The effects of EU enlargement on the countries left outside By by csgirla


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The Economist Intelligence Unit, Country Forecast

Chapter from ECONOMIES IN TRANSITION: Eastern Europe and the former Soviet Union – Regional Overview

June 2001, pages 5-13

                                    The effects of EU enlargement on the countries left outside
                                    By Heather Grabbe, Research Director, Centre for European


                                    This article looks at the implications of the EU accession process for the countries that will
                                    be unable to join the EU within the next few years. EU enlargement is scheduled to start in
                                    2004, and the most likely first grouping is a “big bang”, whereby the EU takes in eight of the
                                    east European applicants (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland,
                                    Slovakia, Slovenia), as well as Cyprus and Malta. If 10 countries join the EU together,
                                    increasing membership from 15 to 25, any further rounds of expansion would take place
                                    some years later.

                                    EU enlargement will have significant economic and political implications for the east
                                    European countries that will be excluded from the process into the medium term. The “left-
                                    outs” are those European countries which want to join the EU and which by dint of
                                    geography and the provisions of the Treaty of Rome, could become members in the future.
                                    These countries differ markedly according to their political and economic “distance from
                                    Brussels”, or the extent and likely duration of their exclusion. At one end of the spectrum is
                                    Bulgaria—an EU candidate country which already enjoys a high degree of economic
                                    integration with the EU and for which, according to a best-case scenario, entry into the EU
                                    may only be delayed by several years after the first round of expansion. At the opposite end
                                    of the spectrum are some or all of the European CIS countries which have low levels of
                                    integration with the EU and for which exclusion from EU membership could be permanent.
                                    The left-outs thus comprise three distinct groups:

                                    1. The candidate countries Bulgaria and Romania, for which the main problem is a possible
                                    lengthy delay to EU entry (which at present seems much more serious for Romania).

                                    2. The “Western Balkans” of Albania, Bosnia and Hercegovina, Croatia, Macedonia and
                                    Yugoslavia for which the EU has devised the special instrument of Stabilisation and
                                    Association Agreements (SAAs). The SAAs offer trade access, political dialogue and
                                    cooperation in many areas - like the Europe Agreements signed with the accession
                                    candidates - but the SAAs mention only the possibility of evolving towards full candidate
                                    status. Among these countries Croatia (which has initialled an SAA) is the closest to the first
                                    group, that is to candidate status. Given its economic progress and institutional
                                    infrastructure, Croatia could even leapfrog Romania in progress towards accession if the
                                    latter suffers further reform and performance reversals.

                                    3. The European CIS countries of Belarus, Moldova and Ukraine. These countries are the
                                    most distant from Brussels in geographic as well as political, institutional and economic

                                         terms. Exclusion from EU membership could be permanent. Relations with the EU are
                                         governed by Partnership and Cooperation Agreements (which also apply to relations with
                                         non-European CIS countries), which offer political dialogue and the prospect of a free trade
                                         area. Strictly speaking, Russia could also be considered a part of this group, but it is in so
                                         many ways a special case that it will not be considered in this article. Turkey is officially a
                                         candidate but is not in accession negotiations - because it is not a East European country it is
                                         not included in this article.

                                         The table below summarises the relationships that the EU and NATO have with the ten
                                         countries neighbouring the EU which are unlikely to join for many years, if ever.
Table 1 The left outs: varying relations with the EU and NATO
Country                                                                 EU relationship                            NATO relationship
Bulgaria                                                      Candidate in negotiations                    Candidate for membership
Romania                                                       Candidate in negotiations                    Candidate for membership
Macedonia                              Stabilisation and Association Agreement signed                      Candidate for membership
Croatia                            Initialled a Stabilisation and Association Agreement                    Candidate for membership
Albania          Cleared to start negotiating a Stabilisation and Association Agreement                    Candidate for membership
Bosnia and Hercegovina           Eligible for a Stabilisation and Association Agreement                         Partnership for Peace
Yugoslavia                       Eligible for a Stabilisation and Association Agreement
Moldova                                       Partnership and Cooperation Agreement                             Partnership for Peace
Ukraine                                       Partnership and Cooperation Agreement           Partnership for Peace and Charter on a
      Distinctive Partnership
Belarus                                       Partnership and Cooperation Agreement                             Partnership for Peace

Deepening divergence between             If, as we assume, the EU expands by taking in the 8 east European candidates (in addition to
the “ins” and the “outs”                 Cyprus and Malta) its population will increase by some 75m or about 20%. The population
                                         left out will be considerably higher—some 120m or one-third of the total for the EU-15.
                                         The data in table 2 highlight the significant differences between the “ins” and the “outs”.
                                         Average income per head in the “outs” is far lower—only some 14.5% of the EU-15 average
                                         in 2000, compared with more than one-third of the EU average for the “ins”. For the “ins”
                                         average real output has now almost caught up with the level of a decade ago, whereas for the
                                         “outs” it is still a staggering 30% below the levels of 1989. Progress in reform—as measured
                                         by the EBRD reform index—has also been much more significant in the “ins”. The
                                         comparative income data also underscore the extent of intra-regional divergence that has
                                         occurred in the region over the past decade, since the differences between the two groups
                                         were far smaller a decade ago. Furthermore, the process of EU accession now risks
                                         solidifying and deepening further this divergence in a variety of ways.

                                         In compiling a “balance sheet” of exclusion, this article considers the impact of the EU on
                                         trade, aid and foreign investment flows; the role of preparations for EU membership as a
                                         reform incentive; the difference between accession and development needs; and the impact
                                         of EU border regimes and visa policies on the “left-outs”. For the countries that have no
                                         hope of joining for many years, the EU is offering greater aid and trade access, as well as
                                         association and partnership agreements of various kinds. However, unless there is a marked
                                         change in EU policy, enlargement will also have negative implications for the wider region.
                                         In particular, the EU’s visa policies and external border controls are already drawing new
                                         lines of division within the east European region. Enlargement is also likely to reinforce the
                                         geographical concentration of foreign investment, which has been one of the keys of

                               successful transition. Finally, the EU’s preferences tend to overlap with those of NATO,
                               causing double exclusion for some countries.

                               Table 2 Comparative data on the ins and outs, 2000
                 GDP at PPP, GDP at Population,             Population GDP per GDP per Real GDP,                 EBRD
                 US$         PPP, % m                       , % of EU head at   head,   1989=100                 index of
                             of EU 15                       15 total   PPP, US$ EU                               economic
                             total                                              average                          reform(1)

The "ins"
Czech Republic         110.9         1.3            10.3           2.7      10,803         46.1           97.7          3.54
Estonia                  8.5         0.1             1.5           0.4       5,852         25.0           84.1          3.50
Hungary                 90.0         1.0            10.0           2.7       8,972         38.3          104.2          3.75
Latvia                  11.4         0.1             2.4           0.6       4,802         20.5           64.1          3.12
Lithuania               17.0         0.2             3.7           1.0       4,607         19.7           65.7          3.21
Poland                 298.5         3.4            38.6          10.3       7,725         33.0          126.9          3.54
Slovakia                46.5         0.5             5.4           1.4       8,606         36.8          102.8          3.42
Slovenia                28.3         0.3             2.0           0.5      14,233         60.8          114.5          3.29
Total "ins"            611.2         6.9            73.9          19.6       8,275         35.3           95.0          3.42

The "outs"
Bulgaria                40.7         0.5             8.0           2.1        5,105        21.8           68.2          3.04
Romania                 97.1         1.1            22.4           5.9        4,332        18.5           77.0          2.83

Albania                  9.8         0.1              3.9          1.0        2,503        10.7          102.9          2.63
Bosnia and              13.7         0.2              3.8          1.0        3,017        12.9           77.5          2.04
Croatia                 31.3         0.4             4.6           1.2        6,881        29.4           80.7          3.17
Macedonia                6.5         0.1             2.0           0.5        3,227        13.8           81.3          2.88
Yugoslavia              31.0         0.4            10.7           2.8        2,901        12.4           45.8 Na

Ukraine                117.1         1.3            50.3          13.3        2,330        10.0           41.6          2.54
Belarus                 53.1         0.6            10.0           2.7        5,295        22.6           86.0          1.54
Moldova                  7.0         0.1             4.3           1.1        1,633         7.0           33.9          2.75
Total "outs"           407.4         4.6           119.9          31.8        3,396        14.5           69.5          2.60
                               (1) Average of scores (on scale of 1 to 4.5) of EBRD scores for 8 different areas of economic
                               reform (EBRD Transition Report, 2000).

                               All averages for ins and outs are population-weighted averages, except for real GDP
                               (1989=100) and the EBRD reform index, which are unweighted averages.

                               The impact on trade and aid

                               The costs of exclusion from EU membership in terms of trade and aid flows are likely to be
                               fairly low for the Balkan countries, but could be more substantial for the CIS countries,
                               mainly because of the adverse impact of EU visa and border regimes (see discussion below)
                               and because EU trade with the Balkans is more liberalised. Insofar as EU membership
                               boosts incomes in the new member countries, the left outs should benefit from some trade
                               creation effects as well as bearing the costs of any trade diversion. Whatever the net balance,

                                     the very limited share of the left outs in total EU trade suggests that the size of the overall
                                     trade effect is likely to be small.

                                     For the “ins”, trade liberalisation has preceded membership - unlike in previous EU
                                     enlargements. Patterns of trade have already changed because of liberalisation, not
                                     membership. That means that any trade diversion affecting the left-outs has already
                                     occurred, and full membership for the ins will have little further impact. The main area
                                     where trade remains highly controlled is agricultural products, because of protected EU
                                     agricultural markets. However, it is not likely that there will be full access straightaway after
                                     accession for new members either. The EU has become considerably more generous in
                                     offering trade concessions to non-members over the past decade, thereby reducing the costs
                                     of exclusion. Industrial trade with the western Balkans has been liberalised almost
                                     completely, and it is possible that it could liberalise trade with the CIS left-outs to cushion
                                     the blow of exclusion. However, EU imports from a country like Ukraine are dominated by
                                     sensitive products such as steel, suggesting that liberalisation would be likely to be less
                                     generous than for the Balkans.
Membership will trigger              Although financial transfers are not the primary motivating factor for countries to seek EU
significant increases in financial   membership, accession will bring immediate financial rewards. Once they join, new member
aid                                  states will gain increasing aid, rising to around Euro€225 per head by 2006 (the last year in
                                     the current EU budget perspective). By contrast, the candidates still left outside in that year
                                     would receive €Euro75 per head if all the pre-accession funds are redistributed. The western
                                     Balkan countries are currently receiving almost as much aid as the worst-performing
                                     applicants, after the EU has made emergency funds available to stabilise the region. Total aid
                                     to the Western Balkans in 2000 was Euro€565.5m, equivalent to around Euro22.5 per head
                                     for those five countries. By contrast, Bulgaria and Romania received only about Euro€30 per
                                     head in 2000 as official applicants. However, unless there is a significant change in EU
                                     policy, from 2005 all the Balkans will receive much less aid than the new EU members. The
                                     gap in aid receipts between the “ins” and “outs” will be even larger for the CIS left-outs.

                                     The impact of exclusion on FDI and restructuring

                                     Unlike in the case of trade, accession could have a significant impact on the geographic
                                     distribution of foreign direct investment (FDI). EU accession had a significant impact on
                                     FDI inflows in previous enlargements. Six countries joined the EU between 1973 and 1986,
                                     and entry to the EU generally brought an increase in capital inflows, although Greece was an
                                     exception, having performed poorly in comparison with the others. (Baldwin, Francois and
                                     Portes, Richard, ‘The Costs and Benefits of Eastern Enlargement: The Impact on the EU and
                                     Central Europe,’ Economic Policy 24, April, 1997). Spain and Portugal saw a major rise in
                                     their FDI inflows in the eight years after accession, thanks to EU-driven liberalisation and
                                     perceptions of reduced risk among investors.

                                     The experience of the accession of the Mediterranean members of the EU–and of the east
                                     European countries so far—is that businesses are much more willing to invest in countries
                                     when they join the EU or when accession looks highly probable. FDI flows within eastern
                                     Europe have already shown a pattern of stark divergence, in part caused by countries’
                                     differing relations with the EU. Inflows have been concentrated in the countries closest to
                                     joining the EU. Poland, the Czech Republic and Hungary have accounted for more than 50%
                                     of all FDI inflows since 1990 into the transition region as a whole. By contrast, Bulgaria and
                                     Romania have received only about 6% of the total; all the 10 left-outs together barely 14%
                                     of the total (table 3).

EU accession will impart a further   There is a general expectation that EU accession will impart a further boost to foreign
boost to FDI inflows                 investment as a result of reduced risk and lower transaction costs. EU entry is expected to
                                     make the east European countries more attractive as a production location because it will
                                     guarantee unfettered access to a huge market and protect investors against any sudden
                                     changes in trade policy. Furthermore, the process of preparing for accession in itself
                                     promotes higher FDI. The adoption of EU rules and regulations helps create a business
                                     environment similar to that in west European countries. It reduces the risk of arbitrary policy
                                     changes in the East, for example in indirect taxation; makes property rights even more
                                     secure; and enhances political stability. Previous EIU reports have analysed how FDI flows
                                     are linked to risk ratings (Economies in Transition: Regional Overview, June 2000). EU
                                     membership is likely to cause a drop in risk ratings and hence increased FDI and lower
                                     borrowing costs, as it did for Spain and Portugal.

                                     Table 3 Foreign direct investment flows, 2000
                                     FDI stock (a), m US$ FDI stock per head, US$FDI stock, % of transition economies total

                                     The "ins"
                                     Czech Republic                           19,996                   1,947                 12.8
                                     Estonia                                   2,213                   1,526                  1.4
                                     Hungary                                  21,392                   2,132                 13.7
                                     Latvia                                    2,483                   1,045                  1.6
                                     Lithuania                                 2,467                     667                  1.6
                                     Poland                                   40,948                   1,060                 26.3
                                     Slovakia                                  4,346                     804                  2.8
                                     Slovenia                                  1,777                     893                  1.1
                                     Total "ins"                              95,622                   1,295                 61.4

                                     The "outs"
                                     Bulgaria                                  3,317                     416                  2.1
                                     Romania                                   6,519                     291                  4.2

                                     Albania                                     532                     136                  0.3
                                     Bosnia and Hercegovina                      260                      68                  0.2
                                     Croatia                                   4,696                   1,032                  3.0
                                     Macedonia                                   483                     238                  0.3
                                     Yugoslavia                                1,015                     121                  0.7

                                     Ukraine                                   3,677                      73                  2.4
                                     Belarus                                     867                      86                  0.6
                                     Moldova                                     453                     105                  0.3
                                     Total "outs"                             21,818                     186                 14.0
                                     (a) Cumulative FDI inflows,, 1990-2000

                                     Source: EIU
Accession prospects have a direct    The EU accession factor has a direct and indirect impact. FDI has been sensitive to progress
impact on FDI flows                  in reform, and the related effect on business environments. The will and ability to implement

                            virtuous policies are in part a function of the credible prospect of EU accession. Empirical
                            research has also shown that there is a direct impact. Alan Bevan and Saul Estrin ("The
                            determinants of foreign direct investment in transition economies", CEPR Discussion Paper
                            No. 2638, December 2000) found that EU enlargement- related official announcements and
                            events (such as the EU's 1997 Agenda 2000 and the identification of a "first-wave" group of
                            east European candidate countries) had a significant positive effect on the rate of growth of
                            FDI inflows to the affected countries. When the EU announces which countries are ‘in’ or
                            ‘out’ of different stages of the accession process, countries deemed to be ahead by the EU
                            get further FDI, while the EU-designated laggards see their capital inflows slow down
                            relative to their better-performing neighbours. This divergence in FDI flows in turn
                            reinforces virtuous cycles of growth and restructuring, and exacerbates vicious cycles of
                            economic instability and stagnation.

                            Given that FDI is critical to industrial restructuring and firm performance, EU accession
                            prospects affect the relative performance of the different economies in the region. Those
                            economies doing well do even better thanks to more FDI, while the low-performing
                            economies do not receive the FDI they need to kick-start the restructuring that would
                            improve their competitiveness and induce a virtuous cycle. The divergence in growth and
                            development between front-runner applicants and their neighbours thus widens rather than

                            The impact on reforms

                            Perhaps the main effect of the prospect of EU membership on east Europe has been its role
                            as an anchor to the reform process. The drive to join the EU has been one of the most
                            powerful incentives for undertaking major reforms in the region. The EU accession process
                            locks countries into a reform programme — through the tasks set annually by the European
                            Commission — and ensures consistent external pressure on successive governments,
                            helping to ensure continuity of reform efforts. The reform anchor role offered by the credible
                            prospect of membership has been reinforced by tangible benefits linked to progress in
                            reforms, such as additional aid, trade access and political support.
A possible loss of reform   When prospects for EU membership recede, it is more difficult to overcome domestic
momentum in the left-outs   political opposition to difficult reforms by justifying hard choices in the name of EU
                            requirements. For the left-out candidate countries in particular, but also for the other left-
                            outs, the first wave of EU enlargement will be a stark reminder of their exclusion and
                            currently poor EU membership prospects. Slower reform has a direct negative impact on
                            performance, but also, as argued in the previous section, has an adverse impact on FDI
                            because of the interlinkage between economic reforms, FDI and accession prospects.
                            Progress towards EU membership helps to encourage reforms, while loss of support for the
                            reform process is detrimental to FDI inflows. Consequently, a loss of reform momentum
                            seems likely to damage FDI receipts, and may well exacerbate a vicious circle of reduced
                            FDI receipts and slower reform.

                                   The “partial ins”: Bulgaria and Romania in the accession process

                                   Bulgaria’s economic performance has improved considerably over the past few
                                   years, as the government became much more effective at forcing through reforms
                                   than its predecessors or counterparts in Bucharest. However, Bulgaria is
                                   considered by the European Commission and Council to have continuing
                                   problems with high levels of corruption, and its preparations are assessed as too
                                   superficial to join in the first wave. Thus, despite recent improvement, Bulgaria is
                                   likely to be stuck in the same category as Romania in the accession timetable.

                                   Both Bulgaria and Romania remain far behind the other candidates in progress
                                   towards meeting the accession conditions. This means not just the economic
                                   conditions, but also capacity to implement and enforce the acquis communautaire
                                   (the body of EU legislation). Opening negotiations and closing chapters of does
                                   not mean very much if the EU-15 and the Commission remain unconvinced that a
                                   country cannot live up to its promises and obligations as a member-state.

                                   The lessons of the experience of Bulgaria and Romania are that the accession
                                   process does not guarantee economic success or underwrite governmental
                                   programmes. It can help to anchor reforms, but there are other pre-requisites that
                                   the EU cannot provide: particularly important are the institutional capacity to
                                   implement laws and regulations, and a political consensus that provides
                                   continuity across changes of government. The EU helps governments to overcome
                                   opposition to unpopular measures, but EU has few sanctions that can be applied
                                   to unwilling governments: it can only encourage, not coerce. Future aspirants will
                                   find that they can only use an application to join the EU as a route to economic
                                   success if they already have both widespread political support for the necessary
                                   reforms and also adequate institutional resources to implement the measures
                                   demanded by the EU.

                                Accession requirements versus development needs

                                The impact of exclusion on reform efforts and development may not, however, be
                                unequivocally negative—in part because of some of the inadequacies of the EU model for
                                both transition and especially developmental tasks. In some areas the requirements of
                                accession are actually unsuited to and inimical to development goals, and the temporary
                                abandonment of the pursuit of policy convergence with the EU could even turn out to be a
                                “mixed blessing”.
Some EU policies are            The EU accession process is based on the model for previous enlargements, rather than
inappropriate for fast growth   being designed specifically to assist and encourage transition economies. As a result, the
                                structure of incentives and constraints that it imposes on economic and regulatory policies
                                may be inappropriate for countries facing acute development and/or reconstruction
                                problems. EU policy-makers tend to assume that accession and transition require the same
                                policies. However, although many accession-related policies are also required for successful
                                economic transformation, applicants have to take on numerous EU policies that were
                                developed for advanced, industrialised economies. They were not designed for countries in

                              transition, and they often require a complex institutional structure for implementation that is
                              little developed in eastern Europe.

                              Front-runner applicants have to implement these policies as fast as possible in order to join,
                              and the benefits from membership and being fully part of the Single Market probably
                              outweigh the costs of sub-optimal policies. However, the countries that are likely to be
                              excluded from the EU for some time might be better advised to devote their scarce
                              administrative and human resources towards reforms for basic development, rather than
                              making enormous efforts to implement policies that are mainly geared towards securing EU
                              accession. This is not to suggest that Bulgaria, Romania and future aspirants should not aim
                              to join the EU. It is still better for these countries to be included in the accession process
                              than entirely outside it. The EU still acts as an anchor for reforms, providing at least some
                              sense of policy continuity when political and economic chaos strike. Moreover, where
                              policy-makers are not concentrating on development priorities either, it is much better to
                              have some blueprint rather than none.

                              Nevertheless, there are distinct tensions between specific EU demands and development
                              needs. Agricultural, environmental, labour and social policies are evident areas of tension.
                              EU environmental and social standards are very high and hence expensive to implement.
                              The Common Agricultural Policy (CAP) is based on a system of production subsidies and
                              market intervention that runs against the grain of market liberalisation. Convergence towards
                              EU labour market policies also arguably involves the introduction of insufficiently flexible
                              labour markets, inimical to fast growth.

                              New dividing lines in Europe: the impact of EU border regimes

                              One of the most significant exclusionary effects of the EU accession process will emerge
                              through its visa and border policies. The enlargement process has coincided with the rapid
                              development of a new policy area for the EU in justice and home affairs. New members
                              have to comply fully with the EU’s emerging policies for border management, asylum,
                              immigration, and police and judicial cooperation. These policies have emerged from the
                              parallel growth of the ‘third pillar’ (on justice and home affairs) and the Schengen
                              agreement (on removing border controls between member-states) that have been
                              incorporated into the EU’s treaty framework since 1997. The EU now incorporates a
                              ‘Schengen area’ that allows free movement without passport and customs checks, but which
                              requires stricter controls on its external borders. Stronger frontier controls have come to be
                              seen as the EU’s first line of defence against instability and its consequences – refugees,
                              crime, and the breakdown of law and order.
Schengen draws new dividing   The EU countries will allow east European applicants to join Schengen only if the new
lines in Europe               members put up high barriers on its eastern borders, including visas for Ukrainians, Russians
                              and Belarusians, as well as other third-country nationals. The EU’s assessment of an
                              applicant’s readiness for membership of the Schengen zone will depend on their degree of
                              confidence in the applicant’s border controls. For this reason, there is an incentive for
                              applicant countries to be even more stringent than EU members in restricting the movement
                              of people. The applicants’ negotiating power is very small because Schengen is now an
                              integral part of the EU, which demands full compliance with visa policies and border
                              controls before new members can join. There can be no opt-outs (exceptions) for new
                              members from Schengen, even though current members such as the UK, Ireland and
                              Denmark negotiated such arrangements.

                               The result for the applicant countries will be greater integration with western Europe at the
                               price of cutting ties with their eastern neighbours. Applying EU visa policies will inevitably
                               inhibit economic integration and bilateral cooperation between countries that are “ins” and
                               “outs” in the EU accession process. The applicant countries provide markets for goods from
                               the surrounding region and jobs for migrant workers. Replacing the Iron Curtain with a visa
                               wall further east also has security implications for the whole of Europe if unstable, poor
                               states are isolated on the fringes of an enlarged ‘Fortress Europe’. More stringent controls on
                               the movement of people and goods across the borders of the applicant countries are
                               expensive to implement and are disruptive to trade and investment.

                               Nationals of eight of the 10 east European applicant countries can now travel without visas
                               to all Schengen countries (for 90 days over a six-month period). However, Bulgaria and
                               Romania remained on the EU’s visa ‘black-list’ until the end of 2000. Bulgaria (but not
                               Romania) was finally moved off it and the visa requirement for Schengen countries lifted in
                               early 2001. Romania has been moved to the ‘white-list’, but with an asterisk noting that
                               visas are still required by all EU countries. In addition, some EU countries maintain different
                               regimes; for example, the UK and Ireland required visas of Slovaks following an influx of
                               Slovak citizens of Roma ethnic origin seeking asylum in the UK in 1998, while Finland and
                               Belgium imposed visa requirements temporarily following similar influxes.
The EU demands firm            The EU is pressuring candidates to introduce visas for non-applicant countries well before
implementation timetables      accession. The EU has demanded timetables for complying with its visa policies, and most
                               applicants have started responding. For example, the Polish negotiating team has set dates
                               for introducing visas for neighbouring countries: for Russia and Belarus by the end of 2001,
                               and for Ukraine by the end of 2002 (although Polish officials claim Ukrainian visas will not
                               actually be required before accession). The Hungarian government has avoided setting a
                               date for the imposition of visa requirements on immediate neighbours, but Russians and
                               Belarusians need visas from 3 June 2001 onwards.


                               Eastward enlargement of the EU will have a range of effects on the wider Europe beyond the
                               current applicants. Some of these are already evident: visa policies and Schengen border
                               controls are drawing new lines of exclusion between applicants and their neighbours, and
                               FDI has been concentrated in the front-runner countries. This will widen gaps in economic
                               performance between the CEE countries. Further divergence within eastern Europe could
                               have grave implications for the long-term stability of the region if some countries are
                               trapped in a downward cycle.

                               The key issues for the left-outs are investment and establishing interim incentives that
                               reward progress in reforms long before membership is possible. EU accession requirements
                               provide a framework for reform efforts, and a set of incentives that is often otherwise
                               lacking. However, the experience of Bulgaria and Romania has shown that the accession
                               process cannot by itself reverse vicious circles of failed reform efforts, low levels of foreign
                               investment, and stalled industrial restructuring. The EU is no panacea for weak institutions
                               and lack of political consensus.
Parts of the EU agenda are a   For future aspirants, it is also important to recognise the opportunity costs of EU accession
luxury for the outs            preparations. For countries that are unlikely to join the EU within the next ten to twenty
                               years, parts of the EU’s agenda may be a luxury that they can ill afford at the moment. It is
                               unlikely to be optimal for these countries to expend enormous efforts in meeting EU
                               standards and harmonising with EU policies designed for established market economies, if

     this is at the cost of more immediate policies to establish sustainable economic growth. EU
     policies are often cumbersome to administer and implement. For countries that are likely to
     join soon, the overall benefits of EU membership certainly outweigh the short-term costs of
     sub-optimal policies and regulatory regimes. But countries that have little hope of meeting
     the conditions in full for many years would be better advised to use the eventual prospect of
     membership as an incentive to undertake basic reforms, rather than concentrating on the
     detail of EU policy models.

     The EU has not yet developed a policy for dealing with the gaps between the main
     candidates for EU membership and the left-outs. Neither does it yet have a strategy for
     integrating the wider Europe into its zone of stability and prosperity. But the EU is
     increasingly feeling responsible for the countries on its new borders, and “proximity policy”
     is beginning to be recognised as necessary in Brussels. The EU will have to reconsider its
     role as a development agency after enlargement, as the countries on its periphery are likely
     to experience widening gaps with their neighbours. The EU will have to consider additional
     measures to help countries that cannot join for many years. It will have to start with Bulgaria
     and Romania, as these countries are currently falling between two stools, neither included
     fully in the group of countries moving rapidly towards EU accession, nor fully included in
     EU policies for the Balkans. In the longer term, a more comprehensive development policy
     will be needed if the EU is to be effective in stabilising the region surrounding its enlarged

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