each member has number of votes,– Populous members more votes, but far less than

population-proportional.• e.g. Germany 10, Luxembourg 2

– Majority threshold about 71% of votes to win.

Nice Treaty Voting Rules

• 3 main changes for Council of Ministers:

• Majority threshold raised

• Votes re-weighted. – Big & ‘near-big’ members gain a lot of weight.

• Added 2 new majority criteria: – Population (62%) and members (50%).

Winners & Losers from Nice

Poland

Spain

ItalyF

ranceU

KG

erman

y

“Aznar bonus”

•Source: Baldwin & Widgren (2005)

Nice reforms: 1 step forward, 2 steps backward• Step Forward:

– Re-weighting improves decision-making efficiency.

• 2 Steps Backwards: EU decision-making extremely difficult.

– 2 new majority criteria worsens efficiency.

– raising vote threshold worsens efficiency.

• Main point is Vote Threshold raised.– Pop & member criteria almost never matter.

• About 20 times out of 2.7 million winning coalitions.

– Even small increases in threshold around 70% lowers passage probability

• The number of blocking coalitions expands rapidly compared to the number of winning coalitions.

Lisbon Treaty rules• Lisbon Reform : Double Majority.• Approve requires ‘yes’ votes of a coalition of members

that represent at least:– 55% of members,– 65% of EU population.

Lisbon Treaty rules very efficient

•Source: Baldwin & Widgren (2005)

0

5

10

15

20

25

Pas

sage

pro

babi

lity

Historical 21.9 14.7 13.7 9.8 7.8

Status quo: May 04 to Nov 04 2.8

Nice rules: Nov 04 to Nov 09 3.6 2.8 2.3

Lisbon rules Dec’09 onwards 10.1 12.9 12.2

EU6 EU9 EU10 EU12 EU15 EU25 EU27 EU29

Do power measures matter?

y = 0.9966x + 0.0323R2 = 0.7807

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

0 1 2 3 4

Vote Share/Population Share

Bud

get S

hare

/Pop

ulat

ion

Shar

e

Ireland

Greece

BelgiumPortugal

DenmarkSpain

Finland

AustriaSwedenNL

France

Italy

UK

Germany

5th enlargement and business

• Increased trade

• Larger internal (single) market

• Opportunites and threats

• Does this impact on certain EU15 States?

• Pre-accession benefits may ‘reduce’ initial impact of enlargement

Other European countries

• EEA - includes Norway

• Switzerland

• Will Turkey ever join?

• Further eastern enlargement?

Conclusion

• Economic and political motivations for enlargement

• Has the EU exceeded its optimum size?

• Are reforms sufficient to accommodate the 5th enlargement?

• Implications for business must be considered