The Political Economy of EU Enlargement

Enlargement generally is motivated by political factors and the current enlargement is no exception. Enlargement has economic effects and these can be important but are not decisive. The enlargement to the Central and Eastern European Countries (CEECs) has two principal motivations in the EU 15:

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1. The desire to end the artificial division of Europe that existed in the Cold War, combined with a sense of historic obligation related to West’s acquiescence in that division.

2. Security: to expand the area where democracy, the rule of law and prosperity holds sway.

Countries on the Baltic and bordering the CEECs see particular advantages in enlargement: security and a reduction in their peripherality. Economic advantages are likely to be greatest for these countries. The UK is very supportive of enlargement not least because of its involvement in the division of Europe. France, Spain and Portugal are lukewarm over enlargement, their security is less directly involved and the economic benefits more marginal. These counties’ budgetary position is likely to deteriorate as a result of enlargement.

The process of enlargement

Put at its most basic the new members must accept the rules of the club. So enlargement does not really involve negotiation, the existing Member States must modify the institutions and policies of the EU so that it can incorporate the new Member States. The applicant states must modify their laws, administrations and judiciary, to ensure that they are able comply with and implement EC law. The negotiations are about transitional arrangements, derogations and technical details of how the rules will apply e.g. the size of agricultural quotas. It could be argued that the real negotiation takes place once a country becomes a member. Thus the UK’s budgetary problem was well known at the time entry in 1973 but it was another 11 years before it was resolved.

Enlargement takes a long time it was 12 years from the UK’s first application for membership in 1961 until entry in 1973. This was exceptional because of President De Gaulle’s refusal to allow UK membership. Greece took 5 years form 1976 to 1981, despite an adverse opinion from the Commission. Portugal and Spain applied in 1978 and 1979 and joined in 1986. Negotiations with the EFTA countries were comparatively swift, because the European Economic Area agreement meant the economic chapters of legislation were largely implemented. In addition budgetary and policy issues were not very difficult, these countries had similar income levels to the EU average, they would not receive substantial amounts of structural aid and agriculture was not very important. So they would be net contributors to the budget.

The current process of enlargement was especially difficult, because the CEECs had to undergo a process of transition, before they could join the EU. They had to move from one party political systems to democracy. This required new constitutions, the development of political parties and a civil society. The economy had to change from a planned to a market system. Prices were not related to production costs or scarcity. Competition was absent and productivity/efficiency was very low. The structure of production determined by the plan was unrelated to consumer demand or comparative advantage.

In particular heavy industry was overdeveloped and services underdeveloped. International trade had been strictly controlled, access to foreign exchange was strictly controlled, and the exchange rate was arbitrary. Macroeconomic policy was via the plan and government was financed from state run economic activity and profits on international trade. There was no tax system, capital market etc. The legal system was politically controlled, with all property owned by the state, there was no system of property rights. Corruption was endemic to the system.

The EU developed a two-pronged strategy to deal with the potential accession of the CEECs. First new association agreements, called Europe Agreements, granted free trade for industrial goods (not agriculture), aid to foster the transition process and the possibility of membership. The first Europe agreements were signed in 1991.

The second part of the strategy was to put in place a system to judge if countries were ready for membership. Premature entry could cause significant problems for the EU and the entrant. For example poor implementation of internal market laws in the new Member States could undermine the effectiveness of the Single Market (Pelkmans et al, 2000). In 1993 the EU drew up criteria to decide whether a country was ready for Membership. These Copenhagen criteria were:

* stability of institutions guaranteeing democracy, the rule of law, human rights, and respect for and protection of minorities

* existence of a functioning market economy, as well as the capacity to cope with competitive pressures and market forces within the EU

* ability to take on the obligations of membership, including adherence to the aims of political, economic, and monetary union.

Questionnaires were sent to the countries to complete, to assess their readiness for membership, and annual assessments were published for each country assessing its progress. In 1997 Agenda 2000 was published, the second part of which consisted of reports on the applicant countries progress in Accession. The Commission recommended that accession negotiations began with five CEECs: the Czech Republic, Estonia, Hungary, Poland and Slovenia. Negotiations opened with eight CEECs but with these five fast tracked. At Laeken in December 2001 it was decided to extend this fast track to Latvia, Lithuania and the Slovak Republic. Together with Cyprus and Malta this makes 10 potential entrants scheduled to join in 2004. The first part of Agenda 2000 consisted of recommendations for the reform of EU policies in preparation for enlargement.

This enlargement also posed particular difficulties for EU institutions. The EU’s membership had expanded from 6 to 15, largely by scaling up the EEC Treaty institutional arrangements. The limit of this process had probably been reached or even exceeded with the EU 15. The number of Commissioners was probably too large for the existing portfolios and for the effective operation of a collegiate system. The balances between the small and the large states in the system, had probably tilted too far in favour of the former, as most new Member States had been small. Another 10 states entering 9 small or very small and one large meant that institutional reform was imperative. A situation could have arisen where a qualified majority in the Council could have represented less than 50% of the population of the enlarged EU. The complexity of the EU decision making process and concerns over its democratic legitimacy also led to demands for reform.