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Europe's New Poor

What will be the effect of the entry of 100 million poorer Europeans into the EU?

November 3, 2003

What will be the effect of the entry of 100 million poorer Europeans into the EU?

The current population of the European Union is 380 million. It is composed of 15 prosperous and democratic member states, which have an average per capita GDP close to $25,000 a year and a low level of corruption.

On May 1, 2004, 10 new member states — mainly from Eastern Europe, plus Cyprus and Malta — will enter the Union.

Their total population numbers close to 100 million. As of May 2, 2004, the enlarged EU’s population will increase by more than 20%. But it will increase its total GDP by only about 3%. The EU's average per capita GDP will drop to about $20,000 a year.

In three years' time, when Romania and Bulgaria join the happy throng, the average GDP per capita will drop to around $18,000. Some time after that, the Balkan states of Croatia, Serbia, Montenegro and Macedonia will be hammering at Europe’s door — and so will 80 million Turks.

When they all join, probably in the decade after 2010, the swollen EU’s per capita GDP will drop to $15,000. This probably will not mean any big cuts in the average Frenchman, German — or Brit’s pockets or savings.

And over time, the coming of 100 million — and then another 100 million — much poorer new Europeans, all hungry to catch up with Western European living standards, should be a great spur in Europe’s growth.

Nonetheless, enlargement means that the EU is going to be focused on, we might say obsessed by, the income gap and the development challenge for decades to come.

It will be the overwhelming issue, because citizens of member states have the right to travel and settle and buy property and work at will across the EU.

That is a process that can be slowed by transition arrangement — but not prevented.

In U.S. terms, EU expansion is akin to the whole of Mexico being suddenly absorbed into the United States — with its residents given immediate full citizenship rights. Then the picture would expand to include the rest of Central America.

There is an admirable — and even heroic — aspect to the great experiment of the European project. It is a noble venture, to bring into the European prosperity club the orphans of Stalin’s wretched Soviet empire, to make a long-divided Europe whole again.

The enlargement process is a great moral cause and an act of high-minded political courage that deserves the support and encouragement of all of Europe’s friends.

But it is going to be a rough ride. Just look at Poland, where the increasingly unpopular left-of-center government of Leszek Miller has just acknowledged a budget deficit of 5.3% of GDP.

With unemployment already hovering at 20%, Miller’s attempts to slash welfare payments have met with stern resistance. After two years of flirting with full recession, the zloty is sinking as foreign debt soars.

The markets suggest that this is going to get worse very fast.

The reason is that a lot of pension funds and other investors poured money into the new member states after the EU summit in December 2002 finally confirmed they would join May 1.

They assumed that the returns on their investment would stay high — even as EU membership made those investments safer. Buy something valued in zloty, and sit back and wait for it to become valued in euros. It looked like a sure bet.

Instead, bonds spread between the EU and the incoming new members have been widening. The markets have started to worry that Europe’s magic wand will not suddenly transform struggling post-Communist states into plump and prosperous stable nations. The gap between today’s EU and its new members is far too wide for that.

Bulgarians have a GDP per head of less than a quarter of EU levels. Even on the most generous (purchasing power equivalent) measurement, Poles have a GDP per head of less than 39% of Europe’s average.

Europe is suddenly going to get a very large, and possibly resentful, new poor class. The EU currently has no agreed poverty level, but assume that it is defined as having a per capita GDP of less than half the current EU levels. That would mean that almost all of the 100 million new citizens are going to be below the poverty line.

Poland’s economic crisis, and the way it looks like spreading to Hungary and elsewhere, is a reminder of Europe’s new vulnerability, its new poverty — and its very stiff challenge.

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