EU enlargement may prove to be better for some than for others

There has been a huge amount of speculation about the impact of enlargement on the politics of Europe but rather less on the impact on its economy.

In shorthand, the general political proposition has been that enlargment helps fringe members of the European Union, such as Britain and the Scandinavian countries, because it dilutes the clout of the core, in particular France and Germany.

It is quite plausible, however, that there will be a parallel economic impact. Quite of a lot of us have argued that enlargement will be good for the European economy in general for all sorts of reasons. What I am just beginning to wonder is whether the impact will be differential: in other words, the fringe will benefit while the core will suffer. Since the fringe is already growing faster than the core, this will reinforce a trend that is already established and eventually lead to a quite different balance of economic power in the EU.

There are two substantial reasons for suspecting that this might happen. The first is that the cheaper wages and other low costs of the new members present more of a threat to core Europe, in particular Germany, than they do to the fringe.

The UK is still a net recipient of inward investment, while German companies have been exporting production (and of course jobs) to the accession countries for a decade. True, there has been a transfer of jobs out of the UK but we do not seem as concerned about this and the process is less direct. A German company can have a plant one hour's drive from the German border and pay workers only 10-20 per cent of the wages they would have to pay in Germany itself.

The other reason for thinking that the UK will benefit more is that it is one of the few EU countries that gives workers from the entrant countries immediate and unlimited access to the labour market. (Most of the EU members, including Germany, France, Italy and Spain, have put a delay of up to seven years before people from the accession countries can come and work.) This is the main reason why the UK growth rate could jump significantly, according to a new report from Lombard Street Research, from which these charts are taken.

The differential in pay rates is almost as large for the UK as it is for Germany. In the first chart you can see the difference at market exchange rates. The average pay in the biggest three accession countries by population, Poland, Hungary and the Czech Republic, is just 13 per cent of UK levels. That is what companies pay, hence the attraction of these countries to investors. Fortunately for the working people of Eastern Europe the gap is not as large in real terms. Allowing for price differences, wages are roughly half UK levels.

Will that differential be enough to encourage the workers to come? When Spain and Portugal joined the EU in 1986 wages there were some 70 per cent (in real terms) of EU average wages and there was some movement, though not a huge one. On the other hand there has been a tremendous movement of workers from East Germany to West Germany, despite lavish subsidies to try to keep them in the East. So perhaps simple availability of jobs is more important than wage differentials.

My guess would be that provided the UK job market remains strong, we will indeed attract large numbers of workers from the accession countries. We have certainly been doing so through the 1990s. The other graph shows what has happened both to immigration and to the size of the workforce.

These are official figures and have to be taken with a pinch of salt. Both the flow of immigrants and the growth of the workforce must be rather larger - the difficulty being to know how much larger.

Still, on official figures, immigration accounts for roughly three-quarters of the rise in the workforce. In one year, 1999, the flow of immigrants was larger than the increase in the workforce.

In other words, had it not been for immigration, the workforce would have shrunk. As it is, we have had a workforce increasing by around 0.4 per cent a year, growth that seems likely to be continuing now. Some 90 per cent of immigrants are of working age.

Looking ahead, Lombard Street Research believes that the flow of immigrants could rise to around 200,000 a year, adding 0.5-0.6 per cent to the workforce annually.

That ought to add half a percentage point to our trend growth rate, though of course it says nothing about output per head. It is perfectly possible that immigration will have more of an impact on trend growth than it will on GDP per head or on living standards.

I suspect that a great deal depends on the strength of the job market in the future. It may seem a bit tautological, but provided we continue to grow reasonably rapidly, we will be able to grow reasonably rapidly because we will suck in the labour needed to sustain the growth. On the other hand were growth to falter, then we would cease attracting so many immigrants. We have had an implicit policy to grow the economy as fast as practicable, pulling in the necessary labour to do so, under both the Major and the Blair governments. I don't see that policy changing. And it is a quite different policy from that of Germany, Italy and France.

If this policy continues to be successful, then it really will change the economic balance of Europe. The UK will not necessarily continue to gain ground in terms of GDP per head, but it will gain ground in terms of the size of its total economy. On present trends the UK will overtake Germany to become Europe's largest economy in about 20 years' time.

We may or may not want this to happen. It would mean big changes in the nature of Britain. If a much larger proportion of our workforce were to be foreign-born it would change British politics, for we would inevitably become rather more like the US. But it would certainly be nteresting.