Integration, enlargement and economic growth: Assessing the development strategy of the European Union

In 2004 the European Union admitted ten less developed members. Compliant with the Maastricht economic cohesion commitment, the incumbents restructured the EU's budget to accommodate for the economic assistance to new members. Such reallocation of funds could potentially delay the union's goal of becoming the world's leading knowledge economy. Not surprisingly, the EU citizens grew apprehensive of the union's expansion. The EU officials, on the other hand, remained confident that the union enlargement and economic policies could parallel each other and in 2007 admitted two more less developed countries. To assess the effects of the EU enlargement on members' economic development and growth, two alternative empirical studies were conducted in this dissertation. The first study is based on the neoclassical exogenous growth theory and tests three hypotheses of the effects of economic integration. The empirical analysis is conducted using a stochastic Solow model with heterogeneous panel data and suggests that over time European integration helps increase productivity or output per capita, promotes economic convergence, and improves income distribution in the union. The second study is based on the endogenous growth theory and the hypothesis developed in this study builds on the notion that enlargement can make it easier for the EU to face upcoming demographic and welfare system challenges. As a result, European integration and union enlargement are hypothesized to have a positive effect on economic growth. Pooled regression results confirm our theory and, therefore, support the EU's strategy of synchronizing integration and union enlargement with economic development policies. The final chapter of the dissertation integrates the empirical findings and discusses their implications for the EU's future. While the European Union enlargement is a complex political process, analytical analysis suggests that certain economic factors may have influenced the union's recent expansions. If these economic factors continue to play a role in the EU's decision-making, no new enlargements can be foreseen in the EU's nearest future.