No pain, no gain

16 December 2002 By Paul Raynes

No pain, no gain

16 December 2002 By Paul Raynes

In the long run, a home market of getting on for 500 million people must be good news for Europe’s largest economy. But enlargement comes at just the wrong moment for a Germany teetering on the brink of deflation and fiscally overburdened.

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The European Summit held at Copenhagen has agreed to admit 10 new member states to the European Union from 1 May 2004. The list is headed by Poland, with 40 million inhabitants the largest new entrant, and includes Hungary, the Czech Republic, the Slovak Republic, Slovenia, Lithuania, Estonia and Latvia, Malta and Cyprus. The candidate countries are set to hold referendums during 2003.

The candidates will be entitled to immediate financial subsidies from the EU budget, and to other privileges of membership such as market access under the Common Agricultural Policy. Over the first two years of full membership, from 2004, the subsidy package on offer amounts to E40.8bn.

As members in 2004, the new countries will be eligible to apply for membership of the Euro. Assuming they are required to shadow the euro for 2 years as members of the exchange rate mechanism of the European monetary system, the earliest they would be able to enter the euro is 20062007.

Germany's economy has stagnated in 2002, while inflation is running at 1% close to stable prices, if one accepts the Bundesbank's estimate that the German consumer price index overrecords inflation by about half a per cent. Unemployment is at 4 million. CSFB estimated in November that there was a 10% chance that Germany would experience deflation in 2004. The probability rose to 40% if a 10% appreciation of the euro was assumed in the CSFB model.

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