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EU Enlargement : Challenges for Germany's New Laender

  • Fuchs, Michaela
  • Thum, Marcel

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.

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Paper provided by Dresden University of Technology, Faculty of Business and Economics, Department of Economics in its series Dresden Discussion Paper Series in Economics with number 07/04.

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Date of creation: 2004
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Handle: RePEc:zbw:tuddps:0704
Contact details of provider: Postal: 01062 Dresden
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  1. Wolfgang Gerstenberger & Beate Grundig & Herbert Hofmann & Carsten Pohl & Heinz Schmalholz & Carola Vögtle & Michaela Votteler & Martin Werding, 2004. "Auswirkungen der EU-Osterweiterung auf Wirtschaft und Arbeitsmarkt in Sachsen," ifo Dresden Studien, Ifo Institute for Economic Research at the University of Munich, number 35, October.
  2. Brenton, Paul & DiMauro, Francesca & Lücke, Matthias, 1998. "Economic integration and FDI: an empirical analysis of foreign investment in the EU and in Central and Eastern Europe," Kiel Working Papers 890, Kiel Institute for the World Economy.
  3. Brecher, Richard A. & Feenstra, Robert C., 1983. "International trade and capital mobility between diversified economies," Journal of International Economics, Elsevier, vol. 14(3-4), pages 321-339, May.
  4. Davis, Donald R, 1998. "Does European Unemployment Prop Up American Wages? National Labor Markets and Global Trade," American Economic Review, American Economic Association, vol. 88(3), pages 478-94, June.
  5. Wolfgang Gerstenberger, 2004. "Auswirkungen der EU-Osterweiterung auf Wirtschaft und Arbeitsmarkt in Sachsen," ifo Dresden berichtet, Ifo Institute for Economic Research at the University of Munich, vol. 11(01), pages 5-18, 02.
  6. Brecher, Richard A, 1974. "Minimum Wage Rates and the Pure Theory of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 88(1), pages 98-116, February.
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