OP:16 Enlargement of the European Union: The Economic Consequences for the Scandinavian Countries
Author(s): Richard Baldwin and Harry Flam
Publication Date: September 1994

Abstract: Just ten years ago EU membership was unthinkable for Finland, Sweden and Norway. two key events changed this: the single-market programme and the cold war's end. The single0-market programme altered commercial realties in Europe by making it easier for firms based in one EU market to compete in other EU markets. Yet, because it applied only to EU firms, the programme unintentionally threatened other EFTA firms with current and future discrimination. To counter this, the EU and EFTA signed an agreement that gave single-market status to EFTA-based firms, namely the European Economic Area (EEA) agreement. The EEA, however, only removes the threat of current discrimination. Due to serious legal and political constraints, the EU could not offer the EFTAns any formal influence over enforcement of existing single-market rules or the formulation of future rules. With political realities altered by the end of the cold war, Scandinavian and most other EFTA governments concluded that EU membership was the best way of redressing the single-market's threat to the current and future interests of EFTA industry. Of course the governments (especially those of Austria and Finland) were also motivated by non-economic factors such as geopolitics. The outcome of this autumn's referendums on EU membership will show us if Scandinavian citizens agree with their governments' judgement.

When Scandinavian voters cast their votes, they will be choosing between two alternatives: Join the EU or - well actually the alternative is not clear. To an optimist the EEA is a long-run solution to the single-market discrimination, so the EEA is the alternative. To a pessimist, however, the EEA's 'influence deficit' makes it unviable in the long run, so the alternative is a great deal of uncertainty. This is important since a complete evaluation of the pros and cons of EU membership must consider the gains that membership would provide and losses it would avoid. Consequently, every evaluation must make assumptions about the viability of the EEA.

The two essays in this Occasional Paper take opposite views of the EEA's viability. The main conclusion of the Flam paper is that EU membership is not very important economically, if one assumes that the EEA is a long-run solution to the single-market threat. Although he makes this assumption in his formal analysis, Flam is not an EEA-optimist. He explicitly points out that the future of the EEA is by no means certain. The main conclusion of the Baldwin paper is that the economic gains from joining the EU will be large because the EEA will fail, leaving EU accession as the only way that Scandinavians can adjust to the new commercial realities in Europe. In particular, he argues that Scandinavian parliaments and industries would soon find the 'influence deficit' intolerable. Therefore a 'no' vote this autumn is likely to force many Scandinavian firms to individually overcome the 'influence deficit' by becoming EU based firms.

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