The Enlargement of the European Union

Issues and Strategies

Victoria Curzon Price, Alice Landau, Richard Whitman

• Publisher: Routledge
• Year: 2012
• eBook ISBN: 9781136859762
• Topic: Languages & Linguistics
• Subtopic: Linguistics
• Index: Languages & Linguistics

This volume looks at the process of enlargment which the European Union is currently undertaking, focusing on both the economic and political dimensions of the subject. The volume examines how enlargment has evolved and looks at the roles and relations of the different actors - member states, applicant states and EU institutions. With contributors coming from different disciplinary backgrounds, the volume offers an unusually rich array of perspectives on one of the most significant political developments of recent years.

Part I

Setting the Scene

Europe Growing Together

Leszek Balcerowicz

To assess the unprecedented changes that have taken place in Europe, one must go back ten years, and recall the situation on the continent at the eve of the fall of the Berlin Wall in 1989. Ten years ago the division in Europe between East and West seemed immutable. Very few people foresaw that the Soviet Union would soon dissolve, that Germany would be reunited, that the Warsaw Pact and the Council for Mutual Economic Co-operation (COMECON) would disappear, that Czechoslovakia would split, that countries which used to be members of organisations, not necessarily of their own free will, would be free to join other organisations. Nobody to my knowledge forecast that in 1998 the European Union (still to be created) would launch negotiations for its enlargement to Eastern and Central Europe. Whatever happens in the next ten years, we must not lose our sense of history.

On Mr Kohl’s historic visit to Poland in October 1989 – he was caught by surprise because the Berlin Wall had fallen apart. He interrupted his visit, went to Berlin, made a speech, then came back to Poland, and then back again to Germany to prepare for reunification. People did not have any blueprint for reunification. I had friends in Germany who had been working for years on the very distant and theoretical hypothesis that one day Germany would be reunified. They had prepared the wrong plans. What actually happened was complete improvisation. In this process of Europe growing together we have made many mistakes. Some of them were unavoidable; some could have been avoided. I think East Germany was subject to what one might call a peaceful bombardment of its economy, which led to a labour cost explosion and much hardship. This was an avoidable mistake.

Nobody forecast that Russia would leave the Soviet Union, but it did. The Soviet Union fell apart, but in a peaceful way. Even in 1990, there were very few people who could imagine that the Ukraine would soon be independent. I remember the visit of the former United States President George Bush, who came to Kiev in 1990, and warned against nationalism. This was the way people thought at that time. Now the Ukraine is independent and a very important geopolitical factor in the new European system. For example, whatever one may think of the ‘new’ Russia, one should look to the Ukraine, and do everything possible to strengthen its independence, because it is a key element in responding to the Russian question.

In 1988, long before all the controversies surrounding the deflationary impact of the Maastricht criteria in the run-up to monetary union – and writing as an economist, I think there are some problems with these criteria – and before the enlargement to include Austria, Finland and Sweden, Western Europe was already prone to high rates of long-term unemployment. Let us recall some figures. In 1960, the rate of unemployment in Western Europe was between 2 per cent and 3 per cent, so there was practically full employment. In 1975, it was 4 per cent; in 1980 it was 6 per cent, slightly higher than in the us.¹ However, from then on unemployment patterns diverged between Europe and America. In most countries of Western Europe, unemployment continued to rise, while it began to fall in the United States. Who would have thought, in 1988, that far from being resolved, the problem of long-term unemployment in Western Europe would be worse than ever by 1998?

Now what is the present situation, and what are the challenges? Looking globally there are four challenges that I shall regard more as opportunities and not so much as problems. These challenges were not identifiable in the late 1980s. We did not even know that we would have the opportunity to solve these problems.

The first task of the CEECs is to release the forces of economic catch-up growth. The CEECs were burdened by the features of an economic system, lasting fifty years, which blocked economic development, and which led to a vast gap in per capita incomes between Eastern and Western Europe. This translated into important things like bad housing, few opportunities for a decent living and low levels of personal consumption. Economic development has a very important human dimension. The CEECs must now create the necessary legal and political framework which would allow for rapid catch-up growth. This implies that they much grow at least two or three times quicker than Western Europe. This is difficult, though not impossible.

There are many historical parallels. In the nineteenth century, France used to be a backward country in contrast to Britain, and Germany used to be in the same position. Finland was a latecomer compared to France, Germany or even Sweden. Japan was a latecomer compared with Europe after the Second World War, but it caught up and even surpassed Europe in less than forty years. We know from experience that countries which used to be economically backward do manage to grow more rapidly than advanced countries, do manage to ‘catch up’. In the meantime, some advanced countries fall into decline. What lessons can we learn from these experiences? Those countries which managed to be successful latecomers did so by introducing and maintaining a market economy, by creating the appropriate institutions. There is no mystery. Such systems have well-known features. The system was what Adam Smith recommended over two hundred years ago, but was forgotten in the twentieth century. The essence of this system is private property, economic freedom, low inflation, a flexible labour market and political stability. Such a system generates rapid economic development and produces remarkable results.

If we look at the countries which have grown very quickly in the latter part of the twentieth century, for instance Germany in the 1950s, Japan in the 1960s and the Asian tigers in the 1970s and 1980s, I think we will find all these five classical features, and a new one which Adam Smith had not thought of – education. To these basically classical features, one could perhaps add a special kind of state intervention – government policies designed to accelerate growth. Politicians in Eastern and Central Europe have, on the whole, introduced a system which allows for rapid catch-up growth.

This is not only of economic, but also of political significance. Rapid economic growth is absolutely essential for a stable democracy in Eastern Europe. Capitalism is necessary for democracy, but perhaps not the other way round. Both are desirable, but if we look for links, both historical and theoretical, we see that private property and markets are linked to prosperity, and that prosperity is linked to democracy. If this is true, privatisation is not only an economic reform, but also a political reform. Reducing the size of the state sector is thus vital for the quality of democracy. A large state sector is directly responsible for what economists call rent-seeking; it is a huge source of inefficiency and a brake on economic growth. Also, if there is a large state sector, politicians try to become popular by distributing positions, and not by competing with the quality of their programmes. This was as true in Italy as in the Union of Soviet Socialist Republics (USSR). Privatisation is therefore important for political reforms. It is, of course, not the only reform needed for rapid catch-up growth, but it is among the most important.

Now for Western Europe. I think here that the main challenge is to overcome the problems associated with the reverse side of the welfare state. Long-term unemployment is the price that Sweden, Germany, France and Italy are paying for taxing labour and discouraging investors and employers from investing. In market economies there are certain simple rules; for instance, there is an inverse relationship between the fiscal burdens put on the shoulders of employers and employees on the one hand, and unemployment on the other. This is why there is a long-term unemployment problem in many countries of Western Europe, especially among young people. This is not such a problem in the United States because job creators are not so extensively taxed as in Western Europe. This problem must be addressed with urgency, otherwise enthusiasm for integrating the CEECs will be absent and public opinion will become hostile to the whole idea.

Turning now to the European Union, you notice the challenge of two familiar tasks – simultaneous deepening and widening of the Community. Some people consider these as being in conflict. However, certain changes in the EU, which are necessary and desirable from the point of view of enlargement, are at the same time necessary from the point of view of its own internal functioning. Even without enlargement to the East, the EU would still need substantial reforms of the Common Agriculture Policy (CAP), as well as institutional reforms. It is a mistake to think that the EU has to make reforms because of enlargement. Those reforms are needed anyway.

Returning to reforms in the CEECs, let me only say a word on the question of whether ‘shock therapy’ is better or worse than gradualism. Both strategies have been tried. Summarising, one could say that Poland (at least after 1993), the Czech Republic, Slovakia, Slovenia, the Baltic states and perhaps surprisingly, Albania, and Tajikistan in Central Asia, are among the radical reformers. On the other hand, at the opposite end of the spectrum we find a completely different approach: slow reformers, or simply non-reformers. One country which symbolises this approach is Belarus, which has successfully avoided any serious reforms at all. Ukraine, until 1994, could be included in this group of very hesitant reformers, but it had become more radical since the election of President Leonid Kuchma.

So we now have two groups of countries that can be compared, controlling for the differences of starting conditions. What conclusions emerge from such a comparison? To begin with, all countries, regardless of their strategies, experienced severe difficulties because of the collapse of the former system. It is like rebuilding a house. The first part is always difficult. It was the collapse of the old system, and not the reforms, that caused the decline in GDP and living standards in all those countries.

In the next period, it became clear that those countries that adopted a more radical approach achieved much better results than the countries that avoided reforms or undertook very hesitant ones. There are already tremendous differences in terms of the rate of growth, of the rate of inflation and structural changes. But even the more advanced reformers still have a lot to do. None of the CEECs has achieved the optimal final system, a system that would ensure rapid catch-up growth.

What remains to be done in advanced reformers, not to mention those least advanced? Three tasks strike me as being particularly urgent. One of them has already been mentioned – privatisation. The share of the state sector is still much too high, much higher than in the West, even before the wave of privatisation that started in the 1980s. The current 14 to 15 per cent is too high.² The price of this is inefficiency, politicisation and bad politics. Privatisation has to be complete.

The second task is a reform of the social sector. The former socialist countries were strange creatures. They were a combination of a crumbling economy and a Swedish-style welfare state. Now the Swedish model has collapsed even in Sweden, and has collapsed even more resoundingly in the former socialist countries. A huge task is to reform the social sector so that even a modest amount of social spending does not block economic development. Among the most urgent of social reforms is that of the pension system.

The third challenge is to extend economic freedom and not reduce it by the arbitrary exercise of power by politicians and bureaucrats, though licensing and various regulations that constrain entrepreneurs and at the same time give rise to corruption. This is very important. One of the main tasks is to introduce or to maintain flexible markets.

What now are the reforms needed in the EU? There is a certain relationship between reforms in the CEECs and what the West must do. But there is an asymmetry of impact. I would say that the West could influence, in good or bad ways, the pace of reforms in the CEECs, but that the latter cannot to such an extent influence what the West is doing. In this sense, the West bears the greater responsibility. What would ideally be the best approach for the EU and its Member States vis-à-vis the CEECs? What criteria should be chosen?

All reforms that encourage rapid catch-up growth should be encouraged. This is a historical challenge. The West should encourage rapid economic development, not block it. It is economically important, humanly important and politically important. It ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright
• Dedication
• Contents
• List of figures and tables
• List of contributors
• Preface
• List of abbreviations
• Part I: Setting the scene
• Part II: The questionnaires: getting to know the enlargement challenge
• Part III: From the questionnaires to the IGC
• Part IV: The geopolitical consequences of the enlargement
• Postscript
• References
• Index