This Mind your Business article looks at Poland and the issues surrounding EU Enlargement.

Mind your Business - 12 January 2004

Poland and the issues surrounding EU Enlargement

The News

Poland and EU Enlargement:
Map of Poland (Courtesy of www.theodora.com/maps) 2004 sees the long debated and long awaited enlargement of the European Union (EU). The process of enlargement began in 1998 and culminated with agreement at the intergovernmental conference in Nice in 2000. Poland became a signatory to the Nice Treaty in February 2001 and is due to join the EU in May. Late last year, the Poles made their mark on the EU when they refused to back down over the issue of voting rights in the new enlarged EU and forced the collapse of talks in Brussels aimed at securing a new constitution for the enlarged EU. The enlargement of the EU is seen as being a major challenge as former communist bloc countries join the Union. Poland is, in many respects, typical of those countries - it has embraced market economic reforms but still faces massive adjustment problems to allow it to be able to compete effectively in the EU. Poland is therefore a useful case study in the problems and benefits of enlargement of the EU.
Map courtesy of www.theodora.com/maps used with permission.

Photo courtesy of the European Commission - General view of downtown Warsaw with the Palace of Culture. (EPA PHOTO EPA JANEK SKARZYNSKI).

The main benefits of joining the EU to Poland can be summarised as follows:

Membership will help bring further stability to the political system - still very much a 'fledgling democracy' following the collapse of the Soviet Union.
Membership will increase the amount of foreign direct investment (FDI) to enable Poland to modernise its industry and infrastructure.
Membership will open up the Polish economy to new ideas, new knowledge and new capital that will help to speed up the rate of economic growth - mainly through the establishment of new firms and greater business co-operation that will be gained from membership (remember that trade with Poland and the West was very limited during the era of the Soviet Bloc).
Business will be more likely to invest in Poland because it will be more confident that it will be operating on a level playing field given that Poland will be subject to EU legislation - competition law, property rights and so on. This should help to boost Poland's economy further.
Poland will gain access to EU structural funds to help develop regions and improve infrastructure.
Membership will further encourage investment by multi-nationals who can seek to benefit from low cost labour. If it remained outside the EU this would be far less attractive.
Poland represents an important geographical link between Western Europe and the countries to the East of Poland - Belarus, Ukraine, Moldova, etc. who, in time, could all apply to become members of the EU thus further widening the market available for increasing trade.

A copper foundry in Legnica (Courtesy of the European Commission)
Membership will increase the amount of foreign domestic investment (FDI) to enable Poland to modernise its industry and infrastructure.
Photo courtesy of the European Commission - A copper foundry in Legnica. (EPA PHOTO / PIOTR KRZYZANNOWSKY).

For the existing members of the EU, the enlargement will have reciprocal benefits - larger markets in which to sell its products, opportunities for investment and expansion with the resulting benefits of economies of scale that can result. However, for both Poland and the members of the EU there are serious concerns about the enlargement. These can be summarised as:

The cost of enlarging the EU is vast - Poland alone will get €1 billion in aid.
There are concerns that Poland will not be able to meet stringent EU standards on hygiene in food production.
There are concerns that Poland will not have the necessary systems to enable it to meet EU regulations on agricultural production - computerised recording of farm stocks for example.
The large farming sector in Poland could get swallowed up by EU agricultural policy - the Common Agricultural Policy (CAP) presents massive problems already without the accession of new states with antiquated farming sectors.
The cost to Poland of meeting EU standards on the environment will be too large for the country to bear (estimates place the cost at between €30 - 40 billion) placing a huge burden on the government and damaging public finances.
Bringing public services up to EU standards - for example, the water supply, health care, education, pensions and employment laws, will lead to increased prices for Polish consumers and businesses as well as putting further pressure on the government's fiscal position.
Poland's industry suffered during the years of Soviet control and there has been insufficient time for it to be able to catch up with the rest of the West - this would suggest that Polish firms will be largely uncompetitive and many will go out of business leading to widespread job losses.
There are fears that Poland could be damaged by its richer partners 'dumping' products, thus further damaging Polish businesses. EU exports to Poland currently stand at between €16-18 billion per year!
Critics also point to the increased likelihood of organised criminal gangs using the EU as an expansion opportunity with car-jacking and commodity-smuggling particularly associated with groups from Poland. The fear is that such groups could easily establish themselves in Germany and other neighbouring countries.

The large farming sector in Poland could become part of the Common Agricultural Policy (CAP), but this has problems already without the accession of new states with antiquated farming sectors.
Photo courtesy of the European Commission - Harvest in Honiatyn near Hrubieszow, eastern Poland. (EPA PHOTO / PRZEMYSLAW POKRYCKI).

Supporters of enlargement do not dismiss these potential problems but suggest that the increased investment and competition will lead to greater efficiencies that will largely offset these problems, but there is no doubting the likelihood of a painful adjustment period. The Poles themselves look to the likes of Portugal, Spain and Greece as examples of how countries that were (in relative terms) poorer than their partners on joining are now seeing increased growth and prosperity with living standards rising.

Theories

The European Union is an example of a customs union. A customs union has free trade between member states but a common external tariff on imports from outside the Union. The EU has developed over the years since 1958 into a body that has not only developed closer economic ties but also political ties. The establishment of a single currency further supports the single market for some of the members that helps to encourage trade and ensures greater transparency of prices across borders. The aims of the EU are to promote the following:

Increase trade, bringing benefits to all member states
Increase the standard of living and growth prospects of members through economic expansion encouraging job and wealth creation
Provide access to member states businesses to markets throughout the Union through the removal of trade barriers including movements of labour and capital as well as goods and services, leading to the benefits that can be gained through comparative advantage
Provide larger markets for businesses, allowing them to take advantage of the benefits of economies of scale as well as accessing component parts and raw materials at more competitive rates
The opportunity to be able to move resources to their most efficient locations, thus gaining the benefits of the 'free' market and increased competition, acting as an incentive to improved efficiency and productivity
Protection for businesses within the Union from competition from outside its boundaries

There are also a number of problems that arise when considering a customs union like the EU. Some would argue that setting up a 'club' and imposing tariffs on imports punishes weak countries that need access to such markets. Agricultural support for farmers in the EU for example means that farmers in less developed countries find it very difficult to compete. Other criticisms include the problems caused by the administration that is needed to support the EU - corruption in the Commission, the massive cost of the CAP, a lack of understanding of cultural and regional needs - see the arguments over the Common Fisheries Policy for example - the bureaucracy and red tape, the fudging of key issues are all major concerns. In addition, with access to markets outside the Union subject to tariffs, some businesses may argue that they are being penalised and access to cheaper goods and service might be denied to the population. The possibilities of getting a true single market is never likely to happen in the eyes of many. Whilst tax rates remain highly differentiated for example, there will never be a 'level playing field' and the fact that countries can opt out of EU wide decisions such as the Social Chapter and the euro reduces the impact of the single market's effectiveness.

Note that in this discussion, the issue of political independence, European defence policies and the like have been deliberately ignored - they are issues but tend to be political ones. In many cases it is impossible to separate the political from the economic - for example, over the issue of interest rate policy in Europe and how it affects individual countries.

What is not in doubt is that the influence of the EU over the lives of its citizens will not diminish but as countries like Poland seek to join the problems of managing a large and often seen as 'unwieldy' body are going to get more problematic. The stance taken by Poland over voting rights in the new constitution is one such example. It has already provoked anger within existing leaders - most notably Germany and France.

Data / Facts / Figures

Population: 38 million
Currency: Zloty comprising 100 groszy
Inflation: 1.9%
Unemployment rate: 18.1%
Proportion of population below the poverty line: 18.4%
Proportion of population employed in agriculture: 20%
Contribution by sector to GDP: Primary - 5%, Secondary - 32%, Tertiary - 63%
(Sources: The Economist (http://www.economist.com/countries/Poland/profile.cfm?folder=Profile%2DEconomic%20Data) and Greek Orthodox Church ( http://www.greekorthodoxchurch.org/wfb2002/poland/poland_economy.html)

Polish GDP - Annual percentage change (Courtesy of the The Economist)
Polish GDP per head (Courtesy of the The Economist)
Polish government debt (Courtesy of the The Economist)
Polish labour costs (Courtesy of the The Economist)
Polish consumer prices (Courtesy of the The Economist)
Polish unemployment (Courtesy of the The Economist)
Data Source: The Economist

Task

You are an economist working as an advisor to the government in the Foreign and Commonwealth Office. The Secretary of State is to attend a Cabinet Briefing session on the implications for the UK of the enlargement of the EU in May 2004. You have been asked to write a report for the Secretary of State to provide information to be used at this meeting assessing the likely impact on the UK of Poland's entry to the EU specifically.

Your report should be dated January 2004, be a maximum of 2000 words and should include the following:

Outline the case for allowing Poland to enter the EU
Discuss the extent to which Poland's entry will affect UK trade
Assess the consequences of Poland's entry over the next 3 years
Conclude by recommending the approach the government should take with the Polish government and the business community in both the UK and in Poland

You will be given credit for demonstrating analysis and evaluation skills, your use of economic principles as well as for the effective use of the data provided along with any other data you might choose to use.
Total marks available = 100

Related Web sites for research

Towards an Enlarged European Union EU Publication (PDF, 548K) (http://europa.eu.int/comm/enlargement/docs/pdf/eurostatapril2003.pdf)
Poland country profile - Europa site (http://europa.eu.int/comm/enlargement/poland/index.htm)

Mark Scheme

Knowledge and Understanding (AO1) 15 marks
Application (AO2) 25 marks
Analysis (AO3) 25 marks
Evaluation (AO4) 35 marks

It is important to remember that there is a heavy weighting towards the higher order skills in this task. To be able to demonstrate these skills it is important to think through your answer prior to starting and work out what you are going to say when and where. You clearly must address the key requirements laid out in the question, but how you support what you say will be very important. The use of the data in the evidence needs to be carefully considered and any other data you can gather (for example, by looking up the nature and extent of the trade between Poland and the UK) will be an important part of the analysis that will allow you to be able to evaluate effectively.

The case for Poland joining the EU has been explained in the background information given so you will have to be selective in how you use that information - do not just copy it out, but try to give the information a different slant whilst retaining the flavour of the information. This is essentially the benefit to Poland and the UK of their membership, but using the data on the trade between the countries could help you to be able to offer some support to the general claims made in the background information.

Having used the information carefully you should be in a position to be able to make some assessment of the impact of Poland's entry - will it be of benefit to the UK? Are there significant opportunities for the UK in Poland being in the EU (again this will be reinforced by the nature of the trade between the two countries)?

Finally you should draw your conclusion about the importance to the UK government of embracing Poland - should the government seek to develop good relations with Poland? Yes, if it can be of benefit to UK business, but if the benefit is only going to be minor in your opinion, again backed up by the 'facts' you use to support your previous arguments with, then the costs of 'courting' the Poles may not be so worthwhile.

From the guide given here, it should be clear that the quality of the facts you gain about the nature of trade between the two countries, the expectations you have attached to the trends in the Polish economy and the expected benefits to Poland of membership will be crucial in determining the quality of your answer.

Poland and the issues surrounding EU Enlargement - 120104