Text 35: eastern promise

The demolition of the Berlin Wall in December 1989 removed the most potent symbol of Europe's post-war economic and political divisions. More than seven years on, however, the continent is far from united. Not only do huge disparities in living standards between Eastern and Western Europe remain, but eastern countries still face a long wait before they are admitted to the west's economic and political club, the European Union.

Although the easterners are eager to join, the EU's 15 current members are in no hurry to let them in. In part, this is because the EU is preoccupied with economic and monetary union. And with more members, decision-making in the EU would become more complicated. But the 15 worry about the economic costs of expansion as much as the political ones. Perhaps they should not. New research suggests that the net economic effects of eastward expansion on the EU's current members would be negligible - meaning that enlargement is much more a question of politics than of economics.

A paper by three economists, Richard Baldwin, Joseph Francois and Richard Portes, looks at the costs and benefits of enlarging the EU both for the Union's current members and for seven applicants (Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia). Not surprisingly, they find that the easterners would benefit hugely from joining the club. As for West Europeans, the authors say that there are small gains to be had from increased trade, to be set against small budgetary costs. The net cost is tiny.

The most obvious economic effect of admitting the eastern countries to the EU' s single market would be to make trade between east and west freer. This effect would not be enormous, because most exports from Eastern Europe to the EU are already tariff-free. But some east European exports, including steel, are subject to EU anti­dumping duties; quotas limit others, such as textiles and shoes, and trade in agriculture has barely been liberalised at all. On joining, the new members would have to scrap their tariffs on goods from the EU. They would also have to adopt the EU's common tariff on non-EU goods. This would cut their tariffs on most manufactured goods but would mean increased protection on farm products.

Messrs. Baldwin, Francois and Portes estimate that, even in the long run, all this would boost the annual GDP of current EU members by a mere 0.2%. Although the seven entrants' combined GDP would go up by proportionately more, their gains would also be modest: 1.5%. The main reason why the easterners gain relatively more than to the west: four of the seven countries send more than half of their exports to the Union, while the east is a small market for EU firms.

The possible benefits of EU membership for Eastern Europe, however, would be rather more impressive if the region became a less risky place to do business. The authors guess, for instance, that if investors saw the east as no more risky than Portugal, then eventually GDP would rise by more than 18% of its 1992 level. This will be an overstatement if investors think that the east is getting safer anyway. It may be: some countries already have credit ratings better than Greece's.

But the benefits to their eastern neighbours weigh less in EU ministers' minds than what it will cost their own countries. How much is that? The EU gives aid to regions where income per head is less than 75% of the Union average, for which Eastern Europe would qualify - partly at the expense of regions which receive aid now but would be relatively richer in a bigger EU. And the east would have to be brought into the Union's cumbersome system of farm support.

Suppose, say Messrs. Baldwin, Francois and Portes, that the newcomers received regional and agricultural support in line with current EU rules. Those rules would help keep the bill down. Regional aid has to be matched by payments from national governments: and even existing members, which are richer than the easterners, have had trouble coming up with the money. EU rules and international commitments cap farm subsidies. The EU's total spending would rise by about one-third. That may sound an enormous burden, but it is not. As a proportion of GDP, the net cost to existing members would be little more than the gains from trade.