Eastern Enlargement of the EU: A Comprehensive Welfare Assessment

This paper takes a welfare-view on eastern enlargement of the EU, focusing on incumbent countries. Enlargement is decomposed into three elements: Single-market integration on commodity markets, budgetary costs from EU-expenditure policies, and single-market-induced migration from new to present member countries. I first use an analytical model to derive a welfare equation that identifies the principle channels for incumbent country welfare gains and losses from enlargement, including product differentiation, capital accumulation, and unemployment due to search-costs. I then propose a method that allows to extend welfare results obtained from a detailed calibrated version of this model for Germany to other incumbent countries. The approach relies on model elasticities extracted from the German model which are then applied to other countries’ idiosyncratic “enlargement-shocks”. Constructing detailed indices for such country-specific “enlargement shocks”, I arrive at a characteristic inter-country pattern of enlargement-induced welfare effects for all EU15 countries. Aggregating these across countries reveals enlargement to be beneficial for the union as a whole, although several countries stand to suffer welfare losses. Address: Johannes Kepler University Linz, Department of Economics, Altenberger Strasse 69, A-4040 LinzAuhof, Austria, phone:+43-732-2468-8239, fax:-8238, [email protected], http://www.econ.jku.at/kohler. A preliminary version of this paper was presented at the International Workshop on “EU Enlargement: Economic and Institutional Reforms”, Catholic University of Milan, June 20-21, 2003. Thanks are due to Carlo Altomonte and Gabriel Felbermayr for extensive and very constructive comments. I am also grateful to the Hamburg Institute of International Economics (HWWA) for its hospitality during a Visiting Fellowship in July 2003 which has allowed me to complete the paper. Part of this research was conducted under a project entitled “Public Finance, Growth and Employment” and funded by the Austrian Science Fund (FWF) under grant no. P14702.