of cross - border exchanges of goods and know how. in doing so, it improves resource allocation and provides both dynamic and static efficiency gains that, in turn, offer the promise of improved economic performance. as for the new member states, many of above mentioned positive features have already been felt as can be seen from faster economic growth and productivity in all of the new member countries. the new member countries will in the future benefit also from greater markets for their products [ and thus scale economies ], while the old member countries are facing stiffer competition in many industrial sectors. stiffer competition is likely to enhance productivity in europe as a whole. large part of the productivity growth in the new member countries has been associated with inflows of foreign direct investments as well as restructuring of the domestic companies. in this process, large internationally operating companies have been playing an important role by importing capital, but also by transferring business management skills and know how and thus decreasing the knowledge gap to rest of the europe. indeed, a large proportion of trade is intraindustry and intra - company trade where a significant proportion of global trade runs through international production and distribution networks. increases in intra - industry and intra - company trade reflects the motives of large companies for diversifying their supply chain and deepening economies of scope in the world market, rather than just reflecting the differences in costs of inputs at different locations. moreover, due to stiffer competition and complexity of the products, companies concentrate on their core competencies. this has a tendency to reinforce the development of a more concentrated, but spatially diverse economy. in the short run, there can be significant employment losses and unbalanced regional development, yet in the medium term european economies will be more efficient. nevertheless, spatial agglomeration across territorial boundaries is a real challenge for europe, as there is a need to find a right balance between strengthening the european most productive areas and their competitiveness globally, yet to develop policies that minimize a risk of excessive regional diversification. policies that enhance exchange of know - how across borders are of crucial importance to minimize such a risk. especially for small new member countries, key to success is to be attractive and adaptive. in the medium term, this requires further strengthening of those business areas with comparative advantage and aiming at attracting foreign direct investment to those areas. this requires also continuing with institutional and legal reforms that strengthen ownership rights, reduce corruption and provide with favourable business environment in general. otherwise, there is a risk that some countries

how foreign investors judge the institutional transition. there are indeed rather large changes as regards inflow of foreign direct investments in many of the new member countries. in many countries high foreign direct investments have supported high output and investment growth rates. however, maintaining a steady inflow of fdis will constitute a major challenge in the future because fdi inflows have tended to decrease in many new member states partly linked to reduced privatisation activity. the decrease in fdi inflows have accompanied by a net outflow of portfolio investments, with loans and trade credits becoming the main source of financing of the current accounts. all in all institutions has developed to right direction during the last decade and as paper argues, they are mostly compatible with market driven economy. of course, institutions as such are not important but they provide necessary conditions for creating environment for future growth and prosperity. but reforms are needed, in particularly as regards to corruption and legal system. professor roland also raises a question : what can we learn from reforms in labour markets, pension and welfare reform? not much, is his conclusion. i would like to put the question differently : what will the impact of the new member states on the regulatory development in the eu of 25? i think that the new member states will be very sensitive with new regulation which will add costs on european. they compete directly with asian countries about fdi ’ s. they don ’ t want to weaken there position. there will be less new regulation. 5. how will eu work with 25? let me finally, turn to the most important and topical issues on how will eu work with 25? i agree with professor roland that the new member states will be active and enthusiastic members. they have not come to use a veto. and the larger is the union, the more difficult it is to prevent a decision by one veto. i would like to discuss also on growth and productivity prospects of european economies during the years to come. as already argued, for europe to work as a stable political entity, and build room for enlarged emu it is necessary to close the income gap between the new and the old member countries. probably the best way to achieve this is to facilitate competition and thus enhance productivity growth in all the sectors of the economies. the rationale for, and success of, the single market is that it reinforces a principle of market economy of the european economies. the market economy is reinforced by subjecting otherwise closed sectors to greater competition and by the prospect of wide range