Greece must prepare for risks of EU enlargement

The Greek economy, which was regarded as Europe’s black sheep in the 1980s, confirmed its status as an oasis of growth in the sluggish eurozone economy in the first quarter. However, its strong economic performance is unevenly spread across sectors and continues to draw heavily from lower interest rates and hefty capital inflows from the European Union to finance investment projects. With the positive impact of lower interest rates expected to dissipate sooner or later, along with the temporary boost from investment spending linked to the 2004 Olympics, EU funds will play an even greater role in financing Greece’s economic growth after 2004. In that sense, Greece should dare to take a second look at the EU’s planned enlargement in 2004 and take measures to safeguard its economic interests. The strong growth numbers put up by the Greek economy in the first quarter confirmed those forecasters who claim it is partially insulated from the uncertain international economic environment. Greek GDP (gross domestic product) grew provisionally 4.3 percent year-on-year in the first quarter, outpacing the eurozone’s average economic growth by a large margin. The economy’s outperformance was based on strong consumption and investment spending, growing by 3.6 percent and 11.3 percent year-on-year respectively in the first quarter. Yet, this success did little to address concerns about the future of the Greek economy, especially after 2006 when EU funds from the Third Community Support Framework (CSF), the Cohesion Fund and other EU programs are projected to drop significantly. To understand the magnitude of the EU inflows, one has to consider the fact that Greece is projected to receive about 5 billion euros on average per annum in the 2000-2006 period, net of its own payments to the EU budget. However, this money, which helps finance important investment projects and boost farmers’ incomes, will most likely not be available after 2006 if 10 more European countries join the EU in 2004. Although EU enlargement should be supported in principle for a variety of reasons such as bringing stability and peace in Europe, strengthening the EU’s political role in world affairs and enhancing its status in international trade negotiations, Greece and perhaps some other EU countries may have strong economic reasons to see that the speed of the enlargement process is slowed down. Even though enlargement promises some economic benefits for all current EU members, it also entails some clear economic costs. On the one hand, enlargement means the single market will consist of some 480 million consumers as opposed to some 370 million at present, providing a boost to trade and new business opportunities for well-prepared EU companies. On the other hand, enlargement will undoubtedly result in higher EU budget expenditures without a concomitant increase in receipts, since most new members will need financial assistance to strengthen their economies. It is estimated that more than 98 million out of the 105 million people in candidate countries live in regions where the average per-capita GDP is less than 75 percent of the projected average for the enlarged EU. Greek Finance Minister Nikos Christodoulakis presented a report to the Cabinet last Thursday claiming that Greece’s per capita GDP accounts for more than 70 percent of the EU average nowadays as opposed to 60 percent in the early 1990s, and that local wages account for more than 80 percent. This is undeniably good news but it should also ring alarm bells. Greece is expected to continue to outperform most of its EU partners in GDP growth this year and next, and some economists even project this outperformance to extend to 2004. This means the country’s average per-capita GDP will continue to close the gap separating Greece from the EU average in the 2002-2004 period and perhaps in 2005-2006. This will most likely drive the Greek GDP average above the 75-percent mark of the enlarged EU’s per-capita income in 2005, given that most new entrants will have a smaller per-capita income than Greece. This, along with a likely reform of the EU’s Common Agricultural Policy (CAP) and structural funds, will make it more difficult for the country to get sufficient EU funds to finance its economic growth past 2006. The Irish seem to have understood the economic implications of EU enlargement and rejected the Nice Treaty in a referendum last year. Ireland has enjoyed a spectacular economic performance in the last decade or so and many economists claim EU funds have played an important role in attaining this outcome. According to European Commission President Romando Prodi, this rejection is not expected to hinder EU enlargement. This is not to say Greece should not favor EU enlargement. To the contrary, there are many compelling reasons to maintain the EU’s momentum of integration. However, Greece and some other small southern European countries will be affected the most by the EU’s enlargement in economic terms, as demonstrated by the effect of EU funds on GDP growth. Therefore, Greece should try to safeguard its economic interests while still advocating the EU’s enlargement, and either seek to slow down the speed of the enlargement process or secure full access to structural funds as the EU welcomes the newcomers.