Table Of Content~EuCoOzN~OMIuC IMPACT OF EU MEMBERSHIP ON ENTRANTS
Economic Impact of
EU Membership on Entrants
New Methods and Issues
Edited by
Richard E. Baldwin
Graduate Institute of International Studies (GIIS).
Geneva and CEPR
and
Aymo Brunetti
State Secretariat for Economic Affairs. Berne and
University of Basel. Switzerland
Springer Science+Business Media, LLC
A c.I.P. Catalogue record for this book is available from the Library of Congress.
ISBN 978-1-4419-4927-1 ISBN 978-1-4757-3407-2 (eBook)
DOl 10.1007/978-1-4757-3407-2
Printed on acid-free paper
All Rights Reserved
© 2001 Springer Science+Business Media New York
Originally published by Kluwer Academic Publishers, Boston in 2001.
Softcover reprint of the hardcover 1st edition 2001
No part of the material protected by this copyright notice may be reproduced or
utilized in any form or by any means, electronic or mechanical,
including photocopying, recording or by any information storage and
retrieval system, without written permission from the copyright owner.
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Vi TABLE OF CONTENTS
MACROECONOMIC CONSEQUENCES OF SWISS EU ACCESSION: THE EFFECTS 153
OF ENTERING THE MONETARY UNION
Peter Stalder
MACROECONOMIC CONSEQUENCES OF SWISS EU ACCESSION: EFFECTS OF 177
FISCAL MEASURES
Jurg Biirlocher
THE COSTS OF THE EU INTEGRATION FOR SWITZERLAND: ALTERNATIVE 193
SCENARIOS
Banu Simmons-Suer, Margit Himmel
Comments: Monika Bi.itler 213
PART III: LABOUR MARKET ISSUES
LABOUR MARKET AND BUDGETARY EFFECTS OF EASTERN ENLARGEMENT 217
IN GERMANY
Christian Keuschnigg
MIGRATION AND SWISS EU MEMBERSHIP 245
Thomas Straubhaar
Comments: Slobodan Djajic 265
AUTHORS' AFFILIATIONS 269
INDEX OF AUTHORS 271
PREFACE
As part of its EU strategy, the Swiss government commissioned several research
projects covering the most important aspects of economic integration. Given the
interesting results and the wealth of methods used in these studies we decided to
organize a conference on the topic of 'The Economic Impact of EU Membership on
Entrants: New Methods and Issues". The idea was to use the work on Switzerland as
a case study for discussing modern approaches on how to assess the economic effects
of joining an integration zone. This seemed to us to be a topic of considerable
interest for the rising number of prospective EU-member countries. The response
was very favourable with many eminent scholars agreeing to contribute. The
conference took place in Lausanne, Switzerland in October 1999 and the papers
submitted together with the discussions are published in this volume. We would like
to acknowledge the financial support of the Swiss State Secretariat for Economic
Affairs and to thank the University of Lausanne for providing the venue facilities for
the conference. Many persons helped in the preparation of the conference and this
volume but we would like to especially mention Marc Surchat who provided
substantial input for the conference and Walter Brodmann who very efficiently
reviewed and finalized the manuscript.
The Editors
RICHARD E. BALDWIN AND A YMO BRUNETTI
THE ECONOMIC IMPACT OF EU MEMBERSHIP ON
ENTRANTS: NEW METHODS AND ISSUES
INTRODUCTION
What a transformation Europe has witnessed in the past 15 years. A ruthless observer
in 1985 could have described the European Economic Community as a glorified
customs union held together by an irreproducible mix of idealism, pretension,
agriculture subsidies and guilt. Just a decade and a half latter, the European Union
has achieved a depth and vigour of regional economic integration that surpasses all
contemporary and historical efforts and it seems intent on pursuing ever-deeper
integration. At the same time, the EU economy has recovered some of the economic
dynamism it enjoyed in the 1950s and 1960s, and this has created a political
economic 'gravitational' force that is attracting a queue of applicants. Between 1985
and 1995, 6 new members joined the incumbent 9, and membership talks are
underway with another dozen nations. Beyond this perhaps another 10 to 20 nations
are contemplating EU applications.
This volume focuses on the entrants rather than the EU. Specifically it centres on
the issues surrounding the likely economic impact that EU membership has on
joining nations, with the main emphasis on new issues and methods. Given the
significantly greater level of economic integration that now exists in the EU,
accession brings up a host of issues that either did not arise or were of secondary
importance during earlier enlargement waves. For instance, EU membership now
entails eventual membership in the monetary union. This raises a series of new issues
such as interest rate convergence, exchange rate stability and the loss of sovereignty
over monetary policy. Additionally, these macro issues interact with micro issues
such as export performance, capital formation and foreign direct investment (FDI).
Migration, unemployment and foreign direct investment are further issues that
acquire a magnified importance for the prospective entrants. Lastly, the vast majority
of prospective entrants are small nations and the EU is by now an economic
superpower. This radical size difference poses a series of challenges for economists.
About half the chapters in this volume focus on the Swiss case that constitutes, in
many ways, a natural experiment. Switzerland, with its long history of European
integration and its market orientation, provides the researcher with wealth of data
that is missing for many of the other nations contemplating EU membership. The
unique role of the Swiss franc in the international financial system also makes the
EMU and macro issues central to Swiss concerns. Nevertheless, exchange rate issues
and questions related to changes in the monetary independence of small European
x RICHARD E. BALDWIN AND AYMO BRUNETTI
nations contemplating EU membership have a wide relevance to all prospective
entrants.
1. NEW WORK IS NEEDED
While there is hardly a dearth of work on the economics of EU enlargement, a
disproportionate share of this focuses on the EU rather than the entrants. While
understandable -- it is naturally more attractive to write about the impact on the EU
with its 370 million citizens than on an entrant with a population of 5-15 million -
the fact that upwards of 20 nations are seeking accession suggests that more works
on the entrants is now essential. Of course, the entrants differ widely. No single
collection of studies could address all the important issues. This volume, therefore,
focuses on issues that are likely to have importance for many entrants. These
include:
.:. EMU-related issues, such as:
;.. Macro-micro interactions
;.. Migration
.:. TradelMicro Issues
;.. FDI
;.. Tax reforms, especially changes in the VAT
;.. Labour Market Issues
.:. Small Economy Concerns
There is no clear cut method of addressing such issues since the economics
profession is a long way from the "grand unified theory" of economic activity.
Instead, a range of methods is used. These included:
.:. Computable general equilibrium models used to calculate the impact of
microeconomic reforms -- both trade and tax policy -- on the general economy .
•: . Structural macroeconomic models for forecasting the short and medium-term
consequences of integration .
•: . Sociological and discrete choice empirical models to predict demographic issues
like immigration or factors that are important in the localisation of firms.
2. SUMMARY OF THE INNOVATIVE CONTRIBUTIONS
The chapters in this volume advance the research frontier in several ways. Many of
the studies adopt the computable general equilibrium (CGE) approach and here
important progress is made. The papers consider innovative ways of including
growth effects, location effects and labour market effects. They also explore the
problems of CGE modelling when the regions used are of vastly different economic
size. On the macro side, the chapters present several innovations mainly focusing on
the budgetary, interest rate, exchange rate and monetary policy aspects of EU
membership. Consider these in turn.
INTRODUCTION xi
2.1. The CGE approach
The European Commission has mainly used CGE models for estimating impacts of
reforms. CGE models are sufficiently rich to capture many detailed aspects of the
working of markets. They can also offer some insights about the distributions of
benefits and costs among different groups of the population and different sectors.
CGE models have also the ability to show precisely which reforms will bring along
the most benefits, which gives valuable information whether such reforms should be
undertaken independently of joining the ED.
Given the importance of the CGE approach, almost half the chapters in this
volume are concerned with such analysis. In the Handbook of International
Economics, Baldwin and Venables (1995) classify the microeconomic effect of
integration into 'allocation effects' (i.e. the classic static effects allowing for both
perfect competition with constant returns and imperfect competition with increasing
returns), 10cation effects' (i.e. the impact on the geographical allocation of economic
activity), and 'accumulation effects' (i.e., growth effects stemming from the
accumulation of technology, physical capital, or human capital). Recently, the
research frontier of CGE analysis has been expanding mainly in the direction of
location and accumulation effects, and the chapters in this volume contribute to both
developments.
2.1.1. Dynamic aspects of integration in CGE models
The dynamic aspects of CGE models -- especially issues concerning the impact of
integration on national capital stocks and FDI -- is still an area in which a good deal
of progress is needed. The chapters by Ji~ Markusen, Tom Rutherford and David
Tarr, by Jean-Marie Grether and Tobias Muller and by Renger van Nieuwkoop and
Andre Muller focus on this set of issues.
Markusen, Rutherford and Tarr, which analyses the impact C?f FDI in producer
services, concentrates on the Iiberalisation of imports of services in Russia and its
impact on FDI and growth. The framework of this analysis is however sufficiently
large so that the method could be applied to any country and any sector quite easily.
The key to the result is the specification of the production function where imported
services are an intermediary good complementary to other services. It is argued that
by definition services provided by foreign firms consist mostly in managerial,
financial, informational and technical services, which are intensive in skilled labour.
Although they need a local presence, they are particular in the sense that they can not
be supplied locally with the same quality, as they require an accumulated knowledge
that is often lacking in developing countries. By liberalising the import of services,
and thus allowing an almost infinite supply of skilled labour, countries encourage
domestic and foreign direct investments, which are complimentary. This in turn
stimulates economic growth and the welfare of most voters. The model shows that
the impact on unskilled labour is non-linear and ambiguous. Furthermore, the impact
on providers of local services, which are a substitute to imported services, can be
negative for a while. However, with time the quality of services provided by local
xii RICHARD E. BALDWIN AND AYMO BRUNETTI
finns improves and becomes competitive with those provided by international finns.
In fact, in a vintage model, local service providers who have the ability to acquire
foreign technologies without loosing their prior investment gain immediately. The
government' choices are clear between protecting local providers and services or
promoting economic growth.
The chapter by Grether and Muller is innovative in several ways. The key to
growth effects in dynamic CGE model is to determine how integration affects the
equilibrium capital stock in an economy. Most dynamic CGE models rely on very
simple rules for determining the equilibrium physical capital stock and thus for
detennining the medium-tenn growth effects that occur as the economy approaches
its new equilibrium capital stock. Specifically, models either rely on a constant
savings rate, or they assume that the capital stock adjusts to restore capital's reward
to a 'normal' level (see Baldwin and Francois, 1999 for a more complete discussion).
Grether and Milller go beyond this, introducing for the first time the Blanchard
(1995) approach to intertemporally optimal savings behaviour. The key equation
here relates an endogenous savings rate to the levels of two types of wealth --human
capital and physical capital. While the details are complex, the result is that the
authors are able to allow tax policy (e.g. the VAT rate) to influence savings and
investment behaviour. This brings up the second innovation which is that they allow
for changes in trade policy and fiscal policy to interact. The third important
innovation concerns assumptions that are necessary to consider the impact of
integration between a very small and very large area (CGE models intrinsically have
difficulties with large size asymmetries). The final innovation concerns foreign
assets. Grether and Milller include earnings from foreign investments and this allows
them to show that the benefits of unlimited free movement of capital. Although these
effects are quite hard to estimate, they have probably been so far quite
underestimated. The ongoing revolution on the European capital market might be a
first sign of such an effect.
The application chosen by Grether and Milller is a CGE model designed to study
the economic consequences of the EU-membership of Switzerland. The study allows
for numerous aspects of integration, including the budgetary costs of joining the EU
and the implications for the Swiss tax policy, potential immigration, a lowering of
non-tariff barriers, the adoption of the common external tariff and of the common
agricultural policy, and finally joining the EMU. Although this covers most of the
reforms, the list is probably not comprehensive. Finally Grether and Milller propose
to include earnings from foreign investments which allows them to show that the
benefits of unlimited free movement of capital, although they are quite hard to
estimate, have probably been so far quite underestimated. The ongoing revolution on
the European capital market might be a first sign of such an effect.
Van Nieuwkoop and Muller also present a CGE model to analyse the
microeconomic benefits of integration. Their research builds on their existing models
and they incorporate it into a global model. The most innovative aspect of their
model is its focus on transportation issues. Specifically, they estimated more
precisely the gains from the transit agreement between Switzerland and the EU,
which is expected to lower transportation costs. They also analyse alternative ways
