EU enlargement opens up markets for Greece, but will affect subsidies

Many analysts, government officials and others are busy trying to figure out what will happen to the Greek economy after the curtain drops on the 2004 Olympic Games. Some more forward-looking individuals ask the same question but use 2006, that is, the year the Third Community Support Framework (CSFIII) is supposed to end. Others go even beyond that year and wonder what will happen after 2008 when the last funds from the CSFIII will dry up. These are legitimate questions and should be raised. It is rare, however, to hear anybody raising the issue of the potential impact of the EU’s eastward enlargement on the Greek economy after 2004 or 2006 or even 2008. Most possibly assume that the impact, if any, will be small, even negligible. But is this the case? There is no doubt that the Greek economy is growing at higher-than-expected rates. This momentum is likely to carry over into 2004 and post strong GDP growth in the first nine months. A further confirmation of this hypothesis came in last week when the National Statistics Service said the Greek economy had grown 5.0 percent-year-on-year in the third quarter. This figure comes on the back of a 4.5 percent and 4.3 percent year-on-year growth rates in the second and first quarter respectively, making it very likely that GDP growth will reach at least 4.3 percent in 2003. This will make Greece the champion of economic growth in the European Union (EU) for the second consecutive year, and help it surpass the EU average for the eighth consecutive year, lifting Greek living standards above Portugal’s. On the other hand, consumer price inflation stabilized at 3.3 percent year-on-year in September, unaffected by the stronger euro, which puts a lid on import prices and helps fight inflation. This was another sign that aggregate demand is growing strongly in Greece as buoyant consumption and investment spending, rising at 3.8 percent and 12.1 percent respectively in real terms in the third quarter, helped keep inflation at relatively high levels compared to the EU average inflation of around 2.1 percent. Effects of enlargement Although it is reasonable to expect a slowdown after the Olympics and more so after the huge CSFIII flows come to an end, one has to take into account how the Greek economy and some of its sectors will be affected by EU enlargement. Greece, of course, does not have to worry about abolishing export subsidies as it did back in 1981 when it joined the European Community, the predecessor of the EU, as a full member. Then, it had to abolish export subsidies which were up to 30 percent of the fob value of exports in some manufacturing sectors, such as garments and shoes, and gradually phase out other import protection and export promotion measures. This led to a larger trade deficit and hurt employment in some formerly protected and inefficient sectors. Of course, this was initially mitigated, and later surpassed, by the large amount of money Greece received from the EU. Theoretically speaking, EU enlargement will open up markets and lead to a more efficient allocation of resources in the sense that labor-intensive production will move eastward, freeing up labor resources in the current 15-member bloc for more productive activities. In this context, EU structural funds will have to be distributed to more regions, resulting in a sharp reduction in funds allocated to countries such as Greece. The inescapable reform of the Common Agricultural Policy down the road will also lead to a drop in the amount of subsidies received by farmers in the current 15 members, including Greece. Studies show that EU enlargement will not upset economic balances in the 15 EU member states, first, because the GDP of the accession countries combined will increase the EU GDP by just 5 percent. But the population increase will be much larger, leading to a decrease in the GDP per capita in the 25 member EU. Second, many countries signed agreements with the EU in the last decade to remove barriers and facilitate the transfer of capital and goods so there is very little left to be done. New immigration wave? Nevertheless, as Ghikas Hardouvelis, the prime minister’s economic adviser, has correctly pointed out, these academic studies refer mainly to the impact of the enlargement on the large EU states and may not be suitable for smaller countries such as Greece. To make the point, Hardouvelis says the same studies, which are based on the previous experience with EU’s expansion toward the Iberian peninsula, predict immigrants will amount to just 1.1 percent of the 15-member EU population. Still, Greece’s experience with immigration after the collapse of the former Soviet Union shows exactly the opposite, that is, a mass influx of illegal immigrants in search for work. Immigration helped suppress the wages of unskilled workers, provided much-needed labor for the construction and tourist industries, agriculture and other sectors and currently account for about 20 percent of the country’s labor force. Of course, EU enlargement may not lead to another mass influx of illegal immigrants, but it will probably not be as small as predicted in the above-mentioned studies. There is little doubt, though, that EU enlargement will make it harder for Greece to get the kind of money it has received from the EU in the last 10 years or so. After all, the projected strong economic growth along with the drop in the EU average per capita income upon enlargement will disqualify some poor Greek areas from receiving EU structural funds. This, of course, does not mean Greece will not be a recipient of EU funds during the 2007-2013 era. According to government officials and others, the country will be receiving some amounts, but they will be much smaller than those under the CSFIII. All in all, EU enlargement may play a larger role in shaping the Greek economy in the years ahead than many of us expect. Setting aside the impact from another round of illegal immigration, likely to be much smaller than the first one, and the negative effect on EU structural fund inflows, much depends on the ability of Greek state-controlled and private-sector companies to grasp the opportunity and do business in the accession countries. The signs, from the Greek business expansion into the neighboring Balkan countries, are promising. However, the majority of the 10 accession countries have little in common with the Balkans and are more demanding in the quality of products and services.