STU 03-01 : Special Topic - Some implications for Belgium of the Eastern EU enlargement [ Short Term Update 03-01 - 08/08/2001]

After a period of rapid expansion during 1999 and the first half of 2000, a clear worldwide slowdown was recorded in the second half of 2000. Current forecasts are assuming that world trade will recover in the second half of 2001. In line with this international scenario (lower growth, higher inflation), economic growth in Belgium has been revised downwards to 2.4% (compared to 2.8% in the economic budget last February). GDP growth next year should reach 2.8%, driven by stronger growth in exports and domestic demand.

In addition to the impact of the recovery of international trade, activity in 2002 should be fuelled by various internal factors boosting private consumption, such as wage and employment increases, the indexation of wages and social benefits above consumer price growth and personal income tax reform.

Domestic employment should rise by around 40,000 persons in 2001 and 45,000 in 2002, leading to a new improvement in the employment rate. Nevertheless, the impact on unemployment will be smaller, given the forecast increase in the labour force.

Inflation should be significantly lower in 2002 than in 2001 (1.5% as against 2.4% for consumer prices), thanks to a small decrease in energy prices, the stabilization of the euro exchange rate and lower prices for food products. The impact on inflation of the conversion of prices into euro is uncertain and any changes, should mainly be seen in 2001.

The impact of EU enlargement to the 10 central and eastern European countries (CEECS) can occur through different channels. Trade can be affected through lower trade barriers, increased competition and specialisation, and a ‘catching-up’ effect in the CEECs. The labour market, growth and public finances will also be affected through the influx of foreign workers. This special topic presents initial findings on the implications for the Belgian economy of the EU enlargement focusing only on some aspects of trade and migration between Belgium and the CEECs.

Implications for trade between Belgium and the CEECs

With EU enlargement, the future trade patterns between Belgium and the CEECs will be affected by the free movement of goods, services and factors between the EU and the CEECs. Although thought to be moderate, this impact is difficult to assess because trade between the EU and the CEECs has already been liberalised to a large extent and because some developments can be attributed to the transition process in general. In addition to the tariff liberalisation already realised on the basis of the Europe Agreements between the EU and the CEECs, full membership implies the elimination of all non-tariff barriers because of the extension of the Single market to the CEECs and the further reduction in trade costs.

This further liberalisation of trade between the EU and the CEECs means that firms can find additional outlets for their products, new trading partners, and new opportunities to invest. But at the same time, this process might be a source of concern for producers in the current EU countries, as competition will intensify, which may force a number of products out of the market because of cheaper substitutes being produced in the CEECs. To analyse the extent to which the different sectors of the Belgian economy are exposed to trade with the CEECs, it is necessary to account for the existing trade pattern and the rather modest involvement of Belgium in trade with the CEECs. To some extent, this “backward looking” analysis also contains elements of forecast of the future impact of Eastern EU enlargement.

STU 03-01 was finalised on July 12th 2001.