Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Central Bank - Five years of an enlarged EU – Economic achievements and challenges – {SEC(2009) 177}
Date: 2009-02-20
Institutions: European Commission
Subjects: economic consequence, economic convergence, economic growth, economic situation, enlargement of the Union

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 20.2.2009 
COM(2009) 79 final 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN 
CENTRAL BANK  

Five years of an enlarged EU  
– Economic achievements and challenges – 

{SEC(2009) 177} 

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FIVE YEARS OF AN ENLARGED EU – A HISTORIC LANDMARK 

Twelve  countries  from  Central  and  Eastern  Europe  and  the  Mediterranean  joined  the 
European Union in two waves in 2004 and 2007. This was the biggest ever enlargement of the 
EU  and  a  historic  step  towards  unifying  Europe  after  several  decades  of  division  resulting 
from the Cold War. Five years after the 2004 accessions, the enlargement has emerged as a 
major success for the EU and its citizens, fulfilling one of the original purposes of European 
integration. 

The  new  Member  States  –  through  their  sheer  number  and  dynamism  -  have  made  the  EU 
stronger  and  culturally  richer.  The  enlargement  process  has  helped  build  and  consolidate 
democracy after the demise of the communist regimes. It has strengthened European security, 
by  providing  a  crucial  anchor  of  stability  in  a  period  of  conflicts  and  upheavals  within  and 
around our continent. It has greatly boosted the economies and improved living standards in 
the new Member States, thereby also benefiting the old Member States notably through new 
export  and  investment  opportunities.  It  has  strengthened  the  economy  of  the  Union  as  a 
whole, through the advantages of integration in a larger internal market.  

The enlargement, by hastening the pace of structural reforms, has also better prepared Europe 
to  embrace  the  benefits  and  tackle  the  challenges  of  globalisation  by  making  it  more 
competitive in the world. An enlarged EU also carries more weight when addressing issues of 
global  importance  such  as  climate  change  or  the  international  financial  crisis.  Overall,  the 
accession of 12 new Member States has increased the weight of the EU in the world and made 
it a stronger international player, in both economic and political terms. 

Together  with  the  accompanying  analytical  report1,  this  Communication  focuses  on  the 
economic  aspects  of  enlargement,  assesses  the  economic  achievements  so  far  and  identifies 
the  main  challenges  ahead.  Enlargement  has  been  a  win-win  situation  for  both  new  and  old 
Member States and the EU as a whole. Despite fears that it would entail disruptions for the 
economic  and  social  systems  of  the  old  Member  States,  the  experience  proves  that  none  of 
these sombre predictions were justified.  

However,  more  diversity  requires  greater  coordination  and  deeper  integration.  The  Lisbon 
Treaty addresses the institutional impact of successive enlargements. Widening and deepening 
the EU have always gone hand in hand and will continue to do so. Of course, there will be 
challenges ahead (including for future enlargements) but we have the means to tackle them. 

*** 

The  latest  enlargements  of  the  European  Union  have  brought  greater  economic 
prosperity for all EU citizens and made Europe a stronger player in the world economy. 
The enlargement helped further unleash the growth potential and increase the resilience of the 
European  economy  by  deepening  economic  integration  and  boosting  competitiveness.  The 
enlarged  EU  is  now  the  largest  integrated  economic  area  in  the  world,  accounting  for  more 
than 30% of the world's GDP and more than 17% of world trade (excluding intra EU trade). 

1 

"Five  years  of  an  enlarged  EU  –  Economic  achievements  and  challenges",  European  Economy,  No. 
1/2009 

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The  institutional  and  legal  frameworks  and  the  common  policies  of  the  EU  played  an 
important role in ensuring this success. Macro-economic stabilisation, institution-building, 
regulatory convergence, improvements in governance, trade integration and capital movement 
liberalisation took place throughout the accession process, so that many benefits were already 
visible  prior  to  2004/2007.  EU  accession  anchored  economic  policies,  created  a  stable  and 
competitive  economic  environment  and  spurred  public  investment  in  human  capital  and 
infrastructure, thereby creating ample opportunities for private initiatives. Investors from the 
old Member States, and all over the world, quickly seized these new opportunities, bringing 
about  an  unprecedented  inflow  of  private  capital  into  the  new  Member  States.  The 
acceleration  in  financial  integration  caused  by  the  introduction  of  the  euro  or  the  prospect 
thereof  and  fast-paced  globalization  created  a  particularly  supportive  environment  for  this 
process. The full and successful integration of new Member States into EU employment and 
social policy should also be highlighted. Those impressive results show the enduring value of 
rigorous reform efforts combined with the EU policy framework. 

Entrepreneurs and citizens throughout the enlarged EU have experienced clear benefits. 
In the old Member States, export-oriented firms realized important competitiveness gains and 
labour  migration  eased  bottlenecks  in  those  countries  that  opened  up  their  labour  markets. 
New  Member  States  experienced  rapid  productivity  growth,  falling  unemployment  and  fast 
income  convergence.  The  four  new  Member  States  that  joined  the  euro  area  since 
enlargement have benefited even more, as they have eliminated exchange rate risk, reduced 
transaction costs, and gained access to capital at lower interest rates.  

Rapid integration brought many benefits for growth but also created vulnerabilities in 
some  of  the  new  Member  States,  which  have  been  further  accentuated  by  the  current 
economic and financial crisis. Foreign investment in the new Member States surged fast and 
boosted  economic  restructuring,  growth  and  employment.  However,  in  several  countries, 
rapid  and  unchecked  domestic  credit  growth,  fuelled  by  foreign  borrowing,  overheated  the 
economy  and  led  to  large  external  imbalances,  sharp  increases  in  labour  costs  outstripping 
increases in productivity, and hikes in real estate prices. As a result, in some countries foreign 
capital was increasingly channelled to non-productive uses. With the large increase in the cost 
of  capital  brought  about  by  the  global  financial  crisis,  countries  with  large  external 
imbalances now face major adjustment challenges. These challenges, however, are not unique 
to new Member States; some of the old Member States face similar problems.  

The enlarged EU is now better positioned to address current and future challenges. The 
reformed  Stability  and  Growth  Pact  provides  a  medium-term  anchor  that  underpins  the 
credibility of fiscal policy, while allowing for sufficient flexibility in the short run. In parallel, 
the  revamped  Lisbon  process,  helps  identify  and  focus  on  the  structural  reforms  that  are 
necessary to further enhance growth potential and resilience. This process has been supported 
by  the  Cohesion  Policy,  which  translated  Lisbon  objectives  into  regional  catching-up  and 
development  strategies.  The  Cohesion  Policy  provided  substantial  support  to  EU  Member 
States,  both  in  terms  of  vital  financial  assistance  and  much  needed  expertise,  with  support 
from  the  European  Investment  Bank  and,  where  appropriate,  the  European  Bank  for 
Reconstruction and Development. The enhanced Balance of Payment facility allows the EU to 
offer  adequate  financial  assistance  to  those  Member  States  outside  the  euro  area  that  need 
temporary  help  to  smooth  adjustment.  These  support  mechanisms  are  now  available  to  the 
new Member States and can promote the necessary adjustment.  

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ACHIEVEMENTS OF THE FIRST FIVE YEARS 

The  accession  process  has  contributed  to  significantly  improve  living  standards  in  the 
new  Member  States,  fostering  economic  and  social  cohesion  within  the  Union.  Income 
per  capita  rose  from  40%  of  the  old  Member  States'  average  in  1999  to  52%  in  2008.  It  is 
estimated that the accession process boosted economic growth in the new Member States by 
about  1¾ percentage  points  per  year  over  2000-08,  when  growth  increased  from  3½%,  on 
average, in 1999-2003 to 5½% in 2004-08. Growth in the old Member States also benefited 
from enlargement (adding up to a cumulative increase in output of around ½% over the same 
period),  in  particular  in  those  countries  that  increased  trade  with  and  investment  in  the  new 
Members. Growth in  the new Members was mostly attributable to capital accumulation and 
productivity increases, each of which contributed more than 2 percentage points per year in 
1999-2008. As a result of corporate restructuring, the contribution of labour was negative in 
1999-2003.  Since  2004,  robust  growth  in  employment  of  about  1½%  annually  in  the  new 
Member States went alongside strong employment creation in the old Member States (about 
1% per year since enlargement).  

Rapid  trade  integration  has  fostered  a  more  efficient  division  of  labour  and 
strengthened competitiveness in the EU. The degree of trade openness in the new Member 
States  has  reached  a  very  high  level.  Their average  GDP  share  of  exports  and  imports  now 
amounts to 56% of GDP, up from 47% before enlargement. This is significantly higher than 
in  the  old  Member  States,  where  the  level  stands  at  38%.  Integration  with  the  old  Member 
States  and,  in  particular,  between  the  new  Members  themselves,  has  rapidly  intensified.  In 
2007, almost 80% of all exports of the new Member States went to the rest of the EU, with 
19½%  of  exports  to  other  new  Members  (compared  with  13¼%  in  1999).  The  old  Member 
States  sell  7½%  of  their  exports  to  the  new  Members,  up  from  4¾%  a  decade  ago.  New 
Members  have  gained  market  shares  by  increasing  the  capital-  and  technology-intensity  of 
their exports, in large part as a result of investments from the old Member States. High-tech 
goods reached 14% of their total exports in 2006, up from 11% in 1999 and close to the 16% 
level  observed  in  the  old  Member  States.  Improvements  on  this  front  have  more  than 
compensated  for  losses  in  cost  competitiveness  stemming  from  real  exchange  rate 
appreciation (which has to some extent been recently reversed). Increased trade integration in 
the  EU  exploits  comparative  advantages,  and  thus  strengthens  the  growth  potential  and 
enhances the competitiveness of the EU as a whole. New Member States have doubled their 
combined  world  trade  share  since  1999,  to  4%,  helping  the  EU  as  a  whole  to  contain  the 
reduction in its market share (falling by 3 percentage points to 38¼% in 2007) resulting from 
the rapidly expanding shares of emerging economies in world trade. 

New  Member  States  have  been  rapidly  modernizing  their  economies.  They  have 
developed functioning market economies and the capacity to cope with competitive pressures 
and  market  forces  within  the  Single  Market.  They  have  also  increasingly  aligned  their 
production structures with those of the old Members. Agriculture and manufacturing are more 
important in the new Members (amounting to 4½% and 21¼% of GDP respectively in 2006, 
compared  with  1½%  and  16¾%  in  the  old  Member  States).  Nonetheless,  the  service-based 
and  knowledge-intensive  economy  has  progressed  in  recent  years.  The  share  of  services  in 
GDP grew from 56% of GDP in 1995 to 63% in 2006, compared to 72% of GDP in the old 
Member  States.  The  rising  shares  of  technology-intensive  exports  and  employment  in 
knowledge-intensive sectors (3.5% of total employment compared with around 5% in the old 
Member  States),  and  increasing  education  levels  also  indicate  a  rapid  pace  of  economic 
modernization  in  the  new  Member  States  that  lays  the  ground  for  further  swift  economic 

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catching-up.  In  addition,  the  new  Member  States  have  taken  and  need  to  continue  taking 
reforms to strengthen the rule of law and modernise their legal systems.  

Investments  from  old  Member  States  have  been  a  key  driver  of  economic 
transformation in the new Member States. In the run-up to accession, new Member States 
made  great  progress  towards  macroeconomic  stability  and  rapidly  embraced  the  legal  and 
institutional  frameworks  of  the  EU.  EU  support  such  as  the  pre-accession  instruments  was 
pivotal  in  fostering  this  process.  As  a  consequence,  foreign  investment  surged,  boosting 
growth  and  employment.  The  positive  impact  on  longer-term  growth  potential  through 
knowledge transfer, productivity spill-overs, increased competition, and additional discipline 
on economic policies was equally important. Foreign investment was particularly high in the 
financial  sector.  As  a  result,  foreign  ownership  in  the  banking  sector  in  the  new  Member 
States  now  ranges  from  almost  100%  in  Estonia  and  Slovakia  to  some  30%  in  Slovenia 
(compared with below 20% on average in the euro area). Insurance groups from old Member 
States have also developed a strong presence in the new Member States. The strong financial 
interdependence  between  new  and  old  Member  States  underscores  the  importance  of 
strengthening the EU-wide cooperation in financial sector regulation and supervision.  

Investment  and  activities  funded  under  cohesion  policy  were  also  instrumental  to 
facilitating  the  restructuring  process  in  the  new  Member  States,  while  strengthening 
economic  and  social  cohesion  throughout  the  Union.  This  policy  significantly  supported 
the integration of the new Member States into the world trading system and in the European 
Single  Market  and  further  developed  economic  links  which  generated  substantial  foreign 
direct  investment  inflows,  creating  new  jobs  and  raising  living  standards.  Territorial 
cooperation programmes also helped to deepen integration between EU regions and promoted 
knowledge  sharing.  In  addition,  cohesion  policy  enhanced  endogenous  growth  potentials  in 
these  countries,  improving  productivity  and  competitiveness  of  their  economies.  Finally,  it 
eased the transition of workers from traditional to new economic sectors which is inevitable in 
such rapid restructuring process, thus fostering a sustainable and balanced growth process. 

The  EU  accession  process  also  brought  about  a  new  framework  for  product  market 
regulation  in  the  new  Member  States,  including  for  competition  policies  and  state  aid. 
New Member States have a higher share of openly announced public procurement (5¾% of 
GDP  against  3¼%  of  GDP  for  the  EU  as  a  whole  in  2007).  According  to  a  Eurobarometer 
survey of 2007, 71% of small and medium-sized enterprises (compared with 63% in the old 
Member  States)  feel  that  there  is  a  significant  increase  in  competition.  Available  evidence 
also  indicates  that  competition  has  notably  increased  in  the  telecommunication  and  postal 
services sectors, which are subject to sector specific regulatory frameworks. State aid in the 
new Members has declined as a share of GDP from 1½% in 2000 to ½% of GDP in 2006 (just 
above the level in the old Member States). Notwithstanding these improvements which have 
played  a  crucial  role  in  boosting  business  activity,  the  enforcement  of  competition  law 
remains a challenge in some of the new Member States. Moreover, small and medium-sized 
enterprises  still  feel  relatively  constrained  in  domains  like  access  to  finance,  recruitment  of 
skilled labour, implementation of new technology, and availability of infrastructure.  

Integration of new Member States agricultural markets and rural economies to the EU 
was accomplished without any major internal economic or social problems. The carefully 
designed accession strategy combining significant investments and assistance programmes in 
candidate countries during the pre-accession period showed its results. Together with a sound 
and  balanced outcome  of  accession  negotiations,  which  put  increased  focus  on  rural 
development and on shifting from market support to direct income support, this permitted a 

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smooth  integration  of  the  new  Member  States  into  the  internal  agro-food  market  and  the 
Common  Agricultural  Policy.  An  enlarged  EU  market  has  brought  many  possibilities  for 
farmers  and  agri-food  businesses  from  all  Members  States  and  has  led  to  increased  intra-
community  trade  and  foreign  direct  investment. Enlargement  has  also  strengthened  the  EU 
position on international markets for agricultural produce. 

New  investment  opportunities  created  by  enlargement  helped  enterprises  in  the  old 
Member States to strengthen their global competitiveness and safeguard jobs at home. 
Enlargement has opened, for enterprises in the old Member States, new markets for exports 
and  foreign  investment.  It  has  offered  them  opportunities  to  increase  their  efficiency  and 
competitiveness.  With  a  well-educated  labour  force  and  a  similar  legal,  institutional  and 
regulatory  environment,  new  Member  States  offer  ample  opportunities  in  this  regard. 
Although  the  restructuring  involved  may  imply  sizable  adjustment  costs  in  the  short  term, 
they increase the global competitiveness of EU enterprises and ultimately help safeguard jobs 
and boost growth all across the EU. Indeed, in several sectors (machinery, furniture, medical 
instruments,  chemicals,  wood)  investment  in  new  Member  States  went  hand  in  hand  with 
employment in the old Members.  

Workers  in  the  new  Member  States  have  profited  from  improved  employment 
opportunities  at  home  and  abroad,  although  labour  migration  created  economic  and 
social problems in some of the new Member States. After more than a decade of economic 
restructuring, labour markets in the new Member States have staged a broad-based recovery 
that took off in earnest in 2003 and created 3 million new jobs between 2003 and 2007. As a 
result,  unemployment  has  declined  to  levels  similar  to  the  rest  of  the  Union  (about  7%  in 
2007), while employment rates have increased to about 60%.  Nonetheless, persistently high 
long-term unemployment (at around 56% in 2006, more than 13 percentage points above the 
average in the old Member States) signals significant skills mismatches. Furthermore, wages 
have grown in excess of productivity in several countries, thereby leading to competitiveness 
losses.  Outward  labour  migration  has  added  to  these  problems  in  some  of  the  new  Member 
States  (in  particular  in  Cyprus,  Lithuania,  Poland  and  Romania).  Labour  migration  has  also 
raised  concerns  about  brain  drain  and  waste  and  labour  shortages  in  specific  sectors  and 
professions, although the supply of highly educated people has been increasing and improving 
economic  conditions  have  reduced  incentives  to  work  abroad.  Moreover,  returning  workers 
tend to bring back new skills that are valuable for their home country's economy. A sizable 
outflow  of  workers  also  led  to  substantial  remittances  from  abroad  (about  5.5%  of  GDP  in 
Bulgaria and Romania and 1.5% of GDP in Poland) that support the domestic economy. 

In  old  Member  States,  concerns  raised  about  massive  labour  migration  prior  to 
enlargement  have  not  materialized.  The  number  of  people  from  new  Member  States  that 
have migrated to old Member States is on the whole limited (about 3.6 million, up from 1.6 
million at end-2003), and is not expected to rise substantially, even after remaining transitory 
restrictions in some Member States are lifted. The relative weight of these flows in terms of 
working age population for each country is small (around 1% or less), with the exception of 
Ireland,  where  immigrants  from  new  Member  States  represent  5%  of  its  working  age 
population.  In  absolute  terms,  the  main  destination  countries  have  been  the  UK  (receiving 
almost  1/3  of  migrants  since  accession),  Spain  (18%)  and  Ireland  (10%),  although  with  the 
financial  crisis  a  significant  share  of  these  workers  may  return  to  their  country  of  origin. 
While some of these flows have generated disturbances in segments of the labour market and 
some  social  effects,  their  overall  effect  is  positive.  Evidence  at  hand  suggests  that  post-
enlargement  intra-EU  mobility  has  not  led  to  serious  labour  market  disturbances.  Free 
movement  of  labour  is  an  important  benefit  a  unified  Europe  offers  to  its  citizens  and 

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enterprises. It is estimated that the recent level of intra-EU labour mobility adds about 0.3% to 
the GDP of the EU as a whole in the medium term. Migrants from the new Member States 
tend  to  work  more  in  low-skilled  jobs  (1/3  of  migrants  compared  with  10%  of  resident 
workers),  although  they  have  relatively  high  qualifications  (40%  of  migrants  fall  into  the 
high-skilled  category  compared  with  25%  of  the  workforce  in  the  old  Member  States). 
Incoming workers have helped meet labour market demands and reduce bottlenecks (e.g. in 
the  construction  and  services  sectors),  without  creating  major  labour  market  disturbances. 
Also, temporariness appears to be an important feature of this migration: in the UK, 50% of 
recent migrants have already returned to their countries of origin. The Commission has called 
upon Member States to consider whether they need to continue applying restrictions in light 
of the situation of their labour markets, notwithstanding their rights set out in the Treaties of 
Accession concerning transitional arrangements2. 

CHALLENGES AHEAD AMPLIFIED BY A SEVERE GLOBAL CRISIS  

The  current  severe  global  economic  crisis  poses  major  new  challenges  for  national 
policies. The crisis impacts all Member States through declining trade, reduced availability of 
financing,  plummeting  household  wealth  and  deteriorating  confidence.  Although  EU 
membership,  and  even  more  so  euro  area  membership,  provides  protection  and  a  stability 
anchor that expands the comfort zone of investors, the crisis puts a large premium on sound 
domestic  policies.  All  Member  States  that  have  experienced  a  credit  boom  have  developed 
similar vulnerabilities, such as a high dependence on foreign savings and weak balance sheets 
in the corporate and household sectors. The EU is working to restore stability, transparency 
and confidence in the financial sector by addressing not only the most prominent failings but 
also tackling the need for a more profound reform of the regulatory and supervisory system.  

The financial crisis has also exposed other vulnerabilities. In several new Member States, 
over-optimistic  expectations  about  enterprise  profits  and  household  income  fuelled  capital 
inflows and credit growth that have surpassed sound equilibrium levels. In many cases, this 
has  led  to  unsustainably  high  current  account  deficits.  As  regards  credit  growth,  credits  to 
households and in particular mortgage loans have had the most dynamic evolution and often 
fuelled  unsustainable  real  estate  bubbles.  Foreign-currency-denominated  loans  have  also 
expanded  markedly  in  several  countries.  This  has  made  households  and  corporations  more 
vulnerable to currency depreciation. Moreover, credit growth in the new Member States has 
largely  been  sustained  by  increasing  cross-border  lending,  which  resulted  in  a  high 
dependence of the domestic banking sector on funding from a group of foreign parent banks.  

These recent events underscore that in all new Member States further major efforts are 
needed  to  safeguard  the  achievements  of  the  latest  EU  enlargements,  particularly  regarding 
income convergence, financial integration, and FDI into converging Member States. The EU's 
policy frameworks are helpful in facing these challenges and enable the new Member States 
to continue to inject dynamism into their economies in the medium and long run. However, 
the  results  will  mainly  depend  on  sound  domestic  economic  policies  and  an  appropriate 
institutional framework. Domestic policies and institutions have not always been adequate in 
the past and often deviated substantially from the EU's recommendations. In particular fiscal 
policy could have contributed more to maintaining macroeconomic and financial stability by 
timely counteracting expansionary pressures stemming from a booming private sector.  

2 

"The impact of free movement of workers in the context of EU enlargement - Report on the first phase 
(1 January 2007 – 31 December 2008) of the Transitional Arrangements - COM(2008) 765, 18.11.2008. 

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Completing  the  Single  Market  and  implementing  reforms  that  further  modernise  the 
economy  are  an  on-going  task  for  maximising  the  benefits  from  enlargement. 
Enlargement  has  enhanced  the  EU's  competitiveness  and  its  attractiveness  for  investors, 
making it able to reap the benefits of globalisation to a fuller extent than before. Nevertheless, 
the  gains  from  enlarging  the  Single  Market,  particularly  for  small-  and  medium-size  firms, 
can be better exploited by deepening the integration of goods, services, labour, and financial 
markets.  These  reforms  pay  a  double  dividend:  they  boost  growth  and  job  creation  and 
promote macroeconomic stability by facilitating the better adjustment of wages and prices to 
shocks.  So  far,  Single  Market  regulations  have  been  implemented  well  in  the  new  Member 
States, but a certain reform fatigue can be observed. Strengthening the rule of law, increasing 
the  efficiency  of  public  administration  and  judiciary  reforms  remain  challenges  with 
important implications for the business environment, competitiveness, and further growth and 
integration in the EU. The experience of enlargement has shown that the effectiveness of the 
public administration, in particular the competition, supervisory and regulatory authorities and 
the  judiciary,  and  efficient  financial  control,  are  key  and  can  considerably  accelerate 
investment. The continuation of efforts in these areas is also important to reap the full benefits 
of the Single Market. 

Successive  enlargements  of  the  euro  area  will  also  help  reap  the  full  benefits  of  the 
Single  Market  but  require  further  reforms.  Euro  area  membership  offers  numerous 
benefits  such  as  the  elimination  of  exchange  rate  risks  and  lower  transaction  costs,  higher 
trade  and  FDI,  increased  competition,  and  enhanced  financial  integration.  All  new  Member 
States are committed to euro adoption, but follow different strategies. Cyprus, Malta, Slovenia 
and Slovakia have already adopted the euro, while other new Member States have made less 
progress in nominal convergence; some have even temporarily backtracked. The goal of euro 
adoption  also  provides  strong  incentives  to  pursue  policies  necessary  to  promote  rapid 
nominal and real convergence, and helps counteract reform fatigue.  

ADDRESSING THE CHALLENGES 

Sound  fiscal  policy  is  essential  to  maintaining  macro-financial  stability  and  promoting 
integration  and  income  convergence.  The  new  Member  States  became  subject  to  the 
Stability  and  Growth  Pact  upon  accession  and  six  of  them  were  included  in  the  Excessive 
Deficit Procedure in 2004. By mid-2008, thanks to strong growth, lower interest rates and the 
increased  EU  transfers  brought  by  enlargement,  the  procedure  was  abrogated  for  all  except 
Hungary.  The  financial  crisis  is  however  taking  the  toll  on  public  finances.  Looking  ahead, 
new  Member  States  can  avoid  a  trade-off  between  maintaining  fiscal  prudence  and  making 
sufficient  funds  available  for  growth-enhancing  public  expenditures  if  they  follow  best 
practice  for  fiscal  governance  (including  transparent  and  credible  medium-term  budgetary 
frameworks) and increase the quality of public finances. Reforms of health care, pension and 
education  systems  are  also  crucial  to  ensure  long-term  fiscal  sustainability  and  to  improve 
economic  efficiency.  The  reformed  Pact  provides  the  necessary  flexibility  for  converging 
economies  to  absorb  the  deterioration  of  the  fiscal  position  during  a  crisis,  as  long  as 
sufficient  efforts  are  made  to  achieve  a  strong  fiscal  position  prior  to  the  crisis.  Ensuring 
ambitious  consolidation  efforts  and  a  proper  assessment  of  the  underlying  fiscal  position 
during  good  times  are  thus  central  objectives  of  fiscal  surveillance  to  ensure  that  this 
flexibility is fully available to policy makers.  

The  Lisbon  Strategy  for  Growth  and  Jobs  acts  as  a  powerful  catalyst  for  structural 
reforms that are also key to promoting integration and income convergence. Productivity 
growth  remains  clearly  the  EU's  key  long-term  competitiveness  challenge.  Looking  at 

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structural  reforms  that  have  potential  to  contribute  to  growth  and  employment,  insufficient 
progress has been achieved over the past in the area of R&D and innovation. The continuation 
of efforts to increase the efficiency of public administration and to substantially cut red tape in 
some Member States is also important to reap the full benefits of the Single Market. In the EU 
as a whole, there is evidence of structural improvement in the functioning of labour markets. 
However,  while  the  overall  picture  is  rather  positive,  there  remains  considerable  scope  for 
improvement  in  some  Member  States,  in  particular  regarding  issues  such  as  regional 
disparities and skills mismatches. 

Enhanced  country  surveillance  by  the  European  Commission  and  the  Council  in  the 
context of the Stability and Growth Pact and the Lisbon Process will be key in fostering 
the  right  policy  in  the  short  and  long  run.  To  this  end,  macroeconomic  imbalances, 
including  in  asset  markets,  policy  options  to  effectively  tackle  these  imbalances,  structural 
reforms  critical  to  the  stability  and  smooth  functioning  of  financial  markets  and  the  rule  of 
law, and to enhance adjustment capacity should be identified early in the surveillance process, 
particularly in the case of countries with major vulnerabilities.  

The implementation of cohesion policy and the EU’s rural development policy, focused 
on long-term objectives, helps create conditions for sustainable growth. As with previous 
enlargements,  new  Member  States  greatly  benefit  from  EU  transfers,  already  before 
accession. Total transfers from the EU budget to the new Member States amounted to around 
2% of their GDP in 2007, and are expected to increase to 3% by 2013. In terms of the GDP of 
the  old  Member  States,  these  transfers  amounted  to  0.2%  in  2007,  increasing  to  0.3%  by 
2013.  Cohesion  Policy  has  been  supporting  the  mobilisation  of  local  growth  potential,  by 
focusing  intervention  on  priority  areas  such  as  research  and  innovation,  ICT,  transport 
infrastructure, the business environment and human capital. Old Member States also benefited 
from  demand  in  goods  and  services  generated  by  these  transfers.  Cohesion  Policy  has  also 
been  helping  to  create  the  necessary  stable,  participatory,  transparent  and  accountable 
institutions  in  the  management  of  public  funds,  thereby  improving  acceptance  by  the  civil 
society and increasing the efficiency of public spending in general. Sound management and 
effective  financial  control  are  a  pre-requisite  for  triggering  additional  private  investment. 
With accession the EU's rural development policies have been extended to the new Member 
States, increasing the farming sector's competitiveness and contributing to the diversification 
of  incomes  in  rural  areas.  In  addition,  the  successful  implementation  of  Stability  and 
Convergence  Programs  and  National  Reform  Programmes  to  ensure  a  stability-oriented 
macroeconomic  policy,  a  favourable  business  environment,  flexible  product  and  labour 
markets, and sufficient administrative absorption capacity is  indispensable for achieving the 
overriding objectives of catching up and increasing competitiveness.  

EU  policies  and  financial  institutions  and  instruments  provide  crucial  support  to  the 
convergence  process.  While  Cohesion  Policy  provides  the  large  bulk  of  resources,  the 
European Investment Bank also offers assistance and foresees a substantial increase (close to 
40%) of its 2009 lending target in the new Member States to finance small and medium-sized 
enterprises  and  projects  in  key  sectors,  notably  environment  and  transport.  Moreover,  the 
European  Bank  for  Reconstruction  and  Development,  which  had  gradually  reduced  its 
operations in the new Member States after enlargement, has started to refocus attention in the 
region  with  its  crucial  expertise  in  projects  related  to  the  financial  sector,  including  the 
provision of venture capital. 

The recent rescue efforts for countries facing financing needs demonstrate that the risks 
to  achievements  accrued  since  enlargement  are  clear  and  present.  Vulnerabilities  in 

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Hungary and Latvia had reached levels that made it necessary for these countries to request 
external financial assistance. The Balance of Payment facility was increased from the original 
€12 billion to €25 billion at the end of 2008 to make it adequate for this purpose and sizable 
assistance, flanked by comprehensive policy programmes, was provided to these countries to 
help avoid excessive output and job losses during the necessary adjustment. The EU support 
has  not  only  helped  the  specific  countries  in  trouble  but  has  also  contained  the  potential 
negative spill-over effects on other new and old Member States. 

CONCLUSION 

The recent enlargements of the EU were a milestone in the process of unifying Europe and 
have  brought  benefits  to  all  citizens  throughout  the  Union.  By  promoting  a  more  efficient 
division of labour and improvements in the legal, regulatory and institutional environments, 
enlargement has enhanced the competitiveness and resilience of the EU economy as a whole. 
Five years on, the EU is better positioned to face increased global competition and to take a 
leading  role  in  the  world  economy  and  its  governance.  It  is  a  much  stronger  player  in 
international  negotiations  and  is  capable  of  reacting  quickly,  as  demonstrated  by  the  recent 
"gas crisis", which affected some of the new Member States quite severely. In this case, rapid 
action  through  a  co-ordinated  European  approach  demonstrated  solidarity  within  the  Union 
and restored crucial energy links.  

Full  integration  of  national  economies  and  income  convergence,  however,  are  still  to  be 
achieved. For Member States, including the new ones, to fully reap the benefits of the Single 
Market, EU legislation needs to be fully transposed into national legislation and product and 
service  markets  need  to  be  further  integrated.  Given  its  many  benefits,  financial  integration 
within the EU will have to be further pursued, while simultaneously tackling the shortcomings 
in regulation and supervision exposed by the financial crisis. In the course of this integration 
process,  Cohesion  Policy  will  continue  to  play  a  key  role  in  supporting  the  economic 
restructuring in the new Member States. 

These reforms are particularly important now, in the wake of the global financial crisis that 
could  slow  down  the  convergence  process.  But  a  crisis  of  this  magnitude  also  offers 
opportunities for taking measures to mitigate its social and economic impact and carrying out 
deep structural reforms to underpin a quick and sound recovery, which will enable European 
economies to fully benefit from the growth opportunities that will emerge in the aftermath of 
the  crisis.  Looking  ahead,  enhanced  country  surveillance  through  the  Stability  and  Growth 
Pact and the Lisbon process will have to play a central role in identifying early on the issues 
Member States need to focus on in their economic policies and the measures they need to take 
to  tackle  the  emerging  problems.  Proactive  structural  reforms  and  sound  macroeconomic 
management will be essential to reduce the likelihood of a major financial crisis in the future. 

As a result of years of thorough preparation and continued monitoring, the EU continues to 
operate smoothly after enlargement. Due to enlargement competitiveness in both the new and 
old Member States was strengthened and additional growth was created. Further reforms and 
their  implementation  are  however  essential  to  ensure  continued  integration  and  income 
convergence in the EU and to maintain the EU's role in global economic governance. Progress 
on this front is also necessary to create an environment conducive to further advances in the 
Union's  enlargement  agenda,  which  in  turn  would  further  enhance  the  growth  potential  and 
resilience of the EU economy.  

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Success  in  tackling  the  current  crisis  and  preserving  the  achievements  of  the  latest 
enlargements  of  the  EU  will  be  essential.  As  in  previous  experiences,  furthering  the  EU's 
agenda will offer benefits that extend far beyond economics.  

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