Communication from the Commission to the Council and the European Parliament -  Enlargement, two years after - an economic success
Date: 2006-05-03
Institutions: European Commission
Subjects: economic consequence, economic convergence, economic growth, economic situation, enlargement of the Union

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 3.5.2006 
COM(2006) 200 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

Enlargement, Two Years After - An Economic Success 

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

Enlargement, Two Years After - An Economic Success 

I. 

II. 

Introduction: enlargement, a success story .................................................................. 3 

Considerable growth and stability................................................................................ 4 

III. 

Increasing integration in the EU economy................................................................... 4 

III.1.  Higher trade.................................................................................................................. 4 

III.2.  More foreign direct investment.................................................................................... 5 

III.3. 

Strong dynamism in the financial sector...................................................................... 5 

IV. 

Smooth adjustment....................................................................................................... 6 

IV.1. 

Fears of relocation not justified ................................................................................... 6 

IV.2. 

Limited migration......................................................................................................... 7 

IV.3. 

Successful implementation of Internal Market legislation........................................... 8 

IV.4.  Agriculture, a success out of a major challenge........................................................... 8 

IV.5. 

Strengthening employment and social cohesion .......................................................... 9 

V. 

VI. 

A managed budgetary impact of enlargement ........................................................... 10 

Conclusion ................................................................................................................. 10 

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

Enlargement, Two Years After - An Economic Success 

I. 

(1) 

(2) 

(3) 

(4) 

1 

INTRODUCTION: ENLARGEMENT, A SUCCESS STORY 

The fifth enlargement  of the EU on 1  May 2004 has been the most ambitious in  the 
history  of  the  European  Union:  the  largest  ever  in  terms  of  number  of  countries  and 
population acceding to the EU; the most complex, as it brought in the EU ten countries 
which had experienced very diverse economic, social and political developments.  

The economic implications of this enlargement were reviewed extensively in the run-
up to the May 2004 deadline. Studies ahead of accession predicted a significant boost 
of economic growth for the new Member States (1.3-2.1% additional GDP growth per 
year). The old Member States were also expected to benefit, but due to the relatively 
limited  economic  size  of  the  newcomers  –  less  than  5%  of  total  EU-25  GDP  –  the 
impact  was  estimated  to  be  marginal.  Consequences  such  as  migration  flows, 
relocation  of  activity,  downward  pressure  on  wages  in  the  old  Member  States  and 
adjustment  costs  in  the  new  Member  States  were  expected  to  be  contained  and 
transitory. 

Two  years  after the enlargement took  place, it is time to review the experience.  The 
lessons  from  the  fifth  enlargement  can  be  useful  to  understand  the  benefits  and 
challenges  of  European  integration.  Further  enlargement  steps  can  take  such  lessons 
into  account.  While  the  accession  which  took  place  in  2004  has  first  and  foremost  a 
political  and  strategic  dimension  for  its  importance  in  reunifying  Europe,  this 
Communication,  and  the  study  on  which  it  is  based1,  focuses  on  the  economic 
dimension of enlargement. It assesses whether the expectations of a positive economic 
impact prevailing in the run-up to the enlargement, in spite of some concerns in both 
the existing and acceding countries, have been fulfilled.  

As outlined below, the favourable economic expectations have been fulfilled. The new 
Member States have undertaken extensive reforms to modernise and are now dynamic 
market  economies.  The  stability  provided  by  accession  has  helped  to  multiply  trade 
and  investment between EU-15 and EU-10  as well as within EU-10, creating a win-
win situation for all involved: contributing to growth and employment in the EU-10; 
opening  new  opportunities  for  firms  in  the  EU-15,  thereby  helping  them  stay 
competitive in the face of a ever more challenging global environment; and having a 
favourable impact on consumer across the EU, who can benefit from a wider choice. 
Overall, the fifth enlargement, by leading to a larger, more integrated internal market, 
has  created  the  conditions  for  the  whole  European  economy  to  become  stronger  and 

"Enlargement,  Two  Years  After",  a  study  by  the  Bureau  of  European  Policy  Advisers  and  the 
Directorate  General  for  Economic  and  Financial  Affairs,  Occasional  Paper,  N°  24,  2006,  European 
Commission,  Directorate  General 
available 
for  Economic 
at:http://europa.eu.int/comm/economy_finance/publications/occasionalpapers_en.htm 

Financial  Affairs, 

and 

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more dynamic, hence to be better equipped to face increased global competition. More 
broadly,  and  fundamentally,  by  enhancing  peace,  stability,  security,  prosperity, 
democracy,  human  rights  and  the  rule  of  law  across  Europe,  it  is  clear  that  the  fifth 
enlargement, as the previous ones, has been a success for all its Member States. 

II. 

(5) 

(6) 

CONSIDERABLE GROWTH AND STABILITY  

The  accession  of  several  less  wealthy  nations  widened  income  disparity  in  the  EU, 
with  GDP  per  capita  (measured  in  PPS)  ranging  from  40%  of  the  EU-15  average  in 
Latvia to 210% in Luxembourg. Economic growth has been on average faster in the 
new  Member  States  (3¾%  per  year  in  1997-2005)  than  in  the  old  (2½%).  The 
resulting catching-up process has seen the EU-10 average income rising from 44% of 
the EU-15 level in 1997 (the year in which enlargement prospects became concrete in 
the Commission’s Agenda 2000 plans) to 50% in 2005. In general, countries with the 
lowest initial per-capita incomes have tended to grow the fastest. Only in a few cases 
growth  has  fallen  behind  expectations  in  certain  years.  The  strong  economic 
performance has improved the labour market situation in these countries and, after a 
long  period  of  decline,  employment  was  stabilised  in  2004  and  expanded  by  about 
1.5% in 2005. 

Strong economic growth went hand in hand with increasing macroeconomic stability. 
Ongoing  economic  integration  and  the  extension  of  the  EU-wide  economic  policy 
coordination  and  budgetary  surveillance  procedures  to  the  new  Member  States  have 
reinforced economic policy discipline. Inflation and interest rates in the new Member 
States  have  come  closer  to  those  of  the  EU-15,  reflecting  the  overall  credibility  of 
economic policy. Developments in public finances, however, have been less uniform 
also reflecting the impact of transition-related reforms. While six of the new Member 
States joined the EU with government deficits in excess of the 3% of GDP threshold 
set  by  the  Treaty,  most  of  them  have  made  progress  toward  the  correction  of  the 
excessive deficit situation, which currently also characterises an equally large number 
of old Member States. In most of the EU-10 the stock of public debt is well below that 
of the EU-15.  

III. 

INCREASING INTEGRATION IN THE EU ECONOMY 

III.1.  Higher trade 

(7) 

Trade  was  liberalised  through  the  Europe  Agreements  signed  with  the  candidate 
countries in the early 1990s. A Free Trade Zone was established by the beginning of 
this  decade  covering  85%  of  bilateral  trade.  Already  before  the  enlargement  the 
prospect of EU accession resulted in increased trade integration within the EU-25 area. 
The  EU-10  countries  are  very  open  economies  with  trade  (exports  plus  imports) 
representing  an  average  of  93%  of  GDP  compared  with  an  EU-15  average  of  55%. 
The  EU-15  share  in  total  EU-10  trade  has  risen  from  about  56%  in  1993  to  62%  in 
2005. The EU-10 market share in EU-15 imports has also increased by 8 percentage 
points to about 13% over the period 1993-2005 (excluding intra-EU-15 trade) with the 
Czech Republic and Poland (with market share of about 3.5%, each) being the largest 
exporters.  While  the  market  gains  of  the  EU-10  have  been  significant,  reflecting 
competitive  labour  cost  conditions,  the  EU-15  continue  to  run  a  substantial  trade 

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(8) 

(9) 

surplus with the new Member States. To a large extent, the pattern of trade integration 
reflects complementarities between Member States. Comparative advantage estimates 
confirm  that  the  trade  of  EU-10  is  so  far  dominated  by  low-  and  medium-low 
technology  specialisation  using  labour  intensively.  The  trade  of  the  EU-15  is  more 
specialised in products requiring a higher skill and capital intensity. 

Upon  enlargement,  the  average  tariff  applied  by  the  EU-10  to  imports  from  third 
countries  decreased  from  8.9%  to  the  EU  average  of  4.1%.  Although  they  face 
increased competition from emerging markets, in particular China and India, the EU-
10 have significantly increased their share in world markets, with exports rising from 
1% in 1992 of the world total to 2.8% in 2003. As it can be expected of catching up 
economies,  the  EU-10  have  been  running  relatively  large  trade  deficits,  which  have 
been easily financed by inward foreign direct investment. In spite of the reduction in 
tariffs and competition from emerging markets, the average trade deficit has strongly 
diminished  in  recent  years  to  about  3%  of  GDP  by  2005.  In  a  number  of  countries 
however, external imbalances remain sizeable, warranting – especially when coupled 
with high inflation – close policy surveillance. 

III.2. More foreign direct investment 

Since  the  mid-1990s  the  presence  of  foreign  firms  in  the  new  Member  States  has 
grown rapidly, with the stock of foreign direct investment (FDI), which was virtually 
non-existent  some  ten  years  earlier,  reached  over  €  190  billion  in  2004,  or  40%  of 
local GDP. With a share of three quarters of the total FDI to new Member States, the 
old  Member  States  are  the  main  investor.  Germany  is  the  top  investor  and  is 
particularly  active  in  the  Czech  Republic,  Hungary,  Poland  and  Slovakia  while  the 
Nordic countries are the main investors in the three Baltic States. The largest part of 
FDI  (55%)  is  invested  in  services,  followed  by  manufacturing  (37%).  While  in  the 
Baltic States and to a lesser extent in Poland manufacturing FDI is still concentrated in 
traditional industries like food processing, textiles and wood products, in Hungary, the 
Czech  Republic  and  Slovakia  foreign  investors  are  focusing  increasingly  on  modern 
manufacturing sectors (e.g. office machinery, computers, telecommunication, cars).  

III.3. Strong dynamism in the financial sector 

(10)  Since the transition-related banking crisis of the early 1990s, the new Member States 
have made substantial progress in developing a stable financial environment and have 
hence avoided any major financial turbulence, although in some cases their exchange 
rate has shown considerable volatility. 

(11)  With the exception of Cyprus and Malta, which have been market economies from the 
outset, the financial systems in the new Member States are typically small compared to 
the EU-15, but are expanding rapidly, as the recent surge in credit growth illustrates. 
Loans  outstanding  in  the  eight  Central  and  East  European  countries  still  remain  far 
below  the  average  level  in  the  euro  area.  The  same  is  true  as  regards  stock  market 
capitalisation.  Integration  has  proceeded  rapidly  in  the  banking  sector  with  cross-
border  investment  and  foreign-banks  penetration  rates  now  much  higher  than  in  the 
EU-15. Enhanced competition has resulted in cheaper loans, especially mortgages, and 
net interest margins narrowing to euro-area levels (at around 0.5%) in Hungary, Latvia 
and Slovakia. By contrast, in some countries, such as Poland and Slovenia, net interest 

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margins  remain  relatively  high  at  3%,  suggesting  that  there  is  scope  for  further 
competition in this field.  

(12)  Accession  has  offered  to  EU-15  financial  intermediaries  the  opportunity  of  new 
growth  markets  and  improved  portfolio  diversification,  which  has  been  taken  to  a 
significant extent by many banks from most old Member States. Austria is one of the 
most striking examples, its banks having 25% of their assets invested in the EU-8. The 
Nordic banks are particularly involved in the Baltic States.  

IV. 

SMOOTH ADJUSTMENT 

IV.1.  Fears of relocation not justified 

(13)  The  right  of  establishment  is  a  fundamental  freedom  under  the  Treaty  and  a  major 
element  of  the  Internal  Market  ensuring  the  efficient  allocation  of  resources,  and 
ultimately leading to overall economic prosperity. Nevertheless, the growing stock of 
FDI  from  old  in  the  new  Member  States  has  raised  concerns  in  the  EU-15  about 
relocation  of  activities  and  consequent  job  losses.  The  evidence  indicates  that  FDI 
flows to the new Member States, while relevant for the recipient countries, have in fact 
been only a minor part of overall FDI outflows of the EU-15: within the latter, in 2004 
the share of outflows to new Member States was 4% against a corresponding share of 
53% for outflows to other Member States in the EU-15 and a 12% share for flows to 
the US. In addition, a large part of the FDI by the EU-15 in the new Member States, 
particularly in the services sector where most of FDI is invested, has occurred in the 
context  of  privatisation  programmes  to  capture  fast-growing  markets  and  does  not 
involve the substitution of activities previously carried out in the home country.  

(14)  Different  studies  have  tried  to  identify  the  impact  of  relocation  non  employment. 
Recent research for some EU-15 countries suggests that a mere 1-1.5% of the annual 
job turnover can be attributed to relocation, and that only a part concerns relocation to 
the  new  Member  States.  In  Germany  and  Austria,  for  example,  two  countries  which 
figure among the largest investors in the EU-10, it is calculated that such investment 
has  lead  over  the  past  fifteen  years  to  a  lower  employment  creation,  in  cumulative 
terms, in the range of 0.3-0.7%, which is a very small percentage in particular if one 
also  considers  the  overall  job  creation  which  took  place  over  the  same  period. 
Moreover,  in  many  instances,  outsourcing  part  of  the  production  process  to  the  new 
Member  States  has  allowed  firms  in  EU-15  to  strengthen  their  competitive  position 
with a net favourable impact on employment. 

(15)  While  not  significant  in  a  macroeconomic  perspective,  the  impact  of  relocation  and, 
more generally, restructuring, can be substantial in certain industries or regions. As a 
consequence,  the  Commission  has  acknowledged  the  need  to  anticipate  and 
accompany  change  in  its  Communication  on  restructuring2,  in  which  it  laid  out  an 
approach aiming at better integrating the different Community instruments, especially 
the Structural Funds, in order to mitigate the associated costs. 

2 

“Restructuring and employment – Anticipating and accompanying restructuring in order to develop 
employment: the role of the European Union”, Communication from the Commission, COM(2005) 120 
final, 31 March 2005, available at: 
http://ec.europa.eu/comm/employment_social/news/2005/apr/com_restruct_en.pdf 

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(16) 

In  the  relocation  debate,  the  argument  has  been  advanced  that  relocation  may  be 
driven  by  differences  in  corporate  tax  rates  between  Member  States.  However, 
international  investment  appears  driven  mainly  by  other  factors,  such  as  unit  labour 
costs  or  agglomeration  economies  (geographical  location  advantages,  market  size, 
external  economies,  the  general  business  environment,  human  capital)  leading  to 
spatial  concentration.  Moreover,  the  effect  of  taxation  on  corporate  revenues,  and 
hence on investment decisions, is likely to depend more significantly on several other 
aspects  of  the  overall  tax  system,  including  labour  taxation,  the  tax  base  and  the 
overall  transparency  and  integration  of  the  corporate  tax  system  (double  taxation, 
transfer  pricing  and  the  possibility  to  shift  corporate  income  between  parent  and 
subsidiaries).  Despite  a  decline  in  corporate  tax  rates  and  changes  in  tax  rate 
differentials  between  countries,  taxes  paid  by  EU  companies  as  a  share  of  GDP 
remained fairly stable in the last decade, both in old and new Member States. Reasons 
for this are likely to include a general broadening of tax bases or, for some Member 
States,  increased  profits  reflecting  higher  returns  to  capital.  Overall,  this  seems  to 
confirm that corporate tax rates as such have been less relevant than other factors in 
affecting investment decisions. 

IV.2.  Limited migration 

(17)  Given that barriers to trade, foreign direct investment and other capital movements had 
already been removed prior to enlargement, the free movement of persons and workers 
constituted  the  most  significant  new  dimension  of  economic  integration  on  1  May 
2004. Free movement of labour has proven to be one of the most politically sensitive 
issues  at  national  level  because  of  the  perceived  fear  of  increased  job  and  wage 
competition arising from accession. Therefore, the 2003 Accession Treaty granted the 
possibility – for a transitory period of up to seven years – to invoke a derogation from 
the  principle  of  the  free  movement  of  workers,  specifically,  by  allowing  national 
restrictions on workers from all new Member States except Cyprus and Malta. During 
the first-two year phase of the transitional arrangements, Ireland, Sweden and the UK 
decided  not  to  apply  restrictions,  although  the  UK  adopted  a  mandatory  registration 
scheme.  The  other  EU-15  Member  States  maintained  a  work-permit  regime, 
sometimes  combined  with  a  quota  system.  During  the  first  phase  of  the  transitory 
period all new Member States opened their labour markets to each other, but Poland, 
Slovenia  and  Hungary  apply  reciprocal  restrictions  to  EU-15  workers.  These 
transitional  arrangements  were  up  for  review  after  two  years.  Following  the  first 
review in early 20063, four Member States (Greece, Spain, Portugal and Finland) have 
decided  to  lift  restrictions  for  the  second,  three-year  phase  of  the  transitional 
arrangements  starting  on  1  May  2006,  while  six  others  (Belgium,  Denmark,  France, 
Italy, the Netherlands and Luxembourg) have decided to alleviate them. 

(18)  Migratory flows from the EU-10 have in general been small, even towards countries 
that  have  allowed  unrestricted  movement  of  workers,  and  there  have  been  no 
substantial disruptions of recipient national labour market. This is consistent with the 
experience  of  previous  enlargements.  Indeed,  if  anything  foreign  workers  have 

3 

"Report on the Functioning of the Transitional Arrangements set out in the 2003 Accession Treaty 
(period 1 May 2004-30 April 2006)", Communication from the Commission, COM(2006) 48 final, 8 
February 2006, available at: 
http://europa.eu.int/eur-lex/lex/LexUriServ/site/en/com/2006/com2006_0048en01.pdf 

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(19) 

complemented  the  existing  skill  base  of  the  EU-15  labour  markets.  In  fact,  the  first 
review of the Transitional Arrangements confirmed that migration from third countries 
is  far  greater  than  intra-EU  mobility.  In  2005,  in  the  two  countries  with  the  highest 
shares of non-nationals in the working-age population, namely Austria and Germany 
(at about 10%), only a small share (1.5% and 0.6%, respectively) comes from the EU-
10  (while  about  7%  are  non-EU  nationals).  The  largest  share  of  EU-10  nationals 
(about 2%, against a total of 8% for all non-nationals) is in Ireland.  

Interestingly,  but  it  is  difficult  to  establish  the  direction  of  causality,  those  Member 
States without restrictions for EU-10 workers (e.g. Ireland and the United Kingdom) 
are  the  ones  which  experienced  a  better  employment  performance.  Remaining 
Member  States  should  carefully  consider  whether  the  continuation  of  labour 
restrictions is needed, in the light of the situation of their labour market. Maintaining 
labour restrictions does not appear justified on purely economic grounds. Labour flows 
are  in  the  end  determined  by  demand  and  supply  conditions  and,  under  such  forces, 
there  is  the  risk  that  rules  can  be  circumvented  leading  to  the  growth  of  the  black 
economy.  Moreover,  restrictions  may  lead  immigrants  to  accept  work  below  their 
presumed  qualification  and  downward  pressure  on  wages,  thereby  generating  some 
form of brain waste and skewing the market towards the lower end of the skill and pay 
scale. Finally, labour market developments in the EU-10 have been positive, especially 
since  accession,  with  unemployment  rates  falling  significantly  in  almost  all  of  them. 
This suggests that there is no reason to expect increased pressure to move outside the 
EU-10, also as the outlook for economic growth remains bright.  

IV.3.  Successful implementation of Internal Market legislation 

(20)  The Internal Market goes far beyond the matter of implementing new legal rules. Its 
economic impact in terms of increased trade, more foreign investment and the creation 
of  a  well-performing  financial  sector  represent  tremendous  benefits  for  old  and  new 
Member  States.  Concerning  legislation,  the  new  Member  States  have  made  rapid 
progress  in  implementing  the  acquis  communautaire,  with  99%  of  directives  having 
been transposed into national legislation by March 2006. As a matter of fact, the new 
Member States are often better than the old ones at transposing EU law. As a result, 
the safeguard clause provided for in the Accession Treaties has never been triggered. 
Only in the area of competition do the new Member States lag somewhat behind the 
average of all Member States. 

(21)  This transposition effort has allowed the new Member States to profoundly reform the 
way  in  which  their  economies  were  regulated.  The  adoption  of  modern  regulatory 
frameworks  in  areas  such  as  financial  markets,  company  law,  accounting  or 
intellectual  property  has  created  a  better  environment  for  business  and  growth.  This 
compensates for the costs of compliance with the acquis which can be considerable in 
specific areas (e.g. around € 100 billion in both fields of transports or environment), 
even though these costs are spread over a long period of time and are co-financed by 
EU assistance. 

IV.4. Agriculture, a success out of a major challenge  

(22)  Agriculture  has  been  of  particular  importance  within  the  enlargement  process 
reflecting firstly the large increase in the EU's agricultural area (up 25%), production 
(up  10%)  and  number  of  farmers  (up  more  than  50%);  secondly,  the  key  role  the 

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(23) 

Common  Agricultural  Policy  continues  to  play  in  the  EU  budget.  Agricultural 
productivity  in  the  new  Member  States  is  considerably  lower  than  in  the  EU-15  and 
the  income  gap  correspondingly  large.  However,  the  situation  in  agriculture  is  quite 
heterogeneous  in  both  the  old  and  new  Member  States.  Some  of  the  new  Member 
States  have  high  agricultural  employment  shares  associated  with  subsistence-like 
farming (19% in Poland in 2005, 16% in Lithuania and 12.5% in Latvia), a situation 
similar to that of Greece and Portugal at the beginning of the nineties. Countries such 
as  Slovakia  and  the  Czech  Republic,  on  the  other  hand,  have  a  rather  low  share  of 
agricultural employment (about 4%), which is already similar to the average level in 
the old Member States. 

Increased  trade  integration,  an  inflow  of  foreign  direct  investment  as  well  as  EU 
support have contributed to the modernisation of agriculture, to the growth of farmers' 
income  ,  and  to  the  increase  of  the  animal  stock  in  the  EU-10.  Agricultural  trade 
almost  doubled  both  within  EU-10  and  between  the  EU-10  and  EU-15  in  the  period 
1999-2004; trade in processed products, an indicator of a modern agricultural sector, 
also  increased  significantly  in  the  same  period.  Direct  income  payments  have 
considerably  enhanced  farmers’  real  incomes,  which  increased  by  70%  on  average 
between 1999/2003 and 2004/2005, while in the EU-15 they have remained generally 
stable. Thus, fears of an adverse income effect related to enlargement have not been 
confirmed in the new as in the old Member States. However, with the annual income 
per  work  unit  in  the  EU-10  still  at  only  16%  of  the  EU-15  level  in  2004/05  (but  up 
from  10%  in  1999-2003),  there  is  clearly  ample  room  for  further  rationalisation  and 
increase in productivity in the agricultural sector of the new Member States. 

IV.5. Strengthening employment and social cohesion  

(24)  During the 1990s, the central and eastern European Member States experienced sharp 
declines  in  employment  and  a  rapid  increase  in  unemployment,  reflecting  a 
combination  of  cyclical  factors  and  structural  adjustments.  While  the  labour  market 
situation has improved lately, at 56% of the working-age population, the employment 
rate  in  EU-10  is  currently  substantially  lower  than  in  EU-15,  particularly  for  young 
and older workers. Moreover, at 13.4% of the labour force, the unemployment rate in 
the EU-10 is 5.5 percentage points above the EU-15 average. Wide variations can be 
observed  across  the  new  Member  States  (just  as  in  the  EU-15),  with  unemployment 
rates in 2005 ranging from about 6% in Cyprus and Slovenia to the more than 16% in 
Slovakia and almost 18% in Poland. 

(25)  The  new  Member  States  are  implementing  labour  market  reforms  as  part  of  their 
National Reform Programmes supporting the Lisbon strategy for growth and jobs. The 
Lisbon employment targets remain ambitious for a number of them, which have low 
employment  rates.  A  major  challenge  is  adaptability  in  labour  markets  and  in 
particular  skills  and  human  resources  development.  The  European  Social  Fund 
contributes to support efforts in this respect.  

(26)  The  new  Member  states  have  not  experienced  major  difficulties  in  aligning  on  the 
acquis  communautaire  in  employment  and  social  policy,  which  includes  minimum 
standards  on  labour  law,  health  and  safety  at  work,  gender  equality  and  anti-
discrimination,  as  well  as  social  dialogue  and  participation  in  EU  processes  on 
employment, social inclusion and social protection. Strengthening social dialogue and 
continuing reforms on social protection are among the key challenges to be addressed. 

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The pre-conditions for successful strategy exist as some of the new Member States are 
among  the  best  in  the  EU  on  some  key  indicators  such  as  the  proportion  of  the 
population at risk of poverty: 8% in the Czech Republic and 10% in Slovenia in 2003. 

V. 

A MANAGED BUDGETARY IMPACT OF ENLARGEMENT  

(27)  The  impact  of  enlargement  on  the  budgetary  resources  of  both  the  old  and  new 
Member States has been manageable. In total about € 28 billion has been transferred to 
the  10  new  Member  States  in  the  last  15  years4.  Already  before  May  2004  the  EU 
supported the preparations for accession. The annual amount has been increasing over 
time  reaching  just  over  2%  of  EU-10  GDP  in  2005.  The  disbursements  to  the  new 
Member  States  represent  6.9%  of  the  EU  budget  (data  based  on  the  2004  budgetary 
execution), which is more than those States' GDP share in the EU (4.7%). This reflects 
the  commitment  of  the  richer  Member  States  to  help  their  poorer  neighbours. 
However,  the  financial  contribution  by  old  Member  States  related  to  enlargement 
remains limited as it represents only 0.1% of their GDP.  

(28)  The  new  Member  States  are  net  beneficiaries  of  the  EU  budget.  For  the  group  as  a 
whole, average net EU transfers amounted to 0.6% of gross national income (GNI) in 
2004 ranging from 0.25% of GNI for Hungary to 2.1% of GNI for Lithuania. Under 
the new financial framework 2007-2013, net transfers to the new Member States are 
expected to almost triple from an average of 1% of GDP in 2004-2006 assuming full 
absorption  of  the  ceiling  for  payment  appropriations.  This  level  of  assistance  would 
continue to represent only a small burden for the EU-15. 

(29)  Because of additionality requirements (in certain domains EU money can not replace 
national expenditure), co-financing requirements (to promote financial responsibility) 
as well as contributions to the EU budget, it was feared that government budgets in the 
new  Member  States  might  be  strained.  This  does  not  appear  to  have  been  the  case, 
thanks  also  to  specific  initiatives  undertaken  through  the  EU  budget,  such  as  the 
“Schengen” and the “Compensation” facilities. It is estimated that in 2004 there was a 
favourable net effect on the government budgets of 0.3% of GDP for the EU-10 as a 
whole, reaching more than 1% of GDP in the Baltic States.  

VI. 

CONCLUSION 

(30)  Overall,  the  fifth  enlargement  has  acted  as  a  catalyst  of  economic  dynamism  and 
modernisation for the European Union, helping the economies of old and new Member 
States  to  better  face  the  challenges  of  globalisation.  At  the  same  time,  the  economic 
changes induced by this enlargement have been absorbed quite smoothly, and there is 
no evidence of disruptive impacts on the product or labour market. Careful preparation 
of the  enlargement over the previous  decade has been key  to achieve this successful 
outcome. 

(31)  While  the  experience  so  far  suggests  that  optimism  is  in  order,  the  remaining 
challenges  should  not  be  underestimated.  Both  new  and  old  Member  States  face 

4 

This  figure  corresponds  to  actual  disbursements,  whereas  40  billion  were  foreseen  as  commitments 
2004-2006. 

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ageing  populations  and  related  budgetary  strains,  global  competition  increasing 
pressure  on  their  economies,  and  a  need  to  adapt  to  these  realities,  including  by 
modernising  their  welfare  systems  and  becoming  knowledge-based  and  innovative 
societies.  Further  convergence  of  the  economies,  itself  a  long-term  challenge,  would 
contribute significantly to this end.  

(32) 

In a world marked by global competition, not least from Asia, economic dynamism is 
essential. The fifth enlargement has offered new opportunities for both the old and the 
new  Member  States  to  undertake  important  steps  in  this  direction.  Further  European 
economic  integration  will  help  Europe  to  stay  competitive  and  gain  from  increasing 
internal  and  external  trade,  and  better  growth  and  employment  prospects.  Both 
companies  and  consumers  will  benefit  from  a  larger  internal  market,  technological 
innovation,  lower  prices,  and  hence  will  be  in  a  better  position  to  fully  reap  the 
opportunities of the new division of labour that is emerging at global level. The Lisbon 
strategy  for growth  and  jobs  and  the path to  the  euro  offer  a  framework  in  which  to 
pursue the necessary structural change. Taking with determination this road leading to 
a dynamic European Union on the world scene will yield further substantial benefits to 
all parties involved in the EU and beyond.  

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