1 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 Reform Introduction 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 2 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 3 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) =100 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 Hercegovina 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, 4 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). 5 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 6 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 narrows. 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. 7 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 8 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. 9 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. Conclusions 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 10 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 borders.
Pages to are hidden for
"The effects of EU enlargement on the countries left outside By"Please download to view full document