May Free Capital mobility before accession be unfavorable for admission to the EU ?

Abstract

We examine the dynamics that may compensate the cost of redistribution policy in the European Union (EU), which is one of the obstacles for a candidate member country, namely Turkey to be admitted. We adress two main issues : i) may a total factor productivity (TFP) increases in the candidate country due to the positive effect of accession on institutional development compensate the cost of redistribution policy and ii) may free capital mobility before accession decrease EU’s incentive for admitting the candidate country. In a two-country model we assume that after Turkish accession, the European household gives a transfer to the Turkish household whereas an upwart TFP shift arises in Turkey due to the positive effect of accession on institutional development. We first find that a TFP increase in Turkey compensates the cost of transfer. Second, allowing for free capital mobility before accession turns out to be unfavorable for admission to the EU.EU accession, Turkey, capital mobility