European Union Enlargement When Ten Countries Recently

EUropean Union Enlargement

When ten countries recently joined the 15 existing European Union (EU) member-states, the event represented the largest enlargement of the European Union in its history (Golino, 2003). One of the major perceived benefits of this union is that the countries formed an economic, political and military coalition with a combined population of 450 million people and an economy that produces approximately one-quarter of the world's annual output.

The new members include eight Central European countries -- the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia and Slovakia -- plus Malta and the southern Greek-Cypriot part of Cyprus (Golino, 2003). Their inclusion is expected to further shape the future character of the EU, how it governs itself, and the global role it pursues. It is also seen as an affirmation of European identity and of a break from Europe's communist past.

The Eastern European and Mediterranean countries have had to introduce major economic reforms and adopt thousands of pages of EU laws and regulations before entry into the EU (BBC News, 2000). For instance, Poland and Hungary, along with the other states, had to implement thousands of EU laws, treaties and regulations over the past decade. This paper will discuss these requirements from the perspectives of the original EU members, the new members and a variety of outside nations, particularly the United States.

The new members have been implementing EU changes for many years. For example, Poland agreed to hire thousands more border guards and tighten immigration controls before it joined the European Union (Lungescua, 2002). The commitments allowed it to negotiate with the EU, which was wary of Polish entry due to the sensitive issue of justice and home affairs.

In a nutshell, the original members of the EU worried that eastward expansion will bring more illegal immigrants and higher crime levels. To reassure them, the largest candidate country, Poland, agreed to hire more than 5,000 border guards by 2006-50% of which have already been hired. These guards replaced conscripts currently patrolling Poland's 1,200 kilometre (745-mile) border with Ukraine, Russia and Belarus.

Poland also agreed to build new border stations and buy modern equipment such as helicopters (Lungescua, 2002). In addition, to meet EU requirements, Poland has implemented a visa requirement for Russians, Ukrainians and Belarussians. However, Poland insists that it does not intend to make the lives of its neighbors difficult and pledged to keep visa fees low.

Economically, countries had to convince the EU that they had a "functioning market economy" and their economies could withstand the competitive pressures of EU membership (Orla, 2000). Politically, they had to demonstrate a functioning democracy with respect for human rights and minorities.

Basically, to fulfill the criteria for accession to the EU, the candidate countries have been adapting their legislation to EU's laws and regulations for years, particularly regarding the free movement of goods, free movement of capital, company law, competition policy, taxation, industrial policy and more (World Tariff Inline Database, 2002).

The newly initiated countries have taken great measures to restructure their economies, especially through privatization that has made the private sector the key momentum to growth. Financial intermediation has also increased, and the eastern countries now have a more stable banking sector. This transformation and restructuring has strengthened business confidence and economic efficiency. As a result, these countries enjoy a greater business investment, which has become a stimulus to growth. Many of these countries registered economic growth well above the EU average during 1997-2001.

Source: World Tariff Online Database.

In addition, the economies of the candidate countries have enjoyed the benefits of the entry of foreign capital, which has been caused not only by lower production costs, but also by a liberalizing investment environment and good trading prospects in the course of their accession to the EU (World Tariff Inline Database, 2002). Poland, the Czech Republic and Hungary are the largest destinations for foreign direct investment. In 2001, foreign direct investment inflows into these three countries amounted to U.S.$8.8 billion, U.S.$4.9 billion and U.S.$2.4 billion, respectively. Germany, the Netherlands and France are the major foreign investors, and their targeted sectors include financial service, transport, construction, energy and manufacturing.

Source: World Tariff Online Database.

In addition to reaping the benefits of the domestic market potential there, foreign investors are attracted to the idea of exploiting the processing production capability of Eastern Europe and the Mediterranean, as the EU's tariffs and quotas on most manufactured products imported from the candidate countries have been removed, given the recent enforcement of various Europe Agreements in developing closer links between the candidates and the EU before their eventual accession (World Tariff Inline Database, 2002).

Along with the proliferation of domestic private enterprises, foreign direct investment has enhanced the competitiveness of the manufacturing industries of the candidate countries, which can produce better quality products for the Western market. Already, the EU has become their largest export market, absorbing more than half of the exports of almost all candidate countries. In the Czech Republic, Hungary and Poland, for example, 69%, 75% and 70% of exports were respectively destined for the EU in 2000.

Foreign capital now flows from the EU to the candidates in the form of financial aid. In preparation for the accession, the EU drew up a financial package to help the new members carry out the necessary reforms, covering infrastructure, environment and agricultural and rural development (World Tariff Inline Database, 2002). This assistance is expected to lead to a higher public spending in the new member states, facilitating a further restructuring of their economies.

The new enlargement of the EU will also affect Europe's citizens. This event will change the daily lives of the 454 million individuals in the now 25-nation bloc in many ways.

Here is a list of some of the changes since the new countries joined the EU (European Union Business, 2004):

FREE CIRCULATION: EU citizens need identity cards, but no longer passports, to travel between the 10 new states and the 15 old ones. Border officials will, however, be stopping people at the frontiers of the 10 new states since these will not be open for free passage under the laws before 2007.

WORK IN OTHER COUNTRIES: Citizens of the new member states are still not free to work without a permit in Western Europe because most of the old member states -- except for Britain, Ireland and Sweden -- have put up restrictions for a transition period that could be up to seven years.

PRICES: New member states must have the same customs duties and value-added tax as the old members. Countries that had eliminated customs duties, such as Estonia, should experience price increases. In Estonia for example, sugar, which had been free of tarifs, will now be twice as expensive. Textiles imported from China and India should be more expensive for the new member states. But in the Czech Republic, Japanese and U.S. motorcycles should be cheaper because customs duties will be lower.

REAL ESTATE: Restrictions on foreigners buying real estate should remain until 2009.

EURO: The new members will have to wait until at least 2007 before they can adopt the European single currency.

Now that they have joined the EU, the accession countries have a minimum of two years to wait - during which they will be members of Exchange Rate Mechanism (ERM) - before they can sign up to European Monetary Union (EMU).

Their accession to the European Union, experts say, is a historic achievement not just for themselves and Europe, but also for other nations, particularly the United States. The main reason for this assumption is that a unified European continent is a long-time goal of American policy attempted by every American administration since that of President Harry S. Truman.

In addition, many of the EU's new members are close allies of the U.S. For instance, Poland, the new EU member-state with the largest population and economy, is supporting the U.S. mission in Iraq by commanding a multinational division deployed to the south-central region of Iraq.

According to Radek Sikorski, director of the New Atlantic Initiative at the American Enterprise Institute and a former deputy foreign and defense minister of Poland (Golino, 2003): "The inclusion of countries that were isolated, impoverished, and politically transformed by half a century of Nazi and communist totalitarianism will change Europe -- economically, politically and above all culturally -- in ways its politicians have not yet begun to comprehend."

Many critics believe that the accession of the newest Eastern European states to the EU will intensify the social crisis in these countries and in the rest of the EU (Slazmann, 2004). The population in Eastern Europe has already experienced major increases in poverty and unemployment, wage cuts and the devastation of social provisions in order to meet the criteria for EU membership.

According to Slazmann (2004): "The introduction of free market conditions, the privatisation of former state enterprises and radical austerity measures have led to devastating economic and social conditions. Wages in the accession countries are presently five to eight times lower than in the EU. Average per capita GDP in the current EU states (24,250 euros) is substantially higher than in Hungary (€7,080), for example, or Latvia (€3,740). Unemployment, the main cause of poverty, rapidly rose in the accession countries in the last 15 years. In the Czech Republic it climbed from 0.7% in 1990 to 6.5% in 1998 and is now almost 11%. On average, it is twice as high as in the EU." significant decline can be witnessed in all aspects of society. In Poland and Hungary, the child mortality rate has increased by over 5% since the end of the 1980s. It is estimated that 50% of the Hungarian population are doing worse than they were 10 years ago, when the EU changes began to be implemented.

At the same time, Eastern Europe is seen as a goldmine for Western European enterprises. "If you look from the smaller company perspective...then [these] countries are quite an attractive option, if one of the things you want to do is use such an investment as a way of strengthening your positioning in the European market," says Mark Ambler, director of the New Europe Program at PricewaterhouseCoopers in London (Miller, 2003). "If you're investing in, say, Hungary or in Poland, you get access to the lower costs they offer, compared with, say, Germany or France or Britain. At the same time, if you're [producing] in Poland, you have an ability to move your goods and services around within the European Union."

Proximity to the wealthy countries of the EU is not the only reason these western countries -- the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic, and Slovenia -- are attractive destinations for foreign investors (Miller, 2003). The need to meet harsh EU-accession requirements has led to a rush of activity over the last several years, as the EU candidates tackled everything from privatizing state-run businesses to upgrading infrastructure and reforming their finance and banking sectors. Many of those efforts are continuing even after formal accession, as are attempts to improve local industries to make them competitive with those of the rest of Europe.

To encourage foreign investment, business taxes have been drastically reduced. In the Czech Republic, the business tax rate was dropped from 7% to 24% (Slazmann, 2004). Like Poland, Slovakia introduced a uniform tax rate of 19%, which applies to the ordinary worker, the multimillionaire and big corporations. Last year, those with high private incomes were still being taxed as much as 38%. In Hungary the tax rate is below 20% and the country is attracting enterprise with tax exemption schemes lasting for several years.

These lower taxes and the enormous wage differentials have caused more and more corporations to shift their production to Eastern Europe. For example, estimates show that in a few years, Slovakia will be the world leader in car production when measured per head of the population (Slazmann, 2004). Service and IT jobs are also moving east. The logistics enterprise DHL, for instance, plans a project in the Czech Republic worth €500 million. As a result, production in Britain will drop. The number of call centers will rise in the Czech Republic by as much as 70% over the next years.

In order to attract capital from around the world, Western European countries are now competing with eastern areas to offer the lowest taxes. Austria, which for years has had the lowest taxes on wealth in the EU, has decided to implement tax "reforms" in 2005, lowering corporation tax from 34 to 25% and offering additional concessions for investors.

According to Slazmann (2004): "In this regard, tax experts are already warning that the radical austerity measures Vienna has imposed on the population over past years will no longer be sufficient to compensate for government revenue shortfalls resulting from this reform, meaning large holes will arise in the budget."

According to economists, the budget and foreign trade deficits may lead to economic crises (Slazmann, 2004). Last year, for example, Estonia's budget deficit reached nearly 15% -- a figure five times higher than the Argentinean deficit, which caused a major financial crisis in 2001. Hungarian leader came under major pressure this year because of the rising state deficit. The Hungarian foreign trade deficit is already 58%.

In addition, opponents of the EU expansion argue that accession of the East European countries will not improve the situation for citizens in those countries. Research shows that the differences in wages between east and west remaining in place for at least 10 years. Also, the "reforms" will remain even after the accession. The Czech government recently said that cuts were necessary in health and pensions provisions. Given the condition of the country's welfare system this means privatization.

The accession of the eastern countries into the EU also opens many doors for conflict. None of the established parties in Eastern Europe represent the interests of the majority of the population. Many of these countries are ruled by ruthless market-oriented "neo-liberals" and retrogressive nationalist forces, which aim to direct justified indignation into reactionary channels.

This has resulted in unstable political situations. In Hungary, many governments have been voted out at elections held since 1991. Recently in Poland the government party split and wins less than10% in opinion polls. The advanced nature of the social crisis in the accession countries equates to major potential for conflict.

EU member Austria recently formed a new coalition government, which includes the far-right Freedom Party of Joerg Haider (BBC News, 2000). Austria, which shares a border with four of the recently admitted Eastern European countries, says it will not block the expansion but wants limits on the number of eastern European workers allowed into the EU, as well as an increase in nuclear safeguards.

According to Slazmann (2004): "The expansion process means not only that social contradictions will increase; the conflicts between the European powers and between Europe and the U.S.A. will also be intensified. This is clearly shown by the distinction drawn by the American government between an "old" and "new" Europe, linked to support for the Iraq war, and conflicts over the creation of a common EU constitution."

In addition, while membership for countries from east Europe is touted as the end of divisions in the European continent, many argue that new divisions are emerging. The realities on the ground on the eastern borders of an expanding EU are fueling such doubts.

Many of these doubts are related to the issue of the EU's expansion in future. The accession added 75 million people to the Union. There is an increasing demand within the EU to define its boundaries firmly in line with its criteria for admissions. These criteria, especially the economic ones, are tough, and the newly admitted countries have had to wait several years for full membership.

For some countries from the former Soviet bloc in Eastern Europe, the EU's expansion signifies the arrival of a large new entity on their borders. The EU has already made its presence very much known among these new neighbors. It has formulated an "Initiative for new neighbors," in order to increase trans-border cooperation and improve relations on the basis of "common political and economic values."

However, changes in the relations among former communist neighbors in Eastern Europe testify to a new reality that is being determined by the EU. The relations between Poland, a new EU member, and Ukraine, a non-member, which remains outside, illustrate the problems involved.

Ever since Poland started negotiations to join the EU, it has increased controls on its borders with Ukraine to check illegal immigration, in an attempt to conform to the strict EU rules on immigration. A major system of visas was initiated. Tighter controls on the Polish border have made things harder for Ukrainians, who previously had easy cross-border access. Facility in movement has allowed informal trade, a source of income for many Ukranians, to flourish in the border areas. Poland shares a huge border with Russia, Belarus and Ukraine. A Ukrainian minority and many people of Belarus origin live in eastern Poland. With tighter border controls, family visits will be more difficult.

Resentment is bound to rise in these areas of Eastern Europe because ever since the collapse of the Soviet bloc, people of Central and Eastern Europe have had substantial freedom of movement in these areas.

The tightening of border controls, the creation of a new EU "wall" facing neighbors to the east, has led to fears of a renewal of old problems between the East and the West. In the area lying between the two giants of the European continent - the E.U. And the Russian Federation - there is an increasing belief that countries such as Ukraine and Belarus would fall back under Russian influence as a reaction to this new expansion.

A proposal for a Russia-Belarus Union has already surfaced. Russia is also the dominant economic force in the Commonwealth of Independent States (CIS), the grouping of ex-Soviet republics, such as Ukraine and Belarus. While Ukraine's economy remains weak and suffers from major structural imbalances, the measure of Russia's dominance may be gauged from the fact that it's current resources include 50% of the gold and copper, and nearly all the nickel and diamond of the former Soviet Union. Its oil resources are the second largest after Saudi Arabia. Russia provides the dominant share of exports to the CIS countries, while its imports make up more than 40% of the total volume of sales.

Eastward enlargement is in the economic benefits of the U.S. Currently, the average daily cross-Atlantic trade volume exceeds U.S.$1 billion (People's Daily, 2004). Europe and the United States contribute almost 37% to the total global commodities trade volume, and about 45% to the total service trade volume. As new and old Europe unites, this market is expected to become attractive. While a stronger EU will bring about some new frictions on trade and economics, generally speaking, supporters of the eastern accession believe that the advantages greatly outweigh the disadvantages.

Still, many worry that an enlarged Europe will become a rival of the United States. This is a possibility, albeit one that does not seem likely in the near future, as Europe still lags far behind the U.S. In terms of military, competitiveness, education, culture and political influence (People's Daily, 2004). In addition, the target of the eastward expansion of the EU is not aimed at the United States as the adversary.

An EU that takes the United States as its opponent is unlikely to realize its enlargement, and would probably cause the re-division of Europe, causing destruction to both sides. In addition, the integration of old and new Europe still has quite a difficult course to traverse, and it still cannot prosper without the help and support of the U.S. At the same time, there is an increasing need for a strong and friendly EU to maintain American stability and play a limiting role in it.