AUSTRIAN BANK HIGHLIGHTS BENEFITS TO EU OF

UNCLAS SECTION 01 OF 02 VIENNA 000328

SIPDIS

SENSITIVE

STATE FOR EB/IFD/OIA, EUR/ERA, EUR/SE AND EUR/AGS
USDOC FOR 4212/MAC/EUR/OWE/PDACHER

E.O. 12958: N/A
TAGS: ECIN PREL TU AU EUN
SUBJECT: AUSTRIAN BANK HIGHLIGHTS BENEFITS TO EU OF
TURKISH MEMBERSHIP


SUMMARY
--------------

1. (U) A recent study by Austria's largest bank, Bank
Austria Creditanstalt, concludes the EU would benefit
economically from Turkish membership and that costs would
be approximately the same as the costs from the May 2004
enlargement. There are certain caveats associated with
Turkish membership, but the study clearly lays out the
economic benefits to the EU from Turkey's strong growth
potential and youthful workforce. The study declares
Turkey's accession is an affordable investment, which
would yield economic dividends to the EU. End Summary.


Benefits of Turkish EU Membership..
--------------

2. (U) Austria's largest bank, Bank Austria
Creditanstalt, recently published a study on the economic
impact of Turkish membership on the EU. The principal
message is that the EU would economically benefit from
Turkish membership. The study also predicts that
membership costs would not exceed the costs of the May
2004 enlargement. The study lists the following economic
and political benefits accruing from Turkish membership:
-- a large internal market with huge growth potential;
-- a window to the countries farther east for EU exports;
-- substantial FDI potential;
-- alternative supply routes to Europe for oil and gas;
-- incentives for further fiscal discipline within the
EU;
-- a strategic partner with abundant water supplies;
-- a young population compared to the EU's aging
workforce; and
-- continued focus by Turkey on observing human rights.

The study also emphasizes that it is impossible to
quantify the positive influence on regional stability of
Turkish membership compared to the cost of future
subsidies for Turkey.


..and Some Caveats
--------------

3. (U) The report lists the following caveats that could
impede Turkey's progress towards accession:
-- reforms depend on continued political stability and
commitment;
-- strong economic growth depends on increased levels of
FDI and progress on structural reforms; and
-- instability in northern Iraq could negatively impact
the Turkish economy.


Young Population and Dynamic Economic Growth
--------------

4. (U) The Bank Austria study emphasizes the advantages
Turkey's young workforce would bring to the EU. With the
median age expected to rise from 25 presently to 33 in
2025, Turkey's population would still be considerably
younger than the EU average. The median age in Germany,
the study notes, will rise from 40 to 48 during the same
period. In 2025 in a EU-29 (i.e. with the expected
addition of Bulgaria, Romania, and Croatia, as well as
Turkey),Turkey would be the most populous country,
assuming current population growth projections.


5. (U) With its dynamic growth prospects, Turkey's
importance as a strategic and economic partner for the EU
will increase even more after membership. Turkey's total
GDP is about half of the combined GDP of the ten new EU
members. However, the study maintains that Turkey's
current growth potential is about 6% annually. Turkey,
according to the study, is already "catching up quickly,"
in particular compared to certain new EU member states
and candidates (e.g., Poland, Hungary, Romania, and
Bulgaria). Turkey's per capita GDP already exceeds that
of Bulgaria and Romania, and the per capita income of
half the Turkish population is equal to Poland's per
capita income.


6. (U) If the Turkish Government continues its reforms
and prudent fiscal policies, the study predicts the total
public sector deficit will fall below 3% of GDP by 2007
and the public sector debt to below 60% by 2009. Thus,
according to the study's projections, Turkey would meet
the Maastricht deficit and debt criteria well ahead of
its anticipated accession date.


Membership Costs
--------------

7. (U) The study argues that Brussels can afford to
absorb Turkey into the EU. The study estimates total
annual net costs of Turkish membership for the EU of Euro
10.8-35.1 billion (USD 14.0-45.6 billion),based on
Turkish EU contributions of Euro 8.1 billion (USD 10.5
billion) and EU payments to Turkey of between Euro 18.9-
43.2 billion (USD 24.6-56.2 billion). This estimate is
based on the following assumptions: annual GDP growth of
2.3% in the EU-25 and 6% in Turkey; and EU payments for
regional programs varying between 1-4% of Turkish GDP.
At the high-end of the estimate (Euro 35.1 billion),this
would represent 0.21% of the combined EU-25 GDP or 19% of
the EU budget (assuming budgetary policies remain
unchanged). Turkish membership costs would therefore be
roughly equal to the costs of the 2004 enlargement. The
study opines this would be affordable, and that changes
to the EU's financing and subsidy regime, particularly in
agriculture, in the medium-term would ease the process.


Comment
--------------

8. (SBU) Turkish EU membership is an emotional issue in
Austrian society, with many warning that accession would
lead to limitless Turkish immigration and enormous costs.
The Bank Austria Creditanstalt study presents another
face of Austria, one that is outward looking, export-
oriented, and constantly seeking new commercial
opportunities. The study objectively challenges fears
that the EU cannot afford Turkish membership.
BROWN