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EU membership sharpens Central, East Europe’s competitive edge
The European Union’s historic expansion in May 2004 took eight new Central and East European members into its fold. But what has the process Einitially started in the early 1990s following the fall of the Berlin Wall Ebrought to the former communist countries in the Soviet bloc?
And two years after the expansion, many EU countries appear to be gripped with “enlargement fatigue.” Will it be a temporary phenomena or will it affect the region’s long-term future?
These were among the questions addressed by panelists during the July 19 symposium at Keidanren Kaikan, organized jointly by the Keizai Koho Center and the Japanese-German Center Berlin under the theme, “Transition and attractiveness of Central and Eastern European markets in enlargement of the EU.”
In May 2004, the EU expanded its membership to 25 by admitting eight former communist countries Ethe Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia Ealong with Cyprus and Malta.
For some of the new members, the process for accession began as early as in 1991, when Hungary, Poland and what was then Czechoslovakia signed association agreements with the EU.
“What did we get from the EU in those 15 years? The most important thing .EE was the purpose to carry out necessary but painful reforms,” said Marek Belka, former prime minister of Poland and executive secretary of the United Nations Economic Commission for Europe. “The driving force behind pro-market reforms in all these countries was the prospect of membership.”
According to Belka, the essence of the 1991 association agreement was that the future EU members obliged themselves to gradually introduce the common body of EU law and regulations. “Every piece of legislation passed in Poland after this date had to conform (to the EU laws and regulations) and if not we were to explain why and impose a certain escape clause or transition period,” he said.
“The implicit deal between the EU and accession countries was that, ‘OK, we’ll accept you, but you have to do everything possible, or even more than possible, to modernize, and we’ll help you,’E he added.
In the run-up to the accession, Poland and other prospective members got enhanced status as future EU members, which carried better ratings and more foreign direct investment, Belka said.
They received policy know-how from the EU as well as financial assistance, but what was much more important was this “purpose” to reform, he told the audience.
Many Central and East European countries changed governments every two years and ruling parties frequently alternated, but “what we had was a general continuity of economic policies, because of a broad political consensus behind reforms (supported) by this prospect of (EU) membership,” Belka noted.
According to Belka, the cost of accession, in the case of Poland, was “mainly psychological and social.”
“Every change is painful, even a change for the better, and if you have a major change or systemic change, you’re going to have losers and winners. The problem is that losers perceive it very clearly .EE and losers scream much louder than winners.
“The social cost of transition was quite heavy because we had to do in 15 years what took 50 years or maybe 300 years in some other countries, and I’m not exaggerating,” he noted.
What has happened since May 2004? Many of the economic fears forecast before the accession Einflation and budgetary crisis Edid not materialize, Belka said.
Poland and other new members received increased investor interest and more tourism. While the opening of the EU labor market remains partial today as some old members decided to delay accepting workers from the new entrants, Belka said it seems the outflow of the labor force toward Western Europe is gaining momentum, at least in Poland.
A brain drain can be a serious problem once the EU labor market opening accelerates, he said. Better access to Western European education institutions triggered a flood of youths from the new member countries taking up education in the west not only in universities but in high schools, he added.
Belka brushed aside the fear voiced by Euroskeptics who argued that Central and Eastern Europe, after taking orders from Moscow, were now losing sovereignty to Brussels “because the significance of new EU member countries like Poland or Hungary has increased only after joining the EU.”
Alfred Steinherr, director of the department of macroanalysis and forecasting at the German Institute for Economic Research, described the EU enlargement as a “success story” in the sense that the Central and Eastern Europe countries have successfully shed their former socialist characteristics Ealbeit to varying degrees Eand achieved a transition to market economy.
“The new EU members are a diverse group of countries Esome are more successful than others Ebut they all share one thing in their diversity Ethat they are successfully converging,” Steinherr told the audience.
One remarkable feature about reforms in the new EU members, Steinherr said, is that they did not simply try to copy the leading economies of old Europe.
“When they moved away from the socialist camp, most of them thought that the job was simply to copy and paste, to become like the leading countries of old Europe. But the more they looked (to their neighbors in the west) the more they realized that it might not be the best idea .EE that you have to do something a bit more challenging, you have to become better than them,” he said.
The most remarkable example is Estonia, which created an institutional framework and built a much more flexible labor market, Steinherr noted.
Steinherr also lauded the new member countries for not imitating old Europe in trying to protect national industries, citing the example of Hungary, which decided to allow foreign institutions to take over its financial business as a way to quickly improve efficiency in the sector.
Such reforms would not have been imaginable in old EU members, he said, adding that Hungary and others that followed “got a reasonable, well-performing financial sector much quicker than if they had tried on their own.”
Bigger and better?
What has changed in the EU as a whole as a result of the 2004 enlargement?
Belka noted that the economic impact was limited because despite the addition of countries with a combined population of 75 million, their combined gross domestic product accounted for only 5 percent of the total GDP of the EU.
But he emphasized that the enlargement has redefined the EU’s foreign policy agenda.
“The eastward enlargement made countries like Russia, Belarus, Ukraine, and Turkey immediate neighbors of the European Union Enot just distant neighbors with whom we could discuss all sorts of partnership relations, but immediate neighbors with which we share borders,” Belka said.
He pointed out that the Orange Revolution in Ukraine took place only a few months after the enlargement. “I think it was the Polish accession that prompted immediate EU involvement in an attempt to solve the crisis in Kiev,” he said.
The second consequence of enlargement Eprobably more important from an economic viewpoint Eis the change in policy discourse, Belka told the audience.
“Suddenly the accession of 10 rather tiny economies Ewith divergent recent economic histories Eprompted discussion on issues like flat tax, pension reforms, labor market flexibility and so on. .EE We became more liberal in a sense,” he said.
One of the major topics among the speakers was the so-called “enlargement fatigue” that has spread across Europe following the historic expansion.
Michael Reiterer, charge d’affaires of the delegation of the European Commission to Japan, said it is extremely important to recognize the strategic value of the process of enlargement “especially in the face of recent indications of ‘enlargement fatigue’ across Europe.”
While he stressed that the enlargement that brought the 10 new members was a “success,” resulting in positive economic effects to new and old EU members, Reiterer said it was “time to build a new consensus on the process of enlargement, which should enhance the EU’s self-interest in extending the zone of peace and prosperity in Europe while at the same time ensuring the EU’s capacity to function effectively.”
He admitted that the EU “has become more cautious about taking on new commitments” for accession, although he emphasized that it is “absolutely willing to honor its existing commitments already in process” for Bulgaria and Romania.
The 2005 Accession Treaty says the two countries will join the EU in January 2007, although the European Council may decide to postpone the accession for a year.
Despite the growing wariness toward accepting more new members, Reiterer said it would be “unwise” for the EU not to use enlargement as its “most effective policy tool” to promote transformation of the countries involved.
Belka said that the 2004 enlargement was a “success that nobody was really well prepared in Western Europe to consume and digest.”
“Many politicians started thinking, ‘Well, we have to do something, we have to appease our electorate and we have to say what are the limits of Europe,” he said.
Belka said an agreement at a recent Council of Europe meeting Ethat the absorptive capacity of the EU and public opinion will be considered when making decisions on future enlargement Ewill in fact put some brakes on the process.
“But I’m not that pessimistic because Europeans have to digest the two shocks that they have gone through recently Ethe introduction of the euro and the enlargement.”
Belka said that the new member countries themselves are also hit by “fatigue” following their accession Ea fatigue from reforms.
“We are tired, too. We have achieved a lot in 15 years and people think that the stakes are now lower in politics, that the political consensus that was behind the reform process throughout the whole transition period is now broken.
“For populist politicians it’s a bonanza. You can say whatever you want, they’re not going to kick us out of the EU,” he said, suggesting that such sentiments are behind the results of recent elections in some new member states that marked setbacks for reformists.
But Belka said he believes that it is a temporary hiccup “because the positive effects of the (EU) membership will dominate, overwhelm fears and will civilize the most populist trends.”