Europe's new division of labor
While most politicians and economists insist that eastward enlargement has been good for the EU, voters are increasingly skeptical. This matters, first because concerns about 'unfair' competition after enlargement impede EU progress, for example with opening up services markets; and second because France, Austria and probably others will hold referendums on future accessions. The Balkan countries and Turkey will not join unless the people in the existing EU countries understand how enlargement has really changed the Union.
Growing skepticism
Public hostility to enlargement should not be exaggerated. According to the latest Eurobarometer polls, 55 percent of the people in the EU-25 say enlargement is something positive, and almost as many would support future accessions. However, their numbers are shrinking, while the share of those against enlargement has risen to 39 percent. In Germany, France and Austria, six out of 10 people are now against any further countries joining the Union.
Economics appear to be the main fear factor. Support for enlargement peaked in 2001, when EU growth was still robust. Today, 63 percent of the people in the EU-15 think that enlargement increases unemployment in their country, up from 43 percent in 2003. In Germany, 80 percent think that enlargement is bad for jobs.
The level of enlargement-related fears is odd, given how small the new entrants are. Taken together, their economies are only as big as that of the Netherlands. Goods from the new members make up only 13 percent of total EU-15 imports (excluding intra-EU-15 trade). Similarly, although Western European companies have invested more than $150 (zł.479) billion in the Central and Eastern European countries, that is only a tiny fraction of what they invest in the EU-15 countries or the US.
Profound changes
However, the relatively small size of trade and investment flows hides the fact that enlargement is changing the EU economy in a more profound way. In the past, the EU was a relatively homogeneous club. Eastward enlargement has added a pool of 40-odd million low-cost workers to the bloc. Many Western European countries have decided to keep Polish, Czech and Hungarian workers out of their labor markets until 2011. But they cannot prevent their companies from relocating to the new member states, where wages are typically one-fifth of what they are in France or Germany.
The key point to bear in mind is that enlargement happened at a time when global competition was becoming fiercer due to the integration of China and India into the world economy. For Western European companies, the choice was not between producing at home or abroad. It was between cutting costs or losing market share - and thus shedding jobs at home anyway. In other words, foreign direct investment from west to east may have caused some job losses in Western European factories. But by helping German, French or Dutch companies to stay competitive on a global scale, it has also helped to preserve jobs in Germany, France or the Netherlands.
Sharing the work
Cars are good examples of how Europe's new division of labor works. German and French, but also US and Korean car companies have invested billions into a 'cluster' of car and component factories in Central Europe. By 2007 Slovakia will produce more cars per 1,000 inhabitants than any other country. One out of 25 cars sold around the world now contains an engine produced in Hungary. Meanwhile, the big Western European car companies have concentrated at home on design and marketing. Most of these companies are doing better now than in the early 1990s.
Information and Communication Technology is another example. Ericsson and Nokia are now producing mobile-phone handsets in Estonia and Hungary. At home they do R&D, design and some high-end manufacturing; neither country has seen a rise in unemployment since production moved to Eastern Europe.
Flexibility is the key
Ireland and the Nordic countries have moved into higher value-added activities smoothly because they have flexible labor and product markets. Western Europe clearly does not have a future as a producer of low value-added, mass-manufactured goods. Enlargement, and the opportunities for outsourcing labor-intensive production, have left Western Europe better prepared for globalization. But Europe's new division of labor is not static. Now the Central and Eastern European countries are coming under growing pressure from China, which specializes in some of the goods they make. In a globalized economy, both old and new members will have to work hard to stay competitive.
Katinka Barysch is chief economist at the Centre for European Reform
