Opinion of the Economic and Social Committee on "The impact of enlargement on EMU"
Date: 2002-09-19
Institutions: European Economic and Social Committee
Subjects: Economic and Monetary Union, accession criteria, accession negotiations, accession to the European Union, enlargement of the Union

14.3.2003

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Official Journal of the European Union

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Opinion of the Economic and Social Committee on ‘The impact of enlargement on EMU’

(2003/C 61/12)

On 1 March 2001, the Economic and Social Committee, acting under Rule 23(3) of its Rules of Procedure,
decided to draw up an opinion on ‘The impact of enlargement on EMU’.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on the subject, adopted its opinion on 3 September
2002. The rapporteur was Mr Vever.

At its 393rd Plenary Session of 18 and 19 September 2002 (meeting of 19 September), the Economic
and Social Committee adopted the following opinion by 42 votes to one with four abstentions.

1. Summary

1.1.
EMU and enlargement, the two major changes facing
the EU, are bound to pose new and interlinked challenges. A
global and cooperative strategy, taking both economic and
social concerns into account, is needed in order to adapt.

1.2.
The Committee would stress that to prepare effectively
for EMU, the applicant countries must successfully complete
all the preparatory stages, while ensuring that they can abide
by the Maastricht criteria in the long term, on the basis first
and foremost of the Copenhagen criteria, i.e. a healthy and
competitive economy that has assimilated all the requirements
of the Community acquis. This means, inter alia, promoting
dialogue with social partners’ organisations and with effective,
representative socio-occupational structures.

The Committee notes the increased budget transfer
1.7.
problems entailed by an enlarged EMU. This means that
the reforms under way in many Community policies (e.g.
agricultural policy and regional policy) must be carried out
within a global perspective and that plans must be made to
bolster the European Union’s own resources for the post-2006
period.

1.8.
The Committee calls for attention to be paid to the
effects of EMU on economies neighbouring or close to the EU.

1.9.
The Committee invites the Convention on the future
of Europe to include the issue of EMU enlargement (e.g.
institutional concerns, subsidiarity in practice, forms of coop-
eration) in its discussions and in the drafting of its conclusions.

1.3.
The Committee would therefore note that the enlarge-
ment of EMU must be conducted in a rigorous manner, with a
strict assessment of each country’s merits, so as to avoid
placing new members in structural difficulties and so as not to
upset the Euro’s internal and external equilibrium.

2. Preliminary comments

1.4.
In addition, to avoid prolonging the EMU accession
process excessively for new Member States, the Committee
would repeat its recommendation that these countries should
join the European exchange rate mechanism, ERM2, as soon
as they join the EU.

1.5.
The Committee hopes that the procedures for the
effective reform of the ECB’s management structure to make it
ready for enlargement will be in place by the time the accession
negotiations are completed, and that the reform will not have
to be postponed.

1.6.
The Committee would stress the need to strengthen the
independent resources of the Eurogroup, with the imminent
prospect of a sharp increase in the number of non-euro
Member States in the Council.

2.1.
EMU and enlargement are both major changes that
will significantly mark the development of the EU over the
coming years. If they are well managed, both will strengthen
the EU. In combination, they are bound to influence each
other, and will certainly complicate many factors. However, in
the long term, they should prove to complement each other
rather than conflict. All will depend on the capacity of the
European Union and its Member States to adapt to the new
demands and to manage the situation in a synergistic manner.

In contrast to enlargement, which will tend to have a
2.2.
centrifugal effect,
inevitably putting the European Union’s
cohesion to the test, the main attraction of EMU will be that it
will act as a centralising, structuring and reassuring force,
working to strengthen that cohesion on a sound and stable
basis, also encompassing the Member States that are outside
the euro zone but that should join at a later stage.

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2.3.
Enlargement will provide new opportunities for EMU
to develop, prospectively doubling the number of euro zone
members over the longer term (bringing in Poland, Hungary,
the Czech Republic, Slovakia, Estonia, Lithuania, Latvia,
Slovenia, Cyprus, Malta, Romania and Bulgaria; and also
Turkey, with which accession negotiations have yet to begin).
The euro will offer these future members a number of
economic benefits, boosting their capacity to attract invest-
ment, stimulate financial markets and secure trade. But enlarge-
ment will also bring the EU as a whole greater political security.
The enlarged EU will be an important area in the world
economy, based on the principles of the rule of law and legal
certainty. Whether this enlargement will strengthen or affect
the European currency’s clout and international cachet,
especially vis-à-vis the dollar, will depend on the way it is
conducted and assimilated (as well as on other possible
developments in the three EU States that are currently outside
the euro zone: the United Kingdom, Denmark and Sweden).

2.4.
Enlargement will clearly pose new challenges for EMU.
Initially, the accession of new Member States to the European
Union will radically alter the terms under which the euro and
non-euro zones coexist, as non-euro zone members will be
greater in number. Whereas in the EU-15, the 12-member
euro-zone coexists with three non-euro States, in a Union of
25 it will have to coexist with 13. Subsequently, as the new
Member States enter the euro zone, the situation for EMU will
change, with a much greater internal diversity (the applicant
countries’ GDP is equivalent to only 6 % of that of the 12-
member euro-zone), which will also complicate the coordi-
nation and control of economic and budgetary policies.

2.5.
The Committee would therefore stress the need for a
global strategy in preparation for managing the predictable
interactions between enlargement and EMU. This strategy
must be political, cooperative and contractual, drawing on:

— the current Convention on the future of Europe (which
rightly involves all the applicant countries), for insti-
tutional reform and the organisation of responsibilities;

— the Member States and EU institutions, for the political

management of EMU;

— economic interest groups, the social partners and other
organised civil society players, which must exercise all
their freedoms independently and responsibly, using
approaches often based on partnership and contractual
agreements, for the consolidation of EMU’s economic
and social foundations.

2.6.

This strategy should centre on two key issues:

2.6.1.
preparing the applicant countries effectively for EMU,
which means agreeing and implementing appropriate EMU
accession strategies for each of the applicant countries;

2.6.2.
on the other, successfully adapting EMU to the
enlarged Union, which means starting to give some thought
now to an overall programme to concern all future Member
States.

3. Preparing the applicant countries effectively for EMU

3.1. The legal and political prospects

3.1.1.
The Amsterdam Treaty and the pre-accession com-
mitments made by the applicant countries clearly stated that
they would not be allowed any form of opt-out clause, of
the kind exceptionally granted to the United Kingdom and
Denmark. Although the new Member States will clearly not
join EMU immediately on accession, they will have to make
every effort to join as quickly as possible, by meeting the
various preliminary requirements. The Committee welcomes
the fact that the EU has made this official
link with the
applicant countries, confirming their aim to join EMU as soon
as they meet all the criteria.

3.1.2.
a four-stage process:

Integrating the applicant countries into EMU will be

During the current pre-accession period, the appli-
3.1.2.1.
cant countries should already be working to adopt
the
Community acquis, not least in the areas that are key to EMU:
namely the free movement of capital, the renunciation of any
State financing privilege for the public sector, and guaranteed
independent status for central banks.

3.1.2.2. When they join the European Union, the new
Member States will already be required to abide by many
Community economic rules, although they will not at that
stage be ready to join EMU. They will thus have to accept the
objectives of EMU, recognise that their exchange and economic
policies will from then on be matters of common interest in
the context of the EU, be sure to prevent excessive deficits,
accept the growth and stability pact, and gradually apply all
the Maastricht criteria. Like all Member States, they will be
subject to an annual audit at the autumn European summit,
with regard to the broad economic and employment policy
guidelines. At
the spring European summit, they will be
assessed on the basis of the commitments made in Lisbon
regarding the implementation of structural reforms in econ-
omic, social and administrative areas (e.g. policies relating to
education, innovation, the labour market, social welfare and
the public sector, etc.).

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3.1.2.3.
Another obligatory preliminary stage will be par-
ticipation in ERM2, the euro exchange-rate mechanism (fol-
lowing Denmark’s current example). The applicant countries
will have to remain in ERM2 for at least two years before
joining EMU.

For every new participating State, the last stage in
3.1.2.4.
joining EMU will be a reasoned decision by the Council on a
proposal from the Commission, taking into consideration
economic capacity and more particularly compliance with the
Maastricht criteria, namely:

— an inflation rate not exceeding by more than 1,5 % the
average of the rates of the three Member States with the
lowest inflation rates,

— long-term interest rates not varying by more than 2 %
from the average of the three States with the lowest
inflation rates,

— a budget deficit close to or less than 3 % of GDP,

— public debt not exceeding 60 % of GDP unless it is

descending towards that level,

— a stable national currency exchange rate within a margin

of 2,25 % above or below the euro.

Furthermore, the national central banks must have formally
guaranteed independence from the national governments and
must pursue the objective of price stability with due regard to
the objectives listed in Article 2 of the EU Treaty.

3.2.

The economic and social requirements

3.2.1.
Just as the political and legal conditions written into
the Treaty and the European summit declarations provide for
an ordered approach to preparing the applicant countries for
EMU, so too the economic and social requirements associated
with the stability and growth pact must be addressed strictly
step by step. Sound preparation for EMU within the applicant
States means not racing ahead. Otherwise, growth and invest-
ment
in the new Member States could be hindered by
excessively strict monetary and fiscal policies, and the very
cohesion of EMU in the enlarged Union could be affected.
There must be no danger of later arriving at a dead-end,
discovering after one or another new member has entered
EMU that it is not able to apply all the rules. There are also
other reasons for proceeding in an orderly way and not rushing
in. The external value of the euro, a key factor in its stability,
must not be affected by EMU enlargement. Neither would it
serve the interests of the euro zone Member States to generate
excessive internal tensions owing to extreme or asymmetric
differentiations. Similarly, budget constraints on the Member
States and on the EU would make it impossible to respond
to increased requests for support following the accelerated
integration of the new States into the Euro zone.

3.2.2.
Special emphasis must be placed on the need for the
applicant countries to consolidate the liberalisation of their
economies and their competitive capacity. Key requirements
include the smooth, obstacle-free running of the capital market
(for investments in real estate as well as in securities),
a stronger banking and finance sector (with the growing
participation of EU establishments), the absence of any public
sector financing by the national central bank, and effective
watchdogs able to monitor the implementation of laws and
regulations and supervise the smooth running of the markets.
These requirements may justify EU inspections in conjunction
with socio-occupational interest groups.

3.2.3.
Great care must therefore be taken to build solid and
lasting foundations for the successful introduction of the euro
in these countries by ensuring, long before the Maastricht
criteria are met — which will also require comparable
statistics —, that the economic and social fabric is strong (e.g.
productivity, social climate, adaptation of the public sector,
SME development). ‘Nominal’ convergence must be backed up
by ‘real’ convergence in order to be sustainable and profitable.
There can therefore be no hope of meeting the Maastricht
criteria on a sustainable basis until a critical threshold of
economic growth and liberalisation has been crossed. It may
even be the case that an applicant country that appears to be
further than another from meeting the Maastricht criteria is in
reality more advanced in consolidating its economic liberalis-
ation and thus in progressing with the real preparation for its
future integration into EMU. It should also be noted that after
accession, certain new factors may temporarily make it more
difficult for the new Member States to meet the Maastricht
criteria. New inflationary pressures are for instance to be
expected owing to the impact of new agricultural prices and
Structural Fund transfers. For this reason, sound preparation
for later joining EMU will hinge on thorough preparation to
meet EU accession requirements on the one hand, and
successful adjustment to the economic and social consequences
of accession on the other.

3.2.4.
In addition to adapting to new economic and legal
factors, close attention will have to be paid to strengthening
the institutional and social
infrastructure of the applicant
countries. First and foremost this means promoting the role of
the social partners and improving the functioning of the labour
market. The development of representative organisations and
consultation between social partners and with the government
should make a very direct contribution to the effective
coordination of macroeconomic policies and social adaptation
policies, especially in the context of the Cardiff, Cologne and
Lisbon processes. The social partners of the current Member
States and the European Economic and Social Committee,
through its joint consultative committees, have a part to play
in supporting the socio-occupational organisations in the
applicant countries by organising exchanges and information
and training programmes.

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3.2.5.
The Commission’s latest annual report of Novem-
ber 2001 on progress made on preparation and more specifi-
cally on adoption of the Community acquis is encouraging for
10 of the 12 applicant States conducting accession nego-
tiations. Romania and Bulgaria still have some distance to
cover before they will be in a position to join (and thus still
more before ultimately joining EMU).

3.2.6.
Accession will clearly raise the issue of keeping up
the momentum for preparing for enlarging EMU. This gives
rise to two comments:

3.2.6.1.
On the one hand, it is important to be aware that
the ‘big bang’ represented by the simultaneous accession of ten
new Member States into the European Union, while opening
up the direct prospect of EMU enlargement, will not necessarily
accelerate it: the 15 Member States, the Commission and
the Central Bank may be inclined to return to a stricter
differentiation for the subsequent EMU accession stage. Where-
as it is to be expected that certain new EU Member States will
manage to move quickly to join EMU, other new members
will almost certainly remain in the non-euro zone for longer.

3.2.6.2.
However, while it is important not to race through
the stages on the road towards EMU, it is also essential not to
be hemmed in by a wait-and-see attitude that allows new
Member States to stay too long in the non-euro category. The
risk in the long run would be to fragment the single market,
while to a greater or lesser degree encouraging a relaxation in
the standards required of those countries to join EMU. A
balance must
therefore be found between these differing
requirements.

An effective response would be to ensure that, on
3.2.7.
the new Member States join the revised EMS
accession,
exchange rate mechanism (ERM2). The Committee made this
recommendation in its opinion of April 2001 (1) on the
economic indicators for accession. It is now repeating it, as it
would make it possible for:

3.2.7.4.
a substantial margin of exchange rate flexibility to
be maintained, as this is still authorised within a 15 %
band under ERM2, thus avoiding premature rigidity and
safeguarding significant economic and social flexibility.

3.2.8. When, after at least two years of exchange rate
mechanism participation, the time comes to decide on actual
entry into EMU, not only will it be necessary to check whether
the Maastricht criteria are genuinely being met, but also
whether they are being met in a sustainable manner.

3.2.9. Well
in advance of joining EMU, many of these
countries will already have been using the euro as a vehicle
currency alongside their national currencies, as some already
did with the German mark before there were euro notes and
coins. This freedom to use the euro in commercial transactions
can offer these countries a number of practical advantages,
boost
international appeal of the euro and also help to
familiarise their populations with the currency that will
eventually become their own. However, it will not be enough
to bring them into the EMU, as that will depend on all
the other economic, financial, budgetary and social criteria
mentioned above.

3.3.

Support from the Union

3.3.1.
Under Agenda 2000, the Union earmarked signifi-
cant budgetary support for the pre-accession period and for
the first few years of membership: the March 1999 Berlin
agreement earmarked EUR 20 billion for pre-accession instru-
ments from 2000 to 2006 inclusive and EUR 50 billion for
new Member States accessible from 2002 if necessary.

On 30 January 2002 (2), the Commission presented
3.3.2.
an update of these provisional budget figures to take account
of two new developments:

3.2.7.1.
the exchange rate policies of the new Member
States to be placed in a Community framework from now on;

— first, the target date for the first wave of accessions had

been shifted to 2004;

3.2.7.2.
continue active preparation for EMU;

pressure to be exerted on these countries to

— second, there are now likely to be not five or six new
Member States in the first wave of accessions but 10.

3.2.7.3.
an essential preliminary legal condition to be met,
removing all risk of one or other of these countries opting out
of EMU, which would go against the previous renunciation of
any political opt-out;

3.3.3.
In preparation for the accession of 10 new Member
States in 2004, these new Commission guidelines also envisage
EUR 40 billion of commitments and EUR 28 billion of
payments for the 2004, 2005 and 2006 period. This projection
remains within the upper limits of the EU’s budget ceiling and,
in particular, the Berlin multi-annual agreement.

( 1) EU enlargement: the challenge faced by candidate countries of
fulfilling the economic criteria for accession — OJ C 193,
10.7.2001.

(2) SEC(2002) 102 final.

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This budget will not affect

3.3.4.
future agricultural,
regional and budget policy reform. It does however involve a
gradual withdrawal of Structural Fund aid from certain former
EU priority regions, a 10-year transition period before direct
payments are made to farmers in the new States, and the
payment by the new members of their contributions to the
Community budget as of the first year of membership (figures
that have still to be confirmed in the accession negotiations).
It is also clear to theCommittee that accession will mean
stepping up the adaptation of agricultural, regional and budget
policies.

A second report (1) submitted by the Commission on
3.3.5.
the same day looks at the future of cohesion policy from
2007.
In a Europe of 25 to 27 Member States, regional
disparities in GDP will double, moving from 1:3 to 1:6. In
addition to transfers for the east, the Commission is also
calling for a support policy that is not restricted to the least
developed regions of the EU, even if this means refocusing (i.e.
cities, upland areas, border regions, peripheral regions). The
Committee notes that from 2007, and possibly earlier, the
cost of enlargement could raise new issues in the area of
Member State contribution levels and EU resources. The
reforms under way in many Community policies (e.g. agricul-
tural policy and regional policy) must be carried out within a
global perspective and plans must obviously be made to
bolster the European Union’s own resources.

In the first half of 2001, the Ecofin Council agreed
3.3.6.
to begin cooperating more closely with the applicant State
finance ministers and central bank governors by inviting them
once during every six-month presidency, and by means of
regular reports to the Ecofin Council on the economic situation
in those countries. The Committee welcomes the development
of this cooperation on economic convergence and suggests
that it should be extended to other Councils directly concerned
by this objective, first and foremost the Employment and
(especially regarding the applicant
Social Affairs Council
countries’ preparations for implementing the employment
guidelines).

The Committee is also pleased to note that contacts
3.3.7.
between the European Central Bank and the applicant
countries, already well-established and regular, have been
stepped up with operational support programmes (e.g. bilateral
contacts, traineeships, methods for updating statistical data).
Most of the applicant country central banks can be considered
independent (although in some cases more time is needed to
anchor a genuine culture of independence and stability). This
independence will in any case be required of each applicant
State on joining the EU.

3.3.8.
Lastly, the Committee welcomes the involvement of
the applicant countries in the March 2002 Barcelona summit.
This EU initiative is in total harmony with the recommen-
dations made by the Committee in its opinion of April 2001
on the economic indicators for accession, where it proposed

( 1) COM(2002) 46 final.

involving the applicant countries in the implementation of the
March 2000 Lisbon mandate. The only way to optimise the
applicant countries’ preparation for EU accession and later for
membership of EMU is to involve them directly in the
economic, social and administrative reforms required by the
Lisbon mandate, seeking to turn Europe into the most dynamic
and competitive knowledge-based economy in the world by
2010.

4. Successfully adapting EMU to the enlarged Union

4.1.

Institutional changes

join until

4.1.1.
The prime challenge will be about numbers: from
the time of accession, the governors of the central banks of
the new Member States will be required to sit on the ECB’s
General Council but not on the Governing Council (which
they will not
they are EMU members). More
specifically, the membership of the Executive Board of the
European Central Bank will have to be reformed and restricted
in order to remain effective subsequent to enlargement. It must
be noted that the Nice Treaty did not deal with the issue of
the reorganisation of the European Central Bank following
enlargement, in particular the revision of the ‘one man, one
vote’ principle. It simply referred the issue back to the Council
by means of an enabling clause. It is not certain that the
governors of the national central banks will manage to find a
solution, while discussion among the Member States appears
to have come to a standstill. Time is short however, inasmuch
as it would be preferable to settle this matter by the time the
accession negotiations are concluded, rather than waiting
another few years for the first EMU enlargement. The Com-
mittee therefore hopes that the procedures for the effective
reform of the ECB’s management structure to make it ready
for enlargement will be in place by the time the accession
negotiations are completed, and that the reform will not have
to be postponed. Special consideration must be given to the
fact that in the enlarged EMU, the central bank will operate
less and less by unanimity and increasingly by a majority. All
the institutional resources must be set in place as of now.

4.1.2.
The second challenge will be that of diversity, with
major development gaps that will lessen or disappear only
very gradually.

4.1.2.1.
Initially, the European Union will have to face up
to the challenge of a greater quantitative and qualitative
difference between the Member States in the euro zone and
those outside it, whose numbers will swell considerably from
a current membership of only three (the United Kingdom,
Denmark and Sweden). With the forthcoming accession of ten
new States into the EU, the 12 States in the euro zone will be
outnumbered by the 13 in the non-euro zone. This prospect
immediately poses the question of whether the Eurogroup
should be made into an institution, in order to give it the legal
status and decision-making powers it is currently lacking, so
that decisions that concern it directly are no longer under the
responsibility of the Ecofin Council.

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4.1.2.2.
Subsequently, as new members join EMU, there
will be major diversity among the EMU Member States. In a
25-member EMU, it will be necessary to review such basic
issues as the application of subsidiarity, the role of national
parliaments, and cooperative management between members.
New forms of cooperation will have to be devised, almost
certainly including European tax reform. The Convention will
have to address a number of issues including how these
reforms can be applied, how to strike a democratic balance,
what powers and what counterbalances are needed, and what
compromise can be found between the Community and
intergovernmental methods. These are all issues that will also
demand very close attention from the European Central Bank,
the Council and the Commission.

4.2. New economic and social factors

4.2.1.
The additional economic weight that EMU enlarge-
ment will bring must not of course be overestimated, bearing
in mind that the GDP of the 12 applicant countries barely
accounts for 6 % of that of the 12 euro zone countries.
However, the fact that EMU will have to develop under more
diverse economic and social conditions will raise many issues,
at first regarding coexistence between the euro zone and the
non-euro zone, and later regarding how to manage a single
currency in more diverse economies. These issues will centre
on the variables for adjustment to these situations.

These will include varying levels of competitiveness
4.2.2.
and economic productivity, pay differentials, and migratory
movements, in particular across borders, that could develop
within the euro zone. In a decade or more, the effects of
acculturation will help to give greater uniformity to this
enlarged euro zone (cf. methods of government, co-responsi-
bility of economic players and social partners, effects of the
economic and social reform process agreed at Lisbon for the
in the meantime, it will be
2000/2001 period). However,

Brussels, 19 September 2002.

necessary to manage the contrasts and frictions between these
widely differing national systems and economies.

4.2.3.
In this context, budget transfers within the enlarged
EMU will be a particularly thorny issue. Until now, the EU has
opted for an EMU characterised by little central intervention,
few shared budgetary resources and the absence of any
significant degree of tax harmonisation. The increased diversity
among the Member States making up EMU will certainly
unearth new problems to which the current set-up may have
difficulties responding, such as the above-mentioned issues of
major differences in production factors, risks of economic or
social tensions, or the effects of asymmetric shocks. For the
post-2006 period, the EU will therefore have to take a fresh
look at:

— the issue of EU budget transfers (Cohesion Fund, aid, etc.)

— the issue of EU budgetary resources (steps towards a

European tax?)

— and other related issues, relating in particular to taxation
in Europe (disparities and competition between tax
regimes and also the overall tax burden).

4.3.

International repercussions

4.3.1.
The euro is destined to become an international
currency with world-wide importance. Care must be taken to
ensure that the enlargement of EMU takes place in conditions
which support — rather than threaten — the international
prestige of the euro, as this is an indispensable condition for
its success.

It will also be necessary to monitor the effects of the
4.3.2.
enlargement of EMU on nearby and neighbouring economies,
especially in Russia, Ukraine, Belarus and other former Soviet
Union as well as Mediterranean and ACP countries.

The President

of the Economic and Social Committee

Göke FRERICHS