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Old Europe must act, not protest

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One year after EU enlargement, opinions in the old member states are divided. While economists maintain that enlargement constitutes a “win–win” situation, populations in countries such as France and Germany are showing increasing scepticism

With buzz words such as “outsourcing” and “social dumping” flying around in the press, a worrying phenomenon of anti-easternism seems to be developing in certain countries. So what is the reality? If enlargement is supposed to be good for the economies of the former EU-15, why is there increasing discontent in old Europe?

A pain-free process

Theoretically, all should be rosy for western member states. Trade liberalisation following eastwards enlargement has boosted growth in central and eastern European countries with negligible costs for old members. Fears about cheap products from eastern countries flooding the western markets have proved unfounded, with imports from the new members amounting to no more than 1% of EU GDP whilst intensified competition has pushed prices downwards, benefiting the European consumer. Furthermore, western investment in these countries, particularly in labour-intensive sectors such as textiles and cars, has allowed EU companies to stay competitive when faced with increasing global competition and to continue to expand in their home markets.

Moreover, the anticipated tidal wave of eastern migrants has failed to materialise. According to a recent study carried out by Liverpool University, approximately 300,000 nationals of new member states are currently officially employed in the old EU countries, accounting for just 0.2% of their workforce. Even in Austria, which has the highest share of workers from the accession countries, they only account for 1.2% of the workforce, whilst in Germany the figure resides at 0.4%. The overall economic impact of the enlargement process for the old member states has in fact been marginally positive. Indeed, the European Commission estimates that following the signing of the European Agreements between the EU and Central and Eastern European countries in the mid-nineties, EU GDP has been pushed up by 0.5%. But if the process has been economically beneficial to old Europe, how can we explain the growing hostility to Eastern Europe in countries such as France and Germany?

Adjusting to the changes

The economic gains expounded by the defenders of enlargement are real enough, but do little to convince the sceptics since these gains are hardly visible in daily life. Whilst benefits are long-term and intangible, the initial disruptive effects of the enlargement are immediate and hard to ignore. Consequently, several politically explosive issues have come to the surface as the single market readjusts itself to its increased proportions.

The relocation of corporations to eastern countries offering more competitive business environments has become a moot point in east-west relations. The introduction of the business-friendly “flat tax” (a single flat rate of income tax) in many new member states seems to have been decisive in attracting businesses and investment to the east. This “one size fits all” tax system has come under virulent attack, not least from Germany’s Chancellor Gerhard Schroeder who was outraged that Germany “as the biggest net contributor [to the EU budget], finances unfair tax competition against itself.” Yet flat tax has nothing inherently unfair about it. Indeed, it seems to constitute an innovative alternative to the Byzantine fiscal constructions favoured by some of the bigger member states.

Business-savvy eastern governments have forced old Europe to do some serious introspection. The knee-jerk reaction to protect their treasured social models provoked France and Germany to call for the introduction of a minimum European tax in 2005. But if the Treaties allow for Commission intervention where anti-competitive practices are concerned, they do not give it the right to dictate the composition of member state’s tax systems; a matter which is left to the discretion of the individual governments.

A push in the right direction

Enlargement has underlined the need for countries such as France and Germany to shake-up their tax systems and slim down their welfare models if their economies are to remain competitive. Old Europe should not try to swim against the tide of relocation but instead react to the changed environment following enlargement. Rather than protecting industries that are migrating eastwards, western members should develop their human-capital industries allowing them to ensure stable economic growth in the future. Eastern immigrants should also be welcomed with open arms by countries such as Germany who, with an ageing population and shrinking workforce, may depend on these workers in the years to come to avoid a potential pension crisis.

As the Commission prepares itself to enter the heated debate over the import of Asian textiles to the EU, it is hard to ignore the fact that global competition is intensifying. If the EU wants to remain attractive to investors and come anywhere near fulfilling its commitments at Lisbon and Gothenburg where it vowed to become “the most dynamic and competitive knowledge-based economy in the world” by 2010, it must act quickly to reform its welfare systems and cut the red tape. Perhaps the extra pressure resulting from enlargement will act as the necessary catalyst for these reforms.