Economic View: More the merrier for the EU

This coming weekend the Irish people vote for the second time on the Nice treaty, the one that provides for EU enlargement. If they vote it down as they did before, then it may be possible for some new members to join, though things will look very difficult. But if they vote it through, and the polls point that way, up to another 10 countries seem likely to join. If these countries all decide to go ahead, this would add another 20 per cent to the EU's population, bringing it to 452 million, and 23 per cent to its land area. But its GDP would rise by only 4.5 per cent – hence the question.

On one hand this could be just the shot in the arm continental Europe needs to rescue itself from economic stagnation. For the EU gains not just a bigger market but a group of fast-growing, dynamic econo- mies that are still catching up with their neighbours to the west. On the other hand there is the troubling example of East Germany, the one former eastern European country to have joined the EU, which is still struggling with 17 per cent unemployment and dragging down the economic performance of Germany and as a result the whole region. It ought to be the first alternative but it could turn out to be the second.

Some numbers make this clearer. All these new entrants have a GDP per head that is less than three-quarters of the EU average. This holds true whether you convert currencies at market exchange rates or at purchasing power parity, as the graph shows. The richest potential new member, Cyprus, may not join because of differences over the division of the island, and the next ones, Slovenia and Malta, are tiny. The biggest potential new member, Poland, is a long way down the wealth league, particularly if you look at actual exchange rates.

Previous enlargements were different from this one, for in the past the new club members were more or less as rich as the existing ones. True, countries like Spain, Portugal and Greece were poorer, but the Scandinavian countries were richer. So instead of having a marriage of equals, the poor cousins are moving in, which will inevitably put a burden on the EU budget.

At the moment a clutch of smaller members – Greece, Portugal and Ireland – scoop the pool, getting a transfer in Greece's case of nearly 4 per cent of GDP from other EU taxpayers. At the other end, a string of countries led by Sweden, Germany and the Netherlands pay into the pot. Britain loses nearly 0.25 per cent of GDP each year to Brussels, and the levy would be much larger had Margaret Thatcher not negotiated the rebate on our contributions (see graph). By the way, whenever you see a sign in Britain for some project saying "Part-funded by the EU", remember we pay in nearly double as much as we get out.

Just how the EU budget will be realigned to cope with the new members is still to play for. Germany, the largest net contributor in absolute terms, has said it won't stump up more money. This is quite understandable given Germany's slow growth. We are the next largest net contributor and will be less than thrilled at having to pay more when we get so little back. It is assumed that countries like Ireland and Spain will get less, since both have been huge economic success stories and no longer really need subsidies. The transfer to the new members will be limited by the fact that they will not become immediate members of the common agricultural policy: agricultural subsidies account for half of the EU's spending. But whatever happens, the new members will be a drag on the EU budget, not a help.

The key question is whether this fiscal burden will be offset by the economic dynamism that these new countries will bring. Are they Ireland or East Germany?

There is a geographical issue and I think a wider psychological one. Geography matters in that the countries closest to the new members will gain most. Poland is by far the largest applicant both in terms of population (more than half of the total) and GDP. The third graph shows how Austria, Greece and Germany have the greatest trade with these countries, while those of us over on the Atlantic have the least. In theory, the near neighbours should gain the most. But UBS Warburg, which prepared the report from which these graphs are taken, acknowledges that much of the trade benefits may already have accrued. Certainly German investment has flooded into Poland, Hungary and the Czech Republic, to some extent in anticipation of these countries joining the EU. But there still ought to be benefits ahead for both sides; if there are not, there is really very little point in enlargement. But expect those benefits to go mostly to the neighbours.

Maybe what will matter most, though, is psychology. There is considerable doubt in some of these countries that joining the EU is a good idea at all. In the Czech Republic, for example, the political elite want to join but the voters are evenly divided. The candidates are being asked by Brussels to jump through all sorts of bureaucratic hoops and for some this is quite humiliating. Having just got their freedom from Moscow, why give it up to Brussels? That is an unfair way of putting the issue, but it has resonance. This is not a done deal by any means.

If, however, Europe does take in these new members, the EU will change – and I believe for the better. As anyone who has travelled in central and eastern Europe will testify, they bring a new set of attitudes – a certain "can do" commercial vigour and a well-educated elite. Europe will be better balanced, less dominated by the western vision of running economies which has contributed to Europe's current poor performance.

It must be right to embrace the cultural and economic diversity of this region – to reconnect a Europe that a century ago was a single economic unit. Fingers crossed for the Irish referendum.