European Economy - Lecture 9 Enlargement: Political Economy of accession...

European EconomyLecture 9

Enlargement: Political Economy of accession to the EU

Stephen Kinsella

Dept. Economics, KBSUniversity of [email protected]

November 3, 2010

Stephen Kinsella (University of Limerick) EC4027 November 3, 2010 1 / 30

From last time:

The Common Agricultural Policy.


Part I

The CAP and Inequality


The CAP

1 Initially a price support mechanism

2 Mansholt Plan (1968); Series of reforms 1970’s and 1980’s

3 MacSharry reforms & Agenda 2000, Fischler reforms

Rural development measures 2007-2013.

1 Competitiveness

2 Land Management

3 Wider rural development

4 Training and skills


Spending by product group, 2007

arablesugarolive oilother veg.productswinemilkbeefother animal productsSerie 9

arablesugarolive oilother veg.productswinemilkbeefother animal products

Dati insufficienti per un diagramma.Il riquadro è troppo piccolo per tracciare il diagramma.arablesugarolive oilother veg.productswinemilkbeefother animal products

!Figure: Spending by product group, 2007


CAP changes after 2013Biggest.Row.Ever.

Increased co-financing by member states

Making regionalisation mandatory;

Increased compulsory modulation;

An end to milk quotas;

Improved management of risk;

De-gressivity of direct payments (a fixed percentage decrease over aspecified interval of time);

Ceilings/caps on transfers to individual farms, and cancelling those offarms below a minimum size.

Continued promotion of biofuels

See Colman, D.‘The Common Agricultural policy’, in Artis, M. andNixson, F. (eds), The Economics of the European Union. Policy andAnalysis, 4th ed., Oxford University Press, 2007.


CAP & Enlargement

(See handout)


Part II

Accession in the EU


Today

Impportant Questions

Has the widening of the EU been a success?

The benefits and costs of enlargement for1 New member states2 Existing (established) members of the EU3 The EU economy as a whole

EU enlargement and immigration policy

How many more countries will join?

Will enlargement prevent final economic union?

How many new states will join the Euro?

What of states that remain outside of the EU e.g. Norway,Switzerland, and Iceland?


Here comes the history bit.

Europe has added new members periodically

Six Main Waves of EU Enlargement

1973 (UK, Ireland and Denmark)

1981 (Greece)

1986 (Portugal and Spain)

1995 (Austria, Finland and Sweden)

2004 (Ten new countries)

2007 (Bulgaria and Romania)

See ? and ? for details of this enlargement.


Right now

Figure: EnlargementStephen Kinsella (University of Limerick) EC4027 November 3, 2010 11 / 30

Data

Figure: Convergence

More Data

1995 2000 2005

�10

�5

0

5

10

Poland

Ireland

European Union

�from 1991 to 2007 ; in percent per year �Figure: Real GDP Growth EU, Ireland, Poland.


Data: Inflation

1995 2000 20050.1

0.51.0

5.010.0

50.0100.0

Poland

Ireland

European Union�log scale �

�from 1991 to 2007 ; in percent per year �Figure: Inflation in EU, Ireland, Poland.


GDP vs UE: Estonia

Figure: GDP and Unemployment in Estonia


Problems with Convergence

Figure: GDP Convergence.

Criteria for Entry

Stability of political institutions guaranteeing democracy, the rule oflaw, human rights and respect for and protection of minorities

A fully functioning market economy that meets the standards requiredfor participation in the single market

Price Liberalisation: Moving away from state controlled prices toallow the price mechanism greater influence in allocating resources

Privatisation: Transfer of ownership, Development of private sectorcapital markets


Gains from joining the EU

Membership of the EU Single Market gives new entrants:

Trade Exploiting comparative advantage to increase trade.

Investment Free movement of capital – looking for the highest return.

FDI Inward investment to aid transformation of nationalinfrastructure – impact on a country’s LRAS / trend growth.

Competition More competition – a boost to labour productivity

Efficiency gains Dynamic efficiency gains from higher capital investmentand faster pace of innovation.


Gains for Accession Countries

Financial Support

Countries will be net recipients of income from

Common Agricultural Policy

EU Structural funds

Many regions have per capita incomes well below the 75% thresholdfor Objective 1 funding

92% of population of accession countries lives in regions with aGDP/head under 75% of the EU25 average. 61% of the populationlives in regions below 50%.

Much of the EU funding will help to finance investment


Macro advantages

Potential macroeconomic advantages

Reduced exchange rate volatility – many countries are keen to jointhe Euro to reduce exchange rate risk and benefit from lower interestrates.

Slovenia, Slovakia, Cyprus and Malta have joined the single currency

Slovenia – January 2007 / Cyprus and Malta – January 2008 /Slovakia – January 2009

Other countries do not meet the entry requirements or have chosen toremain outside – to retain monetary policy flexibility


Gains for existing EU Members

Export potential and exploitation of economies of scale

Foreign Investment and Incomes and Profits

More diverse European labour market

A cleaner environment

Reforms to the CAP (2013)

Spur to countries to reform their labour markets in the face of lowerlabour cost competition

Many countries are already engaging in tax competition


Useful ways to think about enlargement

Useful diagrams for this topic:

Trade diagrams – welfare effects from single market, exploitation ofcomparative advantage

AD-AS diagrams

Inward investment effects

Economic shocks within the enlarged EU economy

Economies of scale

Labour market diagrams e.g. impact of migration


Thinking a bit more about the sources of growth

The Sources of Growth

Productivity

Capital Stock

InventionInnovation

Technology

Labour Inputs

NaturalResources

EconomicGrowth

Fixed Capital

Infrastructure

Social Capital

Labour productivity

Total factor productivity

Labour Supply

Labour Utilisation

Human Capital

Figure: Sources of growth.Stephen Kinsella (University of Limerick) EC4027 November 3, 2010 23 / 30

Political Economy of Enlargement

Discuss. Who actually supported enlargement?

Reasons for support: Geographical proximity/Potential for Economicgain/Influence?

Limited Enlargement Inclusive Enlargement

Drivers AT, FI, GC UK, DK, SWEBrakemen BE, LUX, NE FR, GR, IRE, IT, PORT, SP


Failure of Treaty of Nice

“The starting point is that eastern enlargement can only be successfullycompleted if the interests of decisive players in present EU countries arerespected.”“On the one hand, enlargement is beneficial for important politicalfunctions of EU activities—particularly those of a public good character.On the other hand, there are concerns in regard to the private benefitsfrom integration largely associated with spending policies”See ?;?;


Who has the power in the EU?From ?

J. Barr, F. Passarelli / Mathematical Social Sciences 57 (2009) 339–366 351

Fig. 2. EU15 stance toward EU (Spring 2003).

3.1.2. The EU 27

In regard to the 27 member countries, the first two principal components also account for roughly70% of the variance in the data. We again found a similar pattern with regard to the factors: thatfirst factor is the stance toward the EU on inter-national issues, while the second factor is the stancetoward the EU on domestic issues. The ideal points are presented in Fig. 3. Notice that because wenow include 27 countries rather than 15, the relative positions of the countries change. For example,whereas in the EU15 case, Germany and France have close positions, their relative positions becomefurther apart when we include all 27 countries. However, in both cases we find that Germany andFrance are located in the third quadrant of the graph. The reason for this spread has more to do withhow the relative positions of Portugal and Luxembourg change. In the EU15 case they are relatively‘‘far away’’ from Germany and France. However, when we include 27 countries, these two countriesare relatively closer to Germany and France than the much more Euro-enthusiastic countries such asSlovenia and Romania. As a result, there is a kind of ‘‘compression’’ of the moderate EU15 countrieswithin the EU27 landscape.

The newcomers from Eastern Europe tend to have generalized strong attitudes toward EUcentralization in domestic policy domains (high intra-national stance). A certain degree of diversity isassociated to the inter-national stance, probably due to mixed-feelings toward nationalism.

A rapid comparison of Figs. 2 and3 reveals that the ‘‘topology’’ of the coalitionswill change radicallyin the next few years, after enlargement. The ‘‘center’’ of the EU political space moves upwards, i.e., atleast for intra-national issues, the average propensity to centralize the decision making at Europeanlevel rises consistently. Some oldmembers that could be considered relative Euro-enthusiasts becomemoderate, if not Euro-skeptical after enlargement.19 We expect that countries that were determinant(pivotal) for some policy issues and irrelevant for some others will probably be in a very differentposition after the new members will have joined. Below, we provide quantitative evidence of thesechanges.

19 Observe that here we are talking about the relative attitudes of the countries toward the EU. The coordinates of the graphschange as a result of the PCA. Intuitively, the origin of the graph somehow reflects the barycentre of the political space.The position changes after the enlargement, do not imply that the citizens change their mind toward the EU because of theenlargement. It rather means that it is the center of the space to have shifted after enlargement.Since our analysis is intended to generate all the possible orderings of the players, then any possible issue of the political

space (on Hm−1) is considered. We do not have one specific point of the space that represents the status quo.

Figure: EU 15 Stance


When EU expands:352 J. Barr, F. Passarelli / Mathematical Social Sciences 57 (2009) 339–366

Fig. 3. EU27 stance toward the EU (Spring 2003).

3.2. Measures of power

As discussed above, our objective is to evaluate the relative frequency that each Europeanmember

is pivotal within the Council of the Ministers, recognizing that the probabilities of the coalitions are

constrained by the preferences of the players. We present three different voting games to highlight

how the interaction of voting rules and preferences can alter the distribution of power.

1. The first is the pre-enlargement situation: 15 members and vote allocation more favorable to

the small and middle-size countries. We will refer to this scenario as pre-Nice.2. The second scenario takes into account the enlargement of the EU by the 12 members and the

re-weighting agreed at Nice. This is what we call the post-Nice scenario. It has come into force as of

November 1st 2004.20

3. The third scenario is represented by the Lisbon Treaty (LT): in which the old weighted voting

system is substituted by a double majority, based on both population and number of countries.21

3.2.1. Pre-Nice – 15 MembersTable 1 shows the results for the Pre-Nice scenario. It reports the standard Shapley–Shubik index

(S–S), the normalized Banzhaf index (NBI) and the ideological index in the Owen–Shapley perspective

(O–S) presented above in Section 2.1.1. If we look at the O–S values, we see that the number of votes

is no longer a good predictor of power. Shifting from standard S–S and NBI indices to the ideological

O–S value, yields a concentration of power. This is due to zero-probability, assigned to a large number

of ideologically non-consistent coalitions.

20Changes in the vote allocation from the pre-Nice situation to post-Nice can be seen by comparing column two of Tables 1

and 2. In the Treaty of Nice, the qualified majority threshold was increased from 62 out of 87, to 250 out of 345.

The Treaty of Nice prescribed that bills be passed by the Council with two quotas: a majority of states, and at least 62%

of the total population of the Union. These additional conditions produce negligible effects on winning coalitions. There is

widespread consensus about this point and we verified it through simulations. Thus, we disregard in our analysis these, and

other complicating aspects of the EU decision making, such as amendments, abstentions etc.

21The doublemajority sets two conditions for the passage of a bill: (a) more than 55% ofmember states vote ‘‘yes’’; and (b) the

population of the countries who have voted ‘‘yes’’ represents at least 65% of the total population of the EU.

For a limited number of issues, unanimity has been kept. Moreover, in the LT, a sort of safeguard clause has been introduced.

For simplicity, we focus here on double majority.

Figure: EU27 Expands.Stephen Kinsella (University of Limerick) EC4027 November 3, 2010 27 / 30

Future prospects

Romania and Bulgaria (2007)

Turkey (2010?)

The Balkans (Croatia, Bosnia, Serbia, Macedonia, Albania)?

Belarus, Ukraine, Georgia?

North Africa?


Next Time

Location Effects, Regional and Industrial Policy.

Baldwin & Wyplosz, Chapter 13.

* Puga, D., ‘European regional policy in light of recent locationtheories’, Journal of Economic Geography 2(4), October 2002:372-406

Puga, D. ‘The rise and fall of regional inequalities’, EuropeanEconomic Review 43(2), February 1999: 303-334.


References


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