Enlargement of the European Union will open up competition for offshore outsourcing to politically less sensitive players, analyst IDC is predicting.

European governments in particular are likely to push outsourcing business towards the new EU states, over countries such as India.

At home, trade unions and contractor bodies are among those to express concern about the impact of offshore outsourcing on jobs and the UK economy as a whole. And tax may also become an issue.

"It will be more politically correct to put business towards the new European states," Marianne Kolding, director of EMEA services research for IDC, told vnunet.com.

"And while you probably won't see the public sector outsourcing offshore, these new entrants could be a near shore option."

The UK is leading the way in the adoption of offshore outsourcing. Within large companies, 60 to 80 per cent of IT contract negotiations are now demanding some offshore element, according to IDC estimates.

There have already been suggestions that the UK government may try to introduce barriers to offshore deals, with a tax on offshore activities the most likely option.

But any restriction on business conducted within the EU zone is likely to contravene European trade laws.

EU enlargement in 2004 will see the addition of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia as new member states.

"Skills levels in these countries are quite high. But they still have some work to do in organising themselves," said Kolding.

Susan Kutor, managing director of the Hungarian Software Alliance, a group of 12 Hungarian technology companies, added: "We believe we're very competitive with the Indian market but I don't believe we'll take business away from India because the market for offshore will grow."

Kolding warned that offshore outsourcing to established players in India is an issue that will not go away.

"Offshore will continue to develop. It's a fundamental change to the industry," she said.

"What will be interesting is how it will pan out for established players in the UK's IT services industry, and how local players will build their capabilities."