The accession of Macedonia and Turkey into the European Union : the possible costs and benefits

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The accession of Macedonia and Turkey into the

European Union.

The possible costs and benefits.

Author: Sascha Leurs Student Number: 5876958 Date: July 1st 2014

Program: Economie en Bedrijfskunde Specialization: Economie

Faculty: FEB

University: University of Amsterdam Supervisor: Ieva Rozentale

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1. Introduction

In 2004, the European Union saw its greatest single enlargement to date with the joining of ten countries. This accession was specifically important concerning politics, as the joining of these diverse countries would help in bringing Europe together. Prior to this enlargement, economic expectations were favourable for both sides. (Bureau of

European Policy Advisers and the Directorate General for Economic and Financial Affairs, 2006, p.1) Since then the general consensus on the effects of this enlargement has been positive. The acceding countries are found to have benefited the most, mostly due to the on average initial smaller economic size and low level of development

compared to the old member states. A convergence process had started with the income gap between new and old member states narrowing. The EU itself seems to have

benefited most from the increased competitiveness the enlargement caused. (European Commission, 2009)

The enlargement of the European Unions is far from finished. There are currently five more countries on the list of candidate member states: Macedonia, Montenegro, Iceland, Serbia and Turkey. The effect accession of these countries into the EU will have remains to be seen. There has not been much research concerning the accession of these five countries at this time, but it is an important area to be studied especially

considering the economic and financial changes the recent crisis has brought. Seeing as there are different views on the effects of accession it is relevant to assess the possible effects the coming enlargement might have. This theoretical thesis will therefore aim to evaluate the possible economic effects of joining the European Union on the acceding countries themselves and the EU as a whole. To narrow the scope of this research, it will focus on two of the five current candidates for accession: Macedonia and Turkey.

One of the reasons for focusing on these two specific countries is that both have a history of negative economic and political instability before their applications for

membership. High inflation and a very low level of per capita gross domestic product plagued Turkey’s economy until the late 1990’s, followed by a financial crisis in 2000-01. On the political side, there remained conflict between the Turkish government and the Kurdistan Worker’s Party (Partiya Karkeran Kurdistan, known as PKK) over an independent Kurdish state. Macedonia was previously a part of the Socialist Federal Republic of Yugoslavia, which was plagued by political turmoil, until declaring its independence in 1991. Its economy suffered a severe blow due to sanctions from the United Nations against Yugoslavia from 1992-1996, a unilateral Greek trade embargo from 1994 to 1995, and by the Kosovo conflict in 1999. Macedonia has also faced interethnic tensions between the Slav majority and Albanian minority since its independence, coming close to a civil war in 2001. Today Macedonia is also still in conflict with Greece over its name. Greece is against the use of the name of the ancient Greek region, leading to Macedonia being admitted to the United Nations under the name “The former Yugoslav Republic of Macedonia”. (Kim, 2001)

Another reason for choosing these two countries is their geopolitical importance for the European Union. Turkey is of strategic importance to the EU’s international relations because of its location between Europe, the Middle East and Asia. Macedonia, being part of the Balkans, is important for the goal of homogeneity of Europe and the conflict resolution policy the EU has set.

The research question to be investigated is:

What are the possible economic effects on the European Union and Macedonia and Turkey if they enter the European Union?

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In what way can the costs and benefits of accessing the European Union be evaluated? What are the possible costs and benefits of the accession of Macedonia?

What are the possible costs and benefits of the accession of Turkey?

This thesis consists of four sections after the introduction. The first section consists of a review of the literature available on this subject and answers the first sub-question. The second section indicates which methodology is used in studying the economic effects, followed by a section reviewing the remaining two sub-questions. The final section presents a summary and concluding remarks.

2. Methodology

2.1 Research Approach

To answer the research question, I have chosen to adopt a comparative case study approach, analysing secondary data and existing literature on the chosen topic. This entails that Macedonia and Turkey are compared to countries that had a similar economic state upon accession based on several variables. The effects of those countries’ accession into the EU are then used to assess the possible effects of accession of

Macedonia and Turkey. Literature on the accession of Macedonia and Turkey is analysed, along with literature on previous accessions/enlargements.

The reason for choosing this approach is that not much research has been done on the topic of the accession of Macedonia and Turkey, but there is much literature and data to find on previous accessions. This makes a comparative case study an appropriate approach for this thesis. This type of approach has also been used in existing literature.

2.2 Analytical approach

To evaluate the possible effects of accession as best as possible, Macedonia and Turkey are compared to other countries with fairly similar economic states before accession. Then a prediction can be made concerning the effects of accession based on the costs and benefits that occurred when the countries compared to acceded. The state of the economies after accession will be evaluated based on data from the year before

accession until 2012 to make an as accurate as possible prediction. These comparisons will focus on several economic variables: Gross Domestic Product per capita, total Gross Domestic Product, the budget of the EU, inflation, the current account deficit,

unemployment, household consumption, export as a percentage of GDP, the percentage of total employment working in the agricultural sector and the value added per worker in the agricultural sector. These variables have been chosen based on their use in previous studies, like that of Baldwin et al. (1997) and Risteska (2007).

Macedonia is compared to Poland and Latvia. This is based on data from 2012 for Macedonia and 2003 for Poland and Latvia, showing high unemployment, positive inflation, but not higher than 3%, and similar amounts of GDP per capita. It also has a similar percentage of total employment working in the agricultural sector. The size of the population is not taken into account. Turkey (data from 2012) is compared to the Slovak Republic and Hungary based on data from 2003, showing fairly high

unemployment, very high inflation, above 4.5%, similar amounts of GDP per capita as well as value added per worker in the agricultural sector. (World Bank)

The effects on the European Union are evaluated by looking at the literature on previous enlargements and their effects, basing predictions on the state of the EU economy before and after accessions and meanwhile taking into consideration the state

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of the countries acceding (in comparison to Macedonia and Turkey), the size of the enlargements and the size of the effects they consequently caused.

A prediction is then made, based on the evaluation of the effects of the accession of the countries used in comparison, on what effects are expected to occur if Macedonia and Turkey would now enter the European Union.

3. The costs and benefits of the accession into the European Union of

Macedonia and Turkey

3.1 Costs and benefits of previous enlargements

When looking at the costs of enlargement to the EU budget, two items on the spending side are dominant: the Common Agricultural Policy (CAP), aimed at raising income and output of the EU farm sector, and the Structural Funds, aimed at encouraging

convergence of per capita income levels. This spending helps various regions and groups adjust to the pressures of European economic integration. (Baldwin et al.) Especially the CAP has been, and is still, of importance to the enlargement process because agricultural productivity is lower in the new member states as well as in Macedonia and Turkey. (Angeloni, Flad & Mongelli, 2005) According to Risteska (2007), previous enlargements do show a significant increase in total EU GDP post-accession.

When reviewing the accession of six countries in 1973, 1981 and 1986, Baldwin, Francois, Portes, Rodrik & Székely (1997) find that entering the European Union is generally accompanied by an increase in capital inflows for the acceding countries. Looking at the current account from five years prior to accession up to five years after, the mean current account deficit for the acceding countries shows that after accession capital inflow was larger except for in Portugal.

The enlargement of 2004 saw several less wealthy nations enter the European Union, causing income disparity within the EU to increase. According to the Bureau of European Policy Advisers and the Directorate General for Economic and Financial Affairs (2006), the GDP per capita (measured in PPS) ranged from 40% of the EU-15 average in Latvia to 210% in Luxembourg. The new member states experienced an on average faster economic growth than the old member states partly due to their

relatively smaller economic size resulting in the new catching up with the old when it comes to income rising towards the EU-15 level and thus narrowing the income gap. Countries with the lowest initial GDP per capita have tended to grow the fastest. (European Commission, 2009) These strong performances have improved the labour market situation: employment started to stabilize and expanded in 2005.

Unemployment rates have been falling significantly in almost all acceding countries. The new member states have all seen decreasing inflation rates since their accession (Angeloni et al., 2005), coming closer to those of the EU-15.

According to a report by the European Union Commission (2007) the GDP of the countries that joined the EU in 2004 have shown a growth in GDP of an annual average of 4.3% as compared to 2.2% of the 15 old Member States between 1998 and 2006. Trade between the old and the new Member States has also significantly increased.

When it comes to the agricultural sector, Csaki and Jambor (2013) find that the accessions into the EU in 2004 had a significant impact on the new member states’ agricultural performance. The role of agriculture has further decreased in their economies. There has been a significant increase of farming incomes in the acceding countries, which they attribute mainly to agricultural subsidies. Initial differences among countries however, have remained.

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Evaluating some previously acceded countries, Avery, Faber and Schmidt (2009) show that in the case of Poland the first medium and long-term accession effects became evident in 2007, which was reflected in the economic growth level reaching 6.5%.

Unemployment rates declined and consumption grew 6% per annum.

When looking at Hungary, its GDP per capita shows an increase from 51.6% of the EU-27 average in 1997 to 63.5% in 2007. In the first years after accession the country

experienced a decline in its relative development level. The cause is the recent low rate of economic growth after 2006: following the average 4-5% real GDP growth per year in the period from 1998 to 2006, the growth rate fell to 1.1% in 2007. Hungary did not experience mass migration to other EU members upon accession, unlike some other newly acceded countries. (Avery et al. 2009)

According to Skribane and Jekabsone (2013), Latvia showed fast and dynamic economic growth from 2004 to 2007: GDP rose rapidly along with inflation and the current account deficit, unemployment was low. This turned around during the economic crisis but from 2011 GDP and unemployment have started to grow again.

3.2 Costs and benefits of the accession of Macedonia

When reviewing the available literature it becomes clear that Macedonia is not expected to have a significant effect on the European Union upon its accession. According to Risteska (2007), the burden for the EU budget from Macedonia’s accession would be relatively small due to the size of the country: its GDP is only 0.4% of the total of the EU-25 and its population only 0.4% of the EU-EU-25 as well. Including Bulgaria and Romania it would be even smaller. It will consequently not gain much power within the EU.

Macedonia is eligible for funding from the Common Agricultural Policy due to its relatively low agricultural productivity of 12.397 US$ (2005 constant) with 17% of the total employed labour force working in agriculture in 2012 (World Bank) and Structural Funds due to its low per capita income of 4.565 US$, which is a burden for the European budget, but again, due to the country’s relatively small size the burden will not be

significant. This of course will also be dependent on the policies in place at the time of accession, which can differ from today.

Macedonia entering the EU is expected to have a significant effect on the country itself based on the literature. As previously stated in the literature section, countries with a low GDP per capita have the tendency to grow the fastest. Unemployment rates and inflation rates are expected to fall.

Table 1 and Table 2 show the chosen variables for Latvia and Poland ranging from 2003 to 2012. Both countries show increasing GDP and GDP per capita upon their accession into the EU. The subsequent decrease in 2009 compared to the two years prior can be easily explained by the economic crisis that started in 2007. After 2009 they have slowly started to increase again. Both GDP and GDP per capita have more than doubled for both countries in the chosen time period.

The current account deficit for Latvia steadily increased annually until 2007, and then decreased again in 2008/2009. 2010 even saw a positive current account. In the case of Poland, the CA deficit seems very unstable. It increased significantly after accession, with the exception of the year of accession itself, 2004. After the economic crisis it also shows a large decrease. Inflation in Latvia shows a significant increase up to 15.4% in 2008, followed by a great decrease to 3.5% the next year. 2010 shows negative inflation followed by an increase again to 2.3% in 2012. Poland’s inflation shows a relatively stable and consistently positive path. Starting at 0.8% in 2003, it has fluctuated with an average of about 3%.

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Table 1. Source: IMF and World Bank

Latvia’s unemployment rates show a gradual decrease until a sudden very large increase to 17.1% in 2009, probably due to effects from the economic crisis.

Unemployment in Poland shows a steady decrease the entire period.

Household consumption (US$) has more than doubled for both countries between the years of 2003 to 2012. This is also a clear reflection of the increase in per capita income seen by both countries during this period.

Table 2. Source: World Bank

Both countries also show an increase in exports as a percentage of GDP of over thirty percent in the same period, with that of Poland increasing more gradually than that of Latvia, which shows a decrease in 2006/2007.

When looking at the role of agriculture in Latvia, the percentage workers of total employment employed in the agricultural sector has decreased from 14% prior to accession to 8% in 2012. The value added per worker in the agricultural sector has

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increased from just below 4.000 US$ to nearly 5.500 US$ from 2003 to 2010. Poland saw a decrease of workers in agriculture from 18% of total employment to 13% and its value added per worker increased from 3.291 US$ in 2003 to 4.111 US$ in 2010. These

changes can quite possibly be attributed in part to the impact of the Common Agricultural Policy funding received.

Table 3 shows the chosen variables for Macedonia in 2012.

Its GDP is lower than that of Latvia and extremely low in comparison to Poland, but its GDP per capita, at 4889 US dollars, is very similar to that of both countries upon accession. Macedonia has a positive inflation similar to that of Latvia. Macedonia also shows a very high unemployment rate of 31% whereas Latvia had an unemployment rate of 10.6% and Poland of 19.6% upon accession. Household consumption is similar to that of Latvia. Macedonia’s export in percentage of GDP is a bit higher than that of both other countries. The percentage of total employment working in the agricultural sector is fairly similar to that of both countries although its value added per worker is higher. Table 3. Source: IMF and World Bank

Comparing Macedonia with the effects that accession has had on the chosen variables for Latvia and Poland, a prediction can be made on the possible effects of Macedonia’s accession. GDP and GDP per capita are expected to increase significantly, which is in compliance with the literature. The effects on the current account balance are difficult to predict based on that of the countries compared to due to the significant effect of the economic crisis but considering the growing deficit both countries have shown before the crisis emerged it is probable that the current account balance will decrease.

The inflation rate being fairly similar to that of Latvia, and a little above that of Poland, upon accession, which is at almost the same level in 2003 as it is in 2012 in Latvia and slightly increased in Poland, it is most likely that in the long run it will not change much. Unemployment in Macedonia is expected to decrease significantly considering its height in 2012 and taking into account the economic crisis when evaluating the unemployment rate increase in Latvia. Macedonia’s household

consumption is expected to increase significantly and the export as percentage of GDP to increase as well.

Looking at the agricultural sector, the percentage of total employment working in agriculture is expected to decrease and the productivity measured in value added per worker to increase. These changes will of course depend on the policies in place at the time of accession.

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3.3 Costs and benefits of the accession of Turkey

In a study concerning the accession of Turkey, Nugent (2007) argues that when looking back at the history of the European Union, several previous enlargements were seen as problematical at the time due to differing reasons, but solutions were found and there is no reason to assume it cannot be the same concerning the problems facing Turkey upon its accession. He also states that if the EU keeps expanding towards the east and the south, enlargements will inevitably become more and more problematic due to, in example, the under-developed economies of those countries. Nugent (2007) names the following potential benefits for Turkey upon entering the EU: improved access to the EU market, more financial aid, better prospects for inward investment and participating in a very and increasingly important political and economic power.

The potential benefits that Turkey’s accession brings to the EU have much to do with its geological position. It can become a significant energy route between the EU and big oil and gas sources, and thus of importance in securing Europe’s energy supply (European Union Commission, 2007). Turkey also shows consistent high and steady economic growth and is among the EU's most important trade and investment partners. Besides the geopolitical importance of Turkeys location as a gateway to trade with countries in the Middle East and Asia, there are other potential benefits for the EU if Turkey enters. Nugent (2007) emphasizes the size of the Turkish market: with a population of over 70 million people, Turkey represents many consumers who can be reached even easier with Turkey in the EU. Hughes (2004) states that due to the small size of the Turkish economy, it would have a minimal effect on the EU. Secondly, Nugent points out the relatively young and growing workforce in Turkey compared to that of the EU-25, which has an ever increasing ratio of dependent young and old people to working age people. Hughes (2004) mentions that if migration flows from Turkey are similar to those anticipated from the new EU member states from Central and Eastern Europe, then a long run eventual stock of about 2.9 million migrants can be anticipated, at about the time when the EU is starting to feel the negative impacts of its aging

demographic profile.

When evaluating the literature on Turkey’s accession into the EU a few costs for the EU are prevalent. Turkey is expected to be a major beneficiary of EU funding

programmes. Just as in Macedonia, Turkey has a relatively low agricultural productivity, of 6.598 US$ (2005 constant), making the Common Agricultural Policy of importance. Considering agriculture amounts for 24% of Turkey’s employed labour force (World Bank, 2012) this would make for a large amount of funding and thus a relatively big burden on the EU budget. It’s also eligible for Structural Fund support because of its relatively low GDP per capita of 10.660 US%, leading to possible budgetary problems, although that will be dependent on the spending policies of the EU at the time of

accession. (Hughes, 2004) If those policies do remain fairly similar the implications may be significant.

According to the study by Nugent (2007) there have been concerns regarding Turkey’s economy. Although it is based primarily on market principles, it remains

fragile, as shown by the crisis that plagued the country in 2001. Its low level of economic development, and low level of GDP, may have a negative effect on the EU. Mentioned as a potential benefit as well as cost to the EU is the size of its population. Second only to Germany, it will have significant power in the European Union which will lead to existing members, particularly the larger and medium-sized member states, losing presence and votes in the Council and European Parliament. Another potential cost is the relatively low level of economic development. It is poorer than any of the states that

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joined in 2004 and 2007. Although its population accounts for about 15 % of the EU-25, its GDP is only equivalent to about 2% of EU-25 GDP.

Table 4 and Table 5 show the chosen variables for Hungary and the Slovak Republic ranging from 2003 to 20012. Both countries exhibit strongly increasing GDP and GDP per capita, with only a drop around 2009/2010, probably due to the economic crisis, and 2012. When looking at the current account balance, both countries show a growing deficit until 2009, where he deficit strongly declines, especially in Hungary. The Hungarian CA balance became positive in 2010, that of the Slovak Republic in 2011. Table 4. Source: IMF and World Bank

The inflation rate in Hungary remained fairly constant during the 2003-2006 time period, increasing strongly in 2007 to start decreasing again in 2008. 2009 shows it back to its fairly constant level of the beginning of the time period. Inflation in the Slovak Republic started very high at a level of 8.6, to drop immediately below 3 in 2005. It then fluctuated until settling just below 4% in 2011/2012.

Unemployment rates in Hungary show a significant increase from the moment of accession, almost being doubled by 2009 compared to 2003. Until 2012 it has then stayed very constant. The Slovak Republic, on the other hand, shows a slightly

decreasing trend after 2004, with an increase again in 2009. It has then stayed relatively constant.

Looking at household consumption, countries show an increase of around 100% in the period from the year prior to accession up to 2011. Hungary’s export as

percentage of GDP increased by about half and that of the Slovak Republic by almost twenty percent in the same period.

In the agricultural sector, the fairly low percentage of total employment working there has stayed pretty much constant the entire period in Hungary and has slowly decreased in the Slovak Republic. The value added per worker has increased by almost 3.500 US$ in both countries from 2003 tot 2010 which can probably be contributed in part to the funding from the Common Agricultural Policy.

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Table 5. Source: World Bank

Table 6 shows the chosen variables for Turkey in 2012. Turkey has a significantly higher GDP than the countries compared to but its GDP per capita is pretty much the same compared to that of Hungary and the Slovak Republic upon their accession. Turkey does however, have a positive current account balance, which the other two countries do not. Inflation is very high at 7.5% that mostly resembles that of the Slovak Republic. Unemployment in Turkey is at 9.2%, which is closest to that of Hungary upon accession. Turkey’s household consumption is, as with GDP, much higher than the countries

compared to. Its export in percentage of GDP on the other hand is much lower. Turkey has a fairly high percentage of total employment working in the agricultural sector is 24%, higher than that of Hungary and the Slovak Republic, but its value added per worker is fairly similar.

Table 6. Source: IMF and World Bank

When comparing Turkey to the two chosen countries based on these variables, a prediction can be made as to what would likely be the impact of Turkey’s accession into the EU. Both GDP and GDP per capita are expected to increase significantly. As Turkey has a positive current account balance and the countries it is compared to do not, it is difficult to predict what will happen regarding this variable. The Turkish inflation rate is

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expected to decline considering its current level. Based on the countries compared to, the unemployment rate could go either way, but considering possible migration of the work force to other member states, its more likely to decline.

Household consumption is expected to increase significantly just as in the countries compared to, just as its export. The percentage of workers employed in the agricultural sector will probably decrease taking into account its height in 2012 and the value added per worker will almost certainly increase, in part due to the funding by the CAP.

4. Conclusion

When reviewing the literature and the data of the countries chosen to compare

Macedonia and Turkey to, it is made obvious that the effects that the accession of both countries may have on themselves and the European Union will probably be very different. An important factor in this seems to be the size of the countries’ populations and economies.

Macedonia is not expected to have an impact on the EU economy. Although it is eligible for funding from the CAP and Structural funds, due to its size the burden on the EU budget will be small. Accession will probably have significant effects on the country itself based on the findings in the literature concerning economic growth. Based on the data on the accessions of Latvia and Poland, Macedonia is expected to see an increase in GDP/GDP per capita, a decrease in the current account balance, constant inflation and, due to the size of the workforce being more comparable to Latvia, an increase in

unemployment. Household consumption and export as percentage of GDP are expected to increase significantly. The percentage of total employment working in agriculture is expected to decrease, with value added per worker increasing. Over all, the effects on the country itself are likely to be of a positive nature.

Turkey is a different story. Due to its eligibility for funding and the size of the country, it is most likely a relatively big burden on the EU budget. On the other hand, due to its size it does offer a grand consumer market, the labour force is relatively young and growing and there are of course the geopolitical benefits of Turkey joining the European Union. The ultimate effect accession will have is therefore difficult to predict and further research is needed.

Besides increased political and economic power, Turkey can possibly enjoy other benefits upon accession. Based on the data of Hungary and the Slovak Republic, GDP and GDP per capita are expected to rise, inflation to decline and unemployment to decline as well. Household consumption and export, as percentage of GDP, will most likely

increase. The percentage of total employment working in agriculture is expected to decrease, with value added per worker increasing.

These are predictions based on imperfect and limited comparisons and the actual effects of accession may differ in various ways from the predictions made here. Further research is needed to more accurately predict the benefits and costs of these countries acceding into the European Union.

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The accession of Macedonia and Turkey into the European Union : the possible costs and benefits