Does EU Membership Facilitate Convergence? The Experience of the EU's Eastern Enlargement - Volume I

This chapter offers a framework to analyse the impact of EU membership on economic (“means”), institutional (“ways”) and social (“ends”) convergence of EU11 countries to the frontier. It identifies the channels through which this impact works: trade, investment, finance, migration and institutions. Using this framework, the analysis finds that EU membership shaped the convergence process in important ways. EU11 countries as a group were among the fastest converging countries in the world. The main drivers were trade and FDI. However, the finance channel injected volatility into the convergence process. Through the trade, investment and finance channels, EU membership unleashed strong market forces. However, the institutional channel remained weak, and institutional convergence lagged behind economic convergence. Thus, the unleashed market forces also caused negative side effects. Rapid economic convergence did not translate into a commensurate social convergence. Moreover, fast economic convergence also brought about major imbalances and vulnerabilities. Slow social convergence and imbalances in economic convergence may in turn jeopardise the sustainability of the rapid economic convergence the region has achieved so far.

We revisit the factors of convergence and growth in Central, Eastern and South Eastern Europe (CESEE). While the key elements that were driving pre-crisis convergence – rapid export growth, propelled by low wages, capital inflows and technology import, and catalysed by the EU accession – gave a strong impetus to economic progress, these factors have been weakened after the crisis due to changes in the labour market, demographics and slowdown of capital inflows. As a consequence, potential growth in CESEE economies decelerated. To maintain an adequate speed of convergence, a prospective “new growth model” is emerging as a candidate to be the driving force of growth in CESEE. The key elements of this growth model should be based on home-grown innovation to increase productivity, policies supporting the preservation and development of the productive labour force, and a system of financial intermediation that supports domestic savings.

This chapter analyses the dynamics of regional disparities in the member states that joined the European Union in or after 2004, excluding Cyprus and Malta (EU11). The analysis shows that while differences between countries have been shrinking, regional disparities in GDP per capita and employment rates within countries have been increasing. In particular, there is evidence of a strong and growing divide between urban and rural areas, at least until the 2008 crisis. Consistently, population dynamics also point to increasing within-country agglomeration, with the areas that had lower income per capita in 2000 (prevailingly rural) experiencing very sizeable population outflows over the subsequent 15 years. While a region’s prosperity depends on and affects that of neighbour regions, this spatial dependency has been declining over time, with geographical clusters of prosperous (poor) regions breaking up into more a granular spatial organisation.

This chapter analyzes the sources of Poland’s unprecedented economic performance after 1989, when Poland became Europe’s and the world’s growth champion. I argue that this growth miracle was driven by five fundamental factors, including Poland’s accession to the European Union. All five factors were critically important, but without accession to the EU, Poland’s economic miracle would not have happened.

In the first decade of EU membership, the Hungarian economy was unable to take advantage of the economic potential of the accession. The expansion of export markets and rapidly deepening financial integration opened up new growth opportunities, but the improved access to external financing conserved the unsustainable financing model. External indebtedness of the government increased and private sector used foreign loans to finance excessive consumption instead of financing new investments, and the foreign-owned banks increased the volume of retail FX loans. Thus, when the global financial crisis hit Hungary, a further escalation of that could be prevented by the loan agreement extended by the EU and the IMF. In this period, EU transfers played an important role as they helped to prevent an economic recession. Transformation of the country’s financing model based on a new strategy started in 2010. As a result of a significant increase in domestic savings, the repayment of external loans began. As before, EU funds supported economic growth in Hungary, but now they worked in tandem with the domestic development strategy. As a result, in terms of external vulnerability indicators, Hungary not only worked off its shortfall compared to the Visegrád region but sometimes even became one of the leaders.

This chapter discusses key macroeconomic trends in the Baltic states before and after their accession to the European Union in 2004. The countries have seen rapid economic growth, and the income gap with the EU countries in Western Europe has narrowed substantially. The convergence process has however been accompanied by cyclical volatility, and the setback after the global financial crisis was particularly severe. The cooperation of the Baltic states with the EU began in the early 1990s and strengthened over time, so the accession in 2004 did not cause any abrupt changes. Membership however opened for increased economic support from the EU and further liberalisation of trade, capital flows and movements of labour. A key challenge for the Baltic states is to achieve steady economic growth and continued convergence without jeopardising their macroeconomic and financial stability. This calls for judicious domestic policymaking in order that the countries may reap the benefits from continued integration and cooperation with the EU.

Bulgaria and Romania, the last two participants in EU’s large Eastern Enlargement, joined the Union more than two years after the big Central European wave. This chapter presents an assessment of some of the changes that took place in the period after accession and also seeks to analyse to what extent EU membership has helped them to converge to the EU frontier(s). This assessment shows that despite the similarities between Bulgaria and Romania, the two economies displayed important differences both in terms of the policies followed by the authorities and in the process of economic convergence, restructuring, macroeconomic adjustment and institutional change. Such results can be regarded as evidence supporting the view that EU membership per se does not guarantee convergence to the EU’s frontier(s), sustainable growth in prosperity and the degree to which the local population benefits from these outcomes. The latter remain a mandate and responsibility of the sovereign governments of EU member states and the policies that they pursue.

Almost all non-EU CESEE countries have converged with Western Europe over the past three decades. However, the pace of convergence has been mixed. For non-EU CESEE countries as a whole, convergence has generally developed at a slower pace than for EU member states in the region.

Econometrically, we find that the poorest countries tended to convergence more quickly, and that the investment share in GDP (linked to overall infrastructure quality) and EU accession were important. Other factors also played a role, such as state fragmentation, war, and proximity to Germany. Institutional factors remain key to long-term convergence performance, and here EU-CEE countries are much stronger. Within non-EU CESEE, Albania, Kazakhstan, Serbia and North Macedonia have all registered institutional improvements relative to Germany since 1996. By contrast, Russia, Turkey, Belarus and Moldova have gone backwards.

Compared with EU-CEE, we found that non-EU member states in the region have been characterised by smaller and less competitive manufacturing sectors, and less integration into regional value chains. In addition, they tend to have a lower share of FDI from Western Europe and into manufacturing and finance, and a notably worse development of the private sector in areas such as privatisation, restructuring and price liberalisation.