On May 1, the EU expanded its membership from 15 to 25 member states, increasing its population to 450 million. The national income of the EU member states now makes up 20 percent of global GDP, and EU trade makes up 40 percent of the global total. Nominally, the new EU will overtake the North American Free Trade Agreement (NAFTA) region as the world's biggest single market. In fact, although this expansion seems to promise unlimited potential, it may lead to bubble economies, and possibly a painful transition period.
Late November last year, I traveled to Germany to represent the Land Bank of Taiwan at the annual European Banking Congress in Frankfurt. When the discussion turned to the restructuring of the EU, Italy's deputy prime minister Gianfranco Fini said the EU should not be expanded indefinitely and that the number of member states should not exceed 30, lest it become as ineffective as the UN. Neither Germany's foreign minister, the president of Deutsche Bank nor the Hungarian finance minister, who were all present at the meeting, expressed any disagreement.
Following the eastern expansion of the EU, the 10 new member states with their weaker economic power -- their average GDP only reaches about 40 percent of that of the original 15 member states -- will have an impact on the original member states' economic interests and the pace of future economic integration. The expansion only increased the EU's total GDP by 6 percent (equal to the GDP of Holland), but it led to a 20 percent population increase.
Looking back at the unification of East and West Germany in 1990, West Germany has paid a high price. Despite its annual budget allocation of DM750 million (US$471 million) to East Germany, we are only beginning to see the results today, more than 10 years later. The EU's decision to invest 100 million euros (US$122 million) in the 10 new member states by the end of 2006 seems inadequate. It amounts to only one-tenth of the amount that West Germany invested in East Germany, yet the East German population was only one-quarter of the total population of the 10 new EU member states. From an economic perspective, the eastward expansion of the EU is not positive in the short run; however, it offers a positive long-term outlook. We just don't know how long it will take.
Another example is the accession of Ireland to the European Community (EC) in 1973. Over 12 years, the EC pumped a total of 12 billion euros into Ireland, which in the 1990s developed into a tiger cub economy. There was, however, no payoff in Greece and Portugal. Even if the average GDP growth rate of each new member state reaches 4 percent, the Economist Intelligence Unit estimates that Slovakia will require another 40 years and Poland another 50 years before they attain the economic level of the original EU member states. With such great disparity within the same economic body, it will be difficult to avoid future problems and conflict.
The first problem will be migration and employment. Although migration in theory should be free following the eastward expansion, new migrants might take jobs from the people in the original member states. This will subdue wage levels, create ethnic tension and so on. Each government will then have to bear the burden of increasing social welfare expenditures. As a result, the original member states, apart from the UK and Ireland, are building protective measures in contravention of the spirit of the EU.
The second problem will be writing the first EU constitution in response to its expansion. The UK has proposed a referendum to deal with this issue. If it succeeds, the odds that the other member states will be encouraged to accept the constitution will increase. According to the constitution, each member state will be allowed to retain veto rights on matters concerning their sovereignty, but common principles must be laid down for foreign affairs, taxation and national defense, as well as judiciary and economic policies.
The third problem is the European Central Bank. The bank, which in the past served 15 member states, has already showed signs of being worn out. Now, with the addition of the new member states and with Turkey and Romania waiting in line, the EU is gradually turning into a less economically developed society. Germany and France, the EU's core political nations, originally intended to rely on the support of the EU to compete on equal terms with the US, but they may now see their leading roles weakened.
The Soviet economic system, built on Marxist-Leninist theory almost 100 years ago, collapsed in the end, while the US economic system, based on an older wisdom, developed into an unprecedented economic super power. The European nations have been able to develop into today's EU despite having been through several rounds of war, chaos and destruction in the past 200 years. This has not been an easy task in terms of the democratization process or economic development, and it is unprecedented in human evolutionary history.
Although both the EU and the US are founded on democracy, the rule of law and a liberal economy, the EU will never become another US even if it one day develops into a "European Allied Nation." The differences in language, culture and historical experience among the EU member states are far greater than the gap between the US states.
The development of the EU shows that capitalism not only blurs national borders, but also erodes the sovereignty of centuries-old nation states. The national sovereignty of the current EU member states is no longer complete, because some policies require joint decisions. The EU's democratic movement has, however, strengthened local consciousness through mutual respect for cultural pluralism. This is something the US cannot offer.
Wea Chi-lin is chairman of the Land Bank of Taiwan.
Translated by Perry Svensson
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