1-1 - Enlargement of The UE To Eastern Countries - Challenges and Issues - PR Mazé

Enlargement (2004, 2007):
Issues & Challenges

➲A patchwork of new member States (NMS).
➲No homogeneity between the Central and Eastern European
countries (CEECs).
➲Countries close to Germany (e.g. Czech Republic, Hungary
and Lithuania) have been historically imbedded in comercial
networks since the Middle Ages.
➲Others (e.g. Rumania and Bulgaria) are rather peripherical.
➲A painful transition towards capitalism.

➲The CEECs will abandon the State economy model.
➲Key international institutions : the IMF and the European Bank for
Reconstruction and Development (EBRD), specifically created to
support the transition process in European countries.
➲All CEECs (except for Slovenia) will opt for economic policies know
as the « Washington Consensus ».
Issues & Challenges
➲The CEECs : > 100 M inhabitants.
1989-1995 : CEECs face severe structural problems.

=> Crisis.
➲Endebted economies
➲Trade deficit.
➲Obsolescence of the industrial systems.
➲Quality/norms: not compliant with the standards in Western Europe.
In the early 1990, 70% of the industrial equipments are obsolete.

====>Russian-style privatizations (brutal purge) vs. The Chinese
approach based on a progressive opening and on State support to
firms.
Enlargement to the CEECs:
Issues & Challenges
➲Massive closures of State-owned companies.
➲Privatization.
➲==> Massive unemployment.
➲==> Fall in the purchasing power of the local population.
➲==> Sharp competition from European, American and Asian
products.
➲==> GDP collapse (early 1990s).
➲Fall in industrial production by 30%-40%.
➲Unemployment rate: 0% (zero unemployment in the

CEEC State economies) to 13%-20%.
➲Poverty index: 3% (before 1989), 25% (1993-1995).
➲Hyperinflation: 1,000/year in some CEECs.
Enlargement to CEECs
and Baltic countries:
Issues & Challenges
➲Collapse of salaries.
➲2003 salary: lower than the 1989 level in Rumania, Slovakia
and Slovenia by 30% (48% lower in Bulgaria).
➲Increase of subsistence farming.
➲Explosion of criminality.
➲Capital and people flight.
➲Hyper stress of the population: boom of suicides (1991-1994:
+50% in the Baltic countries).
➲Disillusionment of the population.
➲In the late 1990s, asymetrical commercial relationships of
the CEECs.
➲2002 : 70% of CEEC exportations => EU.
➲2002 : 4% of EU exportations => CEECs.
Issues & Challenges
➲Likethe celtic tiger (Ireland), CEECs adopted lower
corporate tax rates than in Western Europe.
➲=> Became highly dependent on multinational companies
from Western Europe.
➲Inthe 2000s, massive FDI flows into CEECs.

➲=> Acquisitions of State champions.
Skoda => VW
Dacia => Renault
➲In 2003 : multinational companies accounted for 47% of jobs

in Hungary, 29% in Poland, and 27% in Czech Republic.
➲FDI(2003) : 82% (Hungary), 63% (Poland), and 53% (Czech

Republic).
Issues & Challenges
➲In the 2000s, multinational companies accounted for 80%
of the CEEC exportations.
➲New production capacities : assembly lines, sub-

contracting (automotive equipment, textile, call centers,
behind the desk accountability).
➲To be noted. CEECs didn't opt for any industrial

policies aimed at transfoming large national
companies into global companies.
➲CEEC's approach stand in sharp contrast with the

economic voluntarism that shaped South Korea, Taiwan,
Brazil or Russia.
Issues & Challenges
➲Only 1 CEEC firm belonged to Fortune Global 500 in
2012 : PKN Orlen (Polish oil copany with operations
in Poland, Lithuania, Germany and Czech Republic).
➲Ranking: 347th.
➲CEECs are in a similar economic dependence as the

celtic tiger.
Issues related to the entry of new countries
3 main issues
1. Agriculture
2. Migratory flows
3. Tax and social competition
➲1. AGRICULTURE
➲Agricultural exploitations
➲EU 15 (2007): 6,284 M
➲12 NMS (2004-2007): 8,727 M (Poland : 2,172 M ; Rumania : 4,485
M)
➲Agricultural area
➲EU 15 (2007) : 20,2
➲12 NMS (2004-2007) : 6
➲Czech Rep : 79,4
➲Estonia : 21,6
➲Poland : 6,6
Issues related to AGRICUTURE
➲Active population in agriculture (%)
➲UE 15 (2007) : 3,8
➲12 NSM (2004-2007) : 16,6
➲Poland : 17,6
➲Czech Rep : 4,4
➲Rumania : 32,6
➲Contribution of agriculture to the GDP (%)

➲EU 15 (2007) : 1,6
➲12 NSM (2004-2007) : 3,8
➲Poland : 3,1
➲Szech Rep : 1,4
➲Rumania : 12,2
Issues related to MIGRATORY FLOWS
➲Salary gaps between member States
➲Average annual gross salary in firms with 10+ employees
(2003) :
➲Germany : 40,056 euros
➲Spain : 12,220
➲Greece : 16,739
➲Slovakia : 4,945
➲Source : Eurostat 2007
➲Net flows of NMS people to EU 15 (2004-2009)

➲Czech Rep: 31,000 (0,3% of the population)
➲Poland : 917,000 (2,4%)
➲Slovakia : 100,000 (1,9%)
➲Bulgaria : 266,000 (3,4%)
➲Rumania : 1,587,000 (7,3%)
➲Source : Holland, 2011
Issues related to MIGRATORY FLOWS
➲Debate around « the Polish plumber » issue during the

French 2007 presidential campaign.
➲Ongoing issues around the « invasion » of Rumanian

people in France
Issues related toTAX AND SOCIAL
COMPETITION
➲NMS governments partly imitate the Irish model => Sharp tax
and social competition. Low corporate taxes.
➲Average corporate tax in EU 15 :

50% (1980)
30% (2010)
➲Towards tax harmonization in the EU 28 ?
➲Social competition : social dumping.

Salary differential between Bulgaria and Germany : 1 to 8 (2005).
1/5 of NSM employees worked more than 50h/week vs. 1/10 in EU 15.
In Poland (2001) : >30% of the population worked > 49h/week.

45% of the population worked > 45h/week.
Issues related toTAX AND SOCIAL
COMPETITION
Discrepancies in labour costs (1) and productivity costs (2)
in the EU (2004)
Germany (1) 125 (2) 112
Spain 60 83
France 119 119

Italy 85 87
Portugal 40 59
United Kingdom 110 98
Bulgaria 3 37
Litvia 5 37
Poland 20 44
Czech Rep 22 45
Belgium 122 124
Source : Eurostat, 2007

BUSINESS CASE : Tax and social competition
between EU member States.
Relocation of Whirpool France (Amiens) to Poland (Lodz).
➲June 1, 2018 : Closure of the plant in Amiens.

➲Over 600 jobs at stake (unqualified people).
The debate over the future of the Whirlpool plant in Amiens
became a major topic in the final sprint of the French
presidential race.
Issues & Challenges
2013 : Entry of Croatia ito the EU.
GDP of Croatia (2000-2013) = GDP of Poland.

= 61% of the GDP of UE 27
Is there a CONVERGENCE between
the center and the periphery of the
EU ?
➲A slow and uncertain convergence.
➲Examples : Ireland, Italy, Spain and Portugal.
IRELAND
➲Convergence ++++ - Catch up strategy.
➲GDP/inhabitant + productivity : higher than the EU 28 levels.
➲Growth and productivity : boosted by fiscal strategies of
transfer pricing of US multinational companies.
EU ?
ITALY
➲Like several Mediterranean countries, slow convergence.
➲Mediocre economic performance.
➲Stagnation until the 2008 crisis.
➲2000-2003 : zero growth.
- Infrastructure issues (transportation, energy).
- Instability and corruption of political insitutions.
- Mafia networks in the State aparatus.
- Defensive industrial policy.
- Failing research and education policies.
- Technological backwardness of big companies.
- Debt burden.
EU ?
SPAIN
➲Slow convergence.
➲Catalunia and the Basque Country (close to the EU economic center)
boast a dynamic industrial fabric => Strong economic vitality.
➲Andalusia and Estremadura (peripherical regions) haven't reached any
convergence until the 2000s.
➲2000s : economic growth partly driven by the real estate bubble (low
interest rates).
➲2000s : relocation of activities to CEECs (e.g. Automobile).
EU ?
➲A slow and uncertain convergence.
➲Examples : Ireland, Italy, Spain and Portugal.
IRELAND
➲Convergence ++++ - Catch up strategy.
➲GDP/inhabitant + productivity : higher than the EU 28 levels.
➲Growth and productivity : boosted by fiscal strategies of
transfer pricing of US multinational companies.
EU ?
PORTUGAL
➲Slow convergence.
➲Peripherical location.
➲Low technological development.
➲Boom of Chinese investors.
➲Since 2-3 years, catch up strategy : attractive taxes =>
attraction of wealthy European citizens.
Is there a CONVERGENCE between the
center and the periphery of the EU ?
GENERAL COMMENTS
➲Strong growth in capital cities and central regions (e.g. West
London region) & Decline of peripherical regions (e.g. West of
Wales).
➲Increased disparities between regions within each member State.
➲Technological gaps.
Is there a CONVERGENCE between the
center and the periphery of the EU ?
Patent/inhabitant (2008)
➲Sweden 161
➲France 159
➲Ireland 80
➲Greece 22
➲Bulgaria 5
Royalties/inhabitant (2008)
➲Sweden $351
➲France $100
➲Ireland $149
➲Greece $1
➲Bulgaria $0
How will CONVERGENCE between
EU be possible?
Convergence requires the acquisition of technologies that
will help:
➲- increase productivity,
➲- diversify industries and activities,
➲- host clusters capable of attracting productive
investments (e.g ; Londres, Paris area, Stockholm-Uppsala,
Helsinki or Bavaria.
➲Towards a 2-speed Europe ?

Issues & Challenges
END OF CHAPTER II

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Enlargement (2004, 2007):

Issues & Challenges

➲A painful transition towards capitalism.

1989-1995 : CEECs face severe structural problems.

In the early 1990, 70% of the industrial equipments are obsolete.

➲Unemployment rate: 0% (zero unemployment in the

➲Inthe 2000s, massive FDI flows into CEECs.

➲In 2003 : multinational companies accounted for 47% of jobs

➲FDI(2003) : 82% (Hungary), 63% (Poland), and 53% (Czech

➲New production capacities : assembly lines, sub-

➲To be noted. CEECs didn't opt for any industrial

➲CEEC's approach stand in sharp contrast with the

➲CEECs are in a similar economic dependence as the

➲Contribution of agriculture to the GDP (%)

➲Net flows of NMS people to EU 15 (2004-2009)

➲Debate around « the Polish plumber » issue during the

➲Ongoing issues around the « invasion » of Rumanian

➲Average corporate tax in EU 15 :

➲Towards tax harmonization in the EU 28 ?

➲Social competition : social dumping.

In Poland (2001) : >30% of the population worked > 49h/week.

France 119 119

Source : Eurostat, 2007

➲June 1, 2018 : Closure of the plant in Amiens.

GDP of Croatia (2000-2013) = GDP of Poland.

➲Examples : Ireland, Italy, Spain and Portugal.

➲Examples : Ireland, Italy, Spain and Portugal.

➲Increased disparities between regions within each member State.

➲Towards a 2-speed Europe ?

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