The EU and the Economies of the Eastern European Enlargement

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The EU and the Economies of the Eastern European Enlargement

Alberto Quadrio Curzio

●

Marco Fortis

Editors

The EU and the Economies of the Eastern European Enlargement

Physica-Verlag A Springer Company

Professor Alberto Quadrio Curzio Università Cattolica Via Necchi, 5 20123 Milano Italy [email protected]

ISBN: 978-3-7908-2033-1

Professor Marco Fortis Edison S.p.A. Foro Buonaparte, 31 20121 Milano Italy [email protected]

e-ISBN: 978-3-7908-2034-8

Library of Congress Control Number: 2008921401 © 2008 Physica-Verlag Berlin Heidelberg This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Physica-Verlag. Violations are liable for prosecution under the German Copyright Law. The use of registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMX Design GmbH, Heidelberg, Germany Printed on acid-free paper 5 4 3 2 1 0 springer.com

Contents The EU-27 Integration and Economic Relationships with the East: An Introductory Analysis A. Quadrio Curzio and M. Fortis ............................................................................. 1

Part I Cooperation, Integration, and Enlargement of Europe The Economic Goals of the Enlargement and the Challenges to the 27 EU Countries P. Guerrieri ............................................................................................................ 29 “Great Europe”: A Pan-European Perspective on the Future of Europe P. Garonna and Y. He ............................................................................................ 43 Trade and Foreign Direct Investment: Italy, Germany, and the New Europe G. Giovannetti and F. Luchetti .............................................................................. 73 Integrating the Balkans with the European Union M. Uvalic ................................................................................................................ 85 Part II European Banking Institutions and Eastern Europe The European Central Bank, Italy, and the Integration of Eastern Europe G. Tumpel-Gugerell ............................................................................................... 97 The Role of the European Bank for Reconstruction and Development (EBRD) in the Transition of the Banking and Financial Systems F. Saccomanni...................................................................................................... 115 Part III Enterprises and Economy in the Transition Process The Importance of Entrepreneurship for Democratic Development in Central and Eastern Europe O. Pfirrmann ........................................................................................................ 127 East–West European Integration: Patterns of Catching-Up and Labour Market Implications M.A. Landesmann................................................................................................. 149

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Contents

Trade and Foreign Direct Investments: The Point of View of Central Eastern European Countries M. Ferrazzi and D. Revoltella.............................................................................. 167 The European Enterprise of General Interest: A Tool for Balanced Development D. Velo.................................................................................................................. 185 List of Authors ..................................................................................................... 199

The EU-27 Integration and Economic Relationships with the East: An Introductory Analysis A. Quadrio Curzio and M. Fortis

1 Cooperation, Integration, and Enlargement of Europe In the first part of the volume all the economic and institutional themes on the enlargement leading to EU-25/27 are dealt with, along with the feedback both on EU-15 and on the 10 and then 12 accession countries. Also, the possibilities of further extensions across a pan-European scope – not a further EU enlargement, but rather its external completion – are considered. These current and prospective circumstances are echoed in the economic and foreign trade dynamics of/with the Eastern European countries, impacting significantly on Italy, because of the longstanding and expanding economic relationships. Finally, the situation of the countries of Southeastern Europe – now emerging from heavy war conditions and aiming at normalization, which inevitably makes them gravitate towards the EU – is looked at. What eventually comes to light is that the categories of enlargement, integration, and cooperation can positively coexist and that integration can develop across variable scales between enlargement and cooperation. Paolo Guerrieri, in his essay The Economic Goals of the Enlargement and the Challenges to the 27 EU Countries, begins with a remark: …the conventional mind-set of the European citizens about the access of new member states to the European Union seems to have profoundly changed in recent years, shifting the balance towards growing disappointment, if not open hostility, to the detriment of a more pro-European and positive approach.

The negative result of the referendum on the Constitution in France and the Netherlands in 2005 is deemed by Guerrieri an indicator of this new inclination, to be ascribed to the difficulties and fears engendered by the recent enlargement process, broadening the European Union from fifteen to twenty-five members in 2004 and later, with the entry of Romania and Bulgaria on January 1, 2007, to twenty-seven member states. This inward-looking turn was fuelled by the widespread perception that the enlargement asymmetrically favours the new members, taking advantage of low costs and their economic and social backwardness, thus transforming the enlargement process in a zero-sum game for the fifteen members. Guerrieri aims at disputing this widespread opinion, maintaining that actually the

A. Quadrio Cruzio and M. Fortis (eds.), The EU and the Economies of the Eastern European Enlargement. © Physica-Verlag Berlin Heidelberg 2008

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A. Quadrio Curzio and M. Fortis

enlargement, overall, brought about quite positive results to all the member states, although asymmetrically distributed across the European Union. Thus, the prevailing fears seem to a large extent unjustified, and due to other causes. Among them, first of all he points out those related to the unsatisfactory performance of many European countries in the first half of this decade, leading to very low growth and high unemployment. These negative trends do actually precede the enlargement, but later they were unduly ascribed to it. Indeed, the economic potential of enlargement is still wide and needs to be exploited, not only from the trade integration point of view, but rather with reference to the European internal market’s deepening, and to changes in the industry specialization of the single countries. In order to reap the harvest, both in the new member states and in the fifteen countries, changes and reforms are needed, which in many cases are the same necessary to boost Europe’s growth potential on the medium term and to positively face the challenges of global economy. Paolo Garonna and Yan He, in their essay “Great Europe”: A Pan-European Perspective on the Future of Europe, consisting of five parts, display a panEuropean scenario. In the first part the authors examine the 2004 enlargement experience, the reasons for its extraordinary economic success, as well as the limits, explaining the policy makers’ reluctance to proceed and extend that experience. Building on that, the authors suggest the pan-European integration as a new perspective to be considered, in order to escape both the constraints of merely unilateral or bilateral relations, or the confrontation between European powers’ opposite strategies to gain spheres of influence in a “neo-imperial” perspective. Secondly, the economic situation of the EU neighbour transition countries is reviewed, underlining the encouraging progress of the growth and development indicators of the emerging economies in Europe, but also the structural gaps, backwardness, imbalances, and obstacles making this growth vulnerable and hardly sustainable on the long term. Therefore, the EU should intervene and support the integration of these economies, to prevent the crystallization of new divides in Europe and avoid the consequent spill-over effects on the market operation and on the potential income both of the EU and the neighbour countries. Thirdly, the theme of the weakness of Europe (which mainly consists of a kind of slump of the continental Europe countries’ economic growth), the factors that explain it, and the role that the new member states – and in prospect also the neighbour countries at the pan-European level – could play in favouring the recovery and growth acceleration in Europe are mentioned. Fourthly, the authors review the main tools of economic policy to support integration in Europe, in particular, the neighbourhood policy, besides enlargement, highlighting the “missing link”, that is, the panEuropean dimension. Finally, the background assumptions to the launch of a political initiative for the economic integration in a “Great Europe” framework are briefly illustrated. Giorgia Giovannetti and Francesca Luchetti, in their essay Trade and Foreign Direct Investment: Italy, Germany, and the New Europe, argue that, in the last decade, the countries of the so-called “New Europe” have played a crucial role in world trade. In a context of significant changes in the international economic

The EU-27 Integration and Economic Relationships with the East

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scenario, they have doubled their market share in the world trade, especially thanks to the increase in the exchange with the markets of the “Old Europe” to which they supply 8% of total import (corresponding to one fourth of the import from outside the EU). These countries, with the due proportions, contended with China for the primacy of “world factory”, i.e. they substituted production in many sectors (of which the main ones include textile, clothing, leather, and cars) which were previously manufactured in the EU-15, achieving an increasingly decisive role in the European Union trade, and becoming privileged partners also in the intra-industry trade, which in the past was operated by industrialised countries only. For the European and Italian companies, the countries of the New Europe have become not only important outlets, but also suppliers of finished and semifinished goods, markets for temporary export and re-import, and locations to some manufacturing processes, typically those at the lowest added value. Germany and Italy have played the central role at the crossroads of “old” and “new” Europe, both as suppliers and as investors. Foreign direct investments, especially the German ones, have played a key role to boost up Central–Eastern European countries’ “transformation” and change of their comparative advantages. The sectors which have attracted most of the foreign direct investments are often the same where the New Europe countries have increased their market shares. Comparisons between Italy’s and Germany’s performances are also proposed, along with a description of the main features of foreign direct investments flows, the inter-exchange between these two countries, and New Europe’s market, highlighting the effects of delocation on import, export, and foreign direct investment progress. Milica Uvalic, in her essay Integrating the Balkans with the European Union, addresses the problem of economic and political integration of the Western Balkans with the European Union and focuses on five countries (SEE 5): Albania, Bosnia Herzegovina, Croatia, the former Republic of Yugoslavia of Macedonia (FYROM), as well as Serbia and Montenegro. Although Bulgaria and Romania joined the EU in January 2007, in some reviews the author also includes these countries (SEE 7), because they can be useful points of reference for comparative analysis and can play a driving role for the Balkans catching-up. The essay briefly recalls the events of the 1990s, which are indispensable to understand the current political and economic situation of SEE countries. The new course, started in 1989 with the transition to market economy and multi-party democracy, was abruptly interrupted with the breaking-up of Yugoslavia in mid-1991, and the dramatic consequences for all the states thus formed. Throughout the 1990s the SEE region was characterised by political and economic instability, but in 1999 there was a turnaround, with some progress towards democratization in Croatia and Serbia and the launching of a new international and EU strategy for the countries of the region, including a system of trade preferences, the Stabilization and Association Process, and the Stability Pact. Furthermore, the recent macroeconomic records of SEE countries, showing a rapid economic growth over recent years, sustained by average GDP growth rates equal to 5% and by a significant flow of foreign direct investments, are examined. However, such a successful performance does not counterbalance the shortcomings still affecting various areas, despite the progress

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achieved with the reforms oriented to transition, promoted and measured by the European Bank for Reconstruction and Development indicators. Moreover, the important subjects related to integration with the European Union are thoroughly examined, and, finally, the author offers some considerations about the SEE countries’ prospects, stressing the fact that some integration processes, independently of the formal entry in the EU, are irreversible.

2 European Banking Institutions and Eastern Europe In the second part of the volume three important banking innovations – regarding the EU, the transition of Eastern countries, and the dynamics of the credit market to Eastern Europe – are at focus. The European Central Bank (ECB) and corresponding currency, the Euro, represent not only the strongest federal institution in the EU, but also an agent of “moral suasion” even for all the countries that, albeit not belonging to Euroland, move round it. The European Bank for Reconstruction and Development (EBRD) has also been an innovation in the European esprit, maybe with some historical similarities to the European Investment Bank (EIB), giving a significant contribution to the transition of Eastern countries. One should ask whether the transition could be possible – and as satisfactory – in the East without EBRD; we think that the answer would be negative, because in case of radical transformation of economic and policy regimes, public entities acting with rigorous efficiency and effectiveness are fundamental, while the market is not sufficient to re-establish a new balance. Yet, eventually the market must grow up, and, to this respect, Italian banking groups have played a significant role. Gertrude Tumpel-Gugerell, in her essay The European Central Bank, Italy, and the Integration of Eastern Europe, starts with a remark and with a question. The remark is that European integration is a very complex process, impacting on the social, political, and economic life. The question is about the role the European Central Bank plays in this process and how it can contribute to improve wealth. Tumpel-Gugerell maintains that the best way for monetary policy to increase wealth in the Euro area is to ensure price stability and efficiency to the financial markets. Price stability – the main task of the European Central Bank – strengthens the overall economic policies of the Community, favouring a high level of employment and non-inflationary sustainable growth in the short and long terms. Stable, open, and developed financial markets are essential for the good performance of market economies and for an effective implementation of every single policy in the Euro area. In fact, a high level of integration and competition in the financial markets spreads a positive effect on volumes, liquidity, economies of scale, intermediation costs, and on a more efficient capital allocation. Nonetheless, the fact that price and financial market stability create a favourable environment to economic growth might not be sufficient. In order to maximise the positive effects of a monetary policy oriented to stability, appropriate fiscal policies should also be


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implemented and labour and market flexibility should be supported. TumpelGugerell insists on the need to implement structural reforms, removing the residual obstacles, and supporting the adjustment to an environment made unstable by the European integration processes and by the global economic integration. Finally, the author dwells upon the Italian case, remarking how our country benefited from the European integration process, and gives an outline of the Italian economic–financial relations with the countries of Central–Eastern Europe. Fabrizio Saccomanni, in his essay The Role of the European Bank for Reconstruction and Development (EBRD) in the Transition of the Banking and Financial Systems, analyses the role that the European Bank for Reconstruction and Development plays in the process of transition of the banking and financial systems of Eastern European countries, covering the pre-accession countries (PECO) (Central and Eastern European Countries), SEE, and the countries of the former Soviet Union. Established in 1991 after the fall of Eastern communist regimes, the general goal of the EBRD is to focus on the transition of the economic systems from a planned economy to a market economy and democratic forms of government. With its investments the EBRD pursues the objectives of promoting structural and sectorial reforms, competitiveness, privatization and entrepreneurship, robust financial institutions and legal systems, the infrastructure necessary to support the private sector and a rigorous corporate governance. The respect of the environment and the principles of good banking management form an integral part of the process of funding allocation of the Bank. Essentially, the EBRD acts as a catalyst of change, promoting co-financing and foreign direct investments, mobilization of national capitals, and the supply of technical assistance. In order to analyse the degree of transition achieved by the countries, the EBRD has developed a method of analysis and a series of indicators allowing a quantitative assessment of the process: the indicators have a value from 1 to 4, where 1 represents the typical status of a planned economy while 4 corresponds to an almost completed transition. Based on these indicators, Saccomanni examines the development of the banking and financial systems, the banking intermediation share, and the level of capitalization in the financial markets. Stability as well as the challenges still to be faced in order to achieve complete transition are also assessed. Finally, the role of Italian banks in the transition process and the EBRD strategies implemented to manage the persisting backwardness in the transition process are analysed.

3 Enterprises and Economy in the Transition Process The third part of the volume brings together theoretical and applied analyses, dealing with the enterprise both as a leading institution in the transition process to establish a new and sustainable political and economic model within the European Union sphere and as an engine of development in the global market competition, going through the failures and the opportunities of transition. On the one hand, two essays focus on entrepreneurship to enhance the democratization process in

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Eastern Europe, and on the role of European enterprises of general interest as a tool for balanced development in the enlarged Europe; on the other hand, two other essays analyse the dynamics of catching-up within the European integration process, the impact of a changing development model in Central and Eastern Europe on local businesses, and the feedback on partnership, particularly with the Italian enterprise system. Oliver Pfirrmann’s essay The Importance of Entrepreneurship for Democratic Development in Central and Eastern Europe argues first of all that the privatization of formerly state-owned enterprises and their conversion into legally autonomous enterprises has been an essential element in the transition strategies in Central and Eastern Europe. The rhythm and length of privatizations were very different in the single countries: while in Poland, the Czech Republic, and Hungary the process started very quickly and was completed by the end of the 1990s, in other countries, such as Russia, Ukraine, Bulgaria and Romania, privatization was problematic since the very beginning, so that at the end of the last century the process was still in its early phase. While in all the countries of Central and Eastern Europe the so-called small privatization (targeting small economic units, especially in the retail and hotel industries) was completed quickly overall, the socalled large privatization (sale of large business units from the industrial and banking sector) faced much bigger difficulties. Pfirrmann’s essay addresses the challenges encompassed in the typical analysis of the transformation processes and the role of entrepreneurship in Central and Eastern Europe from a political science point of view. The socio-economic assumptions formulated by Lipset are taken as the theoretical background to the model, which is extended to include factors deemed of relevant impact in the process of democratization in Central and Eastern Europe. With this model, the author does not pretend to give an exhaustive review of the democratization processes in those countries, rather, he concentrates on some variables (entrepreneurship, in particular) which can possibly explain the progress of the transformation process up to the full attainment of democracy. The core of the essay is an empirical analysis in which variants of the model are assessed for specific countries of Central and Eastern Europe. Data are based on international statistics, such as those of the World Bank and of the European Bank for Reconstruction and Development, and are combined in an innovative way as far as the typical literature on transformation is concerned. The article ends with a summary evaluating all the results, stressing the importance of entrepreneurship for democratic development in Central and Eastern Europe. Michael Landesmann, in his essay East-West European Integration: Patterns of Catching-Up and Labour Market Implications, goes through the three phases of economic growth undertaken in Central–Eastern–Southeastern Europe since 1989 to detect the changing directions of transition, from stop–go steps during the early two phases, marked by account and exchange rate crises, to the recent catching-up and increasing convergence with Western Europe economies, impacting upon the overall European growth performance. Along with a contraction of the income gaps, the employment elasticity to GDP growth is improving, moderating the risk of “job-less growth” in the new accession countries. Moreover, Landesmann


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points out evidence of “changing comparative advantages” in Central Eastern European catching-up economies, moving from low and medium-low technology to medium-high and high tech industries in their trade relationships with EU-15 markets. In parallel, there is evidence that labour demand is shifting towards increasing demand of skilled labour, not only in the advanced Western European countries, but in the Central Eastern European catching-up countries as well. The same holds referring to “skill bias” – employment declines/grows along with the low/higher level of education. Also in Central Eastern European countries there is evidence of change in skill composition across all sectors, and particularly in the already skill-intensive ones, revealing a “sector bias” pattern, similar to that of Western European economies, adding pressure to the skill composition of the employed labour force across the enlarged Europe. Landesmann considers that such a dynamic structural change taking place in Central Eastern Europe is going to have an effect on the integration process with Western Europe and on the overall European economic integration as well. Matteo Ferrazzi and Debora Revoltella, in their essay on Trade and Foreign Direct Investments: The Point of View of Central Eastern European Countries, start with the acknowledgment of the growing importance of emerging markets characterizing the world economy in the last decade and then discuss Central Eastern European countries (CEE) and China as the major “winners”, becoming the manufacturing arm of the “old” European countries, which are instead moving towards new specializations like soft goods, design, ideas, and patents. Yet, the authors raise the question whether the CEE countries will be able to consolidate their role in the future, as their cost advantages are expected to be gradually eroded. The analysis of Ferrazzi and Revoltella underlines that CEE countries are actually continuing to move towards a development model far from being simply a low-cost production base of “old” EU (also considering the expected increases in labour costs in most of CEE countries). On the contrary, they are increasingly leveraging on some other distinctive features that will provide a decisive boost to productivity growth, such as the growing size of the local markets, the role of European foreign direct investments, the proximity to the Western European markets, and the improvements in the business environment. On the other hand, Italy is among the main trading partners and investors of the CEE countries, which are gaining market shares at the expense of Italian firms in Europe (especially in the German market). Yet, this process is partially driven by the same Italian companies now producing and exporting from CEE countries. Moreover, many Italian companies are in a favoured position to take advantage of the rapid development of CEE local demand, especially in the field of service. Hence, the Italian enterprises, both those operating abroad and in Italy, will be affected by the evolution of the CEE competitive position in the next years. Dario Velo’s essay, The European Enterprise of General Interest: A Tool for Balanced Development, states that the European Union enlargement to the new members from Central and Eastern Europe creates the case for a significant rebalancing; in fact, in the Union today, some of the richest and most developed industrial areas in the world coexist with areas at pre-industrial levels, at very low

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income. Therefore, the enlargement has significantly changed the overall economic system of the European Union, generating new imbalances, and thus claiming that new and effective tools to overcome them should be defined. According to Velo, two alternative solutions to face regional imbalances are most likely to prevail in Europe: on the one hand, a strategy based on the globalization rules, and on the other hand, a strategy of public intervention. The relevant question in the essay is whether the goal of a balanced development in Europe, based on the acknowledgment of a common European interest, is a realistic objective. The balanced development in the Europe of the twenty-first century cannot be achieved only by means of solidarity transfer of resources, rather it requires operation on the development model and mechanisms themselves, in order to make the balance an endogenous structural component of development. In this context, Velo thinks that the creation of European enterprises of general interest could play a key role in achieving the objective of balanced development. For the author, such a tool is topical and realistic at the same time. In a mid-term perspective, the creation of European enterprises of general interest as a tool for balanced development would trigger the launch of a sort of European New Deal, able to renew, with the necessary innovative adjustments, the experience devised by Roosevelt in the 1930s to face a situation that, according to the author, has many aspects in common with the present European one.

4 Some Specific Remarks Certainly, the above descriptions render a set of comprehensive essays, exempting from further comments to be added. However, we will attempt to formulate four reflections in order to uphold our point of view which, coherently with the Fondazione Edison approach, pays constant attention to the Italian economy within the European and international context. The following four topics will be addressed: the Italian economy and Eastern Europe countries, Europe and the enlargement to 25 and 27, the economic dynamics of the new member states, and the inward EU-27 policies and those towards the East.

5 The Italian Economy and Eastern European Countries 1 We will start from clear evidence concerning the long-term dynamics of Italian export illustrated in Fig. 1. One notices immediately that from 1991 to 2006 Italian export to ECO countries (Central and Eastern Europe, i.e. Russia, Ukraine, the Baltic countries, and the new member states from Eastern Europe and the 1

See also Fortis M (2005) The two challenges to made in Italy: globalization and innovation. Analysis of the Second National Conference on foreign trade. Il Mulino, Bologna.


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Balkans) has grown faster than export to Germany and France; in contrast, export to China – highly praised in the “futuristic” expectations about the Italian export – appears negligible. As a matter of fact, in 2005 ECO countries were the third market to Italian exports, outstripping the United States by 10 billion EUR, and in 2006 they became the second after Germany with only a 2.1 billion EUR gap. Often we hear it said that Italian export in 2006 was driven by Germany, and it is partly true. In fact, in 2006 the export to this country, which is still our main trade partner, increased by 3.5 billion. However, the highest demand for Italian products did not come from Germany. In Table 1 we intentionally considered the “old” EU-15 members separately from the new member states from Eastern Europe in order to highlight the most significant phenomenon characterizing Italian foreign trade not only in 2006 but in general over recent years, i.e. the soaring growth of the ECO market. In fact, in 2006 this area accounted for a global increase of Italian export by 6.4 billion, corresponding to one fourth of its total growth. As we can see from Fig. 1, the growth of Italian export to ECO countries has been fast and steady since the beginning of the 1990s. In the early years of that decade the volume of export to this area was half of that to Germany. Instead, in 2006 Italian export to ECO countries amounted to approximately 41 billion EUR, exceeding the export to France and getting nearer to that of Germany (43 billion). Therefore, compared to the gap of about 25 billion EUR in 1995, there is now 45 40 35 30 25 20 15 10 5 0 19 9 1

19 9 2

19 9 3

19 9 4

19 9 5

19 9 6

19 9 7

19 9 8

19 9 2000

2001

2002

2003

2004

2005

2006

---- Germany ……. France -.-.-. Central Eastern Europe China Fig. 1. Italian export to some countries and areas: 1991–2006 (billion EUR) (source: Fondazione Edison processing on ISTAT data)

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only a difference of 2 billion between Eastern Europe, which is becoming the “new Germany” to our foreign trade and the “old Germany”. In 2006 Russia (7.6 billion EUR), Poland (6.8 billion), and Romania (5.5 billion) were in this order the three largest ECO markets for our enterprises, while Ukraine (+30%), Russia (+26%), and Bulgaria (+26%) were the countries with the highest growth rates. Table 1. Italian export in 2005–2006 by main geographical areas and countries (billion EUR) Main invoicing currencies (2005) World

2005

2006

% var. Absol. var.

299.9

327.0

9.0

27.1

EU-15

EUR

160.0

169.9

6.2

9.9

Germany

EUR

39.5

43.0

8.8

3.5

France

EUR

36.8

38.2

3.7

1.4

Spain

EUR

22.5

23.6

5.2

1.2

United Kingdom

EUR

19.7

19.8

0.3

0.1

Outside EU-15

139.9

157.1

12.3

17.2

ECO (Central and Eastern Europe)

EUR (higher than 90%)

34.5

40.9

18.6

6.4

OPEC

EUR (higher than 70%), dollar (about 25%)

12.1

14.3

18.2

2.2

EFTAa

EUR (higher than 80%), Swiss franc (10%)

13.0

14.3

10.0

1.3

China

Dollar (55%), EUR (45%)

4.6

5.7

23.9

1.1

United States

Dollar (higher than 60%), EUR (higher than 35%)

24.0

24.7

3.0

0.7

NICs Asia

Dollar (higher than 60%), EUR (38%)

7.6

8.2

9.1

0.7

Turkey

EUR (higher than 80%)

6.2

6.8

9.9

0.6

India

EUR (higher than 70%), dollar (about 25%)

1.7

2.2

29.3

0.5

Mexico

Dollar

2.2

2.6

18.2

0.4

Mercosur

EUR (2/3), dollar (1/3)

2.8

3.1

12.4

0.3

Canada

US and Canadian dollar (higher than 70%)

2.4

2.7

12.1

0.3

EUR (2/3), yen and dollar 4.5 (1/3) Source: Fondazione Edison processing on ISTAT and ICE data a Including Switzerland

4.5

1.1

0.0

Japan

In 2006 Italian export to ECO countries was seven times larger than export to China, which many consider, too optimistically, the new “Eldorado” for the “made in Italy”, while it is obvious – and we stress it again – that if any “Eldorado” for the Italian exporting companies exists, it should be found in the neighbouring and more promising Eastern Europe.


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That having been said, we will examine some specific aspects referred to Italian economy highlighted in the essays collected in this volume. Giorgia Giovannetti and Francesca Luchetti propose an interesting comparison between Italy and Germany concerning their trade relationships with Eastern Europe. The two countries are the main trade partners of PECO (including Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovenia, and Slovakia). In fact, 7.4% of the total goods imported by PECO comes from Italy (making Italy their third trade partner), while 21.2% comes from Germany (making Germany their first trade partner). Regarding their positioning towards PECO we can see a higher level of integration between Germany and Central European countries, such as Hungary, the Czech Republic, Slovakia, and Poland. This is due, besides historical reasons, also to the delocation of some production processes by German enterprises, concurring to modify the comparative advantages of these countries, which are developing an industrial structure more similar to the German model, shifting to medium–high technological production. In regard to Italy, a higher level of integration is undertaken with Bulgaria and Romania in traditional industries, such as textile, clothing, and footwear, consistently with the typical “made in Italy” production model. From these remarks made by Giovannetti and Luchetti we should not draw negative conclusions about the Italian methods of penetration to the East, because, although at the beginning delocation was driven by lower labour costs, the Italian delocated firms operate in different market segments, delivering both “traditional” Italian products (but of medium–high quality range) and other products, including intermediate goods. In this regard, we recall the cases illustrated at the conference and in the Italian version of this book in the essays by Marazzi and Fumagalli Romario.

6 Europe and the Enlargement to 25 and 27 The EU-15 enlarged to 25 members in 2004 including eight PECO countries the (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia, and Slovakia) and two more (Bulgaria and Romania) in 2007, thus becoming EU-27. This huge enlargement created a widespread debate about the impact on EU-15, assembling around three major streams: worry, optimism, and the wait and see. As far as we are concerned, we belong to the optimistic group, although we do not underestimate the serious concerns originated by the behaviour of Poland in the Brussels summit in mid-June 2007. The Polish opposition to Germany and eventually to the EU was unparalleled in the long EU history of conflicts and resistance to integration because the most profound reasons for the creation of the EU – to establish everlasting peace in Europe after World War II – had never been disputed. Regarding the EU enlargement’s risks, Guerrieri summarises the concerns as follows:

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x There could be a sort of crowding-out effect, as the new members’ export has increased significantly, but to the detriment of the Western enterprises’ products. x Foreign direct investments (FDI) to Eastern Europe have deprived many EU-15 enterprises of investments that were essential for the economic recovery of the “Old Europe”. x The so-called “Polish plumber syndrome”, that is, the fear for mass migration of low salary workers from Eastern Europe, highlights the risk of unfair competition to the prejudice of local labour. These worries are contested by Guerrieri, making reference to positive economic factors, which can be summarised as follows: x While PECO countries’ export increased, their import increased even more, generating significant trade deficit (thus, the EU exported more than it imported). This means that the “Old Europe” got net benefits from trade integration (although not symmetrically distributed, as some countries, e.g. Germany and Italy, benefited more than others). x Regarding FDI, it is reasonable to maintain that FDI to Eastern Europe amount to less than 10% of the total FDI carried out by Western European enterprises. Moreover, the fact that approximately 50% of FDI is directed at services operating in the local markets weakens significantly the supposed reverse relation between jobs created in the East and jobs lost in the West. x The Eastern European workers’ mobility has proven more limited than it was initially estimated, while one can maintain that it has produced positive effects in the destination countries, by eliminating some bottlenecks in the job supply and contributing to improved economic performances. Garonna supports this view, referring to a European Commission study on the operation of the temporary provisions for the access to the EU that shows moderate mobility flows between the ten new member states and the EU-15, insufficient to modify the prevailing conditions of the EU labour market. Furthermore, the abovementioned study adds that, on the contrary, the migratory flows following the enlargement contributed to boost the overall labour market performance, the sustained growth, and the improvement of public finance. “Thus, mobility has not been a restriction, but rather a great opportunity to enhance the positive results of enlargement”. We can add to these elements also Garonna’s remark on the structural funds assigned to the new member states (NMSs). A rather important contribution came from the funds to foster and support structural adjustment policies in candidate countries and to promote convergence of rules and standards. Instead, with reference to the funds for agricultural and social policies, the role they have played is doubtful, since, because of the transition clauses, the NMSs have enjoyed them only to a very limited extent in the first years. The EU agricultural and social funds are still mainly allocated to the old member states. […] The NMS public


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administration efficiency and effectiveness are still below the EU standard, therefore the effectiveness of the policies supporting the development is rather limited and probably low. A symptom of this is the great gap between the value of the funds applied for, that of the contracts signed, and the actual transfers to the final beneficiaries in those countries.

Besides the economic factors, it is worthy to consider also the political factors analysed by Garonna for illustrating – and contesting – the objections to enlargement: x The enlargement would cause a loss of efficiency and effectiveness of the European Union institutions. This argument assumes that a Union with a higher number of members works worse than one with a lower number of members, and that the improvement of institutional and administrative mechanisms is impossible to be achieved. x There would be an inevitable trade-off between economic integration and political integration, between enlargement and deepening of European institutions. Garonna points out that what is missing is actually the political will to develop the European Constitution further, driven by the jealousy of every single national state for its own competences and prerogatives. x The enlargement would lead to a loss of identity for Europe, a sort of erosion of internal homogeneity which could prejudice the sense of belonging and the solidarity ties. However, this event was always associated with each enlargement round. x The enlargement would question the power relations within the EU and, consequently, the role of the founding members. But this is not proved and, in any case, the enlargement strengthens the EU power to the outside. Garonna concludes that the enlargement was chiefly a momentous political action, more than an economic integration endeavour, although it has engendered positive economic effects. Timing, scale, and methods depended more on the rules of politics rather than on those of economics. Obviously, the political incentive (“meta-economic goal to join a community of prosperity, democracy, and stability”) took in a fundamental economic implication, as it allowed the policy makers to launch reforms (aiming at economic and financial recovering, liberalizations, etc.) which are often unwelcome, but are made acceptable by the prospect of the advantages following the entry in the EU. Finally, Garonna asserts that: The idea of Europe has demonstrated an amazing intrinsic strength, the ability to translate into a political proposal and a power of attraction and mobilization without equal anywhere else in the world. This “E Factor” is to be included among the reasons for the economic success of the enlargement, the power to attract and gain public opinion support, to enable structural changes […] the enlargement was a very effective highprofile political action, but it was not in opposition to the economy. Even more so, the political perspective of enlargement and the awareness campaign carried out by its leadership have created the basis for bold economic reforms, which is the main feature of high politics and good leadership.

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We share the above conclusions, although with some caution as regards timing and further enlargements. And with some concern too, for cases like the recent one of Poland.

7 The Economic Dynamics of the New Member States and Other Eastern Countries Although we do not intend to thoroughly examine the economies of PECO countries, it may be useful to recall some basic data, which prove that the abovementioned countries began improving their situation during the pre-accession phase, when the requirement to restructure the economic and institutional system to join the EU played a key role to leverage economic development. Despite the initial substantial delays, the eight new members from Central and Eastern Europe arrived at the beginning of 2004, the year in which they joined the EU, in an economic and social condition similar to that characterizing countries like Spain and Portugal when they joined the European Community. In the beginning, these countries showed positive results in terms of GDP growth. By briefly pointing to the data supplied by Guerrieri, we point out that PECO countries accounted for very high GDP growth rates over the last decade, and the growth dynamics of these countries fell behind that of Pacific Asia. In fact, considering GDP growth rates for 2005, that of Latin America amounted to 3.5%, Asia 6.1% and Eastern Europe 4.4%, of which 7–8% for the Baltic states and 5–6% for Slovakia. In contrast, in the same period the average growth of the EU-15 was slightly over 1%. The same progress is confirmed by United Nations Conference on Trade and Development (UNCTAD) data for the decade 1995–2004, with GDP growth rates marking a constant trend oscillating between 5.3 and 6.3% for the three Baltic states, from 3.7 to 4% for Slovakia, Slovenia, Poland, and Hungary and equal to 1.5, 1.9, and 2.4% for Romania, the Czech Republic, and Bulgaria, respectively. It is interesting to assess the same data for the years 2003–2004, immediately preceding the entry of these countries in the EU (except for Romania and Bulgaria, joining 3 years later). Taking as a benchmark the China GDP growth rate in the same period (9.5%), in Eastern Europe the lowest data is for Hungary (4.2%), while growth rates higher than 8% were registered in Latvia and Romania. Such a remarkable GDP increase was coupled with an overall improvement of the living standards, as per capita GDP increased as well, considering both the decade 1995–2004 (Table 2), when it increased equally or even more than GDP, and the years 2003–2004 (Table 3).


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Table 2. PECO: GDP, per capita GDP, and growth rates, 1995–2004 GDP (million $)

Czech Republic

Per capita GDP ($)

Growth rate 1995–2004 (%)

1995

2004

1995

2004

GDP

Per capita GDP

55,262

107,015

5,349

10,462

1.9

2.1 6.7

Estonia

4,365

10,984

3,017

8,227

5.7

Hungary

44,669

100,314

4,325

9,908

4

4.3

Latvia

4,890

13,623

1,958

5,876

6.3

7.1

Lithuania

6,392

22,006

1,762

6,391

5.3

5.9

Poland

135,905

241,592

3,521

6,265

3.8

3.8

Slovenia

20,019

32,182

10,193

16,359

3.8

3.8

Slovakia

19,402

41,092

3,617

7,607

3.7

3.6

Bulgaria

13,106

24,406

1,580

3,137

2.4

3.2

Romania

35,478

73,167

1,564

3,358

1.5

2

Source: UNCTAD Handbook of Statistics On-Line, 2005 Table 3. PECO: GDP, per capita GDP, and growth rates, 2003–2004 Growth rate 2003–2004 (%) GDP

Per capita GDP

Czech Republic

4.6

4.7

Estonia

5.9

6.4

Hungary

4.2

4.5

Latvia

8.5

9.1

Lithuania

7.1

7.5

Poland

5.3

5.4

Slovenia

4.6

4.6

Slovakia

5.5

5.5

Bulgaria

5.5

6.2

Romania 8.3 8.7 Source: UNCTAD Handbook of Statistics On-Line, 2005

This growth was promoted by an encouraging export performance, facilitated by the gradual breaking-down of most of the trade barriers between the EU and PECO. This allowed eight new members of EU-25 from Eastern Europe to record a significant growth in international trade in 2004. Relevant data mentioned by Garonna highlight an increase by 18.3% in imports and 21.6% in exports during the year after the enlargement, maintaining a sustained growth in the following years. This significant growth of trade flows was crucial for the development of the Eastern European economies, allowing them to start the catching-up process

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with the EU-15 economies. In this regard, Garonna estimates that catching-up with per capita incomes of EU-15 will, however, require some decades. Besides the boom of exports, the economic growth of these countries was supported by a large flow of foreign direct investments (FDI). According to data presented by Guerrieri, FDI flow in Central and Eastern Europe in the decade 1996– 2005 amounted to 144 billion dollars, contributing to the GDP of these countries with a value oscillating between 4 and 6%. In fact, according to Garonna: The high flows of direct foreign direct investment (FDI) in the EU new member states contributed to this growth. The FDI growth was particularly high in the Baltic countries. According to UNCTAD estimates, worldwide FDI flows reached 720 billion Euros in 2005, 29% more than in the previous year. For the NMS-8 the incoming flows amounted to 26 billion Euros, 23% more than in the previous year. This figure is unparalleled in the industrial and financial history of these countries, although, to be honest, they started from relatively modest levels in the Nineties.

Despite the status of member states of the EU acquired in 2004 (or 2007) and the successful economic performance described above, these countries still suffer a number of criticalities, revealing that transition is not yet completed and requires further effort to approach a stable development. Considering the dynamics of other countries which previously joined the EU, the catching-up of the economies of the NMSs with those of the EU-15 will become possible, mainly based upon labour productivity. This implies the adoption of appropriate policy measures, enhancing capital accumulation, and improving efficiency, that is to say, measures supporting market competition and openness to the other markets, including the measures enhancing further FDI flows and economy liberalization. Also, the expenditure for research and development and the investments for training and education have to be taken into account in order to ensure sustainable economic growth in the long term. Therefore, the NMSs have to proceed with the catching-up process – started in view of the access to the European Union – and dismiss obsolete activities in order to stimulate the modernization of their economies and to keep on attracting new FDI. According to Guerrieri, the priority areas of policy intervention are the following four: re-balancing public finances, restructuring and upgrading production structures, modernizing financial systems, and developing infrastructures. After examining PECO countries, it is necessary to analyse the so-called SEE countries: SEE 5 (including Albania, Bosnia Herzegovina, Croatia, FYRO Macedonia, Serbia and Montenegro) or SEE 7 (including also Bulgaria and Romania, which joined the EU-27 on January 1, 2007). During the 1990s, the countries of the Balkans were characterised by an extreme economic instability, certainly due to the condition of political instability after the dismemberment of Yugoslavia and the consequent conflicts. However, since 2000 these countries have shown an encouraging series of positive evidence, as indicated by the following data from UNCTAD. Similar to PECO countries, in the same decade 1995–2004, SEE 5 also recorded very high GDP and per capita GDP growth rates, though they must not be overestimated, considering the low initial levels.


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The best performance is that of Bosnia Herzegovina, with a growth rate for the two parameters of 11.7 and 9.7%, respectively, followed by Albania with 5.9 and 6%. The negative performance of Serbia and Montenegro is due to the fact that in 2001 the state suffered a severe economic crisis as a consequence of civil war (Montenegro became an independent state following the referendum on selfdetermination of May 21, 2006). Also, in the case of SEE countries FDI play a crucial role for economic development. According to Uvalic, during the last 3–4 years, despite the low global standard, FDI in SEE countries increased significantly, and it is reasonable to evaluate this trend as a sign of trust from foreign investors. The flow of FDI to SEE 5 during the period 2000–2005 amounted to 18.4 billion dollars, a figure that, according to Uvalic, is still relatively low if compared to the total flow to Bulgaria and Romania in the same period (equal to 24.7 billion dollars). Moreover, these two countries (be they recorded as PECO or SEE 7) attracted, together with Croatia, most of the investments (about 70% of total to SEE countries), which therefore appear very concentrated in a specific geographical area. In recent years, Serbia and Montenegro also attracted a significant share of FDI (4 billion dollars in 2006), but overall in the period 2000–2005 annual FDI to SEE 5 were still lower than 5 billion dollars. Despite this encouraging evidence, serious obstacles to development still persist in SEE countries. Significant shortfalls in the foreign balance of trade are coupled with a slow economic recovery from the recession of the 1990s. In fact, while the growth rates of per capita GDP are encouraging in the long-term prospect, in 2004 the average per capita income in absolute value of SEE 5 countries, as we can see in Table 4, amounted to only approximately $3,380; moreover, if we exclude Croatia (which in 2004 had a per capita income equal to $7,557), that average would decrease to $2,335. Clearly, these levels are still very low. Table 4. SEE: GDP, per capita GDP, and growth rates, 1995–2004 GDP (million $) Per capita GDP ($) 1995

2004

1995

2004

Growth rate

Growth rate

1995–2004

2003–2004

GDP

Per capita GDP

GDP

Per capita GDP

Albania

2,479

7,946

791

2,554

5.9

6.0

6.0

5.4

Bosnia Herzegovina

2,043

7,884

597

2,017

11.7

9.7

4.0

4.2

18,811

34,309

4,029

7,557

3.5

3.9

3.8

3.4

4,475

5,264

2,279

2,593

1.8

1.4

2.5

2.3

Serbia and 14,889 Montenegro

22,895

1,412

2,178

0.2

0.1

6.0

6.1

Croatia Macedonia

Source: UNCTAD Handbook of Statistics On-Line, 2005

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In addition, the social costs connected with the transition to a market economy in these countries have shown a remarkable worsening of some social indicators, aggravating both poverty and social inequalities. Thus, economic, structural, and institutional reforms are indispensable to enhance the competitiveness of these countries, to attract FDI, and to motivate the delocation of Western enterprises. Besides the policy institutions, a key role in facing these challenges is played by the banking sector, as illustrated in the second part of this volume. Institutions like the ECB and EBRD are crucial to promote more and more homogeneity within the existing institutional systems, a precondition to establish a favourable environment and an acceptable risk profile for private banks extending their activities in Eastern Europe. Some persisting criticalities have to do with the strong dependence on foreign aids and the heavy foreign debt still affecting some of these countries. Obviously the economic situation of these countries does not allow at present investment in GDP shares in R&D, which however is a key element to create the basis for sustainable and long-term development. Therefore, according to Garonna: […] medium- and long-term growth sustainability in these countries is not guaranteed at all. A possible crisis would negatively affect the financial and economic stability of Europe as a whole, including the EU, who cannot afford to have a large area with an uncertain future and considerable risks of economic and political involution at its borders.

In regards to this, the author talks about the benefits of “near-shoring”, that is to say: […] the fact that Europe is surrounded by relatively unstable areas with growth sustainability problems is […] a constraint to the strategies for modernization and internationalization of the European production systems. The European Union has therefore a primary interest in developing its adjacent economies, turning them into sales markets for its products and privileged areas for investment and decentralization of business processes. This interest is particularly high for countries like Italy, whose production system is based on small and medium size enterprises, and which shares borders with the Eastern (Balkans) and Southern (Mediterranean) regions that are mostly affected by the unbalances and tensions brought about by backwardness and instability.

In this perspective Garonna develops the concept of pan-European integration, integrating without enlarging and allowing creation of a large community of players who participate in a common project in a multilateral framework, exploiting Europe’s attractiveness without preventing EU progress and infeasible drifts.

8 A Conclusion on the Past and on the Future of EU-27 Finally, we should examine the EU political–institutional and economic uniqueness, because today EU-27 is a body which needs deepening and integration, not enlargements, as well as economic cooperation within the overall eastern and southeastern areas.


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Therefore, it is obvious to conclude our essay with two remarks: one regarding the re-launching of the European construction and the other a comparison between the EU and the United States – to react to the commonplace that the EU is structurally and irreversibly weaker than the United States. As a matter of fact, the EU reached and outstripped the United States in terms of GDP, which makes it the first economic power worldwide. It was also argued, inconsistently, that, on one hand, the EU is unable to make decisions and, on the other hand, that the enlargement, a huge decision, further aggravated this decisional weakness. This is the issue of “deepening” against “enlargement” mentioned above. The themes of EU reforms and those of its weakness compared to the United States are interconnected. In Italy there are various widespread beliefs on the EU positioning in the world. One, concerning economy, is that the EU has less growth and less influence than the United States. Another belief is that the United States dominate the internationalization and globalization process. A third is that the EU has few chances to “gain ground”, and these chances eventually lie only in the American “liberalist model”, or even in the Chinese–American model, as China has become a successful “model”, despite the fact that its totalitarianism constantly breaches human, civil, and social rights, and despite practices of product counterfeit, some of them even dangerous for the consumers, are often disclosed. A fourth belief is that if the European Union wants to regain a significant growth it has to strengthen its economic and trade relations with China and India, which are the real frontiers to global development. We think that these kinds of conclusions are too easy, because they do not take into due account evidence, meaning, and scope of the European building process, the typical European model of economic democracy, the great potential of Eastern Europe, and the fact that American liberalism is not continuous since often the United States are everything but liberalist in international trade. It should not be underestimated that the EU was and is successful in the past and at present. That is to be understood, in order to re-launch the European model, which requires more awareness and trust, instead of pretending that the EU be adapted to the US model. In one of his recent essays Alberto Quadrio Curzio 2 argued that behind the claimed structural and irreversible weakness of the EU compared to the United States, there is a lot of rhetoric. In fact, the EU has been lagging in growth rates for the past 15 years, especially because of the lower investment in research and development and in human capital, on which the dynamics of productivity and long-term growth heavily depend. It is also lagging in per capita income level. However, according to the Human Development Index of the United Nations, the EU is very close to the United States, while in foreign trade and FDI it is stronger. Regarding the euro, its strength is evident, contradicting the predictions about its failure. Therefore, while the EU has still much to “import”

2

Quadrio Curzio A (2007) Europe and the United States in the globalization test. Il Mulino, Bologna, p. 3.

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from the United States concerning investments in knowledge, its international economic positioning is very strong and its income distribution is far better. Furthermore, Eastern Europe represents a new frontier for the EU to strengthen its growth consistently with its profile and model. Though this does not mean aiming at further enlargements, the pan-European or similar approaches should be seriously considered. Being aware of that also means that now EU-27 has to focus on its integration. The EU has always proceeded with a sequence of economic–political goals with predetermined scheduling: the Euromarket from 1985 to 1992, the Eurocurrency from 1992 to 2001, and the Euroknowledge from 2000 to 2010. The achievements, although incomplete, were huge, and this confirms that the “European model” works fairly well, though it certainly needs to be improved. Quadrio Curzio asks the key question3: “Does Europe believe in its political– institutional and economic model?” To answer this question we should pay special attention to a historical political–institutional event celebrated in the first semester of 2007 under the German presidency of the European Council: the celebrations, which took place in Berlin at the end of March, of the 50 years of the Treaties of Rome. On this regard we recall Quadrio Curzio’s reasoning about the final declaration signed in Berlin on March 25, 2007. First of all, let us consider the institutional–political profile. It looks like a mixture of caution and utopia. In 50 lines a balance of the past 50 years is drawn up and the next 50 years (at least) are predicted not only for Europe, but probably also for the world. Conciseness is welcome, but to jump abruptly from 448 articles of the Treaty instituting on a Constitution for Europe reduced to 50 lines is really too much. The same can be said for the fact that in the Berlin Declaration, the Constitution, the Charter of Fundamental Rights approved at the European Council of Nice in 2000, and the Convention method are not mentioned at all. Certainly the so-called European Constitution was too complex and therefore it needed to be reformed. However, the fact that it is not mentioned at all is incongruous, because, after all, it was ratified by eighteen member states, rejected by only two, while the new members have not yet voted. Moreover, it is surprising that in the Berlin Declaration the reference to the European institutions is rather vague, that the categories characterizing the EU – such as “Community method and Intergovernmental method” or “Union of Peoples and States” – are not used, and that the principle of “subsidiarity” is not explicitly mentioned. In other words, it seems that the Berlin Declaration, although confirming the EU successes, wants to do it with the most neutral language, not to hurt anyone’s feelings, especially of those countries that, for various reasons, are on the “borders” of Europe, such as the United Kingdom and Poland, where a worrying nationalism seems to emerge. That is why the celebrations of the fiftieth anniversary did not eliminate skepticism in and on Europe; on the contrary, in many ways they emphasised it. It is a pity that the six EEC founding states did not give the Berlin Declaration the political–institutional strength that the occasion would have required, and 3

Ibidem.


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which is insufficiently summarised in the final sentence of the Declaration “we are united in our aim of placing the European Union on a renewed common basis before the European Parliament elections in 2009. For Europe is our common future”. The European political–economic model is instead emphasised in the Berlin Declaration as it states: We are facing major challenges which do not stop at national borders. The European Union is our response to these challenges. Only together can we continue to preserve our ideal of European society in future for the good of all European Union citizens. This European model combines economic success and social responsibility. The common market and the Euro make us strong. We can thus shape the increasing interdependence of the global economy and ever-growing competition on international markets according to our values. Europe’s wealth lies in the knowledge and ability of its people; that is the key to growth, employment and social cohesion.

We agree and we do not believe that the “weak and old” Europe is giving in. Many data confirm that confidence in the EU is well-grounded, thanks to the structural recovery in GDP and productivity growth, while the Lisbon strategy, which is much blamed, is delivering positive results, though different from one country to another, with Germany in first place. After the European Council held on June 21–22 in Brussels, many new institutional, political, and economic events occurred. We do not want to examine them but we must at least mention the most important for the EU, that is, the new Treaty signed in Lisbon on December 13, 2007, with which the Constitutional Treaty is abandoned and substituted by a new one. The new treaty will take time to be judged but we want to conclude here, accepting the face value of the declaration published on the official site of the European Union entitled “Taking Europe into the 21st Century” which states: Europe is not the same place it was 50 years ago, and nor is the rest of the world. In a constantly changing, ever more interconnected world, Europe is grappling with new issues: globalisation, demographic shifts, climate change, the need for sustainable energy sources and new security threats. These are the challenges facing Europe in the 21st century. Borders count for very little in the light of these challenges. The EU countries cannot meet them alone. But acting as one, Europe can deliver results and respond to the concerns of the public. For this, Europe needs to modernise. The EU has recently expanded from 15 to 27 members; it needs effective, coherent tools so it can function properly and respond to the rapid changes in the world. That means rethinking some of the ground rules for working together. The treaty signed in Lisbon on 13 December 2007 sets out to do just that. When European leaders reached agreement on the new rules, they were thinking of the political, economic and social changes going on, and the need to live up to the hopes and expectations of the European public. The Treaty of Lisbon will define what the EU can and cannot do, and what means it can use. It will alter the structure of the EU’s institutions and how they work. As a result, the EU will be more democratic and its core values will be better served. This new treaty is the result of negotiations between EU member countries in an intergovernmental conference, in which the Commission and Parliament were also involved. The treaty will not apply until and unless it is ratified by each of the EU’s 27

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A. Quadrio Curzio and M. Fortis members. It is up to each country to choose the procedure for ratification, in line with its own national constitution. The target date for ratification set by member governments is 1 January 2009 – some months before the elections to the European Parliament.

We conclude that the “European model” is working but it needs to be improved rather than dismantled.

9 Final Remarks and Acknowledgments This volume is the main outcome of the international conference Eastern Europe, the EU and Italy: Towards Strategic Connections held in Rome, 30–31 March 2006 and organised by the Fondazione Edison and the Accademia Nazionale dei Lincei. The conference was introduced by Giovanni Conso, President of the Accademia Nazionale dei Lincei and by Umberto Quadrino, President of the Edison Foundation. The conference was organised in four sessions, whose themes, topics, and major conclusions are here briefly summarized. Session 1. The progress of economy and of the institutions. In this session, chaired by Alberto Quadrio Curzio, the following research papers were presented: Production Relocation, Productivity Dynamics and Competitiveness in the Wider Europe, by Michael Landesmann, Scientific Director of the Vienna Institute for International Economic Studies; Cooperation and Integration in the “Greater Europe”: The Challenges to the European Union and Italy, by Paolo Garonna, Deputy Executive Secretary of the United Nations Economic Commission for Europe; and The Economic Dimension of the Enlargement and the Challenges to the EU-25, by Paolo Guerrieri Paleotti, Professor of Economics and Director of the Centre of Research on International Economy (CIDEI) of the University of Rome “La Sapienza”. In this session the theme of the EU enlargement was tackled from different points of view, all aware that the biggest enlargement of the European Union ever implemented in one shot (ten new member states, eight of which were from Eastern Europe, with a population increase up to almost 100 million) disclosed challenges, opportunities, and problems with different temporal scales, including the long term. Among the various relevant ones, we mention three profiles: the enlarged EU per se, as a new economic entity; the relationships between the fifteen EU members and the new and the new accession countries; and the relationships between the enlarged Europe and the rest of Eastern Europe. What emerged was an overall view of aware optimism, not underestimating the integration problems due both to different development levels and to the typical institutional adjustment of the countries that returned to democracy only 15 years ago. Session 2. The economic, industrial, and trade interconnections. In this session, chaired by Marco Fortis, the following presentations were included: Dynamics of Trade Exchange and of Foreign Direct Investments between Italy and Central– Eastern Europe, by Giorgia Giovannetti, Professor of Political Economics at the University of Florence; The Role of Entrepreneurs for the Democratic Development


23

of Countries in Eastern Europe, by Oliver Pfirrmann, Professor at the Free University of Berlin; The European Enterprise of General Interest: A Tool for Balanced Development from the Atlantic to the Urals, by Dario Velo, Professor of Economics and business management at the University of Pavia; Eastern Europe in the Internationalization Process of Italian Enterprises: The Case of Marazzi Group, by Filippo Marazzi, President of Marazzi Group S.p.A.; and Southeastern Europe Integration and the International Business Community, by Aldo Fumagalli Romario, Chairman and Managing Director of Sol Group and former Chairman of BAC (Business Advisory Council) for the Stability Pact for Southeastern Europe. This session focused especially on the role of entrepreneurship, of foreign trade, of foreign direct investments as a tool to boost growth in the EU-15 and in the new member states, as well as in the whole EU-25 compared to the third countries. Among the various analysed aspects we point out three: the role of the enterprise as a tool for integration, including the social–institutional one; the role of business community in the development of Southeastern Europe; and the trade and business connections between Italy and the new members and Eastern Europe. We could say that this session had a “theoretic” approach about the role of the enterprise as agent of development, and an “applicative” approach, emphasizing the advantages for Italy to develop trade and industry to the East. Session 3. The economic and technological interconnections in the transition process. In this session, chaired by Edoardo Vesentini, the following presentations were included: Central and Eastern Europe, Integration Prospect for Industrial Upgrading, by Slavo Radosevic, Professor at the School of Slavonic and East European Studies, University College of London; Integrating the Balkans with European Union, by Milica Uvalic, Professor of Economics, University of Perugia; Catching-Up and Integration: The Next Steps, by Eric Berglof, Chief Economist and Special Adviser of the European Bank for Reconstruction and Development (EBRD); and Modernization of Research Infrastructure Towards PanEuropean Vision 2025, by Andrzej B. Legocki, President of the Polish Academy of Sciences. Also in this session various themes were tackled, and the one concerning technology and science paid particular – though not comprehensive – attention to two aspects: the upgrading of industrial technology in the Eastern countries and the creation of a pan-European area based on science and technology. However, it was clear that, in the transition underway, the economic processes take the lead over the scientific–technological ones. In other words, while in the developed countries the interplay between science–technologies–enterprises expands across a circular process, in the Eastern countries – where basic science has always been top level – the challenge is the strengthening of the production structure more than the technological transfer from science to industry. On that ground, the option for this volume was not to encompass the interconnection between science and technology; although it was addressed in an excellent way during the conference it would deserve a deeper investigation in separate circumstances. Session 4. The banking, financial, and monetary interconnections. In this session, chaired by Carlo D’Adda, the following presentations were included: The

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Role of EBRD in the Transition of Banking and Financial Systems, by Fabrizio Saccomanni, Director General of the Bank of Italy and former Vice President of the European Bank for Reconstruction and Development London; The ECB and the Integration of Eastern Europe, by Gertrude Tumpel-Gugerell, Member of the Executive Board of the European Central Bank; and The Role of the Italian Banking System in Eastern Europe: The Unicredit Group Case, by Alessandro Profumo, Managing Director of Unicredit Group. In this session three different and complementary themes were analysed. First, the financial, industrial, and infrastructural reforms funded by the EBRD in Eastern Europe were reviewed. It was confirmed that the state/s (EBRD) played a key role in promoting economic and financial innovation in the transition of the Eastern European countries to the market: a clear sign that the public nature of the operators may be crucial when big policy interventions take place. Second, the monetary policies of the ECB, proving that the European Central Bank autonomy and its approach to the protection of price stability represent a model for both the integrated Europe and for the countries outside Euroland. Finally, in the debate it also emerged that the euro has already a significant impact on Eastern Europe, highlighting that the Euro area is much wider than Euroland and that the euro has become an essential tool to ensure enlarged markets to national commercial banks’ locating in Eastern European countries. By expanding its banking system to Eastern Europe, Italy played a significant role, ranking as the main European country in the new accession countries. The conference was coordinated by Alberto Quadrio Curzio and Marco Fortis, supported by a scientific committee established by Accademia dei Lincei composed of some members of the Class “Moral, Historical and Filological Sciences” (Carlo D’Adda, Angelo Falzea, Giancarlo Gandolfo, Aldo Montesano, Alberto Quadrio Curzio, Rodolfo Sacco), and of the Class “Physical, Mathematical, and Natural Sciences” (Sergio Carrà and Edoardo Vesentini), and by the Vice-President of the Fondazione Edison, Marco Fortis. The conference structure, as well as this volume, follows a paradigm which has been tested various times by Fondazione Edison, also in its collaboration with the Accademia dei Lincei: that is to say having speakers and authors of three different competence areas: scholars, officials of international or European institutions, and entrepreneurs or executives from industry and banking. The reason for this choice is the conviction that without any dialogue and mutual, even lexical, understanding among these categories, it would be arduous to find ways of collaboration in economics between sciences, technology, institutions, and enterprise. When dealing with economic issues, nobody can lock into the ivory tower of a bounded selfsufficient competence. Therefore, we disagree with those economists who pretend to instruct the entrepreneurs or the politicians or the civil servants on the basis of economic theories; we disagree as well as with those previously quoted who consider the economic sciences totally useless to make business. Also for the ability to nourish such an interaction the conference was a real success concerning speakers, presentations, and audience. But, as it often happens, the structure of the conference and that of the volume are not the same, due to


25

some deadline lags between conference presentations and available papers for publishing, which normally occur in the actual circumstances of time constraints. Furthermore, the English version published here is different in some respects from the Italian one concerning two news essays. Thanks are due to Patrizia Fariselli for her valuable help in the English elaboration of this introduction.

The Economic Goals of the Enlargement and the Challenges to the 27 EU Countries

1

P. Guerrieri

1 Introduction The common approach of European citizens to the entry of new member countries into the European Union has profoundly changed in recent years, with the prevalence of reactions of growing disillusionment if not open hostility. The same negative result of the referendums on the constitutional treaty in France and Holland in 2005 was mainly attributed to the difficulties and fears related to the recent process of enlargement of the Union from 15 to 25 countries. In many important European countries such as France, Austria, and Germany only a minority of citizens now continue to be in favour of further enlargement of the Union. This sentiment of refusal was above all fuelled by the widespread perception that the enlargement has asymmetrically favoured the new countries that have been able to exploit the low costs and their economic/social backwardness, thus transforming the process into a zero-sum game for the 15 countries. In my contribution I would like to rebut this widespread argument by sustaining that the enlargement has actually produced very positive results overall for all the member countries even if asymmetrically distributed within Europe. The widespread anxieties and fears thus to a great extent appear unfounded and determined by other causes. Those related to the disappointing performance of many European countries in the first part of the present decade, which is reflected in extremely low growth and high unemployment, should be mentioned first. These are negative trends that preceded the enlargement and which were then unduly attributed to it. In reality the economic potentialities of the enlargement remain broad and are still to be exploited. Not only and not just in terms of commercial integration, but with reference to the deepening of the internal European market and changes in the production specializations of the individual countries. In order to gather these fruits, changes and reforms are necessary both in the new countries and in the 15 that in many ways coincide with those necessary for the re-launching of Europe’s medium-term growth potential and be able to positively respond to the great challenges of the global economy.

1 This paper is a translation of an article published in a volume of the Fondazione Edison series, L’Europa allargata, l’Est e l’Italia. Le politiche, l’economia, le imprese, il Mulino, Bologna, 2007.


29

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P. Guerrieri

2 Positive Performance and the Pre-Accession Countries (PECO: the Countries of Central and Eastern Europe) From an economic point of view, enlargement can be defined as a success in many aspects. Many data and figures could be quoted in support of this assertion. It will suffice here to make reference to some evidence. In the first place, this can be done by underlining how candidate countries have achieved significant structural adjustments in the years preceding their official entry into the European Union. Many new countries, though discounting initial dramatic delays, entered into the Union in social/economic conditions very close to those characterizing the entrance of other member countries in the past, such as Spain and Portugal. A confirmation of these positive structural changes is the economic performances of the transitional economies, which have recorded truly positive results in the last few years both in terms of GDP growth and exports, above all if compared with those of other emerging countries and areas in the same period. Eastern Europe’s growth dynamics, after those of Pacific Asia, were the most sustained at world level, higher than those of other emerging areas (Table 1). Table 1. Growth in emerging areas, real GDP (annual growth rate) 2000

2001

Latin America

3.8

0.6

Asia

6.4

5.1

Eastern Europe Source: Consensus

3.9

3.0

2002

2003

2004

2005

0.6

1.6

4.6

3.5

5.9

5.8

6.6

6.1

2.7

3.5

4.6

4.4

The Baltic countries have registered rates that fluctuated between 7 and 8%, the Slovak Republic between 5 and 6% in recent years, and the other Eastern European economies have all notably accelerated their growth trend in the more recent period (Table 2). One should also be reminded that in the same years the EU-15 growth suffered a clear slow-down, remaining at little above 1% on average. Table 2. Eastern European countries, real GDP (annual growth rate) 2000

2001

2002

2003

2004

2005

Poland The Slovak Republic

4.1

1.1

1.2

3.8

5.5

3.8

2.0

3.8

4.6

4.5

5.5

6.0

Hungary

5.1

4.3

3.8

3.4

4.6

4.2

Czech Republic

3.0

2.6

1.5

3.2

4.7

4.9

Romania

1.5

5.7

5.1

5.2

8.3

4.2

Bulgaria

5.0

4.1

4.8

4.5

5.6

5.4

Baltic countries Source: Consensus

7.8

7.0

6.8

8.5

7.7

8.3


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The performances of the new member countries have also collected truly encouraging results on the exports front. The elimination by the EU and PECO of most trade barriers favoured, during the course of the 1990s, an export boom for the Eastern European countries that strongly contributed to the recovery of the entire region. Thus in the 1994–2004 decade, Hungary’s exports increased by over five times, those of the Slovak Republic, Poland, and Czech Republic four times on average, and Slovenia more than doubled its exports (Fig. 1). This significant increase in exports was accompanied by a large inflow of foreign direct investments (FDI) into Eastern Europe originating from the developed area and specifically the 15 EU countries. This inflow in this last decade very much exceeded the expected values related to the effective income levels, size of the markets, and relative proximity of the individual countries involved. The FDI flows were strongly concentrated in both geographic and sectorial terms (Table 3). About 144 billion dollars flowed into the Central European countries from the mid-1990s up to the middle of the current decade, particularly rewarding some countries such as the Czech Republic and Hungary (see Table 3), thus becoming primary sources of saving and foreign currency.

Fig. 1. Export performance of the PECO (source: Computations from WTO figures)

The FDI have also contributed to the increase in the productive capacity of PECO in varied manufacturing sectors (such as mechanical, electronics, and pharmaceuticals) rather than in many services. I will dwell on the latter point later.

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P. Guerrieri Table 3. Direct foreign investment inflows to Eastern Europe $ millions 1996–2000

Central Europe

Years

Total

% of the GDP

2001–2005 1996–2005 1996–2000

2001–2005

12.9

16.1

144

4.4

The Slovak Republic

0.7

1.6

11.5

3.5

4.0 6.9

Hungary

2.0

2.0

20

4.4

3.0

Czech Republic

3.4

4.9

41.5

6.4

6.9

Poland

6.5

6.9

67

4.3

3.2

Slovenia Source: EIU

0.2

0.6

4

1.3

2.4

3 The Anxieties and Fears of the 15 If the above figures confirm the relative success so far of the enlargement process, at least from an economic point of view, the perceptions on this event of the EU’s 15 countries’ citizens are currently very different. As previously stated, anxieties and fears are widespread and continue to prevail. The costs of the enlargement are accentuated more than the benefits. They think, above all, that the positive results achieved to date by the Eastern countries have occurred prevalently at the expense of old Europe. In this regard, it is useful to make a list of the more widespread convictions. Firstly, that the new countries’ exports have increased thanks to the very much lower social costs of the countries of origin. The second is that the foreign direct investments have diverted to the East, in search of much more convenient salaries and labour conditions, i.e. many vital investments from the 15 countries transferring Old Europe’s employment to those areas. Furthermore, mass migrations from the new countries and unfair labour competition are hypothesized. As one recalls, the fear evoked in France by the arrival of the legendary “Polish plumber” at the beginning of last year caused the shelving, and then complete distortion, of the European Commission directive on the liberalization of services. Definitively the enlargement is seen as a typical zero-sum game, where, as we know, the gains of some players (the new members) come entirely at the expense of the others (the initial 15). These are actually excessive concerns, which are scarcely founded. And in many cases it is not difficult to show it. It is first and foremost the case of the PECO trade results. As can be seen from Fig. 2 these countries have exported to a great extent but have imported to a still greater extent, accumulating very significant and growing trade deficits.


33

Fig. 2. PECO: trade flows (source: IMF, WTO)

A good part of these deficits was translated into corresponding surpluses of the 15 EU members, which have therefore exported more than they imported from the East. The commercial integration has thus had net positive effects so far for the Old Europe, even taking into account the price decrease deriving from the Eastern imports and the consequent benefits for consumers in the EU-15 area. However, these gains were not symmetrically distributed within the Union, but were concentrated in some countries (Germany, for example) and penalized others (as in the case of Portugal). As to the FDI the evidence is more difficult to collect and evaluate. Also in this case, one can nevertheless point out that the foreign direct investments towards the East are only a minimum part (less than 10%) of the total FDI of the enterprises of Western Europe. Furthermore, diverse studies have demonstrated that, in the majority of cases, there is no direct relationship between jobs created by the FDI in the East and those lost in the West. Indeed it should be clarified that about half of the FDI is made in the services area with the purpose of satisfying local demand and consumption; finally, with regard to the manufacturing FDI the results are more ambiguous but certainly are not offering valid support to the anxieties recalled above. With regard to the feared mass migrations, a European Commission documented report has shown that the mobility of the PECO workers to the EU-15 was much more limited with respect to the early apocalyptic estimates, and in general has had positive effects upon the countries involved easing labour supply constraints and positively contributing to economic performances in general. Thus,

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P. Guerrieri

those countries that have not applied restrictions on migratory flows (United Kingdom, Ireland, and Sweden) have experienced higher growth and simultaneous reductions in the rates of unemployment. Finally, if one looks at the overall costs in terms of the EU’s budget stemming from the enlargement of the EU-15, fears were also not supported in this case, as in the period from 2003 to 2006 the additional costs amounted to a very modest 0.1% of the Union’s total GDP.

4 The Disappointing Performance of the EU as the Basis of the Widespread Anxieties Other figures and evidence could be offered to demonstrate that the enlargement has had overall positive net economic effects to date and many of the more recurring anxieties in the 15 countries of the Union are largely unfounded, at least from an economic point of view. But the fears are a fact, widespread in Europe today and therefore should be explained. A possible explanation is that their causes are related to other events and can be traced both in the poor economic performance of the European countries and in the connected anxieties about globalization that have accompanied these negative trends. Both are phenomena that preceded the enlargement and which have only very indirect links with it. The low growth and high unemployment that, from the mid-1990s up to mid2000, have characterized many European countries and, in the first place, the large continental economies can be considered as the determining factors of these widespread fears, which were then diverted towards the new member countries, associating them with the negative trends and economic difficulties. In fact, the present economic recovery that has been in progress in the European Union since the end of 2005 must not play down the problems and difficulties still to be faced in Europe and that have strongly decreased its growth potential during these years, both compared to the past and to other advanced countries. And at the root of this disappointing performance there are above all long-term structural factors. Three sets of factors have been offered in the literature to explain the modest economic performance of the EU over the past decade (1) market rigidities: scarce flexibility of the labour market, (2) macroeconomic policies: restrictive monetary (ECB) and fiscal (GSP) policies, and (3) a technological gap: inadequate adjustment to the new growth paradigm (ICT model). Actually, the role of macroeconomic policy in enhancing the competitive position of Europe in the near future has to be scaled down. The main challenge is microeconomic. But also structural factors did play a predominant role in the slow-down in economic growth of Europe. The European economies, with a few exceptions, have not been able to adequately adapt to the new growth paradigm based on the ICT technologies characterizing globalization processes. Conversely, the US economy has been growing


35

faster in the more recent period because it adapted better and faster to the new growth model, thanks to its markets, institutions, and norms which allow full exploitation of the new opportunities. As much evidence makes clear, the European economy has not performed satisfactorily in meeting many of the key challenges of the new paradigm over the past decade. At the macroeconomic level, it has been characterised by relatively low growth and high unemployment (Table 4); while in many areas, Europe has not kept pace with the technological advances of competitors and seems to have lost its dynamism. It is true that the EU has been characterised by different heterogeneous performances at the level of individual member countries in the last decade, with a few relatively successful stories (see Scandinavian economies). But common difficulties have penalised mostly large European continental countries in terms of disappointing rates of innovation and poor employment creations, that are mainly related to Europe’s failure to take sufficient advantage of the far-reaching changes that have taken place in the world economy, such as technological advances, particularly in the area of services and the information and communication technologies (ICT system). Table 4. Low growth in Europe (% growth rates) 1951–1972 1973–1982 1983–1992 1993–2002 2001–2005 EU United States Japan

4.8

2.3

2.4

2.1

1.2

4.0

1.9

2.0

1.8

0.9

3.9

2.4

3.4

3.2

2.5

2.4

1.3

2.4

2.0

1.6

9.4

3.8

3.9

1.0

2.0

8.1

2.7

3.4

0.7

1.5

Source: EU, IMF

In the light of these structural difficulties I think that it is obviously important to re-launch European growth (and I will return to this later), but also to counter these false perceptions about the enlargement by spreading the information on its real impact.

5 Future Benefits of the Enlargement Another common statement is that the economic weighting of the new countries is insignificant and that they will contribute to increasing the EU’s gross domestic product to an exceedingly modest extent, a scarce 4.5%. It is absolutely true. However, the overall economic impact of the enlargement is destined to be much deeper than perceived from these numbers. It may favour, in the European area,

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P. Guerrieri

restructuring processes, relocalizations of production, and development of new services capable of expanding and further modifying the single European market. In this regard, the potential economic benefits of the enlargement can be grouped into the following three large combinations: 1. The opportunity for trade integration between the old and new EU members following the liberalization and market transformation processes of the Eastern countries 2. The efficiency gains deriving from greater competition, larger economies of scale, and differentiations of production related to the enlarged size of the single European market (so-called Emerson effect) 3. Deepening of the productive/technological specializations and intensification of the restructuring/delocalization processes following the push towards productive integration between Eastern and Western Europe (so-called Baldwin effect) While the reallocation of trade flows between European countries, consequent to the first order of effects, is capable of provoking positive but limited effects – and largely these benefits have already been mainly achieved during the 1990s – the second order of effects related to the deepening of the single European market is much more significant, and so are the effects that might derive from the restructuring/re-conversion processes with their medium/long-term impact on the accumulation and growth of the entire European area. Thus, enlargement is an opportunity to upgrade production specializations in Europe.

6 The Role of Foreign Direct Investments and the Fragmentation of Production An important role in the expected restructuring and upgrading production processes will continue to be carried out – as has been to date – by the FDI originating from the advanced countries and specifically from Western Europe funnelling towards the East. The benefits of the enlargement to the EU-15 are related, as already underlined, to the increase in the size of the single European market and the role of new member countries both as potential market outlets and as places where economic activities can be delocalised to lower costs and increase efficiency of the value chains. The new demand for goods that will occur by the new members following development of infrastructures, further liberalization of production, and convergence of the regulatory systems should therefore be viewed as a great opportunity for the EU-15 enterprises. Above all, the market opportunities for consumer goods will grow intensely. At the same time the Western European firms must continue to invest in the new areas – equally to that which has occurred to date – to buy existing firms and create new ones. About half the EU investments to date in the new member countries


37

are directed to services (banks, department stores, and hotels). A minor part but equally significant was invested in manufacturing plants in sectors such as motor vehicles, clothing, electronics, and chemicals. And this share of FDI grew notably more recently. With regard to the future sectorial composition of FDI, one could assume that the EU-15 enterprises will continue to invest even less in high labour intensity sectors (clothing, light mechanical) and more in medium to high qualified labour areas. By transferring part and/or some production phases to Eastern Europe – exploiting fragmentation processes taking place at the European and global levels – the Western European firms could maintain strong competitive positions on a global scale and continue to expand their domestic markets. It should be pointed out that the production integration of the two shores of Europe could succeed in creating a virtuous circle of increasing investments, production upgrading, and economic growth. There is also no doubt that FDI will continue to have positive effects on the economic performance of the new members in terms of: technological transfers and advanced managerial know-how, various spill-over effects amongst firms, increases in competitive pressures and stimulus for productivity, and increasing savings and foreign currency inflows. It is in light of these prospects that the enlargement can be taken as a win–win game and not relapse, therefore entering into the typology of the zero-sum games.

7 Needed Reforms in the Eastern Countries In order that this process of gradual integration can fully provide the expected benefits, structural changes are required both in the new countries and in the original EU-15. The size of the effective net benefits will depend on the strategies and adjustment policies that will be put into place by the EU countries over the coming years. The entrance into the European Union certainly represents a significant opportunity for new member countries – but certainly not a guarantee – to increase their per capita income. In 2005 the per capita GDP of the PECO was 52% of the EU average if measured at purchasing power parity and about 30% if measured at current exchange rates. Even in the most favourable scenarios the catching up to the per capita of the EU-15 will require a very long period of time, from three to six decades, and this is provided that there are favourable conditions both in terms of policies adopted by the new countries and in terms of the EU’s overall evolution. In fact, the enlargement should be considered as a process that started over a decade ago but was certainly not concluded in May 2004, as decisive challenges will face the European Union in the coming decades. The economic growth of the PECO was above all led in the past by the increases in labour productivity. Now the experience of other member countries demonstrates that for a positive catch-up process both the productivity and

38

P. Guerrieri

employment rate variables are important. Considering the unfavourable trends of the PECO from the demographic viewpoint, it will above all be the labour productivity that will play the most important role in the future of these countries. As we know labour productivity depends above all on capital accumulation and technological change. Thus policies that favour competition and openness, including those measures directed at deregulating the economy and attracting new FDI, could play a very important role in sustaining a rapid productivity growth rate. Direct measures to increase the quantity and quality of the domestic R&D expenditure, together with those directed at improving education, are also very important. The new members must therefore continue their convergence processes, dismantling activities that have become obsolete, attracting new foreign investments and accelerating that catching-up process with the old EU members that is already progressing. The following four interventions have particular importance (1) rebalancing public finances, (2) restructuring/upgrading production structures, (3) modernization of the financial systems, and (4) development of the infrastructures. To summarize, the catching-up process of the new countries should be achieved by a productive/technological restructuring and further consolidation of FDI inflows. The growth experiences of other less developed countries suggest that a catching-up process is possible when there is a reallocation of resources to more profitable sectors and activities. In order to favour this reallocation, reforms in the new member countries should continue. If these countries want to achieve effective convergence in the next decades there are still many issues to be implemented, with particular reference to both full participation in the single European market and the adoption of the euro.

8 Challenges to the 27 Member EU The future challenges of the enlargement, in terms of necessary reforms and appropriate structural changes to be implemented, obviously also concerns the 15 member countries and the Union overall. The most important economic problem is represented by the low growth at present. In the next 5–10-year period Europe must raise the rate of economic growth to its potential (2%) but, most of all, it must raise its potential growth around one annual percentage point by getting closer to the US standard (higher than 3%). Higher growth is needed in Europe to face the three big challenges ahead (1) adjustment to the new technical/growth paradigm, (2) Europe’s aging and the consequent welfare system reform, and (3) enlargement of the EU. It is an ambitious target that requires efforts at two levels: a significant increase of economic resources available for growth (skilled labour, human and physical capital, research, etc.) and a significant modification of the allocation mechanisms, either public or private, to better exploit available economic resources.


39

Now the two pillars of a strategy to re-launch the EU’s growth process could be represented by the completion of the internal market, on the one hand, and by the re-launch of the investments in R&D and innovative activities on the other hand, to place the latter within an adequately revised Lisbon strategy. In the first place there is no doubt that implementation of the Single Market (SM) will have positive effects, mainly in the service sectors. In particular, the completion of the internal market could accelerate and accentuate the effects of real market integration in Europe, thereby reinvigorating European production and innovation systems through the exploitation of technology and dynamic economies to scale. Thus, one could foresee profound reallocation and concentration of resources across all European countries, stimulating the emergence of new specializations at the European level. Particularly high-tech products and knowledgebased services will be affected, and the most advanced regions and areas of Europe will be favoured due to strong agglomeration effects. Further liberalization of the internal market could have very positive effects, especially in the services sector that is still excessively fragmented and protected at the European level. Liberalization of services and their integration at the European level is a fundamental step to be achieved for higher economic growth in Europe. The recent approval of the so-called Bolkestein directive is a positive fact that did happen – as we know – by removing a large part of its original contents. Therefore one cannot accept what has been achieved so far. One can think of a selected group of member countries in the future that can decide to go beyond and do more in this area. However it is doubtful that such restructurings will suffice to reverse the discomforting trend of the European economy, particularly in terms of information and communication technology. In fact, the effective management of Europe’s human capital is central to meeting the new challenges of the knowledge-based economy. But also institutions should be modified and improved, such as the corporate governance, to increase the propensity to innovate firms. And these market reforms could and should reinforce one to another. Externalities greatly affect competitiveness in these sectors; hence, these structural changes are needed like those which are at the centre of the so-called “Lisbon strategy”, which has functioned very badly to date. Seven years after its launch, the central objective of transforming the EU “into an economy based on the more dynamic and competitive knowledge in the world” appears increasingly far away. In this connection the performances of the individual countries are strongly differentiated. Three Northern European member countries are placed at one extreme – Denmark, Sweden and Finland – and have de facto achieved many of the Lisbon objectives. At the other extreme the three large continental economies – France, Germany, and Italy – are still very much behind and have done exceedingly little to change their structures. Unless there is an acceleration of the reform efforts it is the entire EU that risks being severely penalized. The validity of the Lisbon agenda should in any event be reaffirmed. It remains an effective instrument both for improving European competitiveness and to guarantee maintenance of a good level of social cohesion. The success of the

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P. Guerrieri

Scandinavian countries confirms this. It also demonstrates the concrete possibility of achieving the Lisbon objectives. The problem of how to increase the necessary pressure on the individual countries in order to move ahead with the structural changes required, particularly at local level, remains in any event. In this connection, the coordination mechanisms at the EU level should be reinforced and the incentives for change modified, as they are still too bland and generic today. Finally, and to conclude, the reforms to be implemented to get the future benefits of the enlargement are also needed to revive the European growth potential and respond positively to the new growth paradigm. Only in this way will it be possible to transform the enlargement into a positive game, countering and overcoming the fears and anxieties prevalent in Europe today.

Recommended Reading Aturupane C, Djankov S, Hoekman B (1999) Horizontal and vertical intra-industry trade between Eastern Europe and the EU. Weltwirtsch Arch 135:1 Baldwin R, Francois J, Porter R (1997) The costs and benefits of enlargement: the impact on the EU and Central Europe. Econ Policy 24 Bevan A, Estrin S (2000) The determinants of foreign direct investment in transition economies. Working paper no. 342. Centre for New and Emerging Markets, London Business School, London Brenton P (1999) Trade and investment in Europe: the impact of the next enlargement. CEPS, Brussels Brenton P, di Mauro F (1999) The potential magnitude and impact of FDI inflows to CEECs. J Econ Int 14:1 Breuss F (1999) Costs and benefits of EU enlargement in model simulations. Working paper no. 33. Research Institute for European Affairs, University of Economics and Business, Vienna Buiter W, Grafe C (2002) Anchor, float or abandon ship: exchange rate regimes for accession countries. CEPR discussion paper no. 3184, London Campos N (2000) The growth prospects of transition economies reconsidered. Zei working paper no. B00-13. Center for European Integration Studies, Bonn CEPR (2002) Who’s afraid of the big enlargement? CEPR policy paper no. 7, London Daianu D (2002) Is catching up possible in Europe? Rom J Eur Aff 2:1 ERT (2001) Opening up the business opportunities of EU enlargement. ERT position paper and analysis. European Round Table of Industrialists, Brussels European Commission (2001) The economic impact of enlargement. DG ECFIN enlargement paper no. 4, pp. 1–64 European Commission (2002) Enlargement and agriculture: successfully integrating the new member states into the cap. SEC issues paper, 30 January 2002 Frandsen S, Jensen H, Vanzetti D (2000) Expanding fortress Europe: agricultural trade and welfare implications of European enlargement for non-member regions. World Econ 23:3 Fujita M, Krugman P, Venables A (1999) The spatial economy. MIT, Cambridge, MA Fuller F, Beghin J, Fabiosa J, Mohanty S, Fang C, Kaus P (2002) Accession of the Czech Republic, Hungary and Poland to the European Union: impacts on agricultural markets. World Econ 25:3 Halpern L, Wyplosz C (2001) Economic transformation and the real exchange rates in the 2000s: the Balassa/Samuelson connection. Economic Survey of Europe, UN-ECE, Geneva, pp. 227–239


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Head R, Mayer T (2000) Non-Europe: the magnitude and causes of market fragmentation in the EU. Weltwirtsch Arch 126:2 Kaminsky B (2001) How accession to the EU has affected external trade and foreign direct investment in Central European economies. World Bank working paper, Washington, DC Lejour A, de Mooij R, Nahuis R (2001) EU enlargement: economic implications for countries and industries. CPB document no. 011, CPB Netherlands Bureau for Economic Policy Analysis 24, The Hague McKinsey C (2002) Business consequences of EU enlargement, major change or non-event? Report for the European Business Summit, Brussels Nielsen J (2000) Price–quality competition in the exports of the CEECs. Intereconomics 35(2):94–101 OECD (1998) The competitiveness of transition economies. Proceedings in cooperation with WIFO and WIIW, Paris Pelkmans J, Gros D, Nunez Ferrer J (2000) Long run economic aspects of the EU’s Eastern enlargement. WRR working document no. 109, The Hague, p. 207 Rose A (2000) One money, one market: the effect of common currencies on trade. Econ Policy 30 Rose A (2001) Currency unions and trade: the effect is large. Econ Policy 33 Swinnen J (2002) Transition and integration in Europe: implications for agricultural and food markets, policy and trade agreements. World Econ 25:2 Weise C (2002) How to finance Eastern enlargement of the EU? DIW discussion paper no. 287, Berlin Weyerbrock S (1998) Reform of the EU’s CAP: how to reach GATT compatibility? Eur Econ Rev 42:2

“Great Europe”: A Pan-European Perspective on the Future of Europe 1

P. Garonna and Y. He

1 Introduction: Great Europe as an Alternative to the Dilemma Between Enlargement and Empire The Amato Report (see International Commission on the Balkans 2005) confronts the European Union (EU) with a very difficult dilemma with respect to the Western Balkans: either the EU proceeds with the enlargement and integrates the Balkan countries into the EU, thus ensuring stability, prosperity, and democracy in this troubled area and, consequently, in the whole EU, or the EU will be compelled to increasingly intervene in the Balkans in order to solve instability and underdevelopment crises, maintain peace and humanitarian assistance, fight corruption, criminality, and illegal immigration, while investing substantial financial political and military resources in the process. In other words the EU is facing a crossroads: enlargement or empire (Krastev 2005). The instability at its borders and the stall of the enlargement process is in fact causing an escalation of interventions and risks to create a set of “protectorates” or “supported areas” in the neighbouring countries (consider for instance Kosovo, but also in some respects Montenegro and Bosnia-Herzegovina) always on the edge between stability and instability, development and underdevelopment, democracy and authoritarian involutions. The course of growing humanitarian, security, or assistance interventions of the EU can be considered (in terms of the Amato Report) as some sort of European “neo-imperial” perspective towards neighbouring areas or areas included in its “sphere of influence”. This road is proving very costly and risks being ineffective at mid-term. It contrasts with the outstanding success of the EU enlargement policies, which at a relatively limited cost, have seen candidate countries and new members meet the challenge of the necessary economic and institutional reforms and, through economic integration, take the road to financial reorganization, democratic consolidation, and development. Therefore, in the light of the most recent experience, the enlargement is cost effective for the EU compared with neo-imperial 1 This paper is a translation of an article published in a volume of the Fondazione Edison series, L’Europa allargata, l’Est e l’Italia. Le politiche, l’economia, le imprese, il Mulino, Bologna, 2007. The opinions expressed in this paper are those of its authors and do not necessarily reflect the opinion of the organizations they belong to. We are grateful to Rocco Senatore for his support in preparing the Italian version of this paper.


43

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external support and intervention strategies! This is the conclusion of the Amato Report, presenting a plan to have all Balkan countries take the necessary steps to join the EU within approximately 10 years from the date of the report, i.e. around 2015. Actually the question is broader, more complex, and extends well beyond the Balkans. The dilemma of the Amato Report could, and in fact should, apply to a much wider arena. The dilemma then becomes almost unmanageable! How should the relations between the European Union and Russia be defined? In terms of empire or integration? In other words, in terms of cooperation–conflict between “European empires” (similar to the “great powers concert” in the nineteenth century)? And what about the relation with the Eastern European countries not integrated into the EU and not candidates for accession such as Ukraine and Belarus? Or the Caucasian European countries such as Georgia and Armenia? And with the Eurasian, Caspian, and Central Asian countries such as Azerbaijan and Kazakhstan legitimately claiming some European roots and wishing integration with Europe? What does the future hold for them: enlargement or empire? And what about the “Euro-Mediterranean” area, with Italy’s obvious and priority interest for its integration in a common area? Clearly, the prospect of a credible “enlargement” option and accession to the EU for all these European countries is totally unrealistic. Does this imply that the only available option towards these areas is that of “neo-imperialism” or “supported near abroad”? Then another problem arises: is it possible to reach a common approach within the EU on the way to deal with those countries? Is it possible to integrate the different national “spheres of influence”, obviously reflecting different traditions, visions, and priorities among the EU countries? And how can the relations with the countries and regions likely to fall in the eventual “spheres of influence” of other great powers such as Russia or the United States be managed? In terms of conflict–cooperation relationships between the various “neo-imperial” visions and strategies or between “great powers”? Should they follow a partition, competition or cooperation logic, and should this be mainly dealt with at the unilateral or bilateral level? Our contribution aims at showing that, when considering the large array of countries and economies referring in one way or another to some concept of Europe in its broader meaning, the unmanageable dilemma between EU enlargement and empire has no reason to exist. There is a third way other than enlargement or empire, a possible way out of the dilemma. In fact, relations between the European Union, Russia, as well as Eastern and Southern European countries can and should be developed in a pan-European, multilateral and open economic integration perspective avoiding “neo-imperial” drifts. Therefore a reversal of the unfortunately prevailing trend to intervene and cultivate neighbouring areas in cooperation and/or conflict with other great powers is required. But intervention and integration must not, however, feed unrealistic expectations of extension of the enlargement processes, presently unsustainable, both from an economic and a political standpoint.

“Great Europe”: A Pan-European Perspective on the Future of Europe

45

The goal is to build a “Great Europe”, i.e. a political process of pan-European economic integration, involving all countries claiming a relation, for whatever reason or purpose, with the European family. The European Union is only a subset of this Great Europe, an advanced patrol with more ambitious goals, not only in terms of economic, but also of political–institutional integration. The pan-European economic integration must, on the contrary, be open to the broader concept and wider area of Europe, including the European Union before and after the enlargements in progress, Russia, the Eastern European and Euro-Mediterranean countries, the Caspian, the Black Sea, and the Eurasian countries formerly belonging to the Soviet Union. The United States could also be associated with this process considering the important role they played in the past and can play in the future of European integration (in fact they are currently members of the panEuropean international organizations such as the OSCE and the UN Economic Commission for Europe). Even the small countries such as Switzerland and Norway, certainly belonging to the European family who were, and still are, very reluctant to embark in the process of joining the EU, could join this framework. The goals and scopes of the Great Europe are already clearly marked in the international financial policy agenda of the countries likely to be involved. PanEuropean economic integration in fact needs cooperation in the fields of energy, trade, innovation, research and technology, transport infrastructures (highways, rail, and sea pan-European transportation networks), environment, standards, etc. Moreover, some of these goals can be more effectively pursued in a Great Europe perspective and in a multilateral logic. For instance the dialogue between energyproducing and energy-consuming countries on the common rules of energy security would certainly be more meaningful and influent if placed in a pan-European context, capable of integrating not only the EU consuming countries but also the big European producers in the Caspian and Central Asia, as well as Russia. The same applies to cross-European and Europe–Asia communication and transportation networks. This paper consists of five sections: 1. A brief survey of the 2004 enlargement and the reasons for its extraordinary success. Then, a brief discussion on the limits of the enlargement policies and the rationale underlying policymakers’ reluctance to continue and extend this experience. This is the basis of our idea of the opening of a new perspective: pan-European integration, avoiding the rigidity of mere unilateral or bilateral relations, or the reversal towards opposing strategies promoting spheres of influence among European powers (Sects. 2–4). 2. Next, we review the economic situation of the countries in the transition process close to the EU, highlighting the encouraging trend of growth and development indicators of the emerging economies in Europe, as well as the structural differences, delays, imbalances, and barriers causing the long-term vulnerability and insustainability of this growth. This requires the EU to intervene and support the integration of these economies with its own in order to prevent the crystallization of new dividing lines in Europe and their related spillover effects

46


on markets operation and on the potential revenue both in the EU and in the neighbouring countries (Sect. 5). 3. Then we review the question of the European crisis, which is mostly a crisis of economic growth of the continental European countries, the factors explaining this crisis, and the role of the new member countries and, in the future, the panEuropean neighbours, could play to promote a way out and accelerate growth in Europe (Sect. 6). 4. This section reviews the main economic policy tools and provisions supporting integration in Europe, in particular neighbourhood policies, of course in addition to the enlargement, highlighting the “missing link” of the pan-European dimension (Sect. 7). 5. Finally, as a conclusion, we briefly show the conditions to launch an economic integration political initiative in the framework of Great Europe (Sects. 8 and 9).

2 The Enlargement of the European Union: The Secrets of an Extraordinary Success There are not many economic studies on the impact of the EU enlargement process (see also Angeloni et al. 2005; Barysch 2006; Boeri and Bruecker 2001; European Commission 2001, 2002, 2005a,b, 2006a,b; Kohler 2004), which added ten new member countries in 2004 (and two more in 2007). This is surprising if compared to the much bigger body of studies and surveys promoted both on a national and an EU level, in anticipation of the accession mechanisms, at the end of the 1990s. Obviously then, the need to provide a scientific basis for the campaigns to orient public opinion support for the enlargement process led both candidate and member countries to promote forecasts and advance assessment exercises. Today the so-called enlargement “fatigue” and the “populist” drive to blame the enlargement for the EU economic and financial difficulties have slowed production of studies and surveys; in fact, it is difficult, from a scientific and econometric standpoint to blame the enlargement for the slow growth and economic decline in Europe, as some superficial opinion leaders would like to believe. The available evidence is unequivocal: the enlargement has been an outstanding success, maybe the most important success of the European integration processes in the last 50 years. And it was a success which involved the previous rounds of enlargement (consider Spain and Portugal or Ireland). To illustrate this assessment let us examine some relevant data and indicators. First of all, the economic growth of the new member states enjoyed an impressive acceleration. Figure 1 shows that the GDP growth rate of Eastern European new member states (NMS-8) increased from 0.5% per year in the 1990s to 3.2% between 2000 and 2003 and will reach 4.6% between 2004 and 2007 (see the forecast of the Vienna Institute for International Economic Studies – WIIW). The comparison with the performance of the old member states is significant.


47

Figures 2 and 3 show that the NMS-8 experienced a substantial progress in living standards, measured in terms of per capita GDP; on the other hand, living standards in the old member states (EU-15) compared with the EU average decreased between 1999 and 2005. The increase in per capita GDP was particularly high in the Baltic countries (around 40%). 6. 0 4. 0 2. 0 0. 0 1990

- 2. 0

1992

1994

1996

1998

2000

2002

2004

2006

- 4. 0 - 6. 0 - 8. 0 - 10. 0 - 12. 0

Fig. 1. NMS-8 real GDP growth rate (1990–2007) (%). Note: Forecast for 2006 and 2007 (source: WIIW Handbook of Statistics)

120 110 100 9 0 80 70 60 50 40 30 20 10 0

L

vi at

a P

an ol

d

Li

th

n ua

ia o Sl

k va

ia Es

n to

ia H

un

r ga C

y

ze

ch

R

ep

.

e ov l S

ni

a EU

-1

5

Fig. 2. Per capita GDP, PPS EU-25 = 100%. Note: Estimated data for 2008 (source: Eurostat and World Bank)

48


40 30 20 10 0 -10

i tv La

a

nd la Po

. a ia ia ia ry ni ep ak on an ga R t v ve u n s o o h h u l l t E c H S S Li ze C

5 -1 EU

Fig. 3. Per capita GDP change in PPS 1999–2008. Note: Estimated data for 2008 (source: Eurostat and World Bank)

The international trade growth in these countries was equally high. In the year after the enlargement, export increased by 21.6% and import by 18.3% and this expansion continued at high, albeit lower rates, in 2005 (Fig. 4). Export

Import

40 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Fig. 4. Annual change in trade volume in the NMS-8, 1996–2005 (%) (source: Eurostat and WIIW)

Figure 5 shows the export volume growth of the new member states; this growth continued at high rates (close to 200% in all countries and 300% in Hungary). Eastern Europe is one of the world areas with the strongest expansion in trade flows. International trade development and integration of these countries, both with the EU and with the rest of the world, was substantial. The high flows of direct foreign direct investment (FDI) in the EU new member states contributed to this growth. The FDI growth was particularly high in the Baltic countries. According to UNCTAD estimates, worldwide FDI flows reached 720 billion EUR in 2005, 29% more than the previous year (Table 1). For the NMS-8 the incoming flows amounted to 26 billion EUR, 23% more than the previous year. This figure is unprecedented in the industrial and financial history of these countries, although, to tell the truth, they started from relatively modest levels in the 1990s.


Export

49

Import

400 300 200 100 0 ch ze C

R

. ep

ia on t Es

H

ry ga n u

ia tv a L

ia an u th Li

nd la o P

ia en v o Sl

ia ak v o Sl

Fig. 5. Foreign trade volume change in the NMS-8, 2005 (1995 = 100%) (source: World Trade Organization – WTO) Table 1. Change in FDI incoming flows (1993 = 100%) Country

1993–2003

2004

average Czech Republic

529

682

Hungary

105

177

Poland

284

359

Slovakia

482

564

Slovenia

322

458

Estonia

223

571

Latvia

633

1,435

Lithuania 1,141 2,560 Source: Calculation on UNCTAD data

The progress of structural reforms, stimulated by the accession process, recorded important progress in the NMS. Based on the EBRD Transition Report 2005, four of these countries (Poland, Hungary, Czech Republic, and Lithuania) improved their 2005 score by two ranks (Fig. 6). There have been improvements in the financial system with a positive impact on credit access. Business financing, though, is still problematic, but the difference with the more advanced European countries was considerably reduced. NMS businesses enjoy not only better credit

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access conditions, but increasingly avail of external financing, longer credit terms, and lower costs following the development and increased efficiency of the financial systems in these countries (Fig. 7). Figure 6 shows the changes recorded in nine structural reform areas affected by the transition, summarised and measured in aggregated form by the transition index, prepared by the European Bank for Reconstruction and Development (see EBRD, Transition Report 2006): large-scale privatizations, small company privatizations, governance systems and business organization restructuring, price liberalizations, competition policies, the liberalization of interest rates and reform of the banking system, government securities markets and non-credit financial institutions, infrastructures, and public services.

Fig. 6. Progress in transition by country. Note: Average transition indicator change in 2006 over the previous year (source: EBRD Transition Report 2006)

Fig. 7. Access to credit (source: EBRD, Transition Report 2005)


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3 The Economy and the Enlargement Policy: Why Did We End Up in a Blind Alley? This set of data confronts us with an important question: how could such an undoubtedly positive experience lead the thinking and the initiative in the later stages, and especially in the most recent period, into the blind alley where the discussion on the EU enlargement is today? Presently, the leadership and the public opinion in the EU countries are increasingly anxious and concerned about the appropriateness of continuing the enlargement strategy. The Austrian EU presidency in 2006 promoted a pause of reflection to think about the future of the EU, which should also involve the question of its external borders. In December 2006 the European Council agreed on some sort of moratorium on future enlargements after accession from Romania and Bulgaria at the beginning of 2007. Negotiations for Turkey’s accession are also proceeding at a snail’s pace. Let us try to understand whether these perplexities and reluctances are justified and the rationale behind them. Let us first consider economic explanations. Economic literature agrees in ascribing the success of the enlargement to the following elements: the substantial progress of the structural reforms implemented by the candidate countries to meet the Copenhagen criteria, the convergence of the rules and regulations framework – mainly driven by the acquis communautaire, i.e. the EU standards – the substantial improvement of the economic climate and the operators’ confidence, the ability to attract foreign investments, the orientation to exports and the reintegration of new member states in the world trade flows, and in the international work specialization, etc. (see Abraham and Konings 1999; Baldwin and Windgrèn 2005; Breuss 2002; Doyle and Fidmuc 2004; Grassini 2001; Heijdra et al. 2002; Kopits and Székely 2002; Korhonen 2003; Lejour 2001; Maliszewska 2003; Radosevic and Sachwald 2005; Read and Bradley 2001). Other factors played a lesser, albeit important, role, in particular EU budget subsidies and labour mobility. These two factors have sometimes been used against additional enlargement since the success of the accession processes depends on subsidies, and therefore on the ability to transfer revenues from the current member states. Thus, since an important benefit originates from transfer of workers eventually caused by the enlargement, strict limits on the continuation of the enlargement should be set, considering that the capacity of the member states to finance revenue transfers has reached its perceived limit and the ability to accommodate and integrate new immigration waves is also stretched thin. This is the main meaning of the term “absorption capacity” of new EU member countries, a much discussed concept when considering the enlargement. Since the absorption capacity is stretched to the limit, people say, the road to enlargement cannot be pursued any further. It should be noted that the term “absorption capacity” is today used in the discussion with a totally different meaning than it was when introduced in the economic development literature of the 1950s (Myrdal): the absorption capacity limits, in fact, are not those related to underdevelopment, but to the rich countries’ fiscal and redistribution crisis. Let us therefore consider these two issues more in depth.

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First of all, the EU structural and cohesion funds play an important role in mitigating the imbalances and providing support to financially troubled areas. How much did the transfer of EU funds contribute to the growth of the potential revenue of the new member states? What share of the NMS good performance is due to EU subsidies? Certainly a rather important contribution came from the money spent to foster and support structural adjustment policies in candidate countries and promote convergence of rules and standards. With reference to the funds for agricultural and social policies, the importance of their role is doubtful, since, considering the transition clauses, the NMS enjoyed them only to a very limited extent in the initial years. The EU agricultural and social funds are still mainly allocated to the old member states. Furthermore, it is well-known that there is a substantial difference between the funds allocated in the budget and those actually spent; this difference is due the absorption power (in the classical meaning of the term) of the different countries (Table 2). The NMS public administration efficiency and effectiveness leaves a lot to be desired, therefore the effectiveness of the policies supporting the development is still rather limited and probably low. A symptom thereof is the great gap between the value of the funds applied for, that of the contracts signed, and the actual fund transfers to the final beneficiaries in those countries. Table 2. Structural funds in the NMS-8 Country

Total appropriations

Total payments

(funds allocated)

(funds actually spent)

Structural funds Czech Republic Estonia Hungary Latvia Lithuania

Cohesion funds

Structural funds

Cohesion funds

1,685.1

945.3

859.4

386.0

312.1

196.9

217.3 71.8

2,094.7

1,123.7

1,068.3

258.4

648.9

520.3

330.9

129.6

929.5

614.1

474.1

143.5

Poland

8,631.1

4,219.8

4,401.9

970.2

Slovakia

1,186.9

576.1

605.3

132.4

Slovenia 267.6 190.6 136.5 Note: Copenhagen package, 2004–2006, million EUR Source: World Bank EU 8 Quarterly Economic Report, February 2006

43.8

Another controversial issue is labour mobility. Free circulation of workers is in fact one of the basic freedoms guaranteed by EU rules. The experience shows, however, that, though there has been some increase in labour mobility originating from the NMS after the enlargement, the size of the phenomenon is rather limited. Furthermore, freedom of circulation under the transitional measures has been strictly limited; only a few countries have opened their borders to the new migration flows. A European Commission study on the operation of the transitional


53

measures for EU accession concluded that the mobility flows in the NMS (EU-10) and the old member states (EU-15) after the enlargement have been very small and certainly not sufficient to affect the prevailing conditions in the EU labour market. The study adds that the migration flows following the enlargement have positively contributed to the overall performance of the labour market and, therefore, to the sustained growth and improvement of public finances. In particular, NMS workers have contributed to reduce the bottlenecks in qualified labour supply and have fostered the accumulation of human capital to sustain the development. Mobility was therefore, rather than a restriction, a great opportunity to enhance the potential positive results of the enlargement. Finally, from the financial impact standpoint, there do not seem to be substantial reasons to discuss enlargement policies again.

4 The E Factor: Europe Attraction Power Let us now consider the five main political arguments against enlargement: 1. The enlargement leads to a loss of efficiency and effectiveness of EU institutions. Considering the rules in force, and the failure of the modification proposals contained in the aborted European Constitution, a Europe with 27, 30, or more member states can only work less smoothly than one with 12 or 15 member states (it is claimed). This claim is true only if we take for granted that the necessary adaptations needed to operate EU institutions with a large number of countries cannot be adopted. This was the aim of the proposals contained in the so-called European Constitution. But there is no reason why the institutional and administrative EU operating mechanisms cannot be improved. 2. There is an inevitable trade-off between economic and political integration and between the widening and deepening of European institutions. Therefore, the more the EU enlarges, the more – it is claimed – it dilutes, and prevents the sovereignty transfers needed to create a real political union. An indirect demonstration of this claim resides in the fact that the countries driving for the enlargement are countries, such as Great Britain and the Nordic states, which are very reluctant to accept limits and restrictions to national sovereignty. Actually, since the Amsterdam Treaty created the so-called “strengthened cooperation arrangements”, this objection has lost most of its grip. Today Europe is already a framework in concentric circles where groups of countries with more similar outlooks drive the integration process while other countries lag behind and join only at a later time. This is for instance the case of Social Europe. This was the case for the Euro. The same goes for border management (Schengen) and military cooperation (NATO and European Defence Community). This could be the case tomorrow in other fields such as energy, education, and security. Resistance to sovereignty transfers from the member states does not originate only from the United Kingdom. Actually, all national states

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presently seem jealous of their jurisdiction and prerogatives, some more so than others. Therefore the enlargement cannot become an alibi for the lack of courage and vision of the present national ruling classes. Those wishing to drive the EU political integration forward have all the tools to do so, regardless of the enlargement situation. What is missing is the will to drive the construction of Europe forward. 3. The enlargement leads to Europe losing its identity, blurs the meaning of the common roots, increases dishomogeneity, undermines the feeling of belonging and the solidarity links. This claim has been used at every enlargement round. Consider the Gaullist objections in France to the association of Great Britain. Consider the so-called “Club Med” prejudices in the process leading to the Euro. It is therefore not surprising for this claim to be presented today with respect to Turkey, and it would be even more so in the future with respect to Russia or the Euro-Mediterranean countries. If we refer to the lack of public opinion support, this is also not new. The integration of different countries and cultures causes concern and fear in the general public and is perceived as a threat. Also, with respect to Great Britain, Greece, and Spain, public opinion in the old member states at the beginning of the accession processes was mostly against or in doubt. We have seen though, that, with time, diversity and respect for national and local special features are not negatively affected by new accessions; on the contrary, they constitute the strength and the main feature of Europe’s identity. There is no reason why this cannot be so in the future too. 4. The enlargement, especially now, where the countries involved are no longer small, but large, such as Turkey, Ukraine, or Georgia, or maybe in the future, even Russia, challenges the power relationships within the EU and therefore the role of old Europe’s big countries. This concern is particularly felt in France, whose dominating role in the construction of Europe was gradually downsized. The issue is, after all, a truism: each time some power is distributed, when we accept to share it, we lose some freedom of movement and independence, but in exchange we acquire solidity and bargaining power, in particular with outside relations. Furthermore, we can always compete to democratically uphold internally our worldview and culture. Europe has considered the protection of cultural special features a cornerstone of its “social contract”. 5. The enlargement was a great political operation before and more than an economic integration process. Its timing and modes matched political requirements rather than basic economic factors. We have already discussed the economic cost–benefit consequences of the enlargement and its financial impact: the enlargement has produced, overall, largely positive economic results, and all the risks feared before its implementation have not materialised. Certainly, though, the drive to integration came from politics, from public opinion support in the candidate countries, and from the meta-economic goal to join a community of prosperity, democracy, and stability. Even more so, this political motor had an essential economic meaning, leading policymakers to implement bold and sometimes unpopular reforms, and has made the hardships associated with


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economic and financial reorganization, restructuring, and liberalizations, bearable for the populations, clarifying the link between reforms and achievement of the accession benefits. The European idea has shown an outstanding intrinsic strength, the ability to translate into a political proposal and in a power of attraction and mobilization unequalled anywhere else in the world. We have to include this “E Factor” among the reasons for the economic success of the enlargement, the ability to attract and gain public opinion support, enabling the structural changes implicit in the Copenhagen criteria, with the painful therapies they sometimes required. This was also the Italian experience, which, in the name of Europe, implemented reorganization policies that would otherwise hardly overcome the quicksand of the domestic political power play, e.g. the reforms Italy should have implemented by mere common sense and national interest were made only in the name of the European idea. The enlargement was therefore a very effective highprofile political operation, but it was not against the economy. Even more so, the political perspectives of the enlargement and the convincing action conducted by its leadership have created the basis for bold economic reforms, which is a prerogative of high quality politics and good leadership. Finally, even the political objections, though not devoid of plausibility, do not seem decisive in raising barriers against the enlargement policies and in justifying a general sense of fatigue affecting the future viability of this strategy. The real reason for this blind alley is, in our opinion, another one, involving the relation between the enlargement and the European crisis. The above concepts on the positive impact of the enlargement and its contribution to the stabilization and consolidation of the economy and society in Europe should be enough to break this “spurious” association between European crisis and enlargement. The European crisis has several meanings and dimensions, but it cannot be explained with the enlargement. Therefore, neither an extension nor an acceleration of the enlargement processes, nor a moratorium or a slowdown would cause any progress when confronting the key economic problems undermining the European construction at its roots. The enlargement does not affect more serious problems, requiring other therapies. These problems are the slow growth syndrome and competitiveness decline which hit the heart of the old Europe and the structural vulnerability of European economies outside the EU despite the good growth performance achieved so far. We shall return to these problems in later sections, but it is clear that they cannot be dealt with through progressive enlargement rounds or, even worse, through an enlargement encompassing the whole spectrum of the panEuropean economy. The EU enlargement must continue at its own pace and consolidated modes, without instrumental slowdowns but also avoiding undue force or acceleration. Rather, the crisis of Europe requires some urgent interventions of structural economic reform and the adoption of a pan-European dimension.

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5 Structural Instability and Vulnerability at the European Union Borders The economic studies of the 1990s identified some possible risks for the economies of the countries candidate for enlargement: wider inequalities, loss of jobs (especially those with a low qualification in unmarketable or barely marketable areas), human resource drain due to migration, and loss of the safeguards and protection networks due to tax consolidation. Some risks were also identified for the EU budget and for the old member states, with respect to the impact of delocalization, immigration, salary and regulatory competition, tax competition, etc. After completing the enlargement we can say with relief that overall, also thanks to the accompanying provisions deployed during the preparation process, these risks did not materialise. The NMS economic performance was positive from the growth, investment, disinflation, and financial stability standpoints. Of course there are still some concerns about the maintenance of the “fundamentals” and many reforms still need to be made, but a “New Europe” model is making headway; this model not only seems to properly match the characteristics of the economies of the NMS, but could also be a reference point when considering industrial development strategies in the old European countries (see Garonna 2006 and 2007). If we broaden our scope to include the other European countries in transition at the EU borders, the vulnerability and risk framework looks larger and more uncertain. This is the first challenge the EU must face; the concern is that the solutions implemented in the past, and in particular the enlargement, do not seem capable of providing appropriate answers. Let us consider the financial situation and the outlook of the countries bordering with the EU. These countries experienced a galloping economic growth rate. Figure 8 shows that in recent years, the GDP growth in the former Soviet Union countries has reached very high rates, close to those of the emerging Asian countries. In 2004

Fig. 8. GDP growth 2005/2006 (source: EBRD, Transition Report 2006)


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the GDP grew in those countries by 7.9% and exceeded 10% in Armenia, Azerbaijan, Belarus, Tajikistan, and Ukraine. This framework is in striking contrast with the slow growth in the Euro zone. The growth was accompanied by, and partly due to, large inflows of FDI. These have reached record levels in recent years (see Fig. 9 for South Eastern European (SEE) countries). Another growth supporting factor is the recovering productivity growth, both in terms of labour productivity and of total factors productivity (TFP, see ECE 2005). For instance, the TFP trend in Russia between 1990 and 1994 was 6.5% per year, it reached +1.2% between 1995 and 1999, and attained 7% between 2000 and 2003. Ukraine followed a similar path: 10.2% between 1990 and 1994, 2.9% between 1995 and 1999, and 9% between 2000 and 2003. Of course underlying the good productivity performance are the structural economic reforms implemented by these countries. The growth framework of the Eastern European transition economies is therefore encouraging. In the European slow growth context, these economies are an exception. But they are still heavily dependent on the growth in the rest of Europe. Furthermore, they cannot be relied upon to draw along the growth of the whole European economy. These economies in fact lack the size, the demand, and consumption and investment capabilities needed to pull the European growth

Fig. 9. FDI level in South Eastern Europe transition economies (source: EBRD, Transition Report 2006)

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(see Fig. 10). Suffice it to consider that Russia, the largest economy close to the EU, has a GDP much lower than Italy and 60% of Germany’s. All the economies of the former Soviet Union combined reach just 3.9% of world economy while the Balkans reach just 0.7%. These data lead to the second fundamental challenge for Europe (which we shall discuss in Sect. 6): reacting to the decline of the economies of the old continental Europe and re-launching growth and development.

27,7%

CIS SEE

3,9% 0,7% 1,9%

NMS EU-15

18,8%

USA Japan China

6,0% 13,6%

20,7%

India Rest of the world

6,7%

Fig. 10. World GDP distribution, 2005 (CIS Commonwealth of Independent States, SEE South Eastern European, NMS new member states) (source: IMF World Economic Outlook and Eurostat)

Despite the increase in investment flows, the ability of these countries to attract foreign capital is still rather low and well below their potential. Furthermore, dangerous flights of capitals are occurring: the capital outflow from Russia, according to the Vienna Institute Report (WIIW), was 2,071 million EUR in 1999 and 10,000 million in 2005. The gap between productivity and real per capita revenue between these countries and those industrially advanced is substantial. Also, government accounts sometimes experience some problems, e.g. the current account deficit in the Commonwealth of Independent States (CIS) countries has reached 2.3% of the GDP (see Table 3). Table 3. Current account balance in countries with transition economies (percentage of GDP) 2002

2003

2004

2005

CIS

0.5

2.1

2.3

0.6

SEE

9.4

9.4

10.3

9.0

CEB 5.4 5.7 6.6 6.2 Source: EBRD, Transition Report 2005

Let us consider the development gap between EU member states and the “near abroad” countries in the wider European area. These gaps are huge with no reduction in sight. Tables 4–7 show some clear indicators of the inequalities in thesocial situations and living standards, in particular, poverty, unemployment, childbirth mortality, and personal computer access indicators.


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Table 4. Poverty measurements Extreme poverty measurements Country

Relative poverty measurements Year

%

SEE countries

Country

Year

%

NMS

Albania

2002

25.4

Cyprus

2003

15.0

Serbia and Montenegro

2003

10.5

Czech Republic

2004

8.0

Turkey

2003

1.3

Estonia

2003

18.0

Hungary

2002

10.0

CIS Kazakhstan

2001

11.3

Latvia

2002

16.0

Kyrgyzstan

2001

13.5

Lithuania

2002

17.0

Tajikistan

1999

33.0

Malta

2000

15.0

Uzbekistan

2003

26.2

Poland

2002

17.0

Armenia

2000

24.0

Slovenia

2002

10.0

Azerbaijan

2003

9.6

Slovakia

2003

21.0

Belarus

2002

30.5

Georgia

2003

16.6

Republic of Moldova

2002

33.0

Russian Federation

2004

17.8

EU-15 average

15.2a

Ukraine 2002 13.7 CIS Commonwealth of Independent States, SEE South Eastern European, NMS new member states Source: UNECE data a Calculated on the basis of 2001–2003 data Table 5. Unemployment rates, 2005 CIS

NMS

SEE

Armenia

7.6

Cyprus

5.3

Albania

14.2

Azerbaijan

1.4

Czech Republic

7.9

Bosnia-Herzegovina

46.6

Belarus

9.9

Estonia

7.9

Bulgaria

9.9

Georgia

13.8

Hungary

7.2

Croatia

12.7

Serbia–Montenegro

15.2a

Russian Federation

7.9

Latvia

9

Ukraine

8.6

Lithuania

8.3

Romania

Kazakhstan

8.1

Malta

7.3

Turkey

10.3

Kyrgyzstan

3.3

Poland

17.7

Serbia

20.8

Tajikistan

2.1

Slovenia

6.3

Uzbekistan

0.3a

Slovakia

16.4

Montenegro

7.7

–

EU-15 average 7.9 CIS Commonwealth of Independent States, SEE South Eastern European, NMS new member states Source: UNECE data a Year 2004

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P. Garonna and Y. He Table 6. Death at childbirth per 100,000 births, 2003 CIS

NMS

SEE a

Armenia

22

Cyprus

Azerbaijan

19

Czech Republic

37

4

Bosnia-Herzegovina

8

Belarus

24

Estonia

8

Bulgaria

6

Georgia

50

Hungary

7

Croatia

8

14

Albania

17

Russian Federation

32

Latvia

Ukraine

19

Lithuania

3

Serbia–Montenegro Romania

31

6

Kazakhstan

42

Malta

0

Turkey

55b

Kyrgyzstan

52

Poland

5

Tajikistan

37

Slovenia

4

Uzbekistan

32

Slovakia

17

EU-15 average 5 CIS Commonwealth of Independent States, SEE South Eastern European, NMS new member states Source: UNECE data a Year 2000 b Year 1995 Table 7. Percentage of households with a personal computer (PC), 2003 Country

% with PC

Albania

1.4

Cyprus

42

Bulgaria

7.1

Czech Republic

21.4a

Romania

11.6

Estonia

30

Turkey

12.3

Azerbaijan

24.6

a

Country

% with PC

Hungary

22

Latvia

16.2

Malta

38

Poland

25

Slovenia

38

Slovakia

62

EU-15 average 45.8b Source: UNECE data a Year 2000 b Calculated with 2000–2003 data

A comparison between the EU NMS and the other non-EU European countries provides an impressive picture of gaps and delays. After the efforts made in the 1990s to remove the iron curtain in Europe, we risk the rise of a new fault line separating countries tending to converge towards the EU average (the NMS) from the countries lagging behind in underdevelopment or conditions of structural delay.


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A further risk to be feared is the consolidation of trade flows polarization in the region. The 2005 World Bank Report clearly highlights this trend. Trade flows increasingly polarise around two cores, one “Euro-centric”, including the EU NMS and some East European countries, the other “Russia-centric”, including the Caspian and Eurasia. These two poles are clearly opposed, also in terms of the quality of the products traded. While trade seems relatively balanced in the first pole, with a strong industry and services component, the other mainly focuses on raw materials, in particular fuels (oil and gas). On one side we have concentration and rents, on the other, widespread industrial development and diversification. On one side we have a high technological and value added content, on the other, low technology and low added value. On one side, job creation and widespread improvement of living conditions, on the other, accumulation of wealth and increasing inequalities. Therefore, polarization does not reflect only sector-specific specializations according to each country’s comparative advantages and its production process characteristics. It configures a new division and a fracture in the heart of Europe, separating the Europe of prosperity, stability, and development from the Europe of rents, instability, and underdevelopment. Trade polarization therefore conceals a widening gap in terms of potential economic development and democracy. In summary, at the European Union borders, there are a number of countries, also European, with substantial delays in structural adjustment as well as high risks of economic and financial instability and underdevelopment. The high growth rates lately enjoyed by these countries must not deceive anybody. Their good performance is in fact affected not only by the liberalization and economic reform policies, but also by the high price of raw materials, favouring many of these countries, and by the favourable conditions of international liquidity and credit. Should the cycle of monetary conditions change, leading to high interest rates and financial instability, should the economic reform processes slow down or reverse, should the political and social instability chain adversely affect the business agents’ trust, then there would be a serious risk of involution of the economic, and consequently, the political and social situation. Unfortunately, some worrisome signs of a possible involution of this kind are looming. These fragilities and risks are not only a threat for those countries and their populations, but they menace the whole of Europe, including the EU, which would suffer the full blow of the political and economical impact of the crisis. Suffice it to consider illegal immigration, an unreliable energy supply, environmental degradation, and terrorism. Some of these economies are rich in raw materials and energy, and could be encouraged by the revenues associated with such wealth to disregard public finance limitations and become excessively dependent on oil or other raw materialgenerated revenues. In other words, medium- and long-term growth sustainability in these countries is not fully guaranteed. And an eventual crisis would negatively affect the financial security and stability of Europe as a whole, including the EU, who cannot afford to have a large area with an uncertain future and considerable risks of economic and political involution at its borders.

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Therefore an intervention is called for. The EU cannot wait and see; it must take charge of the future of this vast and complex area affecting its future and that of the whole of Europe. The alternative is then that of the Amato report: enlargement or empire? The problem is that, while the optimum mid-term solution for the Balkans can only be enlargement, as suggested in the Amato report, talking about enlargement in historical times with respect to this large, complex, and diverse area of Europe cannot be provided with any credibility. Is “neo-imperialism” the only solution left then? Or, worse, are we facing a competitive and sometimes conflicting confrontation over “spheres of influence” among the great powers of the twenty-first century, i.e. the EU, Russia, and the United States? Since these countries still feel the call of and the magnetic attraction to the concept of Europe, why not avail, also in this case, of the “E factor”?

6 The Old Europe Illness: Low Growth and Lack of a “Near Abroad” Figure 11 compares the GDP growth trend in the Euro zone, the United States, and the emerging Asian countries as well as with the CIS. As we can see, the growth over the past decade remained low, much lower than that of the United States and Asia. This is the main problem with Europe, the disease affecting the growth in revenues, employment, and living standards, is also reflected in the distaste for European institutions and the processes of further enlargement. It is however wellknown that the enlargement strategies, both in the past and those planned for the future, are totally unrelated with the stagnation of productive activities in continental Europe. The slow growth of continental Europe is due to the shortcomings of the member countries’ economic policies, in particular the insufficient economic reforms, the slowdown in the implementation of the single market for

Fig. 11. Growth trend 1995–2006 (source: IMF database)


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goods and (in particular) services, the loss of competitiveness against the emerging Asian economies, and the delay in technology and research investments compared with North America. The failure of the Lisbon strategies clearly shows the problems of Europe in implementing the reforms with determination, especially those needed to enhance the economy of knowledge. It is known that Europe spends on average only a third of the amount spent by the United States in research and development. The dilution and delay in the implementation of the EU directive on services clearly shows that the single market is still far from being achieved. Many services markets, from professions to product distribution, from financial services to public tenders, from utilities to financial services and energy still suffer in Europe of an over-regulation and competition limitations. But there is an issue in the European growth crisis related to the vulnerabilities and gaps of the European countries we previously discussed. These countries are the EU “near abroad” and could play an important role in the search for production systems flexibility and internationalization of companies. It is clear, in fact, that if the big companies outsourcing and off-shoring strategies can be sized and configured on a global scale, in small and medium size company systems, geographic and cultural proximity play a decisive role. This was, for instance, the case of the Italian North-East, featuring networks of small companies who have found great investment opportunities and sales areas of expansion in the neighbouring Balkans. But proximity also plays a role in high-technology fields and advanced markets. Consider for instance that, when outsourcing information technology, the reference countries for the United States are not only China and India, but also Canada and Mexico, with the advantage of the geographic proximity of these countries to the US sales markets. In this respect, reference is made to the advantages of “near-shoring” as opposed to “off-shoring”. Europe, being surrounded by relatively unstable areas with growth sustainability problems, is therefore a limitation for European production systems modernization and internationalization strategies. The European Union is therefore very interested in developing its adjacent economies, turning them into sales markets for its products and privileged areas for investment and decentralization of production functions. This interest is particularly strong for countries like Italy, basing their production capability on small and medium size businesses and bordering with the Eastern (Balkans) and Southern (Mediterranean) regions which are mostly affected by imbalances and tensions due to the delays in development and instability. In summary, the response to the crisis of Europe, which is basically a growth and competitiveness crisis, includes re-launching the economic reforms. But it also involves the EU “near abroad”. The stabilization and financial integration of the areas close to the EU, the Great Europe space, could produce important benefits for the EU production systems. It is obvious though that the stabilization and integration of this vast area cannot, at least in the mid-term, involve the continuation and extension of the EU enlargement policies as they were developed so far. Meeting the commitments undertaken in the Thessaloniki summit, i.e. start the processes of accession of the western Balkan countries in due time and according

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to the procedures required, seems already an ambitious goal. Enlargement cannot therefore be a response or, at least in the mid-term, the only response. We need to aim for economic integration without necessarily starting the EU enlargement processes. But how can we pursue economic integration without enlargement?

7 European Union Policies for a Broader Europe: The Missing Link What are the tools available to the European Union to promote the integration and stabilization of the economies included in the broader European area? In the past, the main, actually the only, mode available was enlargement. This was so for at least three reasons: 1. First of all, enlargement was, and still is, the mode preferred by the European countries aiming to join the EU in full and with equal conditions. 2. Second, Commission plays an important role in the enlargement with a mandate over the functions of proposal monitoring and control, and it was, and still is, an effective procedure to drive towards a convergence of the reform policies and the acknowledgement of common standards in the candidate countries. 3. Third, the development of a common foreign policy on a broader Europe (as an alternative to enlargement) requires a common view which is not easily attained. This is self-evident in the EU difficulties when defining a common strategy with respect to Russia or the United States. These are the reasons why integration has progressed in the past only with successive enlargement rounds. Now, though, as we discussed, we have reached a blind alley, and the EU has developed a promising set of alternative tools to integrate its “near abroad”. Let us briefly analyse them and consider their advantages and limitations: (1) The “near abroad” policies. In 2005 the EU launched a new set of initiatives in the framework of the “new neighbourhood policies (ENP)”. The goal was to sustain the economic development of areas bordering with the EU “as is”, guaranteeing stability and new sales markets to the current EU members in the process. The key element of the neighbourhood policies is the “ENP action plan”, bilaterally negotiated and agreed upon between the EU and each individual country. The plan includes an agenda of economic and institutional reform policies with shortand medium-term goals and priorities. While the implementation of the new action plans was in progress, the new ENP defined some important innovations and corrections, including new economic trade and mobility support plans, cultural exchanges, etc.; multilateral dialog in specific areas such as energy and transportation; support for regional projects among neighbouring countries, for instance, in the Black Sea and the Mediterranean; more flexible financing mechanisms, including a new ENP financial tool and a broader EIB mandate (see European


65

Commission 2006c); a possible extension of some programs to the “neighbours’ neighbours”, i.e. basically the Caspian and Central Asia not included in the ENP. The ENP goals fully meet the needs previously discussed, i.e. economic development promotion of a large group of countries “neighbouring Europe” [sic] without including or excluding the possibility of an enlargement. However, some difficulties arise, not so much at the execution level, but at a setting and conceptual framework level. These are summarised in four items: (a) First, the ENP primary goal is the development, not the integration, of these countries in the EU. There is obviously an essential relationship between the two. Even more so, beyond a certain level, development is impossible without full integration, not only on a trade and economic level, but at a level of institutional cooperation and democratic progress. (b) The E factor, the attractiveness of the concept of Europe and the economical as well as political importance of which was stressed earlier, cannot apply to ENP countries. The ENP framework assumes the EU as Europe, while “neighbouring countries” are not Europe. Therefore, all the psychological and political advantages (and their impact on the economy) of the E factor are not applicable to the ENP. There is a weaker sense of belonging to a community, and there is less ownership of the beneficiary countries with ENP policies. These countries remain more an object than a subject of the ENP. Even more so, some misunderstandings could arise as well as the feeling of a latent, sometimes understandable, stigmatization. These countries could, and sometimes did, interpret their inclusion in the list as an exclusion from the possibility to joint the EU. (c) There is no multilateralism. The ENP common framework is unilaterally defined by the EU. The action plans, on the other hand, are bilaterally agreed upon (although the new ENP acknowledges the problem and efforts are being made to find multilateral frameworks). (d) ENP effectiveness is still to be demonstrated. Since this a policy of cooperation for development and subsidy/incentive, it suffers from all the limits to its effectiveness, now fully discussed and demonstrated by a growing body of literature (see in particular Easterly 2004, 2005, 2006a,b; for the opposing opinion see Sachs 2000 and 2006; Stiglitz 1998; Stiglitz and Charlton 2005). As discussed with reference to the enlargement, its economic success was not due to financial support mechanisms, but rather to the converging standards and economic reform policies (appropriately supported also with financial incentives and disincentives). Lacking a real multilateralism in guideline definition, with weak ownership and peer pressure in benchmarking, without a clear goal in terms of results – also from a political standpoint – technical and financial support policies tend to be of little effect. The European and international experience provides many examples on the subject (from the Lisbon failure to the ineffectiveness and distortions of much of African development aid, from the failure of the Italian experience with the “Cassa del Mezzogiorno”, to the success of China, etc.). It is important to notice that the most recent documents of

66


the ENP Commission (see European Commission 2006c) show acknowledgement of these difficulties as well as the idea of developing a “long-term vision of an emerging economic community between the EU and its neighbouring countries”, a pan-European community, then, very close to the idea developed in this paper. (2) The Russia–EU partnership. In 2007–2008 the partnership and cooperation agreement between Russia and the EU must be renegotiated. The unsuccessful attempts of 2006 and the growing antagonism between the two blocks show the constraints and limits of the current Russia–EU relationship. The previous agreement in force since 1997 had set some common goals, a framework for bilateral contacts and relations and some priority cooperation areas. In the Russia–EU summits in St. Petersburg (2003) and Moscow (2005), cooperation was re-launched, aimed at creating four long-term “common areas” of cooperation in the fields of security justice and freedom, foreign security, research, culture and education. The road maps to achieve these broad common goals were also approved. But this did not improve the dialogue. Now the day of reckoning has come and all the limits of this setup are causing a deterioration of the climate and a return to the past, not so much to the Cold War (there would not be a basis), but rather to the nineteenth century type of conflicts between antagonistic “imperial” visions. Why is the dialogue stalled? The main reasons are the following: (a) The EU has troubles in reaching and expressing a common view of the relations of the different countries with Russia. There is no common approach and, sometimes, even no intention to look for one. EU countries proceed in a haphazard way and in full autonomy. (b) A pragmatic and selective mentality is prevailing, focused on the short term and on the immediate economic interests. This is the origin of the focus on energy security and human rights, trade clauses, and corruption. What is missing is a long-term strategic and political partnership vision. It should therefore not be surprising for Russia to use all its power tools to protect its immediate interests. Is this not the logical outcome, when the preferential ground in EU– Russia relations is that of power relations as well as pragmatic and selective protection of each party’s immediate interests rather than of a strategic partnership? (c) The framework is typically bilateral, while almost all issues in EU–Russia relations involve third countries, from the Russian energy transit to the EU to the environment, from transportation to military issues. Though the Soviet empire no longer exists, Russia still has a great influence and specific interests with respect to many countries of the so-called European “near abroad” (Balkans, Caucasus, and Central Asia). Therefore, in addition to placing the EU–Russia relations in a multilateral context, the bilateral dialogue cannot but involve relations with important third countries. (d) This is not the place for a review of the Russia–EU disputes. Obviously the dialogue with Russia cannot be managed like a bilateral dialogue with any other neighbouring country. Beyond the bargaining power relations in


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economic negotiations, what does the EU have to offer Russia in terms of long-term strategic goals? Only a good neighbourhood perspective? Can the E factor be meaningful for Russia which, after all, remains a European power? Negotiations with Russia must keep in mind what Russia is: an enormous country with large oil and gas reserves, but with a frail economy (and fledgling democracy) still in a transition phase; an ex superpower whose open wounds still hurt for the loss of influence and prestige; a great military and nuclear power; and a great diplomatic tradition and a veto right in the UN Security Council, etc. It is hard to believe that such a country can be interested in a mere good neighbourhood relation, with the addition of some financial tools to share experiences and use for training purposes. (3) Caucasus and Euro-Asia. EU awareness of these regions’ strategic importance is growing for well-known reason: their reserves of natural resources, the risk of latent conflicts re-ignition, the contiguity with crime and terrorism phenomena, nuclear safety, economic growth potential, the communication axes between Europe and Asia, etc. The German presidency of the EU in 2007 has placed at the centre of its agenda the development of a strategic cooperation program with Central Asian countries. The populations of these countries have developed a feeling of belonging to the European culture and identity. This is not only due to their being part of the Soviet Union for 70 years; the economic, cultural and trade relations and links of these countries with those of the EU are very strong. In other words, these countries too feel in some sense “European”, and it is an EU interest to keep them in a European framework and prevent them from falling in other spheres of influence and instability, besides the fact that they can play a bridging role between Europe and Asia. There are several tools for the cooperation between the EU and those countries. While Caucasian countries fall within the “near abroad” concept and therefore are included in the ENP, Eurasian countries can be supported through TACIS (a program of technical assistance to CIS countries). The same considerations on the lack of a multilateral framework and of a regional integration perspective, as well as on the inapplicability of the E factor and the positive stimuli originating from Europe’s power of attraction, apply also to these countries. Furthermore, relations with these countries cannot but involve cooperation with Russia and the United States, who have a strategic interest in developing a dialogue with them. (4) Euro-Mediterranean. It is now clear that the Barcelona Strategy for a EuroMediterranean Partnership was unsuccessful. The reason for this failure is mainly related to the re-explosion of the Middle Eastern conflicts. But there is more. The fact that, despite all the resources invested and the (economic) results achieved, Europe’s profile and credibility in the Middle Eastern and Euro-Mediterranean area has not significantly improved is striking. Between 1995 and 2003 the MEDA program, the financial tool for Euro-Mediterranean cooperation, has invested approximately 5,500 million EUR in technical cooperation and assistance programs. It is important, on the other hand, that a re-launching of the Euro-Mediterranean

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dimension achieves better results in the framework of the Organization for Security and Cooperation in Europe (OSCE), a pan-European organization whose members also include Russia and the United States. This Euro-Mediterranean dimension is of utmost importance for countries such as Italy, as well as Spain and France. Even more so for Italy’s south, and the small business systems in this country, whose “near abroad” is the Mediterranean. (5) EFTA. This review would not be complete without mentioning the European Free Trade Area. Although EFTA now includes very few countries (Switzerland, Norway, Iceland, and Lichtenstein), after the others joined the EU, this organization is an example of European integration without any implication of an EU enlargement. EFTA countries enjoy the same four basic freedoms of the EU domestic market: free movement of goods, people, services, and capitals. They have by now harmonised almost all their standards to the acquis communautaire. (6) The Euro-Atlantic partnership. The German presidency of the EU has launched in 2007 an initiative for the integration between the EU and the United States. This integration does not only have a value per se from the standpoint of the cooperation between great powers on a global level. It also has a special importance for European integration. In fact, the United States has historically played, since the Marshall Plan, a decisive role in supporting European integration. Its presence and strategic vision in the “near abroad” areas (Balkans, Caucasus, Central Asia), in addition to the relations with Russia, make it a privileged counterpart to promote a European integration, which not only fosters stability and growth in Europe, but contributes to give Europe a leading position in the global arena. This is why a US membership in pan-European organizations and institutions such as OSCE, the Council of Europe, or the UN Economic Commission for Europe, should not only be considered normal, but of key importance. This review of the available tools for European integration leads us to two important indications. First, considering the opinions expressed on the available policy measures, we must acknowledge that, theoretically, enlargement is still the most effective tool for European integration. Therefore, we must hope that the enlargement policies are not shelved despite the present “fatigue” and resistance. This is particularly true for the Balkans, where political commitments in this direction have already been made and, therefore, a reversal cannot be afforded. But it could also apply to other countries such as Georgia and Ukraine. It is in the interest of the EU not to close its doors and continue the enlargement process in due time, following the necessary procedures. Second, since the enlargement cannot solve all problems, and the integration problems cannot wait for the timing and fears of the enlargement to elapse, it is clear that there is a missing link. There is a lack of an effective European integration tool other than the EU enlargement. This is the priority and urgent issue we have to confront: is it possible to integrate without enlarging?


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8 Integration Without Enlargement: The “Great Europe” Perspective The solution to the problem is, in our opinion, the introduction of the panEuropean integration concept, in the discussion, i.e. the construction of a “Great Europe” of integrated economies and markets, a Great Europe of common standards and dialogue on an equal basis on the policies, a Great Europe including all countries claiming for any reason they feel part of the European community, from the Atlantic to Central Asia, from the Mediterranean to the Caspian and the Baltic, a Great Europe which does not challenge the prerogatives of the national states and does not imply substantial sovereignty transfers, especially in non-economic matters, but allows the countries who so wish, to further proceed with the political and institutional integration, with deeper EU links and with enhanced cooperation on specific issues. Integration in the Great Europe would allow movement from the present stalling phase, since, without questioning the enlargement, it gives the opportunity to create a large community, where all possible and useful parties are represented. It would also enhance the multilateral dimension, allowing everybody’s participation in the common project, and it would therefore exploit in full the power of attraction of the concept of Europe without preventing the EU from proceeding in strengthening the institutions or conclude reinforced cooperation arrangements should the political conditions exist. The fields and issues where an integration can take place are those at the centre of the discussion in the dialogue with the “near abroad” and Russia include: energy in the first place and, in particular, energy security and dialogue between energy-producing and energy-consuming countries; the environment, requiring ambitious policies in the countries with a transition economy; transportation, Euro-Asian and Euro-Mediterranean networks, transport safety and energy saving issues; trade and border crossing issues; product and communication standards, and so on. The list can be extended at will, based on the political drive of the European countries. The important thing is a forum for intergovernmental dialogue between countries on economic issues, and this forum must correspond to the concept of a pan-European community, open, therefore to any country feeling part of Europe because of its culture, traditions, strategic interests, and vision of the future. I imagine this approach will immediately open some institutional questions. Are we creating a new institution? If so, in what form? According to which path? We believe it is important now to work on policies and on the concepts underlying the policies – institutions will follow later. We must avoid counting the chickens before they are hatched, as we have sometimes done in foreign policy and common security. After all, some institutions with a pan-European scope already exist, and maybe a reform would be sufficient to accommodate the project. Furthermore, many institutions already operate on a regional level, such as the Central European

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Initiative, the Stability Pact, the Black Sea Economic Cooperation Organization (BSEC), EFTA, etc. Therefore, the Great Europe would simplify and streamline the institutional framework rather than complicating it. Furthermore, the Great Europe is already in progress in some specific fields. For instance, the Commission under President Barroso has launched an initiative to eliminate some community regulations on transport or environment, leaving or promoting regulations with a wider, pan-European scope. Also, with respect to energy, a dialogue between producing and consuming countries in Europe is starting with a pan-European outlook. Some preliminary conditions, though, must be fulfilled to provide force to the project: 1. First, the construction of the Great Europe requires a common commitment and agreement of the EU, Russia, and the United States. The concept is to abandon the post-imperial logic and the competition over the spheres of influence. This is the only way to create a perspective for a future non-conflicting integration in the Balkans, the Caucasus, and Eurasia. 2. Second, the EU must dismiss the (implicit) prejudice that there is no other Europe but the EU. There are already several other “Europes”, all equally legitimate: the Europe of the euro, the EFTA, the OSCE and that of the European Union. In general, a European configuration in concentric circles is gaining support. With the euro and the strengthened cooperation arrangements a hard core of a more integrated Europe can be developed – as called for by the United States of Europe project (see Verhofstat 2005). But we must also work on the outer circle of the Great Europe and pan-European integration. 3. Finally, the EU must play a leading role in the construction of the Great Europe. The European Union must have a policy for Europe. The EU European policy cannot be confined to enlargement or to an “external” neighbourhood policy. There is an intermediate dimension of pan-European integration where the EU must play a leading role. In order to illustrate this concept a brief digression on the US American policy is called for.

9 US Policies for the Americas and EU Policies for Europe Since the post-war years, the United States has developed a set of initiatives for the integration of the American continent. Unlike Europe though, they have not tried to proceed with enlargements and new memberships (I do not think there was ever a request to join the United States). On the contrary, they have promoted free trade areas at a North American level or for the complex of the “Americas”. Actually, the contrast with the European lexicon is interesting since the latter does not accept the plural of the concept of Europe, though there are several “Europes” as mentioned earlier. The idea of a “Free Trade Area of the Americas (FTAA)” was launched by the United States in the 1990s, aimed at fostering economic


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growth and progress in living standards. However, ideological conflicts and the fear of domination by the superpower have negatively affected the negotiation progress. The Brazilian President, Luis Inacio Lula da Silva, stressed in an interview in 2003 that “The FTAA does not belong to the US” and that all countries willing to join must have equal power. As we can see, there is a US factor in America with an opposite sign compared with the E factor; in other words, the American superpower does not attract, but actually repels and frightens potential candidates for integration. The 2005 summit in Mar del Plata therefore ended with a half failure: two opposite declarations were adopted upon summit conclusion – one in favour and one against the FTAA goal. Europe has a different problem. The countries of the European continent aim to join the EU, except for some notable exceptions such as Norway or Switzerland. It is the EU who is unwilling to expand. But the EU does not accept a policy of integration of the European continent other than enlargement. This schizophrenia generates the well-known contrast between increasing drives to new enlargements and the stall of the economic integration processes. The way out of this paradox is pan-European integration. Europe today is at a crossroads – either we succeed in opening a new perspective with a new long-term vision of Europe’s future, capable of integrating the whole continent, without unrealistically driving on the road to EU enlargement, or Europe risks remaining stuck in the quicksand of the EU crisis, which is a crisis of stalled internal integration/liberalization/reform processes as well as a crisis of inability to promote externally Europe’s development and integration.

References Abraham F, Konings J (1999) Does the opening of Central and Eastern Europe kill jobs in the West. World Econ 22:585–603 Angeloni I, Flad M, Mongelli FP (2005) Economic and monetary integration of the new member states: helping to chart the route. ECB occasional paper no. 36 Baldwin R, Windgrèn M (2005) The impact of Turkey’s membership on EU voting. CEPS policy brief no. 62 Barysch K (2006) Enlargement two years on: economic success or political failure? Confederation of Danish Industries, Copenhagen Boeri T, Bruecker H (2001) The impact of Eastern enlargement on employment and labour markets in the EU. Report for the European Commission, Brussels Breuss F (2002) Benefits and dangers of EU enlargement. Empirica 29(3):245–274 Doyle O, Fidmuc J (2004) Who is in favour of enlargement? Determinants of support for EU membership in the candidate countries referenda. CEPR discussion paper no. 4273 Easterly W (2004) Globalization, inequality and development: the big picture. New York University discussion paper no. 2004-E-20 Easterly W (2005) The utopian nightmare. Foreign Policy, September–October Easterly W (2006a) The big push déjà vu: a review of Jeffrey Sachs’s the end of poverty. J Econ Lit 44:118–127 Easterly W (2006b) An identity crisis? Examining IMF financial programming. World Dev 34(6)

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EBRD (2005) Transition report. EBRD, London EBRD (2006) Transition report. EBRD, London European Commission (2001) The economic impact of enlargement. Enlargement paper no. 4, Brussels European Commission (2002) Getting information on Europe: the enlargement of the EU, support for European integration. Special Eurobarometer no. 166, European Commission, Brussels European Commission (2005a) Integrated guidelines for growth and jobs (2005–2008). The EU Economy 2005 Review, Brussels European Commission (2005b) Rising international economic integration – opportunities and challenges. The EU economy 2005 Review, Brussels European Commission (2006a) Enlargement, two years after: an economic evaluation. Occasional paper no. 24, Brussels European Commission (2006b) Enlargement, two years after – an economic success. Communication of the EC to the Council and the European Parliament, Brussels European Commission (2006c) Strengthening the European neighbourhood policy. Communication from the Commission to the Council and the European Parliament, Brussels, December Garonna P (2006) Prospects for the Caspian economy: a Pan-European perspective. Paper presented at Bled Strategic Forum, Bled, Slovenia, August Garonna P (2007) What is new about new Europe’s view of the future of Europe. In: Gaspar P, Jaksa RA (eds) Knowledge economy, innovation and growth in Europe. e-book, ICEG European Center, Budapest Grassini M (2001) Eastern enlargement to the EU: economic costs and benefits for the EU present member states? The Italian case. European Commission, final report. Heijdra B, Keuschnigg C, Kohler W (2002) Eastern enlargement of the EU: jobs, investment and welfare in present and member states countries. CESifo working paper no. 718(7) International Commission on the Balkans (2005) The Balkans in Europe’s future. R. Bosch Stiftung, Stuttgart, Germany Kohler W (2004) Eastern enlargement of the EU: a comprehensive welfare assessment. J Policy Model 26:865–888 Kopits G, Székely IP (2002) Fiscal policy challenges of EU accession for the Baltics and Central Europe. Conference paper Oesterreichische Nationalbank, Wien, 3–5 November Korhonen I (2003) Some empirical test on the integration of economic activity between the euro area and the accession countries. Econ Transit 4:331–347 Krastev I (2005) The European Union and the Balkans: enlargement or empire? Open Democracy, April Lejour AM (2001) EU enlargement: economic implications for countries and industries. CESifo working paper no. 585 Maliszewska M (2003) EU enlargement: benefits of the single market expansion for current and new member states. Centre for Social and Economic Research, Poland Radosevic S, Sachwald F (2005) Does enlargement conceal globalisation? Location issues in Europe, Les notes de l’Ifri no. 58 Read R, Bradley S (2001) The economics of eastern enlargement of the EU. Ind Relat J 32(5):380–400 Sachs J (2000) Globalization and patterns of economic development. Weltwirtsch Arch 136(4) Sachs J (2006) The end of poverty: economic possibilities for our time. Penguin, New York Stiglitz JE (1998) International development: is it possible? Foreign Policy Stiglitz JE, Charlton A (2005) Fair trade for all, how trade can promote development. Oxford University Press, Oxford UNCTAD (2005) World investment report. United Nation Conference on Trade and Development, Geneva Verhofstadt (2005) Gli Stati Uniti d’Europa, Manifesto per una nuova Europa, Fazi Editore, Roma, Italian translation published in 2006

Trade and Foreign Direct Investment: Italy, Germany, and the New Europe 1

G. Giovannetti and F. Luchetti

1 Introduction Over the last 10 years, Central and Eastern European countries (CEECs), the “New Europe”, have gradually increased their integration in world trade and in the international production networks, which distribute sequential stages of production across production sites in different countries. In the “new” scenario, with highly integrated global markets, these countries have nearly doubled their market shares on world exports, mainly as a result of increasing integration with other Western European countries (EU-15). To some extent these countries are now challenging China in its role of “world factory”. They have indeed replaced the “old” EU-15 countries in some sectors (or phases) of production, namely, textiles and apparels, leather and leather products, and motor vehicles. Furthermore, they have gained an increasing role in European Union trade, becoming privileged partners for intra-industry trade, which in the past was confined to industrialised countries, and for trade in intermediates. The “New Europe” has in fact become not only an increasingly important destination a market for both Italian and European firms, but also an important supplier of intermediate inputs (parts and components), semi-finished and finished goods, a market for temporary exports and re-imports, and a location for some stage of production, generally low value-added phases. In this growing integration process between Old and New Europe, Italy and Germany have played a crucial role, both as suppliers and as investors. Foreign direct investment (FDI) inflows, especially from Germany, have in turn induced a change in trade patterns and comparative advantages of CEECs, where the sectors receiving more FDI are mainly those with increasing market shares. In this paper we describe trade and FDI dynamics between Italy and the EU-15 (Germany) on the one side and the “New Europe” on the other, providing some hints both at macro and firm levels. We also focus on the effects of the international fragmentation of production on imports, exports, and FDI, emphasizing the main differences in the roles of Italy and Germany. 1

This paper is a translation of an article published in a volume of the Fondazione Edison series, L’Europa allargata, l’Est e l’Italia. Le politiche, l’economia, le imprese, il Mulino, Bologna, 2007. The authors gratefully acknowledge the project Firb RBNE03YT7Z_006.


73

74


2 Trade Flows and Foreign Direct Investments Since the second half of the 1990s, New Europe countries2 have experienced high growth, a strong integration process with the EU, and significant changes in their production patterns. Following strong capital inflows, in particular from the Old Europe, trade flows between the “two Europes” have expanded considerably, and CEECs have gained increasing relevance as destination markets for European products. Around 8% of total EU-15 export flows are directed to CEECs; for Italy, the share is slightly higher (it was about 11% in 2004) and has gradually increased over the years (it was just above 7% in the second half of the 1990s) (Table 1). The bulk of EU exports to CEECs goes to Poland (more than 20% of total EU-15 export in the area), Russia (18%), the Czech Republic (15%), and Hungary (12%). If we consider the bilateral trade of Italy, a high percentage of exports is concentrated in Poland (16%) and Russia (16%), but in contrast to EU-15, Romania also plays a major role, mainly thanks to the high number of Italian firms relocating phases of production there. The weight of Italian exports to Romania is more than double than that of the EU-15 (14.2 and 6.9%, respectively). Table 1. EU-15 exports to main areas EU-15 EU-15 France Germany

Italy

1996

2004

1996

2004

61.4

61.1

55.3

53.7

9.6

9.4

12.5

12.3

13.5

12.0

17.4

13.6

CEECs

5.7

7.9

7.6

10.8

Africa

2.9

2.7

3.4

3.7

North America

7.6

9.1

8.1

8.8

United States

7.0

8.3

7.4

8.0

Latin America

2.6

1.9

4.8

2.8

Asia 11.0 Source: Eurostat and Istat

9.7

13.2

11.0

In comparison to trade flows, the weight of Foreign Direct Investments (FDI) to CEECs, though increasing, is substantially lower, representing about 3% of total outstock for both EU and Italy. FDI to CEECs is both vertical (export oriented), often comprising relocation of phases of production induced by low production costs, and horizontal (market seeking). The geographical pattern shows some significant differences. While on average EU-15 capital outflows tend to flow mainly to Central European countries (Poland, Czech Republic, Hungary, which are also the EU main trading partners), Italian FDI tend to go to Romania and Croatia, as well as Poland (Figs. 1 and 2). 2

In what follows we refer either to “New Europe” or to Central Eastern European Countries (CEECs), unless we refer explicitly to Romania and Bulgaria.

Trade and Foreign Direct Investment: Italy, Germany, and the New Europe

75

EU15 59%

Asia 5% North Am erica 16%

Others 10%

Latin Am erica Africa 2% 5%

CEEC's 3%

Fig. 1. FDI stock EU-15 (source: UNCTAD)

EU15 70%

Asia 2% North Am erica 9%

Latin Am erica 5%

Africa CEEC's 2% 3%

Others 9%

Fig. 2. FDI stock Italy (source: UNCTAD)

3 Italy and Germany: A Comparison Italy and Germany are, amongst the EU-15 countries, the most important partners for the CEECs. Germany, which is the first exporter of manufacturing in the world, favoured by its long historical ties and its geographical position, is also the main exporter in the New Europe, where its share is over 20% (Table 2). Italy, which is the eighth exporting country at world level3 and third in CEECs after Germany and 3

See ICE (2007) for a ranking of main exporters at world level.

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Russia, with a share of more than 7%, has a strong relative position, in particular in Croatia and Albania (where Italy is the main trade partner, with 17 and 30% of the market, respectively), in Slovenia (18%), and in Romania (17%). Table 2. Market shares in CEECs

1996

2004

Germany

18.2

21.2

Russia

12.6

9.7

Italy

7.8

7.4

France

3.7

4.8

Austria

3.6

4.0

China

1.4

4.0

Source: Italian Institute for Foreign trade (ICE) on IMF-DOTS data

In the period 2000–2005 the relative position of Italy and Germany in the “New Europe” has, on the whole, shown a similar trend. As shown in Fig. 3 below, both have increased their market shares in some destination countries such as Bulgaria, Latvia, and Estonia, while experiencing substantial loss in other markets, particularly in Romania, in the case of Italy, or the Czech Republic and Slovakia in the case of Germany.

6

Market shares of Italy and Germany in CEECs

Estonia 4

Latvia

2

German market shares

Bulgaria Lithuania 0

-6

-5

-4

-3

-2

Slovenia Croatia

Romania

-1

0

Poland

Slovakia

Hungary

-2

-4

-6

Czech Rep -8

Italian market shares

Fig. 3. *Changes between 2000 and 2005 source: ICE on IMF DOTs data

1

2


77

Central and Eastern European countries, on the other hand, have strongly increased their degree of penetration both in the Italian and German markets, even if they only account on average for 3–4% of Italy and Germany’s imports. Most countries have strengthened their position in the old European markets over the years, but while countries such as Hungary, Poland, and Slovakia have mostly increased their presence in Germany, Bulgaria and Romania have been more oriented towards Italy (cf. Fig. 4). Geographical proximity, historical factors, and most of all relocation processes and capital inflows have fostered the evolution of trade specialization patterns of the New Europe, in particular, the Central European countries. As a consequence of this process, Hungary and, to a smaller extent, Poland, Slovakia, and the Czech Republic, over the years have succeeded in shifting their comparative advantages towards medium high-tech productions, developing production structures similar to Germany. Bulgaria and Romania, on the other hand, with their strong comparative advantages in traditional sectors, have shown stronger links with Italy and have kept, and in some cases strengthened, their specialization in traditional sectors and low value-added productions. It does not come as a surprise that a large portion of trade flows between Italy and these two countries is concentrated in traditional sectors (Table 3). Almost one third of Italian exports to Bulgaria consists of textiles, apparel products, and footwear. In the case of Romania, the share of Italian exports in the same sectors is even higher (about 40%) while imports are more than 50%. Large two-way flows suggest that the extent of outsourcing is significant.

0,6

Slovakia

Russia

CEECs market share in Germany

0,5

0,4

Hungary

Poland

0,3

0,2

Romania

0,1

Bulgaria

0,0 -0,1

0,0

Lithuania 0,1

Estonia Latvia -0,1

Croatia

0,2

0,3

Czech Rep 0,4

0,5

0,6

0,7

CEECs market share in Italy

Slovenia

Fig. 4. Market shares of CEECs in Germany and Italy. *Changes between 2000 and 2005 (source: ICE on IMF DOTs data)


Table 3. Sectorial distribution of trade flows between Italy and CEECs

Exports

2.1

Food products, beverages, and tobacco

6.2 3.3 2.4 7.6

Chemicals, chemical products, and man-made fibres

Rubber and plastic products

Glass, ceramic, and construction products

Basic metal and fabricated metal products 8.9

1.0 0.0

Other manufactured goods

Energy and other products n.e.c

100.0

2.4

Furniture

Total

0.1

10.6

Other transport equipment

Motor vehicles

Electrical and optical equipment

21.3

0.8

Coke and refined petroleum products

Machinery and equipment

2.0

100.0

3.2

1.1

1.5

3.0

8.0

13.1

20.5

13.1

2.5

5.6

8.8

0.2

0.2

1.8

3.3

1.8

5.8

0.3

11.7

3.9

4.4

0.1

2.0

Wood and products of wood and cork (except furniture) Pulp, paper, and paper products

Leather and leather products

Apparel

14.8

0.1

Products from mining and quarrying

Textile and textile products

0.7

Products of agriculture, fishing, and forestry

100.0

0.0

1.3

3.8

2.6

5.0

5.8

15.2

19.2

4.3

3.8

8.4

1.2

2.1

0.7

4.4

5.0

6.8

5.4

2.9

2.0

100.0

3.4

1.9

1.1

0.4

16.6

8.6

25.4

11.3

2.1

5.7

7.8

0.3

1.8

0.2

3.1

1.3

4.9

2.6

0.1

1.6

100.0

0.0

1.8

1.7

0.2

4.6

7.4

17.4

11.0

1.5

3.0

4.8

0.5

1.4

0.4

17.5

7.9

16.8

1.6

0.1

0.3

100.0

0.1

1.6

8.4

0.7

1.7

6.6

33.1

7.2

2.2

2.3

5.8

0.0

1.5

0.9

6.8

11.2

5.0

3.9

0.0

1.0

6.4 100.0

100.0

0.6

1.4

0.8

8.2

6.5

12.5

17.9

3.3

3.6

9.6

11.3

2.2

1.0

2.0

1.5

3.5

4.3

0.3

3.1

7.4

1.1

1.4

0.2

6.1

14.3

21.0

13.4

2.1

5.4

6.7

0.1

1.5

0.4

5.9

1.8

7.1

2.8

0.0

1.1

100.0

3.4

2.0

1.7

0.6

7.0

15.9

17.7

13.1

3.0

4.7

9.7

0.2

2.1

0.3

3.5

1.5

8.4

3.4

0.1

1.6

Bulgaria Czech Republic Croatia Poland Romania Russia Slovakia Slovenia Hungary

78

Source: ISTAT – Italian National Institute of Statistics

Total

Products of agriculture, fishing, and forestry Products from mining and quarrying Food products, beverages, and tobacco Textile and textile products Apparel Leather and leather products Wood and products of wood and cork (except furniture) Pulp, paper, and paper products Coke and refined petroleum products Chemicals, chemical products, and man-made fibres Rubber and plastic products Glass, ceramic, and construction products Basic metal and fabricated metal products Machinery and equipment Electrical and optical equipment Motor vehicles Other transport equipment Furniture Other manufactured goods Energy and other products n.e.c

Imports

Table 3. (continued)

2.1 1.1 3.1 11.6 14.6 15.1 1.9 0.8 3.2 7.4 1.2 0.8 24.6 5.2 4.8 0.3 0.1 1.5 0.4 0.1 100.0 1.0 0.1 5.1 7.5 0.9 0.7 2.0 3.3 0.0 8.6 4.1 3.2 10.9 1.3 18.0 19.1 0.6 0.3 0.6 2.7 100.0

4.4 14.6 8.8 9.1 9.7 6.3 7.5 1.7 3.2 7.8 1.5 3.1 9.5 3.2 2.8 0.5 3.3 2.0 0.9 0.1 100.0 2.8 0.9 6.0 1.7 1.8 0.9 1.3 1.6 0.2 4.9 3.3 1.7 5.5 4.8 8.7 49.3 1.3 1.0 0.5 1.7 100.0

1.7 0.1 1.0 7.6 23.9 23.4 3.6 0.5 4.4 3.3 1.6 0.9 10.0 6.6 6.4 1.1 0.3 2.8 0.9 0.1 100.0 0.6 74.0 0.5 0.3 0.0 0.9 0.8 0.4 4.8 1.7 0.1 0.0 15.1 0.3 0.1 0.1 0.1 0.1 0.0 0.0 100.0

1.6 0.1 2.2 1.7 4.0 4.6 3.3 5.8 0.0 8.3 1.4 1.3 12.4 13.4 14.6 22.4 0.1 0.6 0.3 2.1 100.0

2.0 0.5 5.2 4.3 0.5 1.6 3.9 3.3 0.0 6.9 3.0 2.9 17.4 7.8 8.4 16.3 0.7 2.8 1.0 11.7 100.0

7.5 0.1 4.5 4.9 7.5 1.9 1.9 1.2 0.1 10.1 2.8 0.8 6.6 5.9 32.3 7.8 0.1 0.7 0.6 2.6 100.0

Bulgaria Czech Republic Croatia Poland Romania Russia Slovakia Slovenia Hungary

Trade and Foreign Direct Investment: Italy, Germany, and the New Europe 79

80


The fragmentation of international production processes, which can take the form of outsourcing abroad or involve exchange of products from the same industry and import of intermediate goods, can partially explain the differences in trade links between the Old and “New Europe” countries mentioned above. Indeed, flows between Italy and Germany on the one side and “New Europe” on the other side largely consist of intra-industry trade.4 This seems to be particularly high in the case of Germany. Both for Italy and Germany intra-industry trade appears to be mainly vertical and positive, suggesting that these two countries import goods characterised by lower quality with respect to their exports. This in turn seems to suggest that intra-industry trade is linked to outsourcing. Only trade between Italy and Romania seems to be horizontal and this could be due to a higher degree of similarity in specialization. As for trade flows, geographical and sectorial distributions of foreign direct investment from Germany and Italy present some significant differences (see Bonassi et al. 2006). FDI flows in CEECs come mostly from Germany. As shown in Figs. 5 and 6, German FDI, mainly directed to the Central European countries (Slovakia, Hungary, and the Czech Republic), tend to concentrate in productions related to national traditional industries (especially transport equipment, mechanical and electrical machinery), and services (trade, transport, telecommunication, and professional services). Italy, on the other hand, shows a relatively strong presence in low-tech productions (e.g. textiles) and flows go to the Balkans (especially Bulgaria and Romania). The internationalization model of Italian firms in CEECs is coherent

German Foreign Direct Investment

20,0 Trade in services

15,0

Other 10,0professional services Transports & TLC Energy 5,0 Rubber and Plastic

Construction Paper 0,0 0,0

Food products

Chemicals

5,0

Transport equipment

Electrical equipment

Construction products

Metals and metals products Textiles


10,0

15,0

20,0

25,0

Italian Foreign Direct Investment

Fig. 5. Sectorial distribution of investment (employment data) source: MIDI and ICE reprint

4

Intra-industry trade may involve horizontally differentiated goods, considering different goods (exchange of varieties), or vertically differentiated goods (exchange of qualities). Vertically differentiated goods can be positive and negative. Results on intra-industry trade are available on request. Figures referring to trends described in the text and which have been presented at the conference have not been included in the paper for reasons of space. See Landesmann (2003) and Baldone et al. (2001, 2002) for a discussion of these and related issues.


German Foreign Direct Investment

25

81

Trade in services

20

Transport

15

Energy Other prof.sevices

10

5

0

Electrical equipment

Trasports and TLC

0,0

2,0

Construction products

Food products

Chemicals Rubber and Plastic Paper Costruction


4,0

6,0

8,0

10,0

Metals and metal products

12,0

14,0

Italian Foreign Direct Investment

Fig. 6. Sectorial distribution of investment (turnover data) source: MIDI and ICE reprint

with the characteristics of the specialization in the “Made in Italy” products and with the specific production structure, e.g. Italian firms, substantially smaller than German ones, tend to outsource phases of production or invest in “closer” areas, both in a logistic and a geopolitical sense. If we consider commercial investments instead of manufactures, however, the picture is slightly different.5 To gain further insight, integrate the picture described above, and provide further elements to support the trends presented, we looked at firm’s data, confining the analysis to Italy (Tables 4 and 5). Over the years, an increasing number of Italian foreign affiliates have located subsidiaries in the CEECs. According to the ICE reprint dataset, by January 1, 2005, the last available year, “New Europe” was the most important destination area for Italian initiatives abroad, second only to the EU-15.6 The share of foreign affiliates in the region is even higher if we focus our attention on the manufacturing sector (more than 20% of total initiative abroad both in terms of number of affiliates and of employees). Almost 90% of the employees in the region are concentrated in manufacturing, a very high share, especially if compared to other areas, such as Latin America (about 65%). It is interesting also to note that sectors such as ICT and software, in which specific trade is fairly low, play a relatively major role with respect to other areas. Firms that have moved part of their production processes in the “New Europe” are mostly small and medium enterprises (SMEs), specialised in the production of traditional goods. This is mainly due to the fact that it is very difficult for SMEs to afford the high costs and risks involved in reaching far away markets and often they prefer to remain in Europe or in neighbouring countries. 5 See Mariotti and Mutinelli (2007) for an analysis of Italian commercial FDI. The topic, very interesting in itself, is outside the scope of this paper. 6 Preliminary data from 2006 also confirmed the results presented above, see Mariotti and Mutinelli (2007).

82


Table 4. Firms exporting and outsourcing abroad Relocation area Sectors

Food

% of out- Romania China India sourcing firms

EU Other CEEC Others countries, Albania, Turkey

2.1

0.0

0.0

0.0

0.0

80.0

20.0

Textiles

14.7

34.2

4.8

3.3

0.0

51.4

29.0

Leather

15.1

74.3

20.9 10.3

0.0

21.8

10.0

Wood

2.2

29.9

0.0

0.0

0.0

0.0

70.0

Paper

1.6

84.4

0.0

0.0

0.0

0.0

15.0

Oil

1.4

0.0

0.0

0.0 100.0

0.0

0.0

Chemicals

0.5

21.5

0.0

0.0

24.7

0.0

78.0

Rubber

5.6

6.5

53.0

0.0

40.6

6.5

66.0

Non-metalliferous minerals

0.5

29.9

29.3

0.0

0.0

22.0

48.0

Metals

3.4

10.3

37.7

0.0

6.6

24.2

22.0

Mechanics

7.3

6.1

32.2 32.4

32.1

20.9

29.0

Electrical

13.8

19.8

61.9 30.7

7.5

36.8

0.0

Transports

4.3

26.3

11.9 11.9

6.6

75.0

0.0

Others

8.4

25.5

18.9

0.0

19.6

36.6

0.0

Source: The Institute for Studies and Economic Analyses (ISAE)

A survey on Italian firms conducted by ISAE 7 also stresses the peculiarities of Italian firms relocating production in CEECs: they are concentrated in traditional sectors, textiles and leather, and particularly in Romania. More recently, Costa (2007) has pointed out that firms relocating in Romania tend not to change their traditional subcontractor, contrary to firms going further away. Another analysis (De Benedictis and Giovannetti 2008) based on a dataset obtained by merging a Capitalia survey and ICE reprint and limited to manufacturing firms, also confirms the previous results (see also Capitalia, 2005). Considering the distribution of exports by sectors in the different destination areas, investment tends to be significant in sectors which are often the same ones where trade flows go. Using data at the firm level the results are similar to those obtained using sectorial data: the main sectors of relocation turn out to be mechanical machinery and equipment (21% of total in terms of firms, while it was 22% in terms of export flows at sectoral-macro level), textiles and clothing (12.6 and 14.7%, respectively), and metals (13 and 10.7%). 7

Preliminary results of the survey are reported in Costa (2005). See also Costa (2007).


83

Table 5. Sectorial distribution of exports by destination area Destination area Sectors

% exporting CEECs firms by sectors

China South America

EU

North Others America

Food

10.0

5.7

4.6

6.2

10.1

10.2

8.5

Textiles

12.0

12.6

10.7

6.6

12.2

14.6

12.0

Leather

4.7

3.9

5.6

2.1

4.7

6.2

5.9

Wood

2.3

1.8

1.9

0.7

2.3

1.0

1.7

Paper

4.0

3.2

1.9

3.1

4.0

2.5

1.8

Oil

0.3

0.2

0.2

0.3

0.1

0.3

Chemicals

5.8

6.6

4.6

6.9

5.3

4.7

5.6

Rubber

5.8

6.5

4.6

6.4

6.0

5.6

5.4

Non-metalliferous minerals

4.2

3.9

3.2

3.6

4.0

4.6

4.4

Metals

15.0

13.7

8.6

11.9

14.9

10.0

11.4

Mechanics

17.2

20.7

32.4

29.7

17.3

20.7

21.9

Electrical

8.5

9.0

14.5

11.7

8.7

8.5

10.6

Transports

2.8

1.9

1.9

3.8

2.5

2.6

2.3

Others

9.0

10.5

5.6

7.1

7.6

8.8

8.3

3,202

1,079

373

579

2,804

1,267

1,363

33.7

11.6

18.1

87.6

39.6

42.6

Total of exporting firms (% by area)

Source: Merge of Reprint Capitalia database

In terms of the political economy, it is very important to find the effects of outsourcing on the labour market. Some preliminary results from the ICE reprint and ISAE data seem to suggest, for instance, that Italy has not suffered substantial employment loss in sectors where production was outsourced. It is likely that firms deciding to outsource abroad are the most dynamic, the ones which have reacted to the new challenge of globalization, improving the quality of goods produced domestically and/or transferring abroad low value-added production phases. But obviously we cannot exclude a priori that the acquisition of production capacity abroad can be a substitute for domestic activity rather than a complement; unfortunately we do not have appropriate reliable data to test what happens at the different stages of production and if a firm, maybe a subcontractor, exits specific markets or closes down.8 8 See Barba Navaretti and Venables (2004) and Costa and Ferri (2007) for a discussion of these issues.

84


4 Conclusions The analysis of the trade and investment patterns points out that Italy and Germany are the two most important partners for CEECs. The “New Europe” represents a market in expansion and is an important “case of success” in the world scenario of the last 10 years. Especially in the case of Italy, trade links are substantially more important than FDI, but this could simply be the consequence of the small size of Italian firms investing abroad. However, the analysis of trade flows (especially import flows) and FDI seems to suggest that a relevant number of Italian firms have indeed relocated several phases of production in the “New Europe”. This was most likely a reaction to the challenges of globalization: the high value-added phases of productions were kept in Italy, so that the value of Italian export was maintained even with a fall in export volumes. This “stylised fact” seems to be coherent with recent research suggesting a quality upgrading in the production of traditional goods in Italy.

References Baldone S, Sdogati F, Tajoli L (2001) Patterns and determinants of international fragmentation of production: evidence from outward processing trade between the EU and the CEECs. Weltwirtschaftliches Archiv 137(1):80–104 Baldone S, Sdogati F, Tajoli L (2002) EU enlargement to the CEECs: trade competition, delocalisation of production, and effects on the economies of the union. Franco Angeli, Milan Barba Navaretti G, Venables A (2004) Multinational firms in the world economy. Princeton University Press, Princeton Bonassi C, Giovannetti G, Luchetti F (2006) Due Modelli di Integrazione commerciale e produttiva con l’Europa Centro – Orientale: un confronto tra Italia e Germania. In: L’Italia nell’economia internazionale, ICE Annual Report, Rome Capitalia (2005) Indagine sulle imprese italiane, Rome Costa S (2005) La delocalizzazione nel settore manifatturiero italiano – primi risultati da un’inchiesta ISAE. In: L’Italia nell’economia internazionale, ICE Annual Report, Rome Costa S (2007) La delocalizzazione nel settore manifatturiero italiano: primi risultati dall’inchiesta ISAE 2007. In: L’Italia nell’economia internazionale, ICE Annual Report, Rome Costa S, Ferri G (2007) Firing at subcontractors? Spillover employment effects of offshoring in Italy. http://www.dse.uniba.it De Benedictis L, Giovannetti G (2008) Rapporto sulla delocalizzazione delle imprese italiane: una ricerca congiunta CER-ICE. Collana Fondazione Manlio Masi, Rubettino Editore ICE (2007) L’Italia nell’economia internazionale. Annual Report, Rome Landesmann M (2003) Structural features of economic integration in an enlarged Europe: patterns of catching-up and industrial specialisation. European Commission Economic Papers no. 181 Mariotti S, Mutinelli M (2007) Italia multinazionale 2005, Rubettino Editore

Integrating the Balkans with the European Union 1

M. Uvalic

1 Introduction The present paper addresses the issue of economic (and political) integration of the Balkans with the European Union (EU). The focus of the paper is on the five countries in the western Balkan region (the SEE-5)2: Albania, Bosnia and Herzegovina, Croatia, Former Yugoslav Republic (FYR) of Macedonia, Serbia and Montenegro. Although Kosovo is still formally part of Serbia, it will be explicitly excluded from the analysis.3 Occasionally, the wider definition of the region is used which also includes Bulgaria and Romania (the SEE-7). Although these two countries entered the EU in January 2007, they may serve as useful points of reference in a comparative framework, given that they are also part of the Balkans region. The paper will briefly recall the events of the 1990s, as they are crucial for understanding the present economic and political situation of the SEE countries. It will then discuss recent macroeconomic performance, progress achieved with transition-related reforms, and the important issue of integration with the EU. Some tentative conclusions regarding future prospects are given at the end.

2 Background: From Political and Economic Instability Towards EU Integration The transition to a market economy and multiparty democracy started after 1989 in Southeast Europe (SEE), which at that time consisted of only four countries: Albania, Bulgaria, Romania, and SFR Yugoslavia. However, the new course was 1

This paper is a translation of an article published in a volume of the Fondazione Edison series, L’Europa allargata, l’Est e l’Italia. Le politiche, l’economia, le imprese, il Mulino, Bologna, 2007. 2 In the meantime, they have become six countries, following the referendum on independence in Montenegro in May 2006. Serbia and Montenegro became two independent states in June 2006. Most statistics in the paper refer to Serbia and Montenegro while they were still one country. 3 Since mid-1999 when the war in Kosovo ended, according to the UN Security Council Resolution 1244, Kosovo remains officially part of Serbia but has effectively been administered by the UNMIK (United Nations Mission in Kosovo). A. Quadrio Cruzio and M. Fortis (eds.), The EU and the Economies of the Eastern European Enlargement. © Physica-Verlag Berlin Heidelberg 2008

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partly interrupted by the break-up of SFR Yugoslavia in mid-1991, which has had dramatic and multiple consequences for most of its successor states. On the political front, we have witnessed five military conflicts, including the 11-week NATO bombing of Kosovo/Serbia in 1999, authoritarian political regimes, priority given to political (nationalistic) over economic aims, UN/EU sanctions against FR Yugoslavia and its consequent isolation for almost a decade. On the economic front, most countries have experienced hyperinflation,4 very deep recession (even 80% fall in GDP in 1991–1993, following the Yugoslav break-up), very slow output recovery, return of economic crises in the second half of the 1990s, and practically no foreign direct investment (FDI). Throughout the 1990s, the SEE region has been characterised by political and economic instability, slow progress with transition, and delayed integration with the EU. A turnaround came after mid-1999, immediately after the end of the Kosovo conflict, thanks to both internal and external developments. Further steps towards democratisation were taken in two key SEE countries: in Croatia in early 2000 after President Tudjman’s death, and in Serbia after the September 2000 elections, when Kostunica’s Democratic Opposition of Serbia (DOS) replaced the Milosevic government. Parallel to these positive internal changes, a new international and EU strategy was proposed for the five countries of the western Balkans. In the first place, generous EU trade preferences were offered to all the SEE-5 (the last country to be included under the preferential trade regime was Serbia and Montenegro, in November 2000), which allowed duty-free entry into the EU for most products from the western Balkan countries. Even more importantly, the EU launched the Stabilisation and Association Process (SAP) in 2000, which envisaged the signing of Stabilisation and Association Agreements (SAA) with the SEE-5, a new programme of financial assistance specific for the SEE-5 (the CARDS programme), and the eventual prospects of these countries becoming members of the EU. In addition, in mid-1999 the Stability Pact for SEE was set up by the EU and its member states, other developed and European countries, and all major international organisations, with the intention of mobilising donor aid for the SEE-7 in three areas: democratisation, economic reconstruction, and security. Contrary to the SAP which is directed towards the SEE-5, the Stability Pact included all seven SEE countries. Bulgaria and Romania were also among the beneficiaries, since their economies were also indirectly damaged by the 1999 conflict in Kosovo. These initiatives have marked a radical change in international policies towards the western Balkans. The political and economic support offered by the international community, the EU and its member states in particular, has secured substantial donor assistance, as well as increased FDI over the last 6 years, both of which have been fundamental for economic recovery of the SEE countries.

4 FR Yugoslavia had an inflation rate in 1993 of 116.5 trillion per cent, which is one of the absolute records in economy history.

Integrating the Balkans with the European Union

87

3 Macroeconomic Performance In comparison with extreme economic instability characteristic of the 1990s, the last 6 years have seen a number of important achievements in SEE. First, macroeconomic stabilisation has been achieved in practically all SEE countries. During the 2000–2005 period, most SEE countries had one-digit inflation rates; the only exception was Serbia and Montenegro where, following substantial disinflation during 2001–2004, inflation again jumped to 17% in 2005, but a further decline was registered in 2006, to about 12%. There has also been substantial fiscal consolidation, characterised by declining fiscal deficits in recent years (even surpluses, as in the case of Serbia and Montenegro), although public expenditure remains high and relatively rigid in most countries, due to slow structural reforms. The SEE countries have also experienced rapid economic growth (see Table 1). In 2006, we saw the sixth consecutive year of strong growth in all SEE countries; the only exception was FYR Macedonia, as in 2001 it had a severe economic crisis due to the civil war. From 2001 to 2005, the SEE-7 had a 5% average GDP growth rate and outpaced the new EU member states from Central and Eastern Europe (CEE). A similarly high growth rate was also achieved in 2006 at around 5% (see EBRD 2006). Table 1. Real GDP growth in SEE (%) Real GDP growth (%) 2001

2002

2003

2004

2005

Central Europe

2.2

2.2

3.6

5.0

3.9

3.4

Balkans

4.8

4.7

4.5

6.8

4.5

5.0

Albania

7.2

3.4

6.0

5.9

5.5

5.6

Bosnia and Herzegovina

4.3

5.3

4.0

5.7

5.3

4.9

Bulgaria

4.1

4.9

4.5

5.6

5.7

4.7

Croatia

4.4

5.2

4.3

3.8

3.8

4.3

Macedonia

2001–2005

4.5

0.9

2.8

4.1

3.8

1.4

Romania

5.7

5.1

5.2

8.3

4.0

5.7

Serbia and Montenegro

5.5

3.8

2.7

8.0

5.0

4.9

Transition regions

5.0

4.4

6.3

7.2

5.4

5.6

Source: Kekic (2006)

Another encouraging sign is the increasing inflow of FDI, even into countries that previously had attracted very little foreign capital. Over the past 3–4 years, despite the poor global climate, FDI into the SEE region has increased quite remarkably, which is clearly a sign of investors’ confidence. FDI inflows to the SEE-5 during the 2000–2005 period have amounted to US$18.4 billion, though this is still relatively low in comparison to the overall inflows to Bulgaria and Romania over the same period (US$24.7 billion; see Fig. 1). Since 2003, the SEE7 have outpaced the CEE in terms of FDI in percentage of GDP. However, there

88

M. Uvalic Central Europe

Western Balkans

Baltics

CIS

Eastern Balkans

40 35 30 25 20 15 10 5 0 2000

2001

2002

2003

2004

2005

Fig. 1. FDI, 2000–2005 (in billion US$) (source: Economist Intelligence Unit)

has been little greenfield investment, and FDI has been very unevenly distributed: Bulgaria, Romania, and Croatia have attracted the largest part of FDI (around 70% of the total into SEE). Over the last 3 years, Serbia and Montenegro has also attracted substantial FDI (only in 2006, US$4 billion). From 2000 to 2005, as can be observed in Fig. 1, the annual FDI to the SEE-5 was still under US$5 billion. Despite these achievements, there are also serious development constraints in SEE. All SEE countries have had severe external imbalances: high and rising trade and current account deficits, frequently over the critical 7% of GDP in recent years. There is also the problem of aid-dependency in Bosnia and Herzegovina but even more in Kosovo. A common problem to all SEE countries is the low level of domestic investment and savings. Most SEE-5 economies suffer from limited export competitiveness due to policies of strong national currencies but even more due to little capacity restructuring, since some economic reforms have been implemented with substantial delay. Some countries, like Serbia and Montenegro, also face the problem of high external indebtedness, though several favourable write-offs by the Paris and London club of creditors and Russia allowed a drop of external debt from 132% of GDP in 2000 to 55% of GDP in 2004. Despite rapid growth in recent years, the economic recovery after the deep recession of the early 1990s has been slow. Thus some countries like Serbia and Montenegro, in mid-2006, were still at 60% of the GDP it produced in 1989. As illustrated in Fig. 2, most SEE countries today have a GDP per capita of around US$3,000 (at market exchange rates), or 30% of the average in the EU-25. Croatia


89

SEE: GDP per head in 2004 (US$) 12000 10000 GDP/head (market exchange rates)

8000 6000

GDP/head (PPP)

4000 2000 0

a ni ba l A

H B&

ia ia t ia r ia an on oa ga l d r m e C Bu Ro ac M

M S&

Fig. 2. Level of development in SEE (2004) (source: Compiled on the basis of data of the Economist Intelligence Unit, December 2005)

is the only exception, with a GDP per capita of almost US$7,000. The more optimistic Economist Intelligence Unit scenario indicates that by 2025, SEE-5 will have a GDP per head (at PPP) ranging from 31% (Albania) to 55% (Croatia) of the EU average. With the implementation of transition-related reforms, all SEE countries have seen a clear worsening of all social indicators. As elsewhere in the CEE, the social costs of the transition in the SEE have been extremely high, with the increase of poverty and inequality. Unemployment rates in the SEE-5 are among the highest in Europe: based on labour force surveys (which are much lower than the official unemployment rates), they range from 14 to 37%. This is partly compensated by a large informal economy, where many of the unemployed have some sort of activity. The social problems are likely to worsen further in those countries that have delayed enterprise restructuring. Another area facing specific problems is research and development (R&D). As a consequence of recurrent crises, substantial drop in GDP, and budgetary cuts imposed by restrictive economic policies, there has also been declining investment in R&D throughout the 1990s in most countries. Today, most SEE countries cannot afford to invest more in R&D. As can be seen from Fig. 3, general expenditure on R&D as percentage of GDP (GERD) is far lower than the EU-15 or EU-25 average (but Albania and Bosnia and Herzegovina do not have statistics on this main R&D indicator). Budgetary resources of the government have remained the prevalent source of R&D finance, whereas the contribution of the business sector remains very low or non-existent.

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M. Uvalic

Gross domestic expenditure on RTD (% of GDP) 2,5 2

2000

1,5

2001 2002

1

2003

0,5 0 Croatia

FYR Macedonia

Serbia

EU-15

EU-25

Fig. 3. General expenditure on R&D (as percentage of GDP) (source: Uvalic 2006)

Most SEE countries suffer from insufficient and outdated scientific infrastructure and limited use of information and computer technology. Regarding human resources, all SEE countries have experienced substantial brain drain during the 1990s, but also brain “waste” – the leaving of R&D professions in search of more attractive and better paid jobs elsewhere. Although clearly the EU Lisbon agenda is also highly relevant for the SEE countries, it has still not become a priority objective of SEE governments. The R&D sector is also, unfortunately, not considered as a priority sector of international donors who have been hesitant in providing financial assistance for the renewal of libraries or modernisation of scientific laboratories.

4 Progress with Transition to Market Economy Substantial progress has been achieved in recent years in economic and institutional reforms, even in countries lagging behind (Serbia and Montenegro, or Bosnia and Herzegovina). If we consider the European Bank for Reconstruction and Development (EBRD) transition indicators, which are prepared regularly for all 27 countries in transition, there are nine main areas of reform on which the countries are evaluated by scores which range from 1 (implying no reform) to 4+ (situation comparable to a developed market economy). As can be seen from Table 2, by mid-2006 most SEE countries had achieved relatively good results in many areas of reform.

3+

3+

3

65

Macedonia

Montenegro 65

Serbia

Source: EBRD (2006).

55

3+

60

Croatia

3

3

75

Bosnia and 55 Herzegovina

Albania

4

3

4

4+

3

4

2+

2

3

3

2

2+

4

4

4+

4

4

4+

3+

3+

4+

4+

4

4+

2

1

2

2+

2

2

3

3

3

4

3

3

2

2

2+

3

2

2

Private sector Enterprises Markets and trade Financial institutions share of GDP (in %) Trade and Governance Banking reform and Securities markets and mid-year Competition Price Large-scale Small-scale and foreign non-bank financial interest rate privatisation privatisation enterprise liberalisation exchange policy institutions liberalisation system restructuring

Table 2. EBRD transition indicators, 2006

Integrating the Balkans with the European Union 91

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Some SEE countries implemented fundamental economic reforms much earlier than others. In addition, in some areas progress has been remarkable, while in others it has been much slower. By mid-2006, the private sector share in GDP amounted to 55–75%, but poor corporate governance and slow restructuring remain characteristic. The liberalisation of prices and of foreign trade systems has been practically completed in all SEE countries, but competition policies remain ineffective. Despite substantial banking reforms, financial markets are still thin, and the privatisation of the banking sector has been implemented, in some countries, only fairly recently. Today we see a growing importance of Italian banks in the SEE region (already in 2005, Unicredit was present in the top three banks in Croatia, Serbia and Montenegro and Bosnia and Herzegovina, whereas the Banca Intesa was in the top three banks in Croatia and Serbia and Montenegro). In most SEE countries, foreign owned banks today hold 80–90% of total banking assets.

5 SEE–EU Integration A new EU strategy was launched for the western Balkan countries after the end of the Kosovo conflict. This consisted of a number of measures which were to facilitate their integration with the EU including access to EU markets through the abolition of quantitative restrictions and tariffs for around 95% of SEE exports, the conclusion of SAAs which were to prepare their future entry into the EU, and substantial financial assistance. The EU CARDS programme secured some €5 billion over the 2000–2006 period, which together with other financial assistance, has brought a total annual inflow of €6 billion to the SEE-5 during the years 2001– 2005. At the EU Thessaloniki summit in 2003, the EU policies for the SEE-5 were strengthened, drawing from the rich experience with the CEE countries in the 1990s; these policies included the elaboration of pre-accession strategies, European partnerships, new programmes, and financial instruments. The overall effects of all these measures in favour of SEE have been extremely positive. The privileged access to EU markets has enabled major redirection of trade, so that the EU has become the main trading partner of all SEE countries. In recent years, EU–SEE-5 trade has been increasing faster than EU–World trade. Italy is the main trading partner for four of the SEE-5 countries (all except FYR Macedonia), but the western Balkan region still accounts for only about 13% of its total trade with the CEE and SEE countries (Bulgaria and Romania account for 38%, while the new EU member states for 49%). A parallel process of regional trade liberalisation has also been taking place since 2001, when the Stability Pact initiative led to the signing of 33 Free Trade Agreements (FTA) among the seven SEE countries (Moldova has since joined the group). In 2006, it was decided to transform these bilateral FTAs into one FTA under the framework of CEFTA (the Central European Free Trade Agreement). These processes of trade liberalisation have contributed to major openness of the SEE countries, increasing intra-SEE regional trade, and further SEE–EU trade integration.


93

At the same time, progress in EU–SEE contractual relations has been very slow. The EU has, at an early stage, concluded SAAs with FYR Macedonia (April 2001) and Croatia (October 2001), but substantial delays have occurred in the cases of all other countries. With Albania, an SAA was concluded much later, in early 2006, whereas with Bosnia and Herzegovina and Serbia and Montenegro, negotiations on an SAA started only in November 2005. With Bosnia and Herzegovina, although the technical talks have been completed in the meantime, by autumn 2007 an SAA had still not been signed. The negotiations with Serbia and Montenegro were suspended in May 2006 due to the non-compliance with political conditionality (essentially, the “non-delivery” of General Mladic). When in June 2006 Serbia and Montenegro became two independent states, negotiations were soon after resumed with Montenegro, which led to the signing of an SAA on October 15, 2007. With Serbia, negotiations were blocked for over a year; it was only after the formation of the new government in May 2007 that negotiations on an SAA were finally resumed in June 2007. The last technical round of talks took place in September 2007, and an SAA was expected to be concluded by the end of the year. There are a number of open questions regarding future EU membership of the SEE countries. Only Croatia is presently negotiating EU membership, though all the other countries also hope to be considered for EU entry sometime in the not too distant future. In October 2005, EU accession negotiations opened with Croatia, but it is not yet clear when it could actually join the EU. Accession negotiations with FYR Macedonia have been postponed, though as a candidate country it also aspires to be able to begin its accession negotiations soon. The other SEE “potential candidate” countries will probably follow much later, but at the moment it is almost impossible to give a likely year of entry. The EU is still in the process of absorbing the impact of the 2004 and 2006 enlargements, and the ongoing reforms of its institutions are bound to be given priority before any further enlargement can take place. Despite all these uncertainties regarding future EU enlargements, it should be stressed that economic integration of the SEE countries with the EU is already well on its way prior to EU membership status through increased trade flows, FDI, and integration of financial markets.

6 Prospects Continuous inflows of private capital through FDI into the SEE region remains crucial for further economic recovery, especially considering that over the last 2– 3 years, foreign aid to the SEE-5 has been declining, parallel with the sharp reduction of grants in favour of loans. There are a number of potential advantages of the SEE economies which ought to be stressed: namely, these are fast growing economies, wage costs in some countries are less than half of those in CEE, the quality of human capital is considered to be relatively high (though more investment

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in R&D is needed, as stressed earlier), there are still a number of unexploited privatisation opportunities, and a large regional market has been created through the process of intra-SEE trade liberalisation. Further economic integration with the EU has also taken place in the meantime, as both imports and exports of SEE countries from/to the EU have been growing fast. Despite increasing FDI in recent years, so far the opportunities in the SEE-5 have not been fully exploited by investors. At the same time, the SEE countries face a number of challenges. Among the most important is to increase competitiveness in EU markets and further improve the business environment in order to attract even more FDI. In addition to being effective, economic reforms also require radical transformation of all institutions, including reforms of the judiciary (thus the strict implementation of the rule of law) and of the public administration. The change of some key institutions in the SEE countries, in line with much of the experience elsewhere in CEE, has also proved to be rather slow. The more problematic, however, remain the political issues. For some countries like Serbia, the insufficient collaboration with the Hague Tribunal is the main reason for notable delays in improving its relations with the EU, not the lack of substantial economic reforms or bad macroeconomic performance. Bosnia and Herzegovina, more than 10 years after the signing of the Dayton Peace Accords, still remains a very fragile state. There is also substantial tension and political risk in the SEE region linked to the future status of Kosovo, for which no mutually acceptable solutions have been found so far. It is still worth stressing that the overall prospects in SEE have greatly improved since 2000. Moreover, certain processes are now irreversible – not only economic reforms required by the transition to market economy, but also the gradual integration of the SEE economies with the EU. Although EU membership for some SEE countries may still be uncertain, all SEE countries are being more and more economically integrated with the rest of Europe through increasing trade, FDI, and financial flows.

References Economist Intelligence Unit (various issues) Economies in Transition – Eastern Europe and the former Soviet Union, Regional Overview, London European Bank for Reconstruction and Development (EBRD) (2006) Transition report 2006 (and previous issues). EBRD, London Kekic L (2006) Foreign direct investment and development constraints in the Balkans. Presented at the international conference on regional cooperation, peace-enforcement and the role of the treaties in the Balkans, Forlì, January Uvalic M (2006) National systems of research and technological development in the western Balkan countries. Policy report prepared for the Slovenian Ministry for Higher Education, Science and Technology within the EU FP6 project SEE-ERA.NET

The European Central Bank, Italy, and the Integration of Eastern Europe

1

G. Tumpel-Gugerell

1 Introduction In ancient times the 30th of March was the day of the festival for Salus Publica Populi Romani – the goddess of the public welfare of the Roman people. In the past, we would have prayed for prosperity, leaving matters in the hands of Salus. Today, treasuring our welfare, we prefer to take things into our own hands and think about practical ways of how to improve our wellbeing. In this context, I would like to share some thoughts with you on European economic integration and its impact on the welfare of the citizens of Italy and the European Union (EU), as well as countries in Eastern Europe that are outside the EU. I would like to present a central banker’s perspective on these issues. In my paper, first I will discuss how the European Central Bank (ECB) contributes to the welfare of euro area citizens, using the example of Italy. I shall argue that the best strategy in this respect is to maintain price stability and to help ensure efficient financial markets. I will also mention that in order to maximise the welfare gains from a stability-oriented monetary policy, sound fiscal policies and flexible labour and product markets are needed, a message that was also reiterated at the recent spring European Council. Then, I will provide a few facts on the current state of economic integration in Europe, focusing in particular on trade and foreign direct investment flows between Italy and Eastern Europe. I will demonstrate that European economic integration brings many opportunities for increased welfare, but also poses some challenges.

1

This paper is a translation of an article published in a volume of the Fondazione Edison series, L’Europa allargata, l’Est e l’Italia. Le politiche, l’economia, le imprese, il Mulino, Bologna, 2007. This essay is based on the speech of Mrs. Gertrude Tumpel-Gugerell, member of the European Central Bank’s Executive Committee, delivered during the meeting “Eastern Europe, EU, Italy. Towards strategic relationships”, held in Rome on the 30th and 31st March 2006, by the Accademia Nazionale dei Lincei. The English version is also available on the European Central Bank’s website at the following address: http://www.ecb.int/press/key/date/2006/html/sp060331_1.en.html A. Quadrio Cruzio and M. Fortis (eds.), The EU and the Economies of the Eastern European Enlargement. © Physica-Verlag Berlin Heidelberg 2008

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2 The Contribution of the ECB to Welfare in an Integrated Europe Economic and political integration in Europe started a long time ago and has gone through various stages – from the creation of the European Coal and Steel Community in the early 1950s, the signing of the Treaty of Rome, the introduction of the euro, to enlargement. The underlying rationale for integration was – and still is – political and economic stability, leading to the improved welfare of European citizens. European integration is a complex process affecting many aspects of social, political, and economic life. What is the role of the European Central Bank in this process and how can it contribute to welfare gains? Without hesitation, I can answer that the best way in which monetary policy can improve welfare in euro area countries is to maintain price stability and to help ensure efficient financial markets. Let me now discuss these two aspects in more detail.

3 Price Stability Is Key Prices are the main source of economic information in a market economy. With low and stable inflation, consumers and producers are able to receive price signals stemming from the difference between demand and supply for various goods and services in an efficient way, leading to the smooth functioning of the whole economy. Price stability also preserves the purchasing power of the euro and thus facilitates. long-term planning – especially in terms of consumption and investment decisions, as well as borrowing and lending. With stable prices, lenders are likely to require less compensation. Consequently, lower interest rates are more likely to prevail, contributing to higher long-term economic growth, employment, and consequently, welfare. By safeguarding price stability, a credible monetary policy anchors inflation expectations at low levels. In such an environment, shocks to the economy require less reaction from monetary policy than would have been otherwise necessary, resulting in lower short-term volatility in employment and output. In this way, ensuring price stability – the European Central Bank’s main task – supports the general economic policies in the Community and thus contributes to a high level of employment and sustainable non-inflationary growth both in the long and short term. In recent years, low and stable inflation has been a fundamental achievement for the euro area as a whole, and in particular for Italy (see Fig. 1a, b). In 1996, inflation in Italy stood at 4%, while the average figures for those countries that are now members of the euro area was 2.3%. In 2005, the inflation gap vs. the euro area has almost disappeared. Moreover, thanks to the stability-oriented policy framework of the European Central Bank, inflation expectations have stabilised at low levels and long-term interest rates have declined considerably.

The European Central Bank, Italy, and the Integration of Eastern Europe 6.0

99

6.0

Italy

5.0

5.0

Euro area

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

0.0

Jan-00

0.0

Jan-99

1.0

Jan-98

1.0

Jan-97

2.0

Jan-96

2.0

Jan-95

3.0

Jan-94

3.0

Jan-93

4.0

Jan-92

4.0

Fig. 1. (a) HICP inflation (source: Eurostat) perceived inflation (LHS) Overall HICP inflation (RHS)

80

6.0

70

5.0

60 4.0

50 40

3.0

30

2.0

20 1.0

10

Jan-06

Jan-05

Jan-04

Jan-03

Jan-02

Jan-01

Jan-00

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Fig. 1. (b) Italy: HICP inflation and perceived inflation (source: Eurostat)

Today, the euro area economy benefits from the benchmark long-term market interest rates of below 4%, a level which most issuers have not experienced in the last 50 years. In Italy, in particular, the 10-year interest rate spread vs. the euro area average fell from 2.9 percentage points at the beginning of 1996 to 0.2 percentage point at the beginning of 1998 and has since then remained roughly at this level (see Fig. 2). It should be noted that in most euro area countries the decline in long-term government bond interest rates has considerably reduced financing costs. For instance, in Italy, the cost of public debt servicing declined very significantly from 11.5% of GDP in 1996 to 4.9% of GDP in 2005. This implies that due to the disappearance of the spread, the reduction in the interest expenditure burden represents a gain of 0.8% of GDP per year.

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2005Q1

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Fig. 2. Italy: 10-year interest rate spread vs. the euro area average percentage points (source: Datastream)

The success of the European Central Bank in delivering these objectives can be attributed to its institutional framework and the principles it follows. First, the European Central Bank is independent and has a clearly defined mandate under the Treaty to pursue price stability and safeguard financial stability. Second, the European Central Bank has provided and made public a clear definition of price stability corresponding to inflation rates below but close to 2%. Third, the medium-term orientation and the very nature of our concept of monetary policy has contributed to a solid anchoring of medium and long-term inflation expectations, in line with our definition of price stability. Given the topic of this volume, let me also say a few words on euro area enlargement. All ten new Member States that joined the European Union in May 2004 are expected to adopt the euro as soon as they achieve sustainable economic and legal convergence. Seven of these countries, including Italy’s neighbouring country, Slovenia, have already entered the Exchange Rate Mechanism II (ERM II), which is a necessary precondition for adopting the euro. The enlargement of the euro area is a process which follows clearly defined procedures and rules. Countries adopting the euro must demonstrate that they have sufficiently converged towards the euro area for this convergence to be sustainable. The necessary conditions for this are set out clearly in the Treaty and include price stability, sound public finances, a stable exchange rate, the convergence of long-term interest rates towards the best performing EU countries, and legal convergence. The need to meet these criteria will result in a further improvement of the macroeconomic situation in the new EU Member States, which in turn will also benefit the euro area, as it further enhances trade and investment opportunities in these countries.


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4 Financial Markets Matter Turning to the second area where the European Central Bank is strongly involved, let me stress that stable, open, and mature financial markets are essential for the proper functioning of market economies and an effective conduct of the single monetary policy in the euro area. This also positively affects the optimality conditions of the currency union, as a better diversification and sharing of risks among members of the union is possible. Financial markets are also important from the growth and welfare perspectives. The role of financial systems is to facilitate a smooth and efficient reallocation of financial resources from savers to investors, to assess and accurately price financial risk and to manage it efficiently. The high degree of integration and competition in the financial markets has a positive effect on the depth, liquidity, economies of scale, intermediation costs, and more efficient allocation of capital. Since the introduction of the euro, there have been a lot of changes in the financial markets in Europe. The elimination of exchange rate risk has increased the depth and breadth of financial markets and boosted financial innovation. Government bond yields in the euro area have become nearly perfectly correlated. There is also evidence of close integration of stock markets. The euro had a particularly significant impact on the European market for corporate bonds, with a considerable increase in the number of medium-sized firms placing issues outside their home country (see Fig. 3). 1.4 1.2 1 0.8 0.6 0.4 0.2

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Fig. 3. Outstanding Euro denominated corporate bonds. Note: EUR trillions, end-of-period outstanding amounts, nominal values (source: ECB)

Integration has facilitated the harmonisation and consolidation of financial structures, thereby increasing cross-border corporate linkages. In recent years, large flows of foreign direct investment among euro area countries have exemplified this intensification of corporate linkages.

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5 More Structural Reforms Are Needed While price stability and stable financial markets provide a favourable environment for economic growth, higher employment, and the welfare of euro area citizens, this may not be enough. In order to maximise the positive effects of the stability-oriented monetary policy, sound fiscal policies and flexible labour and product markets must also be in place. Sound fiscal policies, as required by the European Stability and Growth Pact, have many virtues. A government that maintains a budgetary position that is close to balance or in surplus over the medium term and reduces its debt to a low and sustainable level has room to let automatic stabilisers operate and can pursue its desired tax and spending policies without putting fiscal sustainability at risk. Moreover, fiscal discipline adds to macroeconomic stability by creating a predictable economic environment. Unfortunately, the Stability and Growth Pact has not prevented the experience of excessive deficits in several euro area countries, including Italy. During the past 3 years, the budgetary situation of Italy has gradually worsened. As a result, an excessive deficit procedure was opened in July 2005, requiring Italy to reach the 3% limit by 2007. The recent Council of the European Union approved the corrective measures set by the Italian government for the year and also indicated that the implementation of substantial additional measures would be necessary in the course of the next year to ensure adequate improvement in the budgetary position. In my view, this is a good illustration of the fact that, in those countries which currently have excessive deficits, budgetary positions would have been even worse without the Pact. For instance, in Italy, the fiscal deficit averaged 10.2% of GDP between 1990 and 1995, whereas between 1999 and 2005 it stood on average at 2.8% of GDP. The effectiveness of monetary policy is also dependent on structural policies in labour and product markets. Rigidities in these markets determine how changes in policy interest rates propagate into the economy and how resilient the economies are to various shocks. With significant rigidities, the adjustments to negative shocks may be more prolonged and costly in terms of output and employment. By contrast, flexible markets result in a more efficient and prompt reallocation of resources and contribute to higher long-term growth. This is especially important in the context of the Lisbon strategy and the ambitions of increasing welfare in the European Union. It is important to keep in mind that flexible markets and growth-conducive structural policies are first and foremost in the self-interest of any country and its citizens. They should not be seen as an obligation that stems from euro area or European Union membership. What is true, however, is that European integration and – even more so – the process of globalisation have greatly increased the opportunities for countries to enhance the welfare of their citizens. At the same time strengthened economic integration at the European and global level requires fostering the ability of countries to adjust to a changing environment.


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6 The Case of Italy and Eastern Europe Since 1992 – when the trade-liberalising “Europe Agreements” were signed between the fifteen countries belonging to the Union or preparing for membership and the countries which joined the European Union later in 2004 – trade flows across the whole of Europe have surged. Over the past 14 years, the euro area countries have re-established and reinforced their economic links with central and eastern European countries via stronger trade, increased foreign direct investments, and sizeable financial integration. The process of financial integration is, of course, far from complete and the European Central Bank is very active in providing a helping hand to overcome the barriers that still exist. Yet, I am optimistic that initiatives, such as the “Single Euro Payment Area” project of the European banking industry, will contribute to transforming Europe’s financial sector and thus generate significant benefits to customers and the economy as a whole. Italy, like other euro area countries, has benefited from the integration process. The key example of UNICREDIT shows that Italy has been able to reach a high degree of financial integration with central and eastern European countries. As far as “fixed” capital integration is concerned, outward foreign direct investment flows towards central and Eastern Europe have enhanced opportunities for Italian firms. Indeed, during the past 5 years, central and eastern European countries have witnessed the largest increase in the number of affiliates of Italian transnational companies (see Fig. 4). Foreign direct investment is beneficial both for the recipient and the investor country. The former gains in a number of ways, including transfer of technologies and sources of financing. These factors played and will 25 20 15 10 5

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Africa

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Fig. 4. Italy: number of foreign affiliates of home-based transnational companies (TNCs) by geographical location abroad. Cumulated changes 2001–2005. Note: Data refers to enterprises with foreign participation in equity capital of at least 10% (source: Politecnico di Milano, REPRINT database)

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continue to play a very important role in Eastern Europe’s catching-up process. Regarding the country of origin, foreign direct investments allow for the expansion of business activity and gaining of shares in the markets of the recipient countries. The high levels of foreign direct investment by euro area countries, including Italy, in Eastern Europe have been accompanied by the loss of export market shares in this region (see Figs. 5 and 6). Besides some substitution of exports with foreign direct investment, the loss of export market shares of most euro area countries in the new Member States reflects the fact that the number of players able to enter the enlarged European market has increased markedly in recent years, and this should be seen as a natural outcome of increased globalisation. Furthermore, the loss in market shares should also be related to some normalisation of export flows towards the new Member States after they peaked in the late 1990s.

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Fig. 6. Euro area: export market shares towards new member states (%) (source: IMF)


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Let me mention that, in contrast to the group of new Member States, Italy has shown an excellent export performance towards Romania and Bulgaria (see Figs. 7 and 8). Moreover, Italy has been able to maintain market shares in the Balkan countries and Russia. Among central and eastern European countries, Romania is also a major recipient of Italian foreign direct investment, not only due to its geographical proximity, but also due to greater language and cultural similarities (see Fig. 9).

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600 500 400 300 200 100 0 Romania China Tunisia Poland Hungary Bulgaria Russia Albania Czech Turkey Slovak Rep. Rep.

Fig. 9. Italy: number of foreign affiliates of home-based transnational companies (TNCs): first ten hosting countries. Note: Data refers to enterprises with foreign participation in equity capital of at least 10% (source: Politecnico di Milano, REPRINT database)

Notwithstanding some clear benefits to Italy resulting from European integration, a number of challenges need to be addressed. Besides the loss of market shares in the new Member States, Italy has suffered greatly from losses of market shares in the intra-euro area market (see Figs. 10 and 11). This poor performance may be related to increased competition from low production–cost countries that have a pattern of specialisation similar to Italy, comprising a relatively large share of low-tech products. This increased competition stems from the new Member States, other Eastern European countries and, more recently, from certain Asian countries, particularly China (see Fig. 12). 14

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Fig. 10. Italy: intra-euro area export market shares (source: Eurostat and IMF)


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Fig. 11. Germany: imports from Italy and the new member states as a percentage of its total imports (source: Eurostat and IMF)

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Fig. 12. Imports from China as a percentage of each country’s total imports (source: IMF)

Thus, it seems that many euro area countries have been substituting their imports of Italian goods with imports of similar goods from the new Member States, southern and eastern Asia, as well as China. For instance, Germany appears to have been gradually substituting imports of Italian goods with imports from the new Member States, both in the basic manufacturing industry and in machinery and transport equipment (see Fig. 13a, b).

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Fig. 13. (a) Germany: imports from Italy and from the new member states as a percentage of its total imports; basic manufacturing (source: Eurostat)

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Fig. 13. (b) Germany: imports from Italy and from the new member states as a percentage of its total; machinery and transport equipment (source: Eurostat)

What are the reasons behind the somewhat disappointing performance of Italy, especially with regard to intra-euro area trade? The loss of competitiveness is a key explanation (see Fig. 14). Over the last 7 years, unit labour costs in Italy have grown at an average pace of 2.8% per year, both in the total economy and in the manufacturing sector. In the whole euro area, the figures are 1.5% for the total economy and 0.1% for the manufacturing sector.

The European Central Bank, Italy, and the Integration of Eastern Europe 115

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Fig. 14. Italy: nominal (NEER) and real (REER-ULC) effective exchange rate (1990 = 100). Note: A rise represents an appreciation, a decline represents a depreciation (source: BIS)

Why have unit labour costs increased so much in Italy compared with its European partners? The key reason is that labour productivity has been virtually stagnating (see Table 1 and Fig. 15). Growth in compensation per employee has thus considerably outpaced the subdued productivity advancements. If we take a closer look at labour productivity growth, we see that some of the weak labour productivity performance can be explained by higher employment growth rates in Italy than those in the rest of the euro area, which is of course a positive signal. Table 1. Developments in costs, labour productivity, employment and value added, average growth rates, 1999–2005 Manufacturing sector ULC Italy Germany France Euro area

2.8 -1.0 0.1 0.1

Compensation per employee 2.8 2.2 2.8 2.6

Labour Productivity 0.0 3.2 2.6 2.5

Compensation per employee 2.6 1.2 2.7 2.3

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Employment

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Real GDP

Employment

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2.8 0.4 1.5 1.5

Source: European Commission, 2005 European Commission estimates

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Fig. 15. Italy: trend productivity and export market shares. Note: Trend productivity obtained by 5-year moving average of productivity growth rates. Export market shares measured at current prices (source: Own computation based on IMF and Eurostat)

But most of the low labour productivity growth is associated with a decreasing “ability” of Italian firms to create added value, which is well captured by the decline in total factor productivity (see Table 2). A great number of studies have investigated the poor productivity growth in Italy in recent years and found that rigidities in product and labour markets, inability to attract foreign direct investment, low spending on research and development, judicial inefficiencies, an unfavourable business environment, unfavourable specialisation patterns, and persisting regional disparities were among the main impediments to productivity advancement (see Figs. 16 and 17 and Tables 3 and 4). Table 2. Growth accounting (average percentage changes) Italy France Labour productivity Germany Euro area Italy France Total factor productivity Germany Euro area Italy Capital income France share Germany Euro area Italy France Capital intensity Germany Euro area

1980-1989 1.9 2.2 1.0 1.7 1.2 1.5 0.6 1.2 0.32 0.33 0.34 0.29 2.2 2.1 1.1 1.9

1991-1995 1.6 1.5 2.3 1.7 0.8 0.6 1.7 1.0 0.35 0.38 0.31 0.32 2.3 2.3 1.9 2.2

1996-2000 0.9 1.5 1.2 1.0 0.4 1.1 0.7 0.7 0.41 0.39 0.31 0.34 1.0 1.0 1.4 0.8

2001-2005 -0.2 1.2 0.8 0.7 -0.4 0.6 0.6 0.3 0.42 0.39 0.28 0.34 0.6 1.4 0.9 0.9

Note: (*) Levels Source: European Commission, 2005 European Commission forecasts


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Fig. 17. Inward foreign direct investment as a percentage of GDP in the five largest euro area countries (source: IMF) Table 3. Italy: indicators of innovation

Note: (1) Number of applications to the European Patent Office. (2) Percentage of households which have internet access Source: Eurostat

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Note: The indicator ranges from a minimum value of 0 to a maximum value of 6, which indicates the highest possible degree of regulation Source: Nicoletti 2004

These inefficiencies call for completing the process of reforms in the product and labour market, which were enthusiastically initiated in the early 1990s. On the labour market side, recent reforms appear to have been in the right direction (see Table 5 and Fig. 18) and should be continued. Table 5. Overall index of employment protection legislation (EPL) on permanent contracts

Note: The indicator ranges from a minimum value of 0 to a maximum value of 6, which indicates the highest possible degree of regulation Source: OECD, employment outlook, 2004

The European Central Bank, Italy, and the Integration of Eastern Europe 70 68 66

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64 62 60 58 56 Italy

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Fig. 18. Employment rate. Note: Total employment as a percentage of the working age population (source: European Commission, 2005 European Commission forecasts)

7 Conclusions Let me now summarise the main points of my speech. Economic integration in Europe has a great potential for welfare improvements in all participating economies. The best way for the European Central Bank to contribute to this process is by ensuring price stability and the smooth functioning of financial markets. The benefits of such policies are clearly visible in Italy, with the cost of financing public debt being a particularly striking example. However, in order to reap the maximum benefits from the stability-oriented monetary policy, sound fiscal policy and flexible labour and product markets must be in place. Such policies must be focused on economic stability and the removal of structural impediments and adapt to a changing environment determined by European and possibly even more global economic integration. In conclusion, let me stress that our welfare is not in the hands of Salus, but is determined by responsible economic polices capable of identifying and facing the challenges of a competitive global economy. Some European countries that are ahead in the process of adopting such changes show that these reforms are able to deliver higher output and employment growth.

The Role of the European Bank for Reconstruction and Development (EBRD) in the Transition of the Banking and Financial Systems 1

F. Saccomanni

1 The Role of the EBRD in the Transition Process of Eastern European Countries The European Bank for Reconstruction and Development (EBRD) was established in 1991 when the disintegration of the communist regimes of Central and Eastern Europe and the ex-Soviet states gradually revealed the need for support of the transition towards democracy and a market economy. What does the term “transition process” mean? Transition economics is a branch of development economics: the EBRD works in countries that cannot be defined as underdeveloped in the conventional sense of the word, but are instead countries that have grown in a planned economy, albeit with different levels of development. The EBRD is the largest single investor in the region and, in addition to its own financing, it is in a position to mobilise significant foreign direct investment. Sixty countries and two intergovernmental institutions (the EIB and the European Commission) hold stakes in it. Despite its public sector shareholders, however, it invests mainly in private enterprises, generally together with commercial partners. In addition, it provides financial services for banks and businesses, both new companies and existing ones. It works towards improving municipal services, restructuring state-owned firms, and supporting their privatisation. Furthermore, the Bank relies on its close relationship with governments in the region to promote policies that will support the transition towards democracy. Consequently, through its investments the EBRD promotes structural and sectorial reforms, competitiveness, privatisation and entrepreneurship, the creation of more solid financial institutions and legal systems, the development of the 1 This paper is a translation of an article published in a volume of the Fondazione Edison series, L’Europa allargata, l’Est e l’Italia. Le politiche, l’economia, le imprese, il Mulino, Bologna, 2007. This contribution summarises the speech of Fabrizio Saccomanni, Vice President of the European Bank for Reconstruction and Development at the time of the convention entitled “L’Est Europeo, la Ue, l’Italia: verso connessioni strategiche” (Eastern Europe, the EU and Italy: establishing strategic connections).


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infrastructures needed to support the private sector, and the adoption of strict corporate governance. Respect for the environment and for sound banking principles is a vital part of the process involved in allocating EBRD investments. Serving as a catalyst of change, the EBRD promotes co-financing and foreign direct investment, the mobilisation of domestic capital, and the supply of essential technical assistance. My discussion analyses the role that the EBRD plays in the transition of banking and financial systems, with constant reference to the general objective of the evolution of the economic systems of former communist states from a planned to a market economy. The EBRD has developed its own method for analysing transition and has devised a set of indicators through which it attempts to conduct a quantitative assessment of the process under way. The figures below use indicators with a score of 1–4, in which 1 represents the level still typical of a planned socialist economy and 4 is associated with completed transition. Based on these indicators, I will analyse the level of development and stability of banking and financial systems, as well as the remaining obstacles to transition. I will then examine the role that the EBRD and Italian banks working in these countries play in promoting transition, followed by the strategies the Bank has implemented to manage delays in this process.

2 The Evolution of Banking and Financial Systems Figure 1 illustrates the progress that the financial sector has made towards transition. It shows significant disparities among the various countries in the region, in which the non-banking financial sector is lagging behind the banking sector. The lighter bars refer to the banking reform process, i.e. the liberalisation of interest rate formation mechanisms and other basic forms of liberalisation; the dark ones instead refer to stock markets and non-banking financial institutions. Based on the EBRD indicator, only Hungary has achieved full transition in both the banking and non-banking sectors, whereas other countries – including very advanced ones such as Slovenia and the Slovak Republic – still have a long way to go. The situation deteriorates as one moves towards the former Soviet Union. Figure 2 illustrates the level of banking intermediation, i.e. total domestic credit as a percentage of gross domestic product. As opposed to the average developed country of the European Union, in which the level of credit intermediation with respect to GDP is between 100% and 150%, in countries still characterised by transition economies this level is quite low, dropping as far as 50–60%. One can observe a positive relationship between the level of banking intermediation and GDP per capita, a figure that is helpful for indicating how far the respective countries being considered here still have to go. The level of stock market capitalisation, likewise evaluated as a percentage of GDP, is also an important indicator. It is evident from Figure 3 that only Estonia (in

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the CEB group) shows a significant level of development, whereas the other countries in the region – even the most advanced – are characterised by small capital markets. 4,0 3,0 2,0

Tajikistan

Uzbekistan

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Banking reform and interest rate liberalisation, EBRD transition score Securities market and non-banking financial institutions, EBRD transition score Fig. 1. Progress in the transition of the financial sector. Note: The acronym CEB refers to the countries of Central Europe and the Baltic states, SEE includes the countries of Southeast Europe, and CIS refers to the states of the former Soviet Union (Commonwealth of Independent States)

Fig. 2. Banking intermediation level. Note: * EU SE refers to the European Union Southern Enlargement countries (Greece, Spain, Portugal) (source: IMF-IFS and EBRD database)

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Fig. 3. Degree of capitalisation of capital market

3 Evaluation of the Level of Financial Development and Stability All countries in the EBRD region have shown rapid credit growth and, as indicated in Figure 4, the share that goes to families or, more generally, to the private sector is particularly significant.

Non-government Households Fig. 4. Credit growth


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However, rapid credit growth can also represent an instability factor. Consequently, the EBRD has analysed trends in the vulnerability of banking systems, essentially examining two sets of factors. The first considers macro-prudential indicators, of which the most significant is the rapid growth in credit to the private sector, which can be associated with speculative factors and bubbles in the markets of real asset, such as stocks and real estate. Furthermore, there can also be elements such as excessive appreciation of the real exchange rate, which can undermine the country’s competitiveness and thus make its banking system more vulnerable.

Fig. 5. Macro-prudential and banking system solidity indicators

With regard to the second group of factors, an indicator (Banking System Indicator or BSI) evaluates the relative strength of banking systems, taking into account a combination of individual bank ratings, which can thus indicate their risk of failure, and a summary assessment of specific systemic risk factors identified on the basis of previous banking crises. Various elements must be considered in order to determine systemic risk factors. In addition to the borrower’s level of indebtedness, the concentration of loans and deposits also represents a weakness factor. Furthermore, it is helpful to consider the ratio of outstanding credit to the loan portfolio (with a critical threshold of 10%) or the level of “connected lending”, a significant phenomenon in these countries. It involves loans to parties that are connected to the bank through relationships of friendship or interest (favoured customers) but do not necessarily reinforce the structure of the bank. Figure 5 combines the two groups of factors described above, i.e. macro-prudential indicators and indicators of the solidity of the banking system. The figure shows that most of the systems analysed here are clustered around the areas from “D” to “E” and from 2 to 3. The EBRD’s annual Transition Report shows that, in terms of the banking system, the country/system considered to be at

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highest risk is that of Hungary, followed closely by Moldova, Ukraine, Kazakhstan, Romania, and Bulgaria. The country with the lowest risk is the Czech Republic, whereas Croatia, the Slovak Republic, and Slovenia showed a slightly lower performance.

4 The Region’s Remaining Challenges to Transition For each of the three regions considered, i.e. Central Europe and the Baltic states (CEB), Southeast Europe (SEE), and the former Soviet Union (CIS), the EBRD is convinced that the challenges to completing the transition process vary from area to area. With regard to the situation in the CEB countries, the overall level of financial intermediation is still low. A certain number of publicly owned banks and insurance companies – in Slovenia and Poland, for example – must still be restructured, and there must be improvement in the development and diversification of financial instruments. The most important aspect here is mortgage credit, the type of credit in strong demand among consumers. In the countries considered here, credit has traditionally been provided to the public sector, i.e. large state-owned enterprises, and little has been done to extend credit to families. Naturally, financing for agricultural concerns and the development of capital markets must be considered and, as noted above, they are still lagging significantly. In Southeast Europe – essentially meaning the Western Balkans – much remains to be done in the area of privatisation, consolidation, and the start-up of solid banking institutions. The process referred to as institution building still requires a great deal of work in the area of corporate governance and the adoption of international financial accounting standards. Moreover, prudential regulation and supervisory activities must be improved, the range of financial instruments must be expanded and the degree of financial intermediation must be developed. The banking market’s barriers to entry and exit must also be minimised in order to create a more competitive industrial structure, facilitate the development of capital markets and non-banking institutions, and lastly (although this is a very important aspect for the EBRD) improve the credit structure in favour of micro and small businesses, a sector that still has great scope for development. In the former Soviet Union, there are fundamental aspects to consider – first of all (yet again) the topics of privatisation and the consolidation and strengthening of banks. Specifically, it is essential to find a solution to problems of insufficient clarity in ownership structures and limited financial transparency. In much of the banking and financial system there remains a vast opaque area regarding the acquisition of certain institutions, their ownership structures, and ties with the government or other political/public institutions. Much remains to be done in the transition process regarding the liberalisation of interest rates and the allocation of credit. The degree of freedom of entry and exit of private banks, including foreign ones, must be improved in order to create a competitive market structure.


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Moreover, it is important to develop an adequate legal framework for private sector financing, which includes adopting appropriate laws governing the provision of guarantees and bankruptcy proceedings, the establishment of land offices, and the creation of credit bureaus. The Commonwealth of Independent States faces the most substantial list of remaining challenges to transition. In addition to the above-mentioned aspects, there is also the problem of establishing effective prudential regulation and a system of independent supervision by authorities responsible for monitoring all financial institutions. Other important aspects include the expansion of financial brokerage, expansion of the range of financial instruments, the development of capital markets and non-banking institutions, and the introduction of an institutional, legal, and regulatory framework that can promote the development of credit to SMEs.

5 The Role of the EBRD and Italian Banks in Promoting the Transition Process Figure 6 shows that the EBRD is quite exposed in the financial sector throughout the region considered here, and credit to financial institutions – banking and nonbanking – represents the highest percentage of exposure (more than 20% of the total). In 2004–05, the EBRD’s exposure has declined in some countries, such as Poland and Croatia, but has increased in Romania, Ukraine and, in general, all the Balkan countries and those of the Commonwealth of Independent States.

2004 2005 Fig. 6. EBRD exposure in the financial sector

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As far as the presence of Italian banks is concerned, in attempting to sketch an overall picture it should be noted that the market share held by our banks is quite substantial in some cases, exceeding 60% in Croatia, while accounting for 25% in Bulgaria and approximately 21% in Poland (Fig. 7). These levels jointly consider the two main Italian banks in the region, namely, Unicredito (directly or through its subsidiary HVB) and Intesa San Paolo (although they are not the only banks present there), which have chosen the geographical area in which the EBRD operates as the main objective for future investment programmes.

Fig. 7. Presence of Italian banks in the region

The substantial interest on the part of Italian banks is undoubtedly due also to the fact that the region benefits from the institutional support of the European Union, as well as institutions such as the European Investment Bank and the EBRD, which provide assistance not only on a financial level but also in the processes of institution building, reform, and improved governance.

6 Strategies in Managing Delays in the Transition Process: The Role of the EBRD The EBRD offers credit at market conditions, but it is “conditional” credit, in that beneficiaries are required to introduce a series of reforms oriented towards achieving transition objectives. In selecting its clients, the Bank strives to support institutes that can augment the overall level and efficiency of banking intermediation and market-based financial institutions, thereby contributing to the institution-building process (which also encompasses building trust in these institutions).


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Furthermore, the EBRD acts as a merchant bank, funding privatisation and restructuring initiatives, and also offering support in the pre-privatisation phase. As such, it also acts as a channel for local and Western investors. The goal of the EBRD is thus to improve the diversification of financial instruments and market depth, as noted above, with a commitment towards operators, clients, and the authorities in order to establish a “policy dialogue” that focuses on achieving a sustainable transition process.

The Importance of Entrepreneurship for Democratic Development in Central and Eastern Europe 1

O. Pfirrmann

1 Introduction Analysis of the transformation processes in Central and Eastern Europe has been through various phases and evaluations. If, at the start of the 1990s, debate concerned the right transformation strategy – shock therapy, founded on macroeconomics, opposed to a political/economic gradualism connected to microeconomic measures – then this was followed by a rather programmatic vision, originating from the observation that neither of the two projects in absolute form could be successfully completed (Quaisser 1997; Heering et al. 1998). A central element of the strategies for overcoming the transformation process in Central and Eastern Europe was the privatisation of previously State enterprises, i.e. the conversion of “Kombinat” (large-scale entities) into legally autonomous enterprises. An independent entrepreneurial system certainly already existed in Central and Eastern Europe in the nineteenth century and at the beginning of the twentieth century, but in any event was not in tune with the socialist economic programming. As a consequence this entrepreneurial system was systematically repressed for political/ideological reasons. With the end of the socialist ideology, it was sought to utilise the dynamic deriving from the incorporation of new enterprises for the economic reconstruction of Central and Eastern Europe. With regard to the speed and method of privatisation, there were clear differences. In some countries such as Poland, the Czech Republic, and Hungary, privatisation was carried out with great speed, to be then widely concluded at the end of the 1990s. Other countries such as Russia, Ukraine, Bulgaria, and Romania initially had difficulties, and at the end of the last century they were still at the beginning of privatisation. After some progress at the beginning of 2000, these countries have taken various paths. A series of States including the three Baltic countries, Estonia, Latvia and Lithuania, as well as Poland, Slovenia, the Slovak Republic, the Czech Republic, Hungary and, recently, Bulgaria and Romania have become part of the European Union (EU). Although the transformation process in 1 This paper is a translation of an article published in a volume of the Fondazione Edison series, L’Europa allargata, l’Est e l’Italia. Le politiche, l’economia, le imprese, il Mulino, Bologna, 2007.


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the last two countries entering the EU has not yet ended, all of the Central and Eastern European countries belonging to the EU are considered as countries that have successfully activated the transformation process (Frankfurter Allgemeine Zeitung 2006). With respect to this, in the evaluation of the results of the transformation process, delusion applies to the ex-Soviet Union countries that have entered the EU. In all Central and Eastern European countries so-called small privatisations, or privatisation of small economic units, especially in commerce and in the hotel industry, were concluded rapidly overall. Much greater difficulties arose in the socalled large privatisations, or the sale of large business units in the industrial and banking sectors. Glancing into the more recent past it can be seen that Russia has again taken the public finance route, at least in selected sectors which have frequent exports, for example, the energy sector. Instead, other countries, preparing for entry into the EU, have successfully accelerated the speed of their privatisation. In Central and Eastern Europe numerous variants of privatisation were experimented with. In the cases of acquisition of enterprises by foreigner investors, nevertheless, neither individual nor mass privatisations, equally motivated voucher systems nor the procedures with which employees of the enterprises were favoured (management- and/or employee-buy-outs) have been able to resolve restructuring problems that were then presented in the desired manner. None of the variants applied was successful in injecting the necessary capital and know-how for privatisation. Often the influence and intervention of the State, notwithstanding the formal transfer of ownership to the private sector, remained constant, or even were strengthened, as the Russian example demonstrates. Discussion on the presumed accentuation of the macroeconomic aspects of stabilisation of public economies, and privatisation of enterprises, has removed the attention from an aspect of the challenge of the transformation process: the constitution of an economic base through an autonomous enterprises sector. This refers to foundations of enterprises that utilise, for example, arbitrage possibilities on the market or are introduced by innovations in existing markets. The latter case, the so-called Schumpeter typology of enterprise, which using their own strengths create an innovative enterprise, is a trait characteristic of industrial countries in the Western hemisphere, and is at the base of the internal competitive structure and economic dynamics of these countries (Audretsch 2001). The experiences originating from the western industrialised countries and new ideas, still relative, deriving from the countries that have previously concluded transformation processes and meanwhile joined the EU, explain the reason why the small and medium enterprises have a significant role in the economic dynamics and competition capacity. Furthermore, the bibliography relative to the transformation, which extends beyond economic questions, shows that these enterprises also have a function in the impediment of social and political instabilities (Dementiev 2000). This function of the small and medium enterprises is not immediately deduced, but nevertheless is shown in the bibliography on the development economy (Casson 1991). Schumpeter’s latest work Capitalism, Socialism and

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Democracy also underlines the multiple role of entrepreneurship: with bureaucracy the latter, increasingly limited, dies out; from a capitalist economy that, at the end, was only constituted by large industry, a socialist economy and society is born (Schumpeter 1987). Apart from this source, the theoretical approaches to establish the role of entrepreneurship in the countries that have concluded transformation processes are anything but numerous. The entrepreneur, for classic social sciences such as political science or sociology, represents an exceptional phenomenon. He was the object of attention only in the more recent analysis on the development and transformation of regions and countries (Brüderl et al. 1996). Even in the economy the entrepreneur has adopted the character of an unknown variable for a long time, implicitly contained, for example, in growth models (Schultz 1975; Hébert and Link 1989). The prospective inter-discipline for the comprehension of economic phenomena, political and social – indispensable in the analysis of transformation processes – remains limited to a few works (Sandschneider 1995; Pfirrmann and Walter 2001). The following contribution is an attempt to consider the challenges described in the analysis of transformation processes in Central and Eastern Europe, and to examine the role of a genuinely economic entity, entrepreneurship, from a political science prospective. The model of the socioeconomic assumptions should be utilised as a theoretical starting point, which was prepared by the social science scholar, Seymour Lipset. This model, after an in-depth dissertation on the possible theoretical approaches to transformation processes (Sect. 2), is extended from a microeconomic and theoretical-individual prospective to factors considered significant for the democratisation process in Central and Eastern Europe (Sect. 3). A standard interpretative model is not therefore employed for the development of democracies, but rather a model extended to individual aspects of the transformation process. An observation particular to the aspect of entrepreneurship is given here. This model does not claim to give an exhaustive interpretation of the democratisation processes in the Central and Eastern Europe countries that have carried out transformation processes. This rather refers to verifying, apart from the standard interpretative model, some variables – entrepreneurship above all here – that can presumably explain the route of the transformation process up to the achievement of a democracy. The core of this paper is an empirical analysis where variants of models are evaluated for determined Central and Eastern European countries (Sect. 4). The data is based on accessible statistics on an international scale, such as those of the World Bank and European Bank for Reconstruction and Development, and are evaluated here in a context rarely addressed to date in the bibliography on transformation. The article concludes with a recapitulatory evaluation of all the results and the importance of entrepreneurship for democratic development in Central and Eastern Europe (Sect. 5).

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2 Theoretical Areas Three significant theoretical lines in connection with political–economic research on the transformation processes in Central and Eastern Europe emerge: 1. Socio–economic theories on transformation 2. Approaches of the elite theory 3. Models of socioeconomic transformation These theoretical lines are briefly presented and then verified up to the point that they are valid for the problem discussed.

2.1 Socio–Economic Theories on Transformation The socio–economic theories on transformation do not constitute a closed theoretical conception, but rather a conglomerate of scientific analytical concepts. However, in their “combination”, they represent the broader theoretical line in the study of the transformation processes. The main interpretative approaches of the social sciences relative to the transformation theory can be distinguished based on the priority given first of all to the causes and determining factors of the transformation and in the second place to the processes and results of the transformation. In relationship to the analysis of the causes and determining factors the following theories are distinguished: x x x x

Revolution theories Theories on the fall of the government/system Theories on modernisation and convergences Legitimacy theories (von Beyme 1994)

With regard to the paths and results the following theories emerge (Sandschneider 1995, p. 58; von Beyme 1994): x x x x

Democracy theories (with functional and historical–genetic variants) Transition theories (theories on democratic transition) “Democratic consolidation” theories “Civil society” theories

Generally, theories on transformation of a socioeconomic character do not exist. Since these approaches are developed in a different manner, an interdisciplinary procedure is opted for, for the purpose of unifying the corresponding analytical values. Thus, for example, this deals with the sociological reflection of an actororiented view, which, better than an equally sociological systemic theory, can explain specific phenomena, for example, the adoption and adaptation of Western style social security systems (von Beyme 1994, p. 167). Often, systemic theories would fail in the “large quantity of single cases to be historically interpreted” (von


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Beyme 1994, p. 170); a similar reasoning is also upheld by Dallago (1995), who noted the relevance of the path dependency, conditioned by historical, individual, technical, and organisational factors. Nevertheless, it was seen that this integral procedure also did not provide any overall theory on transformation, but rather typologies (Sandschneider 1995, p. 84). The fact that a multiplicity of historical and comparative studies, for example, those of Kornai on Hungary (1995, 2000) or Huntington’s researches (1991), which were formulated in a rather global manner, have given limited significance to the theory of interpretation of the transformation processes is also criticised. One can substantiate, for example, that there is an accumulation of political science studies regarding approaches on the democracy theory (Sandschneider 1995). Other than the prevalence of research referred to individual cases and of a historical/comparative type, the limited possibility of taking new conceptual reflections derived from parallel disciplines into consideration is criticised. According to Sandschneider, this would not lead overall to substantial progress in knowledge. Based on his conclusions, the analysis of transformations (of systems) goes well beyond the current interest of individual disciplines of social sciences. This interest would certainly lead to an interdisciplinary procedure, but would not go beyond the classic social sciences (Sandschneider 1995). Central and Eastern Europe’s political systems, for example, are complex systems that escape a simple, linear, analysis and require a research strategy that, in addition to theoretical conceptions, include qualitative and quantitative data (Sandschneider 1995, p. 87).

2.2 Approaches of the Elite Theory Schumpeter is considered not only an important economist, but also one of the most important democracy theorists of the twentieth century (Scheuermann 2002, p. 40). Two significant aspects for our context emerge from his works: on the one hand, the economic development theory of 1911 (Schumpeter 1964), which sheds light on the figure of the entrepreneur as a central variable; and on the other hand, is the competitive elite theory, exposed in his book Capitalism, Socialism and Democracy (Schumpeter 1987, first edition 1942). This paper also assigns a particular position to the entrepreneur. Schumpeter, referring to Max Weber (1971/1972), considers that the classic entrepreneur (contrary to a manager employee) has charismatic power. This constitutes the “specific differentia” of modern capitalism, or else, in the words of Hébert and Link (1989, p. 43), the “persona causa of economic development”. Great economic power, instead, is not easily transformable into political power. According to Schumpeter (1987, p. 427 and following), this is because political power is based on antagonisms and irrationalities. In this work Schumpeter, as a critic of pluralist reflections, came across the democracy theory, the formulations of which motivate the weaknesses of modern parliamentary democracies. The remedy would be possible if the elections were to be faced by representatives of strong

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elites that concur with a mandate for the exercise of political power. From this perspective, democracy is viewed as a limited, institutional means, to produce competent leaders. The competing elite theory is significant here for the reference to the entrepreneur figure. However, it should be noted that, apart from the meaning of this theory, important observations do not concur with other studies on the democracy theory.2 An aproblematic application to Central and Eastern Europe’s societies does not seem reasonable. The strength of these societies, at least at the beginning of their separation from the communist regimes, was to avoid the proclamation of new “personality leaders”, even if in individual cases such as Russia and Belarus it was not possible to impede this. The question posed here is: based on which theoretical approach can the elite’s behaviour be explained? The model of rational behaviour, supported by Sandschneider (1995, p. 155), that is, the individual pursuit of the maximum possible utility, could be a starting point. Nevertheless, the objection to this model is that, with the exception of East Germany, it was not obligatorily clear to the elite who achieved the transformation in the Central and Eastern Europe countries where the route taken would lead. The fact that the market economy has led to democracy, was not an automatic procedure for the many elite (von Beyme 1994, p. 155) and, specifically, for the not inconsiderable elite of the time, this was not referring to a desired path. Here it is necessary to take into account that many countries, after the First World War, had never been able to develop democratic structures, as in the case of Russia, or had done so only for a short period, as in the case of the Czech Republic and the Slovak Republic. A further reserve derives from the fact that the Schumpeter theory on the competitive elite was conceived for developed society, not for societies that have introduced transformation processes. Its application is not therefore anticipated.

2.3 Models of Socioeconomic Transformation Socioeconomic models for interpretation of growth, prosperity, and democracy are traditionally a part of economic and social sciences. Examples, in this connection, are the studies of Kuznets (1963) and Rustow (1970) on those countries that, immediately after the Second World War, obtained political independence, for example, many ex-colonies of European countries. A functional prerequisite for democracy, also particularly discussed in political science theory, is that of the stage of economic development. Referring to the studies of Daniel Lerner, Seymour Lipset elaborated a theory of the functional socioeconomic prerequisites of democracy. Lipset concentrated on the evaluation of indicators that, based on the modernisation theory, appear relevant as particularly favourable prerequisites for democracy. The following should be enumerated amongst these (1) a relatively 2

See Schmidt’s critical appreciation (2000, p. 209 and following).


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high level of socioeconomic development, (2) a large and growing middle class, as well as a lower class that can count on a high degree of social and economic security, (3) a relatively open class structure with multiple opportunities for advancement (vertical mobility), (4) a high participation by citizens in the activities of groups and associations, (5) a relatively high cultural level, and (6) a relatively egalitarian system of values (Lipset 1960, p. 51 and following; Schmidt 2000, p. 440). Lipset, based on empirical data in the transversal comparison of diverse countries, established the existence of an empirically positive connection between socioeconomic modernisation and democratisation. Naturally, within this estimated long-term development there are phases when democratic development does not proceed in a positive manner, but suffers setbacks. On this Lipset et al. (1993, p. 162) refer to Kurth’s research (1979), who interpreted democratisation from a historical/industrial perspective. Democratisation, staying with this conception, as a detaching process from the absolute monarchies, commenced with the growing production of simple consumer goods (shoes, textiles, etc.), as happened in Europe at the dawning of modernity. The entry into the capitalistic production of goods (equipment, locomotives, etc.) phase was accompanied by authoritarian regimes and a consequent reduction of democratic rights; thus was the situation in many European countries before the Second World War. The phase of highly industrial production of enduring consumer goods (automobiles, televisions, etc.) after the Second World War was in turn characterised by an increase in democratic rights. Although technological developments remained ignored, according to Lipset et al. (1993) a positive connection was made between democratic and socioeconomic development: the more positive the socioeconomic development, the more positive the democratic development. Subsequent analyses have confirmed this connection and defined the stage of economic development, measured as the gross national product per capita, as the more significant variable (Bollen and Jackman 1989). Schmidt (2000, p. 441), in his description of this approach, and other relevant literature noted that any (known) comparison between economically rich and poor countries gave highly significant correlations between democracy and stage of socioeconomic development. The theory elaborated by Lipset in the 1960s can manifestly reconcile nondemocratic countries, for example, China, with growing prosperity. However, for most countries the assertion “The more well-to-do-a-nation, the greater the chance it will sustain democracy” is valid (Lipset 1960, p. 48 and following). This approach, also defined the “theory of the prosperity of democracy” (Schmidt 2000, p. 441), does not constitute any determining connection, but rather an empirically verified tendency which was demonstrated as extremely significant. Overall, for the problem followed to this point, i.e. the role of entrepreneurship in the democratic development of Central and Eastern Europe, the approach elaborated by Lipset appears by far the most promising – not lastly because it meets the need, also expressed by other perspectives, of making theoretical research projects accessible through empirical analysis of an evaluation.

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3 Expansion of the Model and Data Source 3.1 Expansion of the Model and Hypothesis The approach of Lipset et al. (1993), considered fundamental for this study, examines various functional connections between democratic and socioeconomic development. Considering the time trend of the development of the democracy variable, various forms of connection are examined based on their empirical relevance. Lipset et al. (1993) commence from four possible paths for socioeconomic modernisation overall. The approach starts with a linear path, only considered acceptable in the context of transversal analyses, and not in longitudinal studies, and then various curvilinear connections are treated. The forms of the path are initially extended in a growing manner, to then stop flowing or even decrease. They are represented in Figs. 1–4. These path forms, according to Lipset et al. (1993), are therefore decisive, as the longitudinal researches take into account a temporal evaluation. As already said above, phases when democratic development has suffered set-backs are taken into account. According to Lipset it is essential that this connection between socioeconomic development and democracy shows so-called thresholds, commencing from which democratic development proceeds upwards or downwards. Lipset et al., in the empirical estimation, identified a trend in the form of an N between income level and index of democracy. Thus, initially, with a growing income level the index of

Fig. 1. Possible pattern of the relationship between democratic (y) and economic/entrepreneurial development (x)


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democracy rises, reaching a first threshold at about 2,000 USD.3 Subsequently, the index of democracy again falls, and at about 3,000 USD reaches a second threshold, commencing from which it again proceeds upwards, up to a value of 5,000 USD, commencing from which the index of democracy is maintained. For Lipset et al. (1993), therefore, a democracy only stabilises with effect from an income level of 5,000 USD. With reference to Lipset, the adoption of a linear type development path therefore appears insufficient. Hence the hypothesis of a non-linear path between socioeconomic development and democracy should also be evaluated. In connection with the various model variants, the existing data should be evaluated on the one hand based on countries (transversal study) and on the other hand based on years (longitudinal study). Based on the reflections of Lipset et al. (1993), it is necessary to verify both a linear and a non-linear connection here. At this point, is the connection recorded by Lipset between socioeconomic development and democracy to the Eastern European and Central European countries that have achieved a transformation process applicable? (von Beyme 1994, p. 157) maintains that in the fourth wave of democratisation (global), democratisation presupposes a market economy, and not vice versa. This can be seen as a fundamental newer project to traditional economic approaches that discuss, for example, the institutional view and the theory of property rights (North 1990), in terms of which a free market leads to a free society. Rather non-mainstream economists contest this point however and note that a purely economic vision is

3

Lipset et al. (1993) concluded this test for various country groups, and according to the groups of countries they identified diverse thresholds.


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not sufficient. With reference to entrepreneurship, evaluating determined countries, they noted that the social prerequisites traditionally and historically opt for collectivity with respect to individuals, and hence the woven configurations will be successful rather than the individual enterprises (Weitzmann 1993). Nevertheless, it should be observed that there are no empirical confirmations for these statements. Regarding an evaluation of the applicability of the Lipset model, it is however necessary to verify in what connection the variables are in a reciprocal relationship. The existence of a small and medium enterprises sector as a foundation of socioeconomic, and therefore democratic, development should be without doubt viewed in the context of other favourable factors. Kuznetsov (1997) highlighted in the first place that this sector necessitates its own lobby that represents its interests, and in the second place that this sector of enterprise should not be seen in isolation from the large enterprises sector (not yet definitively privatised). The western experiences come into play here, based on which precisely the cooperation between large and small enterprises is decisive for a high international competitive capacity, and this is therefore the foundation of growth and economic prosperity. Although it is difficult to represent these entities and institutional relations on the basis of secondary statistical information, there is the possibility of utilising variables that represent this context in an approximate manner. Hence, for an empirical analysis, other than socioeconomic variables and those for democracy, factors were utilised that supply approximate indications on the political and legal framework of each country. The hypothesis that is the basis of these variables is that these contribute to further clarifying, in a specific manner for the individual countries, the importance of entrepreneurship in the Central and Eastern European countries that have carried out transformation processes.

3.2 Data Source Various sources were utilised for the empirical analysis. On the one hand, for the level of democracy, the data bank of the Freedom House Organisation (http:// www.freedomhouse.org) was chosen as a unit of measure; on the other hand, for the characterisation of the socioeconomic situation of the countries that have concluded transformation processes, data were taken from the following entities: x World Bank (http://www.worldbank.org) x European Bank for Reconstruction and Development (http://www.ebrd.org) x European Community Statistical Office (http://www.eurostat.eu) The Freedom House data offer, based on its own scale, a classification of the democratic level for about 190 countries of the world. The democracy index (DEMOCRACY) is a hypothesis arrived at from an index of political rights (“political right index”) and an index of civil rights (“civil rights index”). Both indexes are compiled on the basis of either 9 or 13 individual questions (political

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rights).4 A response on the basis of observations and evaluations is given to the questions, on a scale of seven figures every time. The index of political rights and index of civil rights is then calculated from the sum of the individual value scales, or rather with the simple addition of the two values/index of the index of democracy. The Freedom House scale is not the only means of an evaluation of democracy, and according to Schmidt (2000, p. 412) has specific weak points. These, other than for the problem of the evaluation supported by experts but in any event subjective, consist above all in interpreting, as an index of democracy, the sum taken from the scale of political rights and civil rights. According to Schmidt, the characters of the legal state and the constitutional state do not reconcile either conceptually or empirically with democracy. He nevertheless admits a high uniformity with other scales of democracy (Schmidt 2000, p. 413) and all the scales of democracy he examined also show a high reciprocal correlation. For this reason, and not finally, taking into account the reality and availability of the data, no other scales were input for the research. The data that represent the classic socioeconomic variables of economic growth (GROWTH), prosperity (PROSPERITY) (measured as income pro capita), and life expectancy (LIFE EXPECTANCY) (measured as average life expectancy in each country) prevalently derives from the World Bank’s data bank. Where it was necessary, the classic socioeconomic variables for the individual countries, and above all for the years 2002 and 2003, were integrated with the European Community Statistical Office data (Eurostat). The main source of data for the small enterprises (SME) constitutes a data bank of the World Bank, made up from 76 States of the world and already empirically analysed.5 This database represents the entrepreneurship factor in the Central and Eastern Europe countries and is calculated as the quota of the small enterprises in a percentage referred to all the enterprises of the individual countries. One can object that the phenomenon of entrepreneurship is not sufficiently represented by this because, for example, the constituent dynamic in the countries that have concluded transformation processes is not gathered through this entity. In connection with the complexity of the data supply in the Central and Eastern European countries and in consideration of the fact that comparable statistics on the foundation of enterprises, such as the Global Entrepreneurship Monitor, have only been available worldwide since the end of the 1990s, the World Bank data can be considered the best possible approximation for the entrepreneurship phenomenon. In conformity with the hypothesis on the relevance of the factors supporting the enterprise sector, further variables were used in the empirical analysis. The POLITICAL INSTITUTION variable, also deriving from a World Bank database, 4

The rating was calculated for each country individually, based on the aggregate points of the categories: electoral process, civil society, independence of the media, national/local democratic governance, constitutional/legislative picture, and corruption. It is important to note the downward rating given by Freedom House, for example, authoritarian regimes are associated with high values and more or less democratic states are associated with low values. 5 See the studies of Ayyagari et al. (2003) and Klapper et al. (2002).


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expresses an approximate entity here. It is presented as the value of the age of the political institutions in each country and therefore represents the differentiated manner in which the political system evolved during the course of time. A further variable is the confidence in the legal system of the countries that have concluded the transformation process. The LEGAL SYSTEM variable was deduced from a primary European Bank for Reconstruction and Development survey carried out in the Central and Eastern European countries. This is a measurable magnitude that represents confidence in the legal system relative to the member country, on a scale from 1 (no confidence) to 6 (very high confidence). Thirteen countries overall were included in the research: Albania, Bulgaria, Estonia, Poland, Latvia, Romania, the Slovak Republic, Slovenia, the Czech Republic, Russia, Belarus, Hungary, and Ukraine. The generally utilisable data were grouped in a time period from 1996 to 2003. Data prior to 1996, in particular for democratic development, were not available. Poland, Hungary, the Czech Republic, and the Baltic countries became members of the EU in 2003. Hence, these states can no longer be considered as countries in transformation in the original sense, although the socioeconomic transformation processes are not yet concluded.

4 Results of the Empirical Estimations 4.1 Correlations The data utilised did not generally have a scale level with intervals; specifically, the dependent democracy variable is measured on an ordinal scale, and for this reason it was compiled at less than a Pearson coefficient of correlation. All variables, instead, were correlated by ranks, which correspond to the level of the data scale. It is possible to have a first impact on the connections between the variables utilised, although tests on the significance of the coefficients of correlation are not possible. Table 1 shows the correlation results by ranks. Table 1. Matrix of the correlation by ranks of the applied variables SME Growth Political institution

Growth

Political Democracy institution

Legal system Prosperity

0.21 0.16

0.72

Democracy

0.25

0.07

0.47

Legal system

0.29

0.45

0.36

0.38

Prosperity

0.08

0.02

0.22

0.81

0.32

Life

0.32

0.01

0.34

0.59

0.01

0.65

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Two questions should be clarified here. First, how strong is the connection between the dependent variable and the explicative one where strong correlations indicate a high explicative capacity of the dependent variables but also relate to interdependent connections. Second, how strong is the reciprocal connection of the explicative variables where strong correlations are indicators of multicollinearity, which limits the explicative capacity of the individual variables and base model if one of the variables is not removed or substituted with another. The relations between the dependent variables of democracy and the remaining independent variables are prevalently negative figures. This result then is not surprising, in fact the Freedom House democracy scale includes values from 1 to 7, where reducing values reflect an increase in the level democracy. On the contrary, the values increase in positive cases in the remaining independent variables. A negative correlation therefore emerges. With respect to the first question the correlation values are now decisive. A value of 0.25 emerges between democracy and entrepreneurship, between democracy and age of the political institutions there is a value of 0.47, between democracy and the income level 0.81, and between democracy and life expectancy the variable is 0.59. These independent variables are therefore correlated in the desired sense as also is the assumed value with the independent variable of democracy. An inter-changeability through an almost complete correlation is not anticipated however. Conversely, the connection between the democracy variables and independent variables of growth and legal system is positive, and in the case of the growth variable it is also irrelevant (0.07). With the exception of the growth variables, one can therefore substantiate that all the variables utilised are well affiliated to the dependent variable of democracy, and in consequence can be assumed to be good explicative contributions in connection with an estimation of the model. With regard to the second question it should be noted that it would be difficult to find high correlations between the explicative variables. The correlation of the variables income level (PROSPERITY) and life expectancy (LIFE) rises most, something that, with respect to the value of connection, is still sustainable with 0.65. Multicollinearity, therefore, does not exist. Possible candidates for an exchange or a removal in connection with an estimation of the model are the variables of income level and life expectancy.

4.2 Linear Estimation Linear estimation of the function (type A) shows the following form:

Democracy it

a b1 Growth it b2 SME it

b3 Political institutions it b4 Prosperity it b5 Life it b6 Legal system it eit ,


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with i that assumes values from 1 (Albania) to 13 (Ukraine), t that assumes values from 1 (1996) to 8 (2003), a is the constant, and e reflects the term of error. The linear estimation of the 13 countries examined does show a satisfying framework overall (see Table 2). The variance explained (pseudo-R2) has a relatively narrow value of 0.43, notwithstanding the limited number of cases. The only significant variables are that of entrepreneurship (SME) with 0.030720 and the prosperity variable (PROSPERITY) with 0.000411. With regard to this data the negative figure of the two significant variables is important. Since the values derived from the democracy index reflect an increase of the democratic level, the hypothesis of a Lipset model is legitimate with regard to the SME and PROSPERITY variables. Their increase is correlated with the reducing values of democracy, but this does not mean to say that there is an increase of the democracy level. Table 2. Variant of the type A model (linear estimation programmed with EViews) Independent variables

Dependent variables democracy (specific estimation by country)

Dependent variables democracy (specific estimation by year)

Growth

0.079159

2.308665*

(0.265152)

(0.9921164)

SME

0.030720**

0.149440**

(0.010509)

(0.060664)

0.803006

0.859462

Political institution

(1.039642)

(1.662606)

Life expectancy

0.348722

9.212073

(0.292028)

(37.53220)

Prosperity

0.000411**

0.000740*

(0.000151)

(0.03582)

2.183944

Not calculated

Legal system

(2.124906) Log likelihood Pseudo-R

2

14.86340 0.43

N 13 Note: The numbers in parenthesis are the standard errors *p < 0.05; **p < 0.01

4.651576 0.66 8

A certain improvement is verifiable in the results of the linear estimation over time. The variance explained (pseudo-R2) shows with 0.66 a certain improvement with respect to the estimation of the countries, although there are fewer variables and fewer cases. The significant variables are once again that of the enterprise (SME) with 0.149440, the prosperity variable (PROSPERITY) with 0.000740,

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and the growth variable with 2.308665. It should be noted that the growth variable, differently from the two other significant variables, does not show negative figures. This means that economic growth is also traceable in those Central and Eastern European countries with weak democracy. Effectively this is a phenomenon also traceable in the successor states of the ex-Soviet Union. Generally, the POLITICAL INSTITUTION and LIFE EXPECTANCY variables in the two estimation models are not significant, while the LEGAL SYSTEM variable, due to restrictions of the model’s algorithm, was no longer adopted in the second estimation, such that at the end it also provided advantage to the “model fit”.

4.3 Non-Linear Estimation Non-linear estimation of the function (type B) shows the following form: ln( y )

a b1 6 / xit ,

where x represents the GROWTH, SME, POLITICAL INSTITUTIONS, PROSPERITY, LIFE, and LEGAL SYSTEM variables, a is the constant, and b1–6 are the coefficients that assume the six variables. The non-linear estimation of the 13 countries examined shows a visibly improved framework with respect to the previous linear model overall (see Table 3). The variance explained (adjusted R2) shows a satisfying value with 0.64. Significant factors influencing this model variant are the SME variable with 0.471923, the life expectancy (LIFE) variable with 2.394703, and the prosperity (PROSPERITY) variable with 3.386828. Once again all significant variables are negative figures. Thus, not only is the hypothesis of the expansion of the Lipset model confirmed with respect to the relevance of the SME, PROSPERITY, and now also LIFE EXPECTANCY variables, but also the correlation of these with the democracy variables. The results of the non-linear estimation over time are even better. The variance explained (adjusted R2) shows a very high value with 0.86, something that certainly has to do with the low number of variables and cases of the previous estimation. The situation with the significant variables is nevertheless different: with prosperity (PROSPERITY) at 3.017858, life expectancy (LIFE) at 2.464472, political institutions (POLITICAL INSTITUTION) at 0.43749, and growth (GROWTH) at 0.994738. Once again the growth variable is distinguished with respect to other significant variables, by not reporting any negative values. In this model variant, the variable relating to entrepreneurship (SME) is not significant, while the LEGAL SYSTEM variable, as before, was no longer adopted in the second estimation due to the restrictions of the model’s algorithm.


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Table 3. Variant of the type B model (non-linear estimation programmed with EViews) Independent variables

Dependent variable democracy (specific estimation by country)

Dependent variable democracy (specific estimation by year)

Growth

0.246730

0.994738*

(0.755513)

(2.917504)

0.471923*

0.503636

(3.085761)

(1.959127)

0.643713

0.43749**

SME Political institution

(1.761622)

(4.111497)

Life expectancy

2.394703*

2.464472*

(2.600465)

(4.807512)

Prosperity

3.386828**

3.017858***

(4.451167)

(6.706565)

0.133490

Not calculated

Legal system

(0.891317) Log likelihood Pseudo-R

2

8.735701

29.79240

0.64

0.86

N 13 8 Note: The numbers in parenthesis are the approximative+distribution *p < 0.05; **p < 0.01; ***p < 0.001

Since the parameter values of the linear and non-linear estimation variables were not directly compared, Figs. 5–8 once again graphically illustrate the model estimations, thus favouring a better comprehension of the results.

Democracy (mean score from 1=high to 7=low)

3,10

Democracy and the main explaining variables over time

3,00 1996

1996

1996

SME Prosperity Growth

2,90 2,80 2,70

2003

2,60 0,00

4,00

2003

2003

8,00

12,00

standardised index of SME, Growth and Prosperity

Fig. 5. Plot of the main variables

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Figure 5 shows the outline of the central SME, PROSPERITY, and GROWTH variables on two planes (for better comparability all the variables are standardised): in the first place on the temporal plane (points of the line from 1996 to 2003) and thereafter based on the democracy index (vertical axis). It can be noted that the SME variable in particular shows a non-linear trend, but from 1999 growth also shows reductions. With respect to this, the trend of the prosperity (PROSPERITY) and growth (GROWTH) variables is tendentially growing, and therefore rather adapted to a linear interpretation, in accordance with the model: “if prosperity/economic growth increases, the democratic level also increases”. This is not valid for the SME variable for several reasons. On the one hand, the small enterprises sector in the Central and Eastern Europe states, at the beginning of the 1990/1991 transformation process, developed in a partially turbulent manner. Many enterprises were created and sustained by the vast privatisation measures from the beginning. Knowledge of the development and running of an enterprise in accordance with market economy principles was nevertheless the prerogative of few founders, and after decades of socialist economic planning was not able to be put to use. Added to this know-how deficit was a lack of capital that, for many entrepreneurs, was evident in further development phases after the successful foundation of the enterprise. The necessary capital for further expansion was unable to be raised to a sufficient extent through the corresponding financial markets of the transformation countries. For many small enterprises this signified the end after a few years of economic existence. On the other hand, in almost all countries that concluded transformation processes, some gaps are registered in the recording of small enterprises data, making it necessary to proceed with estimations.6

D e m o c ra c y (m e a n s c o re fro m 1 = h ig h to 7 = lo w )

Democracy by SME

7 Belarus

6 5

Albania

Ukraine

4 Russia

3

Bulgaria

Romania Latvia

2

Slovak Rep.

Slovenia

1

Hungary

Poland

0 0

10

20

30

40

50

SME-Employment (in % of total)


6

Estonia

Czech Rep.

See the studies of Ayyagari et al. (2003).

60

70


145

Figures 6–8 show the central SME, PROSPERITY, and GROWTH variables in their connection with the democracy index for corresponding Central and Eastern European countries. Other than from the illustration relative to the temporal trend, the average values for the respective countries are utilised here. If a diagonal is outlined in Figs. 6 and 7 from top left to bottom right, the relation between the corresponding variables, recognisable in the linear estimations of the model, would be more visible – a growing quota of small enterprises and growing prosperity lead to a reduction of the democracy index (which corresponds to an increase of the democratic level in the respective countries). Democracy by GDP/capita

Democracy (mean score from 1 = high to 7 = low)

7

Belarus

6 5

Albania 4

Russia Bulgaria Romania

Ukraine

3

Slovak Rep.

Latvia

2

Estonia Slovenia Poland

1

Cze ch Rep. Hungary

0 0

2000

4000

6000

8000

10000

12000

14000

16000

GDP/capita (Purchasing Power Parities in USD)


Democracy by Growth

Dem ocracy (m ean score fro m 1 = hig h to 7 = lo w )

7

Belarus

6 5 Russia

4

Bulgaria

3 2

Romania

Slovak Rep.

Czech Rep.

1 0 0,00

Albania

Ukraine

Hungary

2,00

Slovenia Poland

4,00

Estonia Latvia

6,00

Growth (mean annual change of GDP in %)


8,00

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With respect to this, one recognises the already thematised opposite trend connection in the growth variable. By tracing a diagonal in Fig. 8, this time from bottom left to top right, it can be seen that above all in countries such as Belarus, Albania, and also Russia, high rates of economic growth are not accompanied by democratic development.

5 Conclusions The empirical analysis of the significance of socioeconomic variables for democratic development in Central and Eastern Europe prevalently confirms the theory elaborated by Lipset, integrated here with the entrepreneurship variable. The income level factors, here meaning a prosperity indicator, alternatively to life expectancy, growth, and entrepreneurship (SME), have supplied a good contribution to the explanation of the variance in the democracy variable. As a consequence they can be considered as absolutely relevant entities for democratisation in Central and Eastern Europe. The democracy variables variance had a higher estimation in the non-linear model with respect to the linear model. This indicates that the connections are anything but easy compared to a linear relation, where the increase of one entity implies the increase of the other. It is necessary rather to commence by complex chains of effects, which in the context of this rather simple model could not analysed, and which led to the assumption that frequent recurrences of individual independent variables are not necessarily accompanied by a high democracy level. An indication is provided by the growth variable, the significance and the positive figure of which should be interpreted in this manner: An effective economic growth is planned also in the non-democratic states of Central and Eastern Europe. Apart from these satisfying results, further relativisation of the results is necessary. The results are not placed under discussion with this; estimations of in-depth analysis are partially possible. The necessity above all for further data and research is nevertheless evident. This is first of all valid for the entrepreneurship variable. This takes into account only enterprises of the industrial sector and not the services sector. Not only the experience of the industrialised nations of the West, but also that of Central and Eastern Europe show that many small enterprises precisely in the sector just mentioned are active. The examples collected by Pfirrmann and Walter (2001) also show this, and precisely in the progressive Central and Eastern Europe countries, with deregulated markets and relative opportunities for the creation of an enterprise, small enterprises have a relevant significance for the economy. In this collection of contributions a relevant significance is attributed to the so-called informal or hidden economy. This is present above all in countries with autocratic tendencies. Notwithstanding this, it is plausible that the importance of entrepreneurship for democratic development merits a greater estimation with respect to that which the current results lead us to believe.


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Without doubt the expansion to the East of the European Union is of great importance for the democratisation process. This was verified in connection with the empirical estimation through “dummy variables” for certain countries (Baltic countries, Poland, Hungary, Czech Republic, Slovak Republic, and Slovenia). It should in any event be considered that admission into the EU is based on a series of legal/political and economic criteria to which the member countries were bound. In this manner the objections raised on a deformation of the research, originating through a process outside of this analysis, set out here as exogenous, are not removed. The availability and resulting capacity for fulfilment of these criteria was nevertheless provided by the countries themselves. This refers to an endogenous capacity that the variables utilised here have fully come to light. Finally, the forecast capacity and applicability of the assertions produced here should be critically analysed. It is necessary to consider, as said above, that the non-linear estimation has produced better results compared to the linear estimation. Related to this is not only the assessment that democratisation is a complex process, manifestly founded on the interaction of a series of factors, but it should also be borne in mind that any “recipe for democratisation” cannot derive from this analysis. Generally, the sample of the countries and temporal progression of the data are comparatively small. It was not possible to modify these restrictions in the course of the research carried out for this study; in part, it was not possible to acquire statistically stable and plausible data from the Central and Eastern European countries prior to 1995. It was only possible here to take into account available material, and the hope remains that in the future a series of new and more stable data will be available.

References Audretsch DB (2001) Small firms and entrepreneurship – the western experience. In: Pfirrmann O, Walter GH (eds) Small firms and entrepreneurship in Central and Eastern Europe: a socioeconomic perspective. Physica, Heidelberg, pp. 19–51 Ayyagari M, Beck T, Demirguc-Kunt A (2003) Small and medium enterprise across the globe – a new database. Policy research working paper no. 3127, The World Bank, New York von Beyme K (1994) Ansätze zu einer Theorie der Transformation der ex-sozialistischen Länder Osteuropas, in Systemwechsel I. Theorien, Ansätze und Konzeptionen. Leske and Budrich, Opladen, Germany, pp. 141–171 Bollen KA, Jackman RW (1989) Democracy, stability and dichotomies. Am Sociol Rev 54:612– 621 Brüderl J, Preisendörfer P, Ziegler R (1996) Der Erfolg neugegründeter Betriebe. Duncker & Humblot, Berlin Casson MC (1991) The entrepreneur: an economic theory. Edward Elgar, Aldershot Dallago B (1995) The failure of the Soviet-type system and obstacles to transition: collective action in the transformation of an economic system. In: Kovács J (ed) Technological lag and intellectual background in East-Central Europe. Edward Elgar, Aldershot, pp. 263–310 Dementiev VV (2000) Transitional economy as the system of unbalanced power. Paper presented to the annual EAEPE conference in Berlin, 2–4 November

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Frankfurter Allgemeine Zeitung (2006) Sonderbeilage zum Beitritt Bulgariens und Rumäniens zur EU, FAZ 27.12.2006 Hébert RF, Link AN (1989) In search of a meaningful theory of entrepreneurship. Small Bus Econ 1:37–59 Heering W, Pfirrmann O, Schroeder K (1998) Technologie – und Gründerzentren in Mittel – und Osteuropa. Studie für das Bundesministerium für Wirtschaft, Apt-Paper 2/98, Berlin Huntington SP (1991) The third wave. Democratization in the late 20th century. Norman, New York Klapper LF, Sulla V, Sarria-Allende V (2002) Small and medium enterprise financing in Eastern Europe. Policy research working paper no. 2933, The World Bank, New York Kornai J (1995) Das sozialistische System. Nomos, Baden-Baden Kornai J (2000) What the change of system from socialism to capitalism does and does not mean. J Econ Perspect 14:139–153 Kurth JR (1979) Industrial change and political change: a European perspective. In: Collier D (ed) The new authoritarianism in Latin America. Princeton University Press, Princeton, pp. 79–108 Kuznets S (1963) Economic growth of a small nation. In: Robinson EAG (ed) Economic consequences of the size of nations. Macmillan, London Kuznetsov Y (1997) Learning in networks: enterprise behavior in the former Soviet Union and contemporary Russia. In: Nelson JM, Tilly C, Walker L (eds) Transforming post-communist political economies. National Academy, Washington, DC, pp. 156–176 Lipset ML (1960) Political man. Macmillan, London Lipset ML, Seong KR, Torres JC (1993) A comparative analysis of the social requisites of democracy. Int Soc Sci J 45:155–175 North DC (1990) Institutions, institutional change and economic performance. Cambridge University Press, Cambridge Pfirrmann O, Walter GH (2001) Small firms and entrepreneurship. In: Central and Eastern Europe: a socio-economic perspective. Physica, Heidelberg Quaisser W (1997) Strategieansätze und Ergebnisse des Übergangs der mittel- und osteuropäischen Länder zur Marktwirtschaft. Aus Politik und Zeitgeschichte B 44–45:3–15 Rustow DA (1970) Transition to democracy. Towards a dynamic model. Comp Polit 2:337–363 Sandschneider E (1995) Stabilität und Transformation politischer Systeme. Leske and Budrich, Opladen, Germany Scheuermann WE (2002) Die politische Theorie konkurrierender Eliten: Joseph Schumpeter. In: Brodocz A, Schaal GS (eds) Politische Theorien der Gegenwart, vol I. Leske and Budrich, Opladen, Germany, pp. 399–437 Schmidt MG (2000) Demokratietheorien, 3rd edn. Leske and Budrich, Opladen, Germany Schultz TW (1975) The value of the ability to deal with disequilibria. J Econ Lit 13:827–846 Schumpeter JA (1964) Theorie der wirtschaftlichen Entwicklung, 6th edn. Schmidt, Berlin (1st edn. 1911) Schumpeter JA (1987) Kapitalismus, Sozialismus und Demokratie, 6th edn. Mohr Siebeck, Tübingen (1st edn. 1942) Weber M (1971/1972) Wirtschaft und Gesellschaft, 5th edn. Mohr Siebeck, Tübingen (1st edn. 1921/1922) Weitzmann M (1993) Economic transition. Can theory help? Eur Econ Rev 37:549–555

East–West European Integration: Patterns of Catching-Up and Labour Market Implications M.A. Landesmann

1 Introduction The fall of the Iron Curtain in 1989 was the most significant historical event to shape European political and economic developments in the past 20 years. In this paper we shall review the principal features of East–West European economic integration with a focus on economic developments in Central, Eastern and Southeastern (C–E–SE) Europe. We shall see that there are distinct phases in the economic development of different groups of countries in this region and that these phases also shape the extent to which development of the region determine the degree to which East–West European economic development shapes overall European economic development. Section 2 reviews the aggregate growth processes and shows that the countries of this region have increasingly become active drivers of the overall growth process in Europe. Section 3 discusses the changing patterns of specialization between the different groups of countries in C–E–SE Europe and Western Europe, and we shall put this in the context of more general global patterns of international specialization between advanced and catching-up economies. Section 4 finally analyses a number of structural features of labour market developments in C–E–SE Europe and also discusses the implications of the emerging patterns of intraEuropean specialization for labour markets both in Western and Eastern Europe. Section 5 provides conclusions to our findings.

2 Growth Processes After 1989 and the Increasing Weight of C–E–SE Europe in Overall European Growth The aggregate growth experience of the Central–Eastern and Southeastern European countries can be divided into three phases after 1989. First, the period of economic contraction occurred immediately after 1989 when the basic systemic switch took place from a planned to a market economy. This was followed by a period of “stop–go” in which transition economies had to digest major phases of economic and institutional restructuring often combined with experiencing


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external imbalances and exchange rate crises and exchange rate regime switches (pegged to floating rates). Finally, the last phase was the period after 2000 when many of the transition economies embarked on a much more steady growth path of catching-up. Figure 1 compares the average GDP growth rates over the periods 1993–2000 and 2000–2006 for the “older” European member countries (the EU-15) with those of the Central and Eastern European economies (which were to become members in 2004 and 2007). We can see a marked improvement of the general growth performance of the CEEs in the second period over the first and a substantial gap emerging in the growth performances between the old and the new members in the most recent period. This last fact also emerges clearly in Fig. 2, where the average growth rates of the different groups of countries have been plotted: the EU-15, the first round of new members (the NMS-10), the second round members Bulgaria and Romania together with the likely next member Croatia, then the group of Western Balkan countries (SEE-5) and the Ukraine. We can see that this period is characterised by evidence for a convergence process, i.e. that the lower income countries of the C–E–SE region are growing at significantly higher rates than the countries of Western Europe (a simple forecasting model furthermore estimates that this growth differential of about 2.5–3.0% will be maintained over the medium term; see Fig. 2).

Fig. 1. GDP per head, real growth. Note: Annual averages 1993–2000 and 2000–2006, in percent, EU-25 countries, including Bulgaria and Romania (source: AMECO database)

There is another feature which we want to point out in relation to the growth processes in C–E–SE and this is the relationship between output growth and employment growth. Here we observe an interesting difference between the EU-15 and the catching-up economies of Central–Eastern and Southeastern Europe (see

East–West European Integration: Patterns of Catching-Up and Labour Market Implications

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Fig. 2. Growth of gross domestic product: wider Europe. Note: % annual change, 2003–2006 and 2006–2020 forecasts

Fig. 3. Employment and GDP growth. Note: 1995 = 100

Fig. 3). While the EU-15 experienced moderate GDP growth over the period 1995 to 2006 (+27%), combined with moderate employment growth, the NMS-10 experienced much more impressive GDP growth (+52%) with almost stagnant employment growth. One speaks here of “jobless growth” in the new member states. However, more detailed analysis with individual country data reveals that a change has occurred in this respect. Table 1 presents some simple regression results concerning the relationship between GDP growth and employment growth in the new member countries for two periods: 1995–2000 and 2001–2006. What we can see is that for the earlier period there was either a negative or no significant relationship estimated for the panels of different groups of countries, while for the

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more recent period a significant positive estimate for the employment elasticity of output growth was obtained. This observation goes along with results of improved labour market performances in the new member countries which we shall analyse in more detail in Sect. 4 of this paper. Table 1. Structural break in employment-to-GDP relationship 1995–2000 CEE4

2001–2006

0.117

0.183

Other NMS

0.199 0.261 Note: Separate fixed effects panel regressions of log(employment) on log(GDP). CEE4 includes countries CZ, SK, SI, HU. Other NMS are PL, EE, LV, LT, BG, RO

Finally, we want to emphasise a third feature which also indicates a change in growth prospects of Central and Eastern Europe. As mentioned above, the first two phases of transition were characterised in most of the transition economies by stop–go phases of growth and, in most cases, it was current accounts and exchange rate crises which brought the growth phases to an end. This happened in Hungary in the mid-1990s, in the Czech Republic and Slovakia in the late 1990s, and in Poland in the early 2000s. One cold speak of a binding constraint to higher growth coming from the external balances. Table 2 presents some simple regression results which indicate that this constraint on growth in the new member countries has become weaker: we can see that (as one would expect) higher GDP growth does go along with a deterioration in the current accounts, but the relationship has significantly weakened in the more recent period (2000–2006) as compared to the earlier period (1995–2000) for all groups of the new member countries. Hence one can say that the external constraint (through unsustainable current accounts deficits) to higher rates of economic growth has become less strong. We shall discuss in Sect. 3 the reasons which could account for this outcome. Table 2. GDP growth and current account balance 1995–1999

2000–2006

CEE5

0.46

0.12

Baltics

0.52

0.25

Romania and Bulgaria

0.63 0.45 Note: Panel estimation of CA change (in % of GDP) on real GDP growth (annual data)

Summarizing the argument in this section, we found that the countries of Central–Eastern and Southeastern Europe have recently embarked on more sustained and more steady processes of economic growth and, as their income levels catch up with those of the richer Western European economies, their weight in the overall European GDP and growth performance increases; hence, they also exert a stronger impact upon the overall European growth performance. Secondly, we emphasised that while the employment–output relationship in the catching-up new


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members is distinct from the older members (much lower employment elasticity in the former), we have also shown evidence that there has been a change in this relationship which is in line with other labour market indicators; we shall discuss the underlying structural factors for this change in Sect. 4. Finally, there was also a change in the current accounts-to-GDP growth relationship which in almost all catching-up countries is a sensitive relationship which can exert a constraint on growth as was the case for many of the transition countries throughout the 1990s. We argued that there are signs of improvement in this relationship, and we shall discuss features which can account for such improvements in Sect. 3.

3 Dynamics of Specialization in the Enlarged European Union The purpose of this section is to show that patterns of trade and production specialization in the enlarged European Union have been undergoing rapid changes and that these changes are not dissimilar from what one observes at the global level. As we shall show, we are currently witnessing at the global level a renewed process of “South–North integration” driven by fast catching-up processes of significant groups of successfully catching-up economies. This follows the period after WWII which was characterised by the intensified trade integration between advanced economies (“North–North integration”). In the European context the groups of catching-up economies which shape changes in trade and production structures include both European catching-up economies (the cohesion countries, the Central and Eastern European economies, Turkey) and non-European, particularly Asian, economies. Figure 4 supports the view that the most dynamic feature which we observe currently in global manufacturing trade is the increased presence of successful catching-up economies in “Northern” markets (the “North” defined here as the advanced OECD economies). We can see that the import structures of the EU-15, the United States, and Japan changed dramatically between 1990 and 2006. While advanced OECD countries occupied the dominant position in manufacturing imports in Northern markets in 1990, the picture is quite different in 2006. We can see that in the United States and in Japan the “dynamic Asia” group has become the dominant importer, while in the EU-15 dynamic Asia is one of three groups of catching-up economies with strong positions in manufacturing imports: the others are the EU Southern cohesion countries and Turkey and the Central and Eastern European new member countries (the latter experienced a similar growth of import shares as dynamic Asia). We refer to this as the first of the important stylised features of changing global trade relations. We might add here that other groups of “Southern” economies (in Fig. 4 the least developed economies and Sub-Saharan Africa are depicted) hardly feature at all in manufactured imports of the North.

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M.A. Landesmann rich OECD-countries Dynamic Asia least developed countries (LDC)

1990

OECD catching-up EU 10 Sub-Sahara Africa

60 50 40 30 20 10 0 EU-51

USA

Japan

2006 70

rich OECD-countries Dynamic Asia least developed countries (LDC)

OECD catching-up EU 10 Sub-Sahara Africa

60 50 40 30 20 10 0 EU-51

USA

Japan

Fig. 4. Shares (in %) in goods imports of the EU-15, the United States, and Japan, 1990 and 2006. Note: OECD catching-up countries include Spain, Portugal, Greece, Turkey, Mexico; EU10 include the ten new Central and Eastern European EU members; Dynamic Asia includes: Taiwan, Hong Kong, Korea, Singapore, Thailand, Malaysia, Philippines, Indonesia, China and India; the other two categories, LDC and Sub-Saharan Africa are standard UN categories. Notice that in EU-15 imports, the intra-“EU North” trade flows are not included whereby “EU North” are the EU-15 minus Spain, Portugal, and Greece (source: UN trade statistics; own calculations)

The second feature we want to emphasise is that trade in services (especially in the fast growing areas of business and financial services, both included under miscellaneous services) is still very much dominated by advanced economies (see Fig. 5).


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Fig. 5. EU-15 services trade, 2004. Excluding INTRA-advanced EU-trade in USD (billions)

Putting the two features together means that we are witnessing in the current period of globalization a much strengthened (and strengthening) competitive position of groups of catching-up economies in manufacturing trade, while the advanced economies maintain their dominance in services trade. This is as far as the pattern of specialization between the broad sectors (manufactured goods and services) is concerned. In Europe this structure of specialization is also typical for the Western European–Central/East European specialization which is increasingly characterised by positive net trade positions of CEEs in manufactured goods and positive net balances of advanced Western European economies in business and financial services. Let us now come to the third feature of changing trade and production specialization between advanced Northern and catching-up economies. This refers to a feature which is not easily understandable using the tools of traditional trade theory. Traditional trade theory (either of the Ricardian or of the Heckscher–Ohlin– Samuelson, H–O–S, variety) would predict that specialization of countries can be derived either from their differences in technological levels (Ricardian model) or from their differences in relative factor endowments (H–O–S model). The conjecture would be that less advanced economies would specialise in areas where technology (or productivity) gaps with more advanced economies are not too high and in areas more suitable to their relative endowment structures (e.g. less capital-, skill-, or R&D-intensive areas). Hence the prediction would be that less advanced economies specialise in lower tech industries (or stages of production) and less skill-, R&D- and capital-intensive industries. What we find empirically, however, is evidence of a fast up-grading process in specialization structures of the less advanced (but catching-up) economies in their trade relationships with more advanced economies. The catching-up process thus dominates the changing pattern of industrial specialization (for a detailed

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examination of these processes together with the development of a dynamic Ricardian–Schumpeterian model to explain these, see Landesmann and Stehrer 2001, 2007). We can see the changing structure of specialization in Figs. 6 (for selected CEE economies) and 7 (for a range of catching-up economies). What is clearly visible in Fig. 6 is the strong movement of CEE economies from low- and medium/low-tech towards medium-high and high-tech industries in terms of their market presence in EU-15 markets (Fig. 6). Similarly we can see the same phenomenon of up-grading of market share positions for a whole range of catching-up economies on EU-15 markets in Fig. 7.

Fig. 6. Market shares in EU-25 imports


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Fig. 7. Change in market shares in EU-15 imports (percentage point change), 1995 to 2004

The implication of such “changing comparative advantages” is that the competitive pressure in “Northern” advanced economies is not simply felt in the lower-tech, low-skill areas of manufacturing production from “Southern” catchingup economies, but also in medium-tech and medium- to high-skill areas. Similarly, we shall see in the following section that the demand for skills in the less developed, catching-up economies is not following the traditional Heckscher– Ohlin prediction that there will be increased relative demand for high-skilled labour in advanced economies, but a symmetric labour demand pressure for lower skilled workers in less advanced economies (following a traditional specialization of such economies on lower skilled production stages and industries). On the contrary, we find that labour demand is shifting in both advanced as well as in catching-up economies towards a higher demand for skilled labour. This is a robust empirical fact found in quite a few recent empirical studies. We shall come back to these features in Sect. 4.

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One more piece of evidence we want to present with respect to the fast upgrading process going on in the catching-up economies is the improved quality position of new member countries in intra-EU trade. In Fig. 8 we plotted the changing positions of different economies in terms of a quality indicator of the products they sell on EU markets (derived from the calculation of unit value ratios calculated at a very detailed product level) and also whether they increased their market shares in EU imports. We show the movements in both these two variables (unit value ratios and market shares) for two types of industries: low-tech industries and medium-high tech industries. We see that in both these two types of industries the new member states and candidate countries (NMS and Candidates) have improved their unit value ratios and their market shares and that this upgrading process is taking place even more dramatically in the medium-high tech industries. Hence there is evidence not only of fast and successful up-grading of specialization across industrial branches but also within branches, which counters the argument that new member states remain specialised in low-tech segments of industries.

Fig. 8. Price and quality competition in EU-15 markets 1995/1998–2002/2004 by country groups


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4 Structural Change in Labour Markets in Central and Eastern Europe This section of the paper deals with two issues. First, we want to dig more deeply into an understanding of the overall employment situation in Central and Eastern Europe; in particular, we shall be interested in an explanation of the recent evidence for an improved employment elasticity of GDP growth (see Sect. 2). Second, we shall discuss in more detail which type of structural adjustments in the labour market go along with the changing pattern of trade and production integration between advanced Western European and catching-up Central and Eastern European economies. As to the first issue – what accounts for the improved employment elasticity found recently for many of the new member states and hence, given the more consistent recent growth performance, the improved overall employment record in Central and Eastern Europe? The improved overall employment performance over the most recent period can clearly be seen from Fig. 9 where the average (yearly) employment growth rates were plotted for the periods 1996–2000 and 2001–2006. We can see that in all economies except for Hungary (where there was an economic slow-down due to fiscal and monetary policy mismanagement), there was a marked improvement in the employment performance. 3.0% 2.0% 1.0% 0.0% -1.0%

CZ

HU

PL

SK

SI

EE

LV

LT

BG

RO

1996-2000 2001-2006

-2.0% -3.0% -4.0%

Fig. 9. Employment growth rates average annual (in %) (source: WIIW database)

We shall formulate an argument which is based on a “structural transition” in order to explain the improved employment performance. The argument we put forward is summarised in Fig. 10. The figure depicts a “U shape” of aggregate employment developments, i.e. a period of employment decline followed by a period of employment growth. Assume in the first instance that the aggregate GDP growth rate is constant and reflects the possibility of aggregate catching-up of the less advanced with more advanced economies. On the other hand, what we

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observe in the Central and Eastern European economies over the entire period of transition is a change in the structural composition of output: the shares of agriculture in GDP and that of industry are shrinking, while those of the services sector are rising. This reflects the fact that CEEs are “converging structurally”, i.e. the sectors which have traditionally been over-represented in the CEEs compared to the more advanced Western European economies (i.e. agriculture and industry) are declining relatively rapidly in their shares of GDP while the sectors which have traditionally been under-represented (particularly services sectors) are gaining shares.

Employment levels

Strong presence of sectors with declining output shares and strong productivity catching-up

Increasing weight of sectors with strong output growth and lower productivity catching-up

Time

Aggregate GDP growth (catching-up) and convergence in output structures (with more advanced economies)

Fig. 10. Stylised U-shaped pattern of employment growth in NMS

Figure 11 shows that even as late as 2005 this pattern of over- and underrepresentation is still clearly visible. For the employment side, an additional factor is of importance, namely, that (labour) productivity growth – and hence the saving of labour input per unit of output – is relatively high in the sectors which have been over-represented and relatively low in the sectors which are underrepresented. Hence, as the previously over-represented sectors are shrinking in relative terms and the under-represented sectors are growing in relative terms, combined with the fact that the first set of sectors are undergoing fast (labour) productivity growth, we obtain a U-shaped pattern of aggregate employment development. 1

1 There is shortage of space to present the full empirical evidence of relative output and productivity developments by sector which underlies the stylised picture given in Fig. 10; however, this can be obtained in Landesmann et al. (2006).


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Fig. 11. Divergence of employment shares from EU-15 structure, 2005 (%)

The second point we want to emphasize regarding developments on the labour markets both in Western and Eastern Europe is evidence for a strong skill bias of economic development. Figure 12 shows employment developments in three of the new member states for three types of educational groupings (those with lowest educational attainment levels, i.e. those who have not completed a secondary school degree; those with medium educational attainment levels, i.e. with a completed secondary degree; and those with the highest educational attainment levels, i.e. those with completed tertiary degrees). We can see that the entire contraction of aggregate employment can almost fully be accounted for by the dramatic decline of employment levels of those with lowest educational attainment levels, while employment of those with completed tertiary degrees has been growing rapidly and even accelerating. Once we look at the issue in more detail (see Fig. 13) we find that there is a change in the skill composition of employment across all sectors but, furthermore, that this change in skill composition is most pronounced in the sectors which are already skill intensive. Hence there is evidence both for a “skill bias” and a “sector bias” (for details on this see Landesmann et al. 2007). This pattern is true for both Western and Central–Eastern European economies. The pattern would not be compatible with a traditional trade theoretical approach to specialization and trade integration in Europe (see the discussion in Sect. 3), but it is compatible with the approach taken in this paper where we argued that we are witnessing a fast catching-up and qualitative up-grading process in the industrial structures in Central–Eastern Europe (both across industries and within industries) and this in turn brings pressure to bear upon advanced economies to up-grade. Hence the present period of rapid East–West European integration (and of globalization more generally, characterised by the fast integration of successfully catching-up economies into international trade and production structures) is a period in which there are strong pressures exerted on the skill composition of the employed labour force.

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Fig. 12. Employment by educational categories (1993 = 100%), 1992–2005


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Fig. 13. Skill shifts between and within components in low-, medium- and high-skill sectors, 1999–2005. L low-skill sectors, M medium-skill sectors, H high-skill sectors (source: WIIW)

5 Conclusions This paper discussed a number of the stylised facts of East–West European integration. We pointed first to the fact that the Central and East European economies have moved towards a more steady path of growth and catching-up with the more advanced countries of Western Europe, thus narrowing their income gaps and contributing towards the aggregate growth (and productivity) performance of the enlarged European economy. This is also the case for some of the other countries which are not yet members or even candidates, but are similarly on a path of catching-up. We also pointed to some evidence that shows that the employment elasticities have improved in Central–Eastern Europe, which reduces the danger of “jobless growth”. Furthermore, the external constraint which sets limits to fast growth and expresses itself in persistent (and unsustainable) current account disequilibria has weakened in the case of many new member states as a result of a very much improved competitive trade performance. The dynamics of trade specialization was the topic of Sect. 3. There we argued that the pattern of trade integration between Western and East–Central Europe shows features which are typical for the wider processes of South–North integration, which currently characterises increased global economic integration. One of the most dynamic features of current global economic developments is the very significant increase in the presence of successful catching-up economies in global economic relations. These economies not only occupy by now a very important position in the international production and trade of manufactured goods, but also undergo a fast process of up-grading of technological capabilities which shows up both in their changing positions in inter-industry trade and in quality improvements in intra-industry trade. The implication of this is that there is a strong

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pressure to improve the skill composition of their labour forces and, in turn, the more advanced economies are also forced to speed up their processes of upgrading to maintain their positions as high-productivity, high-quality producers. Furthermore, they are pushed to build on their comparative advantage positions in services trades, particularly in business and financial services. The analysis of changing skill composition of the labour force was also a topic of Sect. 4 which dealt more generally with developments on the labour markets. In this context we showed that the skill up-grading process has both a “skill bias” and a “sector bias” dimension and, for the Central and Eastern European economies, comprises both “within industry” and “between industry” components. Hence, the fast changing demand for higher skilled labour is one of the important features of labour market developments in Central and Eastern Europe. The other feature we emphasised is the sectoral structural shift in employment and output structures which reflects another aspect of a convergence process with more advanced economies. We used a structural model of changing output structures combined with uneven (labour) productivity growth processes to explain the “U-shaped” pattern of aggregate employment growth which has characterised employment developments in Central and Eastern Europe. Summing up, this paper has pointed to some of the features of dynamic structural change which have been taking place in Central and Eastern Europe, how these features affect processes of economic integration between Central–Eastern and Western European economies, and how the dynamism of the European economic integration process is affected by these.

References Landesmann M, Stehrer R (2001) Convergence patterns and switchovers in comparative advantage. Structural Change and Economic Dynamics 12:399–423 Landesmann M, Vidovic H (2006) Employment Developments in Central and Eastern Europe: Trends and Explanations; The Vienna Institute for International Economic Studies (WIIW), Research Report 332; Vienna Landesmann M, Stehrer R (2007) Income distribution, technical change and the dynamics of international economic integration. Metroeconomica 58:47–73 Landesmann M, Stehrer R, Leitner S (2007) Skill in European industrial sectors; Part I (‘skills and industrial competitiveness’) of EU skills study. Prepared for the European Commission; Vienna and Brussels


Appendix: Grouping of Industries (Used for Figs. 6 and 7)

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Trade and Foreign Direct Investments: The Point of View of Central Eastern European Countries Changing Hierarchies in a Pan-European Perspective M. Ferrazzi and D. Revoltella

1 Introduction The relevance of Central Eastern European (CEE) economies, following their rapid integration on world trade during the 1990s, has constantly increased in recent years to where they now represent an essential supplier of “old” European countries. The evolution of the industrial structure of CEE countries is one of the main determinants of their remarkable performance, and it is of particular interest to understand the redefinition of the different roles of the various industries across the enlarged Europe. These issues are relevant also because they help explain the competitive position of CEE versus other areas, in particular regarding the increasing competitive pressures from other emerging countries such as China. Given the positive performance of recent years, will the CEE countries be able to consolidate their role in the future? While their cost advantages are expected to be gradually eroded, will CEE countries be able to leverage on other factors to remain competitive amid growing competition from emerging markets? To answer these questions we analysed the most recent trends in trade flows, foreign direct investments, and the evolution of the local business environment in CEE.

2 Changing Hierarchies International trade and foreign direct investment (FDI) flows are contributing to changing the hierarchies at the world level in terms of economic performance, with the so-called emerging countries, playing the most important role. Together with China, Central and Eastern European countries have been among the best performers in world trade during the last decade. In just 10 years, CEE countries have been able to more or less double their share in total world trade, and a similar growth has been recorded in terms of their share with respect to total European imports (Fig. 1). A. Quadrio Cruzio and M. Fortis (eds.), The EU and the Economies of the Eastern European Enlargement. © Physica-Verlag Berlin Heidelberg 2008

167

168

M. Ferrazzi and D. Revoltella 400 350 300 250 200 150 100

US Emerging Asia

CEE China

20 06

20 05

20 04

20 02 20 03

20 00 20 01

19 99

19 97 19 98

19 96

19 95

50

Latin America EU15

Fig. 1. Increasing relevance in EU trade (export share of each country/area with respect to EU-15 import, normalised 1995 = 100) (source: IMF-DOTS, current prices)

This process has been accelerating since 2000: CEE countries now supply almost 8% (+2.5% if compared to 2000, see Table 1) of EU-15 import demand from abroad.1 And, if we exclude intra-EU trade flows, which are very relevant, CEE countries supply almost one fourth of the EU imports from abroad. Table 1. Export shares of CEE countries2 in selected countries/areas, 2000–2006 2000 (%)

2006 (%)

Difference (%)

Germany 9.6

11.8

2.2

Italy

5.5

8.3

2.8

Austria

12.3

12.5

0.2

EU-15

5.3

7.8

2.5

World 2.6 3.9 1.4 Source: IMF-DOTS, current prices

The CEE region, together with other emerging providers in Asia, is gradually becoming the production arm of old Europe. Indeed, on the production side a sort of “substitution” was evident during the last decade, with China and CEE providing what was previously produced in old Europe, especially in some specific sectors. In such manufacturing sectors as leather, textile and wearing

1

Twelve per cent if including Russia and Ukraine (+4% compared to 2000). Poland, Czech Republic, Slovakia, Hungary, Slovenia, Latvia, Lithuania, Estonia, Bulgaria, Romania, Croatia, Turkey.

2

The Point of View of Central Eastern European Countries

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apparels, automotive, rubber and plastic, machinery and equipment, and wood the old EU members strongly suffered under the competition coming from emerging countries. As shown in Fig. 2 a negative figure in the vertical axis means a decrease of EU-15 shares (in the EU-15 markets, hence intra-trade), while positive values along the horizontal means that CEE countries are gaining shares as a percentage of EU-15 import demand. The East–West integration of trade, across different countries, has been accentuated by a new “architecture of supply” determined by the disintegration of the production process,3 with the same European corporations moving eastwards to produce their goods. The automotive sector is probably the clearest example in this sense in Europe, even if not the only one: if we consider the top 10 world players (they cover three fourth of world production), they all produce in CEE. Volkswagen has plants in Poland and Slovakia, Audi in Hungary, Skoda, Toyota PSA (Citroën-Peugeot), and Hyundai in the Czech Republic, Fiat, GM (with the brand Opel) and Ford in Poland, Kia, PSA Peugeot Citroen in Slovakia, and Renault in Romania and Slovenia. Paper & publishing

Decreasing role of EU-15 intra-trade

(change of EU-15 intra-trade market share, 2000-'06)

Chemicals

0% 0%

Basic metals and metal pr.

Coke, refined petroleum pr.

1%

2%

3%

4%

5%

6%

Food, beverages

-2%

Furniture

Wood Oth. non-metallic mineral pr.

-4%

Leather

Electrical Equip.

Machinery and Equip.

Rubber and plastic

Transport Equip. Textiles

-6%

Increasing role of CEE as supplier to the EU-15 (change of CEE market share in EU-15 imports, 2000-2006)

Fig. 2. Trade shares of CEE countries in EU-15 markets (source: UniCredit New Europe Research Network on global insight data)

As a result of those processes, the wider Europe today can already be seen as an integrated area, where Eastern Europe is increasingly relevant as a producer of manufacturing goods. The “old” European countries will probably produce even less manufacturing goods in the future, but they will have to produce more ideas, soft goods, designs, and patents. This process has not been neutral in terms of sectoral specialization of Central Eastern Europe: CEE countries have been able to move towards higher valueadded activities mainly thanks to the spill-overs deriving from the presence of foreign firms and the huge amount of investments received from old Europe. 3

This trend of “integration of trade and disintegration of production”, as intended by Feenstra (1998), is visible at the world level in many other sectors, with the production of electronic devices in Asian countries as one of the best examples, and it is contributing significantly to the rise in trade flows registered at world level.

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3 New Specialization Patterns The positive performance of Central Eastern Europe, amid the increasing competition at the international level, comes in the context of successful deep structural changes. CEE countries have experienced a relevant transformation in their international specialization and production structure throughout the years, from more traditional sectors into new medium-high tech productions. More traditional sectors like food, textile, and leather have started to lose ground, together with some increased competition from some low-cost emerging economies. On the contrary, since the mid-1990s CEE countries have gained new comparative advantages in relatively more technological productions, like machinery and equipment, transport equipment (i.e. automotive and spare component productions, ships, trains, etc.), and electrical and optical equipment (electric motors, radio/television equipment, optical and medical instruments, computers, etc.) (Fig. 3). Such developments have been particularly marked in the countries of Central Europe that have been influenced more deeply by the structure of the German manufacturing sector (in this case both sectoral similarities and geographical proximity are interrelated). Machinery and Equip.

20%

Textile and wearing apparel Electrical Equip.

15%

Transport Eq. Basic Metal and metals pr.

10% Chemicals

Food and Beverages

5%

1998 1999 2000 2001 2002 2003 2004 2005 2006

Fig. 3. Weight of sectoral exports of CEE countries (% of total) (source: UniCredit New Europe Research Network on Global Insight data, current values)

Similar trends are also evident if one looks at the evolution of comparative advantages among sectors (revealed comparative advantages (RCAs)4 of Central 4 RCAs are calculated considering the weight of the sector in the export of each country, compared with the weight of the same sector at world level (CE is the sum of Poland, Czech Republic, Slovakia, and Hungary; SEE is the sum of Bulgaria, Romania, and Turkey). There are different way of calculating “revealed comparative advantages” (for instance, at the global level, at the regional level, with bilateral trade between two countries or trading partners, etc.). Two main trade theories – in few words – have highlighted the role of “comparative advantages”, one originally from Ricardo and the other from Heckscher–Ohlin (H–O). The former assumes that comparative advantage arises from differences in technology across countries; instead, the H–O


171

Europe and SEE are shown in Fig. 4). The shift in comparative advantage is one of the most relevant elements to understand the remarkable economic performance of CEE countries. Similar insights are obtained if considering the evolution of export prices (i.e. upgrades in quality) within each sector.5 Textile and wearing apparel

Leather and leather products

5,0

2,0 4,0

Central Europe South East Europe average CEE

3,0

1,0 2,0

Central Europe 1,0

South East Europe average CEE -

1998

1999

2000

2001

2002

2003

2004

2005

1998 1999 2000 2001 2002 2003 2004 2005 2006

2006

Machinery and equipment Electrical equipment 1,0 1,0

0,5 0,5

Central Europe

Central Europe

South East Europe

South East Europe

average CEE

average CEE -

1998 1999 2000 2001 2002 2003 2004 2005 2006

1998 1999 2000 2001 2002 2003 2004 2005 2006

Fig. 4. Evolution of comparative advantages in selected sectors: Central Europe and South Eastern Europe (source: UniCredit New Europe Research Network on global insight data, current values)

theory attributes comparative advantage to differences in factor endowments across countries (resulting in differences in costs across countries). Hence, classical trade theories are based on the principle of comparative advantage which derives from differences in relative prices across countries. While following the H–O theory, a country’s comparative advantage is determined by its relative factor scarcity. Other theories helped explaining better countries specialization and trade patterns taking into account also the role of local demand (as in Linder, 1961). The difficulties in calculating these advantages were overcome by Balassa, suggesting that comparative advantage is “revealed” by observed trade patterns. Thus, inferring comparative advantage from observed data is called “revealed” comparative advantage (RCA). 5 See Fabrizio et al. (2006).

172


It is interesting to note that while China has been considered, especially after its World Trade Organization (WTO) membership in 2001, a threat to some producers and to many workers in the United States and Western Europe, a sort of complementarity between Chinese and CEE exports exists. While China focuses its export activities in the EU-15 on some labour-intensive sectors, like textiles and leather, and has also developed a strong presence in electronics (particularly in computer component production), the CEE countries’ exports cover a wider spectrum, with a bunch of medium-high tech sectors representing the lion’s share (see Fig. 5, taking into account also the different scale of the two axes). Given such differences in the specialization model, we can believe that even the impressive results achieved by Chinese producers, who were able to more than triple their international trade position in a relatively short period of time, are not necessarily harming the growth opportunities of the CEE region for the time being.

10% (change of Chinese market share in EU15 imports, 2000-'06)

Increasing relevance of China in EU15 imports

Increasing relevance of CEE1 and China on European imports:

Electrical Equip.

Textiles

Leather

Basic metals and metal pr.

5%

Furniture Machinery and Equip. Transport Equip.

Chemicals Food, beverages

0% 0%

1%

Oth. non-metallic mineral pr. Paper & publishing

2%

3%

Rubber plastic Wood

4%

5%

Increasing relevance of CEE in EU15 imports (change of CEE market share in EU 15 imports, 2000-'06)

Fig. 5. Increasing relevance of CEE and China on European imports (source: UniCredit New Europe Research Network on global insight data, current values)

4 Western Enterprises in Search of Opportunities in Central Eastern Europe The performance of CEE countries in world trade is strictly interrelated with the growing importance of the internationalization process undertaken by foreign companies. FDI is often mentioned as an important driver of productivity growth (stimulating technology and knowledge transfer and innovation), investment, and economic growth. In recent years, CEE countries have attracted a relevant amount of FDI, up to 65 billion EUR yearly in 2007. Around 220 billion EUR FDI flew into Eastern Europe in 2004–2007, representing on average almost 5% of GDP during the same period. It is interesting to note that the role of South Eastern Europe


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(Bulgaria, Romania, and Turkey) with respect to total FDI flows is increasing significantly, representing more than 40% of inward FDI in CEE in 2007 (Fig. 6).

60

Others (Baltics, Balkans) Czech And Slovakia Poland and Hungary Romania and Bulgaria

40

Turkey

20

0 1999

2000

2001

2002

2003

2004

2005

2006

2007

Fig. 6. FDI in CEE by area (inward flows, 1999–2007) and by sector (stocks, 2005). (source: UniCredit New Europe Research Network)

Normally we could suppose that foreign direct investments in CEE are mainly related to the delocalizations of some labour intensive phases of the production process, and hence with the manufacturing activity, to take advantage of the sensibly lower cost of the inputs (efficiency seeking FDI). Manufacturing sectors represent 37% of total FDI and receive FDI especially in the segments of intermediate and investment goods, which are needed to nourish the rapid industrialization of CEE countries. On the contrary, market seeking FDI, aimed at serving the needs of local demand, constitute the lion’s share, in particular in the field of services. The sectors of finance, construction, transport and communications, wholesale and retail sales, and utilities represent more than two thirds of the FDI received by CEE countries each year (Fig. 6). An important part of these FDIs is associated with privatizations, as foreign investors took over for instance a large proportion of the banking sector and telecommunications. Hence, a large amount of FDI is now driven by growing local demand: on the one hand, high growth in terms of disposable incomes pushed many foreign companies to move eastwards to serve the local market; on the other hand, the improvements in the business environment during recent years also influenced the decisions of foreign companies to invest in these countries. The most reliable international surveys regarding the business environment rate the CEE countries rather positively (Table 1). Among CEE countries, the new EU members of Central Europe are rated particularly well in this sense, especially the Czech Republic and Slovakia, which in particular seem to be the countries with the best business environments among CEE countries. South East European countries (SEE), on the contrary, are lagging behind in this respect.* Shortcomings in some aspects in terms of local business environment are often associated, at least partially, with a more competitive environment with respect to cost factors, and vice versa (Table 2). When choosing a location, foreign companies are thus taking into account the balance – or, better, the trade-off – between relevant (and *

See Koyama (2006)

174


decreasing) cost advantages and “disadvantages” in terms of a riskier and more complex business environment (Fig. 7). 10

9 Bosnia-H.

WEF Competitiveness Index (deciles)

Moldova 8

7

Serbia

Bulgaria Ukraine Romania

6

Turkey

Russia

5

Slovakia 4

Latvia China

3

Croatia

Poland Hungary Slovenia

Czech R. Lithuania

Estonia

2

1

0 0

200

400

600

800

1000

1200

Gross Monthly wage (€, 2006)

Fig. 7. Gross monthly average wages and “competitiveness” in 2006: CEE and China (source: World Economic Forum, UniCredit New Europe Research Network) Table 2. A survey of some competitiveness6 indicators (decilesa)

Source: World Economic Forum, World Bank, UNCTAD, Transparency International, UNDP The lower the value, the more attractive the country (1 the first decile, 2 the second, and so on)

a

6

Global competitiveness index (GCI): weighted average of different sub-indices covering infrastructure, technological readiness, higher education, etc. Ease of doing business considers, among other factors, time and cost to open a new business, strength of legal rights index, recovery rate in bankruptcy, etc. Inward FDI potential is a simple average of 12 variables including, for instance, country risk, world share of exports of services, R&D spending, etc. The corruption perception index is a perception of corruption existing among public officials and politicians. Human development index (HDI) measures well-being and the impact of economic policies on the quality of life.


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5 The Italian Business Sector in CEE: A Potential Not Fully Exploited The current specializations of Eastern European countries are both the effect and the consequence of the links with the main trading partners and foreign investors. Italy is among the major trading partners of Central Eastern European countries, with Germany being the most important. Both for Germany and Italy the increasing presence in CEE countries has partially to do with the vertical disintegration – especially between design and manufacturing – of the productive process. Also, the different patterns in their presence in each CEE country must be related to the geographical proximity, which can be considered one of the main determinants of the amount of bilateral trade flows,7 and the sectorial specialization of CEE countries.8 The German manufacturing sector maintains strong links with Central European countries, such as the Czech Republic, Slovakia, Hungary,9 and Poland. Italian firms are more oriented towards South East Europe and the Western Balkans (Table 3). In recent years, Italian firms also increasingly participated in the processes of fragmentation of production, especially in some traditional sectors (textile and leather, or furniture can be considered typical examples) and in countries with lower labour cost. Becoming increasingly important is vertical disintegration of production, where some parts of the productive process are decentralised in countries with lower cost of inputs (labour, land, services, etc.), while the Italian labour force is managing some high value-added phases of the production process like design, research, and marketing; and this process is stimulating intra-industry trade. Hence, on the one hand Italian companies have a leading role in this process, and links with CEE are getting stronger. On the other hand, CEE countries are increasingly gaining shares at the expense of Italian firms (see Fig. 8, which is similar to Fig. 2 but also includes the contribution of Italy), a process that can be considered common to other European countries, but much more emphasised. In particular, Italian companies are suffering under the competition of CEE producers in the German market,10 which traditionally represents the main market of destination for Italian goods.

7

As demonstrated in many studies and formalised in the so-called “gravity models” (in analogy with Newton’s theory of gravitation), the amount of bilaterally traded goods is determined mainly by geographical proximity and by the size of the economies of the trading partners. Other variables usually have high explanatory power (even with some theoretical shortcomings in some cases) and enrich these models like, for instance, common language, common borders, the presence of ethnic groups, free trade agreements. Regarding CEE, see for instance Bussière et al. (2005), Christie (2002). 8 See Carluzzo et al. (2006). 9 Hungary, in particular, was the first CEE country to open itself to foreign investors (even before the 1990s) and to privatise large state-owned enterprises to foreign investors. 10 But to complete the overall picture we should consider that some Italian firms are operating now from the East, hence exporting from CEE to Germany.

176


Table 3. Trade flows of CEE countries and the role of Italy

2006

Export to Italy (USD mn)

Import from Italy (USD mn)

Total imports (USD mn)

Italian export shares

4,380

4,058

89,110

4.6

Central Europe Czech Republic Hungary

4,169

4,058

74,687

5.4

Poland

7,070

8,633

127,185

6.8

Slovakia

2,718

1,949

42,721

4.6

Slovenia

2,899

3,673

21,611

17.0

Bulgaria

1,518

1,967

22,169

8.9

Romania

4,932

6,978

53,320

13.1

South East Europe

Croatia

2,206

3,427

19,551

17.5

Turkey

6,749

8,534

129,056

6.6

Estonia

70

410

15,298

2.7

Latvia

122

397

12,429

3.2

Baltics

Lithuania CEE

292

704

18,026

3.9

37,125

44,788

625,163

7.2

25,106

9,633

164,543

5.9

2,515

2,100

52,775

4.0

CIS Russia Ukraine

Source: IMF-DOTS, UniCredit New Europe Research Network

Fig. 8. Intra-EU export share variation (2000–2006): CEE and contribution of Italy (source: UniCredit New Europe Research Network on global insight data, current values)


177

Fig. 9. Trade shares of Italian exporters with CEE countries and contribution of Romania and Bulgaria (source: UniCredit New Europe Research Network on global insight data)

As already underlined, the links between Italy and CEE are not homogeneous among countries and sectors. Figure 9 shows the Italian export shares, by sectors, in CEE countries. The Italian presence in CEE is rather robust in some intermediate goods sectors, such as rubber and plastic and base metals, and extremely strong in leather and textile. In the latter, the contribution of Romania and Bulgaria, for which Italy is the main trading partner, is essential.11 Indeed, Italian trade flows with Romania and Bulgaria are impressive in this sense: around two thirds of total Italian bilateral trade flows (intra-trade is very relevant) with Romania, and around 40% with Bulgaria, regards leather and textiles. Romania and Bulgaria are currently the EU member states with the lowest labour costs. The Italian presence in Romania is also determined by the common origin of the Italian and Romanian languages (with the Latin inheritance deriving from the conquest of Dacia by the Roman emperor Trajan). These markets are particularly suitable for the export activity of SMEs (normally less involved than big corporations in the international markets), which represent the backbone of the Italian manufacturing sector. In particular small and medium enterprises (SMEs), because of their limited size, prefer to use contractual measures rather than FDI, or different kinds of partnerships or shareholdings in order to avoid sunk costs and reduce entrepreneurial risks that they are not able to cope with.12 These patterns must be related with other specificities of the model of internationalization of Italian firms, like the absence of a vast number of big

11 12

See Ferrazzi and Revoltella (2007), Dossena (2005). See Mariotti (2004).

178


leading firms, the presence in sectors with lower economies of scale,13 the difficulties to build strong and stable commercial links, and the role of the industrial district.14 Table 4. The Italian regions: export intensity towards CEE Exports to CEE (% of total goods exported by each region)

Exports to CEE (% of total Italian goods exported in the CEE)

Veneto

11

Friuli V. Giulia

11

18 5

Marche

11

5

Abruzzo

11

3

Basilicata

10

1

Piemonte

10

12

Molise

9

0

Umbria

9

1

Lombardia

8

28

Emilia Romagna

8

12

Sicilia

7

2

Liguria

6

1

Campania

6

2

Trentino Alto Adige

6

1

Valle d’Aosta

6

0

Toscana

6

5

Lazio

6

2

Puglia

6

1

Calabria

5

0

Sardegna

5

1

Italy

8

100

North East 10 Source: ISTAT (Italian Institute of Statistics)

36

On the contrary, only a limited number of Italian medium-sized firms are able to produce and sell in the far and large Asian markets, where competition is actually very strong and the hurdles to overcome are more relevant. 13

The literature suggests that textiles, leather and the food industry are the sectors with the smallest efficiency gains from larger scale production; transport, chemicals, machinery and metals are among those with the greatest economies of scale. See Forslid et al. (2002). 14 The definition “industrial district” dates back to Alfred Marshall in the late nineteenth century. He noted that small firms in the same sector realise economies of scale external to the firm through the concentration of production in particular areas. Regarding the Italian case, where districts are very relevant, district firms exhibit a higher degree of internationalization in terms of foreign trade and a lower degree in terms of delocalization in comparison with firms that do not belong to the district. This is clearly the effect, for numerous SME, of the importance of the positive externalities of the local context. See Mariotti (2004).


179

Regarding again the role of Italy in CEE, the picture from a regional point of view is unambiguous: the Italian regions which have the higher export intensity towards CEE (i.e. the higher percentage of exports directed towards CEE) are those which are on the Adriatic Coast, oriented towards East (regions of the North East, such as Veneto and Friuli, and Marche and Abruzzo) (Table 4). The North East (Veneto, Emilia Romagna, Friuli, and Trentino Alto Adige), one of the main locomotives of the Italian manufacturing industry together with Lombardia, represents 36% of total Italian exports to CEE.

6 Maintaining Competitiveness in CEE to Attract Foreign Investors: Critical Points After the successful transition, especially in recent years and the important role played by the EU convergence process, it is important to understand the future competitive position of CEE, taking into account a pan-European perspective. Any shift in the competitive position of CEE economies (vs. other areas or within CEE itself) can affect numerous Italian companies. It is probable that cost advantages will no longer be the main driver of CEE competitiveness15 in the future. How will CEE countries be able to remain competitive amid higher costs and reduced catching-up potential? Must CEE countries be considered a mere (temporary) step of Western producers, who will move further eastwards in the future,16 or will a strong manufacturing sector develop and serve Europe in view of the strong competition expected from Asian countries? So far, the CEE region is a success story in terms of international competitiveness with the CEE specialization model increasingly shifting from a lower cost into a more capital and technology driven one. Still, some critical points for the future remain: one is the future role of FDI in shaping the evolution of the CEE productive structure, while the other is the different pattern followed among CEE countries, i.e. will the countries lagging behind in terms of industrial evolution be able to replicate the experience of the countries that became EU members in 2004? 15

From a conceptual point of view there is little consensus of what should be the “ideal indicator” of international competitiveness; here we are considering some price and cost measures on the one hand, and some variables related to the business environment on the other hand. See Neary (2006), Ca’ Zorzi and Schnatz (2007). For an incisive critique of the concept of competitiveness itself, seen as a “dangerous obsession”, see Krugman (1994). 16 This intuition, i.e. changes in the geography of comparative advantages (with the need to take as a unit of analysis not the single country, but an integrated area), has already been studied for other areas. The Japanese economist Akamatsu derived in the first half of the last century the term “wild geese flying pattern (FGP)” from the observation of the graphs depicting “time series curves of Japan’s import, domestic production, and export” in some selected sectors before World War II. In brief, he derived different stylised phases of a shifting international division of labour, with leaders, followers, and latecomers countries, hubs, and spokes. Relations of substitution and competition between countries create different phases and shifts in the international position of each country. See Ginzburg and Simonazzi (2005).

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Regarding the first mentioned point, the ability to maintain a high level of FDI inflows, even after almost completing the privatization process, will be the key. Indeed, in recent years foreign investments have played a strong role in shaping the above-mentioned structural changes, enhancing the region’s competitive advantages. The sectors with the highest foreign direct investment (FDI) are also those with the brightest performance in terms of export, so there is a relation in this case, even if it is difficult to assess the direction of causality. As the CEE region continues to attract high levels of FDI, innovation in the manufacturing sectors receives an additional boost. Hence a favourable and open economic environment aimed at attracting FDI (both privatization and non-privatization related FDI) will be essential. While looking at the situation country by country, different patterns emerge. Differences in the timing of privatization help to explain country specific differences in FDI inward stock position (see again Fig. 6). Central European countries (mainly the countries that entered the EU in 2004) experienced a relevant evolution of their productive structure towards sectors with higher technological content. On the contrary, some countries like Romania, Bulgaria, and the Western Balkans can still leverage on their cost advantages, and they still maintain a certain degree of advantage in labour-intensive sectors. It remains to be seen if they will be able to reproduce in the coming years the pattern followed by the other CEE countries or if they will merely remain the low-cost productive base of the EU (see Fig. 10). With other low-cost competitors entering the international arena (in Asia, North Africa, but even in Europe, as in the cases of Moldova, Belarus, and Ukraine), it is presumable that all the CEE countries will have to further move towards productions with higher technology/quality, especially following the EU membership.17 Strengthening overall competitiveness, out from a low labour cost specialization model, is hence the key challenge for the future of the whole Central Eastern European area. Working on a concept of wide-ranging competitiveness, rather than only on lower labour costs, also means focusing on education, R&D, technology, and infrastructure – elements that Europe has already identified (even without a clear strategy to achieve them) – as the long-term drivers of economic growth, i.e. the Lisbon Strategy objectives. CEE countries will not have their own specific (formal or even implicit) Lisbon Agenda, but they will have to count on the innovation deriving from FDI and learning-by-doing processes. Although the allocation of EU structural funds is mainly directed towards “technology related sectors” (i.e. education, SMEs, telecommunication and research which represent 45–50% of total, close to Ireland, which is one of the “positive” benchmarks in this field), the productivity gap with Western countries is still very relevant. Additional efforts must be focussed in two other main directions: one is the emphasis on the quality of the business environment (in terms of infrastructure, bureaucracy, corruption, legal framework, fiscal treatment, etc.) and the other is towards the

17 Romania and Bulgaria completed the Eastern enlargement of 2004 and became EU members in January 2007.


181

Moldova Ukraine China Bulgaria Romania Russia Serbia Latvia Bosnia-H. Lithuania Slovakia Estonia Poland CEE-8 Hungary Czech Rep. Turkey Croatia Slovenia

2006

0

250

500

750

1.000

1.250

Fig. 10. Gross average monthly wages in the CEE countries (2006, EUR) (source: UniCredit New Europe Research Network)

openness of CEE economies (in terms of trade flows and foreign investments18), which is also of vital importance to attract FDI and extend the trade links with Western Europe. Table 5 takes into consideration some features of the attractiveness of each country. On the positive side, cheap and educated workforce, low corporate taxation, and openness to foreign investments in recent years should be mentioned. On the negative side, relevant gaps in terms of labour productivity and R&D expenditure persist. Those gaps are more evident for Romania and Bulgaria. With the gradual fading of cost advantages, the attractiveness of CEE countries will be mainly driven by other elements: the increasing relevance of local demand, as incomes are growing fast; the proximity to the rich European markets, important to serve timely the Western demand, but also to take advantage of the positive spill-overs from affiliates, customers and suppliers, especially in some clusters; the possibilities of building pan-European production centres, with cross-border joint ventures and agreements among producers (a typical example is the automotive sector in Central Europe); the fast upgrade of the labour force, together with improving educational standards and learning-by-doing processes; and openness to foreign investments and commitment to improve the business environment 18 Resistance towards foreign investments in some fields is not so uncommon in Western Europe; this resistance is often motivated by “strategic” reasons, or to protect “national champions” with very recent examples in Italy (Autostrade, Telecom Italia), France (Suez-Lyonnaise des Eaux), and Spain (Endesa). For CEE the situation is rather different, as the privatization process already determined a very relevant presence of foreign investors in many sectors (especially regarding Telecoms and the banking sector).

182


(competition of taxes is already strong, for instance). Moreover some countries will probably continue to remain the “cheap” frontier of the EU, leveraging on this competitive advantage. Given these changes among CEE countries, the attitude of Italian firms towards CEE will have to adapt to the new environment, and focus on local demand, both from households and enterprises, strengthening the links with the (promising) economies of the Eastern border of the EU. Table 5. Source of competitiveness19 (2006) 2006

Poland Hungary Czech rep. Slovakia

Population (mn) 38.2

Slovenia

CEE-8

Romania

Bulgaria

Croatia

Turkey

EU 16

10.1

10.3

5.4

2.0

73.0

21.6

7.7

4.4

73.0

384.15

Average age, years

37

39

39

37

40

38

38

41

40

29

39

Youth education attainment level, %

69

60

59

52

68

65

47

49

55

27

59

Science and technology graduates

9.4

5.1

7.4

9.2

9.3

8.9

9.8

8.5

5.4

5.6

13.6

8,848

11,011

8,151

14,807

8,227

4,501

3,268

7,704

4,365

27,700

636

642

713

503

1,213

637

245

181

906

812

3,513

Labour productivity per person (EU25=100)

61

75

69

69

82

64.5

37

34

62

42

106

R&D expenditure, % of GDP

0.6

0.9

1.4

0.5

1.2

0.8

0.4

0.5

1.2

0.7

1.91

Corporate tax (%)

19

16

24

19

25

20

16

10

20

20

29

EBRD Infrastructure reform index

3.3

3.7

3.3

3.0

3.0

3.3

3.3

3.0

3.0

n.a.

n.a.

FDI (in % of GDP, avg 2004-'06)

4.1

5.6

6.1

6.4

1.7

5.5

8.1

14.8

5.4

2.9

n.a.

GDP per capita, € 7,110 Gross monthly average

Source: UniCredit New Europe Research Network, Eurostat, EBRD

7 Conclusions The growing importance of emerging markets has characterized the world economy in the last decade. This development has been particularly visible in the evolution of hierarchies on international trade: Central Eastern European countries and China were among the major “winners”. Both China and CEE countries dramatically gained export shares in the European markets. In particular, if considering the EU-15 imports, China and CEE gained shares at the expense of the old EU members. Old European members are losing part of the manufacturing activity previously done at home, and are moving towards new specializations like the production of soft goods, design, ideas, and patents. It is unambiguous that Central Eastern 19 CEE-8 is the weighted average of the countries that have been EU members since 2004; youth education: percentage of the population aged 20 to 24 having completed at least upper secondary education; science and technology graduates are per 1,000 of population aged 20–29 years (data as of 2004). EBRD infrastructure reform index is lower for the countries that improved their infrastructure to a lesser degree during the transition (it scores from 1 to 4.3).


183

European producers and China are gradually becoming the production arm of “old” European countries in the manufacturing sector. China and CEE are not following the same patterns of development and there is a sort of complementarity between the two. Chinese production seems to lead in the most traditional and labour-intensive sectors, such as leather and textile, and in electrical equipment industry; whereby in the latter the Far East become the centre of gravity of a fragmented production process (especially regarding hardware and components for personal computers). CEE countries have instead demonstrated resiliency in several medium-high tech sectors (among those sectors are automotive, machinery and equipment, and rubber and plastic). Hence, there is no full substitution between CEE and China, and the Chinese “threat” – in terms of competition – is noticeable only in some segments. The above-mentioned patterns of industrial development are reflected in the sectoral specialization of CEE, that is, gradually moving towards medium-high tech activities. This evolution is particularly helpful because it fosters positive technology spill-overs, upgrade of production through learning-by-doing processes, and trade links with the EU enterprises. Italy is among the main trading partners and investors of CEE countries. The latter countries are increasingly gaining shares at the expense of Italian firms in Europe (especially on the German market), but this process is partly driven by the same Italian companies now producing and exporting from the East. Moreover, many Italian companies are in a favourite position to take advantage of the rapid development of CEE local demand, especially in the field of service. Hence, the Italian enterprises, both those operating abroad and in Italy, will be affected by the evolution of the CEE competitive position in the coming years. CEE countries will continue to move towards a development model far from being simply a low-cost production base of “old” EU (also considering the expected increases in labour costs in most CEE countries), but leveraging on some other distinctive features, like the growing size of the local market, the role of European FDIs, the proximity with the Western European markets, and the improvements in the business environment that will provide a decisive support to productivity growth.

References Bussière M, Fidrmuc J, Schnatz B (2005) Trade integration of Central and Eastern European countries: lessons from a gravity model. Oesterreichische Nationalbank, working paper no. 105, Vienna Ca’ Zorzi M, Schnatz B (2007) Explaining and forecasting euro area exports: what competitiveness indicator perform best? CESifo, Venice International University, Venice, July Carluzzo C, Ferrazzi M, Revoltella D (2006) I settori industriali nei paesi dell’allargamento: caratteristiche, evoluzione e prospettive. In: AA.VV., L’impresa nell’Europa allargata, Vantaggi competitivi, opportunità, modelli di presenza, struttura finanziaria e rischi connessi per gli operatori italiani, Il Sole 24 Ore, Milan

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Christie E (2002) Potential trade in Southeast Europe: a gravity model approach. WIIW working papers no. 21 Dossena A (2005) Opportunità per le imprese esportatrici italiane in Bulgaria e Romania in vista del loro ingresso nella UE: un confronto con i principali paesi entrati nel 2004. In: Rapporto ICE 2004–2005, Rome European Bank for Reconstruction and Development (EBRD) (2006) Transition report, London Fabrizio S, Igan D, Mody A, Tamirisa N (2006) Export structure and credit growth. IMF country report no. 06/414 Feenstra RC (1998) Integration of trade and disintegration of production in the global economy. J Econ Perspect 12(4) Ferrazzi M, Revoltella D (2007) Romania e Bulgaria: Investimenti Diretti Esteri e competitività dei due nuovi membri dell’Unione Europea. In: Rapporto ICE 2006–2007, Rome Forslid R, Haaland JI, Midelfart-Knarvik KH, Mestad O (2002) Integration and transition: scenarios for the location of production and trade in Europe. Econ Transit 10(1):93–117 Ginzburg A, Simonazzi A (2005) Patterns of industrialization and the flying-geese model: the case of electronics in East Asia. J Asian Econ 15(6):1051–1078 International Monetary Fund (2005) France, Germany, Italy, and Spain: explaining differences in external sector performance among large euro area countries. Country report no. 05/401, Washington, DC International Monetary Fund (2006) Italy selected issues. IMF country report no. 06/59, February Koyama Y (2006) International comparison of investment climate in transition economies. Research report, Nigata University, March Krugman P (1994) Competitiveness: a dangerous obsession. Foreign Aff 73(2) Mariotti I (2004) Internationalisation: survival of the Italian district model? Forschungsberichte working papers, IWSG, Frankfurt Neary JP (2006) Measuring competitiveness. IMF working paper, WP/06/209, September

The European Enterprise of General Interest: A Tool for Balanced Development 1

D. Velo

1 Introduction The enlargement of the European Union to new member countries of Central/ Eastern Europe raises the necessity of a vast realignment operation. Some of the richest and most developed areas of the world, which boast leading industries, coexist in the Union today alongside pre-industrial areas with very low income. The balanced development in twenty-first century Europe cannot only be guaranteed by transfers of a solidarity nature, but requires interventions on the development mechanisms in order that the realignment is an endogenous structural component of the development itself. In this framework, this paper analyses the role that the creation of European enterprises of general interest can carry out for modernisation and territorial realignment in the European Union.

2 Integration of the New Member Countries in the European Union: Tools to Proclaim General Interest The entry of the European Union’s new member countries poses a problem of regional imbalance significantly beyond measure. Most European countries have in the past seen, within their countries, problems of imbalanced development amongst various regional areas; the width and depth of the phenomenon remains in Europe today with an intensity never registered in the past in the individual countries. Within the European Union, after the enlargement, the richest and most developed areas of the world coexist alongside others with pre-industrial levels of poverty and development, areas that boast leading industries with very high added value and others where agriculture is the only activity, still organised in a traditional form, areas where human capital has high value and others characterised by the prevalence of untrained labour.

1 This paper is a translation of an article published in a volume of the Fondazione Edison series, L’Europa allargata, l’Est e l’Italia. Le politiche, l’economia, le imprese, Il Mulino, Bologna, 2007.


185

186

D. Velo

These imbalances are destined to be aggravated with the entry of new partners into the Union. Europe is today characterised by regional imbalances of an intensity comparable, under some aspects, to emerging countries such as China and India. The radical difference is that the enlargement has changed the economic order of the Union, bringing imbalances that did not exist before; while large Asiatic countries are coming out from a historical underdeveloped situation. This diversity has a fundamental value to define the tools that can be most effective to meet the imbalances in the various countries. To orient thoughts, it is possible to schematise two alternative solutions that have a greater probability of being asserted in Europe to meet the regional imbalances. In the first approximation, we consider it right to oppose a strategy founded on the globalisation rules, on the one hand, and, on the other, a strategy of public intervention. This confrontation has, in this paper, the objective of defining a starting point for the analysis, to be verified and honed later. The first alternative, founded on the globalisation rules, substantially coincides with the situation existing today. To the new member countries, the Europe of today requires a lowering of the competition barriers, to allow entry and form a full part of the European Single Market. Assistance to these countries is limited. Direct investments by Western enterprises attracted by the low labour cost in Eastern European countries constitute the sole significant source of capital transfers.2 The risk that these countries are marginalised, in the framework of the Single European Market, is high; this risk is destined to increase to the extent where the European economy will be increasingly open to world competition in accordance with the logic of globalisation. The symmetric alternative is based on the reinforcement of European “stateness” and the launch of effective regional policies and/or on the definition of sectorial policies that incorporate the objective of territorial realignment. Historical examples of the latter forms of intervention are not lacking. Post-war Italy developed an industrial policy with regional political values: the decision to locate the second national integrated steelworks centre in Taranto constitutes the symbol itself of this policy carried out in the 1960s and 1970s. Localisation of some important scientific centre in the country’s depressed areas has similar value in the case of the United States. Other examples could be found to illustrate the point. The tools of regional policy were widely analysed by economic doctrine and do not require specific depth analysis in this paper. What has greater significance in this paper is rather to take into consideration whether the objective of balanced development in Europe is realistic. The pursuit of this objective requires the implementation of tools capable of proclaiming the general European interest.

2

It is clearly the reason why the new member countries show that they are little inclined to enter into the Monetary Union; in prospect, the possibility of devaluing the national currency is delineated as the only protectionist tool to meet possible crisis situations and guarantee a form of public control on the local economy.

The European Enterprise of General Interest: A Tool for Balanced Development

187

In this context, this paper intends to confront a specific aspect, i.e. the role that the creation of European enterprises of general interest could carry out for the objective of balanced development. Attention to this specific aspect is motivated by our conviction that this tool is both of great importance and realistic in the conditions prevailing today. In the medium-term prospect, the creation of European enterprises of general interest as a tool for balanced development can be viewed as a trigger point to kick-start a European New Deal, capable of renewing, with the necessary innovative adjustments, the experience conceived by Roosevelt in the 1930s to meet a situation with many common points with the present historical moment in Europe.

3 The Enterprise from the Original Liberal Model to the New Deal The two alternatives schematised above to meet the regional imbalances – respectively, based on the valorisation of the competition or public intervention as a tool of economic policy – are classified in the framework of a broad debate that has far-reaching roots. The general interest can be served with different tools. Over time, theories that identify in the competition or alternatively in the public initiative the tool best corresponding to the pursuit of general interest were developed.3 A component of these diverse theories was a corresponding vision of the enterprise. The importance of the role carried out by the enterprise, in the various configurations that it assumes in the modern economy, is such that any theory has had to assign it a specific role for its implementation. The fundamental paradigms with which the modern economy has analysed the economic system are delineated with the development of liberal thought, which accompanied the industrial revolution. The liberal approach of the nineteenth century was hinged on market assertion, as an autonomous entity, within the state institutional order. Private enterprise is placed at the centre of this framework, as an engine for development and modernisation, capable of creating value and optimising the use of resources. It is in the general interest to let private enterprise be free to act. In Great Britain, which was the first to experience the industrial revolution, a development process prevails based on self-financing; the enterprises generate resources with which the investments are financed within the enterprise itself or in other enterprises capable of making the best use of these financial means. In the liberal model, such as it is structured in the English experience, the general interest is therefore guaranteed by the enterprise that, by maximising profit, makes the

3

Saraceno P (1959) Iniziativa privata e azione pubblica nei piani di sviluppo economico. Giuffré, Milan; Rossi G (1995) Pubblico e privato nell’economia di fine secolo. In: AA.VV. (ed) Le trasformazioni del diritto amministrativo. Giuffré, Milan.

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best use of resources; this is true for the enterprise as an industrial player, and is confirmed for an enterprise as a financial player. The search for profit makes the enterprise operate in the service of general interest, pushing it to make the optimal use of resources, acting in first person as player, or transferring the resources themselves to another enterprise.4 In other countries the industrialisation process develops with various methods, which reduce the centrality of the enterprise. This alludes to the German and Russian experiences which occurred at the beginning of the twentieth century. In both cases it should be underlined that the liberal model was not under discussion due to its intrinsic inadequacy; one acknowledges that it is insufficient to guarantee an economic take-off in environmental situations of relative underdevelopment. The innovative aspect of the German model is the relationship established between bank and enterprise: the banking system takes on the task of ensuring that enterprises have risk capital and short-term and long-term loans, with a direct involvement in the process of accumulation and corporate management. The Russian experience differs, as the State assumes an entrepreneurial role, commencing from the Tsarist epoch. This changes the State’s role in the economy in the first place, even more than it modifies the specific role of the enterprise.5 In the face of a serious delay in industrialisation with respect to European economies, in the Russian experience the State assumes a collector of savings role that is directed towards the financing of development. The Tsarist State directly intervened in the accumulation process, but recognised the autonomy of private enterprise in their sphere of activities. Russia, at the end of the nineteenth century, was at the margins of the West as a direct consequence of its backwardness and cultural and political traditions that have always pushed it to carry out a role as a bridge between the East and West. The model of development financing that was affirmed in Russia during those years is correspondingly at the margins of the European experience, but is still a part of it. Private enterprise, in Tsarist Russia’s economic order, conserved the characteristics matured in the experiences of the more advanced European economic systems, even though in a context strongly influenced by a growing degree of statism. Only after the October Revolution did the political/economic model become collectivist, with the abolition of market mechanisms. It was necessary to wait until the 1930s to see the liberal order under discussion from within. The New Deal signalled an innovative break-point in the economic, political, and social development of the industrialised countries.6 Not by chance, this change occurred in the United States, which was the most advanced economic system of the times and the most consistent realisation of the liberal order.

4

Sciarelli S (1997) Economia e gestione dell’impresa. Cedam, Padua. Hirschman A (1958) The strategy of economic development. Yale University Press, New Haven. 6 Marris R (1972) La teoria del capitalismo manageriale, It. edn. Einaudi, Turin. 5


189

With specific reference to the enterprise, the New Deal acknowledged the crisis of the role traditionally carried out by the entrepreneur/capitalist, which had characterised the original model of a liberal enterprise. The public authority, to remedy market failures, did not limit itself to exercising forms of control by keeping out of the life of an enterprise, but penetrated to the heart of the latter by becoming a component.7 With the New Deal the overcoming of the classic liberal paradigm commenced, in accordance with which the enterprise operates for the general interest when searching for maximisation of profit. The optimal allocation of resources can be carried out in the most effective manner by making the voice of public powers heard in the decisional process of the enterprises. The federal American enterprise was born in this framework, as a tool of the federal government’s economic policy. The liberal model was not abandoned, but was enriched by the New Deal, which qualified the State’s role, in all its expressions, within the liberal model itself. The United States’ New Deal was gradually spread to all advanced economic systems, assuming specific characteristics from time to time consistent with the diverse national experiences. In this framework, Italy provided an original contribution by defining a national New Deal with totally particular and innovative characteristics.8 In this paper it is of no interest to analyse the Italian experience as a whole, such as it has been structured commencing from the 1930s; the most important innovation from the viewpoint of the analysis developed here is the birth of the large modern national public enterprise.9 This constitutes a form of public intervention on the market that modifies the equilibrium of the latter at its roots in the wake of the liberal tradition. Two aspects qualify the large national public enterprise that was born in the 1930s in Italy. The first aspect is the fact that in Italy a combination of diversified public enterprises was born, the activities of which are coordinated and reported to IRI’s unitary design; this aspect distinguishes the Italian experience with respect to the model of the American federal enterprise. The second aspect is the objective of proclaiming the centrality of a long-term economic strategy that relegates the anti-cyclical impact of the manoeuvre to a subordinate position. The wish to

7

The benchmarks on which the New Deal are based are: the redefinition of the roles between State and market, with the assumption by public authorities of a growing responsibility to guarantee good market functioning; the assertion of a renewed governance of the economic/social system between the main public and private players in the decisional processes; the assertion of a renewed governance of the enterprise, with recognition of the role of new stakeholders, amongst whom are classified the public authorities themselves, alongside the capitalists. Shonfield A (1965) Modern capitalism. The changing balance of public and private power. Oxford University Press, London. 8 Vicarelli F (1979) Capitale industriale e capitale finanziario: il caso italiano. Il Mulino, Bologna. 9 Avagliano L (1991) La mano visibile in Italia. Le vicende della finanziaria Iri, 1933–1985. Studium, Rome.

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substitute the lack of private entrepreneurial capacity by developing a direct entrepreneurial role of the State is inserted as a component of this objective.10 The general interest is proclaimed by a broad economic/industrial policy, which influences the whole economic system and acts by permeating the enterprises controlled by the public sector. The public/private relationships thus assume a very particular configuration. It is on this basis that the enterprises controlled by the public sector will be required to carry out an important role in the regional policy. The large modern national public enterprise that first saw the light in Italy in the 1930s was characterised by a mix of factors, certainly crucial amongst which were11: public initiative, public participation in the capital of the enterprise, the long-term strategic prospect, creation of entrepreneurial capacity, and compliance with market rules in the liberal meaning of the term. These aspects are essential to understand the profound reasons for which the model, amended in the 1930s, was able to be confirmed as valid for half a century, in totally renewed environmental conditions.12 It is necessary to understand which of these factors retain validity in the conditions emerging today for designing a new European initiative that is able to recapture, the necessary changes being made, the validity13 of this historical experience.

4 The Reality of a New Generation of Enterprises of General Interest: The Airbus Case The Italian experience saw the birth of an innovative experience represented by the large modern national public enterprise; our country also lived through the crisis of this model of enterprise with great intensity. The turning point was manifested when the “solidary State” prevailed over the “entrepreneur State”. It is right to ask oneself if it is possible to start up a new generation of enterprises of general interest in the conditions prevailing in Europe today. The Airbus success can supply useful cues for reflection for that purpose. The focus of the analysis developed here will be, subsequently, an interrogation into whether the European enterprise of general interest, where it occurs, can be a tool for the balanced integration of the economies of the new member countries of the Union.

10

Klep P, Van Cauwenberghe E (1994) Entrepreneurship and the transformation of the economy. Leuven University Press, Leuven. 11 Maraffi M (1999) Politica ed economia in Italia: la vicenda dell’impresa pubblica dagli anni Trenta agli anni Cinquanta. Il Mulino, Bologna. 12 Posner M, Woolf S (1967) Italian public enterprises. Longmans, London. 13 Osti GL (1993) L’industria di Stato dall’ascesa al degrado. Il Mulino, Bologna; Gobbo P (1993) Privatizzazione e disgregamento dei grandi monopoli nazionali. Economia Pubblica 7-8.


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The Airbus case is significant, from the viewpoint of the analysis developed here, under multiple aspects. This project has undergone a series of significant changes, without ever, however, placing the basic strategy carried out under discussion. In the first place, therefore, this refers to reconstructing the content of this project by extracting it from its evolution over time. The Airbus project commenced, over 30 years ago, as a result of a FrancoGerman initiative. A country, or a combination of countries, that desires to preserve its capacity to produce value, must be good at investing in the “backbone” of the economy, capable of leading the modernisation of the entire system.14 The Airbus project had this objective and was specifically directed at sustaining the development of the civil aeronautical sector in Europe.15 The project, as it was presented at the time of its launch, was totally unrealistic, to the extent of discouraging the participation of other countries or other enterprises in the FrancoGerman initiative. In extreme summary, a comparison of the strong points and weaknesses of the Airbus project and those of the main competitor, the American enterprise Boeing, clarifies the drastic assertion above. At the time of the Airbus project’s launch, the civil aeronautical market was almost totally controlled by the United States enterprises, amongst which Boeing boasted a secure leadership; Airbus would have had to overcome such a serious position of weakness as to constitute an apparently insurmountable entry barrier. Boeing operated in the internal American market, of clearly greater dimensions to that of the entire European continent; Airbus was unable to count on the internal European market, which at the time was strongly fragmented into national markets. Boeing was able to count on a tariff policy managed by the federal authorities, directed at sustaining the development of civil aviation; in Europe, Airbus had to face strongly differentiated policies from country to country. The American federal government has traditionally sustained the international penetration of its industries and this is certainly verifiable for the civil aeronautical industry; Europe did not have any commercial foreign policy at that time. Boeing was able to boast a strategic synergy between its civil and military production, beleaguered in every system to rigorous economic criteria; Airbus was created to concentrate only on the civil sector. Boeing reaped profit from federal public assistance for research; this advantage would have been replicable for Airbus only nationally, in the absence of a European research policy. Other considerations must be developed to complete and fully investigate the description of the aspects of greater significance. In this paper, it is useful to introduce the analysis of this case by utilising an evocative expression: as the scientists have not been successful in demonstrating how the hornet is able to fly for a long

14

Drucker P (1989) Economia, politica e management: nuove tendenze nello sviluppo economico, imprenditoriale e sociale, It. edn. ETAS, Milan; Koselleck R (1986) Futuro passato: per una semantica dei tempi storici, It. edn. Marietti, Genoa. 15 Mosconi F (2005) La politica industriale europea e la competitività italiana nei settori hightech. In: AA.VV. (ed) Tornare a crescere. AREL, Rome.

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time, yet it flies; so the economists were able to predict with certainty that Airbus would be unable to achieve success, yet in 2004 it conquered the leadership of the world market by overtaking Boeing. Airbus is a hornet that succeeded in flying, disproving all the forecasts. If an event took place and the theory did not expect it, it is necessary to deduce that the theory was inadequate. A new paradigm is needed to understand Airbus’ unexpected success. This is decisive from our viewpoint, as this initiative constitutes a European enterprise of general interest. The method by which Airbus’ success was achieved will be considered.16 The panorama that was being delineated at the end of the 1960s saw European aeronautical producers pushed to the margins of the international market, with a secondary role of subcontractors to the American industry.17 The closure of the small national European markets deprived the civil aeronautical enterprises of an internal market capable of absorbing production at economic conditions and directed decisions to the purchase of American aircraft. The defence budgets did not permit the financing of national aircraft design, fatally directing decisions to the purchase of American aircraft. In this manner a vicious circle was prompted, with increasingly serious negative effects. The turning point, constituting the launch of the Airbus project in 1967,18 occurred in this framework. This case has great significance from the viewpoint of the analysis developed here, as it demonstrates the importance of long-term vision, capable of overcoming limits to projects that were otherwise insurmountable. All participants in the project were committed to negotiating the agreement to protect the political priorities and national industries. Support of the initiative was guaranteed by the promoting governments; their coordination was entrusted to an intergovernmental committee: lacking an autonomous structure for the management of the programme, the decisional processes relied on the capacities of this intergovernmental committee to reconcile opposed interests. The legal entity assumed by the initiative took the form of the Groupement d’Intérêt Economique Airbus Industrie, without share capital, with the economic responsibility of the founding members. This structure has an evident public character of a confederal nature; it does not have anything in common with an enterprise in the traditional meaning of the term.

16 The Aeronautic Industry, as from the beginning of the century was born as a sector of public interest, in direct consequence of its importance for military purposes. Its public prominence was reinforced by its nature of an industry with a high intensity of research and innovation. This character remained constant over the whole period of the sector’s development, up to the end of the last world war, which saw the growing importance of civil aeronautics. 17 Bonaccorsi A (1996) Cambiamento tecnologico e competizione nell’industria aeronautica civile. Guerini, Milan; Raffaello G (2007) La grande impresa federale europea: il caso Airbus. In: Velo D (ed) L’Europa dei progetti. Giuffré, Milan. 18 Hayward K (1995) Industrial enterprise and European integration: from national to international champions in western Europe. Oxford University Press, Oxford.


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The legal structure that was adopted, the Groupement d’Intérêt Economique, functions for the protection of the participant’s interests rather than to sustain the autonomy of the unitary entrepreneurial project. This legal form identifies in the European enterprise a simple auxiliary structure, subordinate to the interests of the participating enterprises. Legally, Airbus Industrie GIE was presented on the market as sole interlocutor only for the final assembly, marketing, and technical assistance phases.19 The first objective entrusted to this structure was, however, a typical corporate objective; this alludes to the development of a market-oriented entrepreneurial strategy. The Continent’s aeronautical industries could not count on military projects or on research contracts outside the market; the only possibility of success was the capacity to respond to the requirements of the European and world markets with a winning product compared to the production of the stronger American competitors.20 A “non-enterprise” in the incubation phase was required to overpower, on the corporate and commercial plane, the competition of the consolidated American enterprises. If the endeavour succeeded, it was only thanks to the strategic role carried out by the public player that was capable of proclaiming a long-term vision and directing decisions in a consistent manner to this vision. The support supplied by the public player was not so much financial as political, in the noble sense of the term of capacity to design and sustain a project of wide breadth. To recuperate the delay and catch up with the American competitors, Airbus did not have another option than to make aggressive and risky decisions, designing innovative products projected towards realistic but not yet consolidated market balances. These decisions could not have been made in accordance with a shortterm corporate perspective, but were able to be made in accordance with a longterm perspective directed at the assertion of public interests; this allowed Airbus to be ahead of its time with respect to the leading American enterprises. Boeing must report to the financial analysts on the basis of its quarterly financial results. Airbus must report to the “Core Europe” governments on its capacity to achieve a longterm strategic project; not being bound by the necessity to distribute dividends to shareholders, the company enjoyed greater liberty in following a long-term prospect. These observations are schematic and valid only in the first approximation. In this paper, this summary is sufficient to gather the significance of the Airbus case for the general thematic discussed here. The Airbus promoters found themselves in the position to conceive an innovative model for an enterprise to which we are giving the name of European

19 Hickie D (1991) Airbus industrie: a case study in European high-technology cooperation. In: Hilpert U (ed) State policies and techno-industrial innovation. Routledge, London. 20 Drucker P (1985) Innovation and entrepreneurship. Harper & Row, New York; Mc Guire S (1997) Airbus industrie. Conflict and cooperation. In: US–EC trade relations. St. Antony’s College, Oxford.

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enterprise of general interest 21 in this paper. An interpretative hypotheses of the originality of this type of enterprise, as it was historically proposed in the European experience, can be focused on a single aspect: the introduction of a mechanism of cooperation/competition operating at various levels. This mechanism has favoured collaboration at political level, while it has been an incentive for competition between the participant enterprises. Political collaboration has guaranteed the necessary agreement to support the long-term strategies at the European level, while competition at the entrepreneurial level has favoured innovation and productive efficiency. Airbus Industrie has kept a combination of these forces together, activating synergy between them and avoiding centrifugal trends; it has thus consolidated a unitary entrepreneurial design, exploiting diverse forces that were fuelled, in a virtuous circuit, by the advancement of the process itself.

5 Can the European Enterprise of General Interest Be a Tool of Regional Politics? Airbus is a very significant precedent, as it experienced the possibility of achieving an innovative initiative, which is highly competitive, on the basis of the impetus given by the public authorities. Airbus is classified in the groove of the tradition of large modern national public enterprises, innovating this model from two fundamental points of view: Airbus is a European enterprise, not national, and it is an enterprise of public interest, not a public enterprise. It is right to ask if, the necessary changes being made, this new form of enterprise that is being delineated in Europe itself can set the objectives that have characterised public enterprise as it was configured in our system in the recent past. In the first approximation, the response to this query is affirmative, without the necessity of particular elaboration, if the objectives of industrial policy are considered in their possible declinations – innovation, development, and creation of entrepreneurial capacity. The possibility of giving an affirmative response to the same query appears instead to be less discounted if the objectives of regional policy are considered. The nature of the problem is simple. The European enterprise of general interest can set territorial realignment as its objectives if this does not come into conflict with the single European market rules. The two main areas where it is easier to avoid this conflict are defence and scientific research. Public expenditure in these two areas does not have to respect the same restraints that limit public transfers on behalf of enterprises. The possibility for the European enterprises of general interest to exercise an impact on the balanced regional development terms

21 The definition can be taken provisionally. The problem is to understand the nature and capacity of the process.


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therefore depends on the typology of business carried out and is certainly of a broad nature.22 These considerations can therefore allow us to reformulate the alternative delineated at the beginning of this paper, now with reference to diverse typologies of enterprise. In the previous pages two alternative solutions were schematised to meet the regional imbalances in the conditions prevailing in Europe today: a strategy founded on the globalisation rules, on the one hand, and, on the other, a strategy of public intervention. The small to medium enterprises are, due to their nature, by default inserted in the first strategy, as components thereto organic. Their main contribution to territorial realignment is, in the final analysis, identifiable in their sensitivity to arbitrate the differences in labour cost in the various European regions. The European enterprise of general interest can more easily insert itself in the second strategy, as a component thereto organic. These possibilities depend on the configurations that the enterprise of general interest may assume; these in their turn are placed in relation to the characteristics that the European Economic Union will assume. It is not an objective of this paper to investigate the possibility and methods used for consolidating the European Economic Union. In this paper, the possibility of evaluating to what extent the European enterprise of general interest has its own autonomous reason for being, independently from the context within which it is placed, and to what extent it can be significant as a component of the Economic Union, is of specific interest. It is realistic to predict that the start-up of the European Economic Union can determine the definition of a series of intricate solutions that create European enterprises of general interest. The European federal enterprises, repeating the solutions already experimented in the United States or innovating with respect to the latter, can constitute a chapter by themselves compared to other forms of European enterprises of general interest. Companies registered under European law constitute a reality already studied by the doctrine and experimented operatively. Airbus is an example of structured cooperation, started over three decades in advance with respect to the constitution project drawn up by the European Convention in 2003, to which we owe the first attempt to formally regulate this typology of cooperation.

22 Where the Airbus case is taken into consideration, it is easy to note that this project was not utilised for territorial realignment purposes for very evident reasons. It was conceived by Core Europe, without the participation of countries with serious regional imbalance problems; it was achieved without a general design, such as the Economic Union can be today, capable of managing in a coordinated manner a number of economic policy objectives; the possibility of utilising the Airbus success was not evaluated in any way to meet, in a compatible manner, territorial realignment objectives. The absence of an impact of the Airbus project in the latter direction cannot be attributed to presumed obstacles implicit within it.

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It is right to suggest, therefore, a forecast that we find ourselves on the eve of an explosion of entrepreneurial and legal solutions, ascribable to the “European enterprises of general interest” category. If this is true, it opens space for a broad reflection aimed at identifying which solutions have specific advantages for the problems emerging from time to time, sectorially, and in the development phases that will characterise European economic integration in the next few years. Specifically, it is significant in this paper to interrogate ourselves on which solutions have specific advantages to facilitate balanced development in Europe after the expansion to the East. Other than defining this combination of solutions with precision, it could be of greater usefulness to direct thought to understand the essential common sections destined to emerge in the various experiences.23 Some points have greater significance and, by repeating the analysis already presented in the preceding pages, they can be schematised in the following manner: 1. What unites the diverse forms that the European enterprise of general interest will assume is the constituting of an occasion to restore the long-term prospects to the centre of the decisional processes. This implies the overcoming of shortterm emphasising, which corresponds to the interests of one category of stakeholders, i.e. the shareholders.24 2. To state the role of the European enterprise of general interest as the bearer of a long-term vision, public ownership is not indispensable. Enterprises may be organised ascribable to this paradigm, characterised by a public majority, minority, or totally absent holding. This aspect becomes clearer if we conceive the European enterprise of general interest as an intermediate body, in the framework of a constitutional order founded on the subsidiarity.25 The conception of the enterprise of general interest as an intermediate body allows harmonisation of the capacities of participation in a decisional process that involves the entire community within which the enterprise is located, with the freedom of equipping the enterprise in a flexible manner with a public/private shareholding as a function of specific emerging requirements.26 The European enterprise of general interest is destined to rise and develop itself in a phase when public/private relationships will go through a profound change, in a differentiated manner in the various regions that make up the world community: specifically it is required to carry out the role of a junction in the dialectic relationship that with high probability will be proclaimed among the emerging European model, the American model, and the globalisation process.27 23

Usai G (1976) Le imprese e l’integrazione europea. Giuffré, Milan. Boje DM, Gephert RP Jr, Thatchenkery TJ (eds) (1996) Post-modern management and organization theory. Sage, London. 25 Velo D (2004) La grande impresa federale europea. Per una teoria cosmopolitica dell’impresa. Giuffré, Milan. 26 Kay J (1997) Community values and market economy. Social Market Foundation, London. 27 Hutton W (2003) Europa vs. USA, It. edn. Fazi, Rome. 24


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3. The European enterprise of general interest can exploit the historic experience of the large modern national public enterprise and American federal enterprise, but it will not necessarily repeat these historical experiences simply by transferring them to the European framework. Some individual experiences may refer to these precedents, others will diverge under the legal/economic and organisational aspects. The European enterprise of general interest may make the positive aspects of the large modern national enterprise, and those of the American federal enterprise, their own. These include, in the first place, the capacity of activating entrepreneurship for the achievement of projects projected over the long term, and in the second place, the capacity of following a prevalent public interest in compliance with current market rules.28 The European enterprise of general interest can solve problems that the market is incapable of managing with its own strengths; it can achieve this role in compliance with market and competition laws protected by Europe and radicalised by the globalisation process. 4. Development of the European enterprise of general interest can be sustained, as has been already delineated, by alliances between the public and private segments of the economy. In this manner it could be easier to achieve the dimensions required by projects of particular significance. In the historical experience, the national public enterprise was utilised to develop sectors with high entry barriers, first amongst which is the financial dimension of the required investment. In the prevailing conditions today, the entry barriers constituting advanced knowledge, rather than material and financial resources available,29 are more significant. 5. The European enterprise of general interest presents itself as a pass to a broader mosaic, constituting the European Economic Union: it can obtain energy from it and can contribute thereto in an innovative manner. Europe is building a new “stateness”. European enterprises are part of this design, as are all the components of society; they are destined to be vested by the developments that the European model will register. The enterprise of general interest, amongst the European enterprises, is more destined than others to be vested by these developments, as it is itself deployed on the advanced frontier of the European model. 6. The organisational model is the crucial point to guarantee the convergence of the specific experiences with the unifying paradigm of the European enterprise of general interest. To pose this problem means to research the methods of achieving the enterprise of general interest.30 28

Cafferata R (1983) Pubblico e privato nel sistema delle imprese. Angeli, Milan. Ruffolo G (1967) La grande impresa nella società moderna. Einaudi, Turin. 30 A strategy is defined by the facts that make it up. Any study, plan and project can constitute an antecedent of a strategy, but not a strategy in a strict sense. Grant R (1991) L’analisi strategica nella gestione aziendale, It. edn. Il Mulino, Bologna.

29

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The nature of the organisational problem in question derives from the analysis formulated above. If it is founded, the organisation of the European enterprise of general interest is destined to be configured as an open system in full flow. It is essential that the enterprise of general interest concentrates the design moment within itself; the executive moment not necessarily belonging to the enterprise of general interest. The European enterprise of general interest can be public or private, certainly it has a public part amongst its stakeholders, in a significant position; it can have in its turn a stakeholder role in other operators, downstream, required to participate in the unifying entrepreneurial design. It should be underlined that the term enterprise has an institutional value. The enterprise of general interest cannot be depleted in a project: this is rather the role of the political party responsible for directing and regulating the economic system. As an enterprise, it constitutes a stable organisation, capable of reconciling the principles of opening, continuity, and innovation. The latter indications do not aspire to be in any way original: they are at the base itself of the modern enterprise theory.31 These indications are of maximum significance from another viewpoint. The autonomy of the European enterprise of general interest is protected by its status as an enterprise, which must remain competitive on the internal and international markets. Utilisation of the term enterprise is all except for neutral: only on these conditions is it possible for the European enterprise of general interest to carry out an evolutionary, autonomous role, within the framework of the European Economic Union. This assertion must naturally be verified in relation to the larger or smaller market openings. If the European market will be significantly protected, the European enterprise of general interest will be able to respond in a broader manner to public logics, up to assuming a public agency character; the risk of an involution to the forms assumed by the large national public enterprise in the years of its crisis would be real. If the European market remains open to the world, reconciling this objective with the development of a European economy and society model, then it is plausible that the European enterprise of general interest will constitute a paradigm capable of enriching itself with a growing number of achievements, with fundamental convergent characters and original particularities, capable of developing themselves as open, innovative systems in progress. The balanced development in twenty-first century Europe cannot only be guaranteed by transfers of a solidarity nature, but requires interventions on the development mechanisms in order that the realignment is an endogenous structural component of the development. It is in this framework that the creation of European enterprises of general interest can be an important tool.

31 Here reference is allowed, without further specification, to the complete works delivered to the scientific tradition by scholars such as P. Saraceno, R. Argenziano, and G. Golinelli.

List of Authors Editors Marco Fortis is the Director of the Department of Economic Studies of Edison and contract Professor of Industrial Economics and Foreign Trade at the Faculty of Political Sciences of Catholic University (Milan) since 1989. He is a member of the Scientific Committee of the Research Centre in Economic Analysis (CRANEC) of Catholic University (Milan), a member of the Scientific Committee and Vice-President of the Fondazione Edison, and Vice President of the Fondazione Guido Donegani. His publications include numerous books and articles in books, journals, and newspapers on the subjects of Italian economy, industry and local production systems, technology, development and international trade. His main books include: “Prodotti di base e cicli economici” (Il Mulino, 1988, Iglesias Prize winner), “Il made in Italy” (Il Mulino, 1998), “Le imprese multi utility” (Il Mulino, 2001), and “Le due sfide del made in Italy: globalizzazione e innovazione” (Il Mulino, 2005). With Alberto Quadrio Curzio he edited “Il made in Italy oltre il 2000” (Il Mulino, 2000), “Le liberalizzazioni e le privatizzazioni dei servizi pubblici locali” (Il Mulino, 2000), “Il gruppo Edison 1883-2003. Profili economici e societari (Il Mulino, 2003), “Industria e distretti. Un paradigma di perdurante competitività italiana” (Il Mulino, 2006), and “Valorizzare un’economia forte. L’Italia e il ruolo della sussidiarietà” (Il Mulino, 2007). [email protected] Alberto Quadrio Curzio is Professor of Political Economy, Dean of the Faculty of Political Sciences and Director of the Research Centre in Economic Analysis (CRANEC), Catholic University (Milan). He is Academic Secretary of the Accademia Nazionale dei Lincei, chief editor of the journal “Economia Politica”, il Mulino, and on the Scientific Committee of other journals among which include “Structural Change and Economic Dynamics” and “Journal of Policy Modelling”. He is Chairman of the Scientific Committee of the Fondazione Edison. He has been Dean of the Faculty of Political Sciences of the University of Bologna, Chairman of Società Italiana degli Economisti, elected member of CNR (Italian National Research Council), and President of Istituto Lombardo. He has received many awards among which are the St. Vincent Award for Economics and the international Cortina Ulisse Award. He also received the “Gold Medal Award” from the President of the Italian Republic. He has written approximately 300 scientific publications, many of which are in English. His main subjects of study are economic theory of scarce resources, income distribution, education, economic development and economicinstitutional forms thereof. [email protected]

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Contributors Matteo Ferrazzi CEE Economic Research UniCredit Group Via Tortona, 33 20144 Milan Italy [email protected] Paolo Garonna Deputy Executive Secretary at the United Nations Economic Commission for Europe Palais des Nations, 8-14 Avenue de la Paix CH-1211 Geneva 10, Switzerland [email protected] Giorgia Giovannetti Professor of Political Economy Department of Economics University of Florence Via delle Pandette, 9 50127 Florence Italy [email protected] Paolo Guerrieri Professor of Economics Department of Economics University “La Sapienza” of Rome Via del Castro Laurenziano, 9 00161 Rome, Italy [email protected] Yan He Programme Officer Capacity Building and Field Operations Branch UN Office of the High Commissioner for Human Rights Room 6-02, Avenue Giuseppe Motta 48 Geneva, Switzerland [email protected]

List of Authors

Michael Landesmann Scientific Director and Professor of Economics The Vienna Institute for International Economic Studies Oppolzergasse 6 A-1010 Vienna Austria [email protected] Francesca Luchetti Researcher in International Economics Research and Statistics Area Istituto Nazionale per il Commercio Estero Via Listz, 21 00144 Rome Italy [email protected] Oliver Pfirrmann Director of the Department Technology and Future Markets Prognos AG Goethestraße 85 D-10623 Berlin, Germany [email protected] Debora Revoltella Head of CEE Research UniCredit Group Via Tortona, 33 20144 Milano, Italy [email protected] Fabrizio Saccomanni Director General Banca d’Italia Palazzo Koch Via Nazionale, 91 00184 Rome, Italy [email protected] Gertrude Tumpel-Gugerell Member of the Executive Board European Central Bank Kaiserstrasse 29 D-60311 Frankfurt am Main, Germany [email protected]

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Milica Uvalic Professor of Economics Department of Economics, Finance and Statistics University of Perugia Via Pascoli, 20 06123 Perugia Italy [email protected] Dario Velo Professor of Economics and Enterprises Management University of Pavia – Cattedra europea Jean Monnet Via S. Felice, 5 27100 Pavia Italy [email protected]

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Pioneers of European Integration: Citizenship and Mobility in the EU

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Eastern European Nationalism in the Twentieth Century

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