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EU Enlargement : Challenges for Germany's New Laender

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  • Fuchs, Michaela
  • Thum, Marcel

Abstract

EU enlargement offers significant welfare gains to old and new member states. However, these welfare gains do not come automatically but have to be earned by appropriate adjustments in domestic policies. This is particularly relevant for Germany's New Laender, which could benefit from the proximity to the new EU member states in Central and Eastern Europe but which also suffer particularly from inefficient institutions in Germany. Welfare gains will only be realised if wage adjustment is flexible. Instead, the German welfare system implicitly creates downward rigid wages. Without appropriate social policy reforms, the competitive pressure and the mobility of capital will destroy jobs in the New Laender. The paper shows the potential benefits and risks of economic integration in a simple partial equilibrium setting with flexible and rigid labour markets, respectively. We also discuss the entrepreneurial willingness and ability in the New Laender to adjust to the changing competitive conditions after EU enlargement.

Suggested Citation

  • Fuchs, Michaela & Thum, Marcel, 2004. "EU Enlargement : Challenges for Germany's New Laender," Dresden Discussion Paper Series in Economics 07/04, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    • Handle: RePEc:zbw:tuddps:0704
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    References listed on IDEAS

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    More about this item

    Keywords

    EU enlargement; labour markets;

    JEL classification:

    • J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • F2 - International Economics - - International Factor Movements and International Business

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