What is the economic impact of further expansion of the EU?

Topical issues in the field of economy, (responsible) investment, pension and income: every week, one of APG's experts provides a clear answer to this week's question. This edition: chief economist Thijs Knaap on the question of what the economic impact is of further expansion of the EU.

“Expansion is essential to the European Union.” That’s what Ursula van der Leyen, chairperson of the European Commission, said last week during the presentation of her plans to start the accession negotiations with Ukraine and Moldova. A membership is also beckoning for Georgia and Bosnia-Herzegovina. What is the economic impact of this further expansion?

The EU is a successful model of which many countries are looking to become a member, Knaap emphasizes. “And that is quite understandable as all new member states experience great economic progress during the first years. That applied not only to Portugal, Spain and Greece, but also at a later time to the Eastern European countries.” The Netherlands also benefits from an expansion of the EU, economically speaking. “Many people still believe the Netherlands is mainly exporting flowers and cheese, but the trade these days is increasingly more revolving around the so-called value chains. That means we manufacture the car windows and export them to Germany, where they are then installed into a Volkswagen that is eventually sold in Italy.”

Four freedoms
The advantage is that companies are able to produce very efficiently, says Knaap. “After Slovakia joined the EU, Volkswagen relocated massive factories from Germany to that country. This because it is cheaper to assemble a car in Slovakia than it is in Germany, and such move is relatively easy within the EU. That is great for the company and for its customers.” However, this also represents a disadvantage because the Ruhr Area lost those car factories and, with that, much-needed employment opportunities. “If Ukraine becomes a member in a few years’ time, there is a chance of companies moving their offices or factories to that country. The bigger the economic block, the more efficient companies are able to operate.”

The four freedoms of the EU (the free movement of capital, persons, services and goods) are the basis of the economic narrative of the EU and the eurozone countries. Economically speaking, those freedoms should help compensate for shocks, Knaap continues. “Especially if this involves so-called asymmetric shocks, for example when things are going bad in Spain but well in the Netherlands. Those shocks can be partly mitigated by, among other things, the free movement of capital and persons. When unemployment here is low but high in Spain, Spaniards can come to the Netherlands to work here. That mechanism works to a certain extent within the EU: you could think about the (Eastern) European labor immigrants who came here in the past few years. In that other union of states, the US, it is, however, even more natural to move for work.”

Democratization
The free movement of persons also means the citizens of the new member states will be given the right to relocate to elsewhere within the EU. “Immigration continues to be a sensitive topic, as can be seen in the Netherlands where people are talking about a maximum number of immigrants, among other things because of the housing shortage. But if The Hague wants to limit immigration from the EU, they are stopped by the European Court of Justice. We will have to get used to the fact that more and more powers are going to Brussels. Or we must leave the EU, but the internal market has become too important for the Netherlands for that to happen. Just look at the United Kingdom that noticed after the Brexit that it had become a lot more difficult to trade with EU member states.”

Expansion of the EU does not only offer economic advantages for the new member states, according to Knaap. “Portugal, Spain and Greece freed themselves from their dictatorial regimes in the seventies of the last century and started a process of democratization. As the cherry on the cake, this was eventually followed by the membership of the EU. The same can be said about the countries of the former Eastern Bloc. You can now also hear enthusiastic stories about Ukraine, where they seem to succeed in the eradication of corruption. We don’t have to set everything aside in the Netherlands to achieve this accession, but we will ultimately also benefit from countries in which everything is properly organized.”

United States
Despite the economic and political advantages a membership entails, the EU can also not expand endlessly, Knaap believes. “From an economic perspective you could say that the differences between the countries should not become too big. That would lead to asymmetric shocks within the EU that are too severe. However, it is difficult to say when that limit is reached exactly.”

The Union as a project will therefore never be completed, Knaap concludes, referring to the US. “That federation already exists for 250 years and discussions are still ongoing as to what powers are awarded to the states and which ones to the federal government in Washington, DC. That discussion, but in this case between the member states and Brussels, is very likely to continue within the EU for a long time.”