Ian Bright: EU likely lads put Britain on the spot

In two years' time, the European Union will expand to include another 10 or 12 countries. Two years after that, these countries will join EMU and adopt the euro. That's the plan and it is being pushed hard.

The 10 most likely accession candidates are Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. It is generally accepted that Bulgaria and Romania will not be included in the first round because they are the poorest candidates, and political and structural factors would make it difficult for them to meet the criteria set by the EU. Turkey is also excluded because of political considerations, though its size (population 65 million) could also be a factor.

The most likely candidates have 75 million people between them. Accession therefore represents a large population rise but the economic boost would be modest. These countries represent around 5 per cent of the EMU area GDP, have a per capita GDP around 20 per cent of the EMU average and pay wages around 10 per cent of the EMU average.

This combination of large population and low income provides a number of challenges for the existing members of the EU. Some fear that expansion will allow companies to relocate from the expensive west to the low-paid east, and that it will herald large-scale immigration in the opposite direction.

These fears can be overplayed. The industry composition and skill base of the existing EU and the accession countries differs, so investment flows should not be dramatic. Furthermore, there has already been significant investment by EU countries in the EU candidates over the past few years. Current proposals would also restrict the movement of labour for seven years after expansion. In the meantime, the accession countries should grow more quickly than the existing EU, countering the reasons for migration.

Expansion raises other questions. Some concern money, some the allocation of power and representation within the expanded EU. For example, agriculture has a larger share of the economies in the accession countries than in member states; how will the Common Agricultural Policy be reformed? The EU candidates are relatively poor; how will this affect the allocation of the EU's structural adjustment funds? It is possible that the accession countries will participate in the 2004 elections for the European Parliament; how will this affect the balance of power within the EU?

These questions are being debated now and proposals made. The important point, though, is that the political decision has already been made to expand. Whatever qualms one may have about the economic effects, both for the accession countries and the EU, these are being brushed aside as subordinate to the greater political agenda.

The issue has particular importance for the UK because it affects the EMU debate. If the accession countries join the EU in 2004, they will begin preparing for EMU entry. To this end, they would adopt some form of exchange rate mechanism with the aim of joining in 2006.

This complicates the timing of any UK referendum on EMU. The favoured date is May 2003. If successful, this would allow the UK to adopt the euro around 2004 or 2005. However, if the referendum is delayed or unsuccessful, the UK's entry could clash with that of the accession countries. Would we have to wait until the accession currencies were firmly embedded? Would any future referendum need to be delayed till around 2008? If the Government wants to push for EMU entry, it must act soon.

Ian Bright is group economist at Baring Asset Management.