WOLFGANG QUAISSER / JOHN HALL Making the European Union Fit for Eastern Enlargement* T he European Union is set to incorporate five and possibly more Central and Eastern Euro­pean countries in the next five years or so, with additional countries to follow. The new round of enlargement is unprecedented in sheer-number terms. Moreover, it will change the character of the united Europe significantly. The EU will cease being a»rich men’s club«: it will be much more heterogeneous economically and – at least statisti­cally – poorer. Although we are convinced that eastern enlargement is a worthwhile endeavor, we also believe that at present the EU is not in a position to cope with the consequences. Neither the reform steps taken under Agenda 2000 nor the ones agreed to at the Nice summit of Decem­ber 2000 suffice to make the Union fit for eastern enlargement. An Agenda 2007 is needed. It must address, above all, EU spending under the Common Agricultural Policy and the various structural policies. Limits have to be set on entitle­ments. In addition, emphasis should shift from the present support of less-developed regions to the promotion of economic convergence among countries. The reforms should also offer member states greater control over the choice of investment pro­jects and should concentrate EU spending on fewer objectives and poorer member states. To avoid an endless political horse-trading on transfer pay­ments, a clear and transparent mechanism for financial redistribution is needed. Agricultural­policy reforms should focus on further price liberalization, declining direct-income supports as well as national cofinancing. The reform package should be accompanied by changes in the Union’s institutions that address the»leftovers« of Nice. The powers of the dif­ferent levels of governance must be defined more precisely. The processes of EU decision making need to be further streamlined and rendered more transparent, democratic and effective. In the long run it will be necessary to reconstitute the European Union as a confederation of European states. The Costs of Enlargement: Unsustainable Beyond 2006 In the 1990 s a host of studies estimated the costs associated with eastern enlargement. Early studies by Baldwin( 1994 ), Anderson and Tyers( 1993 ) and Courchene et al.( 1993 ) suggested that the esti­mated costs of CEEC accession would render an enlargement program prohibitive.Today the finan­cial costs of the first accession round are calculated by different researchers to reach between 0.1 to 0.2 percent of the current EU ­15 ’s GNP . As the EU ’ s economy grows, the percentage of this burden is expected to decline. The financial burden has to be set against the welfare gains brought about by eco­nomic integration. For two selected countries, Germany and Austria, net welfare gains derived from the first round of eastern enlargement have been estimated to be in the range of 0.5 to 0.8 per­cent(Keuschnigg and Kohler, 1999 ). As far as contributions to the EU budget are concerned, Germany’s net burden would increase from 0.54 to 0.58 percent of its annual GDP . The net transfer receipts of Spain, Portugal, Greece and Ireland would fall from the current level of between one and four percent of GDP to between 0.3 and 0.8 percent(Quaisser et al., 2000 ). The new member states, in turn, can expect EU net transfers of up to four percent of their GDP . * The authors would like to express their thanks to Michael Dauderstädt, Christian Dahlhaus, Heinrich Hick, Axel Hörhager, Werner Kirsch, Horst Günter Krenzler, Andreas Lillig, Rüdiger Leidner, Dietrich Lin­genthal, Norbert Mühlberger, Franz Neueder, Alfred Pfaller, Burkhard Schmied and Manfred Wegner for their insightful comments. 268 Wolfgang Quaisser/John Hall, Making the European Union Fit for Eastern Enlargement IPG 3/2001