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The Key Role of the European Union
Practically all transforming countries in Europe consider the EU to be the external modernisation anchor. 50-80% of their total trade is already with the EU. Geographic reorientation of trade relations was quickly followed by surprisingly rapid and successful structural transformation. Machinery, computer and electronic products and transport equipment already account for more than 40% of Hungary's exports to the EU, and explain about 60% of total export growth between 1993 and 1996.
Similar trends can be observed in other Central European countries as well. Intra-industry trade, supported by favourable geographic location, foreign direct investment and the institutional framework created by the Association Agreements, has in some cases already reached the level and pattern characteristic of intra-EU trade relations. West European (and West European-located non-European, mainly US) firms became the main beneficiaries of the privatisation business and recognised the substantial locational advantages of the region for regional, pan-European and global production and competition.
The adjustment to EU rules (mainly in the framework of overtaking the acquis communautaire and supported by foreign companies located in the region) increases the similarity of economic structures, institutions and procedures between the Western and the Eastern part of the continent. Moreover, the structured political dialogue and other non-economic factors have helped the transforming countries to become more and more organically integrated into developed European structures. Perhaps even more importantly, the EU provides a fundamental support to democratic institutions and maintains the economic momentum of transformation in two ways.
First, the previously described developments support these positive processes. Second, the retaliatory capacity of the EU may prevent selected transforming countries from going (or falling) back to old practices, thereby abandoning the route started after 1989.
In order to play the role of economic "modernisator", the EU should comply with three basic conditions. According to international experience with successful (and unsuccessful) modernisation, the anchor economy has to be predictable in order to sustain the relatively long process of modernisation. Because all Central and Eastern European countries are small economies, free access to the anchor market(s) is crucial. Finally, modernisation, at least in its first and decisive period, requires a substantial amount of foreign resources which generally have to be provided by the anchor economy.
To what extent can the European Union cope with these challenges? During all previous enlargements, the European Union's future was much more predictable than in the second half of the nineties. At present, the EU has to answer various crucial issues with vital consequences for the future of the integration and of Europe as a whole (institutional reforms, the reform of the common agricultural policy, EMU, structural funds, pattern of enlargement). For a number of reasons, both on the side of the EU and on the side of the applicant countries, the next enlargement(s) will be different from previous enlargements. (1)
In a temporarily asymmetric way, the Association Agreements have opened up the EU's markets for industrial products exported by the transforming countries. Agriculture, however, a sector with important export capacity, did not become part of the free trade agreement. Moreover, financial transfers remained extremely limited. Although the Phare programme has undoubtedly been contributing to economic modernisation in all countries, the resources available fall substantially short of the financial requirement for tangible modernisation. (2) The EU's only partial coping with the tasks expected of an external modernisation anchor has certainly accelerated the process of becoming full members of the integration, thereby becoming beneficiaries of the anchor from inside. In addition, worldwide globalisation and the evident lack of other viable modernisation anchors for the transforming countries have stepped up efforts to achieve full membership of the EU.
As a result of European dynamics and, unfortunately, not as the outcome of a well-defined EU strategy, Eastern enlargment became an acknowledged issue of the integration to be dealt with seriously. Contrary to the period of signing the first Association Agreements in late 1991, nobody can now deny that the EU has to enlarge itself to the East. However, the timing and sequencing as well as the conditions of the enlargement are still in the process of internal discussion. In the meantime, the 10 Central and Eastern European candidate countries have recently started to upgrade their processes of preparing for full membership. Although all of them have achieved substantial progress in selected areas, their EU maturity remains largely differentiated. Likewise, the same holds for the enlargement capacity of the EU concerning the individual transforming countries.
Full membership seems to have two non-political preconditions: free trade in industrial products as stipulated in the Association Agreements, and the acceptance and enforcement of the acquis communautaire. In both cases, the lack of strategic thinking, characteristic of the Association Agreements, is becoming increasingly manifest. First, the rapidly growing trade deficit of some, apparently more developed transforming economies elicits concern. Trade liberalisation among unequal partners generally creates sizeable trade deficits for the less developed country, which can be covered by the inflow of foreign capital and, as in the case of the less developed EU member countries, by transfers from Brussels. Unfortunately, this linkage has not been established in the Association Agreement (Inotai, 1997b). Second, less developed countries, with a special burden (or gift?) of transformation have to take on board the ever more comprehensive and demanding nature of EU legislation. The problem consists not so much in creating EU-consistent laws and then passing them through the national parliaments, but in the enforcement. Again, the lack of financial resources seems to have become a major bottleneck, accompanied by the limited administrative capacity of the candidate countries.
According to the most recent developments, individual Central and Eastern European countries reveal different levels of and capacities for preparation for full membership. Trade and legal harmonisation are probably the most evident problem areas, but others can also be mentioned. For example, agriculture has a relatively low share in GDP and active population (between 5 and 10%) in countries like the Czech Republic, Slovenia, Slovakia or Hungary, but a much higher share in Poland, Romania or Lithuania. More important for the future structure of production and costs of agricultural transformation is, however, the "modernisation capacity" of national agricultures in technical, professional, social and economic terms. In this regard, cross-country differences are more important than other more accountable factors. Moreover, the financial needs of candidate countries are largely different, depending on the per capita level of GDP, the size of population, accumulated welfare (including savings) and mentality. An even wider difference can probably be revealed by comparing the efficient absorption capacity of the transforming countries. In this context, the yearly inflow of foreign direct investment may be used as a convenient proxy.
Migration, a major fear in some EU member countries, is largely exaggerated. Evidently, some transforming countries with large populations and low GDP per capita levels are potential sources of migration. However, most candidate countries are small, and everywhere there is a big difference between statistically registered migration potential and effective (virtual) migration. The best instrument to keep migration under control is of course successful modernisation which creates growing economies and jobs, thus gradually increasing welfare and, most importantly, providing clear medium- and longer-term perspectives.
Essential differences can be observed in the behaviour of candidate countries concerning sovereignty. Some countries seem to have understood that their national sovereignty, in global terms, can be better protected in a large group than on the traditional national basis. Others, not least those which achieved national independence and started to build a nation-state more recently, are more reluctant to give up part of their "independence".
Finally, the candidate countries are differently prepared for EMU. Evidently, membership in EMU is not a precondition of membership in the EU. However, the basic goals of EMU have to be shared by the newcomers. In terms of budget deficits and state indebtedness, at least some candidate countries are in a better position than some EU member countries, but inflation and long-term interest rates are and will, in the medium-term, remain a problem. It has to be stressed that the macroeconomic indicators of candidate countries may undergo substantial changes in the next few years as they enter different stages of the transformation and modernisation process. As a result, "good" macroeconomic figures do not automatically reveal a higher level of EU maturity. The qualitative question is whether the figures reflect the pre-change (pre-modernisation) or post-change (post-modernisation) status of the economy.
Scenarios for Enlargement
The European integration process faces two basic challenges. First, it has to contribute to the successful and sustainable modernisation of Central and Eastern Europe. Second, it has to avoid further or new fragmentation of the continent. But before building a lasting architecture for Europe, one has to be aware that in the 1990s the institutionally split Europe of the post-1945 world was replaced by an economically and socially fragmented Europe. Fragmentation experienced a quantitative and a qualitative growth alike.
In quantitative terms, today's Europe can be divided at least into three (or four) different areas separated from each other by large and partly increasing gaps. Beyond the traditional East-West economic divide, there has developed an at least as important divide between Central Europe and (south) Eastern Europe. Also, the latter can be subdivided into the EU-associated countries and former Soviet states. It is not yet very clear in Western Europe that, in per capita GDP terms, the income gap between them and Central Europe is not larger than that between Central and Eastern Europe.
In qualitative terms, the break up of the bipolar system weakened the bloc mentality in Western Europe and completely destroyed it in Central and Eastern Europe. National interests, at times extremely short-sighted, returned to shape political, economic and other decisions. Two-digit levels of unemployment, ageing populations, growing pressure on established social welfare systems and institutional inflexibility, partly a heritage of the "golden days" of bipolarity, generate a double effort. First, (most) EU member countries investigate the possibility of joint decisions and common (but not necessarily supranational) structures. Second, and simultaneously, they have to find national responses which may or may not result in higher levels of integration.
Even more importantly from a strategic perspective, the fall of the Berlin Wall and subsequent changes in Europe have started a two-way shift in the balance of power of the continent. On the one hand, the (to be) integrated continent has been gradually getting a second "mare nostrum", namely the Baltics. A shift from the south (Mediterranean) to the north cannot be avoided. Evidently, it should be implemented not by "forgetting" the south, but by integrating the "north" into the future architecture of Europe. On the other hand, a shift from the Atlantic towards the geographic centre of the continent is under way (west-east shift). Europe still has to find its new balance of power by adequately responding to these challenges. It is needless to say that the traditional pattern developed after World War II is highly unlikely to successfully cope with this problem.
An additional and strategically very important building bloc, or, in case of failure, a substantial factor of uncertainty within the new European architecture is represented by Central and Eastern Europe. In order for this "new European house" to be built with solid foundations, decision-makers will need to have a clear idea about the basic differences within Central and Eastern Europe which are linked to geographic location, are development-related and rooted in history. They remained largely hidden during the Soviet period but became immediately visible at the very beginning of transformation. Although almost all countries of the region started their new life by pointing in the same direction (political democracy, market economy, similar institutions, etc.), the gaps within the region did not become narrower. Just the opposite, even if temporarily, they became more pronounced in basic areas. There are fundamental differences which do not emerge from published macroeconomic indicators, which in turn tell us little about the quality of transformation. The real differences can be identified in the microeconomic and microsocial fabrics of the individual countries. These can provide an explanation of why countries differ in their economic policies, micro-level adjustment, level of EU-conformity, pattern of foreign trade, attraction of foreign direct investment, institution building, civic society, and so on.
While this differentiated development has already been recognised by the OECD and, most recently, also by NATO, the European Union still seems to insist on the group approach. (3) If there are differences within a given region, the wrong approach would be to ignore the differences and the differentiation and repeatedly state the necessity of uniform treatment for dissimilar issues. Fragmentation, certainly a major danger, will be created by hiding or ignoring these differences. The EU's "startliner approach" of enlargement tries to avoid any openly declared differentiation among the applicant countries. This may not only be motivated by the fear of fragmenting Central and Eastern Europe, but also by the special interests of present member countries, as almost each of them has a special preferred candidate which, in some cases, may not belong in the first round of enlargment. This approach claims that it provides higher flexibility for applicant countries so that, according to their performance, they can move from one subgroup to the other during the negotiation process. This may be particularly important for "in-between" countries that, as a result of potential domestic political changes, could "upgrade" their present position within a relatively short time (e.g. Slovakia).
However, the startliner approach is burdened with a number of problems. From the very beginning, it clashes with the institutional capacity of Brussels to negotiate and integrate 10 candidate countries at the same time. Moreover, it is unable to stop the dynamics of differentiation based on and fuelled by economic and socio-political realities, thereby transmitting a bad message to the more advanced countries which may fear that the date of their accession will be (indefinitely) postponed as they wait for the less prepared countries. (4) Furthermore, this approach could be used by some EU member countries to delay enlargement and sustain their privileged status quo position. Flexibility can also easily be used (or even misused) by the EU to play off candidate countries against each other and undermine their already weak negotiation positions. The most important handicaps of this approach are, however, in the strategic context. First, it would be unable to provide a convenient answer to the challenges Europe is facing at the turn of the Century in security, social, economic and also psychological terms. Second, it could have serious repercussions on the internal cohesion of the Union as different pressures and conflicts generated by Central and Eastern Europe would differently affect individual EU members. Thirdly, it would without doubt establish a barrier against more intensive (sub)regional cooperation.
The gradual or group approach, embracing a small number of selected candidate countries, seems to be justified because the candidate countries are and will be differently prepared for membership once negotiations are opened. Beyond the already implemented selections (OECD, NATO), the lion's share of trade and foreign investments of the EU are concentrated within some Central European countries, indicating that the international business community has already anticipated their accession to the EU. The same Central European countries are much more integrated into intra-industry trade and have more developed production and export patterns. Also their per capita GDP is much higher than that of other applicants. In addition, they have formed CEFTA, a regional free trade area and started high-level political consultations on regional priorities, including preparation for membership of the EU. On the EU side, the group approach seems to be the only viable option for technical reasons, since it is physically impossible to conduct negotiations with all candidate countries at once.
But there is another side to the enlargement coin. A selective approach may create an institutionalised political, security and economic gap within Europe, thereby generating further differentiation with incalculable consequences. More importantly, it would transmit a doubly dangerous message to those left out. On the one hand, it could give (unintended) support to populists and nationalists within the "non-preferred" countries and increase anti-European emotions. On the other hand, it could signal a vacuum to be filled by potentially dominant powers, both within the region and from outside.
Further fragmentation can only be avoided if enlargement takes into account the potential dangers of both approaches. Thus a mixed policy would seem to be realistic. It should be based on two pillars. First, as a political signal, negotiations might be opened with each of the candidates, but be seriously continued with just a few. Second, and no less important, an overall strategy of enlargement should be designed and communicated before starting negotiations. This should include a clear timetable for the various waves of enlargement, arrangements to strengthen cooperation between new members and their non-member neighbours through various instruments (cross-border cooperation, joint infrastructure projects), and upgraded financial support to countries joining the EU later. The establishment of a clear and sustainable framework is not only the task of present members of the EU, but would also be the responsibility of members of the first-wave who would need to be involved with the implementation of a longer-term strategy. Responsibility has to be shared between present and future members of the EU now, at the very beginning of the enlargement process.
Conclusion
For three key reasons, the eastern enlargement of the European Union represents a unique historical challenge, indeed opportunity, for the continent:
- It will be the first enlargement generated not by the artificial division created by a bipolar global structure, but as a consequence of the collapse of bipolarity in Europe. Therefore, it will not only quantitatively add something to the map of an integrated Europe, but is a qualitatively new undertaking to fill the modernisation (and security) vacuum in Europe. Neither will it fit into the logic of earlier enlargements which sought to improve the relative position of the EU against the Soviet-dominated part of Europe. Instead, the new logic of enlargement must be based on creating the framework conditions for a new European security and economic system;
- The eastern enlargement, if implemented gradually, will be the first one which is not reaching the geographic periphery of Europe. The first-wave new members will become transit countries, with largely different possibilities and responsibilities in political, economic, social and other terms, than countries such as Spain and Portugal that joined the EU earlier;
- This will be the first enlargement which will happen in the framework of a globalising world. Eastern enlargement would not be a European "domestic affair". It would be an increasingly important factor in (Western) Europe's global competitiveness. Consequently, the fundamental question is not what kind of short-term gains and/or costs are likely to be generated by the enlargement. The basic, qualitative issue is to what extent the next enlargement(s) can contribute to improving Europe's position in the global marketplace.
Footnotes
For a detailed analysis see Inotai (1997a).
It suffices to state that the per capita amount of PHARE money is about ECU 8 for Hungary (if the whole annual budget could be used), while it amounts to over ECU 600 in Ireland, over ECU 400 in Greece, and is about ECU 300 in Portugal.
In its Agenda 2000, the Commission has distanced itself from this view and, in a strategic framework including all candidate countries, proposed the starting of negotiations with five more advanced candidate countries only. The final decision will be taken at the Luxembourg Summit of the EU in December 1997.
This has been a well-known phenomenon during the CMEA times. Fears rooted in this period are still vividly remembered in Central Europe.
References
- Inotai, Andrs (1997a), Mirt ujszer az Eurpai Uni keleti kibvlse? (Why is the Eastern Enlargement of the European Union Different from Earlier Enlargements?), Eurpai Tkr, no. 3.
- Inotai, Andrs (1997b), A kelet-kzpeuropai orszgok klkereskedelmi deficitje. Okok s kvetkezmnyek az EU-felkszls fnyben (Foreign Trade Deficit of East Central European Countries. Reasons and Consequences in the Light of Preparing for the EU), Trsadalmi Szemle, No. 7.
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