How Much Further Integration Can Europe Afford? - "The Accession of Poorer Countries Is Forcing the EU to Rethink its Budget"

The European integration process is faltering. A number of poorer countries are on the waiting list to join the EU, including the Balkan states Serbia, Montenegro, Macedonia, Bosnia and Herzegovina, Albania and Kosovo. But is the EU prepared to accept new members? Friedrich Heinemann, an expert for fiscal policy and national budgets at ZEW, speaks about the EU`s capability for further expansion, arguing that the accession of poorer countries offers an opportunity to tackle overdue reforms at the European level.

Dr. Friedrich Heinemann is head of the ZEW Research Department “Corporate Taxation and Public Finance”. He also teaches economics at the University of Heidelberg. His main research interests lie in the domain of empirical public economics. He also studies questions related to fiscal competition and federalism in Europe, as well as the factors governing the ability of states and societies to undertake reforms.

There are already stabilisation and association agreements with EU candidate countries that enable duty-free trade. Would the internal market even benefit from further integration?

Yes. The internal market is more than a customs union. It enables the free movement of labour, finance capital, companies, goods and services. EU law has thus removed significant barriers to integration; association agreements are far more limited in scope. However, it is also true that the welfare gains that accrue to the new members are likely to be much higher than those witnessed by the EU's older members. For older members, the inclusion of the Balkan states only means a tiny expansion of the internal market. The expansion of the European internal market across the Atlantic through the creation of a transatlantic free trade zone is a much more enticing prospect for older member states.

Accession to the eurozone is a natural next step for countries that have benefitted economically from the cross-border flow of goods, services, capital and labour. What are the prospects of the Balkan states in this regard?

The European sovereign debt crisis and the crisis in confidence it generated have produced caution about the expansion of the eurozone, and this caution is likely to persist for some time. The turmoil in Greece and Cyprus has demonstrated the error in reasoning that small eurozone members cannot create significant problems. As a consequence, it will be a long time before the Balkan states will be finally accepted into the eurozone, even after a timely EU accession. This is all the more true in view of the fact that the euro often already functions as an important parallel currency.

Last year EU member states had to pay billions in order to shore up the European budget. Will fiscally weak new members potentially lead to additional EU budget haemorrhaging?

The problems associated with the EU budget's current spending structure will be intensified by the integration of relatively poor countries with a high share of agriculture in their GDPs. The Common Agricultural Policy and aid for poor regions and countries make up two-thirds of budget expenditures. The Balkan states would profit considerably from this spending. However, we should not exaggerate the financial burdens that would result. As the EU was expanded eastward, long transitional phases and transfer caps were adopted to ensure the financial costs did not become excessive. Furthermore, small EU states with low GDP are only able to absorb relatively small transfers. Ultimately, if the accession of additional poorer countries forces the EU to rethink its extremely controversial financing of the Common Agricultural Policy and further reduce spending in this area, this might not be a bad thing at all. 

Would the accession of poorer countries thus provide important stimulus for the reform of a core policy area?

Yes, that is definitely true with a view to the EU budget. The inclusion of poorer countries would force the EU to increase expenditures on budget items that really create a European added value. The European budget should be reformed to more consistently finance things of value to all member states, such as foreign, infrastructure and technology policy. The EU budget should not be used to finance the pet projects of politicians in their home electoral districts.

What does the EU need to do to ease the planned expansion?

With the introduction of the double majority rule in the European Council, the Treaty of Lisbon has already led to a better balancing of interests between small and large member states. In order to ensure the administrative efficiency of an EU with over 30 members, as well as preserve the Union's ability to make decisions, additional institutional reforms would be desirable, such as reducing the size of the already bloated European Parliament, or renouncing the principle of "One Country – One Commissioner". The largest challenge, however, is communicating to the EU’s citizenry in a persuasive way that further expansion brings more opportunities than risks.