As prepared for delivery
Good afternoon. It is wonderful to be back in Brussels.
Let me start by thanking our hosts at CEPS for bringing us together today. And let me also say how pleased I am that Commissioner Kos is joining this panel discussion.
We are delighted that enlargement is once again on the European Union’s agenda, with a number of countries looking to join in the coming years. This is extremely positive. At the IMF we have seen tremendous benefits from enlargement, for both new and existing EU members. Indeed, we can say that enlargement activates the convergence engine which is, in my view, the most important invention of the 20th century.
Today, we are launching a new paper that focuses specifically on the Western Balkans and Moldova, accession countries which share certain economic features. At the same time, we recognize the importance of continuing engagement with other countries seeking to join, including Ukraine.
The IMF helps all of these countries—including through policy advice and capacity development. In a few weeks, with the support of our development partners (Italy, the European Commission, Greece, and Luxembourg) and beneficiary countries, we will launch a new capacity development center in Rome for the Western Balkan countries and Moldova—the Southeast Europe Technical Assistance Center, or SEETAC. SEETAC will join another IMF center in Vienna that is providing training to countries such as Ukraine. Together these IMF centers complement the work of the Ukraine Capacity Development Fund, as well as our own Fund program for Ukraine.
For me, enlargement is more than a policy issue. It is personal. Having grown up in Bulgaria, I know the opportunity that European integration brings. Because joining the EU made life tangibly better for the people of my home country.
The biggest enlargement wave to date came in 2004, followed by the enlargement of 2007. In 2004, world growth reached 5.3 percent. Trade was flourishing and global supply chains were becoming more integrated, to the great benefit of European firms.
Now consider where we are today. Global growth is projected to be about 3 percent this year. Trade restrictions and geopolitical tensions are high and rising, and Europe faces significant demographic and fiscal pressures.
Does that make enlargement less relevant? No. On the contrary!
Done well, enlargement can provide a much-needed boost to growth in Europe—for both candidate countries and existing members. The world is becoming a more difficult place—and expanding and deepening the EU’s single market will make Europe stronger and more resilient.
Today, candidate countries face a similar opportunity to that of past enlargement rounds: Their gaps in income levels and governance quality compared to existing EU members are sizable—but broadly comparable to those faced by earlier accession countries.
The potential reward is large. In past enlargement rounds, GDP per capita increased by more than 30 percent within a decade in regions that joined the EU compared with similar regions that did not. Existing member states—and this is important—also gained substantially.
Our new IMF paper shows that candidate countries could repeat this success and increase their GDP per capita by 30 to 35 percent within a decade.
But for enlargement to boost living standards it really must be done well: candidate countries must carry out bold domestic reforms, and the EU needs to provide judicious support.
Why do countries gain from accession? The answer lies largely in higher productivity. Productivity accounts for roughly two-thirds of the overall income gains from accession.
But productivity does not magically arrive with EU membership. It must be earned. It arises when local and foreign investors and businesses see new opportunities in accession countries. It arises when firms innovate, invest, and compete.
And this rising productivity has wonderful effects. It creates better jobs and stronger economic opportunities. Higher productivity and higher wages reduce pressure for workers to leave. Talent stays at home and gets put to work.
Productivity growth is the ultimate pathway to prosperity. It is both a direct source of convergence and a catalyst for higher investment and stronger labor market outcomes.
So, how do we make these productivity gains a reality? Our new paper identifies three mutually reinforcing engines of convergence [shown in the right side of Slide 3.] First, domestic reform anchored in the EU acquis, second, single-market access, and third, effective use of EU funding.
Each of these three engines account for about 1/3 of the potential income gains in our baseline assessment. Differences in effective reform implementation and use of funds explain why some countries converge faster than others.
Strong governance is critically important here. It is what allows all three engines to drive productivity gains. Better institutions reduce uncertainty, encourage investment, improve the effectiveness of public spending, and help firms seize the opportunities created by integration.
So, what is the bottom line?
Maximizing the gains from accession is a shared responsibility!
Candidate countries should implement the acquis effectively and avoid gaps and unnecessary customization or gold-plating. These dilute the benefits of integration.
But the EU also has much work to do. Accession gains will be larger—for everyone—if the single market becomes deeper and more seamless. Enlargement and single-market deepening should be seen as complements: a larger Europe can be a stronger Europe—but much more so if it is a more integrated Europe.
Let me conclude.
Previous enlargement delivered big gains for both new and existing members. Future enlargement can do much the same. Having witnessed the transformative power of European integration in my own lifetime, I am optimistic about what it can achieve for the next generation.
So, let us press on with confidence! Europe needs to believe in itself.
I look forward to our discussion. Thank you.