Many think we may have recently seen an “earthquake” in European politics but tremors have been with us for a while. While policy makers scramble to make sense of the electorate’s motivations at the ballot box, it will pay to recognise a crucial change in how the EU has evolved since 2004.
The biggest enlargement of the European Union took place exactly ten years ago. Many expected it would mark the end of the transition from socialism and radically change the economies and polities of those new EU member states. But certainly few predicted it would transform the European economy and the European Union in such a fundamental manner.
The fall of the Berlin Wall was a defining moment. It signposted the beginning of the end of the communist experiment in central and eastern Europe, a process that took almost two years to complete and culminated with the implosion of the Soviet Union in 1991. It also marked the beginning of a fundamental transition: from authoritarian centrally-planned economies to democratic regimes supported by market-oriented economies.
The transition is finished. It actually ended when eight former Soviet Bloc countries became full-fledged members of the European Union in May 2004. During the transition, there was a large output contraction accompanied by rapid capital depreciation and huge changes in the labour force. There was also a massive institutional vacuum.
With the 2004 enlargement, a great divide opened between central European countries and those from the former Soviet Union. Although it was clear that a wedge was developing, few would have imagined the massive role EU membership end up playing. We now know that for those countries which did not join the EU, that institutional vacuum very much remains, as shown tragically by the current situation in Ukraine. Most former Soviet Union countries remain saddled with a kind of incomplete reform.
EU accession turned the wedge into a wall. On one side, economic dynamism and institutional renewal; on the other, economic stagnation (chiefly for those countries without natural resources) and an institutional vacuum. At the start of their transition, former Soviet Union countries had incomes per capita broadly similar to those in central Europe that eventually joined the EU, while by the end of 2013 a substantial gap had opened.
How did the 2004 EU enlargement change the new member states? Accession was instrumental: it meant much better institutions, much more trade, more labor mobility and technological development. The negotiations for EU membership helped not just to anchor but also to fine-tune institutional change. Financial integration fuelled this exceptionality.
It may be too early to tell, maybe it is too early to measure the benefits from EU membership, but preliminary estimates are encouraging. They show substantial effects even among the newest entrants (and, more importantly, similar to the benefits in the 1973 and the 1986 EU enlargements). A major surprise is that EU accession seems to have played a fundamental role in the implementation and sequencing of structural reforms (an issue that remains largely unexplored in empirical economic research).
Integration and scepticism
The EU in 2024 will be very different from the EU in 2014. The 2004 enlargement changed the EU. Diversity across member countries increased sharply: the lowest GDP per capita was about 70% of EU average before enlargement and now it is about 50%. Labour mobility also increased significantly. Deeper integration of both capital and labour, together with a push for more democracy and efficiency of EU institutions, are creating huge opportunities for the EU.
However such potentially positive impetus from enlargement risks being derailed by the lingering effects of the Great Recession and the difficulties in the policy response at the EU level. Euroskepticism is mounting and Europe is becoming the scapegoat for many politicians despite a body of research showing that the growing distrust of EU institutions is best explained by growing distrust in national politicians.
The results from the 2014 European Parliamentary elections announced the emergence of a vocal Eurosceptic vote delivering unprecedented victories in important member states (France and Britain.) It is a crossroads of sorts: a new reform strategy will be needed as well as a serious debate about the EU’s costs and benefits and how it can be best and more sustainably be sustained.
We are optimistic the EU of 2024 will be better than the EU of 2014. There are many important changes, still on-going, that make for uncertain forecasts. What we are certain of, though, is that to understand this different EU (and, hopefully, to help mould it into a more efficient and democratic union), we must think differently. To understand the process of European Integration until 2004, trade, agriculture and exchange rates were key. To understand it after 2004, economic growth, regional inequality and financial development are key.
Above all, a political economy perspective is needed. In the last two decades, the boundaries between economics and politics blurred. The current debates about European integration selectively ignore these advances but, if the EU is to become more efficient and democratic, to pretend they did not happen is something we simply cannot afford.