member states, it is clear that eu membership will have a very positive effect. full integration in the single market and the impact of the eu structural and cohesion funds are likely to foster the catching - up process in those countries. it is important to keep in mind, however, that the funds can only exert a positive impact on the catching - up process if countries have a stable macroeconomic environment and institutional and microeconomic structures that are conducive to growth. through which channels could eu enlargement affect the european economy? i will focus on two. first the flows of trade, capital and labour, and second the likely increase in competition. let me start with the flows. the abolition of existing import tariffs and the lowering of trade barriers support cross - border trade between the eu and the acceding countries. this process has to a large extent already taken place and the acceding countries as a group have become a main trading partner of the eu. from the acceding countries ’ perspective, the eu has become by far the most important trading partner. the so - called europe agreements have been an important driver of trade integration over the past years. these agreements established a free trade area in many industrial products by removing tariffs and quantitative restrictions. enlargement can also affect the european economy via the liberalisation of capital flows in acceding countries. acceding countries liberalised capital movements early in the reform process, anticipating the obligations of eu accession. foreign direct investment constitutes by far the largest share of total cumulative net private capital inflows to the acceding countries, reflecting also the role of fdi as a financing source in the privatisation process. the prospects for fdi flows after enlargement are very impressive if one considers that private investors are likely to price in a very substantial diminution of risks associated with the entry into the european union. the opening up of eu labour markets may also entail a flow of labour from the acceding countries to the eu. whereas most obstacles to trade and capital flows have been abolished, several eu countries have maintained most legal and administrative barriers to the immigration of labour from acceding countries. after enlargement, eu countries are allowed to use transitional periods to postpone the free movement of labour from acceding countries. in many member states, this aspect of enlargement has been discussed widely and the literature on this topic has been growing strongly. many of these studies seem to suggest that overall migration flows to the eu are likely to be

the real economy, may be long and winding. in essence, events of the past two years can be retold as a story of the progressive breakdown in trust. the proximate cause of the crisis was a breakdown of trust between banks and households, specifically sub - prime mortgage - holders in the united states. the upshot was a loss of credit, and in many cases the homes, of these borrowers from 2006 onwards. repossession rates on us mortgages have more than tripled in the past two years ( chart 1 ). uk arrears and default rates, although lower, are rising. some borrowers are now rationed out of the mortgage market. in july 2007, there were around 9500 sub - prime mortgage products being advertised in the uk. today, there are virtually none ( chart 2 ). as losses on these mortgages and other toxic assets accumulated, trust among banks was impaired. this saw a seizing - up of inter - bank money markets from the second half of 2007 onwards. before the crisis, banks required about 10 basis points of compensation for making a three - month loan to one another ( chart 3 ). by september 2007, that compensation premium had risen tenfold to around 100 basis points. by september 2008, it had risen more than thirty - fold from pre - crisis levels. it has since fallen back to around 35 basis points. these persistent funding pressures have constrained banks ’ ability to lend to the real economy. damaged by losses on assets and constrained by funding costs, questions began to be raised during 2008 about banks ’ future profitability and, in some cases, viability. the equity prices of banks tumbled, falling 86 % on average for the major uk banks between february 2007 and march this year ( chart 4 ). in money terms, that is a loss of market capitalisation of around £300bn, equivalent to 20 % of annual uk gdp. underlying these price falls was a generalised loss of trust between banks and investors in banks, such as sovereign wealth funds and mutual funds. what explained this wholesale loss of trust? in the run - up to the crisis, banks ’ business models were increasingly predicated on making loans for onward sale. loans became tradable securities and long - term relationships gave way to short - term transactions. the perils of this practice were well understood by michael marks, founder of marks and spencer and of course one of the region ’ s greatest - ever entrepreneurs : “ you either make