Research Paper on "EU Enlargement and Economic Growth in the New Member"

Research Paper 16 pages (4332 words) Sources: 25

[EXCERPT] . . . .

1979, the European Monetary System (EMS) was established to stabilize exchange rates between the participating European countries. After a decade, the Single European Act of 1987 was set to pave the way for a single European market and for a monetary union, known as European Monetary Union (EMU). The Maastricht Treaty, which was signed on February 7, 1992, and came into effect on November 1, 1993. Subsequently, European Union was established. Further, on January 1, 1994, the European monetary institute was established in Frankfurt to lay the groundwork and rules for the European Systems of Central Banks, which is responsible for the general oversight of the preparation of EMU. The European Union (EU) was established with the commitment of economic and monetary union under a single currency and central integration. The Euro, EU common currency, was set to start its circulation in January 1, 2002.

The analysis below will focus on how advances in European enlargement have been impacted by the current enlargement with a specific focus on how the growth environment has been affected. The underlying analysis will focus on how the tenets of enlargement can help to either minimize or increase the threats from a widespread economic the current enlargement that affects every sector of society.

2004 European Enlargement

The Maastricht Treaty set down the economic convergence criteria for participating in the union. A European country must meet the following five economic criteria to convert to the new currency. These criteria are as follows:

1. Price Stability: EU members must show an average rate of inflation not exceeding 1.5% of the three best-performing countries. (Previously was set at 2.6% in July 1996, meaning a country's inflation rate cannot exceed 4.1%).

2. Interest Rate Stability: Long-term rates observed over a period of one-year and should not be greater than 2% of the three best-performing countries.

3. Exchange Rate Stability: Countries should maintain their respective exchange rates within the normal fluctuation margins of the exchange rate mechanism of the EMS for at least two years and avoid devaluing their currency against EU member countries.

4. Public Debt Ratio: The ratio of public debt to gross domestic product (GDP) must not exceed 60% unless the ratio is approaching this value at a "satisfactory" pace.

5. Public Finance: The budget deficit (including central, regional, and local governments) should not exceed 3% of GDP.

There are 11 original EU members. They are Austria Belgium, France, Finland, Germany, Ireland, Italy, Luxembourg, Portugal, Spain, and the Netherlands. Greek failed to meet the convergence criteria because of weak economic performance. Britain voted not to join the EU because of its national reasons. There are additional 15 more countries looking to join the EU in the coming decades, which include the Eastern European nations that previously under Soviet Union's bloc.

In 2004 there was the largest single expansion of the EU with the accession of ten countries: Poland, Slovenia, Malta, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, and Slovakia. Majority of these countries were part of the eastern bloc and this paper will examine if accession to the European Union has increased growth and led to better economic conditions for these ten member states.

TENETS of EUROPEAN ENLARGEMENT & ECONOMIC GROWTH

Democracy promotes privatization and free market economic policies and rejects governmental involvement in the economy. EU and especially newly formed democratic states from former communist countries in Central and Eastern Europe are at the forefront of the democratic movement, as such there are many areas that have been significantly reformed. In the wake of democratic practices, there is major EU restructuring taking place. The major tenets of integration include:-

Stable currency

Balanced Budget

Free market capitalism

Free Trade

European enlargement provides an excellent platform to examine some unconventional effects of the current enlargement. Specific emphasis will be placed on the economic implications of the current enlargement and how this is affects the growth environment. Some examples will be briefly examined to provide an application to the theory being researched and examined and to get a better understanding of how the costs of enlargement weigh against the benefits.

European enlargement is one of the few specializations that can simultaneously analyze a complex issue such as the current enlargement and its economic and political implications of the EU. The analysis will provide some insight into the spatial geographic development within Europe as the issue is examined within the economic context.

McConnell and Brue (2005) argue that there are also some important trends that influence the EU and provide a base for how it is defined:

Economic enlargement/cooperation among nations creates larger markets and expands the demand prospects. With the promotion of free trade areas and formations, it is clear that the global market is becoming more intermingled, and economic implications from enlargements have to be examined differently. This makes it imperative that the growth environment adapt and embrace the economic trends, understand market trends and use this to broaden the customer base.

Growth and identification of competitive advantage means that emerging economies with lower wages and cost of production are effectively competing with traditional production and marketing centers. This has direct implications for economic trends in Europe's growth sector and is derived from neo-liberal policies.

There are various trends in the member states that posit to the fact that EU growth environment is affected by the current enlargement, irrespective of being in such a strong union. Therefore the exploration of EU trends and should be with an explicit application to the growth realm. The factors most commonly cited are:-

1) Shifts in demand characteristics: - Countries are becomingly increasingly dependent on international markets; this has created increased competition on a global scale and has made it clear, that many countries cannot depend solely on domestic demand to boost the economy. It is therefore imperative that EU growth objectives be explored to take this into consideration. This activity is identified as a necessary facet of EU growth environment and will be treated as such in this paper.

2) International Trading Agreements: - Globalization and the free market concept have created an environment that causes economies to be linked. Many states now realize that having a comparative advantage in a sector means that there is a demand and market for that particular good or service, since protectionism is decreasing. Since there is now a market demand, the connection with supply has to be via strategies that can link suppliers and demanders and create equilibrium in specific sectors. This inevitably has serious implications in EU, where this trend is most prominent.

3) Increased Trade Activities: - Global trade activities have been used to leverage exports and imports and balance of trade/payments deficits by many states. Figure 1 below shows a seven-year time series of exports and imports activity for the world.

Figure 1: Percentage Change in Exports and Imports for the World

A similar analysis was presented by Basu and Eichengreen (1991) who argued that globalization promotes privatization and free market economic policies and rejects governmental involvement in the economy. Economies are at the forefront of the global movement, as such there are many areas that have been significantly reformed. In the wake of global practices, there is major international restructuring taking place and the enlargement has inevitably changed the structure of the growth environment for EU member states because of this.

The foreign exchange market prices currencies of one country in terms of another currency. Exchange rate markets can be fixed or flexible. Enlargement like that within the EU, embraces flexible exchange rate regimes, since the price of currencies are determined by market forces and will therefore efficiently allocate resources, (Basu, 1991: 23). The need for a stable exchange rate is also linked to the balance of payments, that is, the goods, services, and capital export and import activities. With linkages across currencies, it is clear that shifts in economic factors, such as limited resources from an enlargement causes wide-spread disequilibrium within EU member states growth markets.

How does the foreign exchange market within the EU relate to the growth environment and the enlargement? Globalization also encourages labor mobility, since labor will move across rapidly areas where there is an abundance of economic resources. One of the consequences of the enlargement and its link to the foreign exchange market has been a shift in the global demand for labor, (Eichengreen, 1991: 12). Labor mobility is an emerging facet of EU growth environment and is of increased importance especially in wake of the migration and changes in labor mobility trends. The movement of people predicates on the rapid acceleration of population movements across borders, which is an important aspect of development. The enlargement changes its dynamic from an economic issue to a social issue by embracing a framework that identifies that labor mobility as an important aspect of EU growth environment. The movement of people is still a very questionable aspect of EU development and its linkages with the foreign exchange market, since there are many questions in relation… READ MORE

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