Hamish McRae: We'll grow faster together

What sort of Europe do Europeans want? And which Europeans? The Seville summit this weekend has been presented as a meeting about immigration and that, for obvious reasons, is certainly the hottest political issue. It will continue to be, for the pressure will continue. The voters of several continental European countries have made their views felt in recent elections.

But there are two other matters that are ultimately more important than immigration. Both have been subjects of previous summits: enlargement (the Nice summit) and competitiveness (Lisbon). Anyone interested in the longer-term future of the EU should focus on what Seville has to show about these.

They link. Enlargement could potentially give a great spur to the EU's economic performance. For a start, eastern Europe, seen as a whole, is growing at more than double the rate of western Europe, around 5 per cent through the second half of the 1990s against an average of about 2 per cent.

Just as important, it brings opportunities for western European companies to cut costs, thereby enabling them to compete more effectively against East Asia. "Emerging Europe" as economists rather oddly dub it, has wages rates that are in round terms half those of the EU. Emerging Asia has lower rates still, but without the advantage of physical proximity to the EU market.

Trouble is, most EU members tend to see enlargement as a burden rather than an opportunity. To see why, look at the left-hand graph above, showing the present burdens on the larger EU members and the way the some countries benefit.

As a percentage of GDP the donor countries appear not to be too hard hit: the worst is Sweden at 0.5 per cent (just ahead of Germany), while we pay "only" 0.25 per cent as a price of membership. But in absolute terms it is huge and it is cumulative, adding up year after year. Understandably the Germans are less than thrilled about the size of their contribution and the Swedes are miserable about the corruption and waste in the EU budget. One has to ask whether it is appropriate for the slowest-growing country in the EU to have such a burden and, indeed, whether it would be the slowest-growing if the burden were lifted. Still, these payments have in the past been deemed to be more or less acceptable.

More remarkable is the scale of the benefits received by Spain, Ireland, Portugal and Greece, which are enormous when compared with the size of their economies. No wonder those countries like being in Europe and no wonder they are worried that enlargement might mean the new members start to skim the cream instead of them. Irish voters threw out the Nice treaty, which provided for enlargement, and it is feared they may do so again. But those countries, including the UK, that pay into the EU pot are in general in favour of enlargement. In fact, most of the applicant countries are quite small, and they will not benefit in the early years from the full agricultural subsidies enjoyed by existing members; these subsidies are by far the largest EU transfer mechanism.

The size point you can catch from the right-hand graph above. In terms of GNP (or, indeed, population) the only two really big applicants are Turkey and Poland. Turkey is not at all in the first rank of possible members; it may never join. And the next in size, the Czech Republic and Hungary, already have GNP per head of half the EU average and are growing so fast that, at present differentials, they will have caught up in about 15 years. Romania and Bulgaria are on a slower track, so in as far as transfers are necessary to pull up wealth in eastern Europe's economies to something like western European levels, the only immediate and potentially expensive problem is Poland. That ought to be manageable without increasing the burden on the donors by cutting subsidies to the present recipients. Besides, these countries do not need transfers of 2 per cent of GDP to close the gap.

What worries me more than these budgetary issues is the failure of many EU countries to appreciate quite how much they will gain from a closer relationship with eastern Europe. Economics is not a static game: having poorer countries joining the club might seem to be a drag on the club's finances. But having countries that are growing faster ought to increase the potential growth rate of the whole show.

You cannot prove this. What you can do is look at the dynamic effects of previous enlargements, in particular the effects of Sweden and Finland, and of Spain and Portugal. The first two gave the EU skills and dynamism in the new technologies: simple measures would be mobile phone and internet penetration. The latter two gave it rapid growth and, particularly in the case of Spain, entrepreneurial and reformist zeal.

You can catch a glimpse of the parallel benefits that the next enlargement will bring by travelling to, say, the Czech Republic or Hungary. It is not just that nobody makes jokes about Skodas now: that was Volkswagen's work. It is more that the countries to the east are showing the economic dynamism that western Europe showed in the early postwar years as controls were relaxed and bureaucratic burdens were yet to be imposed.

Ultimately what matters is that Europe's relative economic performance starts to improve. Do not expect it to close the gap with the US, as the Lisbon summit proposed. That is beyond its grasp. But it ought to be able to stop the gap getting worse, reversing the widening of the 1990s. At best, enlargement should be a spur to improved performance. If, when the tally for this weekend's summit is added up, enlargement is being pushed backwards, then it won't just be the aims of the Nice summit that will have been thwarted, but the aims of the Lisbon one too.