Europe’s new division of labour

Two years after the accession of ten new members, the EU is showing clear signs of enlargement fatigue. While most politicians and economists insist that eastward enlargement has been good for the EU, voters are increasingly sceptical. This matters, first because concerns about ‘unfair’ competition after enlargement impede EU progress, for example with opening up services markets; and second because France, Austria and probably others will hold referendums on future accessions. So the Balkan countries and Turkey will not join unless the people in the existing EU countries understand how enlargement has really changed the Union.

Public hostility to enlargement should not be exaggerated: according to the latest Eurobarometer polls, 55 per cent of the people in the EU-25 say enlargement is something positive, and almost as many would support future accessions. However, their numbers are shrinking, while the share of those against enlargement has risen to 39 per cent. In Germany, France and Austria, six out of ten people are now against any further countries joining the Union.

Economics appear to be the main fear factor. Support for enlargement peaked in 2001, when EU growth was still robust, and then declined gradually as the EU economy deteriorated. Today, 63 per cent of the people in the EU-15 think that enlargement increases unemployment in their country, up from 43 per cent in 2003. In Germany, 80 per cent think that enlargement is bad for jobs.

The level of enlargement-related fears is odd, given how small the new entrants are. Taken together, their economies are only as big as that of the Netherlands. Trade between the ‘old’ and the ‘new’ members has grown quickly since the early 1990s, but goods from the new members make up only 13 per cent of total EU-15 imports (excluding intra-EU-15 trade). Similarly, although West European companies have invested more than S150 billion in the Central and East European countries, that is only a tiny fraction of what they invest in the EU-15 countries or the US.

However, the relatively small size of trade and investment flows hides the fact that enlargement is changing the EU economy in a more profound way. In the past, the EU was a relatively homogenous club. Eastward enlargement has added a pool of 40-odd million low-cost workers to the EU single market. Many West European countries have decided to keep Polish, Czech and Hungarian workers out of their labour markets until 2011. But they cannot prevent their companies from relocating to the new member-states, where wages are typically one-fifth of what they are in France or Germany.

The key point to bear in mind is that enlargement happened at a time when global competition was becoming fiercer due to the integration of China and India into the world economy. For West European companies, the choice was not between producing at home or abroad. It was between cutting costs or losing market share – and thus shedding jobs at home anyway. In other words, foreign direct investment (FDI) from west to east may have caused some job losses in West European factories. But by helping German, French or Dutch companies to stay competitive on a global scale, it has also helped to preserve jobs in Germany, France or the Netherlands. A 2004 survey found that 20 per cent of German companies with investments in Eastern Europe had shifted jobs eastward. But three times as many (60 per cent) said their investments had helped to preserve or create jobs at home.

Cars and ICT (information and communications technology) are good examples of how Europe’s new division of labour works. German and French, but also US and Korean car companies have invested billions into a ‘cluster’ of car and component factories in Central Europe. By 2007 Slovakia will produce more cars per 1,000 inhabitants than any other country in the world. Annual car production in the Czech Republic is heading for the one million mark. One out of 25 cars sold around the world now contains an engine produced in Hungary. And Poland churns out more than 850,000 gear boxes a year. Meanwhile, the big West European car companies have concentrated at home on design and marketing, as well as the production of the technically difficult parts which they then ship to Eastern Europe for assembly. Most of these companies are doing better now than in the early 1990s.

ICT is another example. Ericsson and Nokia are now producing their mobile phone handsets in Estonia and Hungary. At home they do R&D, design and some highend manufacturing. Although telecoms is a key industry for both Sweden and Finland, neither country has seen a rise in unemployment since production started to move to Eastern Europe. Similarly, Ireland used to assemble a third of all PCs sold in the EU in the late 1990s. Since then, these assembly lines have moved to Hungary and elsewhere in Eastern Europe, while Ireland’s well-qualified engineers have moved on to high value-added production and related services. Ireland’s computer sector has not suffered net job losses.

Ireland and the Nordic countries have managed the move into higher value-added activities rather smoothly because they have flexible labour and product markets, as well as solid education systems. So workers can easily move on to new growth sectors, in particular in services. The large eurozone countries, with their inflexible labour markets, have found this transition a lot more painful. Workers affected by, or fearful of, factory closures have protested loudly against ‘unfair’ competition from the east. But Western Europe clearly does not have a future as a producer of low value-added, mass manufactured goods. Enlargement, and the opportunities for outsourcing labour-intensive production, have left Western Europe better prepared for globalisation. But Europe’s new division of labour is not static. Now the Central and East European countries are coming under growing pressure from China, which specialises in some of the goods they make. In a globalised economy, both old and new members will have to work hard to stay competitive.