Thursday, November 27, 2014

Europe’s Big Bang at Ten

BRUSSELS – Ten years ago, eight countries from the former Soviet bloc, together with the island states of Malta and Cyprus, joined the European Union, bringing its membership from 15 to 25. At the time, it was feared that this eastern enlargement would create tensions within the EU because new members from Central and Eastern Europe were poor and some had large agricultural sectors. Because the EU spends mainly on poor regions and on farmers, many worried that enlargement would overburden its budget.

In the end, this problem was resolved through a typical European compromise that allowed enlargement to proceed, even though the budget, as a proportion of Europe’s GDP, was reduced. Agriculture has now largely disappeared as a major item on the EU agenda. Moreover, the planning horizon under the EU’s Multi-Annual Financial Framework implies that the issue of who pays for whom has to be addressed only once every seven years.

The purpose of economic integration is ultimately to boost GDP growth and improve living standards. Judged from this perspective, enlargement has worked well. The transition countries have caught up considerably over the last decade.

In the mid-1990’s, many transition countries’ per capita GDP was only about one-quarter to one-third of that of the old EU-15 (in purchasing-power-parity terms). Some of the distance had already been covered when the new member states finally joined the EU, but the process of convergence has continued, even through the financial crisis.

The new members’ income has reached about two-thirds the level of the EU-15. Moreover, the poorest new members gained the most (in contrast to the poorest members of the EU-15, like Portugal and Greece, which are now back to income levels last seen in the 1990’s). This convergence is the reason why job seekers from the eastern member states are not overwhelming the richer EU-15 countries’ labor markets.

The fact that the new members were initially so much poorer, initially a source of tension, turned out to be a source of economic advantage for both sides, as EU-15 firms (especially German companies) could outsource labor-intensive tasks. They gained in terms of global competitive, while the target countries gained much-needed direct investment, jobs, and knowledge transfer. In purely economic terms, enlargement was clearly a mutually beneficial proposition.

Of course, other aspects of enlargement have worked less well. A large part of the aid that has flowed from the EU budget to the new member states has been used for prestige projects that enriched local construction companies. And, though this problem is not specific to the new member states – the same thing happens in countries like Italy or Greece, with their slow and inefficient administrative systems and extensive corruption – it was rendered more acute by enlargement; indeed, many of the eastern members still have lower-quality public administrations than one finds in the EU core.

Thus, enlargement should be viewed as a qualified success. One of the biggest fears, namely that EU institutions would be overwhelmed by the simultaneous absorption of ten new members, also never materialized. The new member states have integrated smoothly into the EU institutions, where they defend their national interests in much the same way as the older members. The difficulties that the EU has experienced in the last years have little to do with the increase in the number of member states, which has now reached 28.

The most important consequence of the EU’s eastern enlargement has turned out to be one that few thought about at the time: it brought the Union much closer to Russia. And, for a Russia that has become authoritarian and has seen how the EU can transform struggling transition countries into increasingly prosperous (albeit imperfect) democracies, Europe is too close for comfort. The prospect of relative prosperity and freedom proved so attractive to the people of Ukraine that they toppled a president who preferred a Russian-led “Eurasian Union” to an EU association agreement.

Unfortunately, a significant minority in eastern Ukraine does not share this “European vocation” and feels threatened by the recent turn of events. Russia supports these tendencies and has used military and other hard-power tools to stoke tensions, because its regime would be threatened by the living example of a “European” Ukraine that is democratic and prosperous.

So, ten years on, enlargement is turning out differently than expected. The internal challenges have proved manageable, but now the EU needs to confront an external challenge for which it is ill prepared. We will not have to wait a decade to find out whether the EU can help to stabilize Ukraine while confronting a Russia whose leadership feels threatened by its fundamental values of democracy and the rule of law.

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    1. Commentedj. von Hettlingen

      Mr. Daniel Gross views in retrospect the EU eastern enlargement ten years ago. Was it a "big bang"? After a two-day summit in Luxembourg in December 1997, attended by EU leaders to discuss the biggest expansion project in its 40-year history, German Chancellor Helmut Kohl was all smiles. He claimed it was the decisive event in the history of Europe since World War II, althought many within the EU were "worried that the enlargement would overburden its budget".
      No previous enlargement of the European Union could be compared to the expansion to include central and eastern Europe. Apart from euphoria, there were also fears, because these countries were much poorer than the EU's poorest members and would absorb a higher proportion of EU spending. Spain, Greece and Portugal were economically weak when they joined the EU, but they had civil societies and established legal systems. The central and eastern European countries had only just emerged from a fifty-year political and economic time warp. Everybody agreed that the EU budget must be reformed before the Union took in new members from the east.
      Eleven countries were to join the family, six in the first wave - Poland, Hungary, the Czech Republic, Slovenia, Estonia and Cyprus. Another five - Latvia, Lithuania, Slovakia, Bulgaria and Romania - would be invited to join later after they carried out reforms to improve their eligibility. The first six "fast track "nations - Poland, Hungary, the Czech republic, Estonia and Slovenia - were deemed better prepared economically and politically for EU membership. Negotiations would expected to go more quickly, although it would take years of further reform before they were allowed to join.
      At the start there was a big gap between the rhetoric of EU countries and the realities of the enlargement process. The advantages of creating a bigger internal market, more consumers to sell to, more business opportunities, and promote stable, prosperous neighbours were convincing. But the process of helping the poorer central and eastern European countries to modernise their economies had its costs, and protectionist countries in the EU feared the flooding of their markets with cheap goods and labour. Western Europe was in a recession partly caused by the reunification of Germany in 1990.
      It's true that "in the end, this problem was resolved through a typical European compromise that allowed enlargement to proceed". Indeed, few had thought that the eastern enlargement had "brought the Union much closer to Russia". Putin envisioned with dismay that "the people of Ukraine" would jump on the bandwagon of "relative prosperity and freedom", as he would have preferred Ukraine to join his “Eurasian Union”.
      The interim leadership in Kiev faces enormous challenges like separatism or the decentralisation of government power. As Putin is obsessed with keeping Ukraine from pivoting to Europe, the threat of a Russian intervention hangs like a Sword of Damocles over the leadership in Kiev. It will have to find a solution to survive in Russia's backyard, while forging close ties with the EU. Given Putin's using oil and gas as weapons, it's uncertain, "whether the EU can help to stabilize Ukraine while confronting a Russia whose leadership feels threatened by its fundamental values of democracy and the rule of law".

    2. CommentedVal Samonis

      EUROPE: The Emotional Economics of ANGELA'S Tears


    3. CommentedIv Vasev

      First of all, get your facts straight Daniel ... there were 7 countries from the former Soviet bloc plus Slovenia; if you can't make that crucial distinction, it's sad to call yourself an analyst.
      Second of all, regardless of the fact that Russia is authoritarian (and most of us who are liberal-democrats do not like it), one needs to admit that, as every country with a lot of power (we have to admit that Russia has it), Russia has its interests and is prepared to defend them. It has never been the EU that Russia objects to but NATO. And to have the missiles at anyone's border is very much unpleasant (to put it lightly). Enough with the good guys (West) v.s. the bad guys (Russia) propaganda; instead look into your own courtyard and be very careful who you support in Kiev.

    4. CommentedVal Samonis

      Daniel, Poland has benefited from access to massive EU funding, with more than $128 billion pouring into the economy over 10 years!

      PLUS Poland has conducted (dirty 30s style) BEGGAR-THY-NEIGHBOR POLICIES (exports enhancing zloty debasement!) possible with no Euro.

      Therefore, Poland NO MODEL for others, esp. Ukraine! And that trick CANNOT be repeated: se ne vrati, as the Czechs say.

      Did I mention millions that emigrated so that Polish GDP falls on much smaller & smaller number of "capitas"? THIS WILL END IN TEARS OF THOSE WHO REMAINED IN POLAND! Even worse emigration from Lithuania!

      THEY ("good times" and young people) WILL NOT RETURN: se ne vrati!

      Val Samonis
      Vilnius University

    5. Commentedhari naidu

      Of course, there was political division within older EU members, in particular, regarding American political push - post 1989 - to enlarge and accommodate former Soviet block countries with little or no institutional/admin compatibility with Western Europe governance.

      Me thinks it'd have been better for all parties concerned if the process was administratively programmed with built-in testing periods for final enlargement.

      In other words, one could argue enlargement has, in fact, accrued anti-EU sentiments across Western Europe, as coming EP elections might well register.

      However, with regard to Ukraine, it is politically inconceivable that Berlin would have advanced *Accuis European* to Kiev without regard to Russia's geopolitical/strategic disposition.

      The entire process was mismanaged by Brussels...and the resulting spat with Putin could have been avoided if the process had been mutually agreed upon - thereby providing adequate space and time for Ukraine to restructure its (Soviet) administrative apparatus and more.

    6. CommentedRoman Podolyan

      When speaking about Ukraine, this article says propaganda, not the real things.

      The reality is that Ukrainian "friends of Europe", Yuschenko and Tymoshenko, in 2005-2010 lead the country into the same credit-bank-construction bubble which peripheral Europe countries experienced. After-crisis GDP contraction was 14% (by coincidence, almost the same as in EU country Estonia).

      As the East of Ukraine for a long time was more industrialized region, what is expected there as "good" is what other industrial regions can see as good: industry growth, jobs growth, wages growth etc. But "movement to Europe" is not about that, talking about joining Europe by peripheral states, we often talk about losing industry and massive emigration in struggle to find jobs abroad, often illegal.

      Also, the movements supporting joining Europe in Ukraine are the worst one nationalistic, fascist and even nazi movements (read on Wikipedia about VO Svoboda openly nazi party).

      Nazi and propaganda, not prosperity, that's what is Europe in the East of Ukraine associated about.

      It's not that much about Russia — where it is, it is about Russian companies' jobs and ties, and that Russia and East of Ukraine share common legacy of fighting European and pro-European nazi, not joining them.

    7. CommentedPaul Daley

      One point not considered by Gros is why the EU decided to proceed differently with Ukraine than it did with the other Central European states. The EU treated the other Central European states as a bloc, taking all in at once and avoiding many of the costs from trade diversion that would have emerged if each had been taken in individually and sequentially. Ukraine was treated individually, in isolation from Belarus and Russia. Might the negotiations with Ukraine gone more smoothly, and relations with Russia remained more friendly, had the EU engaged with Ukraine, Russia and Belarus as a bloc?