Hamish McRae: Europe must lift its economic game

The issues are how best to lift the laggards and how best to encourage the leaders
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The other story yesterday was Europe - the confirmation that Bulgaria and Romania are indeed to join the EU in January. There are conditions to be sure: among others, they have to cope with corruption and ensure the proper use of EU funds. But the deal is done. What next?

The temptation is to see this further enlargement from the narrow perspective of how many Bulgarians and Romanians will come here to work. The experience of the last enlargement, when the numbers of such immigrants were grossly underestimated, has sharpened this concern. But while that has been the most obvious issue, the experience really tells us more about our own economy, and in particular its ability to create jobs, than it does about the future direction of Europe.

There are a number of reasons to expect this expansion will not lead to immigration on a similar scale to the last one. The numbers are smaller: between them these two countries have 30 million people, whereas Poland alone has 39 million. The distances are greater - and even in the age of cheap air travel distance still matters a bit. But most important, the employment opportunities are lower, largely because the previous wave of immigrants has taken up the slack in the labour market. So whether or not there are formal limits to slow the access to our own or other European labour markets, both the supply and demand for labour will be more muted than they were last time.

The much bigger issue, in any case, is not the impact on the UK, but the change in European dynamics, now that it is reaching the limits of its expansion. The idea that the EU would continue gradually to embrace new members has shaped the organisation ever since it was the original six. Now it is at, or at least very close to, the limits of territorial expansion.

I don't think we realise quite how different this will be. An economic region can progress by widening to take in new countries or by deepening to increase the level of economic integration within itself. The EU and its predecessor bodies have for 40 years done both. Both have involved a huge effort: a lot of bureaucratic stuff has to be done. That is not to sneer at all at the bureaucracy, for the detailed work needed to clear the commercial and financial barriers built up in Europe during the first part of the last century is one of the unsung achievements of Brussels. People attack the European commission for creating bureaucratic barriers but tend to forget that much of its effort has been trying to harmonise different national regulations rather than impose new ones on top.

But now the focus will shift. That was acknowledged by the commission president, Jose Manuel Barroso. "It would be unwise to bring in other member states apart from Romania and Bulgaria," he said on Monday.

His point was put in the political context that the EU would need to come to some decision about its constitution before it enlarged any further, but it could equally apply to the economic challenge of getting, say, Turkey and the Ukraine into the union. The question is whether the thrust of EU progress, since it cannot be territorial, will now be political or economic.

Both will be difficult. There are the obvious objections to further political integration, witness the rejection of the constitution. Much less has been written about the difficulties of further economic integration.

There have been some quick "wins" from enlargement. For example, European manufacturers have found, in eastern Europe, a place on their doorstep to outsource lower-value-added production. It is much easier to manage a car assembly plant in Slovakia than it is to try to manage one in China. Another example is the "win" the UK has had from being able to import quality labour, enabling growth to continue without the usual strains that occur when our economy is close to capacity.

By contrast, the "wins" from integration within established western European economies have been much harder to identify. Overall growth in the eurozone has been consistently lower than growth in the non-eurozone EU members since the euro was launched. Worryingly, economic integration within the eurozone does not seem to have brought significant economic benefits. Trade within the zone has grown more slowly than trade between the zone and the rest of the EU, which is almost inexplicable. The whole point of having a single currency is to enable countries to trade more easily with each other.

There will be some gains from this enlargement. Bulgaria and Romania have quite low GDPs: about $3,500 a head, one-tenth that of the UK. So they don't bring much of a market. They do, however, bring great growth potential and will, if the experience of countries such as Poland and Hungary are any guide, become the fastest-growing parts of the continent.

The bigger question for Europe will be how to do better with what it has got: how best to lift its economic game. There are great centres of excellence within Europe. The global competitiveness index from the World Economic Forum ranks seven European countries in the world's top 10: Switzerland at the top, the UK at No 10. As a region, we have nothing to be ashamed of. The issues are how best to lift the laggards and how best to encourage the leaders. Now we have, so to speak, established the empire's boundaries, lifting its economic performance can become the principal goal.