The Impact of the European Union's Eastward Expansion

June 21, 2004

Ten Central and Eastern European and Mediterranean nations (Estonia, Latvia, Lithuania, Czech Republic, Poland, Hungary, Slovakia, Slovenia, Cyprus and Malta) formally joined the European Union on May 1, 2004, bringing the total number of EU member nations to twenty-five.

With this move eastward, the new EU now boasts a total population of 455 million citizens, a combined GDP of 9.576 trillion euro, a foreign trade volume that accounts for 19% of world trade, an outward foreign direct investment volume with non-EU nations that makes up 46% of the world's outward FDI, and an inward FDI volume that accounts for 24% of the world's inward FDI. These figures mean that the expanded EU is now the world's largest unified market.

The following is a brief analysis of some new developments and potential impacts that have emerged as a consequence of EU eastward expansion.

1. Foreign trade: International trade agreements will still apply to trade relations between EU nations and other nations and organizations. New member nations will be required to adopt the EU's existing Common Commercial Policy and regulations and coordinate with the EU on customs administration and procedures. However, as the total volume of internal trade within the new post-expansion EU accounts for an average of 63% of the new EU's trade with the world as a whole, a ratio that is nearly equal to that of the original EU members, the potential for a major increase in foreign trade is not great.

2. Investment: Those foreign businesses that aim to take advantage of the relatively lower investment costs in the new Central and Eastern European EU member nations for the purpose of expanding their markets into other parts of the EU can still benefit from these opportunities in the post-expansion EU. The volume of FDI that flowed into the new Central and Eastern European EU member nations from 1989 to 2003 totaled USD 117 billion, with most of this investment originating from the original EU nations. As most of the major investment projects in the new member nations were completed prior to EU expansion, it is projected that the rate of FDI flowing into these nations will slow down and that the monetary value of FDI will also decrease. As regards the service sector in the EU, integration has not been completed concerning the establishment of service points, the elimination of barriers to the provision of cross-boarder services, or the recognition of professional qualifications and licenses. Differences also remain for sales and income taxes among the members of the EU. Therefore, businesses that intend to invest in the EU should remain vigilant.

3. Economic scale and income levels: The EU's economy remains slightly smaller than that of the US. The combined GDP of the ten new members is roughly equivalent to that of the Netherlands alone. Consequently, the contribution of these new members to the economy of the EU as a whole will apparently not be as great as has been imagined. Also, as economic integration in Europe has been underway for many years, no explosive developments are expected to result from this new eastward expansion. The gap between income levels and related standards of living in the new EU members and the more prosperous original members will remain large. Economic power, market size and spending power among the new members will not necessarily be the same as in the original EU members.

4. Adoption of the euro: Many of the new member nations are already using the euro for trade with the EU. However, as for the full adoption of the euro, progress remains to be made towards meeting the goals of Economic and Monetary Union. Progress is particularly required concerning the improvement of budget deficits and inflation rates. Also, the new members need to reduce their excessive dependence on currency exchange rate differences as it regards their abilities to sustain the related economic impacts.

5. Population movement: The Treaty on European Union requires members to permit the free movement of workers within the unified EU market. Research shows that just 1% of the combined labor population of the new member nations is expected to move to an original EU nation within the five years following expansion. With approximately 220,000 workers, most of them young, highly educated and single, expected to leave their countries for employment annually, the real problem will not be a mass influx of laborers to original member nations, but a serious brain drain among new members.


While in the process of the EU's expansion to the east, the ten new member nations have posted up some high level achievements in terms of their coordination with the EU's existing legal system and have made some significant progress towards making the transformation into efficient and properly functioning economic entities, there is still a way to go towards the achievement of a level of integration that is truly satisfying. Also, despite the success at political integration, only time and determination will lead to the elimination of the gaps between the levels of social and economic development, income levels and standards of living of the old and new members.

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