The Enlargement of the European Union: Issues and Strategies

The Enlargement of the European Union

This volume looks at the process of enlargement which the European Union is currently undertaking, focusing on both the economic and political dimensions of the subject. The volume examines how enlargement has evolved and looks at the roles and relations of the different actors—Member States, applicant states and EU institutions. With contributors coming from different disciplinary backgrounds, the volume offers an unusually rich array of perspectives on one of the most significant political developments of recent years. Part I provides an overview of the formal enlargement process and the progress the applicant states have made on their economic transition. Part II analyses the completion of questionnaires by applicant states, a significant stage in the application process. The following part explores the Intergovernmental Conference that formally opened in 1996. Part IV looks at the geopolitical consequences of enlargement. A postscript details the method and the conditions of the enlargement negotiations at the present time. Victoria Curzon Price is Professor of Economics at the University of Geneva. Alice Landau is Senior Lecturer in International Relations at the University of Geneva. Richard G.Whitman is Senior Lecturer in International Relations and Diplomacy and Jean Monnet Lecturer in European Union Studies at the University of Westminster, London.

Routldege Studies in the European Economy

1 Growth and Crisis in the Spanish Economy, 1940–1993 Sima Lieberman 2 Work and Employment in Europe A new convergence? Edited by Peter Cressey and Bryn Jones 3 Trans-European Telecommunication Networks The challenges for industrial policy Colin Turner 4 European Union—European Industrial Relations? Global challenges, national developments and transnational dynamics Edited by Wolfgang E.Lecher and Hans-Wolfgang Platzer 5 Governance, Industry and Labour Markets in Britain and France The modernizing state in the mid-twentieth century Edited by Noel Whiteside and Robert Salais 6 Labour Market Efficiency in the European Union Employment protection and fixed-term contracts Klaus Schömann, Ralf Rogowski and Thomas Kruppe 7 The Enlargement of the European Union Issues and strategies Edited by Victoria Curzon Price, Alice Landau and Richard G.Whitman

The Enlargement of the European Union Issues and strategies

Edited by Victoria Curzon Price, Alice Landau and Richard G.Whitman

First published 1999 by Routledge 11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2002. © 1999 Selection and editorial matter by Victoria Curzon Price, Alice Landau and Richard G.Whitman; individual chapters © the contributors All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data The enlargement of the European Union: issues and strategies/edited by Victoria Curzon Price, Alice Landau, and Richard G.Whitman. p. cm. —(Routledge studies in the European economy) Includes bibliographical references and index. ISBN 0-415-20292-2 (hc.) 1. European Union. 2. Europe-Economic integration. I. Curzon Price, Victoria. II. Landau, Alice. III. Whitman, Richard G. IV. Series. HC240.E533 1999 337.1′42–dc21 98–38316 CIP ISBN 0-415-20292-2 (Print Edition) ISBN 0-203-20532-4 Master e-book ISBN ISBN 0-203-20535-9 (Glassbook Format)

This work is dedicated to the United Nations Economic Commission for Europe (UNECE) and the European Institute of the University of Geneva. Without the unstinting support of both the UNECE and the European Institute this book would not have been possible.

Contents

List of figures and tables List of contributors Preface List of abbreviations

ix x xii xviii

PART I Setting the scene Europe growing together

3

LESZEK BALCEROWICZ

1

Introduction: the enlargement of the European Union: dealing with complexity

10

VICTORIA CURZON PRICE AND ALICE LANDAU

2

Reintegrating Europe: economic aspects

25

VICTORIA CURZON PRICE

3

The role of the Economic Commission for Europe

56

CAROL COSGROVE-SACKS

PART II The questionnaires: getting to know the enlargement challenge 4

The enlargement: the European Commission’s viewpoint

67

MARC FRANCO

5

Implications of the enlargement for the Common Agricultural Policy JACQUES VONTHRON

76

viii 6

Contents The economy of enlarged Europe: an Eastern and Central European states’ viewpoint

81

ANDRAS INOTAI

PART III From the questionnaires to the IGC 7

The European Union at the crossroads

93

LISBETH AGGESTAM

8

The IGC: facing the enlargement’s dilemma

97

FRÉDÉRIC ESPOSITO

PART IV The geopolitical consequences of the enlargement 9

The new pattern of international relations in Europe

111

ADRIAN HYDE-PRICE

10 The enlargement: transforming Western Europe

118

CHRISTIAN DEUBNER

11 The strategies of enlargement

129

MICHEL FOUCHER

12 The Common Foreign and Security Policy after enlargement

135

RICHARD G.WHITMAN

Postscript 13 From this point onwards: searching for the path

163

ALICE LANDAU

References Index

169 176

Figures and tables

Figures 3.1 Direction of trade: CEEC, 1995 3.2 Direction of trade: Baltic states, 1995 6.1 Central European exports to Germany in comparison with the three southern Member States 6.2 Net contributors and net beneficiaries of the EU’s financial transfers in 1994 (DM per capita)

58 58 85 87

Tables 2.1 EU, Central and East European and Baltic tariffs 2.2 Commission’s assessment of trade and currency regimes of the ten candidate countries 2.3 Merchandise exports of the CEECs by direction, 1986, 1996, shares in total trade (%) 2.4 Merchandise exports of the CEECs, 1986–1996 ($ billion) 2.5 Real GDP/NMP in CEECs and Baltic states (1989=100) 2.6 Unemployment in the CEECs and Baltic states (% of labour force, 1990, 1996) 2.7 Net foreign and capital flows, domestic capital formation and external debt of CEECs and Baltic states (share of GDP, %) 2.8 Disparities in income per capita and relative demographic weights on or around date of accession 3.1 Formal application for membership of the EU 3.2 GDP per capita (PPP), 1996 6.1 Changes in the relative competitive position of CEFTA in extra-EU imports 6.2 Share of agricultural trade in total extra-regional trade of the European Union

27 28 31 32 34 34 40 44 59 60 84 86

Contributors

Lisbeth Aggestam lectures on international politics at the Department of Political Science, University of Stockholm. Her publications include ‘The European Union at the crossroads: sovereignty and integration’ in A.Landau and R.Whitman (eds), Rethinking the European Union: Institutions, Interests and Identities (1997) and co-editorship (with A.Hyde-Price) of New Perspectives on Security and Identity in Europe (forthcoming). Leszek Balcerowicz is Vice First Minister, Minister of Finance of Poland. He is also Professor at the School of Economics in Warsaw. Carol Cosgrove-Sacks is currently Director of the Trade Division in the United Nations Economic Commission for Europe in Geneva and is also a Professor at the College of Europe, Bruges. She is the author of 11 books and over 70 articles, mainly on the EU, international relations and trade development issues. Victoria Curzon Price is Professor of Economics at the University of Geneva. Selected recent publications include ‘The role of regional trade and investment agreements’ (1996), ‘An “Austrian” interpretation of some international trade issues’ (1997), and ‘The European Free Trade Association’ (1997). Christian Deubner is currently Director of the Research Group I for European integration and international relations at the Stiftung Wissenschaft und Politik, Ebenhausen, Germany. He is a specialist in international relations, international law and political economy and the author of books and articles on economic and political aspects of the foreign policy of Germany, France and Japan. Frédéric Esposito is a research assistant at the European Institute of Geneva. His major area of research is referendum processes in the Western countries. He is completing his Ph.D. in Political Science on the relationship between the democratisation of the EU and direct democracy. Michel Foucher is Professor of Geography at Lyon University and Managing Director of the Observatoire européen de Géopolitique. His publications include Transitions géopolitiques en Europe orientale (1998); Les défis de sécurité en Europe médiane (1996) and Visions of Europe (1996).

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Marc Franco is an official in DG1A at the Commission of the European Union in Brussels. Adrian Hyde-Price is currently Senior Lecturer in the International Politics of East Central Europe at the Institute for German Studies, University of Birmingham. Recent books include The International Politics of East Central Europe (1996) and Europe and Security Beyond the Cold War: Four Scenarios for the Year 2010 (1991). Andras Inotai is Director of the Institute for World Economics in Budapest. He is Head of the Strategic Task Force on Integration into the European Union. His major fields of research are economic integration between the EC and Central and Eastern Europe, East-West Economic Relations. His most recent books include Regional Integration in the New World Economic Environment (1986) and the EC’92 Program and Eastern Europe (forthcoming). Alice Landau is Senior Lecturer in International Relations at the University of Geneva. Jacques Vonthron is an official of the Commission of the European Union based in Brussels. Richard G.Whitman is Senior Lecturer in International Relations and Diplomacy at the University of Westminster and Jean Monnet Lecturer in European Union Studies. He is the author of From Civilian Power to Super-power? The International Identity for the European Union (1998) and editor (with Alice Landau) of Rethinking the European Union: Institutions, Interests and Identities (1997).

Preface

This volume brings together a selection of contributors who first presented papers to a conference entitled Enlarging the European Union: Issues and Strategies, organised by the Institute of European Studies of the University of Geneva, the European Institute in Basel and the United Nations Economic Commission for Europe (UNECE), in September 1996. The conference brought together academics and officials working in the area, in order to confront the latest theoretical thinking with, and practical information specific to, individuals actually working on the issues. On the academic side, care was taken to invite representatives of different disciplines—political science, geopolitics, economics, international relations—so as to cover as many aspects as possible. The issues, which were identified in 1996, are still with us today, and will accompany the negotiators in the years ahead. New questions will doubtless emerge. No volume of this type can hope to do more than to capture the main elements apparent at a particular point of this complex process. The approach of this volume, and which guides its structure, is to chart the unfolding enlargement process. Part I provides an overview of the formal enlargement process and the progress the applicant states have made on their economic transition. Part II explores a significant stage of the application process that was the completion of the questionnaires by the applicant states in 1996. The following part (Part III) takes the story on from the completion of the questionnaires by the applicant states to the European Union’s (EU) Intergovernmental Conference (IGC) that formally opened in 1996. Part IV stands back from the actual enlargement process and the IGC negotiations to explore the geopolitical consequences of the enlargement process. A postscript then brings the story right up to date, detailing the method and the conditions of the enlargement negotiations as of May 1998. In exploring the enlargement process in this manner, through these different parts, it is intended to explore both the dynamics and the details of the unfolding enlargement story. The text opens with the chapter, entitled ‘Europe growing together’ by Leszek Balcerowicz, formerly Minister of Economy and Finance, currently Minister of Foreign Affairs of Poland, and is based on a paper presented to the conference while its author was (briefly) out of office, exercising his more usual profession of

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academic economist. We were lucky to persuade Professor Balcerowicz, between ministerial posts, to give us a view of what seemed to him essential at the time in terms of reforms in both Eastern and Western Europe. Nor do we think his list would be different today, though he might put things more diplomatically. In particular, he pleads for a more radical approach to privatisation in the Central and Eastern European Countries (CEECs), enjoins the EU to exercise ‘good’ conditionality in this regard and get its priorities right. He also points out that there is an anomaly in asking the CEECs to make profound structural changes to their economies, to their political systems, to their social institutions while the EU hesitates to restructure its own industries such as the steel industry. Chapter 1 by Victoria Curzon Price (Professor of Economics at the University of Geneva) and Alice Landau (chargée de cours in Political Science at the University of Geneva) analyses the state of the enlargement process as on 30 March 1998, the date upon which negotiations leading to enlargement were officially launched. This date represents a watershed. From that point on the negotiations will gradually whittle away at problems until compromises are reached. But the outcome is no longer in doubt: the European Union will expand to the East to include at least ten new members within a generation. Chapter 2 entitled ‘Reintegrating Europe: economic aspects’ by Victoria Curzon Price, Professor of Economics at the University of Geneva, analyses the economic aspects of EU enlargement to the East. After briefly outlining the analytical framework in terms of static, but mainly dynamic, effects of integration between richer and poorer countries, she concludes that most of the CEECs will, on balance, probably suffer from static trade diversion effects, but that, given that remaining outside the EU is a high-risk strategy in a bloc-dominated world, they have little choice but to join—but not at any cost. Having said this, Victoria Curzon Price asserts that the CEECs will probably experience fewer difficulties in adjusting to the new situation than the incumbent members, which is why the latter are insisting that the candidate countries adopt the acquis communautaire before joining. Curzon Price concludes with a critical assessment of the EU’s criteria for entry and the Commission’s ‘opinions’ pertaining thereto, and published in July 1997. Chapter 3 is entitled ‘The role of the Economic Commission for Europe’, by Carol Cosgrove-Sacks, Director of the Trade Division of the UN Economic Commission for Europe. After reviewing the most obvious difficulties of enlargement (the budget, the institutional issues, migration, prospects for catchup growth, the competitiveness of the CEECs in areas ‘sensitive’ for the EU) Carol Cosgrove-Sacks concludes that all will come right in the end, even if the EU fails, as is expected, to reform its decision-making structures. The author reminds us that enlargement of the EU was supposed to be accompanied by a reform of its decision-making institutions, but this has always failed to be the case. However, enlargements proceeded smoothly, nevertheless, and reform of decision-making apparatus came at its own sweet pace. According to CosgroveSacks the same will happen again. Part II of the text focuses on the background to, and the handling of, the questionnaires issued to the applicant states in 1996 by the European Commission

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to assess their preparedness for the opening of enlargement negotiations. Chapter 4, entitled ‘The enlargement: the European Commission’s viewpoint’, by Marc Franco, a member of the EU Commission, gives an inside view of how the process of enlargement was handled by the EU from the negotiation of the ‘Europe Agreements’, to the European Council summit in Copenhagen in 1993, the ‘preaccession strategy’ agreed upon at Essen in 1994, the Commission’s 1995 ‘White Paper’ on the acquis communautaire which the CEECs would have to accept and, most interestingly, the 1996 ‘Questionnaire’ process, by which the Commission sought to discover from the applicant countries where they actually stood in relation to the ‘Copenhagen criteria’. With the help of the replies to this very detailed questionnaire, the Commission prepared its opinions, finally published in July 1997. Therefore an understanding of the questionnaires is crucial to showing how the Commission reached its decision as to which states to favour for the first wave of enlargement. Mr Franco maintains that the cost of enlargement is much exaggerated and that the EU will have no difficulty in keeping its budget within the ‘Edinburgh limits’ of 1.27 per cent of the EU’s Gross National Product (GNP). Chapter 5, entitled ‘Implications of the enlargement for the Common Agricultural Policy’, by Jacques Vonthron, member of the EU Commission, takes us back to reform within the EU itself. We are reminded that agricultural reform in the EU started before the issue of enlargement arose (as a result of the Uruguay Round) and that it is following its own path. Multilateral negotiations on agriculture will start again in 1999 in the World Trade Organisation (WTO) and nothing can be negotiated with the CEECs until the negotiations on agriculture are over. According to Mr Vonthron, expenditure on agriculture is set to fall in absolute terms; priorities now lie elsewhere. Chapter 6, entitled ‘The economy of enlarged Europe: an Eastern and Central European states’ viewpoint’, by Andras Inotai, Director of the Institute for World Economics, Budapest, takes the view that the Europe Agreements are a dead end for the CEECs. They have conferred no economic benefits worth talking about. Full membership is the only solution. Like Mr Franco, Professor Inotai believes that the costs of enlargement are much exaggerated. According to Professor Inotai, no country could ‘absorb’ foreign resources amounting to 15 or 20 per cent of its GNP, which is what would theoretically be available if one were to apply the current rules on agricultural support and regional policy. He asserts that there is no question of this. All that is needed is a small amount of aid. The chapter concludes on an optimistic note, emphasising the dynamic economic growth prospects of most of the CEECs. Part I I I moves the discussion from the questionnaires to the EU’s Intergovernmental Conference which was supposed to prepare the EU for enlargement. This theme is also pursued by Lisbeth Aggestam, Department of Political Science, University of Stockholm, in Chapter 7, entitled ‘The European Union at the crossroads’. Aggestam discusses the future of the EU in terms of four scenarios: The ‘status quo’ scenario, which involves no enlargement and no institutional evolution (neither widening, nor deepening), is discarded by the author as being the least likely. It would represent a denial of all the EU stands

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for, in particular its repeated statements that it is open to any European democracy. A ‘federal’ scenario is equally unlikely, because there are no signs of any desire on the part of the Member States to increase the power of the centre. ‘Degeneration into a mere free trade area’ —where widening takes precedence over deepening— is viewed as a distinct possibility. Finally, Lisbeth Aggestam asserts that a ‘multispeed, flexible Europe’, which combines both widening and deepening and permits the formation of ‘coalitions of the willing’ would appear to be both desirable and feasible. The author concludes on a warning note: a growing tide of Euroscepticism in Western public opinion limits political leaders’ freedom of manoeuvre, just at a time when Euro-enthusiasts in the East are making heavy demands. In Chapter 8, ‘The IGC: facing the enlargement’s dilemma’, Frédéric Esposito, University of Geneva, explores the IGC as an integral part of the enlargement process but also one which raises questions about the future architecture and direction of the EU in terms of various forms of institutional flexibility. His analysis of the Treaty of Amsterdam shows how the EU now allows for flexibility. While this may facilitate the enlargement process, the fundamental issue remains: will enlargement lead to dilution and hence to destruction of the EU? Part IV examines the impact of the enlargement process on the landscape of international relations in Europe. Each of the four chapters in this part locates the enlargement debate within a wider discussion as to how enlargement will reshape Europe and Europe’s place in the world. Chapter 9, entitled ‘The new pattern of international relations in Europe’, by Adrian Hyde-Price, of the Institute for German Studies, University of Birmingham, refutes the thesis advanced by John Mearsheimer that Europe will fall apart now that the bipolar structures of the Cold War have disappeared. The author argues that Europe today is different not only from Cold War Europe, but also different from the Europe of Bismarck, Palmerston or Napoleon: it embodies what Emmanuel Kant termed a ‘pacific union’, a community in which states and peoples are bound together so intimately that war no longer plays any part in their relations. This being so, Dr Hyde-Price concludes that the major challenge for the future of Europe lies in managing its frontiers and in guaranteeing peaceful relations with Russia. Chapter 10, entitled ‘The enlargement: transforming Western Europe’, by Christian Deubner, SWP Ebenhausen, contains a gloomy assessment of the EU’s likely institutional transformation. Dr Deubner reviews the argument that enlargement to the East will be beneficial to the EU because it will force muchneeded change, but rejects it on the grounds that it might just as well cause its collapse. He is worried that expanding the existing weighted voting system to include ten small, poor countries will shift the balance of advantage in the EU towards a permanent ‘coalition of the poor’. For this reason, Dr Deubner expects the EU to add a population majority requirement to the current qualified majority weighted vote system. While he does not expect the CEECs to accept the logic of the free market, but rather rely on transfers and exceptions, Dr Deubner thinks that WTO commitments will force the EU to accept the free market logic in sensitive sectors. Migration is viewed as a threat and may provoke resentment and social jealousy. Dr Deubner considers the possibility of splitting the EU

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‘poor’ into two groups—the existing incumbents, entitled to high pay-outs, and the newcomers, whose payouts would be limited, say, to 3 per cent of their GNP, on grounds of limited absorption capacity. However, Dr Deubner warns that such differential treatment would probably poison intra-EU relations. As for agriculture, the gap between East and West is so large that Dr Deubner predicts either a very long transition period, or the collapse of the Common Agricultural Policy (CAP). Chapter 11, entitled ‘The strategies of enlargement’, is by Michel Foucher, Director of the Observatoire européen de Géopolitique de Lyon. Like Dr HydePrice, Professor Foucher considers that the EU is the new pole around which all European countries now gravitate and build their strategies. However, not only is there no unity of view about the EU (hence no common strategy is possible), but most states intend to use the EU in the pursuit of their own interests. Even the United States may be ‘using’ the EU when it encourages enlargement to the East—or being used by it, since there are 23 million American citizen-voters who originate from Central and Eastern Europe. Dr Foucher reminds us that Europe contains two distinct political cultures—the democratic culture of the West, and the autocratic culture of the East. These do not mix easily in the new Europe. Wherever the frontiers of the new Europe stop—Russia, India, wherever—there will the locus of tension, on migration, military security and trade issues. Nothing will be what it seems today: the EU itself will change during the period of enlargement and will be changed by it. The candidate countries will also be changing. The main challenge for Dr Foucher is to reduce uncertainty on the continent by keeping the lines of communication open. Chapter 12, entitled ‘The Common Foreign and Security Policy after enlargement’, by Richard G.Whitman, Centre for the Study of Democracy, University of Westminster, provides a detailed review of the Common Foreign and Security Policy (CFSP) since its inception and discusses its future in the light of enlargement to the CEECs. There is no question that this enlargement will alter the international identity of the Union—but in what way? According to Dr Whitman, hopes that the EU’s vast economic strength will somehow be transformed into political influence via the CFSP have so far not been realised within a Union of 12, now of 15 Member States. In Dr Whitman’s opinion there is little chance that this will change much in a Union of twenty Member States. However, it is asserted that it would also be a mistake to underestimate the CFSP. It consists of ‘declarations’, ‘common positions’ and ‘joint actions’, of which a surprising number have been launched and which will, in due course, make their mark. Dr Whitman describes the way in which the candidate countries have, in fact, already been associated with the CFSP ever since the Essen Council and the launch of the ‘structured dialogue’. He notes that enlargement will shift the balance of foreign policy concerns and describes the links to the North Atlantic Treaty Organisation (NATO) and the Western European Union (WEU). Dr Whitman analyses the review of the CFSP by the EU’s IGC, setting forth the reforms present in the Treaty of Amsterdam (ToA). The Yugoslav crisis has provided a

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salutary lesson, according to Dr Whitman, by narrowing the gap between hope and reality with regard to developing an international identity for the EU. In a postscript to the volume Alice Landau brings the enlargement story up to May 1998. In this chapter the current status of the enlargement negotiations is charted. The conclusion brings into light that the negotiations between the Member States of the EU themselves rather than between the EU and the applicant states is more significant at this point. What is clear is that the Commission is mobilised for finding the best possible way to design the enlargement process. It is not one being undertaken through a guiding vision but, rather, is processing pragmatically. It remains for us to thank the various individuals who were involved in the organisation of the conference that inspired this book: Mr Choi of the UN Economic Commission for Europe, Brigid Gavin of the European Institute in Basel, and Frédéric Esposito, research fellow at the University of Geneva, all of whom, in their respective capacities, made essential contributions. We would also like to thank the anonymous referees for Routledge, whose critical comments guided us in trying to turn a set of conference proceedings into a readable and relevant book, and the Routledge team, whose unstinting support and editorial guidance kept us going. Victoria Curzon Price, Alice Landau, Richard Whitman Geneva and London, June 1998

Abbreviations

ACP African Caribbean Pacific countries BALTBAT Baltic peacekeeping battalion BRD Federal Republic of Germany CAP Common Agricultural Policy CDU Christlich Demokratische Union CEDP Common European Defence Policy CEECs Central and Eastern European Countries CEFTA Central European Free Trade Area CEI Central European Initiative CFSP Common Foreign and Security Policy CJTF Combined Joint Task Forces CMEA see COMECON COMECON Council for Mutual Economic Cooperation CSU Christlich-Soziale Union CU Customs Union DI Direct Investment EAPC Euro-Atlantic Partnership Council EC European Community ECE see UNECE ECSC European Coal and Steel Community ECU European Currency Unit EDC European Defence Community EEA European Economic Area EEC European Economic Community EFTA European Free Trade Association EMI European Monetary Institute EMU Economic and Monetary Union EP European Parliament EPC European Political Cooperation ESDI European Security and Defence Identity EU European Union

Abbreviations

FAWEU FCFs FDI FSU FYROM GATT GDP GNP IFOR IGC IMF IPPC JHA MAPE MFN NAFTA NATO NTB OECD OSCE PAS PfP PHARE PoCo PSE QMV SDR SFOR TAFTA TEU ToA UN UNECE USSR WEAG WEAO WEU WEUCOM WTO

xix

Forces Answerable to WEU Foreign Capital Flows Foreign Direct Investment Former Soviet Union Former Yugoslav Republic of Macedonia General Agreement on Tariffs and Trade Gross Domestic Product Gross National Product Implementation Force for Bosnia Intergovernmental Conference International Monetary Fund Integrated Pollution Prevention and Control Justice and Home Affairs Multinational Advisory Police Element Most Favoured Nation North American Free Trade Agreement North Atlantic Treaty Organisation Non Tariff Barriers Organisation for Economic Cooperation and Development Organisation for Security and Cooperation in Europe pre-accession strategy Partnership for Peace Poland and Hungary: aid for economic reconstruction Political Committee Producer Subsidy Equivalent Qualified Majority Voting Special Drawing Rights Stabilisation Force for Bosnia Transatlantic Free Trade Area Treaty on European Union Treaty of Amsterdam United Nations United Nations Economic Commission for Europe Union of Soviet Socialist Republics Western European Armaments Group Western European Armaments Organisation Western European Union WEU Communications Network World Trade Organisation

Part I

Setting the scene

Europe growing together Leszek Balcerowicz

To assess the unprecedented changes that have taken place in Europe, one must go back ten years, and recall the situation on the continent at the eve of the fall of the Berlin Wall in 1989. Ten years ago the division in Europe between East and West seemed immutable. Very few people foresaw that the Soviet Union would soon dissolve, that Germany would be reunited, that the Warsaw Pact and the Council for Mutual Economic Co-operation (COMECON) would disappear, that Czechoslovakia would split, that countries which used to be members of organisations, not necessarily of their own free will, would be free to join other organisations. Nobody to my knowledge forecast that in 1998 the European Union (still to be created) would launch negotiations for its enlargement to Eastern and Central Europe. Whatever happens in the next ten years, we must not lose our sense of history. On Mr Kohl’s historic visit to Poland in October 1989—he was caught by surprise because the Berlin Wall had fallen apart. He interrupted his visit, went to Berlin, made a speech, then came back to Poland, and then back again to Germany to prepare for reunification. People did not have any blue-print for reunification. I had friends in Germany who had been working for years on the very distant and theoretical hypothesis that one day Germany would be reunified. They had prepared the wrong plans. What actually happened was complete improvisation. In this process of Europe growing together we have made many mistakes. Some of them were unavoidable; some could have been avoided. I think East Germany was subject to what one might call a peaceful bombardment of its economy, which led to a labour cost explosion and much hardship. This was an avoidable mistake. Nobody forecast that Russia would leave the Soviet Union, but it did. The Soviet Union fell apart, but in a peaceful way. Even in 1990, there were very few people who could imagine that the Ukraine would soon be independent. I remember the visit of the former United States President George Bush, who came to Kiev in 1990, and warned against nationalism. This was the way people thought at that time. Now the Ukraine is independent and a very important geopolitical factor in the new European system. For example, whatever one

4

Leszek Balcerowicz

may think of the ‘new’ Russia, one should look to the Ukraine, and do everything possible to strengthen its independence, because it is a key element in responding to the Russian question. In 1988, long before all the controversies surrounding the deflationary impact of the Maastricht criteria in the run-up to monetary union—and writing as an economist, I think there are some problems with these criteria— and before the enlargement to include Austria, Finland and Sweden, Western Europe was already prone to high rates of long-term unemployment. Let us recall some figures. In 1960, the rate of unemployment in Western Europe was between 2 per cent and 3 per cent, so there was practically full employment. In 1975, it was 4 per cent; in 1980 it was 6 per cent, slightly higher than in the US.1 However, from then on unemployment patterns diverged between Europe and America. In most countries of Western Europe, unemployment continued to rise, while it began to fall in the United States. Who would have thought, in 1988, that far from being resolved, the problem of long-term unemployment in Western Europe would be worse than ever by 1998? Now what is the present situation, and what are the challenges? Looking globally there are four challenges that I shall regard more as opportunities and not so much as problems. These challenges were not identifiable in the late 1980s. We did not even know that we would have the opportunity to solve these problems. The first task of the CEECs is to release the forces of economic catch-up growth. The CEECs were burdened by the features of an economic system, lasting fifty years, which blocked economic development, and which led to a vast gap in per capita incomes between Eastern and Western Europe. This translated into important things like bad housing, few opportunities for a decent living and low levels of personal consumption. Economic development has a very important human dimension. The CEECs must now create the necessary legal and political framework which would allow for rapid catch-up growth. This implies that they much grow at least two or three times quicker than Western Europe. This is difficult, though not impossible. There are many historical parallels. In the nineteenth century, France used to be a backward country in contrast to Britain, and Germany used to be in the same position. Finland was a latecomer compared to France, Germany or even Sweden. Japan was a latecomer compared with Europe after the Second World War, but it caught up and even surpassed Europe in less than forty years. We know from experience that countries which used to be economically backward do manage to grow more rapidly than advanced countries, do manage to ‘catch up’. In the meantime, some advanced countries fall into decline. What lessons can we learn from these experiences? Those countries which managed to be successful latecomers did so by introducing and maintaining a market economy, by creating the appropriate institutions. There is no mystery. Such systems have well-known features. The system was what Adam Smith recommended over two hundred years ago, but was forgotten in the twentieth

Europe growing together

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century. The essence of this system is private property, economic freedom, low inflation, a flexible labour market and political stability. Such a system generates rapid economic development and produces remarkable results. If we look at the countries which have grown very quickly in the latter part of the twentieth century, for instance Germany in the 1950s, Japan in the 1960s and the Asian tigers in the 1970s and 1980s, I think we will find all these five classical features, and a new one which Adam Smith had not thought of— education. To these basically classical features, one could perhaps add a special kind of state intervention—government policies designed to accelerate growth. Politicians in Eastern and Central Europe have, on the whole, introduced a system which allows for rapid catch-up growth. This is not only of economic, but also of political significance. Rapid economic growth is absolutely essential for a stable democracy in Eastern Europe. Capitalism is necessary for democracy, but perhaps not the other way round. Both are desirable, but if we look for links, both historical and theoretical, we see that private property and markets are linked to prosperity, and that prosperity is linked to democracy. If this is true, privatisation is not only an economic reform, but also a political reform. Reducing the size of the state sector is thus vital for the quality of democracy. A large state sector is directly responsible for what economists call rent-seeking; it is a huge source of inefficiency and a brake on economic growth. Also, if there is a large state sector, politicians try to become popular by distributing positions, and not by competing with the quality of their programmes. This was as true in Italy as in the Union of Soviet Socialist Republics (USSR). Privatisation is therefore important for political reforms. It is, of course, not the only reform needed for rapid catch-up growth, but it is among the most important. Now for Western Europe. I think here that the main challenge is to overcome the problems associated with the reverse side of the welfare state. Long-term unemployment is the price that Sweden, Germany, France and Italy are paying for taxing labour and discouraging investors and employers from investing. In market economies there are certain simple rules; for instance, there is an inverse relationship between the fiscal burdens put on the shoulders of employers and employees on the one hand, and unemployment on the other. This is why there is a long-term unemployment problem in many countries of Western Europe, especially among young people. This is not such a problem in the United States because job creators are not so extensively taxed as in Western Europe. This problem must be addressed with urgency, otherwise enthusiasm for integrating the CEECs will be absent and public opinion will become hostile to the whole idea. Turning now to the European Union, you notice the challenge of two familiar tasks—simultaneous deepening and widening of the Community. Some people consider these as being in conflict. However, certain changes in the EU, which are necessary and desirable from the point of view of enlargement, are at the same time necessary from the point of view of its own internal functioning.

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Even without enlargement to the East, the EU would still need substantial reforms of the Common Agriculture Policy (CAP), as well as institutional reforms. It is a mistake to think that the EU has to make reforms because of enlargement. Those reforms are needed anyway. Returning to reforms in the CEECs, let me only say a word on the question of whether ‘shock therapy’ is better or worse than gradualism. Both strategies have been tried. Summarising, one could say that Poland (at least after 1993), the Czech Republic, Slovakia, Slovenia, the Baltic states and perhaps surprisingly, Albania, and Tajikistan in Central Asia, are among the radical reformers. On the other hand, at the opposite end of the spectrum we find a completely different approach: slow reformers, or simply non-reformers. One country which symbolises this approach is Belarus, which has successfully avoided any serious reforms at all. Ukraine, until 1994, could be included in this group of very hesitant reformers, but it had become more radical since the election of President Leonid Kuchma. So we now have two groups of countries that can be compared, controlling for the differences of starting conditions. What conclusions emerge from such a comparison? To begin with, all countries, regardless of their strategies, experienced severe difficulties because of the collapse of the former system. It is like rebuilding a house. The first part is always difficult. It was the collapse of the old system, and not the reforms, that caused the decline in GDP and living standards in all those countries. In the next period, it became clear that those countries that adopted a more radical approach achieved much better results than the countries that avoided reforms or undertook very hesitant ones. There are already tremendous differences in terms of the rate of growth, of the rate of inflation and structural changes. But even the more advanced reformers still have a lot to do. None of the CEECs has achieved the optimal final system, a system that would ensure rapid catch-up growth. What remains to be done in advanced reformers, not to mention those least advanced? Three tasks strike me as being particularly urgent. One of them has already been mentioned—privatisation. The share of the state sector is still much too high, much higher than in the West, even before the wave of privatisation that started in the 1980s. The current 14 to 15 per cent is too high.2 The price of this is inefficiency, politicisation and bad politics. Privatisation has to be complete. The second task is a reform of the social sector. The former socialist countries were strange creatures. They were a combination of a crumbling economy and a Swedish-style welfare state. Now the Swedish model has collapsed even in Sweden, and has collapsed even more resoundingly in the former socialist countries. A huge task is to reform the social sector so that even a modest amount of social spending does not block economic development. Among the most urgent of social reforms is that of the pension system.

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The third challenge is to extend economic freedom and not reduce it by the arbitrary exercise of power by politicians and bureaucrats, though licensing and various regulations that constrain entrepreneurs and at the same time give rise to corruption. This is very important. One of the main tasks is to introduce or to maintain flexible markets. What now are the reforms needed in the EU? There is a certain relationship between reforms in the CEECs and what the West must do. But there is an asymmetry of impact. I would say that the West could influence, in good or bad ways, the pace of reforms in the CEECs, but that the latter cannot to such an extent influence what the West is doing. In this sense, the West bears the greater responsibility. What would ideally be the best approach for the EU and its Member States vis-à-vis the CEECs? What criteria should be chosen? All reforms that encourage rapid catch-up growth should be encouraged. This is a historical challenge. The West should encourage rapid economic development, not block it. It is economically important, humanly important and politically important. It is also in the interests of the West to have dynamic neighbours and not poor members without the prospect of economic improvement. If we accept this, what should be the concrete measures encouraged by the West? Let me mention the main ones. First, the West should be careful to set a good example. In the East there is a struggle for the minds and hearts of people and no shortage of politicians very happy to quote bad examples from the West as magic solutions to the East’s problems. Second, opening markets means more opportunities for growth and setting a good example at the same time. Third, the West should support fundamental marketfriendly reforms in the East, by insisting whenever it can on privatisation, deregulation, balanced budgets, macroeconomic stability, lower taxation and the like. This is called conditionality. This is a technical term used with respect to the International Monetary Fund (IMF) or the World Bank when they offer assistance in exchange for policy reforms. I think there is nothing wrong with conditionality as such. The problem is whether the right kinds of conditions are being set. What we need is appropriate conditionality. I mention this because I see a worrying trend. Not only does the West set a bad example when it protects its markets from competition by central European firms in ‘sensitive’ sectors (encouraging them to do the same), but it sometimes recommends inappropriate policies and sets inappropriate conditions on assistance to the CEECs. Bearing in mind that the West can set good conditionality and bad conditionality, what can be said about the actions of the EU? I would say they lie somewhere in between, but that they certainly do not constitute 100 per cent ‘good conditionality’. What is actually happening is a mixture of good conditionality and some rather dangerous elements. I think the attitude of the EU is not clear enough as far as the most important reforms are concerned. First of all I would mention the problem of trade liberalisation. This is a good example of the type of measure that would do

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much to encourage economic growth in the CEECs. On this front, I think more should be done. I would mention the CAP, which we all know creates strong barriers to trade in exactly those sectors in which some CEECs— Poland or Hungary—have a comparative advantage. Here we have got a situation where, without deep reforms of the CAP, it is difficult to imagine a successful outcome to enlargement. Not only because a market-oriented reform of the CAP is necessary for the EU to enlarge without excessive costs, but also because the CAP itself constitutes a bad example for the CEECs to follow. Here we have a special case of a bad example and of inappropriate conditionality at the same time. Speaking about other weaknesses on the trade liberalisation front, I would mention that rules of origin which cannot be cumulated and which hamper trade between the EU and the CEECs are particularly irritating and petty. I would also mention the trade barriers that persist in the EU with regard to special categories of sensitive products—textiles, steel, coal, coke. Again, it is a question of setting good and bad examples. How can the West expect the East to adopt far-reaching reforms if it continues to protect a few ‘sensitive’ sectors that are precisely those in which the East possesses its best hopes for success? It is particularly ungenerous and unworthy of the noble sentiments expressed at every public gathering of the EU Member States’ leaders. Another example of mistaken EU policies in dealing with Central and Eastern Europe is a question of emphasis, of getting priorities right. If you read the White Book3 there are a lot of appendices, a lot about the maximum content of nicotine in a cigarette, but there is almost nothing about privatisation as a reform that should be focused on. I remember speaking to representatives of the EU, expressing my surprise that the Commission should concentrate on trivia and pass over the essentials in silence. And they replied that privatisation was political. As a political matter, it could not be mentioned. I must confess I find this strange, because at the same time the Commission mentioned that macroeconomic stability was very important. Are we to conclude that macroeconomic stability is not political? In what way does it differ from a policy of privatisation? I would say that the EU has already gone so far in recommending that the CEECs should do this, that the CEECs should do that, that it is out of place to suddenly become shy about not recommending more privatisation—unless of course, the EU is not convinced that this is something which should be emphasised. Let me repeat, however, how vital it is. With a large state sector, there is total certainty that state firms will make losses. If there are losses, there is a pressure upon governments to subsidise. If governments subsidise, they have to tax or print money; if they have to raise taxes they discourage investment, if they print money they create inflation. The consequences are endless. So there is a direct link between privatisation and the capacity of the CEECs to meet the general conditions for admission to the EU. This is only one example of the need for the Commission to get its priorities right. But there is also a danger that it may set wrong conditions. What I have in mind is equalising social

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security standards between East and West, stressing the so-called social side of integration, which if translated into concrete terms could amount to an increase in social spending. If this idea were to be pursued further, it could block the economic development of the CEECs by introducing new levels of taxation and regulation, which they can ill afford. To sum up, I would say that what we need within the EU and the CEECs are reforms on both sides and a clear, strong, and beneficial conditionality, by which I mean that the EU should use its very great influence to encourage reforms which are unambiguously beneficial to growth in Central and Eastern Europe. This should replace unclear and weak conditionality, which seems to prevail. Notes 1 2 3

Eurostatistics Data for Short Term Analysis, Luxembourg, Office of Publications of the European Communities, 1985. Transition Report, London, European Bank for Reconstruction and Development, 1995. White Paper: Preparation of the Associated Countries of Central and Eastern Europe for Integration into the Internal Market of the Union, Brussels, Commission Communication to the Council, 3 May 1995, COM (95) 163 final.

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Introduction The enlargement of the European Union: dealing with complexity Victoria Curzon Price and Alice Landau

On 30 March 1998 negotiations for the accession of five Central and Eastern European Countries (CEECs) plus Cyprus to the European Union (EU) were launched. This concluded a long period of uncertainty during which the EU’s attitude to the problem posed by the collapse of the Union of Soviet Socialist Republics (USSR) remained obscure. Now at last, welcome light is shed on some of the puzzles set by the end of the Communist era. 1

2

3

Clarification of the criteria for accession: the EU has decided to distinguish between the first and second ‘waves’ of applicants or in the Euro vocabulary the five ‘pre-ins’ and the six applicant countries. To the general ‘Copenhagen criteria’, decided upon in 1993 and which include democracy, stable institutions, protection of minorities, a functioning market economy and ability to cope with competition, is added an extra condition, namely the ability to enact the acquis communautaire some time in the not-too-distant future. The first wave of applicants, being slightly ahead of the others in terms of per capita income, are deemed to be closer to being able to adopt the acquis than their more backward neighbours. Ten future members have been identified: the first ‘wave’ consists of the Czech Republic, Estonia, Hungary, Poland and Slovenia, with whom negotiations for accession have started—although no one is guessing when they will end. The second group consists of Bulgaria, Latvia, Lithuania, Romania and Slovakia, who, while waiting for permission to start negotiations, will be offered a pre-accession ‘partnership’, involving as much aid as is made available to the first wave of applicants.1 The EU is at pains to point out that the process leading to accession involves all the applicant countries from Central and Eastern Europe. No one has been left out. To cope with the problem of Turkey: at the Luxembourg summit in December 1997, the EU decided to set up what is known as the ‘European Conference’, launched in London on 12 March 1998 ‘to bring together the Member States of the European Union and the European states aspiring to join it [in order] to develop ways of tackling issues on a pan-European basis’.2

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This group was to include the 15 EU member states, the 10 CEEC applicants, Cyprus and Turkey. However, Turkey, offended at not being included explicitly in the set of future members (described only as ‘aspiring to join’) and upset over the prospect of Cyprus starting negotiations for accession without any settlement of the ‘Cyprus question’, declined the invitation to attend the first meeting of the European Conference in London. It is not clear how this new body will function, since the country for which it was specially designed has declined to participate. The European Conference will meet at least twice a year, once at the level of Heads of State and Government, and once at the level of Ministers of Foreign Affairs. The affair nevertheless shows that the ‘Turkish question’ is coming to a head. Not all ambiguities have been lifted, however, and many unresolved issues remain: 1 2 3 4

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How to enlarge to the 11-member group of favoured countries without creating new divisions and conflicts in Europe and beyond? Within the super-select group of five favoured countries, will some join sooner than others, or will they all join at once? If the latter, what timetable is it reasonable to expect for the first wave to achieve accession? What, if anything, is to be done about making EU decision-making institutions more transparent, more representative, more democratic and more efficient? Will the EU succeed in reforming its major spending and redistribution programmemes (agricultural and regional policies) in order to accommodate the new members without busting the budget?

These unanswered questions remain vital for the future, because this enlargement is different from all the others: 1

2

3

In terms of sheer numbers of new members (the first CEEC five plus Cyprus, then another five), the EU has never had to cope with such a massive enlargement. It is therefore forced to consider extensive institutional reforms which are deeply unpopular with voters and within the political leadership in the EU Member States. The EU has never had to accommodate new members with such low relative incomes. This forces it to reconsider many traditional common policies, and in particular its whole philosophy of ‘solidarity’, i.e. income redistribution at the inter-state level as proof of commitment to ‘Europe’. Can other forms of commitment be invented? The enlargement takes place in a context of accelerated globalisation pressures, further multilateral trade negotiations in the World Trade

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Organisation (WTO) and more liberalisation on all fronts. This raises the pressure for structural economic change to an unprecedented level, which public opinion may well balk at. The EU will be at a much more ‘advanced’ state of integration than on the occasion of any previous enlargement. The West European economy needs to be modernised urgently, along the lines already chosen by the candidate countries—namely, in the direction of greater market flexibility, reform of the welfare state, reform of the state sector and so forth. But is public opinion ready? Public opinion, which was virtually absent from previous enlargements, is today a much more important factor. Euroscepticism has become fashionable, making it difficult for Western Europe to meet all the exceptional challenges that enlargement implies. The enlargement has political, strategic and economic implications of a problematic nature: how to handle the EU’s relations at its frontiers, and most importantly with Russia, (so far agnostic to EU enlargement) without a meaningful common foreign policy?

The nature of the EU’s political role Any reflection upon the future of Europe encompasses the question of the enlargement of the European Union to the Eastern and Central European states. The development of this region is a key element in the reshaping of the European continent. The fall of the Berlin Wall, symbolising the disintegration of the Soviet Union and the collapse of Soviet influence in Central and Eastern Europe, created a power vacuum and a heady sense of freedom in Central Europe, but projected the European Union into a political role for which it was ill-prepared. Like it or not, the EU is seen by the CEECs as a pole of stability for countries which have mostly known turbulence, poverty and oppression during the course of the twentieth century. Western Europe represents peace, freedom, order and prosperity. Less fortunate Eastern Europe cannot wait to hook up to this magic system. Yet it is not that simple. The EU cannot simply replace the Soviet Union. It has no wish to dominate, or possibly even lead, except in the economic sphere. Indeed, the Yugoslavian disaster showed that it is constitutionally incapable of leadership. It just ‘is’. It represents freedom, democracy, order and prosperity, but has no magic formula to transmit this desirable package easily and swiftly to its Eastern neighbours. The EU has specified that the CEECs must acquire these qualities before they can be allowed to join. It is even willing to help, up to a point, but cannot impose solutions. As a result, the EU cannot possibly meet all the hopes that are being placed in it by public opinion in the CE ECs, but it will doubtless be blamed for whatever disappointments are in store. It will in the now famous phrase of a French politician be ‘responsible for but not guilty of’3 the mistakes made by others.

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The far-reaching changes that have followed the end of the Cold War require brilliant, far-sighted, multifaceted policies and a clear mission on the part of all present and future Member States of the EU. These are surely present in the abstract, but the devil is in the detail. Time and again, the EU has shown that consensus and compromise do not normally produce clear, highquality decisions and simple rules that apply to all. The size of the gap that must be bridged by the enlargement eastwards For the candidate countries, joining the EU is perceived as a condition for strengthening democracy, consolidating the economy, guaranteeing the development of civil society and the rule of law, gaining access to a useful source of free funding, in addition to ensuring regional peace and security on the continent. More than that, enlargement will be a potent symbol of merging the CEECs back into the Western part of Europe, and re-establishing a sense of ‘belonging’ that they have always claimed. There is a strong sense that they have endured much suffering and many sacrifices in maintaining Western values under Soviet rule and, indeed, that their suffering somehow made it possible for Western Europe to prosper under its threatening shadow. They feel that Western Europe ‘owes’ them a lot and they are now happy to collect the cheque. That they might be perceived by Western European countries as a mere buffer zone between the Western part of the continent and Russia, victims of Nazi and Soviet aggression, geography and the Cold War, for which the West bears no particular responsibility, does not fit their sense of injured pride. Enlargement will not be without problems for the EU. It will impact on economic and political structures, entail large budgetary costs and contain the potential for ‘dilution’ of Community policies, to name only a few. At the same time, Member States are trying to work out solutions to the economic, political and social problems generated by creating an economic and monetary union. The CEECs are faced with the challenge of joining a Union which is more integrated and complex than was the case in the previous enlargements. The Union has evolved considerably since the late 1980s, from being an imperfect customs union to becoming a fully-fledged Economic and Monetary Union (EMU). Since the Maastricht Treaty it is slowly finding its marks outside the purely economic sphere: it is gradually defining itself as an institution created to uphold democracy and the rule of law. In any event, it is difficult to escape the notion that the EU’s sophisticated programme for constructing an economic and monetary union is perhaps a little premature for countries still reeling from forty-five years of Communism. Indeed, countries without suitable property legislation, free markets, an efficient administration of justice, an effective but not oppressive police force to guarantee property rights, an efficient and trustworthy administration and a not-too-capricious form of democracy, will find it difficult, if not impossible, to

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catch up with the changes that have taken place in the EU and meet its minimal standards for the running of a state. Apart from adopting the programme for EMU there are also the second and third ‘pillars’ of the Maastricht Treaty—the Common Foreign and Security Policy (CFSP) and Justice and Home Affairs (JHA) to be adopted by the applicants. The CEECs have not only to adjust to the acquis communautaire, but also to build their own body of laws, which support the transition process to a market economy. Thus, the problem is not merely to approximate the EU laws, but above all, and without wasting any time, to create functioning democracies and market economies from scratch—a huge task. In the CEECs, despite the brave words from the Commission,4 many of the laws for a successful transition from a planned economy to a free market are missing; such fundamental institutions as a properly functioning judicial system are simply absent; the traditions and culture of a market system, without which it cannot work properly, have been lost. Problems also arise concerning the administrative capacity of the Eastern and Central European countries to cope with EU membership. There is a ‘dual system’, with a small well-trained, highly dedicated and efficient group of people in leading positions and a large group of poorly trained, demotivated, badly paid officials at lower levels, inherited from the previous regime. This apparently trivial factor could effectively undermine the CEECs’ ability to play their normal roles in EU activities which, as we all know, involve a great deal of detailed monitoring and application of technical rules. The EU is nothing if not bureaucratically complex. Performance of the CEECs Despite these hurdles, the achievements of the CEECs on the political and economic transformation front are impressive. Democratic institutions have been functioning for a number of years and the young parliamentary democracies have survived the second wave of general elections with changes in governments and coalitions in most, if not all, of the countries. All of the applicant countries have repeatedly stated their commitment to the objectives of the EU, and programmes are being implemented to proceed with the approximation of legislation, i.e. the process of absorbing the acquis communautaire into their own legislation. Therefore, the overall assessment of countries’ readiness to join the EU is relatively positive. Nevertheless, certain problem areas persist that concern the protection of minorities in Slovakia, Bulgaria, Romania, the Baltic states and Macedonia. The EU and the enlargement Enlarging eastwards is not that simple for the EU; even although the EU is used to handling the process of enlargement. It has acquired considerable experience as new entrants have marked each recent decade in the history of

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the Community. From a core of six countries, the EC turned into a community of nine, ten, twelve, and then fifteen, Austria, Sweden and Finland being the last entrants. The timetable already exists, which from Copenhagen to Madrid, to Dublin and Luxembourg, forces governments to respect programmes and determines their actions. Although the EU has gained considerable experience in handling the process, the enlargement to the CEECs is problematic by the number of applicant countries and the complexity of the problems the Commission and the Member States have to deal with. Financial transfers to the CEECs and agriculture are highly sensitive issues that mobilise lobbies and governments with the EU. Candidate countries threaten two powerful interest groups—incumbent EU farmers and poor regions— during the decades they will need to catch up.5 There are a wide range of estimates of the amounts that should be transferred to the CEECs. Figures offered as to the cost of enlargement go from 27 billion ECU upwards, which according to some calculations would increase the EU’s annual budget by a mere 15–25 per cent, or according to others by 50–100 per cent.6 Some estimates go as far as 63.5 billion ECU, increasing the budget by 74 per cent.7 These are approximate figures. Interestingly, the Commission is keen to keep these the figures approximate, fearing that more precise numbers would make the negotiations more difficult and antagonise Member States more than necessary.8 Whatever the final figure agreed upon, it will have to be compatible with the unwillingness of the EU’s main net budget contributors (Germany, Netherlands, UK) to increase their net contributions and the resistance of the EU’s main net budget recipients (Spain, Ireland, Greece, Portugal) to any reduction in ‘their’ hand outs. That small net contributions to the CEECs will be spread out over many years, and hopefully paid for by economic growth, is probably the most that can be expected, but even this requires subtle reforms of the Common Agricultural Policy (CAP), regional policy, and cohesion policy, since the same basic laws should in principle apply to all present and future Member States. Previous enlargements were accompanied by tailored structural funds, created specially for the applicants, or the incumbent members who felt threatened, in order to avoid any conflicts with previous commitments. It is unlikely that these initiatives will be duplicated in the current situation. The Commission has been less explicit about the impact of the eastward integration on structural policies, although economic and social cohesion will remain a fundamental objective of the Union, and cohesion policy may need to be reinforced in the future union. One thing is quite clear: the Mediterranean countries are not prepared to agree on a financial framework for the CEECs which would reduce their own transfers. Spain has already threatened to use its veto power if the reform of the Structural Funds leads to a reduction in the resources available for the development of the existing backward regions.9

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Who is threatening whom? Who is gaining? According to the contributors to this book, commercial factors constitute additional core problems of enlargement. It is a serious issue, as trade is the linchpin of political integration and thus the key to the strategies of the prospective members to modernise their economies.10 Increased access to the Community market is seen as the crucial ingredient for financing economic reforms, and also avoiding massive migration westward. One of the dilemmas faced by the EU is how to deal with domestic pressures, emerging from lobbies and industrial sectors, which have relentlessly resisted the import of sensitive products—foodstuffs, textiles, chemicals, pharmaceuticals or steel—from the CEECs. Moreover, concerning agriculture, in this volume Andras Inotai asks a straightforward question: ‘who is threatening whom, and who is gaining?’ Except for Hungary, each applicant country now has a deficit in agricultural trade with the EU. Whether this is the right specialisation among European national economies, is another question. Taking into account the effects of the 1992 reform of the CAP and the further alignment of EU agricultural prices on world market prices announced in 1998, the increase in CAP costs due to enlargement are estimated at between 8 to 12 billion ECU, the largest part of this sum being direct income support. Nevertheless, the CAP reform process is not over yet. As Victoria Curzon Price puts it in Chapter 2 of this volume, direct income support for farmers has to be ‘re-nationalised’, or ‘de-communitairised’, before substantial sums can be released from the EU budget for other purposes. Negotiations on agriculture in the World Trade Organisation (WTO) will restart in 1999, and the EU is still adjusting to the MacSharry reforms of 1992. The implementation of the CAP in the CEECs will have to respect the commitments that the EU has made in past and future WTO negotiations. One of the core problems is that the support measures that will assist agriculture have to stay in conformity with the Uruguay round commitments. This means direct income support, which tends to be more of a drain on public funds than price support, which is paid for by unsuspecting consumers. How to finance regions which have been impoverished by the decline of their farmers—and indeed, any other economic activity? The problem of economic decline does not concern only agriculture, but is part of a more general issue, and it can hit urban as well as rural communities. Agriculture has traditionally seized the lion’s share of EU disposable funds, but that could be seen as a historical accident—during the 1960s the only sector to do really badly on a large scale was agriculture, and so it needed help, and it has been successful in hanging on to this initial privilege. Now many sectors need help, and there is no reason why farming should monopolise the scarce Community resources. A shift from focusing on agriculture to addressing more general regional issues is therefore predictable in the EU, and indeed is the only way out of the problem

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of devising a system of inter-EU financial transfers that is not capricious and arbitrary. Enlarging eastwards: an inclusive process? The EU has always been ambivalent in facing the challenge of enlarging eastwards. It has successively proposed links of varying strengths, from affiliation to association or full membership, that underlined the EU’s fears about enlarging eastwards. Each new link, depending on its strength, involved implicit security issues. A process of selective enlargement could create a new division in a continent which has been fragmented and delineated for a long time. Hence, the real challenge for the EU is to have all the CEECs inside the Union to avoid further division of Europe, while starting negotiations with countries most ready for membership. The European Conference in March 1998, bringing in all the EU members and the applicants countries together captures the idea that the enlargement process is inclusive, and that all the applicants are part of it.11 Inclusion has become a new leitmotiv, which mirrors the Community’s malaise. Yet, all the participants are not on an equal footing in negotiating with the EU. The Commission has multiplied formulas—from the questionnaire process to the ‘screening’ now unfolding both for the ‘pre-ins’ and the applicant countries—to assess the economic and political situation of the CEECs and their readiness to join the EU, to adjust to the acquis. The questionnaires sent to all of the CEECs in 1996 underlined the many gaps between the current situation in the CEECs and the criteria for accession set by the European Council at its summit in Copenhagen in June 1993. Hungary, Poland, the Czech Republic, Estonia and Slovenia have been admitted to the first wave, but the other applicants are either have too fragile democracies, or a lack stable institutions, or lack the capacity to adopt the acquis.12 This latter group has been invited into ‘pre-accession partnership’ with the EU to help them get ready for membership. Christian Deubner asks a fair question in this volume. ‘Why the five?’ What is the real organising principle which separates the first from the second group? It may be true that the criteria have been interpreted more generously for some applicants than others. However, some facts remain.13 Poland would probably have been, together with Slovakia, the last candidate on the grounds of its low level of economic development and its size. However, politically, it has become unthinkable to exclude Poland. Slovakia will not take part in the first wave of enlargement, largely because of Prime Minister Meciar’s antics and undemocratic methods.14 However, once Poland is admitted, then further equally impoverished countries, like the other two Baltic states, cannot be excluded, except on rather weak and subjective grounds, such as ‘insufficient’ protection of minorities. The EU is negotiating simultaneously multilaterally and bilaterally with the applicants, while opting for the first approach with the ‘pre-ins’, and leaving open whether at a later stage there should be a unique group of eleven

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applicants or two groups which enter jointly: the first made up of the countries that have started the negotiating process; the second of five ‘partner’ countries— Romania, Bulgaria, Slovakia, Latvia and Lithuania.15 In the meantime, each applicant is under scrutiny by a ‘screening’ of its political and economic structures, after the Commission has charted its acquis communautaire This stage is supplementing the earlier questionnaires, sent to the CEECs by the Commission. From the standpoint of the CEECs, the negotiating process is uneasy. A group-to-group approach is unlikely, even if desirable, and even if a precedent exists (it was required in previous negotiations with the African Caribbean and Pacific countries (ACP) and the European Free Trade Association (EFTA) countries). Between the CEECs, the multilateral integrative mechanism is still embryonic, and when it comes to national interests, countries pursue a unilateral approach. Each country has to negotiate bilaterally with the Commission in order to devise derogations and specific treatments. Introducing more members with different priorities and different levels of development requires accommodative concepts. Some observers argue that the current process, which will at least have the virtue of clarifying the geopolitical determinants of the EU, will inevitably transform the European Union. In short, will the monolithic, one-rule-for-all, homogenous EU survive more or less intact this latest attack, or will it finally succumb to flexibility?16 From variable geometry to flexibility There is one factor which has always conditioned the European unification process: multilayered internal cleavages.17 These divisions concern, inter alia, the scope of integration which it is desirable to pursue, the role the United States should play within Europe, and the style of diplomacy which the EU should adopt, conditioned itself by other sets of variables— ‘big’ versus ‘small’ countries, Nordic against Alpine, Atlantic versus Mediterranean, etc., — leading to differing foreign policy concerns depending upon history and geography. These elements suggest that the concept of ‘variable geometry’ was intrinsic to the European unification process from the start and resulted in building coalitions among different member states according to the issues. William Wallace refers to a multi-tier Community, similar to Delors’ ‘concentric circles’, in which a core of Member States accomplishes the objectives set by the EU, while the others tag along.18 Each core member has its own foreign policy concerns, which leads, in turn, to other circles of states linked to the EU with various degrees of intensity. Concerning the internal ‘construction’ of the Economic and Monetary Union, ‘variable speed’ or ‘variable geometry’ are other labels, referring to the same process of having some Member States moving ahead more rapidly than others. One could even go as far as suggesting à la carte integration, according to which

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Member States could choose their own menu of integration policies. Although this idea is resisted strongly by the Commission as being contrary to what the whole European adventure is about, it is coming up again with the enlargement to the CEECs. The ‘opting out’ of Denmark and the United Kingdom from certain aspects of the Maastricht Treaty can be seen as an encouraging sign that the EU is becoming more flexible, or as a negative signal that the EU is losing its soul. Whatever the interpretation, it represents a political reality. Thus Denmark’s 50.7 per cent ‘no’ to the Maastricht Treaty in June 1992 was transformed into a narrow margin in favour of the ratification of the Maastricht Treaty in May 1993 once it was granted with four opt-outs over monetary union, EU citizenship, cooperation in justice and home affairs, and any defence issue.19 Sweden has no official opt-out from EMU, but has no obligation to meet its convergence criteria, and is not expected to join EMU before 2002. This might be termed informal variable geometry. Flexibility is a competing term utilised by the Commission. It captures a situation in which a sub-group of Member States moves towards deeper integration than the others, on the understanding that all members will one day reach the same destination. It captures a provisional situation in which the CEECs, for example, would not be obliged to sign up for all EU obligations at once. Germany, France, and more reluctantly Britain, back flexibility. According to Mr Malcolm Rifkind, former British Foreign Secretary, flexibility is the key to reconcile European cooperation with Europe’s diversity. Britain is not shy of flexibility, nor of taking part ourselves in enhanced co-operation. Sometimes we will be a leading player, in other cases we may stand aside. But we want to see flexibility work in the interest of all Europeans. We think it can do so if all member states are assured that their interests will be safeguarded when others co-operate in a specific area… We think our aim should rather be to find specific answers to specific problems, not more Europe but a better Europe.20 The inner core provides the leadership and direction of the EU, ensures the continued commitment of larger countries, and avoids the possibility that the slowest ship could determine the pace of the convoy. The inner core pool their sovereignty, and push towards a common currency, a common defence and foreign policies and a common set of laws. It would include Germany, France, Holland, Belgium and Luxembourg. The second circle would include Britain and some other member countries, which would remain at their present level of integration, and would include participation in the CAP, the Single Market and structural funds to help poorer regions. A final outer circle would contain other member and aspirant states.21

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This concept would be consistent with the Maastricht Treaty, which allows some opting out. Questioning the community method of enlarging Thus, enlargement is a more complex process than was first envisioned. It is ill-timed. The EU passed through an identity crisis in 1992 after the Danes nearly rejected the Maastricht Treaty, and the marginal French vote raised equally fundamental questions. Until then, the integration process had been driven by the political elite, on the simple assumption that public opinion would applaud every move. In fact, it never involved European civil society at all. The EU model is now under scrutiny by an increasingly ‘Eurosceptic’ public. Politicians at the Member State level may in due course have to respond to public demands for more Euro-accountability, transparency and democracy. Clearly the EU system still has plenty of room to evolve. Even as it is, academics find that the EU’s political institutions have created a novel form of governance (or government, if we want to be radical). It simply escapes classification. Political scientists may speak of the EU’s novel forms of multilevel governance, involving a complex matrix of institutions, local and regional authorities and non-governmental actors,22 but the nature of the integration machinery is far from clear, even for the experts. The EU lacks clarity of purpose, leadership, ‘actorness’. The EU lacked unity in facing the war in the former Yugoslavia, despite the new instruments of a CFSP created by the Maastricht Treaty. There is growing evidence that the enlargement raises questions about the ‘community method’ employed so far and the integration process in general. The EU has always postponed contentious issues until after the enlargement process had been completed, or has addressed the problems by creating new policy instruments overlaid on existing ones.23 The ‘pre-accession strategy’ outlined at the European Council of Essen in December 1994, the ‘White Paper’, drafted by the Commission in 1995, outlining the Community regulations and directives that are directly related to the functioning of the internal market and therefore needing to be adopted by the candidate countries as quickly as possible, and the questionnaires sent to the candidate countries in 1994 are all clear signals that this enlargement is unlikely to be similar to the previous ones. Major issues will be left over. Christian Deubner’s assumption that the Intergovernmental Conference (IGC) would fail to make the EU ‘fit for enlargement’ has turned out to be true. The Amsterdam Treaty has brought only minor improvements in efficiency, as to the role of national parliaments, a minor reduction of intra-Union transfer programmes, and has confirmed a general tendency to introduce more flexibility into institutions and procedures.

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The IGC, both as a symbol of integration, and a demonstration of Member States’ ability to adapt to external stimuli, has not fulfilled initial expectations— quite the contrary. The reason could be that, however embarrassing and inappropriate, the outcome Member States do diverge fundamentally over the model of integration they envision. The Member States overestimated the symbolic and legitimising function of the IGC in re-insuring the steady progress of integration.24 Once again it could be argued that this reincarnates old lines of cleavages. One of these cleavages being the scope of integration that the Member States wish to pursue.25 A strategy of ambiguity Michel Foucher points out in Chapter 11 that the ‘strategy of ambiguity’ dictates the EU policy towards its periphery, including the CEECs. This policy resembles a division into zones of influence, and not a global policy, which would be exempt from incoherence and contradictions. There is another sense of ambiguity with regard to the use of the European forum for the pursuit of legitimate national interests by certain Member States. France’s development cooperation policy or Germany’s policy towards the CEECs are case in point. They are playing in the name of Europe, but not for her. The result, naturally, is a lack of a common vision with regard to the future of Europe. The national interests of the Member States are divergent, especially with regard to the new questions raised by the political transformation in Central and Eastern Europe. Sometimes their interests appear to converge, but the motivation is not the same. Both Germany and the United Kingdom favoured the EU enlargement towards the east, but for different reasons. For the latter, the enlargement is a way to weaken the EU. For Germany, rebuilding bridges to the East was best done indirectly via the EU than directly from Germany. So far, Germany’s leading position in Eastern and Central Europe, together with reunification, has not caused the questioning of her commitment to the EU—quite the contrary, in fact. As for France, although enlargement to Eastern and Central Europe is deemed inevitable, it would resist any attempt to smuggle ‘flexibility’ into the community system via enlargement. It must not become a threat to the ‘community construction’. Germany is a core issue in the French policy towards Eastern and Central Europe, and a French-led Ostpolitik is a way to counterbalance Germany. An eastwards enlargement without French involvement would reinforce Germany’s position in the EU. The EU has to manage all these contradictions. Moreover, the enlargement induces some fundamental reflections upon security problems in Europe. Richard G.Whitman lists the likely consequences in this volume. Although the fragmentary nature of the CFSP process to date ensures that the CEECs would not have to ingest a substantial or clearly defined European common foreign policy, their inclusion might stop all further progress along these lines.

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If so, the North Atlantic Treaty Organisation (NATO) will remain the primary focus for security policy concerns for the CEECs. The EU is still at the core of the economic and political reforms the CEECs need for their process of modernisation, but NATO is a key element for their military security. Although, during the 1960s and 1970s, the EC distanced itself from the United States, the latter constitutes to this day the guarantee for the military security of the European continent. The current enlargement of the EU begs the question of where Europe’s Eastern and Southern frontiers actually lie. Europe, according to William Wallace, is not a ‘well-delineated territory, but is a mental map, an imagined space. The concept of Europe has often been redefined according to geopolitical or ideological perspectives’.26 So far, enlargements of the EU have been marked by a homogeneous Europe, with divisions between North and South being blurred by the Community machinery. This enlargement is different. It opens up very broad possibilities and forces EU member states to clarify their positions. For instance, there is a common understanding between Germany and the United Kingdom that Russia is not a European country. In their view, Russia is an Asiatic power, which grew out of the Byzantine Empire.27 The EU enlargement to encompass all the CEECs will give the Union borders with Russia and with Russia’s close neighbours, Belarus and the Ukraine. With the membership of Sweden and Finland, and soon the Baltic States, a Baltic lobby will appear, which will want EU support in resolving many conflicts with Russia. With the entry of Slovenia the Mediterranean lobby will be reinforced. The EU’s frontier on the Mediterranean is an even more explosive question, for it implies the inclusion or exclusion of such countries as Croatia, the Federal Republic of Yugoslavia, Moldova, Turkey and Former Yugoslav Republic of Macedonia (FYROM).28 The border problem interlocks with the security problem. The ‘security’ definition of Europe is different from a historical or geographical definition, and would encompass a very large number of countries, even including the central Asian republics. The ‘democracy-human rights’ definition of Europe, on the other hand, would reduce the number of candidates in the short run— but perhaps increase them massively in the long run. The ‘single marketmonetary union’ definition of Europe is, in the final analysis, the most restrictive. Would it not make sense, at least in the immediate future, to separate the economic from the security aspects of Eastern enlargement? These are the problems eastward enlargement presents to the EU. The EU has to define a new policy. As Professor Balcerowiz points out, the old choice between widening versus deepening is obsolete: in order to widen to the East, the EU has to deepen and re-focus—but that would have been needed anyway. Perhaps the collapse of the Soviet Union and the liberation of Central and Eastern Europe was just the kind of challenge the EU needed to jolt itself out of a rut and set it on the path to institutional innovation and inventive

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governance. Indeed, the EU is passing through turbulent times, but the enlargement eastwards is inexorable. Notes 1

2 3

4

5 6

7 8 9 10

11 12 13

14 15 16 17

18

EU Commission, Agenda 2000, Opinion of the Commission on the Application for Membership of Respectively Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Czech Republic, Romania, Slovenia, Slovakia, Docs 97/11–20, 15 July 1997. EU Commission, Agenda 2000, Vol. 1, For a Stronger and Wider Union, COM 97 2000, 15 July 1997. Lancaster House, press release, 12 March 1998. ‘Responsable mais pas coupable’ was the admission of Mme Georgina Dufoix, French Minister of Health under President Mitterrand, when accused of being responsible for allowing HIV-contaminated blood to be used long after it was known to be dangerous to health. According to the Commission, of the ten candidate countries only Slovakia fails to meet the political conditions for membership laid down by the European Council in Copenhagen in 1993. See Agenda 2000 op. cit. R.Baldwin, Towards an Integrated Europe, London, Centre for Economic Policy Research 1994, p. xvii. A.Inotai, ‘From association agreements to full membership? The dynamics of relations between the central and eastern European countries and the European Union’, Budapest, Institute for World Economics Working Papers, 1995, No. 52. Baldwin, op. cit. Interview with the Task Force for the Enlargement on 18 May 1998. Interview with DG1B official on 19 May 1998. K.Nicolaïdis, ‘East European Trade in the aftermath of 1989: Did international institutions matter?’, in Robert O.Keohane, Joseph Nye and Stanley Hoffmann (eds), After the Cold War, International Institutions and State Strategies in Europe, 1989– 1991, Cambridge, Harvard University Press, 1992, p. 199. Survey of Current Affairs, London, Foreign and Commonwealth Office, 1998, 27, 4, p. 104. EU General Report 1997, Brussels, Office for the Official Publications of the European Communities, 1997, p. 289. John Redmond, ‘The wider Europe: Extending the membership of the EC’, in Alan Cafruny and Glenda Rosenthal (eds), The State of the European Community, Vol. 2, Boulder, Lynne Rienner, 1993, p. 210. The Economist, 13 September 1997. Agence Europe, 7153, 5 February 1998. Agence Europe, 7136, 12–13 January 1998. Alice Landau, ‘External dimensions and geopolitical determinants of the European construction’, in Regional Integration Process, European Union/Southern Africa Development Community, Bordeaux, CEAN, 1995. p. 90. William Wallace, The Transformation of Europe, London, RIIA, Pinter, 1989, p. 44.

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19 The Social Chapter included the promotion of employment, an extension of qualified majority voting procedures to promote proposals on working conditions, consultation of workers, equality between men and women, a greater role for social partners, and unanimous decision-making in areas such as social security. 20 Survey of Current Affairs, London, Foreign and Commonwealth Office, Vol. 27, No. 4, 1997, pp. 119–120. 21 Le Monde, 24–25 March 1996. 22 Frans Van Waarden, ‘Dimensions and types of policy networks’, European Journal of Political Research, 21, 1–1; p. 33. 23 Christopher, Preston, ‘Obstacles to the EU enlargement: The classical community method and the prospects for a wider Europe’, Journal of Common Market Studies, Vol. 33, No. 3, 1995, p. 460. 24 Juliet Lodge, Intergovernmental conferences and European integration: the case of the Amsterdam Treaty, Journal of International Negotiation, (Winter 1998). 25 Landau, op. cit., p. 90. 26 Wallace, op. cit., p. 7. 27 Ibid. 28 International Herald Tribune, 17 January 1995.

2

Reintegrating Europe Economic aspects Victoria Curzon Price

Introduction Enlargement of the European Union (EU) to include the countries formerly under the sway of the Soviet Union is a political imperative: politically, culturally and economically they are part of ‘Europe’1 —or rapidly becoming so. Having been excluded for decades from what must seem a most desirable club, whose citizens enjoy much personal freedom under the law and decent levels of income, they are understandably very keen to join. The applicants2 have all signed up for democracy and the market economy; membership of EU looks like the best way to consolidate these fledgling institutions. However, 40 years of communism have left a fault-line where the Iron Curtain once was. Its principal component is a generally much lower standard of living than in countries to the west which were fortunate enough to escape the consequences of central planning and dictatorship of the proletariat. Transition to democracy and the market economy is supposed to set the Central and Eastern European countries (CEECs) on a path to convergence. But after almost a decade of ‘transition’ some countries are further from this goal than ever, and none look set to achieve average Western levels of income and wealth within a generation. The process is proving disappointingly slow. Nobody knows how long it will take to reduce the gap, let alone eliminate it, but the consensus view is not encouraging. According to Hamilton and Winters, who make an optimistic prognosis based on the CEEC’s reputedly high level of educational achievement, if they were to grow 2 percentage points faster than the EU, it might take 30 years to raise their incomes to half current EU levels.3 According to Baldwin4 (well known for his optimistic dynamic growth models), it could take the Visegrad countries 40 years to reach 75 per cent of the EU’s by-then average income,5 and Poland 20 years to catch up with Portugal. Only one thing we know for sure: economic convergence will take longer than the CEECs are willing to wait for admission to the EU. So although the pace of enlargement is in large part politically driven, as we maintain in the introductory chapter, it may raise some difficult economic issues along the way.

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In particular, the EU has to address the question of economic integration between unequal partners to an extent never before encountered. Can it be done? At what cost? Where are the main problems likely to arise? What does economic theory have to say, if anything, about economic integration between unequal partners? We shall see that mainstream economics does not think that this is much of an issue at all, either statically or dynamically. To make it into one, we would have to throw out some our favourite theories, like the doctrine of comparative advantage, or the idea that homo economicus is much the same everywhere. However, this view is clearly not shared by most observers, including the EU Commission, which stresses that these much poorer economies cannot ‘cope’ with full integration and that caution and long transitional periods are needed. This paradox is worth exploring, and forms the second part of this chapter. Economic integration between unequal partners: static aspects Can ‘rich’ and ‘poor’ countries in principle coexist within a ‘tight’ form of economic integration, like a customs union? Will both types of partners enjoy mutual benefits, or are there risks that the economic benefits might concentrate with the richer partner, to the detriment of the less-developed one? Let us start with a simple, old-fashioned customs union (free trade in goods and a common external tariff) and the most favourable scenario. In this scenario (1) the ‘rich’ country partner has generally low tariffs, and in any event, lower than the ‘poor’ country partner and (2) the ‘rich’ country calls the shots (imposes its tariff on the poorer partner). If this is the case, and if there is ‘sufficient’ overlap in the industrial structure of traded goods,6 a customs union (CU) will tend to be highly beneficial for the poorer partner. The reason is that the CU forces the high-tariff country to apply a lower tariff quickly and credibly to non-member Most Favoured Nation (MFN) trade, while at the same time freeing trade completely with the richer, lower-tariff partner (who is close to worldclass competitiveness, as its low-tariff policy testifies). There is plenty of scope for trade creation (elimination of previously highly protected local industry) and not much scope for trade diversion (since the common external tariff is low). The richer, more liberal partner will not enjoy much extra benefit from trade creation (it is already open to world competition and the margin of preference for partner producers is low) and its ‘pickings’ from trade diversion in the poorer country will be unimpressive. Consumers in the poor country will benefit, while those in the rich country will see little or no difference, unless producers in the poor country turn out to be wildly competitive in their areas of comparative advantage and compete away the modest rents embedded in the low common external tariff. If the rich country is the more protectionist of the two, these conclusions have to be reversed: the rich country imposes its higher tariff on the poorer partner, who then suffers plenty of trade diversion and little trade creation.

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Consumers/tax-payers in the poor country lose out. Even producers in the poor, open economy are not likely to benefit from the increased protection of the high common external tariff because the price of imported inputs will rise, forcing them to restructure away from their areas of comparative advantage. On the other hand, producers in the rich country will benefit from the trade diversion endured by the poorer partner—they gain a larger market for their high-priced goods and earn a comfortable artificial scarcity rent off consumers in the poorer country. Consumers in the rich country will see no difference, especially as producers in the poor country have had their competitive wings clipped. Given these very different economic outcomes, where is reality for the CEECs likely to lie in practice? Making generalisations about overall levels of protection is notoriously hazardous. Average tariff levels may hide a high level of dispersion, trade-weighted average tariffs can be misleading,7 a ‘low’ tariff can be very protectionist if the product is standardised and undifferentiated (while some ‘high’ tariffs may fail to stem imports), and visible tariffs may not even be the main instrument of protection. Table 2.1 therefore needs to be interpreted with care, in conjunction with Table 2.2. It would appear that the Czech Republic, Slovakia, Estonia and possibly Latvia practice as liberal, or more liberal, a trade regime as the EU for industrial products; that Bulgaria and Romania are way behind the liberalisation process in general, and the trade liberalisation process in particular; and that Hungary, Poland and Slovenia more protectionist than, but fairly Table 2.1 EU, Central and East European and Baltic tariffs

Sources: Column 1, Messerlin op. cit. p. 86; Columns 2 and 3, Commission opinion op. cit. on applications for membership (points 3.4 ‘Sectoral policies’ and 3.8 ‘Trade and international economic relations’). Producer subsidy equivalent (PSE) is a composite measure of agricultural protection, developed by the OECD and calculated according to a common definition, to facilitate international comparisons.

28 Victoria Curzon Price Table 2.2 Commission’s assessment of trade and currency regimes of the ten candidate countries

‘Second wave’ candidates Bulgaria Trade:

Abolition of state trading monopoly in 1990–91, trade regime liberal on paper, but price controls affected over 50% of consumer goods until spring 1997—so exports not free. Export prohibition on wheat (artificially low price). Import surcharge from mid-1996.

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Sources: Commission opinions on applications to join EU, July 1997. Note: a At the Luxembourg Council Summit in December 1997, the EU Member States decided to expand eastwards by opening negotiations for accession with a ‘first wave’ of candidates, while emphasising that it was only a matter of time before all ten would be members. See Chapter 1.

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close to, the EU levels of protection for industrial products. However, most applicants appear to practise a much lower level of agricultural protection (the EU’s PSE at 49 per cent is well over double the most protectionist CEEC (Slovakia) and 16 times that of the Baltic states). One cannot overemphasise what an amazing picture this is. Eight of the ten applicants have abolished their foreign trade monopolies (a necessary part of central planning) and replaced them, on the whole entirely successfully, by decentralised market-driven private traders. It confirms Kierzkowski’s statement that the ‘introduction of convertibility and liberalisation of foreign trade can be achieved almost overnight by a determined government’.8 Of the ten applicants, eight have demonstrated such determination—and one has gone the whole way to free trade. This constitutes a drastic break with the very recent past, so drastic in fact that there may be some danger that the degree of liberalisation may in some cases be partly reversed.9 However, the overall picture is one of countries opening their economies to international competition with dedication and conviction. This impression is confirmed by consulting Table 2.2, which summarises the results of the EU Commission’s ‘Questionnaire’ sent to all applicant countries in order to gather soft and hard data concerning their progress along the road of transition from planned to market economies. Trade liberalisation has been an important part of the transition process. One can see clearly that internal and external liberalisation go hand-in-hand—the Baltic states having gone as far as possible along both dimensions, followed closely by the Czech Republic, while Bulgaria and Romania have failed to make much progress on either front for the time being. The remaining applicants fall somewhere in between. The currency regime is also revealing: most applicants have achieved convertibility for current transactions, but retain controls on capital movements. This has not always protected them from devaluations, as the Czech case shows, and it is again the Baltic states which so far have achieved the most open—and the most stable—exchange-rate regimes. On the basis of the static part of CU theory, we conclude tentatively that, as far as manufactured goods are concerned, only Bulgaria and Romania look like clear winners from forming a CU with the EU. Other applicants are already open economies to all intents and purposes, often more so than the EU, and the gains from trade creation are likely to be largely cancelled out by losses from trade diversion. This is particularly the case for Estonia, the Czech Republic and Slovakia. This kind of generalisation will be refined over time as more detailed research is done to measure these effects in greater detail. For instance, there are some sectors where the EU is very protectionist and one could imagine trade diversion easily exceeding trade creation in these cases, even for Bulgaria or Romania. Textiles and clothing, leather, footwear, wood products and light consumer products are all sectors where trade diversion is likely to be large, since they tend to be ‘sensitive’, and therefore highly protected, in EU markets. It is in these sectors that the Europe Agreements have already given rise to a large

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network of ‘outward processing’ quotas10 which have undoubtedly stimulated EU-CEEC trade flows, but where market access is conditional on buying inputs from a Community source (a classical example of managed trade diversion). In a sense, joining the EU as full members would not alter the situation—one could just say that the trade-diversion damage has already been done. Turning to agricultural goods, we conclude with far more certainty that adopting the current version of the CAP would involve the applicants (with the possible exception of Slovenia) with more trade diversion than trade creation. This is because prices would have to rise to EU levels, and the CEECs would have to take on board the various instruments of protection which keep EU farm prices above world-market prices. However, if, as we are promised, radical reforms to the CAP are pursued in the immediate future, and EU prices fall to world levels, of course this gloomy prognosis would be reversed. Trade creation and trade diversion are, however, not the end of the story. In fact, most people tend to think that these static effects are an academic curiosity, especially since all attempts to measure them in a rigorous fashion have always turned up pathetically small numbers. Many people, including policy-makers and the EU Commission, put their faith in dynamic effects, to which we now turn. Economic integration between unequal partners: dynamic aspects

Initial adjustment If one takes a dynamic view of industrial development, there is no reason why the CEECs should not, in due course, achieve world-class competitiveness Table 2.3 Merchandise exports of the CEECs by direction, 1986, 1996, shares in total trade (%)

Source: United Nations Economic Commission for Europe, Economic Survey of Europe in 1996– 1997, New York and Geneva, 1997, p. 236.

Source: UN ECE, Economic Survey of Europe in 1996–1997, New York and Geneva, 1997, p. 232.

Table 2.4 Merchandise exports of the CEECs, 1986–1996 ($ billion)

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and scale economies in any number of sectors—that is what market access to the entire market of Western and Eastern Europe is all about. Once entrepreneurs in the CEECs are exposed to challenges, and new information by opening up to a more developed partner, it is probable that many opportunities will be seized and that the industrial structure will change rapidly. This is the standard, market-economy view of how things work. Let us note immediately that even the static analysis of CUs implies that factors of production move dynamically from one sector to another. This assumption is absolutely essential to the theory of comparative advantage, for if factors are ‘sector specific’ and cannot move, then they have no alternative use and cannot be reallocated—but they can be made unemployed. If this is the case, opening one’s market to foreign competition could be disastrous. ‘Trade pessimism’ stems from an attenuated version of this theory: namely, that there are few or no immediate attractive alternative uses for domestic factors,11 which remain like sitting ducks, easy targets for predatory foreign firms. This vision of how markets work is very common and explains, inter alia, why the Europe Agreements are asymmetric and why the EU and Commission worry about whether the CEEC applicants possess ‘the capacity to withstand competitive pressure and market forces within the Union’.12 However, there is no evidence which suggests that the ‘sitting duck’ syndrome is characteristic of the CE ECs. It is more than possible that many underdeveloped countries in the nineteenth and first half of the twentieth centuries may have been in this uncomfortable position, but industrialisation is all about developing a multitude of alternative uses for factors of production. Since the CEECs were integrated into the grand Soviet socialist division of labour, they have long been fully industrialised, even if the actual allocation of their resources may have been surrealistic and ‘wrong’ from a market economy view point. Once freed from the grand plan, resources have moved swiftly. The level of education is high, and the motivation to make up for lost time enormous. One has only to look at how quickly the CEECs reoriented their exports from the Council for Mutual Economic Cooperation (COM ECON) area to the developed market economies (see Table 2.3). Thus in 1986, the former Soviet Union (FSU) took 31 per cent of CEEC exports; by 1996 this share had fallen to only 9 per cent. In the meantime, exports to developed market economies (whose customers are so difficult to please) rose from 32 to 64 per cent of the total. At the same time exports started growing rapidly in absolute terms from 1993 onwards (see Table 2.4). Czech exports grew by 150 per cent in the four years from 1992 to 1996; Estonian exports grew by a factor of 4.7 during the same period. Even Romanian exports grew by 76 per cent. Such a performance would have been impossible if factors had remained ‘sitting ducks’. True enough, Gross Domestic Product (GDP) in the CEEC’s and Baltic states does not yet appear to have recovered to 1989 levels (with the exception of Poland—see Table 2.5). However, there is no way that one can assign a reliable

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Table 2.5 Real GDP/NMP in CEECs and Baltic states (1989=100)

Source: UN ECE, Economic Survey of Europe in 1996–1997, New York and Geneva, 1997, p. 225

market value to the ‘net material product’ which was produced before the collapse of the Soviet system. Given the choice, one would surely prefer the bundle of goods produced in 1996, even if they represent nominally only 50 per cent of the mad bundle of goods produced in 1989. It is also true that registered unemployment is infinitely higher—there was no unemployment in the socialist system. But by comparison with Western European levels, absolute unemployment levels appear surprisingly low (see Table 2.6), given the huge structural shift in production and trade which has taken place in less than a decade. The wrenching fall in output in the Baltic states calls for comment: they were totally integrated in the Soviet Union and for a longer period of time than the other applicant countries. Yet their exports are now growing by leaps and bounds (see Table 2.4) and their registered unemployment is low. We have also Table 2.6 Unemployment in the CEECs and Baltic states (% of labour force, 1990, 1996)

Source: UN ECE, Economic Survey of Europe in 1996–1997, New York and Geneva, 1997, p. 229. Note:a =1992.

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seen that they are among the least protectionist of the applicant countries, their exchange rates have been stable since 1994 and annual inflation (after a poor start) had fallen to 14–16 per cent by 1996.13 In view of the enormous structural changes which these small economies have faced, these indicators do not suggest the existence of the ‘sitting duck’ syndrome. Economies of scale Dynamic effects in customs union theory refer, inter alia, to internal and external economies of scale, investment effects, terms of trade effects and various politicaleconomy aspects of union. Among the most important are economies of scale. Secure and open access to wide markets is a necessary ingredient of this magical (but none the less real) gain, and it is precisely what full membership of the EU offers. Hence, although one could agree in principle with Kierzkowski that ‘the Central European countries are almost textbook examples of small economies which should trade freely with the whole world’, one cannot overlook the fact that in a world divided into trade blocs, small economies remaining outside are exceedingly vulnerable.14 They can decide to import freely, but their exports are discriminated against.15 They are therefore unlikely to attract investment grounded in world-class scale economies because of the lack of secure and open access to a large regional market. An established market economy like Switzerland can (perhaps) take this risk, because Swiss firms can develop a ‘niche’ strategy, which does not rely on economies of scale for success, but on differentiation, innovation, uniqueness, high quality and very, very high prices. Swiss multinational firms can also invest directly and exploit economies of scale by becoming honorary private members of the EU. Neither option, it seems to me, is yet available for the CEECs, and is a high-risk strategy even for the Swiss. The CEECs still need to attract investment, build up their economies with modern production facilities and if possible enjoy many years of catch-up growth. They probably can best do this by joining the EU, despite the trade-diversion dangers. However, they should not join the EU ‘at all costs’, and should look carefully at the hidden costs of adopting the acquis communautaire as it stands today. ‘Hyper-dynamic’ effects In addition to the traditional dynamic effects mentioned above, there is also room for what might be termed ‘hyper-dynamic’ effects. To describe these, we take an ‘Austrian’16 approach to economics and abandon the convenient hypothesis of perfect knowledge. Without perfect knowledge, the allocation of known scarce resources to known ends according to known technologies, achieving a unique social optimum, becomes impossible. The notion of imperfect competition does not capture the extent of the gap between the unattainable ideal of perfect competition and market ‘realities’ because it still assumes perfect

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knowledge on the part of all economic agents. Reality is much worse: according to the Austrian view, all agents are taking decisions on the basis of very imperfect knowledge, making mistakes and proceeding by trial and error. Competition becomes a search-and-discovery process by which the veil of ignorance is partially lifted. Indeed, competition becomes the only source of relevant information.17 In the Austrian perspective, firms are continually adjusting not just the level of output, but also what they produce and how they produce it. They are constantly seeking new products and new technologies. The question ‘how much should I produce?’, so dear to neo-classical economics, is relegated to third place, well after ‘what should I produce next?’ Although this perspective might be compared with the model of monopolistic competition and product differentiation in the neo-classical tradition, it is much richer. The firm in monopolistic competition tries to create a ‘niche’ market for itself, by introducing marginal changes to an existing product, according to the principle of minimum differentiation. The entrepreneur (incidentally, not the same as ‘the firm’) is not so limited. He will specialise in producing whatever appears most promising to him at any particular point in time, but he will change constantly, following the market wherever it leads him. Competition is a discovery process.18 By contrast, in the world of perfect knowledge there is nothing left to discover. The Austrian approach endogenises entrepreneurship, innovation and creativity in the economic process. Hyper-dynamic ‘Austrian’ adjustment to international competition We have seen how, according to the neo-classical view, factors of production are reallocated smoothly from one activity to another under the pressure of competition. This is the basis of the theory of comparative advantage. There is always an alternative (in this case, more productive) sector to which factors can move. It has been argued above that this is a fair representation of what happens in general, and in the CEECs in particular, but—embarrassingly— many noneconomists remain sceptical, arguing that in poor countries, people are ignorant, non-entrepreneurial, stuck-in-the-mud, used to taking orders from authority rather than relying on self-help, with the implication that it will take a long time, much international aid, many expert consultancy hours and great ‘effort’ on somebody’s part to get things going. The Austrian approach offers a sound basis in logic for believing that one need not be so pessimistic. It is precisely because knowledge is imperfect and the future uncertain that opportunities are created for alert entrepreneurs. It allows us to be confident that in the presence of great change, where new opportunities are multiplied, entrepreneurship will flourish as never before. All entrepreneurs need is freedom and property rights defined under the rule of law. In most of the CEECs they now have this (however, the Commission is more confident about the applicants meeting the political criteria for membership than the economic ones).

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In the Austrian world of entrepreneurial discovery, opening up a previously closed market to competition from world-class firms should not only raise the level of active searching for solutions on the part of all affected entrepreneurs, but will also increase the range of new opportunities before them, in the shape of changing relative prices, new products and new technologies. The range of choice for entrepreneurs in the traded sector is not simply to stay in known sector X or move to known sector Y, or some sub-sector of X, but includes the whole range of new and unknown products and methods, yet to be invented. Entrepreneurs are pulled towards this sector—Z if we want a short-hand—precisely because they are part of the discovery process. Conventional trade theory gets it wrong when considering the ability of an economy to adapt smoothly to discontinuous, non-marginal challenges such as those implied by the transition from planned to market economies, or the wholesale reorientation of the pattern of trade. It tends to underestimate the problem of structural adaptation, because of the assumption of perfect knowledge and instantaneous ‘perfect’ reallocation of resources. And it tends to overestimate the problem of structural adaptation by limiting the range of alternative occupations to known sectors. The process of adaptation in an Austrian perspective is both harder and easier than in a neo-classical framework—harder because entrepreneurs take decisions without anything like full knowledge, easier because the greater the change, the greater the incentive to innovate one’s way out of the problem. But mainly, the two approaches complement each other. The neo-classical approach implicitly abandons the hypothesis of perfect knowledge when it goes from static to dynamic mode, and the Austrian approach provides a plausible rationale for endogenising innovation and entrepreneurship. Taken together, these two approaches reinforce the view that the market economy is good at adapting dynamically to change—even discontinuous change. Entrepreneurs in the CEECs, being in a ‘catch-up’ phase of economic development, need not spend a fortune discovering new products and processes. They can just use ideas that have worked elsewhere and apply them to their own specific circumstances. Hyper-dynamic effects should therefore work particularly well in their case. Economic integration between unequal partners: factor movements ‘Second generation’ integration arrangements allow for more than just free trade in goods. They may include free movement of services, or factors of production, or various combinations of each, or all ‘four’ freedoms together.19 They are the natural outcome of the extension of the EU, but also of the increasing international mobility of many items which used to be considered ‘non-traded’, such as services. The Treaty of Rome, as is well known, providedfor all ‘four’ freedoms back in 1958, because the intention was to go beyond a mere CU and ‘lay the foundations of an ever closer union among

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the peoples of Europe’.20 Revolutionary in 1958, by now this broad approach has even been adopted, in part, by the World Trade Organisation (WTO). The applicant CEECs will, of course, have to adopt all four of the EU freedoms. We shall now discuss what problems might arise from the free movement of capital and labour. Free movement of capital For many years to come the CEECs should be net importers of capital. That is, they should run a persistent current account deficit. Unfortunately, it is not that easy to attract foreign direct investment which remains committed to the host country in the long term. Each firm will have its own list of priorities: some will look for a large and growing host-country market, others will be attracted by a central location or reliable supplies of a scarce factor. As a matter of public policy, governments cannot always affect these parameters, but only try to set a general framework. Paradoxically, one of the best ways to attract foreign capital is to abolish exchange controls on capital movements—that way, investors know that they cannot only enter, but they can also ‘exit’ if they wish to. Furthermore, free capital movements impose a certain discipline on governments with regard to macroeconomic and regulatory policies. For these reasons, countries will find it easier to attract foreign capital if they deregulate it. There is therefore nothing particularly controversial about ‘close’ forms of integration between rich and poor countries when it comes to capital movements: the poorer partners should adopt this liberalisation measure as soon as possible for its own sake. Yet it is amazing how long governments tend to hang on to exchange control on capital movements. Table 2.2 confirms that only the Baltic states have decided on full convertibility. There are several reasons for this. First, it is felt that domestic capital should be kept at home. If residents were free to export their savings—why, every last cent might flee abroad! In periods of transition and great uncertainty, this is by no means an idle prospect. The trouble is that in an open economy, people will find thousands of ways to transfer their savings abroad anyway, illegally if necessary. Abolishing exchange controls lets them do it legally. This is better and less wasteful all around. It is also somewhat disingenuous of governments to complain that people want to invest their savings abroad: it begs the question of why people are so worried about the future of their own country. Is the government not partly responsible for creating such worries in the first place? A second reason why governments like hanging on to exchange controls is because they think it is easier to manage macroeconomic policy if they can control inflows and outflows of capital. But do they really control these flows? We have just seen that people can be very ingenious if put to the test. And, second, is it not worth learning immediately what today’s advanced countries have learned over time—that open economies cannot hope to use

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macroeconomic demand management to stimulate growth in any permanent way? If this is the case, then there is a good case for aiming directly at price stability and an equilibrium exchange rate. This is quite difficult enough as it is, but free capital movements provide precious extra information and actually make the task easier. If investors like the policies our government is adopting, they will immediately make this known by investing in our stock markets and buying up our government bonds. If they are suspicious, they will flee. It is on the whole better to have immediate access to this candid assessment than to drift along in blissful ignorance. Of course, some governments like to try to hide the sad truth from their electorates that they have adopted wrong policies, and some electorates like to try to live a while in Wonderland. However, these are not acceptable reasons for hanging on to exchange control on capital movements, but merely heaping one more mistake upon another. An open economy implies free movement of capital. The only way to justify controls on capital movements is to clamp down on the rest as well, in order to retreat into a closed economy cocoon. This is an option—but clearly not one which the CEEC applicants have chosen. The main reason why poorer partners in a close-knit integration scheme might find it difficult to adopt full freedom in capital movements is in certain social and political tensions that might accompany inward investments. Assume for a moment that ownership of capital and knowledge of how to make use of it is imperfectly distributed (investors in the richer partner, by definition, possess more of these factors than citizens of the poorer country). Until the poorer partner ‘catches up’ is there not a danger that most of its assets will simply be bought up by investors from the richer areas? Especially if the numbers are such that there are many more investors in the rich partner than there are assetholders in the poor county. It is no accident that many CEECs maintain restrictions on foreigners buying land and houses. They are quite happy to let rich foreigners buy their bankrupt companies—no problem there at all. Or to let rich foreigners create new companies. But why should rich foreigners be free to buy up their historic city centres? Why should foreign speculators bid real estate prices up? Nice for the (relatively new) property owners perhaps, but not for those who would like to buy these nice properties for themselves in due course and at a low price, but who just now are no match for wealthy Westerners. Since there are many more people who believe that they should be able to buy these nice houses at reasonable prices than there are owners of such property, a democracy will often pass the relevant laws. This is a very common 21 manifestation of economic nationalism (or should we call it cultural exceptionalism?) and is presumably an area where the EU can afford to be flexible and allow for long transitional periods to accommodate such susceptibilities.

Sources: UN ECE, Economic Survey of Europe in 1996–1997, pp. 162, 157; EU Commission opinions for domestic investment rates. Note: a Assuming that half the 1996 rate of inflow will be representative now that the transition is well under way.

Table 2.7 Net foreign capital flows, domestic capital formation and external debt of CEECs and Baltic states (share of GDP, %)

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It is more important that economic nationalism should not spill over to business-oriented foreign investment. Although foreigners are sometimes excluded from the first round of privatisation, foreign investors tend to be welcomed with open arms in the CEECs. Asset-holders probably could not get a better deal from a local resident, and other ‘stakeholders’ are keen on the extra economic activity. As long as foreign direct investment does not produce a negative emotional reaction (‘we are selling out our economy to foreigners’) it can do a lot to increase catch-up growth and reduce disparities in levels of income. The alternative, as South Korea has learned to its cost, is to encourage domestic firms to go into debt and shoulder all the entrepreneurial risk for themselves. The trade-off is clear: keep the ownership, but take the risk—or persuade foreigners to take the risks in return for title to property. Can the CEECs keep a cool head over this? Net capital flows (equivalent to current account deficits plus or minus changes in reserves) are in five cases over 30 per cent of gross capital formation (see Table 2.7), not because the flows are so large in absolute terms, but because GDP is so low. But that is precisely the problem. If incomes are to grow quickly, foreign capital offers a short-cut. But if the ownership of assets ends up mostly in foreign hands, or domestic firms take on a huge burden of foreign debt, a more measured rate of growth might turn out to be socially and politically wiser. But this problem should not be exaggerated. As the United Nations Economic Commission for Europe (UNECE) puts it very bluntly, ‘there is no credible alternative to pushing ahead with privatization and involving foreign capital’.22 Countries which have reformed most have reaped the greatest benefit. High rates of domestic capital formation tend to go hand in hand with attracting large inflows of foreign capital, unless there is a clear public policy to oppose this natural trend (for example, in Japan). In the end, while the proportion of foreign capital may be high to begin with, it will never overwhelm local capital formation. Rapid growth and prosperity is the best way to preserve a country’s heritage. There is no reason to believe that entrepreneurship is lacking in the CEECs. In fact, one could imagine that it is likely to be particularly active after having been suppressed for so long. This at least is what the macroeconomic data presented here suggest. Table 2.7 presents data on net capital inflows, rates of domestic investment and the level of official foreign indebtedness for the ten candidate CEECs. No clear pattern emerges for the moment. Domestic investment as a ratio of GNP varies from lows of 14–19 per cent (Bulgaria, Latvia, Poland, Hungary) to highs of 25–30 per cent (Estonia, Slovakia, Czech Republic). But one must be careful in interpreting ratios, especially at the beginning of a period of rapid change. Nobody can tell what Poles’ or Estonians’ time preference will be once things settle down, but one thing is sure—there is no point in forcing high rates of investment out of society. It just gets wasted in ‘malinvestment’ as the Soviet experience has shown. Indeed, few countries have experienced spontaneous rates

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of investment of over 30 per cent for long periods of time, nor is there anything particularly desirable about such high rates. What is important is not to waste people’s savings in unproductive ventures. As for the net share of foreign capital in GDP, this tends to vary a lot, depending on a country’s level of economic development, the quality of its economic policies and the competing attractiveness of other locations. It also varies from year to year because of the ‘lumpiness’ of investment. We can see from Table 2.7 that net foreign capital flows into the CEECs follows this general pattern. It varies from lows of only 1–2 per cent (Estonia, Poland) to 10 per cent (Lithuania, Hungary, the Czech Republic). Expressed as a share of domestic capital formation, foreign capital flows into the CEECs are (at 20 to 30 and even 50 per cent) high by international standards. From this it can be concluded that the CEECs are experiencing no difficulty in attracting credit. Perhaps they should start worrying about the opposite problem: the inflationary consequences of over-investment. Free movement of labour in the presence of significant wage and productivity disparities Can significant wage and productivity differences coexist within a tight-knit form of economic integration? Standard international trade theory tells us that low wages reflect low productivity (or relatively scarce capital, which is the same thing) and that capital-rich and labour-rich countries can enjoy mutual gains from trade by specialising in the types of goods which use the locally abundant factor intensively. In fact, the larger the disparities, the bigger the gains from trade. This is as true within a CU as worldwide. The dynamic theory of international trade suggests furthermore that once the process is started (and other elements are present), trade-induced growth will change the pattern of comparative advantage such that the poorer country’s pattern of trade will progressively—even quickly, within a generation— resemble that of its richer partners (as the many examples in South East Asia, Latin America, Spain and Portugal show). Standard international trade theory asserts that the catching-up process will occur even if factors of production, in this case labour, are immobile, as international trade in goods substitutes for international factor movements. Furthermore, since most countries apply strict controls on immigration, it is not unreasonable to assume that labour is immobile between countries. To the extent that economic theory addresses the issue of international migration, it tends to view the free movement of labour positively—the more the merrier, so to speak. If poorer countries export labour to rich countries, both societies benefit from this flow (as well as most of the individuals concerned, otherwise the flow would stop). The richer society benefits from hard-working and highly mobile immigrants who do low-status, badly paid jobs no (rich) citizen is interested in, while for the poorer country, the counter-flow is made up of workers’ remittances and (theoretically) higher wages for labour which

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remains at home. Globally, welfare rises because scarce resources are used more efficiently.23 The catching-up process is accelerated. Worries are often expressed about the ‘brain drain’ and what happens if the demographics are such that there is an unending migratory flow such that a country ‘loses its cultural identity’, or if countries ‘empty out’ completely. However, this seldom happens practice—the reality is much less dramatic and migratory movements generally take place ‘at the margin’. The numerous positive effects discussed above balance out these negative aspects. That net immigration helps developed countries to restore their demographic deficits and pay pensions to their senior citizens is not without relevance. Finally, markets can use three alternative channels to iron out the effects of international labour productivity differentials: international trade in goods and services, international capital movements and international labour movements. It is probably of diminishing significance these days whether capital goes to where the labour is, or whether labour goes to where to capital is, as long as what is produced is free to find consumers wherever they may be. In purely economic terms, therefore, the trade and the factor movements generated by significant labour productivity differences are deemed to be on balance favourable to both rich and poor nations. As so often, however, the economic view is not always shared by other social sciences, or policy-makers, who have to study and cope with such important questions as national sentiment, xenophobia and social integration problems. For this reason, one will find numerous international agreements which promote freer trade in goods and services, and even freer capital movements. But seldom, if ever, do they provide for free movement of labour. This is a fact of life, not necessarily to be deplored, for as we have just seen, free trade and capital flows are in many ways substitutes for free labour flows. The North American Free Trade Association (NAFTA) provides a good example of economic integration which relies on free movement of goods and capital, but not free movement of labour. On the contrary, the United States quite openly hopes to stem the tide of illegal immigrants by promoting free trade and investment with Mexico, in an almost classical application of conventional international trade theory. But even this indirect form of economic integration gives rise to much anguish (listen to Ross Perrot’s ‘loud sucking noise’ as he sees US jobs being drained away to Mexico—a persistent myth unsubstantiated by any evidence whatsoever). The EU is the exception in that it explicitly allows people to move freely within the Union to where their marginal product (i.e. wage) is highest. This is because, as we have already seen, the EU is ‘determined to lay the foundations of an ever closer union among the peoples of Europe’ —and where better to start than to let people move around freely? Previous enlargements of the EU to poorer nations (Ireland in 1972, Greece in 1981, Portugal and Spain in 1986) gave rise to fears that unmanageable migratory flows might develop, but they proved groundless. Growth in these

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Table 2.8 Disparities in incomes per capita and relative demographic weights on or around date of accession

Sources: OECD statistics for 1971–1987, current prices and exchange rates. For CEEC applicants: EU Commission, Agenda 2000, Vol. 2, statistical tables, (also current prices and exchange rates); Commission Opinions on applications.

countries was fast enough to give people hope that their daily lives could be improved without the trauma of migration. However, as we can see from Table 2.8, income disparities this time around are very much larger. It can be seen that relative per capita incomes range from lows of only 5–7 per cent of the EU average, to a high of 42 per cent for Slovenia. It is also significant that all the ‘first wave’ countries are relatively richer than the ‘second wave’ countries, with the notable exception of Slovakia (which has been excluded from the ‘first wave’ for political reasons—see below). Only Slovenia, the Czech Republic and Hungary are in a situation comparable to those created by previous enlargements, for instance to include Greece and Portugal. Some applicants have very low per capita incomes indeed (Lithuania, Romania, and Bulgaria). Even in Poland, which earns much praise for its successful transition and ‘shock therapy’ approach, per capita GDP stands at only 14 per cent of the EU average. These findings are reinforced by information concerning average monthly wages for industrial workers (Table 2.8, third column).

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Such income disparities may indeed give rise to large migratory flows once restrictions are lifted. Furthermore, averages are not a real indicator of the EU’s power of attraction: it might be more realistic to compare, say, Estonia’s average per capita income with Germany’s (at 5.2 per cent it is about 20 times lower), or even compare the lot of Estonia’s poorest with the average working man’s standard of living in, say, Holland. Although the gap is reduced if one adjusts for purchasing power parities, it is not obvious that one obtains a more precise picture thereby. After all, poor immigrants will not buy the same basket of goods and services as local residents. To compound the problem, whereas the previous comparable enlargement involved a small country (Portugal), whose population amounted to only 3.7 per cent of the EU’s, this time around, we are looking at an initial 16.8 per cent increase in the population with incomes well below the EU average, not to speak of the ‘second wave’ which will increase the EU population by 11 per cent at incomes less than 10 per cent the EU average. This is the real challenge of enlargement. Even a small proportion of the combined active labour force of the CEECs could amount to several million people. And what if they all converged on one or two rich countries? Clearly, the EU will be negotiating for a long transition period! Before leaving this issue, let it be said once more that this is not so much an economic as a social and political problem. The answer to it is rapid, dynamic growth in the applicant countries. The EU’s strategy of enlargement to Central and Eastern Europe By this time it should be clear that it is not the CEECs that have a problem ‘coping’ with accession, but the EU that has problems coping with the CEECs, a point also made by other contributors to this volume who are looking at the issue from a political point of view. The economic problems are largely of the EU’s own making, for as we have seen, there is no reason in economic theory, and few reasons in principle generally, why rich and poor countries cannot prosper together in a close-knit CU. Had the EU been able to enlarge in the past without various ‘tailored structural funds, created for the applicants in order to avoid any conflicts with previous commitments’ (see p. 15), all would today be much easier. Instead, in 1970–71 the UK fought for, and obtained, an EC-funded ‘regional policy’ which was supposed to compensate for the budgetary losses it would clearly suffer from the application to its peculiar situation of the CAP of the time. This is all old history now, but various funds have since grown and grown, whenever it was necessary to achieve one delicate political compromise or another. The poorer members now consider that they have a right to a certain number of handouts. The EU cannot enlarge to the East without assuring the poorer EU members that this system will continue and it cannot offer the new applicants

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anything less (but see Deubner, Chapter 10, for a possibly dissenting view) —so it has a major budgetary problem to solve. Agriculture is another problem in its own right. As we have seen (Table 2.1 and Table 2.2 above), EU prices and levels of protection are much higher than those prevailing to the East. There is little doubt that if the EU system were applied to the CEECs tomorrow, labour and capital resources would flood into farming, output would rise dramatically—and the EU would have another major budgetary problem on its hands, buying up unwanted surpluses. Even if—as we are constantly promised—the CAP is reformed before the CEECs enter, it is unlikely to take the road to free trade, world-market prices and direct income support, paid for by individual member states at rates determined by domestic political processes. Too much political capital is involved and the European agricultural lobby has grown to powerful. So agriculture remains a major practical issue. The Commission published its first post-Uruguay Round CAP reform proposal in March 1998.24 It represents a welcome move from price support to direct income support, but continues to channel direct income support for farmers through the EU budget. This has to change before enlargement. It is a capricious key to income redistribution, favouring countries with a large farming sector, whereas everyone knows that the answer to rapid catch-up growth is to promote a rapid structural shift of real labour resources out of farming and into internationally traded goods and services with expanding markets. It would be doing the CEECs an ill service to trap their resources in farming. The answer, therefore, is to re-nationalise (or ‘de-communitairise’) direct income support for farmers. Finally, the EU’s regional policy must also be adapted if enlargement to the East is not to bust the budget. There is little doubt that this will happen. One of the great allies of the EU is time—with time Portugal and Spain will grow even faster, with time the CEECs will develop, with time the gap will close— before enlargement. After all, much has happened since Portugal and Spain joined in 1986. In particular, Economic and Monetary Union (EMU) has been launched, to say nothing of the Common Foreign and Security Policy (CFSP) and Justice and Home Affairs (JHA), the other two pillars of the Maastricht system. Thus the criteria which a new applicant has to fulfil have grown in number, and here we have the key to the EU’s enlargement strategy. EU’s criteria for membership The Copenhagen summit of June 1993 identified three different types of criteria for membership: political criteria, economic criteria and a practical capacity to fulfil the obligations of membership. We shall comment in detail only on the last two criteria, although it is noteworthy that according to the Commission of the ten applicants, only Slovakia does not satisfy the political conditions laid down by the Copenhagen summit,

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namely that ‘membership requires that the candidate country has achieved stability of its institutions guaranteeing democracy, the rule of law, human rights, and respect for and protection of minorities’.25 The 1997 Treaty of Amsterdam adds in for good measure ‘liberty’ and ‘fundamental freedoms’, so we can look forward to further refinements of the definitions of the basic values by which the EU identifies itself. As we know all too well, these fundamental values are not easy for societies to live by and if they can be anchored more firmly by virtue of the EU’s various mission statements, then all to the good. But let us hope that what must necessarily be a subjective evaluation of whether or not a country meets these increasingly strict political criteria will not be used as a method of prevarication and exclusion. The economic criteria defined by the Copenhagen summit require that future members possess ‘a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the Union’.26 After due investigation, the Commission finds that ‘none of the applicants fully meets the two economic conditions of Copenhagen today, although some should be able to do so a few years from now’.27 Looking into this question in greater detail, we note that ‘in general, structural reform still has a long way to go, particularly as regards the banking and financial systems, and as regards social security. Most applicants still need to restructure large state-owned industries, which dominate local economies and are very hard to reform for both social and economic reasons’.28 Indeed these are knotty problems with which EU members themselves are also struggling. Note that the Commission implies that a social security system is part of a functioning market economy. This is an important concession to the north-western EU members, none of whom wish to put their welfare states at risk through excessive competition from the CEECs. But just how much is a social security system part of a ‘functioning market economy’? Or, to put the question another way, how much social security is needed before the EU will consider that a CEEC country meets its standards? Balcerowicz suggests in his contribution to this volume that if the EU insists on the CEECs raising their standards of social security, this would constitute negative conditionality. As it is, it seems very much as though the EU has defined ‘a functioning market economy’ in its own image, without regard to other possibilities. In any event, if used, this could become a powerful instrument of exclusion and prevarication. It is interesting to see what the Commission makes of the second Copenhagen economic criterion ‘capacity to withstand competitive pressures and market forces within the Union’.29 We are not surprised to read that a ‘key question is whether firms have the necessary capacity to adapt’, but instead of an answer we have some powerful beating about the bush: is there ‘a sufficient degree of macroeconomic stability for economic agents to make decisions in a climate of stability and predictability’? Clearly not, but if entrepreneurs always had to wait for a ‘climate of stability and predictability’ then precious little economic activity would occur anywhere in the world. Western Europe itself has at times

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been prone to macroeconomic instability, and some would argue that Italy, for one, has not suffered too much from it. In short, it would be ridiculous to use insufficient macroeconomic stability as a reason for exclusion, or prevarication, but if that is so, why is it among the criteria which have to be met? Yet another aspect of the ‘capacity to withstand competitive pressures’ is ‘a sufficient amount, at an appropriate cost, of human and physical capital, including infrastructure (energy supply, telecommunication, transport, etc.), education and research, and future developments in this field’.30 Are these present in the CEECs? Clearly not, but again, since when do entrepreneurs get these nice things delivered to them on a plate ‘at an appropriate cost’? Economic development in the West did not start with these things— they were the result of economic growth. Again, it looks rather as though the EU is specifying its own economy (the result of 200 years of economic development) as the model which has to be successfully copied by the CEECs before enlargement. Another aspect of the ‘capacity to withstand competitive pressures’ which the Commission emphasises is whether the CEECs’ government policy and legislation ‘influence competitiveness through trade policy, competition policy, state aids, support for SM Es etc’.31 These are cited approvingly by the Commission, but are they really useful in withstanding competitive pressures? Many people would argue that their impact is negative. Why do entrepreneurs need protection, government aids and support? Where does the money come from? How much sticks to the hands of those who take the decisions on how it is allocated? But the Commission has no such doubts and clearly thinks that such measures are necessary—though lacking. Again, it is clear that a particular model of the market economy is being promoted. In short, the Commission is arguably setting the wrong standards at absurdly high levels. Not surprisingly it concludes that none of the applicants are ‘ready’. According to the Commission, only Hungary and Poland, among the first wave of candidates, look like being able to ‘withstand competitive pressures’ in the medium term, ‘provided they stay on their current course’.32 The Czech Republic and Slovenia should ‘strengthen their efforts and avoid policy reversals’. Estonia’s ‘large external imbalance is a cause for concern’ (but does this show that it is incapable of withstanding external competition (as the Commission implies), or is it just attracting lots of foreign capital?). Latvia, Lithuania and Romania ‘have made great strides recently’ and Bulgaria ‘has made considerable progress very recently’.33 Encouraging words for each individual applicant, while the ‘overall picture’ (no names, no pack drill) is still ‘far from satisfactory’. In particular, ‘the state of infrastructure remains poor’ (are we surprised?), ‘wage levels are still well below Union levels’ (is this not one of the natural compensating factors for the poor infrastructure?) and ‘privatisation has progressed at different rates and the process remains to be complete’.34 Careful reading of section 2 of Agenda 2000 Economic criteria—capacity to withstand competitive pressure and market forces within the Union reveals that, according to the Commission, only Slovakia meets this second criterion—but

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unfortunately, it does not meet the first (it ‘cannot yet be fully regarded as a functioning market economy’), nor the overriding political criteria. One wonders how an economy which is not yet a properly functioning market economy is deemed capable of withstanding competitive pressure. But mainly, this example serves to underline the fact that as the number of criteria expands, the probability of satisfying them all diminishes, increasing the EU’s discretionary power to select its new members, pace the accession negotiations and set transitional periods. It would have been quite enough to specify that the CEECs should possess a ‘functioning market economy’ and to have left it at that. To add a competitiveness criterion is unnecessary and even suspect. The third economic criterion is also interesting and revealing: ‘other obligations of membership’.35 New members will have to adopt the entire acquis of the Economic and Monetary Union—not that this is a surprise. It was always obvious that the EU would insist on ‘homogeneity’, not just for reasons of establishing a ‘level playing field’ for intra-EU competition, but also in order to promote ‘an ever closer union among the peoples of Europe’. But it must come as a bit of a shock to hear that the acquis must be transposed into domestic legislation before accession. The 1995 ‘White Paper’ on enlargement listed all 899 directives and regulations that applicants would have to transpose into their domestic legislation. Some of these directives will prove extremely expensive to apply in practice in the CEECs.36 For instance, the EU directives on water purity are very strict and getting stricter. Exactly why drinking water standards need to be set at European level remains a mystery, but that is not the point. The fact is that they are set at European level (some 40 parameters) and it will be very difficult for the CEEC’s to meet them. For instance, according to a World Bank study37 Poland may have to spend $40 billion on improving its water systems. This staggering sum (about 40 per cent of Poland’s entire GDP), even spread out over several years, will of course not be supplied by the EU solidarity funds, nor will Poland find the money that easily internally for this particular purpose. There might be more urgent uses for such funds. Nor are water supplies the only area which the EU has seen fit to regulate from the centre. There are over 200 directives regulating a great many aspects of the environment, for example, air purity, pesticide residues, waste management, chemical hazards, biotechnology and the like. Nor is the environment the only concern of the EU. It is also involved in establishing the Social Chapter and protecting the consumer, and well as facilitating trade through encouraging the adoption of high-quality Euro-norms by industry. All of this is very worthy, but very costly. If the adoption and enforcement of most of the acquis is a pre-condition for membership, not only does the EU have a perfect method of exclusion for many years to come, but the CEECs themselves need to consider very carefully if it is in their interest to even try to adopt the acquis before they have made up most of the income gap between themselves and the EU.38

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As the Commission says, with masterly understatement, ‘the adoption and implementation of the acquis upon accession is a difficult challenge for the applicants to meet’.39 It is ‘a far greater challenge than in earlier enlargements’. We note further that ‘the European Council has ruled out any idea of a partial adoption of the acquis’. The Commission admits that there is no explicit obligation under the Europe agreements to adopt the acquis, but reminds the applicants that the 1995 ‘White Paper’ ‘set out the key elements of the acquis to be adopted in each sector such as agriculture, environment, energy, transport and social policy’. And it concludes: ‘the progressive adoption of the acquis in these different areas is a task which the applicant countries need to complete as far as possible before accession’.40 Here we have the answer to the EU’s dilemma. It cannot say ‘no’ to the CEECs. But it cannot say ‘yes’ either. So it sets an impossibly high standard for them to meet—adopting and implementing the acquis as far as possible before accession. This does not stop the EU from launching negotiations for accession with the Czech Republic, Estonia, Hungary, Poland and Slovenia. Presumably these talks will last for many years. Many sympathetic Western observers have suggested that the CEECs could do worse than to apply for a European Economic Area- (or EEA) -type of arrangement, either as an alternative to full EU membership, or as a waiting room,41 only to be told by the parties concerned that this is quite unacceptable— EU membership is the one and only thing they want. Yet the current situation may be much worse than an EEA type of arrangement: the EU imposes on the applicants a unilateral adoption of the acquis, but does not seem to offer them anything in exchange—only a bit more money and a rather surrealistic ‘European Conference’ designed to ‘address questions of general concern’, decided upon at the Luxembourg Council Summit of December 1997.42 Conclusion Opening up the EU to the much poorer East does not present insuperable economic problems in principle. However, because of the many and complex redistributive aspects of the EU, which have grown over time, an immediate enlargement, based on existing redistributive rules, would bust the budget and would in any case be politically unacceptable from the point of view of the main net contributor—Germany. This cannot be candidly admitted, so the obvious solution is to postpone the problem for ten years or so, during which all sorts of things could happen—economic growth in the CEECs, reform of the CAP, irrepressible growth in Spain or Ireland. Indeed, in the Commission’s Opinions much is made of the fact that the EU would be fully capable of meeting its redistributive obligations (between 18 and 24 billion ECU, or between 16 and 21 per cent of the EU budget)—by the year 2006, by which time economic growth alone would have generated the extra billions. So excuses have to be

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found to explain why immediate accession is not possible, and as we have seen, the ones developed by the Commission are that the applicants are not yet ready to enact the acquis and that their economies are too weak to cope with competition from the EU for the time being. Both of these assertions are spurious. As we have seen, the acquis (designed by advanced societies to meet the concerns of wealthy people for personal safety and the environment) is simply inappropriate for CEECs at their present level of economic development, which barely rises above 10–20 per cent of the EU average. It is therefore not surprising that they have not yet enacted it. Were they to do so, just in order to gain EU membership, they would probably to responsible not only for a massive misallocation of resources, but also for punitive levels of taxation and regulation, which would halt all natural economic development in its tracks. The EU’s standard reply is that the acquis must be adopted before the ‘four freedoms’ can be granted (free movement of goods, people, capital, free provision of services), because otherwise there would be no level playing field, there would be unfair competition, social and environmental ‘dumping’ and a ‘race to the bottom’ in terms of regulatory and fiscal standards. These are fearsome arguments, except that they forget one thing: high standards of safety, like high wages and shorter working hours, are ‘presents’ (consumption goods) that rich societies give themselves, not handicaps which stupidly reduce real income and maim ‘competitiveness’. They reflect high real incomes. They are the result of high productivity. They are ways of consuming the results of high productivity. If a high-productivity country works long hours, resists wage increases and takes no holidays (like Japan in the old days), it will enjoy unusually high GNP growth rates, rapid export growth, its exchange rate will appreciate and total factor income will rise. If a high-productivity country decides to work less, take plenty of holidays, give itself a gold-plated social security system and protect the environment (as in, say, the Netherlands or Sweden), its measured growth rate will certainly fall, it may not be able to export so successfully in the short term, its currency will depreciate, but it will certainly not disappear off the face of the economic map and it will continue to export the goods in which it has a relative cost advantage. The structure of comparative advantage is not affected by general, across-the-board welfare-state policies. And who is to judge that such a country is worse off? It has just chosen a less stressful and higher-quality life-style. What of course it cannot hope for is to enjoy this easy-going life-style and experience high growth rates and rapidly rising incomes. These are alternatives. Furthermore, in a free and wealthy society, individuals can, within certain boundaries, choose between these alternative life-styles, so when we speak of a whole country choosing a less stressful lifestyle, we are really only saying that a majority of the population has chosen this way of life. But just as no one has the right to impose their life-style on someone else, so a country, or set of countries like the EU, have no right to impose their ‘life-style’ on others, especially, as is the case, the other set of countries is much, much poorer.

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In the introductory chapter, Curzon Price and Landau mention that the EU has no ambition to replace the Soviet Union in Eastern and Central Europe, to dominate or lead, except in the economic sphere. In this sphere, however, the EU is quite clearly trying to impose its particular model of the economy on a group of countries which is not ready for it and would certainly not choose it spontaneously. This is probably done with no conscious intention to harm the candidate countries, but in the name of Community ‘homogeneity’, the sacred bonding which is supposed to keep the Community pure. However, it at the same time guarantees that established EU producers will have nothing to fear from competition from the CEECs. For to impose an easy-going, high-quality life-style on low-productivity countries is to sign their economic death warrant— and could be interpreted as mere protectionism in disguise. The sad thing is that the applicant CEECs, eager to join the EU at all costs, will doubtless move heaven and earth to adopt and enforce as much as the acquis as possible, seriously compromising their future prospects of real growth in the process. Turning now the second reason why candidate countries cannot join immediately (their economies are too weak to ‘withstand competitive pressure and market forces within the Union’), the suspicion must be that reality is exactly the opposite. Were the CEECs to be admitted immediately to the four freedoms without first enacting the acquis, on the basis of mutual recognition, they would be quite competitive enough to survive and prosper. Indeed, that is exactly why they will only be admitted once they have enacted the acquis—to take the edge off their ability to compete. It is possible to suggest a pre-accession strategy on the part of the CEECs and make a modest prediction. The CEECs should identify the parts of the acquis which are not too difficult or costly to enact, and adopt them quickly, if they have not already done so (like technical standards for electrical appliances—there is no point in producing industrial goods for the modern consumer if they are not up to standard; or switching to VAT, or enacting anti-trust legislation). This ought to lift some of the technical and non-tariff barriers to trade between the CEECs and the EU, even before entry, and should be the object of specific ‘transitional’ negotiations with the EU. Given that each candidate country will be negotiating these issues separately, transitional periods, and conditions for transition, can be ‘flexible’, i.e. differ from country to country. The really difficult parts of the acquis should also be identified and costed (like water and air purity standards), country by country. Such financial assistance as may be available during the accession negotiations should be directed towards meeting them and long transitional periods have to be conceded by the EU. For the remainder (health and safety at work, social legislation under the EU’s Social Charter, other aspects of environmental regulation not covered in the ‘very high-cost acquis’ category) the candidate countries should also aim for very long and flexible transitional periods.

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Once the principle of long and flexible transitional periods is accepted for these last two categories of the acquis, the actual date of formal accession would be entirely symbolic and could occur quite quickly, and at the same time, for all candidates. Notes 1

2

3 4 5 6

7

Europe’s geographic dimensions, though the subject of great controversy, are not at issue here, since these countries have always been part of Europe geographically speaking. As we shall see, expanding the EU to the east is proving an interesting exercise in defining ‘Europe’ politically, economically and socially. However, future enlargement discussions, already visible on a not-too-distant time-horizon, suggest that the EU will one day have to define ‘Europe’ geographically as well. That will be an interesting moment. The following Central and Eastern European countries have applied for admission to the EU (in chronological order): Hungary (31/3/94), Poland (5/4/94), Romania (22/6/95), Slovakia (27/6/95), Latvia (13/10/95), Estonia (24/11/95), Lithuania (8/ 12/95) Bulgaria (14/12/95), Czech Republic (17/1/96) and Slovenia (10/6/96). C.B.Hamilton and L.A.Winters, ‘Trade with Eastern Europe’, Economic Policy, 14 (1992), pp. 78–116. R.Baldwin, ‘The eastern enlargement of the European Union’, European Economic Review, 39, 4 (1995), pp. 474–481. R.Baldwin, Towards an integrated Europe, London, Centre for Economic Policy Research, 1994. It is a well-known conclusion of CU theory that if future partners are already highly complementary before union, there will be little scope for trade creation, and much opportunity for mutual trade diversion. This is not likely to be a problem for EUCEEC integration. One indicator of similarity in trade structures is the extent of intra-industry trade already in existence between the future partners. According to a study by Messerlin about half the sectors of trade between advanced CEECs and the EU already show ‘noticeable’ intra-industry characteristics. This finding confirms the notion that the CEECs are (or are rapidly becoming) diversified industrial economies—granted, in need of serious restructuring— but they are not underdeveloped, or heavily specialised in primary or agricultural production. Their basic economic structure is therefore close to that of Western Europe, albeit at a much lower absolute level of productivity. P.Messerlin, ‘The re-emergence of trade among the East European and Baltic countries: Commercial and other policy issues’, Economic Bulletin for Europe, 48 (1996), pp. 75–91. For instance, the Commission reports Lithuania as having a trade weighted average tariff level of only 4.3 per cent, but at the same time has a trade weighted average MFN tariff of 27.5 per cent. The first average includes all the trade which comes in under Lithuania’s free trade agreements (plenty of trade-weighted zeros!), while the second average concerns the margin of preference. It is the latter which needs to be taken into account when judging the extent of trade creation and trade

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8 9

10 11

12 13 14 15

16

17

18 19

20 21

Victoria Curzon Price diversion. European Commission, Agenda 2000, Opinion of the Commission on the Application for Membership of (Respectively) Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Czech republic, Romania, Slovenia, Slovakia, Docs 97/11–20, 15 July 1997, pp. 19 and 76 respectively. H.Kierzkowski, ‘Central Europe looks west’, in A.Arndt and H.Milner (eds), The World Economy, Global Trade Policy, Oxford, Blackwell, 1996, pp. 29–44, 38. H.Kierzkowski, ‘Reforms in East-Central Europe—preparing for EU membership’, in K.Kaiser and M.Brüning (eds), East-Central Europe and the EU: problems of integration, Bonn, Europa Union Verlag, 1996, pp. 15–37, 32. Messerlin, op. cit. p.85. I.M.D.Little describes this view as ‘structuralist’: ‘The structuralist sees the world as inflexible. Change is inhibited by obstacles, bottlenecks, and constraints. People find it hard to move or adapt, and resources tend to be stuck. In economic terms, the supply of most things is inelastic.’ I.M.D.Little, Economic Development: Theory, Policy, and International Relations, New York, Basic Books, 1982, p. 20. This is the second of the economic criteria defined by Copenhagen summit of June 1993; see Bulletin of the European Communities, No. 6, 1993, Paragraph I.13 United Nations Economic Commission for Europe, Economic Survey of Europe in 1996– 1997, New York and Geneva, 1997, p. 231. H.Kierzkowski, ‘Reforms in East-Central Europe op. cit., p. 30. P.Stanovnik. and M.Svetlicic, ‘Slovenia and the European Union’, in Switzerland and Slovenia: Facing the Challenges of EU and NATO Enlargement, Geneva, IEUG, 1997, pp. 19–43. So called in reference to such Viennese economists as Eugen von Böhm-Bawerk, Ludwig von Mises and Friedrich von Hayek who developed a different approach to economics based on individual human action, imperfect knowledge and the role of markets as instruments for coordinating the actions of many individuals. One should not fall into the trap of believing that the Internet is capable of removing our fundamental of ignorance relevant economic information. Entrepreneurship involves acting more on tacit than on explicit knowledge and the Internet only increases the supply and reduces the cost of the latter, not the former. F.A.Hayek, ‘The use of knowledge in society’, reprinted in Individualism and Economic Order, London, Routledge & Kegan Paul, 1949, pp. 77–91. Pour mémoire the ‘four’ freedoms are: free movement of goods, free provision of services, free movement of capital, free movement of labour. One could add a fifth: free establishment of companies (also subsumed under the free movement of capital). Treaty establishing the European Economic Community, Preamble, first objective, 25 March 1957. And not reserved to poor countries either. Switzerland also has strict laws prohibiting the sale of real estate to foreigners (the Swiss are perhaps rightly worried that there is not enough of their beautiful country to ‘go around’ if the entire world wants to buy in). Also, who can forget the furore caused by the sale of the Rockefeller Centre in New York to a Japanese buyer, or the sale of London’s Savoy Hotel to Arab interests? However, there is a lot to buy in New York and London, so in the end

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22 23 24 25 26 27

28 29 30 31 32 33 34 35 36

37 38

39 40 41

42

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these deals went ahead. It is a matter of the ratio between limited local supply and a potential foreign demand perceived as being virtually unlimited. United Nations Economic Commission for Europe, op. cit., p. 173. The trade creation/trade diversion story could also be applied to factor movements, but we shall refrain from doing so here. Bulletin of the European Union, No. 3, 1998, paragraph I.10. EU Commission (1997a), Agenda 2000, Vol. 1, For a Stronger and Wider Union, Com(97) 2000. Ibid. Agenda 2000, Opinion of the Commission on the Application for Membership of (Respectively) Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Czech republic, Romania, Slovenia, Slovakia. Docs 97/11–20, 15 July 1997, part 2, p. 52. Ibid, p. 54. Agenda 2000, For a Stronger and Wider Union, Com(97) 2000, p. 54. Ibid. Ibid. Ibid., p. 55. Ibid. Ibid. Ibid., p. 55. V.Curzon Price, ‘Residual obstacles to trade in the Single European Market: are standards finished as non-tariff barriers?’, Euryopa articles et conférences, Vol. I (1996), pp. 13–14, p. 22. Financial Times, ‘Poland faces big bill to bring water supply to EU standard’, 6 October 1997, p. 18. A concern shared by Patricia Bauer, ‘Eastward enlargement—benefits and costs of EU entry for the transition countries’, Intereconomics, January-February 1998, pp. 11–19. Agenda 2000, op. cit. Agenda 2000, op. cit., p. 57. Baldwin (1995), op. cit. See also S.Peers, ‘An ever closer waiting room? The case of Eastern European accession to the European economic area’, Common Market Law Review, 32 (1995), pp.187–213. Bulletin of the European Union, 12/97, 1997, paragraph I.4, et seq.

3

The role of the Economic Commission for Europe Carol Cosgrove-Sacks

Introduction The objective of this chapter is to provide certain insights into the role of the United Nations Economic Commission for Europe (UNECE) in order to understand the ways in which UNECE could assist the central and east European countries (CEECs) on their way towards membership of the European Union (EU). This chapter also considers various challenges and opportunities that are on the road of eastern enlargement of the EU. The mission of UNECE is to be a neutral forum for negotiations about economic issues in the region. Membership includes 55 countries that spread from Ireland to the eastern coast of Russia, and because of the involvement of the North American Allies during the Second World War, the United States and Canada are also the founding members of the UNECE.1 Hence, the region of UNECE work is not merely Europe, but it spreads from Vancouver in the west to Vladivostok in the east, which gives the UNECE an advantageous position of influence in a large section of the world. Role of the UNECE Following the end of the Cold War, the role of the UNECE has evolved. Since the beginning of 1990s, the principal focus of activity has been helping the transition economies to integrate into the European and global economy. The UNECE is developing various kinds of instruments with the objective to promote economic integration in the region, and to assist in the creation of links with the global economy. The UNECE includes 15 countries who are Member States of the EU and the countries, which are seeking to join the EU, are also all Member States of the UNECE. Most of the countries were the founder Member States, however, several countries, such as Slovenia are new members of the UNECE joining only in the early 1990s. The duty of the UNECE is to respond to the request of its Member States, as UNECE is first and foremost the only neutral regional

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forum with such wide membership, which allows the debate of difficult issues. Problems in politics, economics, environment, transport are discussed and resolved with employment of the principle of consensus. Fifty-five Member States of the UNECE have been accounting for roughly two-thirds of world trade. Therefore, UNECE has a major role in setting the norms, standards and quality standards (e.g. for fresh fruits and vegetables) which are essential for smooth trade in the modern international economy. UNECE standards and norms are the basis for the majority of global standards, and thus one of the main functions of UNECE is to assist the CEECs in adoption of these norms and standards. The ‘White Paper’ (issued by the EU in 1995), sets broad requirements for the CEECs in terms of being eligible and ready to join the EU. The UNECE norms and standards are also included in the acquis communautaire (the body of all the positive EU rules and regulations). According to Agenda 20002 (the EU plan for the medium term which was delivered in 1997), the acceding transition economies will have to apply, implement and enforce acquis communautaire upon entry into the EU. In addition to the standard-setting function, the UN ECE is actively involved in promoting networks in the integration of the region in terms of the economy, trade, investment, transport, energy efficiency, environment and pollution issues. In all of these areas, the UNECE has a role in assisting the economies in transition to adjust, adopt and make progress in the transition process which would enable them to be eligible for accession to the EU if they wish so. Trade patterns of transition economies In terms of the trading pattern (the direction of trade of the CEECs) nearly two-thirds of the CEECs exports in 1995 were going to the OECD market (Figure 3.1), mainly to the EU. This indicates a fundamental change in terms of exports in the region. While throughout the preceding decade, three-quarters of their exports went to the countries in the Eastern bloc, now only around 10 per cent of trade was with the CIS (imports consisted principally of energy products from the Russian Federation), and approximately the same share was exchanged within the CEECs. The Baltic countries (Lithuania, Latvia and Estonia) remain much more dependent on trade with the Russian Federation than the CEECs (Figure 3.2). More than a third of foreign trade in the Baltic region was with the CIS in 1995. Such relationship could be expected, as the Baltic countries were deeply integrated into the Soviet Union, much more so than the CEECs. However, approximately a half of trade in the Baltic states was with the OECD markets; mainly with the EU. There is still a continuing diminution of dependence for the Baltic states on the Russian Federation and the CIS. This change in trade patterns will enable them to participate more and more in the accession process to the EU.

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Figure 3.1 Direction of trade: CEEC, 1995 Source: UN/ECE.

EU enlargement Ten CEECs have applied for EU membership since 1994 (Table 3.1). These applicant countries are in various stages of the transition process; some of them have more difficulties in meeting the requirements for the EU entry3 set in the ‘White Paper’ (1995) and Agenda 2000 (1997). This gave reasons to the EU for starting talks about full accession with only the Czech Republic, Estonia, Hungary, Poland and Slovenia as of the end of March 1998.4 However, the EU continuously monitors developments in other applicant countries and will offer accession talks to them as soon as they are deemed eligible.

Figure 3.2 Direction of trade: Baltic states, 1995 Source: UN/ECE.

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Table 3.1 Formal application for membership of the EU

The UNECE perceives the EU as the core of the European economic architecture. After all, the EU5 enlarged over time its original membership of six countries in 1957 to 15 in 1994, and it is likely that the current membership may even double over the coming decades. However, the UNECE also takes a note of activities of other regional integration organisations, which actively participate at the meetings of the UNECE. For example, the European Free Trade Association (EFTA) comprises Switzerland, Iceland, Norway and Liechtenstein. With the exception of Switzerland, the European Economic Area (EEA) between the EU and EFTA supports free movement provisions for manufactured goods and services. Several of the CEECs considered applications to join EFTA and the EEA, possibly as a stepping stone on the way to the EU membership. Challenges The EU, as the regional core, has expressed and confirmed on a number of official occasions its commitment to enlargement provided that the conditions for membership are met by the applicant countries. However, there are several ‘technical’ priorities that need to be settled before the forthcoming round of enlargement. First and foremost, as the priority of the highest order, the EU needs to implement the monetary union in the period 1999– 2002 and to ensure its unrestrained operation. Second, the EU will have to reform its agricultural policy and the budget; and lastly, the EU must reform its institutional organisation prior to the next round of enlargement. Then and only then, the enlargement process may proceed. This, however, does not preclude the possibility that the accession negotiations may not go side by side with the other priorities. Financial issues The enlargement process of the EU will face major difficulties and some of the most obvious obstacles include the problem of the EU budget and the cost of enlargement. The five acceding transition economies (marked by * on Table

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3.2) have GDP per capita between a half and a quarter of the average in the EU. As such, they will be eligible for the receipt of large regional and social (structural) funds, which would require either reduction in the transfer from those EU funds to the eligible regions in the current 15 member countries, increase in the budget of the EU or both. Neither option seems very likely without major political changes. On the one hand, the vested interest of the countries and regions in the current 15 EU member countries would fight for the preservation of their share of the budgetary receipts, while on the other, the strict rules for the monetary union prevent the participating countries from increasing their expenditures. The second critical factor that will dictate the costs of the eastern enlargement is the cost falling on the Common Agriculture Policy (CAP) unless the current system is reformed. While agriculture contributed 2.4 per cent to the EU GDP in 1987, the average contribution in the acceding five transition economies was twice that much in the same year.6 In addition, agriculture employed 5.3 per cent of the EU labour force in 1997, while on average around 9 per cent of the labour force in transition economies is involved in agriculture. The exception is Poland, where farming employed 26 per cent of the labour force. As such, the acceding countries would be eligible for a significant part of the EU funds that give support to farm produce. This will create obvious problems with the current member countries, thus the CAP needs to be reformed prior to the eastern enlargement of the EU to avoid further complications. Costs and difficulties of the eastern enlargement apply to both parties. The EU may feel the budgetary impact of the enlargement and, potentially, the loss of certain jobs in the ‘sensitive’ industries. And there will be costs on the part of the CEECs that need to be weighted against the benefits of secure access to Table 3.2 GDP per capita (PPP), 1996

Source: The Economist, 20 December 1997.

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the wide and wealthy market of the EU (15), transfer of funds and possibility for the migration of labour. The EU is concerned that the acceding countries may not be able to withstand competition with the producers in the EU(15) and that they would face the same problems as the eastern part of Germany following the reunification of the country. Therefore Agenda 2000 earmarked ECU 45 billion for the period 2000– 2006 as the preaccession aid to the acceding five transition economies. 7 This mini ‘Marshall Plan’ is designed to assist the acceding countries in adjusting to the full membership of the EU. Institution and standards In addition to the financial implications of the EU enlargement, there are the institutional issues. There is a need to work out the procedure of the new member country’s participation in the institutional decision-making, and juridical structure, which was initially designed for a small group of six original member countries of the EU. The original system has proved extremely durable and flexible in extending from 6 to 9 to 12 and to 15 countries. Such institutional framework may be dynamic, but some of the decision-making procedures and languages used in the official business of the EU could become cumbersome in an EU of 25 or even 35 member counties. Because of the complexity of the issue, the 15 countries could not find an agreement, and the Treaty of Amsterdam (1997) and various European Councils postponed the solution of this institutional issue for the future. Another concern is the ability of the acceding countries to apply the acquis communautaire (which includes around 80,000 pages of EU laws and regulations).8 According to Agenda 2000, environment would pose the biggest problem and challenge to the eastern enlargement.9 It is estimated that the application of the environmental dimension10 of the acquis communautaire would cost the five transition economies around ECU 120 billion. Poland alone would have to invest up to ECU 35 billion.11 While there will be certain support from the EU, most of those funds will have to come from the acceding countries themselves and from loans. This will be another challenge for the acceding countries that have an out-of-date capital stock. How to use scarce investment funds? Should they be used in fixing the environment which may not have a direct impact on the national output in order to satisfy the conditions that are set by the acquis communautaire? Or should the money be invested elsewhere that may be able to repay the loan? Of course, not all the provisions of the acquis communautaire need to be satisfied at once. However, according to Agenda 2000, those provisions that deal with the EU competition rules and the Single Market must be applied immediately upon accession.12 Derogations from this principle would not be offered to any country that will join the EU in the future.13 Hence, one should not be surprised if the acceding countries pass through a longer transition period prior to the actual entry of the EU in order to eliminate the

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post-entry adjustment which may have a negative impact on the operation of the Single Market. Prospects for the future One final comment on the exports of ‘sensitive’ goods from the acceding and other transition countries to the EU. As high levels of unemployment (reaching 10 per cent) in the EU countries persist for more than a decade, without a doubt there are sensitive industries in the EU such as textiles, footwear, steel, agriculture and bulk chemicals. The EU producers and certain unions fear competition from the acceding countries that is based on relatively lower costs of production. While some EU industries may feel real immediate pressure from the new suppliers, the overall EU economy need not worry because of the eastern enlargement, the long-term benefits of which will outweigh the direct and shortterm difficulties. Just as was the case in all previous rounds of enlargement, the overall EU economy will be able to sustain and benefit from the eastern enlargement. In the short term, there could be some problems if one takes a narrow view on the proportion of textile and footwear coming from Romania, or the proportion of agricultural products coming from Hungary or Bulgaria, which are the sensitive areas of EU economy. There could be serious protests from the EU farm community and from other industries where jobs are being threatened. This may cause the EU member states to be cautious regarding the fast enlargement. However, the Europe Agreements have already opened up in 1997 the EU market for the biggest part of the of CEECs’ exports, with the exception of agriculture. The EU economy has not had any major ‘shake-up’ because of such liberalisation, which suggests prospects of beneficial changes caused by enlargement of the EU. Conclusion The UNECE has been working to assist the CEECs in the accession process in a number of key areas. The UNECE is particularly involved in policies to promote trade and investment; and to establish international conventions regarding investments and arbitration; to give investors confidence about the investment legislation and prospects in the CEECs. The UNECE is deeply involved in standardisation and norms area, many of which are explicitly stated in the White Paper. The CEECs are required to adopt UNECE norms and standards as part of their accession process to the EU. The UNECE is also involved in assisting the CEECs to enter into global commerce. It is therefore putting extensive efforts into electronic commerce, electronic data exchange, support through training programmes, and evolution of the necessary institutional capacity in the CEEC’s to enable them to access the electronic commerce networks which dominate modern trade and business. The UNECE is also helping the CEECs to adopt international conventions

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regarding the movement of goods by road, rail and multi-modal transport systems. The UNECE is assisting the CEECs in problems of pollution and other environmental issues. In all of these areas, one may take the UNECE as a partner and a neutral forum for the EU in assisting the CEECs to develop and be ready for accession. Notes 1 2 3

4 5 6 7 8 9 10

11 12 13

Israel is also a member country of the UNECE. European Commission, Agenda 2000, Vol. 1, For a Stronger and Wider Union, Brussels, COM(97) 2000, p. 61. Basically these requirements include the existence of a fully functioning market economy that can withstand strict and demanding EU rules of competition; acceptance of the acquis communautaire and a democratic political system. Accession negotiations also started with Cyprus. This chapter uses the term EU as the organisational habitat for the European Economic Community and the European Common Market. In Poland it was 6.0 per cent. European Commission, op. cit., pp. 62–63. The Economist, 6 June 1998, p. 37. European Commission, op. cit., p. 56. The British water industry is expected to spend around $60 billion between 1989 and 2004 to bring its water supply network into line with the EU directives (Financial Times, 6 October 1997, p. 18). Financial Times, 3 March 1998, p. 3. European Commission, op. cit., p. 61. European Commission, 1997, Vol. II, p. 57.

Part II

The questionnaires Getting to know the enlargement challenge

4

The enlargement: the European Commission’s viewpoint Marc Franco

Enlargement is a historical challenge and an opportunity for Europe: •

•

•

Enlargement will strengthen, in the candidate countries, the rules of democracy, and will consolidate the development of civic society and the rule of law. Enlargement will contribute to the regional peace and security in Europe. It creates opportunities for economic development and social welfare in the region by limiting the chance of major conflicts. Enlargement creates opportunities for economic development and for enhancing social welfare in the Central and Eastern European Countries (CEECs) region and in the European Union (EU).

Enlargement will not be without problems for the CEECs as well as for the EU: its impact on economic structures, its budgetary cost, the potential for ‘dilution’ of the Community’s policies if enlargement takes place, before necessary underlying structures are in place, to mention but a few. The EU and the CEECs alike have an enormous workload in front of them in order to overcome these difficulties and to make the enlargement succeed. The aim of this chapter is to give you some insight into the institutional and procedural aspects of how the enlargement was organised, and what the role of the European Commission is in this respect at the point in which the prospective applicants responded to the Commission’s questionnaires. This analysis acts as a backdrop, placing the Eastward enlargement against the set of agreements that then existed between the European Union and the CEECs. Background Relations are rather recent between the EU and the CEECs. Contacts between the Community and the CEECs only started after 1985. Before that there were bilateral trade relations between individual Member States and the countries of Central Europe, but there was no agreement between the Community and

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individual countries. It was only after Gorbachov had given the green light that these negotiations and contacts took place. These contacts were speeded up tremendously after the watershed of 1989; and in 1990 the first trade and cooperation agreements came into force. The latter provided for the development of the relations and removed obstacles to trade, but they fell short of creating a free trade area. Already in 1992, the first Europe agreements were concluded and signed and that provided for the deepening of political relations and economic cooperation, and at the same time, the setting up of a free trade area. Following the necessary ratification procedures by European and national parliaments, the Europe Agreements entered into force for Hungary and Poland in February 1994, and Bulgaria, Romania as well as the Czech Republic and Slovakia in February 1995. In 1995 the Association Agreements with Estonia, Latvia and Lithuania were signed and one and a half years later, in mid-1996, the Europe Agreement with Slovenia was signed. The interim agreement with Slovenia, which provides for entry into force of the trade provisions of the European agreement, was initiated on 29 September 1996 with the entry into force of the trade provisions out of the Europe agreements from 1 January 1997. The Europe Agreements provided for an expression of the intention of the CEECs to become members of the EU, and this was followed up a year later by the recognition on the side of the Union at the European Council of Copenhagen in June 1993 that these countries could become members.1 It was stated that the CEECs could become members of the EU if they wished to do so provided they comply with a number of conditions. The European Council of Essen in December 1994 outlined a ‘pre-accession strategy’. Six months later the Commission presented to the European Council the ‘White Paper’.2 The ‘White Paper’ brings together the Community regulations and directives that are directly related to the functioning of the internal market and therefore should be adopted by the candidate countries as quickly as possible. Although within the acquis communautaire, all regulations and directives are equal, some are more equal than others. Those referring to the functioning of the internal market take priority. All associated countries have presented their applications for membership (the last to apply for membership were the Czech Republic in January 1996 and Slovenia in June 1996). The European Council of the Madrid Summit in December 1995 gave a new impetus to the process by asking the Commission to expedite the preparation of the ‘opinion’, i.e. the Commission’s assessment of the candidate country to join the Union.3 In view of the preparation of the Opinion, a ‘Questionnaire’ was sent out to all the candidate countries at the end of April 1996. The countries had, three months later, to produce replies to the 150-plus pages of questions. In some case the replies totalled some 1,500 pages. All countries handed in their replies in time (the end of July 1996) and the Commission processed the material in

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order to produce a preliminary draft for the spring of 1997. This was in a context in which it was understood negotiations for accession could only start six months after the end of the Intergovernmental Conference (IGC). This preliminary draft was revised in the light of the results of the IGC and of the development of the situation in the countries concerned and published as a part of the Agenda 2000 document. For many, in particular those in Central Europe, the pace of enlargement is too slow and the EU is accused of dragging its feet on accession. Taking a step back and putting the process in perspective, it becomes apparent that the integration of the CEECs into European structures has taken place rapidly, and the speed has been more than adequate. When the Iron Curtain came down in Hungary, Western and Central Europe were two worlds, lightyears apart. Nobody, even in 1992, suspected the speed and the changes that were to take place in the whole region and beyond, including the Soviet Union. Only three years later the possibility of memb ership was acknowledged. While recognising how important and thorough the changes have been in the CEECs, it is important to bear in mind that the accession to the Union has far-reaching implications for new members as well as for old. Consequences should be carefully considered and adequate preparation is necessary on both sides. This could require some time. However, provided accession is guaranteed, this should not constitute a fundamental problem. This process of preparation on both sides is further complicated by the fact that the CEECs, as well as the EU, are in rapid evolution and that it is difficult to fix clear points of reference or guidelines. The evolution of the CEECs in political and economic terms, the development of democratic systems and the extension and deepening of the market economy is obvious. But the Union has also evolved considerably over the last five years, and continues to evolve. At the beginning of the 1990s, neither the Single Market nor Economic and Monetary Union existed, the Macsharry reform of the CAP was not yet defined and the Maastricht treaty with its second (Common Foreign and Security Policy— CFSP) and third pillar (Justice and Home Affairs— JHA) was still to be signed. So the Union is now very different than was the situation in 1990. The evolution continues, and before the eastward enlargement occurs it is expected that EMU will be in place and new reforms of the EU, as contained within the Treaty of Amsterdam, are to be implemented. The role of the Commission The Commission as the executive body of the EU had a major role to play in this preparatory process. It was asked by the Council to prepare four documents that needed to be available after the end of the IGC and were eventually published as the Agenda 2000 documents. These documents were to contain the following:

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1 2 3 4

the opinions i.e. the assessments per county of their capacity to join the Union; an impact study, assessing the EU’s capacity to absorb the new members a financial framework for the enlargement; a composite paper that will be the political recommendation, drawing the conclusions of the three documents together.

Taking these papers in a slightly different order, the ‘impact paper’ related to the reference in the conclusions of the European Council of Copenhagen that ‘the Union’s capacity to absorb new members, while maintaining the momentum of the European integration, is also an important consideration in the general interest of both the Union, and the candidate countries’.4 In other words, widening is not a substitute for deepening. A paper on ‘Agriculture in the context of enlargement’ was discussed during the Madrid Council.5 It came to the conclusion that agriculture need not be the stumbling block in the enlargement process provided that adequate policies are followed in the EU as well as in the CEECs. There is an urgent need for investment and modernisation and this will require special attention in the years to come. The Commission had been less explicit about the impact of the eastward integration on the structural policies. Two elements needed to be stressed. In the first place, reinforcement of the economic and social cohesion will remain a fundamental objective of the Union. Moreover, the work on enlargement coincides with the revision of the EU structural policies. Cohesion policy may need to be reinforced in the future Union and its basic principles might have to be adjusted. New policies will have to be defined, taking into account the regions in the present Member States as well as in the candidate Member States. The impact on present and future policies also needs to be considered. This concerns areas such as the internal market, competition policy and the environment where even if the acquis communautaire is immediately and fully adopted, the enlargement could have a negative influence on the future development of new measures and the deepening of Community policies. Finally, enlargement would have an impact on the institutional level. Indeed, institutions and decision-making procedures, conceived for a Community of six Member States, would have to be applied to a Union of up to 25 members. The overall assessment of the possible impact of the enlargement on the Union would have to take into account all these factors and for obvious reasons could only be made once the IGC had come to a conclusion. The financial framework related to the impact, because the basic question is the cost in terms of agricultural policy, of structural policy, of other policies, and in science and cooperation policies. The Commission had not, at that time, produced any official estimates for the financial framework of the eastward enlargement. It is indeed impossible at this stage to calculate, with any degree of precision, the cost of enlargement. Too much depends on assumptions and political decisions. From the point of view of the Commission, there is a danger

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of putting forward official estimates at too early a stage that tend to have a life of their own thereafter. Various institutions had produced estimates, and, depending on the assumptions made, they vary widely. Some estimates attached a prohibitively high price tag to the accession. The European Commission, estimated that the costs of extending the structural funds to the CEECs would amount to 42.2 billion, compared with a total of ECU 3.3 billion for the EC 15 in 1999 and would fit within the budgetary framework decided in Edinburgh (i.e. limiting the EU budget to 1.27 per cent of GDP).6 Taking into account the effects of the 1992 reform of the CAP and a further alignment of EU agricultural prices on the world market, estimates of the CAP cost amount to between 8 to 12 billion ECU, the largest part of this sum being income support. As far as the structural policies are concerned, his estimation for the CEECs came to 10 billion ECU, the cost of participation in other programmes at 5 billion ECU. This brought the total cost of hypothetical enlargement in the year 2000 at 27 billion ECU, well in line with the Edinburgh norm. These figures accorded with partial and tentative estimates that the Commission had produced in the framework of the ‘Agriculture in enlargement’ paper of December 1995. These figures, however tentative and hypothetical, did indicate that budgetary constraints need not be the major stumbling block on the road to enlargement provided adequate policies are followed in the EU as well as in the CEECs. The opinions that the Commission prepared on the capacity of the countries to join the Union were to be based on the criteria defined during the European Council in Copenhagen.7 They had been formulated as follows: 1 2 3

stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities; the existence of a functioning market economy as well as the capacity to cope with the competitive pressure and market forces within the Union; the ability to accept the obligations of membership, including adherence to the aims of political, economic and monetary union.

The ‘questionnaire’ was handed over to the associated CEECs at the end of April 1996 and all the countries delivered their replies, as requested, before the end of July 1996. The replies on the questionnaire were then evaluated and there were no early statements on the way the individual countries fulfilled the criteria. Overall assessment More generally, the accomplishments of the CEECs on the political and economic transformation front are impressive. Never before, in the history of mankind, has such a profound transformation been accomplished in such a short time. Democratic institutions have been functioning for a number of years

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and the young parliamentary democracies have survived without any problem the second wave of general elections with changes in governments and coalitions in most if not all of the countries. From the macroeconomic point of view, the countries have succeeded in turning around their economies after an initial period of recession and destabilisation. In most cases, a respectable macroeconomic balance has been achieved. From the microeconomic point of view, prices have been liberalised, markets are functioning, state intervention in the economy has diminished and almost disappeared. All the countries have repeatedly voiced their commitment to the objectives of the EU and confirmed their intention to join. In most countries, programmes have been decided and are being implemented to proceed with the ‘approximation of legislation’, i.e. the process of absorbing the acquis communautaire into their own legislation. The overall assessment of countries’ readiness to joint the EU is therefore relatively positive. Nevertheless, certain problem areas have to be taken into account and have to be dealt with in order to ensure that problems do not turn into obstacles. These are as follows. Rule of democracy and minority policies Although the overall assessment of the development of democracy and respect for the rule of law in the CEECs is excellent, some countries have more problems in adopting the ‘culture of democracy’ characteristic of the West. Moreover, the Central European region has some tenacious minority problems that could constitute an element of regional instability. No country in the EU, nor in Central Europe, has a perfect democratic record, and the process of judgement on the degree of democratic development is bound to be a delicate one and there is always something delicate about one country (or a group of countries) judging the degree of democracy in another one. Nevertheless, and in particular in the light of the war in former Yugoslavia, it is unlikely that the EU will want to import additional minority problems. Even if politicians believe that integrating countries in a larger whole diminishes the tension between national minorities and majorities, it is unlikely that the public opinion (i.e. the voters) might support an enlargement, that would bring the danger of civil war within the EU. Competitivity of the CEECs’ economies Although economically most countries have performed rather well, even in the best-performing countries, the question of the depth of the restructuring has to be examined. After an initial fall in production, the CEECs succeeded in relaunching the growth of their economies and in particular their export performance (thanks to an undervalued exchange rate and cheap labour costs).

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Moreover, tariff and non-tariff barriers and other (de facto) obstacles to trade have limited the competition between Western and local products on the CEECs’ markets. In the process leading up to the accession, and certainly after the accession, these advantages will eroded and the crucial test of the competitivity of the productivity of the industry, will be the management and marketing skills of the management. In this context, the need to step up investment in new technologies and to attract foreign investment cannot be underestimated. Moreover, the flow of Foreign Direct Investment (FDI) to Central Europe is lower than could have been expected (taking into account the enormous economic potential). At this stage no clear overall view exists on these various issues and impressive shortterm performance should not necessarily lead to optimism about the mediumand long-term prospects. Quality of the public administration An important role is played by the civil service, not only in ensuring the adequate functioning of the market economy as well as in the process of enlargement and follow-up of accession. A large part of the public administration in the CEECs is inherited from the previous regime and staff are not trained for the tasks which they are expected to perform. Increasingly, the public administration in the CEECs is turning into a ‘dual system’, with a small well-trained, highly dedicated and efficient group of people in leading positions and a large group of poorly trained de-motivated and inefficient people at lower levels. That could effectively constitute an obstacle for the further development of the market economy as well as for the accession to the Union. Environment and nuclear safety Levels of pollution and the lack of nuclear safety is regarded by the EU public opinion (rightly or wrongly) as one of the major differences between East and West. The acquis communautaire in the field of environment is already fairly comprehensive and gaining progressively in consistency with the Integrated Pollution Prevention and Control (IPPC) approach. Not only do the CEECs have to make an important effort to reach the EU level of environmental awareness, legislation and pollution standards but because of increasing demands for new legislation, the gap between the EU and the CEECs could become larger before it starts to diminish. From obstacles to opportunities The problem areas identified above are not to be considered obstacles to accession. They are difficulties that the CEECs and the EU have to deal with in the context of what since the Essen European Council has been called the

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pre-accession strategy (PAS). Major efforts will have to be made by the CEECs. As far as the EU is concerned, the PAS comprises a three-pronged approach, i.e. through the implementation of the Europe Agreements, the Structural Dialogue and the PHARE programme. In order for the eastward enlargement to succeed the EU will have to live up to the expectations created in the application of the trade defence instruments provided for under the EU and that the various areas of economic cooperation are systematically and fully exploited. It requires an adequate adaptation of the Europe Agreements—to take into account the Uruguay Round and the last enlargement as well as a continued improvement of the trade conditions on the agricultural chapter. The Structured Dialogue (i.e. the meetings between the EU Ministers and the Ministers of the CEECs) has perhaps not fulfilled all expectations. There is certainly scope for improvement on both sides (e.g. through better preparation and more focused meetings). The Structured Dialogue could play a larger role in the political cooperation between the EU and the CEECs, in particular those where minority problems exist. Despite the criticism (some of which is justified, some not) levelled at it, the Poland and Hungary: aid for reconstruction (PHARE) programme has shown great adaptability. Its main focus has shifted from technical assistance to economic transformation to the financing of the pre-accession strategy. This implies that a large part (perhaps two-thirds) of PHARE funding is presently allocated to investment support. The programme should focus more on the possible problem areas on the road to accession, as indicated earlier. In this respect, revision of procedures in view of the further de-centralisation of the programme management to the partner countries and the devolution of programme to the national governments and local authorities will have to be considered. Moreover, in some cases, programmes could be progressively modelled on the type of structural support that the EU budget provides to the member states. Perspectives and conclusions The next step in the enlargement process was determined by the conclusion of the IGC which was to have determined the architecture and the decisionmaking mechanisms of the future Union. The Commission had to submit the abovementioned papers (which became the Agenda 2000 documents) to the Council within a very short time period in order to allow the start of the initial phase of the negotiations six months after the end of the IGC. Up until that moment the Commission had repeatedly stressed that all countries would receive an equal treatment and that no distinction would be made up to the moment the Council decision on the opening of negotiation was prepared. At this stage, there is no fixed timetable for the next steps on the way to enlargement. From a purely indicative point of view and under very optimistic assumptions the date 2002 has been mentioned as the earliest

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date for the enlargement. This date is based on a number of optimistic assumptions: • • • •

ratification of the Amsterdam Treaty will take two years, and it will enter into force on 1 January of the year 2000; negotiations will last two years and the accession treaties will be signed early 2000; ratification of the accession treaties will take two years; enlargement will take place in early 2002.

This implies that there is a heavy task before the Commission, i.e. the EU and the CEECs concerned, to overcome all the political, economic and procedural hurdles. In the end the main hurdle might well be public opinion in Central as well as in Western Europe. In the EU, people tend to view accession of new Member States as a burden that will reduce the level of economic welfare in the West. In the CEECs, people tend to consider enlargement as a direct access to the (inexhaustible) EU budget. In old and new Member States the process of enlargement and its consequences, benefits and costs, have to be explained and a consensus must be sought. Otherwise the enlargement will run into a ‘dead-end street’ of negative referenda results, popular disappointment and discontent. However formidable the difficulties, the assessment offered here is one of confidence that in the EU, and the CEECs, the political will is present to bring this historical task of the uniting of Europe, of all of Europe, to an end. It will however require skilful leadership and unrelenting effort to reach effectively the common goals. Notes 1 2

3 4 5 6 7

EU General Report 1997, Brussels, Office for Official Publications of the European Communities 1997, pp. 289ff. White Paper: Preparation of the Associated Countries of Central and Eastern Europe for Integration into the Internal Market of the Union, Brussels, Commission Communication to the Council, 3 May 1995, COM (95) 163 final. Bulletin of the European Communities, 12/95, Luxembourg, Office for Official Publications of the European Union. Bulletin of the European Communities, 10/93, Luxembourg, Office for Official Publications of the European Union. Bulletin of the European Communities, 12/95, Luxembourg, Office for Official Publications of the European Union. ‘Stable money—sound finances: Community public finance in the perspective of EMU’, European Economy, 53 (1993). EU General Report 1997, Brussels, Office for Official Publications of the European Communities, 1997, pp. 289ff.

5

Implications of the enlargement for the Common Agricultural Policy Jacques Vonthron

The structured dialogue that is taking place between the EU and the Central and Eastern European countries is a long process. Andras Inotai discusses the Commission questionnaire in Chapter 6. This author had experience in the European Commission of negotiating on enlargement, when he was responsible for negotiations with the European Free Trade Association (EFTA) countries on agriculture. Three of the EFTA states then joined the EU; Switzerland did not wish to add its voice to the negotiations. The negotiations demonstrated just how hard these preparations were, and the degree of intensity required for this process. In the case of the CEECs, there was an unknown as to whether, when they received the questionnaire, they would be able to reply properly. Although the author expressed doubts about the capacity of some of the Central and Eastern European states in their ability to reply to the questionnaire, the Commission received thousands of pages which it was then required to go through. As Inotai also asserts, enlargement is an ongoing process, a very interesting and constructive one, because there are no economic solutions already prescribed. There are negotiations taking place at an official level, under the guidance of the Council of Ministers at governmental level, but these are not trade negotiations; they are intergovernmental negotiations, on a range of political matters and obviously the European Parliament has its say. An economic reflection is lacking at the moment, and this is indeed a very important challenge. Concerning the negotiation process, there are 11 individual negotiations, which have to be carried out. In each of these individual negotiations; there are 15 countries on one side; one country on the other. Bridges can be established across parallel negotiations, but each country will have to raise a list of questions pertaining to its own particular problems, because otherwise the negotiations will stop after a single round. The candidate countries should therefore request

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particular and individual treatment. They will have obviously to accept all of the acquis communautaire. If they comply, there will be no problem; in the opposite case, negotiations could stop at once. There are, perhaps, more important challenges according to the number of countries with which we are confronted. There is also a heavy emotional political and geopolitical charge in this enlargement as a consequence of the post-war past of the CEECs and their exclusion from the integration dynamics. These negotiations will be different from any other negotiations in the past. There is a technical challenge, and we have to deal with it. In this regard several points are to be explored. The position of agriculture in the CEECs’ economies In the CEECs, there are ten countries comprising a hundred million people. If, and when, they join the EU there will be an additional one-third added to the population and land area of the EU. Broadly speaking, these economies are growing. Many Western European countries would like to have a similar growth rate. However, as far as agriculture is concerned it accounts for a relatively important share of the CEECs economies, as a proportion of the total land area and roughly 25 per cent of GDP: Around ten million people are in this sector. In the EU it accounts for a mere 6 per cent of the total population.1 When these countries join, along with Cyprus—which would not change the figures much—there will be twice as many farm labourers and farmers. This is the general situation. It is known that the collapse of Communism output had an effect on agriculture. There were a lot of difficulties in reaching previous production levels. Professor Inotai in Chapter 6 discusses the growth rate in industry, which is quite impressive. He speaks of competitive gains, but agriculture, unfortunately, is influenced negatively by the fact that a lot of people are moving towards industry. As was observed in Western European economies after the Second World War, there were gains in competitiveness as the agricultural population moved towards other sectors. Supply and demand In the agricultural sector, there has been a generalised collapse of output. This is due to a lack of subsidies, and has had a direct effect on farmers. Also, output prices have suffered, and farmers can no longer control prices. Moreover, there is more competition in the marketplace, and consequently, there is a lot of pressure upon producers. There has been a process of environmental depletion extending over generations: even before 1989, there was soil erosion, and various other forms of pollution. These are the factors that impact upon the agricultural sector. As far as agribusiness is concerned, we have already noted that trade in general has been directed towards the EU.

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It is interesting that trade with the United States accounts for only 5 per cent of the CEECs’ total trade and with Japan 2 per cent.2 Western Europeans have a responsibility because the EU accounts for 60 per cent of the applicant states’ trade. The Association Agreements have not managed to deal with trade liberalisation yet. They were originally designed to do this; they were supposed to be agreements that would give preferential access for agricultural exchanges. It was envisaged that this access would be given to the CEECs, and the EU would lose out slightly. Surprisingly, despite this imbalance, the EU has gained the most benefit from these agreements, when the CEECs should have gained the advantage. As far as basic goods are concerned, this has been the case, and even processed goods have followed this path. Perhaps something was wrong with the way the agreements were originally designed? Quotas are generally suggested as the cause of this situation. The problems still exists. If there had been a dynamic export sector in these countries, the Agreement could have borne fruit. As a result it should be asserted that we should not simply think of quantities, we should think of qualities. Structural reform Once again there is a problem for the CEECs because they had collective farms, although in Slovenia and Poland there were some small or private landowners. The CEECs need to de-collectivise now, and to establish a real-estate market, a land market. This process takes time. It is difficult to move from a system that did not have a real-estate market to one that does. You need a banking system to make sure that the estate system will function. Again the CEECs would have to adapt to the present situation in the EU. Support policies pose a very difficult problem. In most of the CEECs measures have been implemented in order to stabilise the agriculture sector. One might have thought that considering the price differences between the CEECs and the Community market and world market, the measures would have been superfluous. However, they were adopted, because between the prices the farmers get and the prices reported at the frontier, the cost of wheat has been found to double. This is a traditional phenomenon in developed agricultural economies. There is definitely a downstream problem as well as an upstream problem. The low prices in the beef and the milk sectors should not be grounds for satisfaction. The herd has to be rebuilt. It has been slaughtered in these countries, and money has to be found to replenish this herd. In an industrialised economy, demand tends towards high technology products, and agriculture in most of the CEECs is lacking investment. As a result, these countries may not even have the right credit law that is needed to invest in order to achieve the same level of production as the EU and penetrate its markets. As far as the General Agreement on Tariffs and Trade (GATT) is concerned, there are a lot of problems that need to be resolved if the CAP is to be introduced in these countries. They will have to respect the commitments that they made

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in the GATT negotiations. One problem is on support measures that will assist agriculture. The agreement these countries have inside the GATT reflects their low level of agricultural support and is expressed in the national currency rate of exchange. This will cause difficulties in the future. What are the prospects? By increasing revenues in the CEECs, demand might be stimulated for agricultural products, although even if we think that a higher consumer level per capita will be achieved, we are not sure whether animal production will be increased. Changes will have to be made even within agriculture. Most of these countries have to restructure the food sector, and this will take until the end of this decade. The restructuring of holdings will take even longer. The agricultural sector will only have very limited opportunities to attract capital investments. As far as budgetary constraints are concerned in these countries, it is most likely that state aid to agriculture will be limited. The Commission thinks that even if productivity rises, it is not certain that levels will get back to pre-transition levels. It is true that the CEECs are worried and people wonder whether the EU is threatening the CEECs or vice versa. The accession of these countries provokes concern in the EU because there is the possibility of increased agricultural production by the prospective members. It is worth remembering the effect the Marshall Plan and the Single Market programme had on growth. Growth can increase very quickly, and the Commission is worried about this potential increase. However, the main problems in the CEECs are structural ones such as the lack of capital, and downstream problems. Reform of the CAP As is well known, the CAP has been reformed from 1992 onwards. This reform was considered by international fora as a minor one, but it can be argued that, in fact, it has been an earthquake. The right CAP has been negotiated. The market has been stabilised, although there are still problems with the meat sector; intervention stocks have been reduced, apart from beef, because we are now buying large amounts to put into stock. Agricultural revenues have in fact gone up in the EU. Obviously, the economic situation has helped the Union, but the reforms have put the EU in a strong position. The Commission wants to go further with the reform process. There are areas of agriculture where work still has to be done, and we have to respect deadlines. The deadlines are imposed on the EU by the GATT and the question of enlargement. Negotiations for the CAP reform began in 1989, and reduced external aid and developed access to markets. The Commission will decrease the amount of subsidies. From all sides, changes are expected, and in some cases, the timetable has now been set. As of 1996, there is the new US Farm Bill. The

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Commission also has its own deadlines and important challenges to meet: developing agriculture in tandem with the environment and rural development. As far as the budget is concerned, there are a number of elements that we have to look at in the long term. The Council decided for the first time in 1996 to reduce agricultural expenditure by 1 billion ECU. In other words, the 1997 agricultural budget was fixed at 42 billion ECU. The Council and the Parliament decided after the first reading to reduce it by 1 billion. This shows that the EU has other priorities in budget making, and currently the agricultural budget is 50 per cent of the total budget. This is not a criticism of what the EU is doing, but the cut will not help other aspects of the budget. It was done to reduce Member State contributions so that their budget deficits can be reduced to meet the EMU convergence criteria. The structural funds have also lost 1 million ECUs. In other words, the agricultural sector will not be a free rider as far as the budget is concerned. Agricultural policy is decided by the Council. The European Parliament has a say in the matter but the Council takes very little heed of its views on the agricultural budget. The Parliament is seeking to get more powers to deal with agriculture in the IGC. We still do not know if it will succeed. There is no space to discuss the impact of enlargement. Comment will be limited to stating that the 1995 document explains what effect enlargement could have.3 This was a hypothetical scenario because, in December 1995, the actual situation was unclear. However, it is a good starting-point, especially if agricultural policy is to be discussed, but there are certainly problems. There has to be further reform of the CAP. Three options have been discussed. Radical reforms are not politically desirable. Therefore, the Commission intends to continue the path taken by the 1992 reform. Notes 1 2 3

Indicateurs clés de l’emploi 1995, Brussels, office des publications europoéennes, 1996, COM (96–485). Eurostat, External Trade: Monthly Statistics, nos 8–9, Office for Official Publications of the European Union. Interim Report from the Commission to the European Council on the Effects on the Policies of the European Union of Enlargement to the Associated Countries of Central and Eastern Europe: CSE (95) 605, Brussels, Office for Official Publications of the European Union, 1995.

6

The economy of enlarged Europe: an Eastern and Central European states’ viewpoint Andras Inotai

This chapter concentrates on the economic side of the enlargement debate, although we all know that with regard to enlargement the political, institutional and economic issues are heavily intertwined and cannot be separated from each other. The intention here is first to summarise the most important tasks and challenges to be faced in Central and Eastern Europe. Then the key issues of preparation, and also of negotiation on accession will be addressed. Finally, some conclusions will be drawn and specific characteristics will be highlighted on the issues that the EU and the candidate countries have to face. Where are we today? Preparation for accession has started, and is characterised on three different levels. One is still linked to the Commission’s questionnaire, because after providing the answers to the first set of questions in July 1996, a very intensive stage of dialogue has already started with new questions, new answers. This lasted until the Commission decision on the candidates for enlargement was prepared in the late spring of 1997.1 By focusing so much on the questionnaire, the impression is sometimes generated that there has been neglect of the tasks which are created by the Association Agreements. These Agreements last until 2001, and are now reaching their second stage, whereby the CEECs have to dismantle the still existing tariff and non-tariff barriers, and make a much more intensive adjustment. At the end of this process the CEECs will be at the same level as the EU. The third stage of preparation is certainly the formulation of the preaccession strategy, which should comprise several periods. The first period embraces the preparations for negotiation on accession. Here a clear negotiation strategy is needed. The second period covers the negotiation process until full membership. However, the experience of other countries joining the EU, such as Austria,

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Finland and Sweden, very clearly shows that a third period is needed. The preparation for accession should not end with the signing of the Agreement, because some of the adjustments will be extended into the period of full membership. The manner in which the Hungarian government filled out the questionnaire gave a positive impression and this was for different reasons. First, because the national bureaucracy, which did not necessarily work at a high level in the last few years, proved that in certain cases it is able to produce some useful outcomes. Second, until recently there was a scattered pattern of dealing with the EU issues. The questionnaire forced different ministries to cooperate and, as a result, a certain network has been created, which is useful for the preparation for negotiations as well. Third, the questionnaire itself has made clear that there are a number of strategic issues that have to be answered before the negotiations on accession start. Finally, for Hungary, at least since the early 1970s, such a comprehensive document detailing the state of the country, not only in the realm of economics, but also in a political, social and institutional framework, has not been produced. The Commission is to be congratulated for this questionnaire. What are the main economic challenges? The first is the need for a clear national strategy for accession. National strategy does not mean legal harmonisation alone. Obviously, legal harmonisation is important, but if a state tries to replace the strategy by legal harmonisation, it will have a negative experience. Moreover, this strategy is not confined to trade policy. It is part of it. From 2001, there will be free trade in industrial products, and therefore the trade policy tasks will be reduced accordingly. However, an overall and comprehensive strategy has to also include non-economic factors for accession to the EU and affects a variety of areas and activities including the economic, the social, the political, and the institutional. The second challenge is how to increase a state’s economic competitiveness. Higher competitiveness is a precondition for successful accession. From the economic point of view, it is important to change the present structure of Gross Domestic Product (GDP) distribution from consumption to investment. All the CEECs need investment-oriented growth, otherwise they will not be able to increase competitiveness. It is, of course, an economic and a political question to what extent the countries and the societies will be able to shift the proportions of distribution of the GDP, which had, or have been, established in the last few years. Nevertheless, it must be strongly doubted whether, with investments at 16 per cent, 18 per cent or 20 per cent of GDP, any of our countries will be able to become very competitive. A high growth rate is also needed to increase competitive position, and in order to tell the EU: ‘Look, there is a new market, and it is in the interest of the EU to take applicant countries’.

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Third, as a part of this investment-oriented growth, a very strict restructuring of the budget is required. This is not only in the case where the budget is in deficit. It is needed for the applicant states to be able to efficiently absorb the potential financial transfers that are expected from the EU once the applicant states become full members. As yet, national budgetary plans which have considered these issues are not apparent. In order to take up such financing the beneficiary countries will have to ensure co-financing funds. Therefore, budgetary reforms should take into account this important factor. Last, the applicant states have to change their institutional framework to facilitate accession. Most countries have already created a top-level body, in most cases chaired by the prime minister. Also, integration secretariats have been established, mainly within the foreign ministries. Inter-ministerial committees coordinating the technical work of the ministries involved in EU issues have existed for a longer time. Also, in the national parliaments, there is, in most cases, a committee on integration. In Hungary, in addition, an independent Task Force for Integration Strategy was set up to deal with the strategic issues of preparing for negotiations and full membership. Achievements and tasks Turning to economic achievements, it has to be underlined that there has been a tremendous reorientation of trade in recent years. Moreover, patterns of exports have changed. Six years ago, 13 per cent of Hungarian exports to the European Community (EC) consisted of machinery products. In 1995, this share was 35 per cent. There is a similar (although less dramatic) change in the statistics of most other CEECs. The competitive position of the CEECs, particularly that of the Central European countries, has improved tremendously. Poland, the Czech Republic, Hungary and Slovakia had a 2 per cent share of the EU’s external imports in 1989, and of 5.8 per cent in 1995 (adding Slovenia to these figures the share would be 6.5 per cent).2 The four Central European countries exported less to the EU than Taiwan in 1989 (see Table 6.1). In 1995, however, their exports almost reached the combined exports of the four small Asian tigers (Singapore, Taiwan, Korea and Hong Kong). They have gained market share against each of the non-EU member countries. Take Switzerland, a country that had exported 3.6 times more to the EU than the four Central European countries in 1989. By 1995, Swiss exports were just 38 per cent higher than those of the Central Europeans. Germany is the most important economic and trading partner of Central Europe. Central European exports to Germany can be compared with those of the three southern EU member countries, Greece, Spain and Portugal (Figure 6.1). In 1989, the total exports of the Visegrad countries were 50 per cent less than that of the three Mediterranean countries. Six years later, they were almost 20 per cent higher.

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Table 6.1 Changes in the relative competitive position of CEFTA in extra-EU imports (share of Central European Free Trade Area (CEFTA) always 100)

Sources: Own calculations based on Eurostat, External Trade. Monthly Statistics (6B), No. 5, 1991, No. 7, 1994 and Nos 8–9, 1995. Notes a January-September. b Algeria, Morocco, Tunisia, Libya, Egypt. c Hong Kong, Republic of Korea, Singapore, Taiwan. d Hong Kong, Republic of Korea, Singapore, Taiwan, Malaysia.

More importantly, the driving force of the export growth, in comparison with the EU southern countries, were machinery and electronic goods, and not just the so-called ‘sensitive’ products. In 1989 Central European machinery exports to Germany corresponded to 40 per cent of the amount exported by the three Mediterranean EU members. In 1995, the former group exported 70 per cent more machinery to Germany than the Mediterranean group. These figures indicate that there is a tremendous change on the micro-level, which has certainly been supported by foreign investments. This is the bright side. The focus will now shift on to the trade balance, which has been deteriorating in the last few years. Between 1992 and 1994, the EU registered a cumulative trade surplus of more than 11 billion ECU with the four Central European countries. Now we are entering a period in which this trade balance could deteriorate even further. Several reasons explain this situation.

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Figure 6.1 Central European exports to Germany in comparison with the three southern Member States Source: Statistisches Bundesamt. Aussenhandelsstatistik 1996.

First, a number of the applicant countries are entering the second stage of the Association Agreement when they will have to open up the still protected markets. Second, most CEECs have introduced temporary import surcharges which have to be dismantled in the coming period. Third, some CEECs are today already in a stage of economic modernisation where they need huge imports in order to become more competitive in the future. Now they have to pay for these imports, and the export revenues will emerge, in the case of efficient investments, only a few years later. How can these states manage to fill the, hopefully, temporarily but growing trade gap? Certainly, direct investments are a very important element. Export-oriented measures may also help, but it would not be a surprise if this gap was temporarily to increase. One thing, however, has to be kept in mind: there must be free trade, otherwise there could not be membership of the EU. Agriculture Except for Hungary, each country has a deficit in agricultural trade with the EU (Table 6.2). Whether this is the right specialisation among European national economies, is another question. Table 6.2 shows that in the total exports of the EU to the CEECs agricultural, products increased their share from 12 per cent to 16 per cent between 1990 and 1994. At the same time, of the EU imports, the share has decreased from 9 per cent to less than 6 per cent. So, in regard to agricultural adjustment and fears that have been expressed about the future of the agricultural sector in the EU the question must be: ‘Who is threatening

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Table 6.2 Share of agricultural trade in total extra-regional trade of the European Union (total extra-regional exports and imports=100)

Sources: Own calculations based on Eurostat. External Trade. Monthly Statistics (6B), No. 5, 1991; No. 5, 1994 and No. 8–9, 1995. Notes Agricultural products included in SITC 0 and 1 categories. a For 1994, figures for exports and imports are for Russia only. b For 1994, figures for exports and imports are for Czech Republic only.

whom and who is gaining?’ The CEECs do not threaten the EU, but, rather, the opposite is the case. There have been many assessments to evaluate the costs of agricultural integration of the CEECs into the Common Agricultural Policy (CAP). These assessments have been based on two figures: the share of agriculture in GDP and the share of agricultural employment in the total active labour force. These indicators are important, but two remarks can be made. First, the individual countries of Central and Eastern Europe have very different indicators. Some countries, such as the Czech Republic, Slovenia, Hungary and Slovakia, as well as Estonia, have agricultural figures which largely fit into the present EU picture, being the share of agriculture higher in some EU countries, notably in Greece, Ireland and also partially in Portugal. Second, the real cost of adjustment and integration into the EU regarding agriculture is probably that of the modernisation process. However, calculations on how much would be needed to modernise the agriculture sector are missing. There were, in the communist period, waves of modernisation in some countries, but there has been no real modernisation in some other countries in the past 40 years. Countries with a modernised agriculture, including land ownership, vertical integration, human factors, technologies and institutional framework (see, for example, Hungary), will need much less money than those with a non-modernised agriculture.

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Finance With respect to finance Franco’s assertion in Chapter 4 of this volume regarding the exaggerated figures is shared. In addition to Franco’s analysis a number of comments can be made. When costs and benefits are discussed, what must always be kept in mind is that these do not start once the CEECs become Member States. To calculate the potential transfers to new members is part of the story. However, costs and benefits have already appeared. It would be interesting to calculate how much the individual countries of the EU, on the one hand, and the CEECs, on the other hand, gain or lose. Trade deficits are certainly a partial, but telling, indicator. Here, the EU has gained a great deal In addition, all the CEECs have to pay a rather heavy sum in the preparation period for accession, this is normal, while the potential benefits will come after membership. There is again a gap, and if we take into account the three different processes at the same time, the transformation process, the modernisation one and the preparation cost for accession in undercapitalised economies, we realise how difficult it is to meet all of these requirements simultaneously. Figure 6.2 contains a personal calculation comparing the net EU transfers with those of the PHARE programme elements provided for Hungary. Even if Hungary could use the PHARE programme funding up to the last cent, it would be DM 16 per capita as compared with DM 1303 for Ireland, DM 843 for Greece and DM 510 for Portugal. These figures do not require any further comment.

Figure 6.2 Net contributors and net beneficiaries of the EU’s financial transfers in 1994 (DM per capita) Source: Bayerische Landesbank. Note: Based on 85 million ECU, provided by the PHARE programme.

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There are a number of calculations, which suggest that if the CEECs got the necessary EU transfers today, and according to the current mechanisms of the EU, they could not absorb the resources efficiently. To be sure, no country can absorb resources which amount to 15 per cent or 20 per cent of its GDP. The problem today is not the absorption capacity. The problem is that there are no resources available to be absorbed, and the applicant states would need these resources well before membership. Any comparison with the previous experience of the EU, be it the intra-German transfers, or the absorption capacity and the efficiency of absorption, for example, in Greece, Spain or Portugal, may be misleading. There are three factors which may enhance the absorption capacity of a given country, and all of them support more efficient absorption by the Central European candidates. First, there is a positive correlation between the level of education and the capacity of absorption. Second, the capacity of absorption, and in particular the absorption of money devoted to infrastructure investments, is correlated with geographic location. If a country is at an end point, in geographic terms, it can hardly benefit from the multiplier impact, which, however, may emerge in a transit country. Central Europe is a transit region. Third, the absorption capacity is linked to the social and economic flexibility of the given country. The collapse of communism has broken up institutional networks, has eliminated a lot of pressure groups, while having created others. However, in all countries there is a high level of flexibility. Potentially it may very positively contribute to the absorption capacity. Manpower There will be a longer period of derogation on both sides with respect to manpower. The problem today is not so much how many Hungarians or others would like to go to the EU, but the fact that highly skilled people already find the (global) market open. What will happen if those people leave their countries at a critical period of modernisation? That is the applicant states’ problem. There is an argument in Western Europe that job exportation is taking place. To some extent it is true, to some extent not, because relocation of production is increasingly a precondition to maintaining jobs in Western Europe. Of course, the EU and the member countries may restrict or even stop the free flow of labour from East to West, as happens today. However, there is no law, or regulation, which would be able to restrict or stop the flow of capital. Capital will be moving to the CEECs as far as the political and economic conditions are favourable in those countries. In the view of this commentator, it is much healthier to bring capital to the labour than let labour go out and look for capital (employment). The first scenario is already

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happening, as foreign direct investors are increasingly interested in some Central European countries as production locations. Conclusion The next enlargement, whether it takes place gradually, in various groups or as a bloc, will challenge the present EU strategy in three areas. First, each Central and Eastern European candidate is a less-developed country. Over decades, (Western) European integration combined two integration strategies: that of market integration and that of developmental integration. There is no doubt that the developmental pattern of Eastern enlargement has to be maintained, or even strengthened, in the immediate future. Second, all of the previous enlargements reached various parts of the European periphery in geographic terms. Enlargement by Central European countries, however, has to strengthen the transit and not the end-point character of integration. It is most likely that, for this geographic reason, the multiplier impact will be substantially higher, provided a coherent economic strategy can be applied. Third, although the CEECs are poor and most of them are small, with a GDP equivalent to that of the Benelux countries, they constitute a dynamic region. The EU used to talk of the ‘development banana’ from England to Catalonia. There is another ‘development banana’ emerging from Slovenia through Central Europe up to the Baltic. These countries have, in the last few years, had a two to three times higher GDP growth, and, what is more important, have experienced a four to five times higher productivity growth than comparable figures reveal has taken place within the EU. It is evident, that this process will continue for a further period of time. Hungary is interested in joining the EU at the earliest possible time and on the highest possible level of preparedness. The date decision does not depend on the Hungarian policy-makers, while the second has to be a top priority for Hungarians. Efficient preparation for negotiations on membership requires the identification of a few priorities. The more priorities are defined, the longer the negotiation process may last. As a result, the potential advantages deriving from longer negotiations may be more than offset by the handicaps linked to postponed membership and the loss of most EU transfers until membership materialises. One of Hungary’s top priorities is to become a member of a globally open, competitive EU characterised by balanced internal power relations. Considering the likelihood that Hungary will join the EU earlier than most of its neighbours, it is imperative to possess a transparent strategy towards those countries which are either likely to join the EU later or are unlikely to join it in the foreseeable future. Hungary’s fundamental interest lies in not only maintaining the present level of regional cooperation but in raising it onto a qualitatively new stage. Regional security considerations and taking care of the Hungarian ethnic minorities in neighbouring countries are only part of the Hungarian strategy. At least as

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important is the strengthening of Hungary’s role as a transit country, which is one of the major advantages Hungary can offer to the EU during membership negotiations. Without open borders to non-members such a transit position could not be fully utilised. Finally, an essential task of Hungarian preparation consists in the implementation of an ambitious communication strategy both towards the present member countries and, and more importantly, towards the Hungarian population. Such a strategy must choose a realistic approach and identify benefits and costs to be expected from membership. At present, the Hungarian society is very much in favour of membership. However, part of the above-average optimism stems from rather superficial knowledge of EU mechanisms and from a mostly emotional approach. The selection of strategic priorities from the basket of a large number of particular priorities in the final stage of preparing for negotiations will become one of the first moments when public opinion is likely to become more differentiated. Once negotiations start and progress, opinions may become even more fragmented. As a result of a successful communications strategy, however, a clear majority in favour of membership seems unlikely to be questioned when a national referendum will be due some time after 2000. Notes 1

2

EU Commission, Agenda 2000, Opinion of the Commission on the Application for Membership of Respectively Bulgaria, Estonia, Hungary, Latvia, Lithuania, Poland, Czech Republic, Romania, Slovenia, Slovakia, Docs 97/11–20, 15 July 1997. EU Commission, Agenda 2000, Vol. 1, For a Stronger and Wider Union, COM 97 2000, 15 July 1997. Eurostat, External Trade: Monthly Statistics, Nos 8–9, Luxemburg Office for Official Publications of the European Communities, 1996.

Part III

From the questionnaires to the IGC

7

The European Union at the crossroads Lisbeth Aggestam

A key theme of this volume, indicated in its title, has been the focus on issues and strategies of enlargement. The impression conveyed in the contributions to this book is that whilst the issues raised by enlargement appear relatively easy to determine, viable strategies of enlargement are more difficult to outline and conceptualise. Moreover, the problem of reaching a consensual strategy of enlargement characterised the laborious negotiation process of the 1996 Intergovernmental Conference (IGC). The Amsterdam Treaty only marginally addresses the challenge of enlargement that the Union faces in the beginning of the new millennium. Why? It could be argued that addressing strategies of enlargement raises fundamental questions about the nature of European integration and the type of Union the EU should be modelled on. The EU’s geographical boundaries, institutional effectiveness, scope and divisions of responsibility have become pressing issues to address against the background of wider political change and uncertainty in post-Cold War Europe. In short, enlargement raises questions about the Union’s identity and cohesion, and where the boundaries of a future Union should be drawn. In one sense, the debate about European integration as a process towards an ‘unknown destination’ is not new per se. However, taking into account both internal and external dynamics (for example, EMU and the end of the Cold War), it could be argued that the EU is increasingly moving towards a crossroads. The choice of enlargement strategies will significantly influence the future course of European integration. Similarly, discussions about ‘widening’ and ‘deepening’ are not novel as such. The practice in the EU seems to suggest that widening and deepening go hand in hand, that is, the integration process is strengthened before new members are admitted. All previous enlargements have been preceded by substantial revisions of the treaties, or extensions of the areas of cooperation. Yet, in this new round of enlargement, it seems as if the pairing of widening and deepening has become more contentious. At this advanced stage of European integration, questions are raised, not only about the finalités des politiques, but the finalités des

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états. Four scenarios—or visions of Europe—can be outlined around which we may want to discuss different strategies of enlargement. A status quo Europe This is a ‘non-strategy’ and the least likely scenario if EU Member States are not to negate their proclamation in the Maastricht Treaty, which states that ‘any European State whose systems of Governments are founded on the principle of democracy may apply to become members of the Union’. To avoid the extension of EU membership would seriously call into question the Union as a ‘peace project’ and as a vital anchorage for a stable political and economic order in post-Cold War Europe. A United States of Europe This is an explicitly federal strategy to advance towards a ‘positive’ stage of integration, that is, promoting a cohesive European identity of interest followed by fundamental constitutional and institutional change. Whilst there exist strong centripetal forces towards further integration, the experience of European integration seems to indicate that varied national perceptions and interests preclude the emergence of a new political power centre above the Member States which would render their sovereignty obsolete in all its aspects. A free-trade Europe This vision of Europe is less a strategy of constitution-building, but one of the removal of barriers for the free flow of transactions, goods and peoples. From this perspective, the goals in the Single Act of an internal market are simply extended to new members. Widening takes precedence over further deepening. It would seem to imply a kind of ‘laissez-faire’ integration, accompanied by greater pragmatism and less orthodoxy as to the ‘end product’ of European integration. A multi-speed Europe There exist a great many variations and themes of what we may broadly call a multi-speed Europe—for example, concentric circles, variable geometry, core Europe—to mention only a few. These concepts have somewhat different meanings, yet, they all have in common what seems to have become the new buzzword in EU policy relevant circles: flexibility. ‘Flexible integration’ is appearing in key documents, declarations, and speeches on enlargement.1 In the context of European integration, flexibility indicates the prospect that some, not all, EU Member States, advance into new areas of cooperation and deepen the process of integration further. The possible emergence of a multi-speed

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Europe is a function of how far the EU Member States collectively prove capable of aggregating diverse and sometimes conflicting political and economic interests within a band of common policies. Differentiated integration avoids the problem of allowing the least enthusiastic EU Member States to set the pace of integration. It provides the basis on which a ‘coalition of the willing’ may evolve—an inner core of members that can provide leadership and direction for the EU at a crucial time. On the other, it should be remembered that a multi-speed Europe implies a markedly different conception of solidarity and cohesion between the EU Member States. In the latest round of treaty negotiations, proposals were submitted containing a mixture of all these four scenarios. However, no clearly demarcated vision has emerged of how the European Union should evolve and manage the forthcoming enlargement. EU Member States continue to favour a strategy of constructive ambiguity. So, whilst it appears safe to conclude that European integration continues to move towards its ‘unknown destination’, there is, none the less, a number of immediate issues referring to the institutional implications of enlargement that have to be addressed. In short, they relate to the efficiency and legitimacy of an enlarged European Union. How should the members of the European Union increase the efficiency by which they take decisions and actions at the European level which also attracts legitimacy among the broader European public? There are obvious numerical problems that are raised with enlargement and relate to the representation of Member States in the institutions of the Union. How should the nomination of Commissioners take place in an enlarged Union? Should every Member State appoint a member of the European Court of Justice? How many members in the European Parliament, and on what principle of representation? Should the Presidency of the Council continue to rotate between all the Member States every six months? A related problem to representation is the voting procedures. Is majority voting to be extended to new issue areas? How are the votes to b e weighted b etween the memb ers in an enlarged Union? What constitutes a blocking minority vote, and on what issues should the principle of unanimity be retained? The Amsterdam Treaty addresses a few of these questions. For example, a ceiling is now set at a maximum of 700 members in the European Parliament. However, the divide remains unresolved between the demands of larger states for greater representation, in contrast to the smaller members who favour the ‘protection’ of their privileged small state status. The Amsterdam Treaty clarified and to some extent simplified the formal intricacies of the European integration process. Yet, it was decided to postpone the myriad of questions and problems relating to eastern enlargement to a future intergovernmental conference. Important to remember in this context is that the debate about enlargement and fundamental reforms of the Union are taking place at a time when there are indications of growing Euroscepticism among

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the European public opinion. Among the governments of the EU Member States, rhetorical visions of Europe are replaced by cost-benefit calculations of integration. This lack of legitimacy and support of a further deepening of European integration provides less room of manoeuvre for some governments to negotiate—an ‘integration dilemma’ that the government of my own country, Sweden, is presently experiencing. This brings us back to where this chapter commenced—the European Union at the crossroads. Perhaps the greatest challenge for European policymakers is how to formulate a vision of peace and order in Europe that resonates with what otherwise is an increasingly Euro-reluctant public opinion. Notes 1

On flexible integration in the Amsterdam Treaty—see, for example Making Sense of the Amsterdam Treaty, Brussels, The European Policy Centre, 1997; R.Dehousse (ed.), Europe: The Impossible Status Quo, London: Macmillan, 1997.

8

The IGC: facing the enlargement’s dilemma Frédéric Esposito

Introduction The forthcoming enlargement of the European Union (EU) is a task of an order never before faced by the EU. The challenges to be met include the sheer number of candidate countries (14 applications for membership1), the diversity of the countries represented (Baltic states, Eastern countries, Mediterranean basin) and the structural and financial consequences of the enlargement for the Union. The aim of this chapter is, first, to measure the importance of the enlargement in the context of the 1996 Intergovernmental Conference (IGC) and, second, to study whether the enlargement will bring about a deepening or a dilution of the European integration process (when also considered alongside the contents of the Treaty of Amsterdam). To put these problems into perspective this chapter will first analyse the dynamics of the relationship between the EU and certain applicant countries (the analysis will be limited to the Central and East European countries:2 CEECs) and second the debate within the IGC about the structures of the EU. The first part of this text will be based on the different trade agreements between the EU and the CEECs; in the second part there will be an examination of the different projects that have been formulated in the preparatory, as well as in the final stage, of the IGC by the Member States, the institutions of the EU, socio-economic organisations, European and national political parties and individual actors. The collapse of the communist bloc represented, and, indeed, continues to represent, an important economic opportunity. The process undertaken by the EU to develop more and more close commercial links with the eastern countries therefore seems normal.3 Furthermore, with the disappearance of the Council for Mutual Assistance (CMEA) the Eastern European countries did not only lose a vital commercial network but also an element facilitating economic transition. Hence this double approach: above all, from the EU towards the East and from the eastern countries towards the EU. If this approach can be measured mainly in terms of trade,4 it is mostly through the different agreements that were signed that the approach has been formalised. These agreements include the Association Agreements between

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the Union and the eastern countries as well as those between the latter and the EFTA. Still, this approach is not the result of an elaborate and organised process. On the contrary, the relations between the EU and the CEECs were bilateral and not embedded in a group approach. Indeed, when we consider the free trade agreements with EFTA countries and the Europe Agreements with the EU, they did not refer to explicit criteria for EU membership. In this perspective, they did not constitute a plan for the admission of the eastern countries into EU. This explains why, until Essen Council, ‘There is no timetable, nor really any explicit priority, for the legal and regulatory harmonization process’.5 The only political opportunity that had been established by article 2 of the Europe Agreements involves meetings between the President of the European Council, the Commission and the CEECs. The lack of political programme led Baldwin6 to consider possible the progressive integration of the CEECs within a general framework which would entail three steps: an Association of Association Agreements (AAA),7 an Organisation for European Integration (OEI)8 and finally the adhesion to the EU. In practice, the EU tried to fill the political gap by asking the CEECs to develop regional collaboration as a condition to EU membership. It resulted in the creation of a committee of cooperation in Central Europe between Poland, Czechoslovakia and Hungary in 1991. This sub-regional cooperation, validated by the Visegrad Agreements, evolved finally into a quadrilateral free trade agreement (CEFTA).9 Yet, if the economic effects of Visegrad are globally positive, it was not part of a progressive scheme of integration into the EU. On the contrary, it has created a feeling of the marginalisation of the eastern countries on the Western European scene.10 If it was thought that the CEFTA represented a structure of dialogue with the EU, the increasing number of eastern countries applying for membership rendered such a proposition untenable. Nevertheless, even though the EU was rather slow in recognising the goal of the eastern countries to integrate with Western Europe, the different trade agreements showed the evolution of the EU towards the question of the enlargement. Hence, the approach between the EU and the eastern countries may be illustrated by bilateral Agreements, support programmes (like the PHARE programme) and mainly by the Association Agreements. Indeed, the recognition of the willingness of the eastern countries to become members of the EU is illustrated in the preamble of the Europe Agreements: ‘Having in mind that the final objective…is to become a member of the Community and that this association, in the view of the Parties, will help to achieve this objective’.11 If the EU recognised for the first time in an official document the perspective of an enlargement to the East, its position was still evolving until the publication of Agenda 2000. But before that time, the different agreements and declarations could be seen as constituting a kind of framework, or

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preparatory stage, for future enlargement. This was developed with the preaccession strategy presented at the European Council at Essen (1994), the ‘White Paper’ (1995), and the commitment by the EU to open negotiations (with Cyprus) six months after the end of the IGC. Eventually, the Agenda 2000 document (July 1997) suggested suitable candidate countries12 for the next EU enlargement. Thus, and even if the Europe Agreements constituted the core of the bilateral framework between the CEECs and the EU, it created with the other agreements a dynamic that gradually developed the relationship between Eastern Europe and the Union. The theme of the EU enlargement was enshrined in the agenda of the revision process of the Maastricht Treaty, as illustrated by the conclusions of the presidency of the European Council of Turin: Future enlargement, which represents a historic mission and a great opportunity for Europe, is also a challenge for the Union in all its dimensions. In this perspective, institutions, as well as their functioning, and procedures have to be improved.13 Thus, the question of the enlargement conditioned the 1996 IGC, which means that the motive power of the enlargement moved from the economical to the political area. Yet, although the EU enlargement has officially been launched in March 1998, the conditions for membership remain unclear. The strategy developed by the EU has a one-sided dynamic because the main purpose is to prepare these applicant countries for EU integration rather than to adopt the EU institutional framework. Nevertheless, in the Treaty of Amsterdam, the protocol on ‘the institutions with the prospect of enlargement of the European Union’ takes into account this question by, first, limiting the size of the Commission (one national of each of the Member States) when the first enlargement will come into force and, second, by reconsidering (one year before the EU has 20 members) the composition of the EU institutions. In regard to the number of the next Member States (six), it appears that the EU will first revisit the composition of the institutions and then resize the Commission. Indeed, it seems difficult to imagine that all the future members will adhere to the same conditions, given the existing differences on an economic level. The new Title in the Treaty establishing closer cooperation between the Member States represents to a certain degree a possible answer to balance these differences. In this sense, studying the proposals of the IGC process, especially those regarding the structure of the EU is a premonitory. Beyond the debate about the future shape of the Union, the question as to aims of the European integration was also being asked. In regard to the arrival of new members, the task to pursue the establishment of a common market will depend on the evolution of the European integration, be it in the direction of a deepening or its dilution.

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The enlargement: the motive power of integration? The debate about the structure of the Union is an ancient one and was not a hallmark of the IGC. Nevertheless, with the approach of the future enlargement of the EU, it has become an important theme in which European and national actors have participated by offering their suggestions. And yet, paradoxically, the real modalities for the conditions of membership are not explicitly stated. To account for this, we will analyse the proposals in the context of the preparatory stage, then their evolution until the current stage, in order to measure the impact of the future enlargement on the process of European integration. Even though the debate about the enlargement was opened in the preparatory stage of the IGC, it is rather astonishing with regard to the importance of enlargement, that this question did not figure among the three big debates of this IGC (these were the institutional questions, the citizen and the Union, and the external representation of the Union). Indeed, considering the conclusions of the Reflection Group,14 it was, above all, the question of the democratisation of the Union that characterised this stage. Still, even though these conclusions led to an approach between the EU and the citizen, i.e. that decisions had to be taken as closely as possible to the citizen, the guiding strand of the discussions of this preparatory stage remained the enlargement. Thus the current debate about the aims of the EU, its architecture and its budget is entirely linked to this problem. It is possible, therefore, to affirm that the question of the enlargement governs all the levels of the current reform process, in particular, those of the institutions and the future structure of the Union. Such fears have been expressed in numerous suggestions, and long before the beginning of the mandate of the Reflection Group. Meanwhile, the lack of political will has finally been addressed with the presentation, by the Commission, of the Agenda 2000 document in July 1997, and with the proposals made by the Commission15 in March 1998 which represent the concrete measures of Agenda 2000, that will be debated in the Council and in the European Parliament. A new structure for an ancient Europe: the story of the IGC With the preparatory stage of the IGC, the debate on the question of the structures was launched by the publication of a document by the CDU/CSU in Germany.16 It constituted one of the major sources of proposals, and was one of the key documents in this process. Whereas most of the governmental actors, as well as the political parties, tried to avoid certain terms, such as Europe à la carte, the most striking feature of the document of the CDU/CSU was that it presented its project without any ambiguity: hard core for the structure, with the eventual institutionalisation of it, and requiring a constitutive text—of federal inspiration—defining the competencies within the Union. When bringing their document up to date17 the CDU/CSU removed the term’s hard core and federalism. This suggested that if the report of September had orchestrated the debate on

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the IGC, its version of June 1995 tended to reflect the remarks formulated on the initial document. Even though the prospective memberships are omnipresent in the discourse, the debate on the structures of the EU concerned, above all, the possibility of adjusting the different conceptions of integration of the Member States and less directly those of the candidate states. It is therefore not a coincidence that this debate has been transposed onto the monetary field, as illustrated by a declaration of the German Secretary of State for Finance Theo Waigel. He wanted to exclude Italy from the third stage of the EMU18 by turning the discussion on the Euro (in particular the timetable for EMU) into the most conflicted element of this preparatory stage. Thus the reflection upon the structures of the EU was gradually shaped to evolve, with the approach of the Madrid summit, into a confrontation of two conceptions of Europe. Indeed, the advocates of an intergovernmental Europe, in Paris and London, were opposed by those in favour of a supranational Europe, in Bonn and Rome. This intergovernmental/supranational axis to the debate did not come as a surprise as it has animated the debates about the conception of Europe since the creation of the ECSC.19 It can also be observed on the level of the European movements, since some of them, like the Federal Committee of the Union of European Federalists could only imagine the IGC ‘to progress in a federalist perspective’, in order to avoid the resurgence of ‘the nationalism, protectionism and anarchy’.20 A differentiated Europe versus Europe á la carte: false debate? Another question that animated the preparatory stage of the IGC was the concept of differentiation. In view of an enlargement of the Union towards the countries of Central and Eastern Europe a large number of actors wished for the EU to move progressively towards a two-speed Europe, in order to pursue the integration process. Among advocates of differentiation divergences existed; even though all of them had a common aim which was the integration of the continent. Indeed, the principal actors agreed on the general concept of differentiation and on the future global architecture of the Union. They disagreed, however, on the modalities for its realisation. Behind the various concepts of hard core Europe, two-speed Europe, concentric circles, other projects also referred to different conception of the institutional framework as presented in the below. The first document of the CDU/CSU was in favour of the establishment of a hard core embedded in a federal structure and leading to a Union that is more integrated. The letter of Chancellor Helmut Kohl and the French President Jacques Chirac 21 confirmed, in general terms, the idea of being flexible. The Belgian Prime Minister Jean-Luc Dehaene considered the institutionalisation of this hard core desirable.22 The report of the French delegation of the National Assembly at the EU suggested organising the Union around three circles (an economic

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and monetary circle, a defence circle and common market circle), and reinforcing its intergovernmental character at the same time. 23 The government of Belgium accepted the idea of a two-speed Europe, but considered this to be transitory.24 If one concludes that all of these different proposals on differentiation mainly confirmed this principle, one must also note that it is a false debate in the sense that the opting out conceded to the United Kingdom and Denmark contributed indirectly, not so much to the institution of the notion of differentiation, but rather to the notion of flexibility. If, in the first case, the emphasis is put on the idea that all states pursue the same aim, but at a different pace, in the second case, the concept of flexibility reveals a much more pragmatic approach. In reality, this notion is close to that of the hard core, the only difference being that it does not include the notion of a group leader promoting integration, thereby avoiding the debate about the potential members of this group. The discussion on EMU is a perfect illustration of the differentiation concept. Indeed, concerning the participation of Italy in the third stage of EMU, it was the creation of a group of states—constituting a hard core—that decided on the candidates for the Euro, even though it was formally the task of the European Council to designate the countries that would participate in the EMU. The question of the enlargement at the current stage: a process at the margin The dynamic of the enlargement of the EU is now launched, since the EU has opened negotiations with Cyprus, the Czech Republic, Estonia, Hungary, Poland and Slovenia.25 Practically, this does not really affect the future waves of enlargement, as the principal aim has been defined to ensure the functioning of an enlarged Europe, the latter being composed of either 24, 27 or 30 states,26 in order to achieve the aims fixed by the Maastricht Treaty: The Union shall set itself the following objectives…to maintain in full the acquis communautaire and build on it.27 As we can see, the framework in which the enlargement is to take place was very clear, in the sense that the acquis communautaire, that is the whole of the dispositions contained in the Maastricht Treaty, represent the common denominator. The practice, however, is slightly different as the EU applies a form of differentiated integration with the United Kingdom and Denmark. Furthermore, the new Treaty of Amsterdam institutionalised three forms of flexible integration:28 enabling causes, case-by-case flexibility and predefined flexibility. In the first case, it allows Member States to establish closer cooperation between themselves in the field of the first (article 5a) and the third pillar (article K.12).

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The second and third cases concern, first the constructive abstention provision in the second pillar (article J.13) and specific fields as illustrated in the protocol Y, protocol X, protocol Z, and the protocol integrating the Schengen acquis. Even if the use of the flexibility principle will depend mainly of the political will of the Members States it constitutes a new stage in the integration process. Indeed, flexibility will indirectly soften the conditions for adhesion because the Member States know that they can manage the differences between the members, and with the new members, by using this principle. The main impact will certainly be on the institutional framework which can evolve towards a Europe à la carte even though the Council and the Commission have the opportunity to hinder the use of the flexibility by the Member States. In this perspective, the European institutions share this analysis, in the sense that both the European Parliament and the European Commission reject the idea of a Europe à la carte, being fully aware that, Institutional mechanisms designed for a Europe of 6 members which have not been properly adapted since, and could not simply be transposed to a European Union with more than 20 members without a risk of paralysis and dilution of the European Union… Whereas the reform of the Treaties requires institutionalisation of the principle of the ‘necessary means’.29 In the IGC process, the debate on the future architecture of the EU was centred on the notion of flexible arrangements, as is illustrated by the proposals of the Member States that can be divided into three groups. The question of a differentiated integration was proposed, and the solutions linked to it: Europe à la carte, multi-speed Europe, variable geometry, hard core, enhanced solidarity, concentric circles. Three tendencies for a conclusion: flexibility The first group 30 reflected the most federal ideas on the principle of differentiation, partially representing the position of the Parliament and the Commission. Composed of a large number of states,31 it rejected the concept of a differentiated approach of integration in order to avoid a Europe à la carte. Yet, these countries recognised two possibilities32 to whom this principle would be applied. The first was to accept the notion of a temporary differentiation, as for Great Britain and Denmark. However, and this is the second option, the principle of differentiated integration has to be based upon the maintenance of the institutional unity. Furthermore, even if we admit the necessity to adapt the rhythm of each state to the European integration process, the states must pursue the same aims which constitutes the acquis communautaire. It is on this condition only that the single institutional framework will be saved.

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The second group, composed of Germany and France,33 also accepted the idea of a differentiated integration and suggested the institutionalisation of the concept of a multi-speed Europe. In the German case the proposal was to make the Franco-German cooperation the centre of a hard core, itself composed of five states (Belgium, France, Germany, Luxembourg and the Netherlands), and participating in all of the actions fixed by the Maastricht Treaty. As to the other Member States they could integrate into this hard core as soon as they could and wanted to. France added to this concept the idea of enhanced solidarity which is an extension of the principle of supranationality to new fields, such as Schengen, for example. As to the last group, composed of the United Kingdom and Denmark, it was not surprising that they defended the policy of differentiated integration, since both countries contributed to it. Nevertheless, the Danish government emphasised the risks of such a policy, as many national and community domains are interdependent; hence the difficulty in treating them separately. The position of the United Kingdom was clearer, in the sense that flexibility was considered to be the only means to build a Union composed of more than 20 Member States. The idea of the hard core, however, was rejected as the United Kingdom wished every state to be allowed to join a community field whenever it decided to do so. This rather pragmatic approach stipulated the maintenance the current structures, with the possible risk of entirely paralysing the functioning of the EU. Conclusion The EU enlargement has been launched, even though the institutional reform and the conditions for adhesion (transition periods for instance) have still not been tackled. Certainly, the procedure applied in the four preceding enlargements never really enquired into the precise conditions for enlargement, except during the negotiating stage. Yet, concerning the second wave of enlargement the question of the conditions seems more important because the impact on the structural issues will be higher. Indeed, if transition periods are introduced in sensitive sectors, such as agriculture, it is far from clear that the CEECs would accept such a process. If, from the very beginning, the EU fixes the different levels of integration to which the CEECs may aspire, especially with regard to the flexibility principle, this would allow the EU to clarify its future structure and, above all, its aims. The Member States have to choose between two perspectives: either to discuss the conditions of membership for each candidate country or to determine beforehand the general framework within which the membership will be realised. The EU has adopted both perspectives; it has started the enlargement process and stated some of the conditions of membership, mainly through Agenda 2000. Following the pragmatic logic that has driven the integration process since the beginning, the dynamics of the enlargement

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started before the conditions of membership had been fixed. As a consequence of this, the whole process is of both a medium- and a longterm nature which softens the impact of the proposals made during the IGC since they do not touch upon the modalities for adhesion. Indeed, despite the fine working of the current process of transition in the CEECs, 34 the latter will not be able to join the first group of countries which will enter stage three of the E MU. This means that the structure of the EU will necessarily tend towards a form of flexibility, illustrating at the same time the marginality of the question of the enlargement in the process of the revision of the Maastricht Treaty. As to the impact on the European integration process we have to note that the IGC adhered, from the very beginning, to the idea of a deepening of this process. Its aim was, in fact, to put rather more emphasis on a more efficient organisation of the existing institutions and processes than on the creation of a new organisation.35 Still, with regard to questions about the structures, the confirmation of the principle of flexibility, during the IGC, and in the new Treaty, shows a dilution of European integration since the different degrees of integration that are conceivable can lead to a destruction of the European framework. Indeed, whatever kind of differentiation is applied, the EU will hardly be able to maintain a single institutional framework if half of the Member States profit from specific conditions. The work of the different institutions would be difficult if their members varied according to the sectors for which special conditions would have been negotiated. In this sense we may talk of a dilution of the integration process despite the fact that the debate about the institutional questions showed a tendency towards a deepening. The IGC process was therefore a departure from the idea of ‘the dynamic of the Six and the ideal of the Founding Fathers’,36 as the principle of flexibility is now confirmed. Nevertheless, this does not necessarily imply the emergence of a new structure or the evolution of the present one. The EU will have to make sure beforehand that the impact of the enlargement on the integration process does not lead to a disintegration. This is a paradox because the marginal character of the enlargement in the IGC contrasts with the determining role the enlargement plays on the future shape of the European Union and, as a consequence, on the integration process as a whole. Notes 1

There are ten applications for EU membership from the East and Central European countries: Hungary (31 March 1994), Poland (5 April 1994), Romania (2 June 1994), Slovakia (27 June 1995), Latvia (27 October 1995), Estonia (28 November 1995), Lithuania (8 December 1995), Bulgaria (14 December 1995), Czech Republic (17 January 1996) and Slovenia (10 June 1996). The remaining applications concerned Turkey (14 April 1987), Cyprus (3 July 1990), Malta (16 July 1990) and Switzerland (20 May 1992). We note that Switzerland and Malta have frozen their applications.

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Frédéric Esposito I consider Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia, Slovenia. R.Baldwin, Towards an Integrated Europe, London, CEPR, 1994. J.-P.Broclawski and N.Holcblat, ‘Repères économiques pour l’Europe centrale et orientale en 1994’, Le courrier des pays de l’Est, 385, pp. 40–46. D.Kennedy and D.E.Webb, ‘The limits of integration: Eastern Europe and the European Communities’, Common Market Law Review, 30, 6, p. 1111. Baldwin, op. cit., pp. 206–224. The aim of the AAA is to regionalise the trade and the investment liberalisation components of the Europe Agreements. The OEI represents a new institution creating an intermediate step between free trade in industrial goods and full memberships. The OEI will cover the same matters as the EEA Agreement without migration. CEFTA: Central European Free Trade Agreement. K.Szymkiewicz, ‘Le difficile “retour à l’Europe” des pays de l’Est’, Revue du Marché Commun et de l’Union Européenne, juin 1993, No. 369, pp. 527–530. Official Journal of the European Communities, No. L 347, Brussels, Vol. 36, December 1993. Czech Republic, Estonia, Hungary, Poland, Slovenia plus Cyprus. Reflection Group, Final report from the Chairman of the Reflection Group on the 1996 Intergovernmental Conference. A Strategy for Europe, Brussels, Council of the European Union, 1995. The Reflection Group set up to prepare for the 1996 Intergovernmental Conference held its inaugural meeting in June 1995 and presented its final report in December 1995. Its composition was the following: two members of the Parliament, a member of the Commission and one delegate for each state. Communication de la Commission du 18.03.98 au Conseil et au Parlement européen portant sur l’établissement de nouvelles perspectives financières pour la période 2000–2006. Christlich Demokratische Union Deutschlands/Christlich-Soziale Union in Bayern. Überlegungen zur europäischen Politik, Bonn, CDU/CSU, 1994. The first document was on the CFS P (Christlich Demokratische Union Deutschlands/Christlich-Soziale Union in Bayern (1995). Die Europäische Union au? en-und sicherheitspolitisch handlungsfähiger machen, Bonn: CDU/CSU; and the second on the third pillar (Christlich Demokratische Union Deutschlands/Christlich-Soziale Union in Bayern (1996). Mehr europäische rechtsstaatlichkeit, Bonn: CDU/CSU. The German Secretary of finance said at the Bundestag ‘considering that the criterion to the third stage of the EMU are stated in the Maastricht treaty, Italy, even if she is a founding Member, won’t be part of it’, in P.Lemaître, ‘Le ministre allemand des finances exclut l’Italie de son “Schengen monétaire”’, Le Monde, 95, 9. p. 2. The European Coal and Steal Community. Agence Europe, 11 April 1995, pp. 9–10. J.Chirac and H.Kohl, Common Press Conference, Franco-German Summit, Baden-Baden, 7 December 1995.

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22 J.-L.Dehaene, La Conférence intergouvernementale de 1996 et l’avenir de l’Europe, Conférence donnée au Collège d’Europe, Bruges, 22 mars 1995. 23 A.Nicole et C.Nicole, Quelles réformes pour l’Europe de demain, Rapport d’information déposé par la délégation de l’Assemblée nationale pour l’Union européenne, Paris, Assemblée nationale, Rapport d’information no. 1339, 1995. 24 M.Eyskens et F.Willockx, La conférence intergouvernementale 1996, Rapport intérimaire fait au nom du Comité d’avis chargé de questions européennes, Bruxelles, 30 mars 1998. 25 Malta’s application for membership is actually frozen. 26 I consider the following number of countries: 24 (with all the CEECs); 27 (with the Baltics States) and 30 countries with Malta, Switzerland and Turkey. 27 The Maastricht Treaty (1991), Titre I, Article B. 28 A.C.-G.Stubb, ‘The Amsterdam Treaty and flexible integration: a preliminary assessment’, Paper presented at the IPSA-Research Committee on European Integration Unification Seminar, Brussels 10–12 July 1997. 29 European Parliament, Resolution on the Functioning of the Treaty on European Union with a View to the 1996 Intergovernmental Conference-Implementation and Development of the Union. European Parliament, Brussels, 1995. 30 F.Esposito and S.Mimouni, Le processus préparatoire de la conférence intergouvernementale de 1996. Document de travail pour servir à l’analyse d’une négociation, Geneva, Centre for Applied Studies in International Negociations (CASIN), Geneva, 1996. 31 Austria, Belgium, Greece, Ireland, Italy, Luxembourg, Netherlands, Spain and Sweden. 32 See also: Proposition du gouvernement italien sur la conférence intergouvernementale pour la révision des traités. Gouvernement italien. Proposition du gouvernement italien sur la conférence intergouvernementale pour la révision des traités, Rome, Ministères des affaires extérieures italien, 1996. Government of Ireland, Challenges and opportunities abroad, Dublin, Chancellery of Ireland, 1996. 33 J.Chirac and H.Kohl, op. cit. 34 A.Inotai, ‘From association agreements to full membership? The dynamics of relations between the central and eastern European countries and the European Union’, Working Papers, No. 52, Budapest, Institute for World Economics, 1995. 35 Reflection Group, op. cit. 36 C.Roquefeuil, ‘L’Europe et l’ornithorynque’, Europ, 3, p. 28.

Part IV

The geopolitical consequences of the enlargement

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The new pattern of international relations in Europe Adrian Hyde-Price

In his contribution to this volume Leszek Balcerowicz has spoken of a Europe ‘growing together’. This provides the point of departure for my contribution. The end of the Cold War has raised expectations of a Europe at long last ‘whole and free’ (in the words of the then US President George Bush in 1989). However, nearly a decade after the opening of the Berlin Wall, such optimism seems misplaced, given the resurgence of nationalism in many parts of Central and Eastern Europe, bloody fighting in the Balkans and growing Euroscepticism in parts of Western Europe. This chapter assesses the overall character of contemporary European international relations, in order to consider the implications of an eastern enlargement of the European Union (EU) for European order. It begins by identifying some of the key changes to European international relations in the post-war period. It then goes on to consider the role of the EU in contemporary Europe, before concluding with an analysis of the impact of the enlargement of the EU on European order. Introduction Let us start by reminding ourselves of the scope and depth of the changes that have transformed Europe since the late 1980s. The collapse of communism in Central and Eastern Europe brought the Soviet-designed structures of the Warsaw Pact and the Council for Mutual Economic Cooperation (COMECON) crashing to the ground; Germany has reunified, peacefully and democratically; the USSR has disintegrated, with surprisingly little violence; the Balkans have erupted in armed conflict; and a plethora of new states have appeared in Central and Eastern Europe. The ramifications of these seismic changes are not clear, and most serious analysts are aware of the considerable ambiguity and complexity which continues to characterise contemporary European developments. Yet there are some who see things much more simply. Europe’s future, it has been argued, will resemble its past. For example, in his oft-quoted article, the American neo-realist John Mearsheimer has argued that post-war Western Europe was held together by the bipolar structures of the Cold War.1 With their demise, he suggests, NATO and the EU will disintegrate,

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and Europe will revert to a multipolar balance of power, with Germany at its centre. In this context, war cannot be discounted. But whilst ‘Back to the future’ may be a snappy title for an academic article, it does not help us understand the nature of the changes sweeping Europe today. Europe on the eve of the twenty-first century is a very different place from the Europe of Stalin, Bismarck, Palmerston or Napoleon. European international relations have been transformed by a series of social, economic and political changes which have created a qualitatively new situation. Hence the problems facing policy-makers in Europe today are, in a number of important respects, qualitatively different from the problems of the past. Consequently, academics are finding it very difficult to theorise about the changing pattern of European international relations using concepts and models drawn from the past. Above all, it is important to recognise that despite talk of the ‘return to Europe’ of the new post-communist democracies, the end of the Cold War does not simply mean that Central and Eastern Europe will copy the West and become pale imitations of Western Europe. Western Europe itself is in a process of farreaching differentiation and structural innovation, both as a consequence of the new patterns of interaction in post-Wall Europe, and as a result of globalisation, integration and societal change. This means that post-war notions of ‘Western’ and ‘Eastern’ Europe are now of declining utility. The end of the Cold War has thus provided the catalyst for a major restructuring of European order—for the third time this century. And at the heart of this changing European order stands the European Union—which is itself grappling with two major challenges: Economic and Monetary Union (EMU) and eastern enlargement. The post-war transformation of Europe The end of the Second World War heralded a new phase of major socioeconomic and political change in Europe. Much of Central and Eastern Europe found itself in the Soviet sphere, and was transformed in the image of the ‘land of Lenin’. The international structures created by the Soviet Union—the Warsaw Pact and COMECON—were designed to institutionalise communist party rule and insulate the bloc from external influences. Western Europe, on the other hand, was transformed by a very different series of pressures and influences. Five factors stand out in particular: 1

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Post-war reconciliation, with Franco-German reconciliation at its heart. This was a largely organic process, which was encouraged and driven at the elite level, but which was also sustained by non-governmental civic groups (including schools, churches, local communities, trade unions, political parties etc.). Democratisation: the consolidation of stable liberal democracies in Western Europe changed the way these states related to each other. Whilst some have questioned the claim that ‘democracies do not fight each other’, there

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is still no evidence to suggest that this is not the case. Indeed, there is good reason to suggest that the consolidation of stable democracies in western Europe has been a key factor in the way these states interact. Economic interdependence: Western European economies have been increasingly bound together by a myriad of threads of economic interdependence, based on microeconomic specialisation, transnational corporations and crossborder trade. This has been reinforced and deepened by globalisation, which has been driven primarily by technological changes affecting communications and transport. Institutional architecture: the post-war years witnessed a veritable proliferation of international organisations, which transformed the institutional landscape of Europe. Today there are three key bodies—the European Union (EU), North Atlantic Treaty Organisation (NATO) and the Organisation for Security and Cooperation in Europe (OSCE) —yet they jostle with a host of others, including the United Nations Economic Commission for Europe (UNECE), the Council of Europe, the Western European Union (WEU), the European Free Trade Association (EFTA), the Central European Free Trade Association (CEFTA), the Central Europe Initiative (CEI), the Council of Baltic Sea Cooperation, AlpeAdria, etc. This alphabet soup of institutions gives European international relations a very distinctive quality: Europe is unique in having such a dense institutional matrix, and this contributes to the very different character of international politics in the continent. European integration: the post-war period witnessed a novel process of integration which has transformed the politics and economics of Western Europe. Whilst there have been other forms of institutionalised cooperation in Europe—notably the Nordic Council and EFTA—the integration process has been led by the EU. The EU traces its origins back to the European Coal and Steel Community (ECSC), which was superseded by the Treaty of Rome and the EEC. The explicit purpose of the ECSC and the EEC was to make war structurally impossible and to lay the foundations for lasting international peace and cooperation in Europe. The EU today has pioneered a unique form of integration, with elements of intergovernmentalism as well as supranationalism. It is more than just another international organisation, but less than a new federal state.

The impact of the EU on European international relations At the heart of the changes which have transformed post-war Western Europe stands the EU. It is a union of democracies bound together by institutionalised forms of multilateral cooperation, underpinned by complex patterns of economic interdependence and informal integration.

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Given that the EU is at the centre of the transformed post-war Europe, it is not surprising that the development of the EU has had a major impact on European affairs: 1

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The EU embodies the emergence in Europe of what Kenneth Boulding called a ‘zone of stable peace’; what Karl Deutsch called a ‘pluralistic security community’; and what Emmanuel Kant termed a ‘pacific union’. All these concepts refer to a community of states and peoples bound together so intimately that war, or the threat of war, no longer plays any part in relations between them. The EU has generated novel forms of multi-level governance in Europe. Public policy-making in the EU area increasingly involves a complex interaction between national governments, EU institutions, local and regional authorities and non-governmental actors. The development of the EU has helped facilitate the emergence of multiple and overlapping identities. It is not unusual to meet individuals from, for example, Munich, who regard themselves as Bavarian, German or European, or individuals from Edinburgh who define themselves as Scottish, British and European. The above changes have helped both to reduce the saliency of nationalism in Western Europe, and to alter its character. Nationalism in most of Western Europe is now largely defined in civic, rather than ethnic terms, and coexists with other forms of identity (regional, local, European). Finally, the EU has provided one of the key institutional solutions to the perennial ‘German question’. Since the late nineteenth century, the question of how to fit Germany into the European states system has proved highly destabilising. It was a central factor in the outbreak of war in 1870, 1914 and 1939. However, the development of the EU, along with democratisation and other forms of multilateral integration, have tamed and constrained German power, and effectively solved the German question as an issue threatening the security of Europe.

The EU has thus been central to the changes which have transformed postwar European international relations. Some have claimed that the sovereignty and independence of the nation-state have been eroded to such an extent that the Westphalian states system is now being transcended by the emergence of a ‘neo-medieval’ system. This neo-medieval arrangement consists of overlapping and multiple forms of authority and identity, in contrast to the distinctive structures of sovereign nation-states which characterise the Westphalian system. Whilst it is too early to herald (yet again) the ‘withering away’ of the state, there is good reason to suggest that some major processes of change are at work in Europe today which have already transformed the character of European international relations. The key question today (to return to the opening theme) is how the EU will operate in a Europe ‘growing

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together’ —or at least no longer divided by an iron curtain? More precisely, how will the EU’s eastern enlargement affect the constitution of European order? The main challenge facing us as Europeans is how to enlarge the EU without losing the advantages of the existing forms of institutionalised cooperation, and without undermining the dynamism and integrity of the integration process. To put it more simplistically, how to combine widening with deepening. The problem is how to do this in a political environment in which increasing numbers of Europeans are questioning the advantages of integration itself. It is clear that eastern enlargement will force changes in the policies and decision-making procedures of the EU. The two largest items on the EU budget are the Common Agricultural Policy (CAP) and the Structural Funds. Both are untenable in their existing form in an enlarged EU. EU institutions and decision-making procedures were initially designed for a community of six. They are already straining to deal with 15 members. In a community of 20 or more, they will become unworkable. Enlargement will thus force changes in the key policies, institutions and practices of the EU. More importantly perhaps, it threatens to undermine the complex patterns of package deals and multilateral negotiations through which the EU functions. It threatens to weaken the Franco-German axis, which has provided the motor of the integration process; to exacerbate north-south divisions within the Union (between richer, northern states like Germany, Sweden or Britain, and poorer, southern states like Greece, Spain and Portugal); and between large and small states (particularly in terms of qualified majority voting and the number of commissioners). On the other hand, the eastern enlargement of the EU is an essential foundation for developing a zone of stable peace in Central and Eastern Europe. The failure of the Union to enlarge to the East would be a major blow to the hopes of the new democracies in the region who aspire to ‘rejoin Europe’, and could have dire implications for the future stability of Central and Eastern Europe. More positively, the enlargement of the EU would consolidate the process of political democratisation in the East; it would stimulate the further modernisation of their economies and facilitate their integration into the global economy; and it would foster a greater sense of a shared ‘European’ identity and common interests. Above all, it would expand the zone of institutionalised multilateral cooperation in Europe, thereby strengthening the cooperative aspects of European international society. Enlarging the EU eastwards thus provides the current generation of European leaders with an historic responsibility comparable to that faced by the immediate post-war generation of Monnet, Schumann and Adenauer. EU enlargement and the future of European international relations The eastern enlargement of the EU raises five main issues for the wider pattern of European international relations:

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The long-term task facing Europeans in the early twenty-first century is expanding the Euro-Atlantic ‘security community’ eastwards, in order to lay the foundations for an Europaeische Friedensordnung (a European peace order). The eastern enlargement of the EU is a necessary but not sufficient condition for this. Forging a Europe ‘whole and free’ involves much longer processes of growing together (including cultural exchange, normative convergence, societal interaction and deepening economic interdependence), and these organic processes cannot be achieved simply by institutional expansion. ‘Enlargement to the East’, EU Commissioner Hans van den Broek has argued, ‘is in the first place a political issue relating to the security and stability on our continent’. EU eastern enlargement raises some important questions concerning security. Will an enlarged EU become a more autonomous actor, with a closer relationship to the WEU and a more robust Common Foreign and Security Policy? Or will enlargement weaken the momentum towards political union (as the former British conservative government hoped)? Either way, this raises important questions concerning the future of NATO, and of the role of the USA in European security— questions which continue to generate tensions between Paris and Washington, and between European members of NATO and the WEU. Germany and Mitteleuropa: the EU has helped provided a solution to the German question, and the multilateral integration of the BRD in the Union provides considerable reassurance to Germany’s neighbours in both East and West. This is particularly important for the new democracies in Mitteleuropa, who have not always found it easy living in the shadow of their powerful western neighbour. Germany has been a major advocate of the eastern enlargement of the EU, and the inclusion of the Visegrad countries in the EU would give the BRD a group of important new allies. This could have important implications for coalition-building and multilateral negotiations within the councils of the Union, with unpredictable implications for the Franco-German axis. Russia and the CIS: Russia will for many decades be considered as too large—and too backward—to join the EU. This makes it very important that the eastern enlargement of the EU does not lead to a new division of Europe. This is a very worrying problem, which has not yet received the attention it deserves. EU enlargement must therefore be crafted in such as manner that it acts as a form of ‘bridge-building’ to countries in the CIS left outside of the Union. Finally, we all—academics and policy-makers—need to come to terms with the implications of an increasingly more complex and differentiated Europe. EU enlargement will inevitably lead to some form of ‘differentiated integration’, ‘multiple speeds’ and ‘concentric circles’. Europe is already becoming more regionally differentiated, with new regional patterns of cooperation and conflict developing in Central Europe, along the

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Mediterranean coast, around the Baltic and the Black Seas, and in the Balkans. There is also a high level of functional differentiation between organisations such as the EU, NATO, WEU, OSCE and Council of Europe: ensuring that Europe’s institutional architecture consists of interlocking—not interlocking—structures is already proving a difficult and demanding exercise. Conclusion This chapter has of course raised more questions than it has answered. None the less, hopefully it has highlighted some of the wider implications of EU enlargement for the future of European order. The main point to be stressed— by way of conclusion—is that the end of the Cold War has exposed and accelerated a series of profound and far-reaching transformations in the nature of European international politics. EU enlargement will not simply mean the ‘westernisation’ of East Central Europe as some naively thought in the heady days of the annus mirabilis. Rather, the eastern enlargement of western organisations will act as a catalyst for changes in all parts of Europe. The eastern enlargement of the EU is therefore not simply a technical matter involving changes to voting procedures or agricultural policy. Nor is it something that concerns only the existing 15 Member States and the applicant countries. Rather, its major implications for the very constitution of European order, and for the social sciences is largely terra incognito. Academics therefore need to be aware that we cannot simply rely on past concepts and models to understand the very new dynamics of a changed Europe. More importantly, policy-makers must approach the question of EU enlargement with a sober awareness of the broader responsibilities they bear for the future of peace and cooperation in our continent. Notes 1

J.Mearsheimer, ‘Back to the future: Instability after the cold war’, International Security, 15, 1 (1992).

10 The enlargement Transforming Western Europe Christian Deubner

A question that should be guiding our reflection is to know if the eastern enlargement of the EU will transform Western Europe? And if yes, how? A number of tentative answers could be given. Western Europe has already recognized the need to transform itself even before the enlargement process unfolds. However, acknowledging that transformation must take place is not the same as agreeing on the actual form of this transformation. In the institutional field, there has been incapacity on the part of the 15 to strengthen further the EU institutions and procedures, or increase t h e i r e f f i c i e n c y, t h e i r l e g i t i m a c y a n d t h e i r t r a n s p a re n c y. T h e Intergovernmental Conference (IGC) has already illustrated this incapacity. Therefore, the ability to decide efficiently on questions important to different members has been reduced. Different models have already been envisaged for some of the members to advance at a quicker space than the others have, in particular through the principle of ‘flexibility’ enshrined in the Treaty of Amsterdam. In the field of economic integration, the monetary integration project of Economic and Monetary Union (EMU) will bring a new and sharply felt differentiation between those who are going to be the members of the common currency from 1999, and those who are not. The common currency will have political and institutional consequences, which are liable to deepen the cleavage between the ‘ins’ and the ‘outs’. The process of globalisation, low-price import competition as well as the incredible acceleration of international capital mobility, have already dangerously reduced the popular legitimacy of EU’s external liberalisation project, together with its ability to contribute to economic well-being for most of its citizens. In the field of solidarity inside the EU, symbolised by the Cohesion and the Regional Funds, but also by Common Agricultural Policy (CAP), the joints creak. Germany has loudly demanded a reduction of its net contribution because of its reduced per capita income after reunification. The need to discuss the EU’s future financing with the ending of the Delors’ package in 1999 will bring difficult and painful intra-EU confrontations in this field.

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In the field of external security, the EU has not yet created, and will not create, efficient institutions and procedures for making common decisions and carrying them through. In a situation when national positions on key issues remain important, and different, this will provoke crises. The EU has not been able to formulate a common vision of its external interests, strong enough to give impetus to common and coherent action. In these four fields, therefore, quick eastern enlargement will not create new problems and cause new transformations to come about for Western Europe. It could either contribute to a change in developments (shock therapy for the ailing integration process), or reinforce and aggravate them. Unfortunately everything points to an aggravating effect in all four fields. These aggravating effects will be: 1

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even more differentiation in the institutions and procedures with deeper cleavages between the poor and the rich, and regional coalitions, and even less chance for the common advance of all members together; even deeper cleavages in economic development and economic/monetary policy interests; even more confrontation over the distribution of transfers from rich to poor; even less ability to arrive at Common Foreign and Security Policy (CFSP) positions.

The important concluding question will be whether a European Union of this kind will, with all its weaknesses and limits, still be accepted as a stable European ‘multilateralism’, a kind of positive and stable alternative to a system of national states balanced out in a pre-1945 manner, or whether it will be considered insufficient to guarantee the survival of essential progress and benefits brought by the past decades of EC integration, and give rise to an effort to save progress and benefits by the creation of a hard core group which seeks deeper integration in all of these fields. Eastern enlargement transforming Western Europe: definitions and scenarios What is Western Europe? Evidently, it is today’s EU, which may become tomorrow’s EU after the enlargement of the EU’s western part. Here we will concentrate on those aspects of today’s Western Europe which are clearly EU-related. To do this, it is a good idea to start by pointing to those transformations that are not due to eastern enlargement: 1

The widening of economic cooperation with low-cost Eastern Europe to gain competitiveness. This kind of cooperation does not require EU enlargement as much as many advocates of quick eastern enlargement

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seem to think. Two of the most-cited examples for this kind of cooperation, Japanese and US industry, have succeeded with global outsourcing in going wherever production factors were cheap. The industries in these states did not wait for the world market to be ‘integrated’. Western Europeans can do likewise in Eastern and Central Europe in the context of free-trade regimes. Increasing competition with Western European markets is not going to set in with eastern enlargement. The commercial openings towards the CEECs already started in 1990 and Western Europe today encompasses the primary destination of Eastern European exports. Anyhow, Eastern European exports constitute only a small part of low-cost competition on Western European markets, the larger part resulting from the globalization and the continuing liberalisation of economic exchanges worldwide. Below, there will be a closer examination of the kind of economic challenges which can actually be attributed to eastern enlargement.

Integration scenarios by 2005 What kind of Western European will it be which faces the challenge of eastern enlargement? How well will the EU have anticipated, and prepared for the enlargement? Therefore what will be the changes which impose themselves, in addition, leading to ‘transformation’? A reasonable guess, supported by the information coming out of the negotiations, is that the IGC and the resultant Treaty of Amsterdam will not make the EU ‘fit for enlargement’. In fact, this reform, together with those required to take place by 1999 (both finances and agriculture) is likely to bring only minor improvements in efficiency, and the reduction of intra-Union transfer programmes. This reduction of intra-Union transfer will confirm a general disintegration tendency by introducing more flexibility into institutions and procedures. Thus, it will be an insufficiently prepared EU which confronts enlargement. Eastern enlargement The EU has now entered into enlargement negotiations. This round of negotiations includes Cyprus, three of the so-called Visegrad states: Poland, the Czech Republic and Hungary, Estonia and Slovenia. Why these states? If the EU had judged then by the fulfilment of political, legal and economic criteria, Poland would probably be, together with Slovakia, the last candidate on the grounds of its weak level of economic development. But politically, it became unthinkable to let Poland wait longer than, say, Hungary. Thus, if the EU accepts one, there can be no way to refuse the other. The open question evidently concerns the way to handle the extremely delicate issue of a divided Cyprus.

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In consequence, the coming enlargement might be from 15 to 21. Thereafter, we can count on another five CEECs which already have more or less explicit promises of future membership in their pocket (Romania, Bulgaria, Slovakia, Lithuania, Latvia). They could come in the decade after the first five and would bring total membership up to 26. Problem of uncertainty: the EU as a ‘process’ confirmed European integration has never reached a definite form and content, neither for its institutions, procedures and competencies, nor for its members. Its characteristic mark was that it always resembled a ‘process’ towards an unknown destination. Many think that the EU of the 1990s will not even be able to survive with its acquired measure of integration and competencies if it does not succeed in making clear steps beyond the process stage in the direction of closer integration with a clearer finalité. With the enlargement of a basically unconsolidated, an even more flexible EU, this perspective of closer integration and definite final form moves further beyond the horizon whereas the uncertainty and the process character of integration is confirmed. Will eastern enlargement modernise the EU? Can eastern enlargement force unwanted reforms on the EU member countries? Europeanisation as the cost of stabilising the East? Perhaps, but the result of the reform of EU finances will show the success of this reform effort in one of two ways. It will: • •

enforce reform of cost-intensive policies by increasing expenses to a point where it is impossible that they will not be lowered; force an improvement in decision-making power by adding on so many members that things become intolerable. Could this not be exactly what the Euro-sceptics want?

The institutions The Council of the EU (Council of Ministers) The Council of Ministers as the most important legislative and executive institution (together with the Commission in the executive domain) is going to be substantially expanded by additional entrants. If we take the two enlargements sketched out above then the first one would carry us from 15 to 21, and the second one from 20 to 26 members. This brings problems of sheer numbers which may make decision-making much more difficult than today. Think of the time consumed by having everybody express their view on a question; think of the issue of translation;

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think of the simple logistics of fabricating and preserving decision-making coalitions through difficult negotiations within a circle as big as this. Second, it enormously increases the number of poor Member States (counted by today’s criteria), because in these coming enlargements every entrant is poorer than the lowest of the four poor incumbents Spain, Portugal, Greece and Ireland. Of the 21, the poor will thus be nine; of the 26, they will be 16. With differences in the economic and social situations of the Member States, the resulting demands for transfers must therefore play a vastly bigger role, and constitute a far greater difficulty for all common decision-making in the future. Third, the poor stand a better chance of having their own way in the enlarged EU. This will clearly by the case in the 20 and much more so in the 26, if the Council keeps its present voting system. Today’s four biggest member states with 255 million inhabitants holding more than half the population, even of a EU of twenty-six (473 million), will then have shrunk in power from 46 per cent of the weighted votes in Council, today to just 30 per cent in the future. They will even then still control a blocking minority, nothing can thus be decided against the will of all four of them, but this is just by one single vote. If they want to pass a decision, they do not need four, as today, but will need seven, or in an EU of 27, eleven other large and medium Member States, to vote with them. In contrast, the poorer Member States will increase their voting weight in the Council from 24 per cent via 39 per cent to 50 per cent, and instead of needing at least seven large and medium other members to build winning coalitions, as today, four, or only three, large ones will suffice for them in the future. More important still, they gain a blocking minority when only two of them, the Czech Republic and Hungary, enter the EU, and they will maintain this situation in further eastern enlargements. This gives them ample weight to make their specific demands heard in each and every decision of the Council, especially if it is of special concern to the richer member countries. Even if there were a reform of the voting procedure in the Council of Ministers not every new voting model would change this relationship. For example, if one adopted the model proposed by the institutional committee of the European Parliament, the Herman model of a double majority— requiring a majority of both the population of the EU plus a majority of the qualified majority votes of the Member States—the coalition of the poor would still gain power quickly.1 And even if the present voting weights of members was retained, to the advantage of the states with the most votes, the coalition of the rich would gain only an insignificant advantage against the votes of the poorer states.2 This might motivate the Member States, in the end, to choose the least controversial ‘reform’, namely to add the requirement of total populations’ majority to that of present qualified weighted majority of states, for a qualified majority to come about in Council. This would also be a non-reform, because it would bring almost no changes at all in voting outcomes.

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Thus, it would not be surprising if this motivated the richer Member States of the Union to reduce their engagement with deepening in the classical fields and proceed in the direction of market opening, liberalisation, harmonisation, coupled with the institution building. The existing Member States might be too afraid of coming up against demands for transfers, exception clauses etc., each time they raise the topic of deepening. What was formerly considered an asset in negotiations over integration politics, logrolling, connecting every negotiating issue with every other one in order to get compromises passed through Council, might well become a nightmare in the face of the new variety of situations and interests. The Single Market The Single Market can only come about and flourish between the CEECs and the EU if it functions to the advantage of both sides. Up to now it is doubtful whether this will come about in time. Freedom of commercial exchanges As to the CEECs, all depends on whether, and in which sectors, commercial goods and services of the newcomers will be competitive, and, second, whether their legal and institutional conditions will be such as to permit their full participation in the Single Market. When they are, the logic of the free market can come to dominate the integration process from their side as it has done in Western Europe. This is hardly probable, perhaps with the exception of specific low-cost production, certain limited service sectors, and foreign investments, and evidently agriculture over the medium term. The Czech Republic may be the only one of the newcomers which may fare better. The probability is greater that another logic will take the place of market liberalisation, namely, the one of a development community, in which market integration takes second rank compared to intra-Union regimes of special exceptions and of aid transfers. When negotiating entry into the Single Market, the CEECs might be tempted to take the continuing demand of Western Europe for protection against Eastern European agricultural goods and labour as an argument for pleading for these kind of sectoral protection regimes for themselves. This issue has motivated West European strategies which would take the new entrants into the EU but not first subjecting them to the full disciplines of the first pillar, while making them fully participate in the second, and partly in the third pillar, from the start. As to the incumbent members, an eventual increase of Eastern European imports of products, which still remain under a protective regime (such as agricultural goods, textiles and clothing, or iron and steel products), from the

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moment of eastern enlargement would certainly be painful to the respective sectors. But in the end it would have to be considered as just an addition to the already pervasive presence of international low-price competitors on the EU markets. Furthermore, the EU has agreed to World Trade Organisation (WTO) regulations in those sectors which force it to engage in more liberalization. Freedom of movement for labour Free movement of labour is liable to become the most problematic and contentious issue of the Single Market’s four freedoms. The example of the southern enlargement with relatively limited labour movement effects is not valid, because of vastly lower standards of living and larger jobless industrial workforces in the CEECs. A very long transition scheme seems likely to be proposed for the CEECs, to protect the Western European labour markets for extended periods. If a transition scheme is not adopted then the influx of CEEC labour will be an evident effect of Eastern enlargement, with marked effects on labour markets and on the social integration mechanisms for foreigners. This migration will provoke resentment and social jealousy and brings risks for trade union unity in Germany for example. Cultural problems or not, free movement of persons vis-à-vis the East will change the face of many Western European cities, especially German ones, in a noticeable way. The policies, high-cost There is a strong temptation to take the new entrants in to the EU by stages, and let them slowly join regional and farm programmes. Regional policy The point of departure is that to extend present programmes unchanged with the present system of criteria, to an enlarged EU is too expensive to be financed by the incumbent Member States. Two lines of action should be considered. One is to reduce the aid level for everybody by downsizing programmes across the board and by applying stricter criteria. Within this renewed frame, the East would get the lion’s share, to the detriment of the incumbent poor. The second one would create two classes of regional transfers and treat CEECs (or newcomers?) less well than the others, mainly by introducing a scheme to limit the transfers going in their direction, for instance to a certain percentage of their GNP (e.g. a limit of 3 per cent of the receiving country’s GNP) invoking their limited absorption ability. One way to do this might be to create a second fund for them, aside from the existing Cohesion Fund.

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The two-class-approach seems to prevail for the moment; it does have the enormous attraction of splitting the group of the poor into the incumbents and those yet to come. Up to an EU of 20, or a few more, the new entrants will not be able to reach blocking minorities to defend themselves; but approaching the 27 Member States the newcomers can, by themselves, block decisions. It is then doubtful whether this two-class system will remain tenable. But until then, introducing differentiation into a highly sensitive system of intra-EU solidarity may well poison intra-EU relations and seriously harm the image which the EU has of itself. Common Agricultural Policy The CE EC agricultural production has, up to now, been limited and insufficiently competitive compared to the West. Accordingly, CEEC imports into the EU are relatively low to date. However, with help in modernisation, and especially with access to the EU’s system of subsidisation, CEEC imports may increase very substantially and pose a big problem to Western European farmers. Thus there is strong motivation to control CEEC agricultural access to the EU market and keep them from full participation in the CAP for as long as possible. The CAP is harder to divide up than regional aid, because it is an immediate precondition of the single market for food products. Thus, the only possibility here is to negotiate a very long transition period before the entrants can enter into the cost-intensive agricultural policy. This would amount to excluding their agriculture from the single market for that period. Even though it seems hardly possible to exclude CEEC agricultural goods from entry to the Western EU’s markets in a context of their single market membership, the EU seems, indeed, to be preparing for that. The caveat evidently being whether the CEECs will, quickly become full members of the single market. During this time, the CAP could continue and even facilitate further the CEECs preferential access to the EU agricultural market and build up EU aid in the modernisation of the sector. On the other hand, and at the same time, efforts to reduce the cost of CAP in the whole Union will continue even if it were only to conform to the obligations the EU accepted under the WTO. When the CAP has become less costly it might be the right time to let the CEECs fully enter. Nevertheless it must be doubted whether this can actually go so far as to necessitate substantial national income subsidies to farmers to ensure them a decent income (as certain German politicians hope it will). This would violate the EU’s competition code, would it not? In the end, an important EU policy, unifying living and production conditions for an important part of the EU’s production, may well be split up.

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The dynamics of integration sapped Economic related functionalism The integration-deepening dynamic inherent in the common market enterprise, which has proved its vitality and force, up to, and including, the project of the common currency, will very probably suffer as a consequence of enlargement. The EC, up to now, has been a project based on equally shared responsibilities in, and dividends out of, mutual liberalisation among comparably developed societies, which induces, in its turn, self-enforcing steps in further homogenisation of policies (e.g. monetary policies), and a transfer of competencies to a common decision-making centre. The dynamic inherent in this project will hardly be able to continue functioning in the vastly more heterogeneous composition of an enlarged EU. Security policy urgencies In security policy the problem for the EU is that it is unable to mount a common position, and even less common actions, vis-à-vis security risks in the EU’s neighbourhood, and even less so if they are geographically farther away. The most probable development here is that a very flexible regime will be created which permits, case-by-case, security policy positions taken by only a group of Member States. These positions would be, in the best of cases, underwritten by the rest of the EU and politically supported, but which could come about even without such a guarantee. Perhaps a scheme may emerge under which such a group might form coalitions for armed intervention in extra-EU conflicts, be it under mandates from the United Nations (UN) or the Organisation for Security and Cooperation in Europe (OSCE).This added to the coexistence of the UN, NATO, the Western European Union (WEU), Eurocorps, and more or less confirmed neutrals, may even more increase confusion and difficulties of decision. In the (German) debate about Eastern enlargement the security policy argument has always played a big role: extend the EU to the East to stabilise this region and thereby increase (German) security. Germany has attached a great importance to stability in Central and Eastern Europe. 3 Recently in the context of NATO enlargement strategies this point has become more specific: • •

as security for the CEECs is urgent, take them first into the second (and the third?) pillar and not in the first; take in the Baltic states because they cannot yet be taken into NATO and need a security ‘belt’, for themselves, this partial membership might be especially appropriate.

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Which effect on logic? As to the driving forces of integration in Western Europe, these developments change the picture considerably. Not that security and political influence are considerations unheard-of in past Community politics—for example, the whole southern enlargement. But this time around the Member States have to support a much greater charge of demands for practical solidarity in many respects (financial transfers) and security demands from the inside of the EU, and from the outside. On the other side of the balance, there is a clear reduction of the classical neo-functionalist dynamic driving integration forward to higher levels. The necessity of material solidarity between different nation-states has great limits as a mechanism to bind them together of their own free will. Rather, it creates a motivation to separate when feelings of national identity and the political mechanisms of unity are not strong (witness on the one hand the experience of German unification with its gigantic act of West German material solidarity, and on the other the alacrity with which the rich Czech Republic recently cut loose from poorer Slovakia, and the temptations provided by this example on Ugo Bossi in Northern Italy). Up to now, the security issue is not as pervading as it does not have a equally unifying an effect on all Western and Central Europeans. In fact, one would expect the incumbent members—all of them—to become very status quo-oriented defenders of the Single Market, trying to uphold, as much as they can, the respect for its rules, but refraining from undertaking new reforms and deepening initiatives which might expose them to new transfer demands from the numerous poor members. The core of the former deepening dynamic among all members of the EC might thus be neutralised. Mediterranean vs. Eastern The EU will dramatically change the relative weighting of its priorities towards its eastern and southern flanks by eastern enlargement. To the East, immediately neighbouring countries have been recognized as ‘European’ and therefore having a natural right of belonging to the EU, something its neighbours to the south of the Mediterranean will not be able to get. Towards the East there is an attitude, which is basically positive and hopeful, in both political and economic aspects. This has brought a dramatic shift in the disadvantage faced by the area south of the Mediterranean which had enjoyed a more advantageous status, compared to the East, before the fall of the Iron Curtain. Now, in addition, the EU-position towards the South has already been changing into one of a defensive, pessimistic attitude, in which only the oil and gas links provide the remaining positive elements to be conserved and protected. There will be other eastern neighbours beyond the new eastern frontiers of the EU post-enlargement. Belorussia and the Ukraine will definitely remain outside and beyond them there will be Russia. This will bring a foreign policy factor of formerly unheard-of force onto the EU agenda.

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Notes 1 2

3

A.Kirman and M.Widgren, ‘European economic decision-making policy: Progress or paralysis’, Economic Policy 21, 3 (October 1995), pp. 423–460. , Cf. for this, Christian Deubner and Josef Janning, Zur Reform des Abstimmungsverfahrens im Rat der Eu, Ebenhausen: Stiftung Wissenschaft und Politik research paper, 1996. In any case, the Herman-model for majority voting is the only really satisfying and just reform model. C.Preston, Enlargement and Integration in the European Union, London, Routledge, 1997, p. 237.

11 The strategies of enlargement Michel Foucher

The question of enlargement is a rather banal topic if it is considered only in terms of the mechanisms by which the Commission organises the negotiations. The main question with regard to enlargement to the CEECs is not technical, but rather geopolitical. The responses that will be found to the problems created by the enlargement, will go further than resolving bilateral issues. Rather, the enlargement will contribute to the reorganisation of the European continent. Enlargement per se is one of the elements of a greater project to reorder the continent. With the end of the Cold War, the EU is a new pole around which the other states, the applicants, gravitate and construct their own strategies. What is important is to reduce some of the uncertainties, (i.e. migration, security questions) faced by the continent and ensure the consolidation of democracy. Because each country does not have the same view of the continent, there is also the question of divergences. There is no unanimity among the EU Member States as to the nature of the reorganisation the continent needs. This is complicated by the fact that the EU itself is evolving without an agreement among the Member States as to what the future direction of the EU should be. A strategy for reorganising the European continent It is therefore necessary to consider what would be the appropriate strategy for reorganising the continent. First of all, parameters should be clearly defined, which will allow this reorganisation to take place. There are intentions, practices and facts, actions and decisions, which should be taken into account. The Europe of tomorrow will be the result of these strategies and the existing situation that already structures the configuration of the continent. As far as strategies are concerned, a number could be envisaged. A strategy of impatience In a speech in Paris in October 1992, Vaclav Havel referred to the play, Waiting for Godot, as the strategy of the CEECs waiting to join the EU.1 Havel believed that the CEECs might have too high expectations concerning what Europe

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could do for them. They might be too obsessed by the desire to accede to the EU. Havel’s criticism was that the architects of the European construction were not leaving enough time for individuals and societies to evolve. Havel’s alternative was for a strategy of patience, leaving a maturation period for states and societies to evolve. The strategy of the European Commission and the strategy of the Member States This is the strategy that is dictated by the timetable. European construction continues quite irrespective of the views of the national governments. When Chirac took power, he had his own agenda. However, his room for manoeuvre was limited by the strategy already prepared by Mitterrand. In Europe there is an attempt to control the pace of integration through a timetable. Indeed, the timetable already exists, the Treaty of Amsterdam has already been signed, and a decision has been taken on the candidates for EMU. The EU is already moving on to the next points in its timetable, which include the five year budget package agreed by 1999, and the revision of the CAP in the light of the World Trade Organisation (WTO) negotiations. In a recent speech, Jacques Chirac declared that by the year 2000 Poland should be a new member.2 The timetable strategy determines governments’ programmes. As far as enlargement is concerned, the negotiations have started after the end of the IGC. They should take one and a half years for the negotiations to be completed, plus two years for the agreements to be ratified. A strategy of ambiguity There is an ambiguity on the part of the candidates over the future and functioning of the EU. Often they speak of Europe, but they dream of America. This is true for most of the CEECs. The American dream of a free market is very much present in those countries. After years of living in the United States, many Americans of Central European extraction have returned to their home countries, to take charge of policy planning and the reorganisation of the country with this American mind-set. The fact that some of the CEECs want to join the EU and NATO could create some feeling of discomfort in the French public opinion. Certain sections of French public opinion, wonder whether the CEECs want to join the EU because it would give them political responsibilities. Or do they want to find a sense of security reassurance with the United States in NATO. Are some political players in Central Europe acting like Trojan horses for ultra-liberalism? Mr Klaus has a very ultra-liberal viewpoint when he speaks in public, and I do not think that the French like this. Andras Inotai mentioned in Chapter 6 that there is a social and economic model for Europe. The Germans speak of

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a social market economy. It is a valid model, and it is adaptable to the needs of Hungary or Poland. Moreover, there is another sense of ambiguity with regard to legitimate national motivations among certain states. National strategy is legitimate, but there is a national strategy which can be found behind an impatient request for accession to the EU. All of these demands have to be handled or the result is going to be multiple visions of Europe, which might be irreconcilable. The right conditions will have to be created to accommodate differences. One has simply to look at a map to realise that there will be problems of new frontiers, and of minorities. Even in the Europe of the 15, the word ‘unity’ has practically disappeared from the public vocabulary since Germany has been reunited. It is even more difficult to build the unity of the other part of Europe. Jacques Chirac has said that we should not believe that enlargement is a priority for all the Member States of the EU. Even in the biggest Member States, we cannot see any common vision about the future of Europe. An indirect strategy There could be an indirect strategy. It is not desirable for the EU to become a very weak body such as the Council of Europe. In the US, there was a debate about a rapid enlargement of NATO. According to some studies in the United States, the enlargement of NATO could double military costs by the year 2010 and it is uncertain as to whether Congress is prepared to spend $40 billion extra.3 The question is even the presence of the United States in Europe. We should remember that in the US 23 million voters come from Central or Western Europe. It is certain that these voters have been an important lobby in US elections. A global strategy The final strategy that could be envisaged sees enlargement as tied to globalisation. It is a global strategy the EU may need more than enlargement. There is a process of globalisation, which has its effects on societies (as illustrated by the huge demonstrations in France and Germany about unemployment and de-localisation); at the same time there is the current debate over enlargement of the EU. Public opinion has already criticised the potential accession of Poland because the public sees a connection between the economic restructuring of Central and Eastern Europe and globalisation and the EU. Western Europe is affected by the economic restructuring of Central and Eastern Europe, because investments are finding their way to the region because of lower labour standards and social costs.

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A strategy of interdependence The EU must have other priorities outside Europe. The EU should have a common position to the world outside Europe, as well as within Europe. Some countries that are already involved in regional integration schemes are meeting with the EU on a region to region basis. This is clearly demonstrated by the proposal for a Transatlantic Free Trade Area (TAFTA) between Europe and North America, or the Europe-Asia dialogue. The EU’s influence can extend far beyond its borders by acting as a reference point for other regional integration schemes such as Mercosur. Reorganising the continent: the structuring factors Clearly there is a reorganisation of the continent taking place and this can be demonstrated by focusing on the factors that are involved in the restructuring of the continent. Five factors should be envisioned: Location of candidates Some countries in Central Europe have comparative advantages in being integrated into a geo-economic European area. These advantages do create differences between the applicant countries. Some among them are geographically closer to the Member States than the others. Therefore in both Germany and Austria, strategies exist for them to stimulate the integration of their neighbours. For a long time, France’s strategy was to seek to surround Germany by new members. Obviously this is not to suggest that Germany is seeking hegemony in Eastern Europe. Rather it would prefer to be surrounded by friendly states. The same arguments are to be found in Austria. Historical background There is no unity of the political cultures in Europe. Social, political and cultural division exist, and it is not desirable to make those divisions even deeper. Janos Czus has spoken of three Europes: the Europe of the West, Europe of the East and Europe of the Central East.4 Speaking about the latter he said that these three universes explain their destiny in terms of the other, and that the Europe of Central East always moves towards one or the other. It does not do so on purpose. To a certain extent, the reorientation strategy of the CEECs towards the West betrays Russia. It is a legitimate strategy because there is no alternative. However, the problem that is faced is not equal across all parts of the continent. For example, more difficulties are to be found in Southeast Europe, and in Belorussia. Furthermore, it cannot be said that democracy is really secure in Russia.

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National interests The Western states pursue their own national interests under the European banner. It is not a question of Realpolitik, but rather this illustrates how difficult it is to have a common vision. You cannot have a common foreign policy if you do not have a common vision. A large number of the Member States of the EU have a long history of empire. Russia has to go through a process of learning to live without an empire if it is to become a normal state. This requires a radical change. The pursuit of national interests continues, but has taken a new form. This new form is the competition between states to provide an attractive location for business. In Central and Eastern Europe, there has been a great deal of investment in the applicant states. There has been much less investment in the Ukraine and Russia. This could create new tensions in the region. Moreover, the concern within an attractive location for investment extends across the old East-West divide with even Germany’s concern about its competitive position. Migration A question which must be asked is where the new borders of the EU will lie, and therefore new barriers will be erected. Germany, for example, is a very attractive destination for migrants. As a result, Germany has negotiated migration and re-admission agreements with a number of countries in Europe. These agreements therefore contrive to establish migration limits for the whole of the EU, because of Germany’s geographical position. When the full extent of enlargement concludes there will therefore be new pressures from migration from those who are excluded from the enlargement process. Security This is a very complex and a multidimensional issue. There has to be the revision of a certain number of security concepts. Security is no longer only a military strategy, there are also economic aspects. In security terms, the best way to ensure the absence of conflicts is to consolidate, and this comes from economic growth. As well as economic growth to consolidate democracy, there also have to be mechanisms to ensure peaceful conflict resolution. This is of particular importance with regard to frontiers and minority community problems. Neighbouring states need to become good neighbours in Eastern Europe in order to be accepted into the EU. In addition to all of these structuring factors detailed above, there is also the point that there is a restructuring taking place within the EU. The EU that the applicant states join in five or ten years will not be the EU of today. The relationships between the existing members of the EU will be totally different. In particular, the creation of a single currency, and perhaps developments towards

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a common defence on the part of a small group of member states will radically transform the situation. There may be a whole collection of different functional networks, which could vary according to topics. The EU seems to be evolving towards this model. What both the restructuring factors and the developing internal dynamics of the EU demonstrate is that we are not discussing just enlargement but the emergence of a very different order for the European continent. Perhaps the most pressing problem is to create institutions and relationships between all of the states in the European continent (and most importantly to encompass Russia). Therefore, enlargement is not merely a question of ensuring that states satisfy criteria for membership, but, rather, those not included in membership of the EU have ways to participate in the reorganization of the continent. In August 1996, France came up with a proposal to keep some consistency between the enlargement process and this strategic reorganisation of the continent. France’s proposal was to have a conference with the 15 states, Russia and all of the applicant countries. This is Europe’s problem. It is not possible to enlarge without having an overview, an overall plan, otherwise, instead of reducing uncertainty, the EU will amplify uncertainty. For example, in the relationship between Hungary and Romania, if you do not have a dialogue you will have problems. If you do not have a framework within which restructuring can take place, there will be uncertainty on the European continent. Therefore the EU must have an organisational strategy, an overall strategy, which is much more complex. Notes 1 2 3 4

Le Monde, 29 October 1992. Le Monde, 12 September 1996. Financial Times, 20 August 1996. Jenó Czúcs, Les trois Europes, Paris, Editions l’Harmattan, Paris, 1985, pp. 48–75.

12 The Common Foreign and Security Policy after enlargement Richard G.Whitman

Overview This chapter analyses the content of the European Union’s Common Foreign and Security Policy (CFSP) from its inception in 1993 and the implications for enlargement of the EU on the CFSP. As regards the states discussed, the focus is primarily upon the Commission’s candidates for enlargement negotiations (Czech Republic, Estonia, Hungary, Poland, Slovenia and Cyprus). The account commences by highlighting attempts to forge a foreign policy for the European Community prior to the Treaty on European Union. There is then an examination of the manner in which the CFSP has represented a departure from past practice before an exposition of the content of the CFSP to date and the CFSP policies that the prospective Member States would have to adopt. The chapter then turns to an examination of the impact upon the CFSP of the enlargement of the EU to Central and Eastern European Countries (CEECs). The focus is first upon the impact of enlargement on the decisionmaking of the CFSP. The focus then shifts to examine the external consequences of enlargement on the CFSP. There is also an examination of the development of the Western European Union (WEU) and the relationship of the prospective members to that organisation. The last component of the chapter examines issues discussed for the revision of the CFSP within the 1996 Intergovernmental Conference (IGC) and the codification of agreement within the Treaty of Amsterdam which (if ratified) the prospective members will have to adopt. The CFSP to date From EPC to CFSP The Treaty on European Union (TEU, or ‘Maastricht Treaty’), which came into force on 1 November 1993, provided the European Union with an aspiration to create a Common Foreign and Security Policy (CFSP). The CFSP was an attempt to address the expectations of states outside Western Europe, and those

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of Member States themselves, that, after the Cold War, the Community’s economic strength should translate into greater political influence in the international system. The Common Provisions of the Treaty on European Union made clear that the CFSP was intended to represent an enhancement of the international role beyond the foreign economic policy conducted by the European Community; The Union shall set itself the following objectives: …to assert its identity on the international scene, in particular through the implementation of a common foreign and security policy including the eventual framing of a common defence policy, which might in time lead to a common defence.1 Attempts to create a European foreign policy involving the Member States of the European Community (EC) had predated the Treaty of Rome that founded the European Economic Community (EEC) in 1957. The earliest attempt was the de Gasperi initiative of 1952 (the year after the creation of the first EC institution, the European Coal and Steel Community or ECSC). The aim of the initiative, which accompanied the ill-fated attempt to create the European Defence Community (EDC) by the six members of the ECSC, was to create a federalist European Political Community with a common foreign policy.2 From 1970 onwards the Member States of the EC engaged in a process of foreign policy cooperation—European Political Cooperation (EPC) —that, although unspectacular, was a tacit recognition that the process of economic integration generated both expectations and responsibilities beyond Europe. From its initiation in 1970 until its demise with the ratification of the Maastricht Treaty, EPC represented an attempt to harmonise the foreign policies of the Member States on an intergovernmental basis with each Member State exercising a veto over any common action.3 Title V of the TEU establishing the CFSP built upon the experience gained by the Member States through EPC and attempted to move beyond the systematic cooperation that was a characteristic of EPC. Title V contained a number of broad objectives for the CFSP,4 and the means for the CFSP’s implementation including Common Positions (Article J.2) and Joint Actions (Article J.3). Furthermore, Title V broke the taboo on questions of defence being discussed within the framework of the EC (following the failure of the EDC) with Article J.4 detailing the EU’s aspiration of a common defence policy and designating the WEU as the body through which this aspiration was to be realised. The CFSP has been in operation since 1 November 1993 when the TEU came into force following an arduous 22-month ratification process. During the duration of its operation the CFSP has been frequently criticised for its failure to convert the aspirations declared in the TEU into reality and for its failings as a mechanism through which the EU and its Member States can formulate appropriate responses to foreign policy challenges.5

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The existing international role of the Union is informed by a combination of factors: the depth of formal and informal integration that has been undertaken within and between the Member States; the institutions and policies that operate at the European level; and the 15 distinctive national identities that the Member States bring to the Union. Successive enlargements of the EC and the EU have affected each of these factors, and, consequently, have altered the international role of the Union itself. There is no question but that enlargement to include the CEECs and Cyprus will change the international identity of the Union. However, we are examining this one facet—the CFSP. The TEU transformed the EC into a new three-pillar structure. Pillar one, the EEC, was joined by two new areas of activity, pillar two, the CFSP, and pillar three cooperation in the area of home and judicial affairs. Pillars two and three were to have a style of decision-making distinct from that which operates under the Community pillar of the Treaty and tend to be characterised as intergovernmental. The legal foundations for pillar two do not give the European Court of Justice competence in the realm of the CFSP. The decision-making processes of the pillar grant the European Parliament the right to express its view on the main aspects of the policy, and to be consulted by the Presidency of the EU, but not a formal role in the CFSP decision-making process. 6 The Commission participates in the process but shares a right to initiate policy proposals with the Member States. The centrality of the Member States in the CFSP is enshrined in both the decision-making processes and the requirement to take decisions unanimously within pillar two.7 The CFSP process of decision-making is an alteration from that which operated under EPC. Article C of the Maastricht Treaty requires that the Union shall be served by a single institutional framework. The General Affairs Council (the Council of Foreign Ministers) of the European Communities has now adopted the title of the Council of the Union (hereafter, ‘the Council’). The distinction between EPC ministerial meetings and General Affairs Council meetings that had been progressively eroded under EPC has now been terminated altogether. The Council, in its meetings, now operates with a single agenda and in a single setting, with CFSP and other Union business taken together. The preparation of CFSP items remains, as under EPC, the responsibility of the Political Committee (PoCo), which works for the Council and is made up of civil servants from national foreign ministries. PoCo’s work is underpinned by working groups, composed of national experts, meeting in Brussels. The Political Directors (the most senior of these civil servants) meet on a monthly basis, CFSP Counsellors (based in the Permanent Representations in Brussels) meet weekly, and foreign ministry-based European Correspondents are responsible for day-to-day contacts.

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The EPC Secretariat, created under the Single European Act, has been merged with the General Secretariat of the Council. The CFSP Secretariat is staffed by diplomats seconded from each Member State and by officials from the Council Secretariat. Communications concerning the CFSP are conducted through the Coreu telex network, which conducts communications in English and French, and CFSP units are based within the Member State foreign ministries, which are responsible for coordinating the positions of the individual Member States and supporting the work of the Correspondents and the Political Directors. Title V of the TEU detailed the provisions governing pillar two, the objectives of the policy established by Article J.1.2, and the attempts to realise them. In pursuance of the objectives of the CFSP two approaches were provided for. The first entailed ‘establishing systematic cooperation between Member States in the conduct of the policy, in accordance with Article J.2’.8 This requirement did not represent a substantial departure from EPC. However, the Member States made it possible to go beyond this process by creating Common Positions. In defining Common Positions it was incumbent on Member States to ensure that their national policies conformed to the Common Positions and, furthermore, that these were upheld in international organisations and conferences, even when all the Member States are not participants.9 The TEU also went further and provided for ‘gradually implementing, in accordance with Article J.3, joint action in the areas in which the Member States have important interests in common’.10 The introduction of Joint Actions also generated a new decision-making process through which these positions are formulated. Joint actions were intended to provide for self-contained ‘packages’ of foreign policy: Whenever the Council decides on the principle of joint action, it shall lay down the specific scope, the Union’s general and specific objectives in carrying out such action, if necessary its duration, and the means, procedures and conditions for its implementation.11 The decision as to what should be the subject of a joint action resided with the Council, acting under general guidelines from the European Council. Both Common Positions and Joint Actions required unanimous agreement in the Council. However, a provision for voting was introduced, albeit in limited circumstances, and this broke with the previous EPC practice of unanimity.12 The record of the CFSP from inception to the Treaty of Amsterdam The Treaty on European Union appeared to inaugurate a new era in European foreign policy: it seemed to signify that EPC would give way to a more binding intergovernmental process. The planned use of Community institutions also

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appeared to signify a relaxation of the attempt to maintain control over EPC by governments at all levels of the process. The European Council meeting in Maastricht in December 1991 tasked the Foreign Ministers with preparing a report which would provide the beginnings of a strategic rationale within which to conduct the CFSP. In the aftermath of the signing of the TEU on 7 February 1992, and with the expectation that the Treaty would come into force on 1 January 1993, the Foreign Ministers of the then twelve Member States presented a report ‘on the likely development of the CFSP with a view to identifying areas open to joint action vis-à-vis particular countries or groups of countries’ to the European Council meeting in Lisbon in June 1992.13 The Foreign Ministers stated that the CFSP should both be seen not only as the successor to EPC but also that: With specific aims and means, the CFSP represents a ‘saut qualitatif’ in the sense that it integrates the ‘Acquis’ of EPC and gives it greater potential, principally by means of joint action, an additional instrument which implies a strict discipline among Member States and enables the Union to make full use of the means at its disposal.14 In particular, the CFSP was to ensure that the external action of the Union was to be less reactive to events and ‘more active in the pursuit of the interests of the Union and in the creation of a more favourable international environment’.15 The intention, clearly influenced by the experience of the Community in the early stages of the Yugoslav conflict, was that the Union would engage in preventive diplomacy. The Lisbon Report proposed both ‘geographical areas’ and ‘horizontal domains’ as the basis on which to implement the CFSP. Each area identified for activity was to have specific objectives and a set of these was outlined in the Report.16 Although these broad objectives can be discerned within the content of the CFSP to date an examination of the joint actions, common positions, illuminate how the CFSP has evolved in a fragmentary manner. Joint actions The European Council has laid down general guidelines for the areas that the Council of Ministers should consider to be the subject of joint action. At a European Council meeting in Brussels on 29 October 1993, the European Council primed the CFS P pump by asking the Council of Ministers to outline the basis for joint action in five areas: the reinforcement of the democratic process and development of cooperation in Central and Eastern Europe via the promotion of a stability pact; the use of the political, economic and financial resources of the Union in support of the Middle East peace process; support for the transition towards multi-party democracy

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in South Africa, through the assistance of preparation and monitoring of elections and the creation of a framework for economic and social assistance; searching for a solution to conflict in former Yugoslavia by means of contributions to the implementation of the peace plan and humanitarian action; and support for the democratic process in Russia by dispatching observers to the Russian Parliamentary elections.17 Subsequently at another two European Council meetings in 1994, at Corfu and Essen, another three joint action areas were added: joint action on the preparation of the 1995 Nuclear Non-Proliferation Treaty Conference, and two decisions on the control of exports of dual-use goods. An additional nine joint actions were agreed in 1995—five of these concerned the EU’s involvement in the former Yugoslavia and two developed support already offered for the Middle East peace process. In 1995 one new area was created: joint action to combat the use of anti-personnel mines by support for the Conference to Review the Convention on Prohibitions or Restrictions on the use of Certain Conventional Weapons. In 1996 three new areas of joint action were also designated: involvement in the Korean Peninsula Energy Development Organization; the African Great Lakes region; the Helms Burton Act. Only one new Joint Action was created in the first six months of 1997, to support the work of the Nuclear Suppliers Group promoting transparency in nuclear related export controls between signatories to the Nuclear Non-Proliferation Treaty. Throughout 1996 and in the first six months of 1997 the existing joint actions in the former Yugoslavia, Middle East, on dual-use goods and anti-personnel mines expanded or extended. The scope and implementation of these Joint Actions demonstrates three characteristics. First, Joint Actions have been largely reactive in nature. The EU has primarily responded to developments as illustrated by the ongoing Joint Actions on the former Yugoslavia, the Middle East Peace Process and the African Great Lakes. An exception to the reactive nature of Joint Actions was the Conference for Stability in Europe. The purpose of the initiative was to ‘implement preventive diplomacy, aimed at arousing neighbourly relations and to encourage the countries, notably through concluding appropriate agreements, to consolidate their frontiers and settle problems of national minorities which they face’.18 The Union explicitly used the aspiration of the countries of Central and Eastern Europe to join the Union as leverage to ensure their compliance. The initiative, which eventually resulted in a collection of over one hundred bilateral treaties and a declaration on good neighbourly relations between Central and Eastern European states, was handed to the Organisation for Security and Cooperation in Europe (OSCE) for the monitoring of compliance to obligations. A second characteristic of Joint Actions is that they have been overwhelmingly either inspired by, responded to or been implemented through multilateral organisations and/or international agreements. The primary exception here is the Joint Action on the Helms Burton Act which, although it does not refer to the United States or the Act, is clearly a response to the US legislation prohibiting

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foreign investment in Cuba. No activity has yet been taken under this Joint Action. A third characteristic of the Joint Actions is that they have resulted in the development of new instruments for implementation by the Union. The EU has created the role and position of special envoy (Yugoslavia, Middle East, Great Lakes), engaged in election monitoring by creating special one-off institutions for the purpose (Russia and South Africa) and taken on board the administration of the town of Mostar in Bosnia headed by an EU-appointed mayor. Alongside these new forms of action the EU has continued the EPC practice of the use of Community foreign aid to further foreign policy objectives. Common positions From 1 November 1993 until 31 December 1996 the Council has adopted 32 Common Positions in 17 areas. In five of these areas there has been the definition of a Common Position which has included embargoes on military exports (former Yugoslavia, Nigeria, Sudan, Myanmar, Afghanistan) and in five areas the implementation, alteration or removal of economic and financial sanctions (Federal Republic of Yugoslavia and the zones of Croatia and Bosnia controlled by Serbian political authorities, Haiti, Libya, Nigeria, Iraq) under Article 228a of the European Community Treaty. The remaining Common Positions detail the objectives and priorities for the Union’s relations with countries (Rwanda, Burundi, Angola, Ukraine, East Timor, Cuba), and the remaining three were used to set out Common Positions on the joint leasing of diplomatic missions, blinding lasers, and support for the strengthening of the Convention on biological weapons at the 1996 review conference. The most striking issue with respect to Common Positions is the failure to define a position despite a pressing foreign policy issue. As illustrative, the inability of the EU to define a Common Position on Algeria, despite the intensity of the continuing violence, can be read as a lack of substantive agreement among the Member States on an appropriate response to events and an indication that a Member State may still wish to preserve a domaine privé. Declarations If we examine the CFSP between its implementation on 1 November 1993 and 31 December 1996 it becomes clear that the Union has relied heavily on the use of declaratory instruments. Declarations issued under CFSP have departed from the practice, followed under E PC, of using the plural expression ‘the Community and its Member States’ to distinguish between the two entities. Declarations under the CFSP refer to the ‘European Union’ in the singular. Despite the ordering of interests detailed in the Lisbon Report

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the majority of the 332 CFSP declarations of the period have concerned the African region. Declarations are used by the Union as reactive instruments to respond to unfolding international events. But it is perhaps the silences rather than the declarations that are of interest. Declarations, which either welcome or condemn events, are a public expression of consensus among the 15. The paucity of declarations can be read as a lack of substantive agreement among the Member States on an appropriate response to events. The use of troops by the Russian Federation in Chechnya on 11 December 1994 did not generate a declaratory position by the Union until 18 January 1995. Speaking on the events in Chechnya the Belgium Foreign Minister Frank Vandenbroucke characterised the difficulties in a Union response by stating that ‘European foreign policy is handicapped by the requirement for unanimity by member states for each decision’.19 Through both the Joint Actions and the Common Positions the Union has drawn on existing Community strengths (economic and financial) in the joint actions it has undertaken. It has also sought to create specific instruments to serve particular joint actions. Although these draw upon the resources of the Community and the Member States their explicit aim is to further the CFSP and, in turn, enhance the international role of the European Union. They thus represent an operationally tentative, but profoundly symbolic, advance on E PC. However, all the instruments utilised to implement the CFSP detailed above represent a recourse to civilian forms of power. The commitments under Article J.4 of the TEU suggested an alteration of this situation by the introduction of a defence aspiration which will now be subject to examination. The CFSP, the CEECs and Cyprus: the existing situation Under CFSP the Union has gone beyond EPC in creating a structured relationship with the Europe Agreement countries;20 this is in addition to implementing the structured dialogue defined in the Presidency Conclusions of the 1994 Essen meeting of the European Council. The Europe Agreements signed by the CEECs contain an obligation to support the construction of an appropriate political dialogue with the Union.21 Subsequently the General Affairs Council approved an extension of the dialogue with the CEECs and provided for the CEECs to be able to associate with the EU in statements, démarches and joint actions.22 Once per presidency a special Council meeting is convened; the Union has involved the applicants for CFS P membership— ‘Associates’ —in CFSP actions by inviting them to half-yearly political committee meetings and working group meetings.23 The Associates have been invited to create ‘Shadow European Correspondents’, and a mechanism has b een established which allows them to align themselves with the Union by

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making common declarations, implementing joint actions, and by coordinating within international organisations. In the first nine months of 1996 there were, in addition to a foreign affairs ministers meeting on 27 February, two meetings of Political Directors (in February and May). 24 Therefore, under the CFSP the Union has created a status of Association analogous to that existing within the Western European Union (WEU), which also represents an attempt to broaden and deepen the relationship with the Associates beyond the Community pillar. (See p. 149 for a detailed discussion of the WEU.) The impact of enlargement on the decision-making of the CFSP The inclusion of the CEECs within the existing decision-making structure of CFSP will have both internal and external consequences. The internal consequences are the impact upon the existing decision-making processes. The external consequences are those which may affect the EU’s relationship with third parties. More ‘chairs at the table’ There are four potential internal consequences on the C F S P of enlargement. First, the accommodation of the additional ‘chairs at the table’. This will increase the volume of communications, the potential number of different viewpoints, and the opportunities to construct different coalitions. The requirement for unanimous agreement for action that currently operates under the CFS P will be reformed by changes to voting arrangements that are contained in the Treaty of Amsterdam. This could reduce some difficulties in decision-making, but the question of equal rights to initiate discussion or action has not been proposed. The changed role of the presidency Second, the importance of the presidency in driving the CFSP process will be both enhanced and diminished: enhanced because the presidency will need to consult with a larger number of parties to achieve consensus for action (or nonaction), and also because the presidency will represent a larger group of states in both bilateral and multilateral contexts; diminished in two ways: through the creation of a new figurehead for CFSP, and through the slower rotation of the presidency. A consequence of the latter two developments is that the Member States outside the CFSP process may be more likely to undertake unilateral policy initiatives.

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New foreign policy traditions into decision-making The third consequence of enlargement is that new foreign policy traditions, interests, and aspirations will influence foreign policy-making processes. New cleavages between Member States will emerge as, inevitably, Eastern Europe, the Baltic and the Balkans become the primary focus of foreign policy concern for the CEECs once they are inside the Union.25 Those states that have important bilateral extra-Union relations beyond Europe in the Mediterranean, Africa, Latin America, Pacific may have to contemplate a relative decline in the commitment to these areas. The enlargement of the EU to the applicant states will boost three advocacy groupings in the CFSP process: Baltic, Central European, and Russia. Each of these groupings will generate an enhanced interest in the region with which they are concerned and bring issues relevant to their particular advocacy grouping into the CFSP. Baltic advocacy The existence of the Council of Baltic Sea states that embraces all the Baltic littoral states (Poland, Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Norway, Russia and Sweden) demonstrates the existence of a distinctive grouping of European states exploring a distinctive agenda. With a first wave enlargement encompassing the ‘yes’ states over half of the Council of Baltic Sea states will be EU members. Furthermore, the existence of the Baltic Council, established in 1990 between Estonia, Latvia and Lithuania to cooperate on foreign policy, economic development, domestic government and politics, illustrates that Estonia has strong set of Baltic relationships that it will bring to the CFSP. Central European advocacy The enlargement of the EU to the ‘yes’ applicants will embrace almost all of West Central Europe with Slovakia remaining outside the EU. Of the Member States of the Central Europe Initiative (CEI) only Romania, and Slovakia will remain outside. The EU will gain new boundaries for the first time with Croatia, Belarus, the Ukraine, Romania, and the Federal Republic of Yugoslavia. Transboundary security threats which emanate from those states will be identified by their EU neighbours and will find themselves onto the CFSP agenda. Russia advocacy The accession of Estonia and Poland to the EU will add another two states to the Union who share a boundary with Russia. In addition it will add a state, Cyprus, which has recently relied upon Russia as a source of major weapons

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procurement including an agreement to purchase a S-300 SAM air defence system, 41 T-80 main battle tanks and 43 BMP-3 armoured fighting vehicles. In accompaniment with the enlargement to the other new states of the EU the geostrategic heart of the Union moves eastward. As was noted above Russia has already been a subject of the CFSP through declarations and a Joint Action. The need to engage more directly with Russia on an increasing range of issues will be generated as a consequence of proximity but will also be a consequence of the development of a European Security and Defence Identity through the Western European Union. Managing the foreign policy relationship with Russia is likely to emerge as the key issue for the CFSP in Europe and the advocacy of a more developed policy will increase. Fourth, enlargement will affect the implementation of CFSP. The CFSP has relied heavily upon declaratory diplomacy for its implementation (as noted above). Effective Joint Actions and Common Positions require collective action and a failure to participate in implementation diminishes the policy area. Elements of the CFSP that contain a defence dimension are the preserve of the Western European Union. This aspect of implementation is explored below. The external consequences of enlargement for the CFSP (1) The external consequences of the enlargement for the CFSP are two-fold. First, there is the consequence of the EU occupying more space in the Europe system of states. The second key issue is the inheritance enlargement brings and its impact on the CFSP. The conditionality of the pace and waves of enlargement The key issue of significance in this respect is the pace and waves of enlargement of the prospective members into the EU. Each new wave of candidates will redraw the line within Europe between those who become Member States and are full participants in the CFSP and those who remain outside the EU and are potential subjects of the CFSP. The key issue is then how to manage security relations with those who remain outside. The next enlargement of the EU will clearly contribute to the replacement of Cold War divisions of Europe by extending membership beyond the former Iron Curtain but in its place we are creating a new landscape of international relations in Europe. The groups of states This new landscape has as its primary feature different classes of relationship to European regional institutions. States can already be ranged together in different groupings according to whether they are likely candidates for EU and NATO membership. These groupings can be classified in a fourfold manner: ‘yes, membership is available’, ‘yes, membership is available but not in the first

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wave’, ‘maybe membership will be available in the future’ and ‘no, membership is not yet a credible option’. NATO has made already made very clear who its ‘yes’ states are (Poland, Hungary and the Czech Republic) and who its ‘no’ state (Russia). Whether more states fall into the ‘no’ category and who falls into the ‘yes but’ and ‘maybe’ categories is not yet clear with respect to NATO. For the EU these categories will become crystal clear when the decision is made on who to invite to open membership negotiations and, as with NATO membership, what timescale we consider. However, at this point in time we can offer an ordering of states in Central and Eastern Europe based upon the form of agreement with the EU which is currently in place: ‘yes’ equates to an opening of membership negotiations (Cyprus, Poland, Czech Republic, Hungary, Slovenia and Estonia), ‘yes but’ equates to a Europe Agreement and a submitted membership application (Latvia, Lithuania, Slovak Republic, Romania, Bulgaria, Turkey), ‘maybe’ to a possible Europe Agreement (Belarus, Ukraine, Croatia), and ‘no’ for no possibility of a Europe Agreement in the foreseeable future (Albania, Bosnia-Herzegovina, Former Yugoslavic Republic of Macedonia (FYROM); Federal Republic of Yugoslavia, Moldova, Russia). Immediately this raises the issue of a disjuncture between NATO and EU (enlargement as currently proposed by the Commission). Prospective new EU members Cyprus, Estonia, Slovenia are not prospective members of NATO. Questions of military security will be explored below. Taking this differentiation between states, and in particular the grouping of ‘no’ states, it is clearly the case that in Europe there will be a group of countries that will remain the potential subjects of the CFSP, rather than participants in the process, for the foreseeable future. Clearly a key issue in the medium, and the long term, will be to manage relationships with these states so that none moves from being a challenge for the CFSP to a security threat to the EU and its Member States. Of particular importance to the Union will be any pre-existing bilateral disputes which exist between a new Member State and a state remaining outside the EU. Once inside the EU, membership disappears as a foreign policy objective for new Member States and they have to grapple with the foreign policy issues raised by other states within the CFSP but also have the opportunity to promote their own foreign policy concerns. Therefore in accepting a state for membership the EU will inevitably inherit any pre-existing bilateral disputes that the state has prior to joining the Union. Clearly no state will be admitted to the EU without the existing Member States accepting that the state has a foreign policy broadly orientated in the same direction as the other Member States and this view has been reflected in the Commission avis on each of candidates v i e we d a s c a n d i d a t e s f o r i m m e d i a t e m e m b e r s h i p n e g o t i a t i o n s . Furthermore accepting membership means accepting the acquis politique which includes all the pre-existing commitments developed through the CFS P (detailed above). Therefore of interest for us is where we can

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discern possible points of future difficulty or divergence for the EU through the membership of a new Member States. These possible points of divergence will be explored under three headings: territorial disputes with non-members; other bilateral disputes with non-members; and diaspora and minority communities issues. The external consequences of enlargement for the CFSP (2) The inheritance of enlargement? Territorial disputes Territorial disputes between existing Member States of the EC/EU do have precedents. Therefore a territorial dispute does not preclude membership of the EC/EU. For example the UK-Spain dispute over Gibraltar, and the Irish Republic-UK dispute over Northern Ireland) and territorial disputes have also existed between an EU member state and a third party (Federal Republic of Germany and the German Democratic Republic; Greece and Turkey). Territorial disputes require a common border for there to be dispute. If the EU enlargement proceeds according to the Commission opinion then the EU will inherit a number of border disputes. Only one of these can be classified, in the language of the International Institute for Strategic Studies, as an ‘active international border and territorial conflict’ —the current situation in Cyprus. Clearly, the admission of the Republic of Cyprus prior to a settlement over the division of the island will represent a formidable and ongoing challenge for the EU and will add an extra dimension to relations between the EU and Turkey. Other territorial disputes between first-wave prospective Member States and third parties also exist but either have a process in train for resolution or have been the subject of recent bilateral agreements, most notably through the stability pact. Unresolved disputes currently exist between Slovenia and Croatia over the maritime border in the Piran Bay and demarcation of some points of the land frontier. Hungary’s basic treaties recognising existing borders, and the rights of minorities, with Austria, Slovenia, Croatia, Romania, Slovakia and the Ukraine appear to have resolved a clutch of boundary disputes as have agreements signed by Poland and its neighbours. However, border crossing arrangements in place with the Ukraine, Belarus, Lithuania and into the Russian oblast of Kaliningrad are problematic. Estonia has yet to formally delineate its maritime border with Finland and Sweden and the delineation of sea borders with Latvia has been completed and awaits ratification. More problematical, there is still the absence of a border agreement between Estonia and Russia although a draft border agreement exists covering the existing control line, with minor amendments.

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Pre-existing bilateral disputes The second issue of significance for the CFSP are other pre-existing bilateral disputes could either evolve on accession to become EU-third party disputes or, more likely, as past practice suggests, they are either likely to remain outside the purview of the CFSP because of disputes in approach between the EU Member States. The most problematic bilateral dispute to enter the Union as a consequence of enlargement is that between Cyprus and Turkey. Bilateral disagreements between Greece and Turkey already impact upon the EU and the accession of Cyprus is likely to further complicate this situation. Bilateral disputes also currently exist between Slovenia and Croatia over property law, the management of the Krsko nuclear plant and banking and economic cooperation issues. Differences remain between Hungary and Slovakia concerning the implementation of their bilateral treaty. Hungary has not yet recognised Slovakia as the successor state of Czechoslovakia, partly because of the dispute over the construction of the Gabcikovo-Nagymaros dam (referred to the International Court of Justice). No treaty has yet been signed between Hungary and the Federal Republic of Yugoslavia, as a result of the situation of Hungarians living in the Voivodina. A number of Estonian-Russian bilateral disputes have been resolved through bilateral agreement on the withdrawal of Russian troops from Estonia along with an agreement on the treatment of Russian military pensioners. Poland has made a particular effort to intensify relations with Lithuania and Ukraine. A number of minor issues remain to be settled between the Czech Republic and the Slovak Republic. Diaspora and minority communities Diaspora and minority community matters are the third set of issues which will have a possible impact upon the CFSP as a consequence of enlargement to the ‘yes’ states. The existence of diaspora and minority communities in third countries has already caused dispute between states and Central and Eastern Europe. The most significant diaspora community with which a prospective member state has an affinity is the ethnic Hungarian population which resides in Romania, Slovakia, the Ukraine and the Federal Republic of Yugoslavia. Romania and Hungary have had a particularly fractious dispute over the treatment of the Hungarian minority in Romania although they have reached an agreement on pursuing international standards for the treatment of minorities. Likewise the Slovakian treatment of its 600,000 Hungarian minority creates a possible future issue for the CFSP in EU-Slovakia relations. The status of the substantial Russian minority in Estonia (30 per cent) will create a Russian interest in the treatment of this minority once Estonia is within the EU. In addition, Slovenia has a concern with the well-being of Slovene

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minorities in Italy and Austria and there are significant Polish minorities in Lithuania, Belarus, Ukraine and Russia. The international implications of the enlargement for the CFSP The most significant international implication of the enlargement of the EU for the CFSP is to enhance the size of the EU grouping within both regional (the OSCE and the Council of Europe) and international organisations. Although none of the prospective members of the EU are members of the G-7 or Permanent Members of the United Nations Security Council both the G-7 and the UN system are important forums for the CFSP. The role of the Presidency of the Union, and therefore the CFSP, raises the profile of the state holding the rotating presidency and this takes on especial importance in both the G-7 and the UN. In the G-7 the state holding the presidency of the EU participates in the G-7 structure of meetings. In the UN system the presidency represents the views of the EU. The EU Member States as a percentage of the UN General Assembly will increase to about 15 per cent of total EU membership; measured as a percentage of assessed contributions to the UN budget the EU contribution will only rise marginally from 32.65 per cent to 33.73 per cent (as against 25 per cent for the United States, 12.45 per cent for Japan and 6.71 per cent for Russia) but the EU states will compose 12 per cent of the UN Security Council (the UK, France as permanent members; Portugal and Sweden holding a two year term from 1 January 1997). The WEU and enlargement Member States’ armed forces and existing military alliances The armed forces of the Member States of the EU, and the prospective members, are brought together in five main structures: the North Atlantic Treaty Organisation (NATO), NATO’s Partnership for Peace (PfP) and its attendant Euro-Atlantic Partnership Council (EAPC), the Western European Union (WEU); and bilateral structures. Through these organisations the Member States have a ‘variable geometry’ of defence relationships and obligations. Of the 15 Member States, and the prospective members, only Ireland remains outside any of these institutional arrangements. NATO and PfP The strongest relationships exist within the NATO structure with the 11 Member States who are committed, alongside other members of NATO, to a common defence under the Washington Treaty. This defence burden is shared with the other four members of NATO outside the Union. The NATO Partnership for Peace (PfP) programmeme draws Finland, Sweden, Austria and the CEECs

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into a bilateral cooperative relationship with the NATO members. Only Ireland remains outside the PfP. The CEEC prospective members have clearly placed NATO as the best candidate for the future of their own military defence, as is evidenced by both their applications to join NATO, but also because they have not sought to create a collective military security organisation of their own— even as an interim measure. The development of the WEU The Treaty on European Union (TEU), in establishing the CFSP, widened the extent of the Member States’ efforts at foreign policy harmonisation to ‘include all questions related to the security of the Union, including the eventual framing of a common defence policy, which might in time lead to a common defence’, and designated the WEU as the body which would ‘elaborate and implement decisions and actions of the Union which have defence implications’.26 In the TEU the Union had signalled the intent of the Member States of the Union to move beyond a civilian-power Europe and to develop a defence dimension to the Union’s international identity. In a declaration attached to the TEU the then nine members of the WEU spelled out their proposals for relationship of the WEU and NATO which was to be developed as both the defence component of the European Union and as a means to strengthen the European pillar of the Atlantic Alliance.27 The WEU, under Article V of the founding Brussels Treaty signed in 1948, offers a collective defence guarantee to any of the signatories if they suffer armed attack in Europe.28 Reactivated in 1984 as a forum in which to pursue closer European collaboration within NATO, the WEU has permitted the Western European members to act collectively outside the NATO area of operations, as in the Persian Gulf from 1985.29 In the aftermath of the Gulf War and the outbreak of conflict in Yugoslavia30 the Council of Ministers of the WEU, in the Petersberg Declaration of 19 June 1992, signalled their intent to expand the operations of the WEU to encompass ‘humanitarian and rescue tasks, peacekeeping tasks and tasks of combat forces in crisis management’. These are now known as the ‘Petersberg tasks’.31 As well as setting out a list of practical measures to enhance relations with the EU, and a strengthening of the European pillar of the Atlantic Alliance and its own operational role, the declaration offered either accession or observer status of the WEU to any member of the Union. Other European members of NATO were offered associate membership status. To facilitate the realisation of these objectives a Planning Cell was established and located within the WEU Council. The Council has been moved from London to Brussels, thereby symbolically indicating the WEU’s new status with respect to the European Union (and taking advantage of the practical benefits of proximity). Within the Planning Cell the WEU has recently added an Intelligence Section, alongside a Situation Centre and a politico-military group in support of the Council, as part of its commitment to enhance its operational development.

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CJTF, ESDI, FAWEU The development of capabilities by the WEU to match its aspirations was given a boost by the NATO summit of January 1994 and the endorsement of the principle that NATO assets and capabilities could be made available for WEU operations, and in particular through the concept of Combined Joint Task Forces (CJTF). A slow move towards the inter-operability of EU non-NATO and the CEECs with NATO assets was demonstrated by Austria, Finland and Sweden and four of the countries of Central and Eastern Europe (the Czech Republic, Hungary, Poland, Estonia) contributing troops to the Implementation Force for Bosnia (IFOR—Operation Joint Endeavour).32 Involvement has also continued in SFOR (Stabilisation Force for Bosnia— Operation Joint Guard), which although about half the size of IFOR, includes troops from the Czech Republic, Estonia, Hungary, Poland and Slovenia. NATO has now gone further and approved the implementation of the CJTF, thereby creating military structures to run military operations that may not include the United States and further support the development of a European Security and Defence Identity (E S DI) within NATO. 33 Alongside this endorsement, the WEU Planning Cell developed an inventory of Forces Answerable to WEU (FAWEU) to identify those forces available to carry out WEU tasks and created a framework for the development of a WEU maritime force. By enhancing the WEU satellite centre at Torrejon, Spain, the WEU has also made a commitment to create an independent European satellite system and to further develop the WEU’s capability to use satellite imagery for security purposes.34 In the future a WEU strategic transport capability may be enhanced through the Future Large Aircraft project. The WEU has already produced a preliminary document outlining the objectives, scope and means of a Common European Defence Policy (CEDP) and described by the Minister of Foreign Affairs of the Netherlands as ‘the acquis, as it were—which have already been developed in the WEU, in the European Union and in NATO’.35 The proposal was also made that the CEDP required a greater strengthening of operational capabilities, in particular: the exercising, preparation and inter-operability of forces; generic and contingency planning; strategic mobility; anti-missile defences and defence intelligence in Europe; and a mechanism for the sharing of burdens and the pooling of resources.36 The importance of creating a European armaments policy, as a part of a CEDP, was acknowledged as taking place through the Western European Armaments Group (WEAG) and which has resulted in the creation of the Western European Armaments Organisation (WEAO) encompassing the ten WEU Member States, Denmark, Norway and Turkey to focus on defence research. The Union, through the WEU, has, although tentatively, created a defence force and an embryonic defence policy. As noted above these are intended to be compatible with the Atlantic Alliance and to strengthen its

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European pillar based upon the principle of separable, but not separate, military capabilities. However, the disjuncture between WEU and EU membership remains. Only ten members of the Union are currently full members of the WEU and enjoy the defence guarantee of Article V; Ireland, Denmark, Austria, Sweden and Finland are currently confined to observer status within the WEU. The WEU and its associate partners The defence identity of the Union therefore excludes one-third of the membership of Union but, at the same time, through different forms of membership of the WEU, encompasses another 17 states. Alongside an observer status the WEU created an associate member status open to European members of NATO. This has been granted to Turkey, Norway and Iceland. These associate members, by their nomination of assets to FAWEU, now participate in WEU operations on same basis as full members. The associate members are also integrated into WEU planning through the nominating of officers to the planning cell and connection to the WEUCOM communications network. The WEU has also created an associate partner status offered to the ten Central European and Baltic countries that have Europe Agreements with the EU. The associate partner status offers involvement in the meetings of the WEU Council, liaison arrangements with the planning cell, participation in exercises, and association with the WEU operations involving Petersberg tasks. In any involvement in WEU operations a right to involvement in the Council’s decisionmaking process and command structures is granted.37 These arrangements have not been without their critics: one group of expert commentators characterised them as ‘an approach which simply serves to blur the concepts of a common defence policy and common defence’.38 Bilateral military structures The question of deepening the defence identity through a common European army is raised by Eurocorps. Eurocorps, which contains German, French, Spanish, Luxembourg and Belgium forces, was formed by an expansion of a previously existing Franco-German brigade on 5 November 1993, four days after the TEU came into effect and now operational with 40,000 troops. Alongside Eurocorps the Member States have a number of bilateral arrangements, which have been placed at the disposal of the WEU. These include an Anglo-Dutch amphibious force and a Franco-British Euro Air Group to coordinate RAF-French air force joint operations, in support of either peacekeeping or of offensive activities. France, Italy and Spain have organised Eurofor, a land force, and Euromarfor, a maritime force, open to all WEU members. These have been designated as ‘forces answerable to WEU’.

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New member states will also bring pre-existing bilateral defence relationships into the EU. Lithuania, Latvia and Estonia have established a Baltic peacekeeping battalion (BALTBAT) and participated in a major PfP exercise (Baltic Challenge) in 1996. Poland has established joint battalions for peacekeeping with both Lithuania and the Ukraine. A full analysis of the role and activities of the WEU is beyond the scope of this article but the use of the WEU under Article J.4.2 is pertinent as this represents an explicit use of an instrument beyond a civilian form of action. The EU first tasked the WEU under Article J.4.2 in June 1996 to ask it to make preparations to undertake evacuation operations of nationals of Member States when their safety is threatened in third countries.39 The EU also requested the WEU to prepare a military response to the crisis in the Great Lakes region in May 1997 but the change of events on the ground resulted in this action not being undertaken. However, the WEU has operated alongside, although not under the control of, the EU, in the former Yugoslavia in Mostar (providing a WEU police force) and in Albania in the provision of a Multinational Advisory Police Element (MAPE). The relationship between the EU and the WEU has been evolutionary to date. The EU has had very limited recourse to the WEU and the WEU has focused upon the development of an operational capability to facilitate its aspirations. The prospective members of the EU from Central and Eastern Europe are already integrating into European military structures. Cyprus presents a somewhat different picture not yet having an institutionalised relationship with European military structures. The desire to deepen the relationship between the EU and the WEU, on the part of some Member States, was manifested in the 1996 Intergovernmental Conference (IGC) and it is to amendment of the CFSP that we now turn. The Treaty of Amsterdam and the future of the CFSP A significant issue explored in the 1996 IGC, whose outcome was codified in the Treaty of Amsterdam signed on 2 October 1997 was, what improvements could be made to the functioning of the CFSP? If the Treaty of Amsterdam is ratified these amendments to the CFSP will have to be adopted by the applicant states. The debate within the IGC was complicated by theological disputes about the obstacles to an effective CFSP and the most appropriate mechanisms for decision-making and implementation. The dichotomous positions in the debate can be expressed in terms of supranationalism and intergovernmentalism: whether in the long term a more effective CFSP would be ensured by the CFSP’s integration into the Community structure with its existing methods of decisionmaking and implementation, or, alternatively, whether any attempt to create a policy that would supersede national foreign policy is unattainable and Member States will always want to retain full freedom of action. Such viewpoints were

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not so starkly expressed in the IGC CFSP debate but such thinking can be inferred from positions adopted by Member States and the Commission and the issues of disputation. The IGC deliberations coalesced around a number of issues and indicate what are perceived by the Member States to be obstacles to the effective functioning of the CFSP: amending decision-making, an enhanced analysis capability, funding, improved representation, and the relationship of the EU to the WEU. Amending decision-making The dominant view among the Member States was that the operation of the CFS P was severely hampered by the requirement for unanimous agreement before action can be undertaken. Discussions revolved around the possibility of techniques such as ‘constructive abstention’ or ‘unanimity minus one’ to deal with the decision-making problem. The amendments in the decision-making procedures eventually adopted in the new treaty was to permit constructive abstention and to extend Qualified Majority Voting (QMV) in the CFSP. Under Article J.13 of the Treaty of Amsterdam (ToA) when the Council of the European Union adopts a decision a state may abstain, not be obliged to apply the decision but ‘shall refrain from any action likely to conflict with or impede Union action based on that decision’. 40 Furthermore, if a sufficient number of states wish to abstain that they represent more than one-third of the qualified majority votes wielded by the Member States then the decision will not be adopted. For analysts focused upon the decision-making processes the introduction of QMV in the CFSP raises the question as to whether models developed to analyse voting and voting behaviour in pillar one, the Community pillar, will be applicable to pillar two. A substantive change in the ToA is to create a new instrument, the ‘Common Strategy’. Common Strategies are to be defined by the European Council and to ‘establish the objectives, duration and the means to be available’. Common Strategies are then to be implemented primarily through Joint Actions and Common Positions. The definition of a Joint Action is also refined in the ToA by being used to address specific situations where operational action is needed, the objectives and the means for implementation. Furthermore, the treaty also provides for the Council to instruct the Commission to draw up proposals for the implementation of an action. The domain of common positions is also refined as defining ‘the approach of the Union to a particular matter of a geographic or a thematic nature’. The Treaty of Amsterdam extends QMV to the adoption of Joint Actions, Common Positions or any other decision on the basis of a Common Strategy already adopted by the European Council and when taking any decision implementing a joint action or a common position.

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An enhanced analysis capability There was general agreement among the Member States during the 1996 IGC on the need to create an analysis unit to prepare CFSP strategy. The differences that emerged between the Member States and the Commission were within which Union institution it should be based and how it should be staffed.41 The approach codified in the Treaty of Amsterdam was to establish it within the General Secretariat of the Council under the control of the Secretary General of the Council (whose new role is detailed below). The unit is to be run by seconding staff from the Member States, the Commission and the WEU. Funding The administrative expenditure for the CFSP is currently financed out of the Community budget. The question of how operational expenditure should be financed appeared to be an intractable problem that has haunted the CFSP since its inception and hindered the implementation of Joint Actions. An agreement on financing the operational expenditure of the CFSP has been agreed in the ToA and will be charged to the Community budget. With financing occurring under the Community budget the question of what heading and/or procedure becomes important and required agreement with the European Parliament (EP). The budget is an area in which the European Parliament exercises its greatest powers, and the operational budget of the CFSP falls under the heading of non-obligatory expenditure. This grants a ‘power of the purse’ to the EP which now has to approve, with the Council, the amount proposed by the Commission for CFS P operational expenditure in each annual Community budget. The Inter-Institutional Agreement between the European Parliament, the Council and the Commission codifying this agreement on expenditure also provides for a mechanisms to resolve disputes on the size of any proposed budget and any need for increased expenditure. Improved representation Perhaps the most eye-catching modification of the CFSP suggested during the IGC was the French government’s proposal for a ‘Mr CFSP’ or ‘Ms CFSP’ to be appointed by the European Council. The idea had acceptance within the IGC but most Member States had reservations about appointing a high-profile politician to such a position. The U K government proposed that the representative should be at the rank of Secretary General, appointed by the Council of Ministers with a role in formulating matters to be discussed by the General Affairs Council and who, if thought necessary, could represent policies on behalf of the Union.42 The eventual stance adopted was to appoint the Secretary General of the Council as High Representative for the CFSP (Article J.16). The ToA also abolishes the Troika thereby leaving the Presidency, High

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Representative and the Commission as the most high-profile manifestations of the CFSP. A new Article (J.14) also provides for the Presidency to negotiate agreements with states or international organisations to then be approved by the Council. Another new Article J.16, which details with the creation of role of High Representative also makes provision for the High Representative to be involving in the conduct of political dialogue at the request of the Presidency. Relationship of the EU to the WEU The future relationship between the EU and the WEU created the greatest dispute within the IGC. Proposals ranged from the preservation of the WEU as an autonomous organisation representing the European pillar of the Atlantic Alliance (the position of the UK government) to the eventual full integration of the WEU into the EU (the position of the French and German governments).43 The eventual formula agreed upon in the ToA was for a shift from a commitment to the eventual framing of a common defence policy to a ‘progressive’ framing should the European Council so decide and the ‘fostering of closer institutional relations with the WEU with a view to the possibility of the integration of the WEU into the Union’. A substantive development was the acceptance on the part of the neutral states (Finland, Sweden, Ireland and Austria) on the inclusion of the humanitarian and peacekeeping elements of the Petersberg tasks of the WEU into the ToA (Article J.7.2) with the entitlement of non-WEU Members to participate fully in the tasks (J.7.3). The WEU signaled its willingness to respond to the commitment of the Member States under the ToA and a Protocol of the ToA provides for the EU and the WEU to draw up arrangements for enhanced cooperation within one year of the ToA coming into force.44 None of these amendments represent obstacles that the prospective members would have difficulties in overcoming. The key issue here will be how far they enhance the functioning of the CFSP. Conclusion The absence of a coherent foreign policy? The declarations issued, Common Positions agreed and Joint Actions undertaken via the CFSP do not yet add up to a coherent foreign policy for the Union. Indeed, the Union’s failure to respond collectively and with a single voice to crises often leaves a more lasting impression than any of the successful activities undertaken via the CFSP. Indeed, a greater attention to mechanisms for crisis management would represent the greatest advance for the CFSP.

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Diminished expectations of the CFSP The crisis in the territories of the former Yugoslavia demonstrated both the inability of the Union to cope with a conflict of such magnitude through its own efforts and also the problems of decision-making in a system in which the Member States are a substantive source of influence. The EU can take little comfort from its involvement in the region and has been a secondary actor in the attempts at conflict resolution since the United Nations involvement at the end of 1991. A paradox exists in which the EU was the political actor of greatest significance in Europe yet was effectively marginalised in the resolution or the management of the conflict. The Yugoslav crisis has proved a salutary lesson in the development of the international identity of the Union and has contributed to the closure of the gap between the realisation of the capabilities of the Union and expectations made of it.45 Business as usual after the Treaty of Amsterdam? The additional capabilities granted to the CFSP under the ToA represent an incremental, rather than a radical development in the decision-making processes and implementation instruments of the CFSP. Foreign policy has traditionally been an area of ‘high’ politics and, as is illustrated in the three-pillar structure created by the TEU, and retained in the ToA, there is an unwillingness by the Member States to relinquish direct control. EPC and the CFSP have operated primarily through the existing structure of foreign ministries operated by the Member States. The situation has not altered under the ToA and the new members will embrace the existing structure. The impact of extra voices and concerns The CEECs have designated NATO as the best guarantee of their military security and have actively pursued NATO membership.46 Under the CFSP the Union has tentatively gone beyond drawing upon existing Community strengths in the joint actions that it has undertaken thus far by seeking to create specific instruments to serve particular joint actions. However, the relatively underdeveloped content of the CFSP ensures that there is not a substantial body of policy for the CEECs to digest. The addition of extra participants in the process, through the commitment to enlarge the EU, ensures that there will be a re-calibration of policy to reflect new foreign policy concerns. I would suggest that for the CFSP the key issue will be whether the pace and waves of enlargement will enhance the CFSP—by gradually extending security by providing a context in which extra voices can be heard, and extra concerns expressed—or whether the redrawing of the line between insiders and outsiders generates security problems to be dealt with through the CFSP.

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Notes 1 2 3 4

Treaty on European Union, Luxembourg, Office for Official Publications of the European Communities, 1992 (hereafter TEU) Article B. For a full account of the de Gasperi proposals and the EDC, see: E.Fursdon, The European Defence Community: A History, London, Macmillan, 1980. For a comprehensive history of the development of EPC see: S.J.Nuttall European Political Co-operation, Oxford, Clarendon Press, 1992. The Article J.1.2 of the Treaty defined a set of broad objectives for CFSP: – to safeguard the common values, fundamental interests and independence of the Union; – to strengthen the security of the Union and its Member States in all ways; – to preserve peace and strengthen international security, in accordance with the principles of the United Nations Charter as well as the principles of the Helsinki Final Act and the objectives of the Paris Charter; – to promote international cooperation; – to develop and consolidate democracy and the rule of law, and respect for human rights and fundamental freedoms.

5

6 7 8

As illustrative of trenchant criticisms of the CFSP, see the report sponsored by the European Commissioner Hans van den Broek: High-level group of experts on the CFSP, European Security Policy towards 2000: Ways and Means to Establish Genuine Credibility, First Report, Brussels, 19 December 1994. TEU Article J.7. TEU Article J.8. The exceptions provided for are on procedural questions and Article J.3(2) to be examined below. Article J.2 required that: Member States shall inform and consult one another within the Council on any matter of foreign and security policy of general interest in order to ensure that their combined influence is exerted as effectively as possible by means of concerted and convergent action.

9 10 11 12

TEU, Article J.2.2–3. TEU, Article J.1.3. TEU, Article J.3.1. TEU, Article J.3.2 ‘The Council shall, when adopting the joint action and at any stage during its development, define those matters on which decisions are to be taken by a qualified majority [author’s emphasis].’ A declaration attached to the Treaty, ‘On voting in the field of common foreign and security policy’, takes this principle further: ‘with regard to Council decisions requiring unanimity, Member States will, to the extent possible, avoid preventing a unanimous decision where a qualified majority exists in favour of that decision’.

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13 Conclusions of the Presidency, European Council, Lisbon 26–27 June 1992, DOC 92/3, Commission of the European Communities. Annex I. 14 Ibid., Point 2. 15 Ibid., Point 3. 16 Ibid., Point 10. The ministers listed a threefold set of factors that should be considered in determining the common interests of the Union: geographical proximity; an important interest in the political and economic stability of a region or country; and the existence of threats to the security interests of the Union. 17 Presidency Conclusions, European Council, Brussels, 29 October 1993. 18 Agence Europe, No. 6139, 31 December 1993, p.3. 19 ‘Belgium calls for clear EU policy on Russia’, Reuters Euro Community Report, 10 January 1995. 20 Those countries of Central and Eastern Europe—Poland, the Czech Republic, Slovakia, Hungary—that have signed an Association Agreement with the European Union. 21 As indicative of this see the Europe Agreement signed by the Czech Republic, and the provisions contained in: Title I ‘Political Dialogue: Proposal for a Council and Commission Decision concerning the conclusion of a Europe Agreement between the European Communities and their Member States, of the one part, and the Czech Republic, of the other part’, COM (93) 386 final, Brussels, 28 July 1993. 22 ‘Guidelines for the implementation of the 7 March General Affairs Council conclusions on enhanced political dialogue with the associated Central and Eastern European countries’, Doc. 10344/94. 23 Agence Europe, 9 March 1994, pp. 4–5. In the second half of 1995 a series of 12 either troika or plenary meetings of experts dealt with the following topics: terrorism, the UN, disarmament, security, OSCE, nuclear non-proliferation, chemical and biological non-proliferation, drugs, conventional arms exports, human rights, former Yugoslavia, Central Europe, and Central Asia. ‘Relations with the associated CCEE in the second half of 1995’, Presidency Conclusions, European Council, Madrid, 15 and 16 December 1995, Annex 6. 24 Report from the Council on relations with the associated CEECs during the first half of 1996 (8169/96 PECOS 81), Presidency Conclusions, European Council, Florence 21 and 22 June 1996. 25 As indicative see the positions of Czech and Bulgarian commentators: Jaroslav Sedivy, ‘Common foreign and security policy: A central European view’, in: S.A.Pappas and S.Vanhoonacker (eds), The European Union’s Common Foreign and Security Policy: The Challenges of the Future, Maastricht: EIPA, 1996; P.Pantev, V.Rachev and V.Tsachevski, Bulgaria and the Balkans in the Common Foreign and Security Policy of the European Union, Sofia: Institute for Security and International Studies, 1995. 26 TEU, Articles J.4.1 and J.4.2. 27 TEU, Declaration No. 30. 28 Brussels Treaty, as amended by the Protocol modifying and completing the Brussels Treaty, signed at Paris on 23 October 1954.

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29 P.Tsakaloyannis, The Reactivation of the Western European Union and its Effects on the European Community and its Institutions, Brussels, EIPA, 1985. 30 For an account of the history of the WEU from 1985 to 1992 see: T.Salmon, ‘Testing times for European political cooperation: The Gulf and Yugoslavia, 1990– 1992’, International Affairs, 68, 2 (1992), pp. 233–53. 31 Western European Union Council of Ministers, Petersberg Declaration, Bonn, 19 June 1992, II.4. 32 Of prospective EU members, Romania, Latvia, Lithuania, also contributed troops. 33 North Atlantic Council, ‘Communiqué from the ministerial meeting in Berlin, 3 June, Agence Europe Documents, No. 1989, 5 June 1996. 34 Western European Union Council of Ministers, Kirchberg Declaration, 9 May 1994, I.6. 35 Hans van Mierlo, Nato Review, March 1995, p. 8. Preliminary Conclusions on the formulation of a Common European Defence Policy. The document was endorsed by the WEU Council of Ministers in the Noordwijk Declaration of 14 November 1994. 36 Preliminary Conclusions, ibid., Part B, II.25. 37 Kirchberg Declaration, 38 High Level Group of Experts on the CFSP, op. cit., p. 4. 39 Agence Europe, No. 6760, 29 June 1996. 40 Unratified text of the Treaty of Amsterdam at: http://europa.eu.int. 41 The differences in position of the Member States were made clear in the words of the Reflection Group Report composed of Member State representatives to identify issues and an agenda for the IGC before its formal commencement. Presidency Conclusions, European Council, Madrid 15 and 16 December 1995, Annex 15. 42 Agence Europe, No. 6786, 7 August 1996. 43 The Reflection Group Report offered four options for the future WEU-EU relationship: (1) maintaining full autonomy of WEU but a reinforced partnership; (2) a closer link to allow the Union to direct the WEU for Petersberg tasks; (3) incorporation of the Petersberg tasks into the TEU; (4) a gradual integration of the WEU into the EU through the WEU either agreeing to a full merger or a WEU commitment to implement military issues. The report proposed that the fourth option could be realised not just by incorporating the Petersberg tasks into the treaty but via a collective defence commitment contained either in the main body of the treaty or as a protocol to the revised TEU. 44 Declaration of Western European Union on the Role of Western European Union and its Relations with the European Union and with the Atlantic Alliance, Brussels, 22 July 1997. 45 C.Hill, ‘The capability-expectations gap, or conceptualising Europe’s international role’, Journal of Common Market Studies, 31, 3 (September 1993), pp. 305– 28. 46 Public support for membership of NATO varies across the CEECs, as recent Eurobarometer polling indicates. In Poland 69 per cent support membership and only 6 per cent oppose; in Romania 64 per cent approve and 4 per cent disapprove. The greatest number of those opposed to membership are to be found in Bulgaria (26 per cent); the Czech Republic (23 per cent); and Hungary (22 per cent) (Central and Eastern Europe Eurobarometer, No. 6 March 1996).

Postscript

13 From this point onwards Searching for the path Alice Landau

After many to’s and fro’s, the enlargement process is on its way. The Task Force established by the Commission has already started the ‘screening’ of the state of implementation of the acquis communautaire by the applicant states. Within the Commission, and in the Member States, ideas are being floated, discussions are ongoing, and solutions are devised to solve the deep problems raised by the commitment to enlarge the European Union (EU). One of the key decisions that has been taken is to distinguish a first wave of applications from a second wave (the latter for which immediate accession is not possible) but without creating any further divisions on the continent. The decision was politically difficult, though necessary for practical reasons. Twelve states were on the starting blocks, more than the maximum of four the EC/EU had dealt with in the previous enlargement negotiations. According to Preston, the group had to be reduced to a manageable size.1 Over the years, and across the summits that punctuate the enlargement story, the Commission has produced a list of conditions of eligibility for membership. Besides the basic condition of being European, having a democratic political system and respecting human rights, applicants must accept the acquis communautaire, and subscribe to the long-term objectives of the EU. They must have a functioning and competitive economy, something which went unsaid, but assumed, in previous enlargements, but which in the context of the present enlargement needs to be re-defined and specified. Obviously, some prospective Member States are too weak to cope with open competition from the EU. A double-track negotiation No one has been left out in the current enlargement process, but negotiations are being pursued on a double track. On the one hand, negotiations with all the applicant countries are taking place simultaneously both multilaterally and bilaterally. As far as the first wave applicants are concerned, the screening of their adherence to the acquis communautaire has been limited to easier issues such as vocational training, education, telecommunications, small and

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medium enterprises, industrial policy, research and development, through which only minor divergences emerge. In research and development, for example, there are no directives, only programmes in which applicant countries already participate. The applicant countries have to alter their legislation on these issues, evaluate the costs and formulate their negotiating positions, which will mainly take the form of periods of transition and temporary derogations. The ‘pre-ins’, second wave applicants, are dealing with the tougher issues: movement of persons and trade in goods, and are dealt with only multilaterally. The Commission argues that this distinction is justified because most of the problems faced by the ‘pre-ins’ lie in the core area of the internal market. These problems are precisely what motivated the distinction between the first and the second waves of applicant countries. Whatever the rationale justifying the two-track approach, its adoption by the Commission helps the CEECs move from a position that consists of endlessly repeating their desire to accede to the EU, to the real task of preparing themselves for accession. Indeed, preparation involves considerable monetary, economic and social costs; preparations for the ‘pre-ins’ will entail even more structural and institutional adjustments.2 The Commission as such has no negotiating position.3 This does not mean that the Commission has adopted a waiting position. The EU has never had to cope with such a difficult enlargement. It is forced to consider extensive reforms which are deeply unpopular with voters and within the political leadership in the EU Member States. However, most of the reforms are not. They could have been adopted in a situation of stability; now they have to be adopted in a diametrically different situation. Enlargement occurs with a much more integrated and larger Community, which translates into more diverging interests and complex issues to solve within the EU. The EU crisis-response mode of decision: the reform of the CAP and the Structural Funds The enlargement process is influenced by the institutional setting which determines how negotiations are conducted. Two characteristics dominate: member countries tactically choose to postpone decisions on issues in the expectation that eventually a cumulative crisis will force an agreement; decisions are then posed in a delicate balance so that they are taken simultaneously as part of a package deal.4 This two-step process is currently in evidence. However, the building-up of package deals is likely to become increasingly complex as a more integrated and larger EU addresses ever more difficult issues. The EU is likely to proceed pragmatically, allowing time for the Member States to accommodate their diverging interests, and for the Commission to structure a package deal, made up of multiple elements, acceptable to

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governments.‘Member States have to do their homework’, to quote a well-placed Commission official.5 This procedure is of particular relevance in two respects: the Common Agricultural Policy (CAP) and the Structural Funds. As argued by Josling in the case of the CAP, ‘the reactive approach has a ring of reality: the CAP has usually required a crisis to force change’.6 Thus, given the similar role played by the Uruguay Round, the enlargement may act as a catalyst for reforming the Structural Funds and the CAP.7 Reforming the Structural Funds: between the rhetoric and the reality The most far-reaching change concerns the reform of the Structural Funds and the Cohesion Fund, the most crucial problem from the Commission’s viewpoint. It is difficult to get any information on the precise cost of the impact of enlargement on the Structural Funds. Besides the fact that any official information could impact on the negotiations, estimates of the cost may seem irrelevant before the renegotiations, which are scheduled to take place by 1999. However, this is indicative of the sensitivity of the issue.8 Agenda 2000 stated that the new Member States would receive a total allocation of some 45 billion ECUs to be made available from the year 2000, and reckoned that with the necessary reforms of the Community policies including CAP, expenditures would not exceed the existing ‘own resources’ ceiling (1.27 per cent of GNP).9 However, the Structural Funds will have to be reformed within three main constraints: the unwillingness of the EU’s main net budget contributors (Germany, Netherlands, UK) to increase their net contributions, the resistance of the EU’s main net budget recipients (Spain, Ireland, Greece, Portugal) to any reduction in ‘their’ hand-outs, and the refusal to grant the eastern countries any second-class status. However, the ‘homogenizing and equilibrating principle of solidarity, ensuring the fair redistribution of resources to each member’ cannot be abandoned when the EU has to incorporate unequal partners, far from average western levels of income and wealth.10 Many suggestions circulate, including the possibility of capping cohesion spending within a GNP limit. What is crystal clear, is that ‘there is a gap between the rhetoric concerning the vision of a wider and inclusive Community and the hard bargaining necessary to achieve it’.11 The other central issue is the CAP reform, undertaken by Franz Fischler the farming Commissioner, which is complicated further by the existence of two constraints: the enlargement process and the follow-up to the Uruguay Round. The Uruguay Round agreement imposed cuts in the main areas of the CAP (export subsidies, domestic support, market access), and put limits on the price support scheme. It obliged the EU to move towards a more expensive (for the tax-payer) system of direct income support for farmers.

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Renationalising the CAP? The Commission has identified the costs implied by this reform for the existing 15 Member States and for the 21 Member States, 3.3 billion and 3.9 billion ECU respectively.12 Reforms involve large price cuts until they get close to world market levels for cereals, dairy products and beef, offset by an increase in direct aid payments to safeguard producers’ incomes, subject to ceilings, and reinforced action on the environment.13 However, more important is how to cap the reform between two contradictory external constraints: the enlargement and the new round of agricultural talks that are due to start in 1999 in the World Trade Organisation (WTO). Some Member States would like to complete the reform before enlargement to avoid paying compensation transfers to the CEECs. The current low price levels in most of the CEECs would mean important compensation payments to bring them up to EU levels and would put the Community budget under additional severe strain. The Commission had foreseen increased agricultural expenditure for market organisation and modernisation measures. The WTO negotiations could provide an added incentive for a wait-and-see strategy. Some Member States, for example, support the view that CAP reform should be withheld until these negotiations are completed. The main contenders in the next WTO round—the United States and the Cairns Group14 —want to obtain a more market oriented agricultural trading system.15 An intra-EU crisis could develop between a coalition of Germany, the United Kingdom and Denmark, supporting reform before enlargement, and Belgium and the Netherlands, favourable to holding up the reform until the negotiations start in Geneva.16 Side-payments in the olive oil market could be offered to Spain.17 Given such diverging preferences, the EU is likely to withhold and delay the decision as far as possible until the cost of no decision overcomes the benefits. Package deals that would accommodate this diversity of interests are increasingly difficult to build. The environmental pre-conditions, which according to the Commission should be compulsory for receiving direct aid, are a case in point. The UK, Sweden, the Netherlands, Austria and Germany support compulsory environmental preconditions; France, Ireland, Luxembourg and Finland moderately support them; while Spain, Portugal and Belgium, are against any conditionally.18 The EU could adopt a reactive strategy, delaying reforms that would improve economic efficiency, agricultural competitiveness, equity and international trade relations. In December 1997, France adopted a wait-and-see attitude and even Germany voted against the package of reforms, proposed by the Commission. However, the EFTA enlargement has set a precedent which could make it possible to more easily accommodate the next enlargement. New programmes for Arctic regions have been paid for by the individual countries involved, leading de facto to a ‘renationalisation’ of the CAP. As Josling has pointed out, ‘if Finland

Searching for the path

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and Sweden could run “Nordic” agricultural programmes, and Austria could maintain its existing small-farmer payments, why not have a special dispensation for national aids for other areas that have special features?’19 Stretching the EU further east Problems presented by enlargement are difficult to solve, but one thing remains certain: the EU has the political will to enlarge, to entrench stability and security across the continent, whilst maintaining the acquis communautaire intact. However, the relationship between widening and deepening is likely to be transformed by this new enlargement. Previous enlargements were facilitated by tailor-made solutions, but these are more difficult to adopt in the present circumstances. Mutual adjustments have become increasingly more complex and more difficult in the EU of 1998. Stretching the EU further east will necessarily reduce its present level of cohesion and integration. The EU has to accept this as the inescapable consequence of enlargement. Notes 1

Christopher Preston, Enlargement and Integration in the European Union, London, Routledge, 1997, p. 235. 2 For a detailed review of the required adjustments, see Lucjan T.Orlowski, ‘Economic conditions of accession of the East European transforming economies to the European Union: A policy proposal’, in Iliana Zloch-Christy, Eastern Europe and the World Economy, Challenges of Transition and Globalization, Cheltenham, Edward Elgar, 1998, pp. 137–147. 3 Interview with the Task Force, Brussels, 20 May 1998. 4 Donald P.Barston, ‘International negotiations: the development of central concepts’, European Journal of Political Research, 11, 1993, pp. 129–139. 5 Interview with the task force, Brussels, 20 May 1998. 6 T.Josling, ‘Can the CAP survive enlargement to the east?’, in John Redmond and Glenda G.Rosenthal, The Expanding European Union, Past, Present, Future, London, Lynne Rienner Publishers, 1998, p. 96. 7 A.Landau, ‘Bargaining over power and policy: the CAP reform and agricultural negotiations in the Uruguay round’, Journal of International Negotiation, 4, 1998. 8 H.Grabbe and K.Hughes, ‘The impact of enlargement on EU trade and industrial policy’, in John Redmond and Glenda G.Rosenthal, op. cit., p. 147. 9 Agenda 2000, For a Stronger and Wider Union, Brussels, Bulletin of the European Union, 5/97, pp. 63–66. 10 Frank R.Pfetsch, ‘The development of European institutions’, in Regional Integration Process, European Union/Southern Africa Development Community, Bordeaux, CEAN, 1995, p. 189. 11 Christopher Preston, op. cit., p. 235. 12 Agenda 2000, For a Stronger and Wider Union, op. cit., p. 62.

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13 Proposals for Council Regulations (EC) concerning the Reform of the Common Agricultural Policy, Brussels, Commission of the European Communities, COM (1998) 158 final. 14 The Cairns group brought together a set of heterogeneous developing and developed countries (Australia, New Zealand, Canada) located in Latin America (Brazil, Chile, Colombia, Uruguay and Argentina); and Asia (Malaysia, Thailand, Philippines, Fiji islands). All shared the same interests as exporting agricultural countries. See Alice Landau, Conflits et coopération dans les relations économiques internationales: l’Uruguay Round, Brussels, Emile Bruylant Publishers, 1996, pp. 156– 162. 15 Agence Europe, 19 May 1998. 16 Interview with the DG VI, 19 May 1998. 17 Ibid. 18 Agence Europe, 16 May 1998. 19 Tim Josling, op. cit., p. 93.

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Index

absorption capacity (aid) 88, 124 accession criteria: see criteria for accession Acquis communautaire 10, 14, 17, 18, 35, 49, 51, 57, 61, 68, 70, 72, 73, 102, 103, 146, 163, 167 Adenauer K. 115 Administration: see public administration Afghanistan 141 Africa 144 African Caribbean Pacific (ACP) countries 18 African Great Lakes region 140, 141, 153 Agriculture 45, 60, 62, 76–80, 85–6 Albania 146, and Multinational Advisory Police Element (MAPE) 153 Algeria 141 Alpe-Adria 113 amphibious force (Anglo-Dutch) 152 Angola 141 applicant countries 25 Arctic regions 166 association 17 Association Agreements 68, 78, 81, 85, 98 Atlantic Alliance: see NATO Austria 4, 15, 81, 147–152 passim, 156 Austrian school of economics 35; environmental pre-conditions 166 Balkans 111, 132 Baltic 14, 22, 33, 34, 57, 89, 126, 144, 152 Baltic Council 144 Baltic peacekeeping batallion (BALBAT) 153

banking system lacking 78 Belgium delaying CAP reform 166; against conditionality 166 Belorussia (Belarus) 6, 22, 127, 132, 144– 149 passim Bilateral disputes among CEECs 146–8. Commission 8, 69, 103, 137; and CFSP 155, 156, 164, 165; reform of 121, Bismarck 112 Blocking minorities: see voting Bosnia 141 Bosnia-Herzegovina 146 Bossi U. 127 Boulding K. 114 Broek H.v.d. 116 budget (EU), net contributors 15, 165; cost of CFSP 155; cost of enlargement 50, 60, 67, 71, 80, 86, 118, 165 Bulgaria 10, 14, 18, 27, 30, 41, 44, 68, 121, 146 Bureaucracy: see public administration Burundi 141 Bush G. 111 Cairns Group 166 capital movements 38–42, 88–9 CDU/CSU 100 Central Europe (an) Initiative (CEI) 113, 144 Central European Free Trade Association (CEFTA) 98, 113 Chechnya 142 Chirac J. 130–1 civil war 72 Coalitions: see package deals

Index cohesion fund, policy 15, 118, 124, 165; capping 165 Combined Joint Task Forces (CJTF) 150 Common Agricultural Policy (CAP) 31, 45, 115, 118; cost of extension to CEECs 71, 86; reform of 6, 8, 15, 16, 46, 59, 60, 76–80, 125, 130, 165; renationalisation of 46, 165; see also WTO Common Foreign and Security Policy (CFSP) 14, 22, 69, 116, 119, 135– 160; CEEC ‘Associates’ 142; identity 145; outsiders 145; Presidency (‘Mr CFSP’) High Representative 143, 155, 156 Council of Ministers 139; reform of 121–3 Common Positions 138, 139, 154 Common Strategies 154 comparative advantage 33, 36, 42 competitivity (competitiveness) of CEECs 31–35, 41–45, 48–9, 72, 82, 84, 123; screening by Commission 163 Concentric circles: see flexibility conditionality 7, 47, 166 Conference for Stability in Europe 140 Convention on Prohibitions or Restrictions on the use of Certain Conventional Weapons 140 Convergence 25: see also growth convertibility 28–9 Copenhagen Council: see Councils Cost of enlargement: see budget Council for Mutual Economic Cooperation (COMECON, CMEA) 33, 97, 112 Council of Baltic Sea Cooperation 113, 144 Council of Europe 113, 117, 131, 149 Council of Foreign Ministers, General Affairs Council, Council of the Union, European Council or simply ‘The Council’ 137, 139, 155 Councils, Copenhagen 10, 46, 71; Corfu 140; Essen 20, 68, 74, 98, 140, 142; Lisbon 139; Luxembourg 10, 50; Maastricht 139; Madrid 68, 70, Turin 99

177

criteria for accession 10; economic criteria 46–50; refining of definitions 163 Croatia 22, 141, 144, 146, 147 Cuba 141 customs union theory and the CEECs, static 26–31, dynamic 31–35, hyperdynamic 35–37, factor movements 37–45, capital 38–42, labour 42–45 Cyprus 11, 102, 120, 135, 144–151 passim, 153 Czech Republic 10, 17, 27, 30, 41, 44, 48, 50, 58, 68, 83, 86, 102, 120, 123, 135, 146, 151 ‘development banana’ 89 decision-making in an enlarged EU 61, 70, 122; in CFSP 137, 138, 143, 154 Declarations (CFSP) 141 deepening/widening of EU; see also dilution 5, 22, 70, 93, 97, 115, 123, 126–7, 167 defence identity of EU 152 Delors J. 18 democracy in CEECs 14, 67, 71–2, 129; growth and 5, 133; defining characteristic of EU 22; democratisation of EU decisionmaking 100; in Germany 114; screening by Commission 163; Denmark 19, 103–4, 144, 151, 152; supporting CAP reform before enlargement 166 Deutsch K. 114 dilution of Community policies 13, 67, 97, 99, 105, 120 disintegration 105, 120 division of Europe, danger of 116 East Timor 141 Economic and Monetary Union (EMU) 59, 60, 93, 102, 112, 118 economic transition 4, 6 embargoes 141 environment 49, 51, 61, 73, 166 Essen Council: see Councils Estonia 10, 17, 27, 30, 41, 44, 48, 50, 57, 58, 68, 86, 102, 120, 135, 144– 151 passim

178

Index

Euro-Atlantic Partnership Council (EAPC) 149 Eurocorps 126, 152 Eurofor 152 Euromarfor 152 Europe à la carte: see flexibility Europe Agreements 33, 50, 59, 62, 68, 74, 142, 146, 152 European Coal and Steel Community (ECSC) 113, 136 European Conference 10, 11, 17, 50 European Council: see Councils European Court of Justice 137 European Defence Community (E D C) 136 European Economic Area (E EA) 50, 59 European Free Trade Association (E FTA) 18, 59, 76, 98, 113, 166 European Parliament 76, 80, 103, 122, 137, 155 European Political Community 136 European Political Cooperation (E PC) 136, 157 European Security and Defence Identity (E S DI) 151 Eurosceptics 20, 96, 111, 121 factors, sector specific 33 federal option (for Europe s future) 94, 100, 113 Federal Republic of Yugoslavia 22, 72, 139, 141, 144, 146, 148; former Yugoslavia 140, 141, 150, 153, 157 financial transfers: see transfers Finland 4, 15, 22, 81, 144–152 passim, 156, 166 Fischler F. 165 flexibility 18–20, 52, 94, 100–105, 116, 118–120 Forces Answerable to WE U (FAWE U) 152 foreign direct investment; see also foreign capital flows 35, 39, 41, 73, 85, 89, 133 Former Yugoslav Republic of Macedonia (FYROM) 14, 22, 146 four freedoms 37–8, 52, 124

France 21, 104, 149, 152, 156, 166 Franco-British Euro Air Group 152 Franco-German axis 112, 115–6; brigade 152 free trade 82 free trade Europe 94 Freedom; see also four freedoms 5, 36 Future Large Aircraft project 151 G-7 149 Gabcikovo-Nagymaros dam 148 Gasperi de 136 General Affairs Council 137 geopolitical implications of enlargement 129–134. Germany 21, 22, 44, 83, 100, 104, 111, 144, 156, 165; reunification of 3, 61, 147; ‘German question’ 114, 116; supporting CAP reform before enlargement 166; environmental pre-conditions 166 Gibraltar 147 globalisation; see also WTO 119, 120, 131; see also flexibility, deepening/ widening 113, 153 Greece 15, 44, 83, 122, 147, 165 growth, democracy and 5, 133; economic catch-up growth 4, 7, 41–2, 46; and cost of enlargement 50; investment-oriented 82–3 Gulf War 150–5 Haiti 141 harmonisation; see also acquis communautaire 49, 57, 82 Havel V. 129–130 Helms Burton Act 140 Herman model (double majority in Council of Ministers) 122 homogeneity 49, 52, 126, 165 human rights 46, 71; definition of Europe 22; screening by Commission 163 Hungary 10, 16, 17, 27, 41, 44, 48, 50, 58, 68, 82–90, 102, 120, 135, 146– 151 passim hyper-dynamic effects of integration 356–7

Index Iceland 59, 152 immigration: see migration Implementation Force for Bosnia (IFOR) 151 incomes (GDP) in CEECs 33, income gap 25, 43–45, 60 institutional reform in EU; see also decision-making 4, 11, 61–77, 95, 118–128 integration between unequal partners 26–45 integration: see customs union theory Intergovernmental Conference (IGC) 20, 69, 70, 74, 80, 93, 97–107, 120, 135, 153, 155 intergovernmentalism International Court of Justice 148 international relations of European states; see also CFSP 113–117, 127–8, 144 investments: see foreign direct investment Iraq 141 Ireland 15, 122, 147, 149–152 passim, 156, 165, 166 Italy 149, 152 Japan 149 Joint Actions 138, 139, 154 justice (judicial system) 13, 14; nationalism 114 Justice and Home Affairs 14 Kaliningrad oblast 147 Kant E. 114 Klaus V. 130 knowledge and economic adjustment 35–37 Kohl, H. 3 Korean Peninsula Energy Development Organization 140 Krsko nuclear plant 148 labour movements; see also migration 42– 45, 88, 124 large-small states division 115 Latin America 144 Latvia 10, 18, 27, 41, 48, 57, 68, 121, 144–147 passim, 153

179

leadership role (EU) 12, 52 legitimacy of EU: see democracy Libya 141 Liechtenstein 59 Lithuania 10, 18, 44, 48, 57, 68, 121, 144–149 passim, 153 lobbies 15, 16, 88, 131; agricultural 46 log-rolling: see package deals Luxembourg 166 Luxembourg Council: see Councils Maastricht criteria 4 Maastricht Treaty (Treaty of European Union, TEU) 13, 14, 19, 69, 94, 102, 104, 135, 137, 150 Macedonia, see Former Yugoslav Republic Madrid Council 68, 70 Marshall Plan 61, 79 Mediterranean 144; countries 83; vs. eastern 127; lobby 22 Mercosur 132 Middle East 139, 140, 141 migration 16, 42, 61, 124, 129, 133 minorities 14, 17, 46, 71–2, 74, 90, 131, 133, 147–149. Mitteleuropa 116 Mitterrand F.130 Moldova 22, 146 monetary union: see Economic and Monetary Union Monnet J. 1155 Mostar 141, 153 multi-speed Europe: see flexibility Myanmar 141 Napoleon 112 ‘neo-medieval’ state system 114 neo-functionalism 127, 127, 134 Netherlands 15, 165; delay CAP reform 166; environmental pre-conditions 166 neutral countries; see also individual states 126, 152, 156 Nigeria 141 non-tariff barriers 52 Nordic Council 113 norms; see also harmonisation 57, 62

180

Index

North Atlantic Treaty Organisation (NATO) 22, 112–3, 116–7, 126, 130– 1, 146–151 passim, 156, 157; and Partnership for Peace 149–150, 153 north-south division; see also poor member states 115 Northern Ireland 147 Norway 59, 144, 151, 152 Nuclear Non-Proliferation Treaty Conference 140

121, 129 producer subsidy equivalent (PSE) 27, 28–29 property rights 4, 13, 36 protectionism; see also CAP, EU, sensitive products, tariffs 52, 123; agricultural 7 public administration 73, 88 public opinion 11, 12, 20, 72, 73, 75, 90, 96, 118, 130, 131, 164

opting-out: see flexibility Organisation for Security and Cooperation in Europe (OSCE) 113, 117, 126, 140, 149 outsourcing 119 outward processing 30

questionnaire process 17, 68–9, 76, 81, 82

Pacific 144 package deals 115, 123, 138, 143, 164, 166 Palmeston Partnership for Peace: see NATO per capital income in CEECs 4, 11 Petersberg tasks 150, 152, 156 PHARE programme 74, 87, 98 ‘pillars’ (Maastricht Treaty) 14, 123, 126, 138, 154, 157 Piran Bay 147 Poland 3, 10, 17, 27, 33, 41, 48, 58, 60, 68, 78, 83, 102, 120, 130, 135, 144– 153 passim; and ‘shock therapy’ 6, 44 political cultures (Europe of the West, East and Central East) 132 poor member states; see also Mediterranean, north-south division 122; permanent coalition of 122–3 population 44, 77 Portugal 15, 44, 45, 83, 122, 149, 165; against conditionality 166 pre-accesion partnership, strategy, aid 10, 17, 20, 61, 68, 81, 99 ‘pre-ins’ 164 Presidency of EU 149 pressure groups: see lobbies preventive diplomacy 139 privatization 5, 8, 39, 48 ‘process to unknown destination’, EU as

redistribution: see transfers Reflection Group 100 reforms in western Europe 75 regional policy, fund 16, 45, 46, 118, 124 Rifkind M. Romania 10, 14, 18, 27, 30, 44, 48, 68, 121, 144, 146, 147, 148 rule of law 13, 36, 46, 67, 71–2 rules of origin 8 Russia (Soviet Union, CIS) 3, 22, 33, 57, 111, 116, 127, 132–4, 140–149 passim Rwanda 141 sanctions 141 Schengen 103–4 Schuman R. 115 security issues 17, 21, 116, 119, 126, 129, 133; common defence 134 ‘sensitive’ products 62, 124 Serbia 141 services 37 side-payments: see package deals Single European Act 138 Slovakia 10, 14, 18, 27, 30, 41, 68, 83, 86, 121, 144, 146, 147, 148 Slovenia 10, 17, 22, 27, 31, 44, 48, 50, 58, 68, 78, 86, 89, 102, 120, 135, 146–151 passim Social charter 49, 53 social dumping 51 social security 8, 47 solidarity principle: see transfers Spain 15, 83, 122, 147, 152, 165; against conditionality 166 special envoy 141

Index Stabilisation Force for Bosnia (SFOR) 151 stabilty pact 139 Stalin 112 standards: see norms, harmonisation strategies for enlargement 93–96 structural funds/policies 70–1, 80, 115, 165; tailored 15, 45, structured dialogue 74, 76 Sudan 141 supranationalism; see also flexibility, deepening/widening 113, 153 Sweden 4, 15, 19, 22, 81, 144–152 passim, 156; environmental pre-conditions 166 Switzerland 35, 59, 83 tariffs 27, 28–29, 73, 81 and non-tariff barriers 52 Task Force (screening of CEECs by Commission for acquis) 163 territorial disputes between CEECs 147 trade ‘pessimism’ 33, 123 trade 16, CEEC regimes 28–29, liberalisation 30, trade balance of CEECs 84 trade creation 26 trade diversion 26, 31, manufactured goods and 30, agricultural goods and 31 trade patterns of CEECs 57, 78, 83, 85, 120 Transatlantic Free Trade Area (TAFTA) 132 transfers; see also cohesion, regional, structural funds 11, 15, 16, 50, 87, 118, 122, 125, 165 transition to market economy 4, 6–7, 14, 25, 30, 37, 58 Treaty of Amsterdam 20, 46, 61, 69, 75, 93, 95, 99, 130; and flexibility 102– 105, 118, 120, 138, 143, 153–157 passim Treaty of Brussels 150 Treaty of European Union: see Maastricht Treaty Treaty of Rome 37, 113, 136 Troika abolished 156 Turin Council 99

181

Turkey 10, 11, 22, 146–152 passim two-speed Europe: see flexibility unequal partners, economic integration between 26–45 United Kingdom 15, 19, 21, 22, 103–4, 147, 149, 155, 156, 165; supporting CAP reform before enlargement 166; environmental pre-conditions 166 United Nations 126 United Nations Economic Commission for Europe (UNECE), role in enlargement 56–63, 113 United Nations Security Council 149 United States 22, 78, 116, 130, 149, 166 unknown destination: see process Uruguay Round 74, 165 USSR: see Rusia Vandenbroucke F. 142 variable geometry: see flexibility Visegrad group 83, 98, 116, 120 Voivodina 148 voting in Council of Ministers; see also decision-making, ‘Herman model’ 122, 125; in CFSP 138, 143, ‘constructive abstention’, ‘unanimity minus one’ 154 Wallace W. 18, 22 Warsaw Pact 112 Washington Treaty 149 Western European Armaments Group/ Organisation (WEAG, WEAO) 151 Western European Union (WEU) 113, 116–7, 126, 135–6, 143, 149–152 passim, 156; associate status 152; observer status 152 Western European Union Communications Network (WEUCOM) 152 widening vs. deepening: see deepening and/or widening World Trade Organisation (WTO), GATT 11, 16, 38, 79, 124, 125, 130, 165 Yugoslavia: see Federal Republic of Ukraine 3, 6, 22, 127, 133, 141, 144– 148, 153; unemployment 4, 5, 34, 62