Specific Enlargement and the EU Enlargement

Abstract

This Paper analyses a hold-up problem in the EU enlargement process. EU-specific anticipatory investments of private firms lower the governments outside option. The EU takes advantage of the applicants' increased dependency and extracts more surpluses through entrance conditions that benefit it and impose huge costs on applicants. If private firms pay less than the full entrance fee in taxes, enlargement immiserises the entrant. While in practice an applicant may possess sufficient bargaining power to avoid immiserisation, the hold-up problem reduces its potential gains from joining the EU. This result suggests that previous calculations, ignoring both the applicants' costs of joining the EU and the dynamics of their bargaining position during the negotiations, overestimate the welfare effects of membership.

Keywords: EU enlargement, sunk costs, hold-up problems

JEL Classification: D71, F02, F15