Blog: EU enlargement
Dave Leggett | 28 April 2004
On May 1st the EU expands to include another ten countries in central Europe and the Baltics. A club of fifteen countries becomes twenty-five strong. The politics will get interesting for sure and there’s quite a bit of uncertainty about how well the enlarged EU will function and whether or not the new EU constitution will be accepted and ratified by member states (there will be a referendum in the UK, for example – and the result is not exactly a foregone conclusion).
One issue is the extent to which some economic activity and future investment in Europe will gravitate towards the lower cost countries to the east. And that's a big issue for the auto industry of course. But maybe we shouldn’t get too carried away with the rise of the east.
While there are already a number of vehicle manufacturing plants planned for central Europe which will increase production there in the future (eg Toyota and PSA in Czech Rep, Hyundai in Slovakia), there hasn’t exactly been a massive stampede out of western Europe. Vehicle manufacturers are still investing in western Europe. And so are their suppliers. Companies have long established supply and distribution lines and they don’t easily opt to switch to new locations unless the advantages in doing so are huge.
And when it comes to vehicle manufacture, the assembly labour costs are estimated to be around 7-9% per vehicle produced (a statistic that I heard from Garel Rhys yesterday). Therefore, ‘cheap’ labour alone is not enough to sway the issue. Same goes for most forms of component manufacture. VMs like to be close to their customers and so do Tier 1s.
What about the size of the local market and the impact that has? Poland is by far the biggest economy and automotive market in central Europe, but it is still quite small. All new accession countries’ economic output combined is about the size of the Dutch economy. The Polish new car market is about the size of Greece’s.
Expectations in the region could be an issue though. A Hungarian bus driver on BBC news last night said that he was looking forward to having the income and lifestyle of his counterparts in Austria. The experience of Spain (joined EU in 1986) suggests that even in the best case, it will take a generation before that can even be close to being achieved. And the subsidies that poured into Spain after it joined won’t be available for the new batch. The EU’s finances aren’t exactly healthy and agricultural policy reform is still needed.
But I'm not saying that economic progress won't come in the east. They'll be trading more with other EU states and that will inevitably mean higher economic growth and incomes. But big progress won't come overnight. And western Europe's much bigger market and better developed infrastructure means that it will always attract a lot of the available investment that is out there.
But hey, now we have a club with twenty-five members rather than fifteen. Breadth versus depth in the EU, in terms of economic and political integration? The debate will continue but it looks like the case for breadth is about to get a big shot in the arm.
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