EU enlargement to boost German GDP

23 March 2004

BERLIN – The approaching EU enlargement is likely to boost German GDP by between 0.3 and 0.5 percent over the long term, according to the president of Deutsche Institut für Wirtschaftsforschung (DIW) Klaus Zimmermann.

Speaking at the presentation of a new DIW study on economic integration between present EU members and accession countries that are due to join the EU in May, Zimmerman said that the impact of the accession on EU economy is expected to have positive and negative aspects, but their scope will be rather limited.

The study was produced for the European Commission.

Zimmermann suggested that with the eight Central and East European (CEE) countries growing much faster than the EU-15, their demand for investment and consumer goods will increasingly provide new business to domestic and European producers.

CEE-8 GDP grew by 3.7 percent in 2003 and is expected to gain 3.9 percent this year. EU-15 GDP was up 0.7 percent last year and is forecast to add 2 percent in 2004.

Because German foreign direct investment (FDI) in the CEE region has been so strong, companies that are largely or fully owned by German corporations are the first in line to get the new orders.

According to the DIW president, German investment accounts for about 50 percent of FDI stocks in Hungary and the Czech and Slovak Republics and is largely focused on the manufacturing sector.

At the same time, Germany’s proximity to CEE countries makes it a trading partner of choice as short transportation distances keep down the costs of imported German goods and make them more competitive.

Germany accounts now for almost one-quarter of CEE imports.

Moreover, once German multinationals such as Volkswagen and Siemens established their manufacturing presence in the region, the level of CEE exports to Germany, whose large share is made up of cars, electrical goods or consumer electronics produced at factories financed and owned by German companies, has risen steeply.

In 2002, Germany accounted for almost one-third of all CEE exports.

EU eastward enlargement is also expected to accelerate liberalisation of the EU labour market, delivering a further boon to German economy, Zimmermann noted.

With the EU severely curtailing employment of workers from accession countries until as late as 2010, DIW economists expect only moderate East-West labour migration.

As Zimmermann sees it, even if the current hurdles were abolished now, only between 1.4 million and 2.2 million people would move from the accession countries into Germany over the next 25 years. About 600,000 of them “are already here,” he said.

For all of the EU, the migration level is projected at 3.8 million.

At the same time, DIW economists cautioned that EU enlargement is likely to present a competitive challenge to EU companies which haven’t established a production base in the accession countries.

Because most companies in the CEE region already operate according to EU quality standards, they compete easily on price for domestic market shares with the goods manufactured in the current EU-15.

Indeed, the so-called substitution trade between accession countries has been rising steadily in the last few years, cutting into the EU’s share of trade with the area. This is a drastic change from the trade patterns established after the collapse of the Comecon trading bloc in the early 1990s.

“Short-term, EU companies are facing a clear challenge from CEE businesses,” said Mechthild Schrooten, a leading DIW researcher who has put the study together.

“They have to adjust to meet the challenge.”

DPA

Subject: German News