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By Richard Grieveson

• The European Council has approved the start of accession negotiations with Ukraine and Moldova.
• EU accession is economically transformational for all countries that join. But domestic policy choices are still very important in maximising the gains.
• Many things about this accession round are similar to 2004: EU accession still drives transformational economic change in the same ways; integration with the EU’s industrial core is still important; the countries attempting to join again constitute a very small share of existing EU GDP; Ukraine’s economic fundamentals in relation to the EU average is similar to some 2004 joiners at the start of their accession processes; and a geopolitically motivated enlargement is not new and has worked in the past.
• Nevertheless, 20 years on, some things are different. Most significantly, Ukraine has been invaded and is engaged in resisting an aggressor at the same time as undertaking the accession process. Moreover, the global economy offers a less supportive backdrop; attracting FDI might be harder than it was in 2004; CESEE has undergone 20 more years of demographic decline; and the emergence of large external imbalances is potentially more likely. The ‘bilateralisation’ of the accession process seen in recent years is also not something that the 2004 joiners had to face in the same way.
• For existing EU members, worries about Ukraine’s impact on the EU budget are overstated, but Ukraine’s agricultural competitiveness will be a challenge, and Ukraine could divert some investment from EU-CEE.
• Ukraine will ultimately, though, also bring a lot to the EU table, with its defence capabilities, green energy, IT strengths (including cyber warfare), cheap food and critical raw materials. This will support the EU’s aim of strategic autonomy. Current EU-CEE members will also move more to the geographic and economic centre of the EU, and could reap some of the positive agglomeration effects that Austria and Germany did in the previous accession rounds.

The start of accession negotiations for Ukraine and Moldova puts those two countries firmly on the EU integration path. While most expect the process to take years, and media reports often emphasise the challenges on the way to accession, it is nevertheless the case that Russia’s invasions and occupations of parts of Ukraine since 2014 – and especially the invasion of 2022 – have dramatically accelerated the EU accession prospects for Ukraine and Moldova.

A look back at the accession rounds of CESEE countries over the last 20 years shows that the economic impact of EU accession is transformational, and Ukraine and Moldova should be able to look forward to many of these positive effects. EU-CEE countries have been among the great success stories of the global economy in recent decades, as was widely covered at the time of the twentieth anniversary of the 2004 ‘big bang’ enlargement in May of this year. The full package of economic factors linked directly to EU membership – reforms, EU budget transfers, large and high-quality inflows of foreign direct investment (FDI), market access – has been transformational. A comparison with the Western Balkan states, which have not yet joined the EU, is instructive in this regard: they have received only a fraction of the benefits of EU integration and consequently remain economically very underdeveloped relative to EU-CEE.

Yet a key lesson for Ukraine and Moldova is that, while the rising tide of EU accession does indeed float all boats, the extent to which the boats are lifted depends greatly on who is steering them: domestic policy still matters. Convergence has moved at very different speeds in the region over the last 20 years; and in institutional terms it has even gone backwards in some countries, especially Hungary.

Does all this still matter?

The world of 2024 is very different from that of 2004, and yet many of the positive factors that EU-CEE countries benefited from still apply to Ukraine and Moldova – and should also apply to the Western Balkans, if indeed there is fresh, positive enlargement momentum. This can be demonstrated in at least four ways.

First, the mechanisms by which EU accession drives transformational economic change all still apply. If Ukraine and Moldova advance towards EU membership, they will undertake big reforms to make their economies and institutions function better, and they will get increased inflows from the EU budget to finance infrastructure upgrading. Because of these factors, they will be able to attract higher levels of better-quality FDI, which will drive the upgrading of productivity in their industrial sectors. And all of this will make them better able to take advantage of their eventual entry into the EU single market and customs union. They should, under these conditions, achieve quite a rapid rate of convergence with EU living standards.

Second, the integration of Ukraine and Moldova into the EU will, from an EU perspective, be very minor in economic terms. This was also the case in 2004. Then, all eight CESEE joiners had a combined nominal GDP equivalent to around 5% of the then-EU’s. Now, Ukraine’s GDP is around 1% of the EU’s; the Western Balkan six combined are a further 1%; and Moldova is only around one tenth of that. In economic terms, this is therefore a very small – if not negligible – enlargement round.

Third, despite a great deal of reporting to the contrary, Ukraine is not especially an outlier in the context of previous EU joiners from CESEE: based on the Copenhagen Criteria, there is little that stands out about its economy, relative to the EU, compared with EU-CEE countries when they started their membership negotiations. Based on economic fundamentals (at least before the 2022 full-scale invasion), Ukraine is in most ways a typical CESEE country at the start of an EU accession process.

Fourth, the idea of an enlargement round driven by geopolitical aims is nothing new: EU enlargement has always been, to varying extents, a mixture of geopolitics and conditionality, so this time will be no different. Enlargement in the 1980s had a major geopolitical component, and one can also point to 2004 and especially 2007 as quite geopolitically motivated. Despite the institutional challenges presented by Romania and Bulgaria after accession, those who claimed that the two countries had been let in too early seem to have gone very quiet since February 2022. Both states have been hugely important in Europe’s – and indeed NATO’s – response to the most recent Russian invasion of Ukraine. Romania and Bulgaria may not have been fully ready to join in 2007, but it was still the right decision to let them in.

Some things have changed

While many things remain the same, it is also clear that a lot has changed since 2004. In several ways, Ukraine and Moldova have embarked on their accession process in a very difficult environment. Five factors are worth mentioning.

First, the geo-economic context is not very positive, especially considering the central role of FDI in driving economic convergence in CESEE. Our most recent FDI report found that new capital pledged by German firms was increasingly being diverted away from CESEE and towards the US. It is true that near- and friend-shoring present opportunities, but there is little in the data so far to suggest that this is happening.

Second, CESEE is now 20 years further into its demographic decline than it was in 2004. This is relevant in many ways, but again here FDI is relevant. Foreign investors might be put off by the labour shortages facing CESEE. Twenty years ago, this was not such a big issue. For Ukraine, of course, for tragic reasons, the demographic situation is especially bad.

Third, the current candidate and potential candidate countries seem to have a bigger problem with external imbalances than EU-CEE. Although EU-CEE countries also often ran big trade deficits 20 years ago, these have turned to surpluses within the EU. For the Western Balkans, this has mostly not happened, in part because of real exchange rate appreciation driven by large capital inflows for reconstruction after the wars of the 1990s. This made it hard for domestic industries to be externally competitive. This is naturally also a relevant concern for Ukraine, as huge inflows are likely to arrive to finance reconstruction in the future.

The fourth big thing that has changed since 2004 is the ‘bilateralisation’ of the accession process. In 2024, EU accession is not just about conditionality, but also about open bilateral disputes with existing member states. North Macedonia, in particular, has suffered from this, having its progress towards accession hampered by issues that have nothing to do with the Copenhagen Criteria or Acquis communautaire. This is something that all candidate and potential candidate countries now have to take into account much more than in the past.

Finally, the fact that Ukraine has been invaded and is currently fighting an aggressor on its territory naturally makes this accession round very different from 2004. The only comparison that is in any way useful is that with Cyprus, which joined the EU 20 years ago despite the partition of the island; but that was owing to a war fought several decades previously. When countries join the EU, they also get a mutual defence guarantee (Article 42.7), although in practice this is only credible due to the overlap with NATO membership, which most EU countries have. If Ukraine is ready to join the EU before it has joined NATO, and if the security threat from Russia still exists at that point, the EU will be in a very difficult position.

Ukraine’s impact on the rest of the EU

Ukraine’s accession has provoked a great deal of worry about the potential repercussions it could have for the rest of the EU. Many seem concerned that Ukraine could have a huge impact on the EU budget, turning net recipients into net payers. Meanwhile, the competitiveness of Ukraine’s agricultural exports has already caused alarm in many EU member states, with blockades on the Ukrainian border in some cases.

It is impossible to predict today exactly what Ukraine’s impact will be on the EU. The country is unlikely to join very soon: in a previous study, conducted together with the Bertelsmann Stiftung, we estimated that – based on the reform progress of previous joiners – about 10 years would be a realistic estimate. By that time, Ukraine will be significantly wealthier than it is now, and may also have a very different population size. This will affect its EU budget allocation. Nevertheless, a few things can be said even at this stage.

The impact of new EU joiners on existing member states, especially those close by, has tended to be positive. Germany and Austria, for example, have benefited enormously from the accessions of 2004-2013: these allowed German and Austrian firms to outsource elements of their production to much cheaper locations within the single market and customs union. Meanwhile, workers from EU-CEE countries make up a hugely important part of the German and Austrian labour markets. And as EU-CEE countries have become wealthier within the EU, so they have become ever more important economic partners for Germany and Austria. Taken as a whole, the Visegrád 4 (V4) is now comfortably Germany’s most important trading partner.

Despite the overall positive effects, there are also some costs for existing EU member states, and these will be relevant in the case of Ukraine. Worries over the budget are probably overstated: various studies have now shown that most net recipients of the EU budget will remain so after Ukraine joins. The impact on the EU agricultural sector is likely to be more significant, however, given Ukraine’s high level of competitiveness. Here, the EU will need to think carefully about how to manage integration and how to reform the Common Agricultural Policy. Finally, Ukraine will probably get some of the FDI that might otherwise have gone to EU-CEE, as it will be highly competitive on labour costs. And here size also matters, in a way that favours Ukraine. Currently, Poland has by far the highest inward FDI stock in CESEE in absolute terms. That reflects, of course, many features of the Polish economy that foreign investors like. But it also underlines the importance of the large domestic market: foreign investors see Poland not only as a place in which to locate production, but also as an important market in its own right. Despite the current tragic loss of life and outward migration, Ukraine still has one of CESEE’s biggest populations; and as the economy recovers and grows after the war, it will attract FDI interested in the domestic market as well.

What is also crucial to keep in mind in the context of Ukraine’s accession, however, is how much it will bring to the EU table. Ukraine has strengths – either pre-existing or developed as a result of the invasion – that the EU needs, and ever more so in the current geo-economic climate. Ukraine has potential in a number of sectors: it has very capable defence capabilities, and foreign investors are already showing interest in the defence industry, which is likely to be one of Europe’s most important in the future. The country also has major potential in green energy and critical raw materials, both of which are highly relevant for the EU’s strategic autonomy agenda. Finally, Ukraine was already strong in IT, and these capabilities – especially in cyber defence – have increased markedly since the 2022 invasion. Again, this is something the EU needs badly and so it can benefit from Ukraine’s integration.