Report allays fears over impact of eastwards enlargement

In May 2000, the European Commission issued a report which attempts to allay concerns about the potential social and economic impact of the integration into the European Union of the 10 candidate countries from central and eastern Europe. The report predicts that enlargement will have only a limited impact on jobs and pay in western Europe.

On 21 May 2000 the findings of a report entitled The impact of eastern enlargement on employment and wages in the EU Member States were presented by the European Commission. The research, which was carried out on behalf of the Commission, attempts to address a number of concerns voiced by the present European Union (EU) Member States. The main fear is that the integration of the 10 candidate countries from central and eastern Europe (CEE) could have a detrimental impact on jobs and pay. The CEE countries that are candidates for accession are Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, the Slovak Republic and Slovenia.

Premise for research

The report states that there are fears that the integration of 10 low-income economies into the EU will lead to:

  • a drop in the living standards of unskilled workers;
  • the displacement of jobs;
  • downward pressure on pay; and
  • the mass migration of cheap labour which will affect labour markets and social cohesion.

However, the report has gone some way towards allaying such fears and the employment and social policy Commissioner, Anna Diamantopoulou, is optimistic about the prospect of enlargement. Commenting on the study, she stated that "enlargement will bring economic and political benefits to Europe's citizens – both in today's EU and those in the applicant countries of central and eastern Europe. We do not expect any major problems from enlargement through labour migration." The report has also been welcomed as a valuable contribution to the debate on the free movement of people and trade in the period following enlargement.

The study provides an overall assessment of the economic disparities between the "CEE 10" and the "EU 15" and comments on the prospects of economic convergence. It also addresses concerns relating to the displacement of jobs through "social dumping", the impact of the migration of cheap labour and the effect of the opening of new avenues for trade.

Economic parity decades away

The report states that, in terms of economic disparities, the variance in per capita income between the EU 15 and the CEE 10 is larger than in previous EU accession rounds – average pay levels in the CEE 10 are the equivalent of 25% of the levels in the EU 15, at purchasing power parities. A further significant difference, according to the report, is that while the CEE countries have an abundance of labour compared with the EU, the EU is well endowed with physical capital compared with CEE.

Given such economic differences, real convergence between the CEE 10 and the EU 15 is unlikely to occur in the near future. Given that the convergence of income levels in the present EU Member States has been a long process, the research predicts that current differences in income between the EU 15 and the CEE 10 will take decades to be reduced. Thus the report recommends that policies to encourage economic growth in the CEE 10 should be established as a priority in order to mitigate future pressures on the labour markets of the present EU Member States as a result of enlargement.

No stampede to relocate in the CEE 10

The possibility that labour-intensive production, enticed by lower labour costs, will relocate to the CEE countries – a practice referred to as "social dumping" – is a key fear engendered by the enlargement process. However, the study reveals that only some 20% of current foreign investment in the CEE 10 is aimed at industries where low labour costs play a significant role and where the labour supply is abundant. Such industries include clothing and footwear, electrical machinery, rubber and plastic products. By contrast, the report points out that nearly 50% of all foreign direct investment in the CEE countries is aimed at non-trade sectors such as public utilities and communications.

The study therefore concludes that only a small proportion of foreign direct investment is driven by low wage costs and a desire to relocate production, while the majority of investment is aimed at securing market access. As such, this investment is neutral in terms of employment and pay in the investing countries and complements trade.

Unfounded claims over mass migration

A further concern related to the integration of low-income economies centres on the prospect of mass migration of cheap labour from the CEE 10, with the prospect of an influx of cheap labour having an adverse effect on labour market conditions in the EU 15. However, according to the report, "fears that the EU will be swamped by immigrants from the CEE countries ... seem to be ill-founded."

The study forecasts that the number of immigrants from the CEE 10 to the EU 15 will increase to 335,000 per year after the introduction of free movement of people. It also predicts that this number will have fallen to fewer than 150,000 people within a decade and that within 30 years only 1.1% of the total EU population will consist of immigrants from the CEE countries. Currently, 0.2% of the whole EU population and 0.3% of the EU workforce respectively is made up of people from the CEE 10.

However, almost 80% of all immigrants from the CEE 10 are concentrated in Austria and Germany. Following enlargement, Germany is expected to receive some 220,000 people from the CEE 10 and after 30 years some 3.5% of the German population is predicted to be made up of immigrants from central and eastern Europe.

Moderate impact on unskilled labour

While the prospect of mass labour migration may appear to have been exaggerated, the report concedes that the arrival of immigrant workers will affect blue-collar workers in manufacturing industries and unskilled labour services. However, the report maintains that the impact on such workers will be less than is widely expected because it calculates that an increase in the size of the migrant workforce in a given branch by one percentage point means that average pay will drop by 0.25% in Austria and 0.6% in Germany. Given the same increase, the risk of dismissal appears set to rise by 0.8% in Austria and 0.2% in Germany. The report therefore concludes that the "impact of migration on wages and employment is likely to be rather moderate even in the two most affected countries, Austria and Germany."

The report also points out that, despite the fact that formal education levels in CEE countries are high, immigrant workers will continue to be employed in the same sectors as other foreign workers, competing for work with blue-collar workers and unskilled labour. However, the study contends that there is potential for immigrant workers from the CEE 10 to adapt to the demands of the EU labour market and, with time, compete for highly-skilled positions.

New trade to secure and create jobs

Concerns that the new trading opportunities presented by enlargement will affect the price of goods within the EU and have a detrimental impact on workers' pay, as well as altering trade patterns within the EU, are unfounded, according to the report.

This is because although import and export flows between the CEE countries and the EU increased between 1988 and 1998 – 75% of all EU trade with the CEE countries is undertaken by Austria, Germany, Greece, Italy and Finland– trade volumes are too small to affect prices and wages in open economies. The impact of this trade is also limited because EU Member States and the CEE countries are not specialised in the same kinds of goods and the trade flows are therefore complementary. This means that there is also no threat to current trading patterns within the EU – southern EU Member States have expressed concerns that their export markets within the EU could turn to imports from the CEE 10, thus depriving them of trading opportunities. The report states that this will not be the case.

In fact, the report predicts that enlargement could help generate jobs. It states that several tens of thousands of jobs could be secured as a direct result of trade with the CEE 10 given the new trading opportunities for EU companies in sectors such as communication equipment, measuring instruments, computers and motor vehicles. However, in sectors where there is competition between traders in the EU 15 and the CEE 10, such as clothing and footwear, there could be a detrimental impact on the pay of unskilled workers in these sectors in the EU, while construction workers in some regions of Germany could also be affected by the offer of construction services from the CEE countries.

Commentary

This report is a valuable contribution to the debate concerning eastwards enlargement and the social and economic implications of the integration of 10 low-income economies into the EU. The study has gone some way towards dispelling fears that eastwards enlargement will lead to a fall in workers' living standards in EU Member States, social dumping and lower pay. The study has also highlighted the fact that enlargement could lead to increased job creation through increased trading opportunities.

However, while this is a timely report, its forecasts will ultimately depend on the speed with which accession negotiations proceed. Given that such negotiations appear to have lost their momentum, it could be the case that, despite the official entry date of 2003, the first of the CEE countries will not join the EU until 2005 or beyond (Neil Bentley, IRS).

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