Hamish McRae: Expansion may bring benefits to the European Union that prior enlargements have not

A great leap forward or a bridge too far? The final details of the deal that the new candidates for membership of the EU will be offered will be hammered out in the next couple of days. The EU summit in Copenhagen starts with a dinner tonight and will carry on probably till the weekend. Unless something astounding happens the accession countries should be set on their path to membership, assuming indeed that this will be what their voters want to do.

But will this make the European economy stronger or weaker? Up to now most of the argument has been in political terms – the need to bind the former members of Russia's central and eastern European empire (plus a couple of Mediterranean islands) into the Western club. The economic argument that this would be good for both parts of Europe has been taken more or less on trust. But then it was also assumed that the enlargement of Germany would be good for both sides, whereas it has been in economic terms at least pretty much of a disaster. So what do we know?

The first point to make is that the first wave of these accession countries – Bulgaria and Romania are in the next group – are not huge in relation to the present European economy. As you can see in the first graph, they add a little less than 20 per cent to Europe's population and a little more than 20 per cent to its land area. But they only add 5 per cent to its GDP. That is of course because their GDP per head is much lower than that of their western neighbours.

If you make the calculation at market exchange rates (second graph) they are way down the league; even at purchasing power parity (PPP) they are still significantly poorer than the European average. (Some of the accession countries are very small indeed: Malta has a GDP of $3.6bn, roughly the same as the London Borough of Islington.)

Whether this matters depends on expectations of the dynamics of the new members. They have two advantages that East Germany did not have. One is that they have been and are independent states whereas East Germany was in effect taken over by the West within a few months of achieving its freedom from Russia. So there was no time to learn how to adapt to the market economy in its own way: it had to buy the version that had been developed by its neighbour.

The other is that they will not be saddled with the wrong exchange rate, for parity between the East and West German marks gave East Germany an exchange rate that was roughly double that justified by its productivity. The result has been continuing subsidies from the West, unemployment in the high teens in the East – and demoralisation on both sides.

So the East German experience, while an obvious and proper concern, is not likely to be repeated elsewhere. The new members are just as likely to be over-competitive – because of their keen exchange rates – than to be a drag on the rest of the EU.

Nor will they provide a great market for the EU. The map shows the parts of the present EU that do most trade with the accession states. As you might expect the closer you are physically to the new members the more likely you are to do a lot of trade with them. So Germany, Austria and Italy do more trade with the entrants than do the UK or Portugal. But even for Germany the impact is quite small as a market. Instead it is extremely important as a production base, for that is where much of German industry is fleeing to cut costs.

As these countries get richer and costs rise they will gradually become more attractive customers and less attractive havens for inward investment. But that is 10 or 20 years off. For the time being the accession countries bring a boost to the EU's global competitiveness, not to the size of its internal market.

Might their competitiveness be damaged by the additional regulatory and other costs of joining the EU club? This is a serious concern among some of the accession countries, though it is more evident in commercial circles than political ones. There will undoubtedly be some additional burden but the cost advantages at the moment are so huge, thanks to much lower wages as well as lower social costs, that it is unlikely this will seriously damage the region in the short term.

Might these lower wages lead to an influx of skilled workers into the parts of the EU (like the UK but unlike much of continental Europe) that are prepared to give immediate access to their labour markets?

The answer there must be that to some extent there will be cross-border migration and the still-strong job market of Britain must be the biggest magnet. But if you look at the numbers involved it is unlikely to be enormous.

The total population is not that large and some countries, like the Czech Republic, seem to have a tradition of staying at home. Cultural and language barriers to population movements remain large. For example, There has not been great migration from Greece or Portugal to the rest of the EU despite significantly lower wages at home.

Finally, what about the budgetary costs of expansion – need these be a concern to countries like the UK that are net contributors to the EU budget?

Well, the final deals are yet to be done but again these look manageable. The new states are not being given the East German treatment: subsidies on such a huge scale that they cause resentment among the people who pay and discourage enterprise among those who receive. Instead the contributions will be modest from the point of view of the existing EU members though they will in some cases be significant for the recipients.

So what does the EU get out of all this? On a static analysis there are quite a lot more people, a lot more land, but only a slightly larger market. But on a dynamic analysis the outlook is surely more exciting.

For a start Europe gets a great mass of talent and energy: well-educated people who have recently thrown off the yoke of communism and will be very chary of going back to collectivist ways.

In addition it gets several fast-growing economies. In round numbers the 10 accession countries have grown at double the rate of the eurozone members during the past five years. Expect that superior performance to continue as investment funds continue to move from Germany to its neighbours to the south and east.

Expect too a different set of ideas and values. It is very hard to pin down quite how these will change the EU's embedded habits but the very different historical experience will bring economic benefits as well as cultural diversity. That too will make the EU more competitive in global terms.

So while on paper the economic advantages may not appear enormous, expansion may bring dynamic benefits to the EU in a way that previous expansions have largely failed to do. All this, however, assumes that the electorates of the accession countries will indeed want to proceed, for this is not at all a done deal. But let's hope they do.