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Between Past and Future

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Sorin Antohi

IV. The New Europe: Prospects for Cooperation and Conflict

17. The Europe Agreements and Transition: Unique Returns from Integrating into the European Union1

Bartlomiej Kaminski

Texte intégral

Introduction

  • 1 The author gratefully acknowledges very helpful comments from Maurice Schiff.

1No other institution seems to evoke so much controversy as the European Union (EU). Its administrative arm, the European Commission (EC) has been accused of excessive bureaucratization. Complaints about faceless, under-worked, and overpaid EC functionaries abound. The term “democracy deficit” seems to have become synonymous with the workings of the EC. Predictions about inevitable failure accompanied each turn of the EU’s history including, most recently, the launching of the Euro on 1 January 1999.

2Yet the EU has remained the most successful experiment in regional integration. The movement toward deeper integration has been slow but persistent. It has helped lay to rest the Franco-German conflict and has thus established foundations for European stability and economic prosperity. It has outlived other European attempts at integration, such as the European Free Trade Association (EFTA) and the Council for Mutual Economic Assistance (CMEA). Defections to the EU—first by Denmark, Ireland, and the United Kingdom in 1973, followed by Portugal in 1986, and then by Austria, Finland, and Sweden in 1995—have characterized the history of the EFTA. If anything, it has shown that the seven original EFTA founders opted for the wrong path to European integration. The six founders of the European Economic Community chose the right one.

3Unlike EFTA members, CMEA members did not have the option of exit (at least until 1989). The CMEA produced neither stability nor prosperity; on the contrary, it only magnified the distortions inherent to central planning. Its collapse under the weight of accumulated economic inefficiencies in 1991 was welcomed with a sigh of relief. Despite fears to the contrary, its dissolution did not trigger economic catastrophe, proving its complete irrelevance to the economies of its member countries in post-cold war circumstances.

4Due to its mere size and geographical proximity, if not because of its policies, the EU has quickly emerged as a major economic partner of the former CMEA countries. For most of them, the EU has always had the potential to be both their largest trading partner and their most important source of capital and technology. However, as long as politics determined their external relations, this potential could not be explored. With the collapse of central planning—that is, once external commerce was finally subordinated to economic considerations—the EU has provided their major market.

  • 2 CEECs here denote Central European countries, which formally applied for membership in the EU. The (...)

5The initial stages of the transition from central planning underscored the importance of the EU to Central and East European countries (CEECs2). With the collapse of domestic demand, which followed the shift from a supply- to a demand-constrained economic regime, booming exports to the EU were the only bright spot for rapid reformers. The quickly expanding demand in the EU for CEEC products moderated the decline in economic activity and facilitated combat against inflation. Exports to the EU initially drove economic recovery. Improvements in market access granted by the EU helped CEEC exporters to compete with suppliers from nonpreferential countries.

  • 3 D. Marsh and L Barber, “Morsels from a Groaning Table”, The Financial Times, 7 June 1993.
  • 4 J. Pomfret, “Is Another Curtain Descending on Europe”, The Washington Post, 27 April 1993.
  • 5 Václav Klaus, “The Ten Commandments of Systemic Reform” (occasional paper 43, Washington, D.C., Gr (...)

6Yet there was perceptible dissatisfaction with the policies of the EU vis-a-vis CEECs, despite the European Association Agreements. For instance, looking at developments in trade balances between CEECs and the EU, some argued that “the Community appears to have received the better part of the bargain3.” The Washington Post warned about another (iron) curtain descending in Europe4. Václav Klaus, then prime minister of the Czech Republic, complained that the absence of “symmetrical relations based on the principles of equality...[resulted]...in discriminatory and protectionist measures that have greeted any success of our exports in Western markets5.” Nothing short of a miracle could produce greater symmetry in EU-CEEC relations. Furthermore, neither has the curtain fallen nor have the CEECs acquired such a bad bargain after all.

7These comments seem to have missed the real meaning of the European Association Agreements (EAs). The EAs had all the necessary ingredients to launch deeper integration. Modeled after similar agreements signed among founding members of the European Community, they in fact held the possibility for future membership. The process of policyinduced integration into the EU, which began with the signing of the first European Association Agreements by the then-Visegrád troika, demonstrated a unique feature when compared to other regional integration arrangements. First, it involved countries at widely divergent levels of economic development, thus representing the case for “north-south” integration. Except for the North American Free Trade Agreement and EU Southern Enlargement, there are no other cases of such attempts at integration. Second, it has created both the challenge and opportunity to increase the wellbeing of their respective societies, modernize their economies and legal systems, and accelerate restructuring.

8But politics is about perception. By falling short of articulating the conditions for accession, the European Commission failed to provide adequate encouragement for postcommunist leaders to take the bold measures necessary to shift to new political and economic regimes during the first stages of transition.

9On the other hand, it is not clear if a more activist EU policy would have changed the course of developments in CEECs. One doubts it, as reforms tend to be driven by domestic politics. Those who embarked on the path of reform easily obtained external assistance elsewhere. But proponents of rapid reform have enormously benefited from the European Association Agreements. Preferential access to EU markets was only one of these benefits; there were other, even more important gains related to the introduction of new economic institutions and policies. European Agreements have obligated CEECs to “modernize” many policy areas, including antitrust legislation and institutions, customs, foreign trade, services, the right of establishment, etc. They have also given reformers a convenient domestic political shield to pursue these policies. The business climate in those countries that introduced such policies has significantly improved, resulting in a surge of foreign capital inflows. Hence, analysts coined the term “the EU factor” to describe the special attraction of foreign investors to Europe Agreement signatories.

10The EAs have triggered measures to liberalize restrictions on capital movement, opening so-called strategic sectors to foreign investment, and introduced other institutional measures toward meeting the requirements of the acquis communautaire. The overall impact of these measures has been the reduction of legal, policy, and regulatory uncertainty. This in turn has attracted new flows of investment, accelerated growth, and helped improve economic efficiency. The benefits of the sound economic policies that resulted from compliance with EAs have improved the CEECs’ chances for formal membership in the EU.

The Returns of Integration into the EU for Economies in Transition

  • 6 Quoted in Maurice Schiff and L. Alan Winters, “Dynamic Politics in Regional IntegrationArrangement (...)

11Politics has been at the core of European integration. Note first that the EFTA was merely a response to a much more ambitious project embodied in the Treaty of Rome. This project was based on the use of economics to pursue political objectives. Robert Schuman and Jean Monnet, the founding fathers of the European Economic Community, saw it as an arrangement that would make a Franco-German war not only “unthinkable, but materially impossible6”. The solution of this problem could be achieved in the framework of broader European cooperation. The loss of some sovereignty over the national economy that is implicit in regional arrangements has since been regarded as a price worth paying for improved international security.

  • 7 Vincent Furchart, “An Analysis of the Logic of European Enlargements” (Paper presented at a confer (...)

12Furchart convincingly shows that neofunctionalist attempts to explain European integration driven by internal economic logic have failed miserably7. European integration did not develop through a process of economic spillover; that is, the integration of one sector generating through the demonstration effect the integration of other economic sectors.

  • 8 Christopher Preston, Enlargement and Integration in the European Union (London and New York: Unive (...)

13While Northern Enlargement in 1973 and the EFTA’s enlargement in 1993 admittedly were driven mainly by economics, political considerations were responsible for the Southern Enlargement of the EU. Preoccupation with the consolidation of democracy was at the core of the accession of Greece in 1981, and that of Portugal and Spain in 19868. These three countries would not have met the economic criteria for accession had they been the only considerations. Their gross domestic product (GDP) per capita was well below the average of the EU, and it was clear that they would not be net contributors to the EU budget; on the contrary, they were net recipients of EU funds. It appears that the increase in spending from the EU budget was deemed a small price to pay for stability in these countries. Similar considerations appear to have influenced the EU’s decision to initiate the accession process vis-a-vis CEECs.

14Returns of “policy-driven” integration with a highly developed partner such as the EU are huge for the CEECs. But such returns do not come by default. Only a combination of liberal economic policies and the absorption of the best practices and standards used by EU members yield significant benefits to a CEEC. Although some of these benefits could be accrued as a result of commitment to unilateral liberalization, integrationist arrangements with the EU magnify them. Regional accords, even those limited to trade, enhance southern credibility in terms of commitment to economy-opening reforms and facilitate access to technology, know-how, and capital.

15The accords do not have to have special clauses on treatment of foreign investment to serve as a credibility-enhancing mechanism: a domestic liberal regime lends additional credibility when a developing country becomes party to the agreement. By reducing the risks that foreign investors face and improving a country’s business climate, they increase the flow of direct and portfolio investment, often diverting them from other regions. By the same token, these arrangements have a positive impact on the macroeconomic situation, thanks to the enhanced growth potential of a country—that is, higher growth of real GDP triggered by the larger inflow of foreign direct investment (FDI).

  • 9 This does not apply only to North-South integration, as a failed coup in Paraguay illustrates. Pre (...)
  • 10 Composite paper reports on progress towards accession by each candidate country (Brussels: Europea (...)

16But the returns go beyond economics. Preferential arrangements provide an anchor to domestic politics by putting a heavy price on attempts to move away from democracy9. Both the EA and implicitly spelt-out criteria of EU accession contain political conditions. Moreover, with the adoption of the Amsterdam Treaty in May 1999, these no longer apply to acceding countries. The present Article “O” of the EU “constitution” will contain a new statement recognizing that the EU “is founded on the principles of liberty, democracy, respect for human rights and fundamental freedoms and the rule of law10”.

The EU’s Response to the Collapse of Communism

17Notwithstanding its policies, the EU was deemed as the most important external factor for CEEC reform. For all of them the EU had potential as their largest trading partner and the most important source of capital and technology. However, this potential could not be explored as long as CEECs remained bound by membership in the CMEA and trade-averse economic regimes. With the collapse of both—that is, once external commerce finally was subordinated to economic considerations—the EU quickly emerged as their largest trading partner. This outcome was bound to occur with or without a network of special preferential arrangements.

  • 11 See, for example, Patrick A. Messerlin, “The Association Agreements between the EU and Central Eur (...)
  • 12 Winters, “Limited Market Access”.

18The response of the EU to the collapse of communism contained two ingredients: assistance programs and preferential arrangements. An analysis of EU assistance programs would go beyond the format of this paper, but the package initially offered by the EU has been the subject of many analyses11.” The general conclusion of these critical comments is that the big bang in Central Europe produced merely a whimper in the European Union12.

19Indeed, the EU’s first response to the demise of communism in Central Europe did not live up to the historical significance of this event. By granting General System of Preferences (GSP) treatment to their exports, the EU merely “upgraded” the status of some postcommunist countries to that of developing countries. Not all CEECs obtained this status during their first year of transition. Bulgaria and the former Czechoslovakia had to wait a year, whereas the Baltic states obtained it almost immediately after independence.

20The turning point for progress toward preferential status was the EA (European Association Agreement), which went beyond a traditional preferential trading arrangement. Its preamble contained a clause recognizing that an ultimate goal for the CEECs is full membership in the EU. More significantly, however, it contained provisions committing CEECs to deeper integration. The following section begins with the discussion of the EA’s contribution to the credibility of commitment. Then I turn to an assessment of the other benefits attributed to north-south integration that have transpired.

Institutional Change and Credibility of Commitment: The Europe Agreements and Beyond

  • 13 This should not imply transplanting all institutions, but only those that would enhance potential (...)

21The most important benefit related uniquely to “policy-induced” integration of a “poor” country into highly developed economies is that the former can become like the latter in terms of economic institutions and policies13. The effectiveness of an agreement to lock a country in a virtuous circle of economic reform hinges critically on its scope and depth, as well as on punishment mechanisms for exits.

  • 14 With the benefit of hindsight, it is rather ironic that mass media and many politicians in both Ea (...)
  • 15 Gerhard Pohl and Pirita Sorsa, “European Integration and Trade with the Developing World”, Policy (...)

22The “Europe” Agreements—as they came to be called to emphasize differences with the agreements on association signed earlier by the EU with other countries—went well beyond narrowly conceived issues of market access14. They had several unique features, which have been crucial to the process of integration. For one, the Agreements have set up entirely new frameworks for economic and political relationships between the EU and its “European associates”. They have also launched the accession process. Their preamble recognized that the ultimate goal of the CEECs is full membership in the EU. Moreover, the EAs were modeled after agreements among founding members of the European Community—a point somehow ignored in subsequent discussions of their significance—during their initial stages of integration from 1958 to 196115. As such, they contained provisions for gradual yet full Integration into the economic, if not explicitly the political, structures of the EU. By including provisions concerning convergence of the CEECs’ economic legislation with EU standards, the “Europe” Agreements were more comprehensive than free trade arrangements. Although they initially fell short of granting EU membership (though the EU officially recognized this as a goal for the CEECs at the Copenhagen Summit), they placed the CEECs close to the top of the preferential pyramid of EU external relations.

  • 16 H. Kramer, “The European Community’s Response to the ‘New Eastern Europe,’” Journal of Common Mark (...)

23Kramer argues that the provisions of the Europe Agreements, which are compatible with the 1987 Single European Act, do not set the path for CEECs to adapt to extensive integration along the political and economic dimensions foreseen in the Maastricht Treaty16. Under these circumstances, the issue of membership either has to be addressed outside the framework set in the Europe Agreements or its provisions have to be renegotiated. As a result, an extra barrier to the aspirations of CEECs is in place. Subsequent developments in EU-CEEC accession negotiations do not seem to corroborate Kramer’s assessment.

  • 17 These institutional and regulatory requirements are similar to the treaty between the EU and EFTA, (...)

24The CEECs were expected to align the legal infrastructure of their new economic systems with the EU archetype. These institutional measures included, among others, laws on competition—company law, company accounts and tax regulations, banking law, laws on mergers and state aid, intellectual property law, rules of indirect taxation, and transport and environmental laws17. In this respect, the main advantage of the Agreements was that they might provide guidance to CEEC institutional transformation and incentives to implement regulatory infrastructures enhancing economic efficiency and growth. Due to their significant dependence on trade with the EU, the Agreements played the useful function of shielding some important institutional issues or policies from possible vicissitudes in the domestic politics of these countries.

25This potentially positive impact, however, has been considerably weakened by the absence of a timetable and criteria for full membership, easy-to-use safeguards, and weak punishment measures for exit. Despite pressures from Central European governments, the Copenhagen Summit fell short of making a firm commitment. As a result, the Agreements set the framework for the new European order without, however, determining its future shape. This clearly contributed to CEEC uncertainty and reduced incentives to accelerate the transition process.

26The EAs envisaged deep integration spread over a transitional period during which the CEECs would bring economic legislation to EU standards. The EA called for the establishment of institutions supporting competitive markets; hence, CEECs were obligated by the EA to implement legislation on unfair competition and antimonopolistic regulations that are currently in force in EU countries. The introduction of such measures had a three-year grace period. Legislation regulating state assistance and subsidies was to be brought in line with Articles 85, 86, and 92 of the EU Treaty. The requirement concerning its implementation, however, was even weaker than in the case of antitrust legislation. The EA allowed such reforms to be deferred by five years with the possibility of an additional five-year extension. In the meantime, the General Agreement on Tariffs and Trade (GATT) subsidy code would be used to assess distortions in market competition caused by monopolistic practices and state subsidies. The problem with this arrangement was (and still is) that GATT disciplines are weak, and the absence of these regulations has made CEECs’ exporters more vulnerable to various EU nontariff actions.

  • 18 Messerlin, “The EU and Central Europe”, 98.
  • 19 According to this view, the EA has granted the EU almost unlimited opportunities to use nontariff (...)
  • 20 Brian Hindley, “Exports from Eastern Europe and Contingent Protection”, in Trade, Payments and Adj (...)

27Although the use of safeguard clauses concerning foreign trade policy was less restrained under the EA than under GATT rules, which link safeguards to ongoing liberalization, the EA has not deprived the EU of the ability to resort to its favored import restricting tools: “voluntary” quotas in the name of safeguards and tariffs against dumping. As Messerlin notes: “the safeguards provisions are powerful enough to reverse the trade liberalization aspect of the Agreements18”. Many analysts predicted that this indeed would happen19. Hindley argues that the danger of reversal is there, especially if the CEECs sustain their export expansion20. But most CEECs sustained their impressive export growth performance, and except for some products, the EU has not “abused” exporters from these countries. Rather, it appears that the ramparts of “fortress Europe” have turned out to be quite porous, even for sensitive products.

  • 21 For an extensive discussion of the impact of the EA on foreign trade policies of first-wave entran (...)

28Although first-wave accession negotiators—Hungary and Poland in particular—often resorted to various measures restraining imports from the EU and other partners, there was no massive reversal of trade-liberalizing measures. In hindsight, the value of the EA was that it assured a pretty credible commitment to trade liberalization, at least among first-wave entrants. Even when safeguards were used, these measures were applied on a nondiscriminatory basis. Overall, the EA and the power of the EU derived from the sale of around two-thirds of CEEC exports have restrained protectionist temptations in these countries21. On the other hand, the EA has failed miserably to discipline trade policies of such countries as Bulgaria and Romania.

29Following the EU Council Summit in Copenhagen (21-22 June 1993), the scope of the EA was expanded significantly by including conditions for membership. These boiled down to one message: Those who want to be considered for membership must meet the “four freedoms” of the 1986 Single Market and establish functioning democracies.

  • 22 Note that even today many members are not in compliance with all provisions of the 1986 Single Mar (...)

30Beyond the harmonization of legislation, adopting the acquis communautaire includes providing for the implementation and enforcement of legislative and regulatory systems, standards, and certification methods compatible with those of the EU. Hence, in addition to the adoption of some components of the acquis22, acceding CEECs would have to satisfy special economic and political conditions. Due to these political conditions, the Copenhagen criteria are substantially different from the general requirements for countries that previously sought EU membership. These criteria include: 1) stability of institutions guaranteeing democracy, the rule of law, human rights, and respect for and protection of minorities; 2) the existence of a functioning market economy; 3) the capacity to cope with competitive pressures and market forces within the single market; and 4) adherence to the aims of political, economic, and monetary union.

  • 23 The essential internal market legislation of the White Paper is divided into twenty-three areas. T (...)

31Explicitly linking membership to the consolidation of democracy and competitive markets was clearly a step forward. It had, however, two deficiencies. First, no timetable was set for a country to meet these conditions. Applicant CEECs simply had to provide evidence of their democratic institutions, market orientation, competitiveness, and commitment to other EU political and economic goals. Second, the Copenhagen declaration did not indicate which components of the acquis a country had to adopt, and when, to be eligible for accession. It took the commission another two years to address these issues. The 1995 White Paper finally identified the items in the acquis that had to be met by an acceding country. Its focus was clearly on components that would enable the internal market to function23. There is no premise, however, that all aspects of the acquis must be implemented prior to admission.

32With the progress made in preparations for membership, the effectiveness of EU-controlled arrangements, in terms of their influence on the shape of economic institutions and policies, has significantly expanded. In contrast to earlier stages, the process has become bureaucratically structured and thus more predictable. It has also become more intrusive, forcing governments to actively look into the compatibility of institutional arrangements with the acquis. It also provides an opportunity for the extra push on reforms that would accelerate much needed adjustment and modernization of institutions and policies; consider, for instance, that responding to the acquis involves a painstakingly detailed examination of a country’s regulations and administrative arrangements. It thus offered a unique opportunity to assess strengths and weaknesses. Screening, selection, and subsequent accession negotiations exert enormous pressure on a government to stay on course of reform. The requirements of accession—that is, adoption of the acquis communautaire and meeting the Copenhagen criteria—give a government extra legitimacy to introduce sound policies, provided it is committed to do so.

33Has the accession, broadly conceived here as the process initiated by the EA, conferred stronger credibility on reform programs and facilitated their implementation? In general, for governments committed to the transition to competitive markets, the “EU factor” has offered an extra weapon to demonstrate their credibility of persistence in moving to a market-based democracy. The greatest threat to such persistence comes from changes in government policies in response to domestic pressures. If strong support for accession to the EU exists among the populace, the risk of jeopardizing it may offer the reformers an extra tool to stay on the course of reform.

  • 24 Bernhard Seliger, “Integration of the Baltic States in the European Union in the Light of the Theo (...)

34The EU integration process has also facilitated transition in another way. Seliger notes that seeking accession to the EU narrows institutional development to simply emulating EU solutions24, but this is not entirely so. The EU does expect applicants to solve problems by institutional imitation to a degree, but only insofar as they involve issues embraced by the acquis. While this provides guidance to reforms, the danger is that, in areas not covered by the acquis, the wrong institutions and practices may be copied. There is significant institutional diversity within the EU, which embraces countries as different as Austria and Ireland or the United Kingdom and Greece. Thus, an applicant country faces a choice in its path of development. The bottom line is simply that the path chosen should not obstruct integration.

35Some interest groups within applicant countries support accession because they see it as providing them with arguments in favor of copying not market-based policies, but its bureaucratic components. The latter include agricultural policies and social regulation. For instance, the Common Agricultural Policy attracts Polish farmers. Import-competing industries would like their governments to adopt EU-contingent protectionism. The problem is that bad practices are usually politically more rewarding. Their adoption in a country with a low GDP per capita may undercut its growth potential, as the case of Greece amply illustrates. Hence, although aspiration to EU membership narrows institutional choice, it does not wipe it out entirely.

The Trade Component: On the Path to a Single European Trading Bloc

  • 25 The exceptions were Romania, which enjoyed lower tariffs thanks to its GSP status, and the former (...)

36Until 1988 there were no significant differences in the access of European CMEA countries to EU markets25. The differentiation in treatment began when the EU established diplomatic relations with Hungary and Poland and signed nonpreferential Trade and Cooperation Agreements with them. The agreements set a 1994-95 deadline for the elimination of specific quantitative restrictions. But in response to the collapse of communism in Central Europe in 1989, the European Commission overturned these agreements.

37The measures designed to support transition were initially limited to market access and were geared toward countries that moved fastest in dismantling communism. The major stipulation was the granting of GSP status, first to Hungary and Poland, and later to other CEECs. The demise of the east-west division in Europe initially led to a mere “upgrade” in the status of CEECs to that of least developed countries. No other attempt was made to help CEECs during their first year of transition. Czechoslovakia and Bulgaria obtained such status in the second year after the collapse of their communist regimes.

  • 26 An important caveat is that many of these imports are subject to GSP preferential rates within lim (...)
  • 27 Kaminski, “The Significance of Europe Agreements for Central European Industrial Exports”, Russian (...)

38Access to EU markets by CEEC exporters was significantly improved by GSP status, especially for industrial products. GSP preferential rates embraced sixty-three percent of all Combined Nomenclature (CN) tariff lines in EU imports, and most of them (ninety-four percent of GSP items) were subject to zero rates26. This share was higher for industrial products and amounted to seventy-four percent—all GSP preferential rates for these products were zero. As a result, the share of exports with duty-free access almost doubled from approximately eighteen percent to about thirty-five percent27. Other measures included: the removal of specific quantitative restrictions and the suspension of nonspecific restrictions (excluding imports of agricultural products, textiles, and steel) in 1990 and 1991; the elimination of quantitative restrictions (excluding exports to the Benelux countries, Germany, and Italy) on steel and iron imports; and increases in textile and clothing quotas.

39Thanks to these measures, in 1990-91 CEEC suppliers had obtained considerable EU tariff preferences over exporters from non-European OECD countries, and in many markets they had similar access to importers from Lomé Convention countries. However, GSP status had three shortcomings that rather substantially reduced its significance. First, tariff concessions did not extend to many products in which these countries seemed to have comparative advantage, including agricultural and chemical exports. Second, although GSP preferential rates embraced sixty-three percent of all EU tariff lines, many of these imports were subject to GSP preferential rates within limits, and above them to “normal” most favored nation (MFN) rates. Last but not least, the GSP status was subject to annual review, introducing uncertainty as to whether or not it would be maintained.

  • 28 Inotai, 1993

40Even when assessed narrowly in terms of changes in market access, the EA was clearly a step toward increasing preferential treatment of CEEC exporters. Although in some instances its trade provisions narrowed the preferences enjoyed in access to EU markets28, it overshadowed GSP arrangements by retaining most preferential tariffs and making them permanent rather than subject to annual reviews to maintain GSP status.

  • 29 Winters, “Expanding EC Membership”.
  • 30 Elzbieta Kawecka-Wyrzykowska, “Poland”, in From Association to Accession: The Impact of the Associ (...)

41The EU offered CEECs an attractive market for many of their labor-intensive products, but it is difficult to estimate the overall impact of the European Association Agreements. European transition economies inherited large distortions in their trade patterns, as they had significantly undertraded with the EU, and changes in their trade performance during the first stages of transition can be to some extent attributed to this. But, like the South European countries earlier29, they recorded market gains in footwear, textiles, and apparel. Interestingly, a majority of them initially gained most in products not subject to extensive liberalization measures30.

42The EA had provisions that offered CEECs unrestrained access to EU markets for industrial products for a five-year period. In the wake of the conclusion of the Uruguay Round of multilateral trade negotiations and in response to pressures from CEECs, these transition periods were subsequently shortened. Consequently, exports of industrial products from CEECs already by 1996-97 did not face tariff barriers to EU markets. In contrast to earlier EFTA-EU free trade agreements, the EA provided enhanced access to agricultural markets similar to those granted to developing countries by the Lome Convention and the Mediterranean Agreements.

  • 31 There were some notable exceptions. Poland suspended tariffs on all imports for almost a year in 1 (...)

43But the importance of the trade component of the EAs—as well as the process they have activated—goes beyond the issue of access to EU markets. First and foremost, the Agreement has committed “European Associates” to open their markets as well, though gradually and over a period of ten years. Since hardly any political constituency has been in favor of free trade, this has been an important factor contributing to the liberalization of market access for the bulk of their imports31. This has benefited producers and consumers alike by increasing competitive pressures in domestic markets. Interestingly, this gain is rarely mentioned.

44Second, because the European Economic Area established a common market for EU and EFTA countries, the latter had little choice but to negotiate free trade agreements with CEECs modeled after the European Agreements. Their economic objective was to avoid less favorable treatment in CEEC markets than that bestowed upon EU exporters. Similar considerations drove CEEC decisions to enter in agreements with EFTA partners.

  • 32 Philippe G. Nell, “Extension of the European Union/EFTA Regional Trading Bloc to Central and Easte (...)

45Third, flaws that emerged in the trading system triggered a policy response facilitating further integration through trade. The emergence of such bilateral trade agreements created a very fragmented system of independent free-trade zones. The system facilitated commercial relations between a CEEC and the EU or EFTA, but it had two major shortcomings. First, it spurred the proliferation of a hub-spoke pattern putting spoke (CEEC) firms at a disadvantage vis-a-vis their hub (EU or EFTA) firms. Second, it added a new disincentive to trade among CEECs: although each had a preferential agreement with the EU and EFTA, intermediate inputs that one CEEC produced to be exported by another CEEC to the EU or EFTA did not qualify as local content. Nell notes that the system had become so messy that West European industry supported measures that would eliminate obstacles to trading across preferential zones32.

46Over time, attempts to address these deficiencies led to the replacement of several independent preferential trade zones by a single pan-European trade zone. The EU Council adopted the so-called European Cumulation in July 1996, which set the stage for the formation of a single European trading bloc. Several steps preceded it. With the establishment of the Central European Free Trade Agreement (CEFTA) by the three Visegrád countries, a single trading zone replaced three separate zones, each with the EU. Next the EC recommended that other CEECs join CEFTA or sign free trade agreements with one another. Both the trade components of the EAs and the new agreements standardized the removal of tariffs and nontariff barriers, to be achieved by the end of 2001. Then a single pan-European trading zone will become a free trade zone.

47Thus, the interim trade component of the EA turned out to be more important than anybody could have anticipated when it went into effect in March 1992. It was the starting point in a process that actually improved market access not only for the (then) twelve EU members, but ultimately for all other EU and EFTA countries and CEECs. This strikes as a huge return from integration.

Foreign Investment

48Although the original Agreements had some shortcomings, their overall impact on foreign investment is quite significant. Some original drawbacks were eliminated over the accession process. Others lost their relevance once accession negotiations were launched. It would be difficult to estimate the portion of FDI inflows for which the EAs bear direct responsibility, yet their implementation has amounted to the promise of a country becoming part of a larger market, as well as providing assistance in the establishment of market-supporting institutions.

  • 33 For the latter point, see Messerlin, “Association Agreements”.

49Yet the EAs were partially deficient in terms of creating an environment that provides satisfactory incentive for inflows of capital and know-how to CEECs, which are crucial to the restructuring of their industrial bases, for three reasons. First, with their rich collection of instruments of managed trade, the Agreements have offered back-door entry for those demanding higher levels of government intervention in the economy and encouraging a shift to managed trade33. During the initial stages of the transition, CEECs significantly liberalized their foreign trade regimes. Various provisions related to safeguard clauses, trade in automobiles and apparel (especially outward processing traffic rules), are a potentially major factor in the erosion of the initial commitment of many CEECs to free trade. Empirical evidence suggests that liberalization of foreign trade is an important factor in attracting FDI. The lack of stronger commitments to liberalization might have weakened the interest of foreign investors.

  • 34 Rollo and Smith, “Political Economy”.
  • 35 Hindley, “Exports from Eastern Europe”, 145.

50Second, the Agreements allow the EU to resort to protectionist measures, which in turn may seriously deter investment in the CEECs34. As for foreign direct investment, this contingent protectionism affects not only non-EU firms, but also those from non-EU countries. Although “there is no direct evidence that protection by OECD will in fact be a major problem for CEEC exports35”, its possibility—sanctioned by the Agreements—influences investment, growth, and trade specialization.

  • 36 The impact of the rules of origin on trade between the CEECs and the EU is difficult to assess. Th (...)
  • 37 Winters (1993), 13.

51Third, the rules of origin that determined the goods and services entitled to preferential treatment were rather restrictive, requiring at least sixty percent local or EU content. The rules of origin could easily be used as protectionist tools, influencing sourcing decisions by firms in both the EU and CEECs36. On a positive note, they provided incentives to EC firms to invest in production in CEECs, thus setting the groundwork for the development of intra-industry trade. Yet, since the initial stages of production often required the massive use of imported intermediate products and components, the rules of origin “effectively preclude many non-EU firms from establishing viable plants in the Central and Eastern European countries37”. As a result, many potential investment opportunities were lost—a point of considerable consequence given the relatively large involvement of non-EU firms in investment in CEECs. Clearly simplifying and decreasing “local” content requirements would have had a positive impact on industrial restructuring in the CEECs.

52Another weakness of the EA, also related to the rules of origin, was that imports from other CEECs used in exports to the EU did not qualify as local content (the so-called bilateral cumulation), thus discouraging CEECs’ mutual trade. However, the Commission addressed this issue by first replacing bilateral cumulation with diagonal cumulation, extending local content to the founding members of CEFTA (the Czech Republic, Hungary, Poland, and the Slovak Republic). In 1997 a new system of rules of origin extended the common local content rule (the so-called European cumulation of the rules of origin) to ten CEECs. Consequently, intermediate inputs from EU, EFTA, and CEEC suppliers are accounted at domestic origin.

53Despite these initial weaknesses, the EA-triggered accession process offered a number of advantages with potential for attracting foreign investors. Leaving aside higher investment attracted by economies of scale associated with access to EU markets, other provisions aligning economic regimes with those in the EU were even more significant inasmuch as they improved the business climate. The right of establishment of foreign firms as well as commitments to liberalize access to services, along with other provisions envisaging an orderly process of interaction between the EU and its associate members, serve as a credibility-enhancing mechanism.

  • 38 Nell, “Extension of the European Union”, 142.

54Another concession—permission for CEECs to use a duty drawback—was a mixed blessing. Generally, free trade agreements do not allow each signatory to use a drawback rule—that is, refunding exporters for duties paid on imported inputs. Since tariffs may vary across participating countries, this might give an extra advantage to an exporter shipping its products to another country. The EU wanted to strengthen CEEC competitiveness by reducing the negative impact of CEEC tariffs and providing them with an extra tool to lure foreign investors38. Indeed, this provided extra incentive to investors from non-EU member countries to invest in CEECs rather than in the EU. An outside investor targeting EU markets and investing in a CEEC could save on import duties, since a similar investment in the EU would be subject to duties on the import of inputs. With some modifications, this provision remained in place until the end of 1998. In 1999, CEECs can no longer reimburse exporters for duties paid on imports, as the Pan-European Cumulation is based on a no-drawback principle.

55Although the duty drawback mechanism in the EA has been described as an important concession of the EU, it removed the incentive for governments to lower their tariff rates to those in the EU. With the exception of the Czech Republic (the rates of which were close to EU levels) and Estonia (which had zero tariff rates for almost all products), CEEC tariff rates are significantly higher than those of the EU. As tariff rates on EU imports have been lowered by CEECs in accordance with provisions of the EA, the extent of reverse discrimination against nonpreferential suppliers (for example, the United States and Japan) has been on the increase. So has the potential for trade diversion, often to more expensive suppliers in the EU. They seem to have been the main beneficiaries of this provision, as high tariff rates kept competitors from non-EU countries at a disadvantage. Had there not been the no-drawback provision, protectionist CEECs would have reconsidered the option of lowering their MFN protection to EU levels instead of giving rents (gifts) to EU suppliers.

Impact on Economic Performance

56The main returns from integration with a “northern” partner include institutional convergence, the enhancement of economic reform credibility, and improvement of business climate. These benefits appear to occur when a developing country that is already committed to a liberal regime becomes a party of the agreement. They increase the flow of direct and portfolio investment by reducing the risk that foreign investors face and improve a country’s business climate. The enhanced growth potential of a country results in higher growth of real GDP triggered by the increased inflow of FDI. By the same token, these arrangements have a potentially positive impact on the macroeconomic situation.

  • 39 A panel of experts for The Wall Street Journal Europe prepared these. See “Central European Econom (...)

57How has the integration process affected the CEECs? In order to address this question, one may start by asking if the European Commission has picked up the most institutionally advanced negotiation countries for accession. These countries are in bold text in Table 17.1. Columns 7 and 8 contain scores prepared by a panel of experts to describe a country’s attractiveness to business and the rule of law39. They can be used as a proxy for institutional advancement. Not surprisingly, the two are strongly correlated. Five first-wave negotiators are at the top in terms of both these variables, with Hungary and Poland leading the pack. While

58Latvia is close to Estonia in terms of the rule of law, it falls well behind in terms of attractiveness. Hence, countries most advanced in establishing market-supporting institutions are also most advanced in the accession process.

Table 17.1 Performance of Central and East European Countries: Selected Characteristics

Table 17.1 Performance of Central and East European Countries: Selected Characteristics

59Source: Derived from Havrylyshyn and Wolf, Global Development Finance (Washington D.C.: The World Bank, 1998); Economic Survey of Europe 1998, No. 1, (New York and Geneva: UN Economic Commission for Europe, 1998); and Central European Economic Review, Dow Jones, June 1998.

  • 40 Pietro Garibaldi, et al., “What Moves Capital to Transition Economies?”, (paper presented at the I (...)
  • 41 It is interesting to note that Russia has been the only net exporter of capital among transition e (...)

60Total capital inflows to transition economies during the 1990s were quite large in comparison to other developing countries40. They were also highly concentrated, with CEECs accounting for more than eighty percent of total inflows since 1992 and the balance going to other former Soviet republics41. FD1 inflows show similar distribution. From 1990 to 1997 all transition economies attracted around $64 billion in FDI, of which $15 billion went to the former Soviet republics (excluding the Baltic states); $41 billion, or sixty-three percent of the total, went to first-wave accession negotiators; with other European transition economies absorbing $8 billion.

61While all first-wave countries attracted more FDI than others (with the exception of Latvia, which had higher inflows per capita than Slovenia and Poland), Bulgaria and Romania obtained less FDI than Croatia. Hungary was clearly at the top. Considering Slovenia’s high GDP per capita and superior geographic location, the FDI was surprisingly low.

62What factors are responsible for this variation? Regional arrangements do not provide a full explanation. Such associates as Bulgaria, Lithuania, Romania, and Slovakia attracted fifty percent less than Poland, which is at the bottom of first-wave countries in terms of FDI per capita. On the other hand, associates are clearly at the top. Thus, the accession process is a necessary though not sufficient condition.

  • 42 Garibaldi, et al., “What Moves Capital”.
  • 43 Stijn Claessens, Daniel Oks, and Rossana Palastri, “Capital Flows to Central and Eastern Europe an (...)

63Institutional environment, the mode of privatization, and the record of servicing sovereign debt seem to be among the most important factors explaining the variation. Institutional environment especially appears to stand out. Using a vigorous econometric analysis, Garibaldi shows that the legal and political climate rather than macroeconomic fundamentals have shaped FDI flows to transition economies42. It appears that macroeconomic stability without a business-friendly environment is not enough to attract foreign investment. Claessens, Oks, and Palastri arrive at a similar conclusion, linking progress in economic reforms with FDI43. These conclusions find support in simple calculations of correlation coefficients between total FDI per capita from 1990 to 1997 (column 9 in Table 17.1), the rule of law (column 8), attractiveness to business (column 7), and inflation in 1997 (column 6). There appears to be a strong positive correlation between FDI and institutional parameters (0.67 and 0.68), and a very weak negative correlation (-0.27) with the rate of inflation in 1997.

  • 44 Bartlomiej Kaminski, “Foreign Trade and FDI in Hungary and Slovenia: Different Path-Different Outc (...)

64The choice of the mode and scope of privatization as well as debt-servicing record have favored Hungary44. Hungary opted for privatization to an outside investor and opened the so-called strategic sectors (telecommunications, utilities, and financial services) to foreign investors. Furthermore, the decision to avoid foreign debt default put to rest the debate about the “dangers” of foreign capital. Privatization-related FDI flows to Hungary accounted for around forty percent of total inflows. Long negotiations on Poland’s private debt under the aegis of the London Club kept investors away until 1993-94, despite the selection of a similar mode of privatization—albeit much less extensive in scope initially than in Hungary.

65The EU integration project seems to offer an explanation why CEECs have obtained so much more foreign capital than the economies of former Soviet countries, as it has provided special opportunities in terms of exploiting economies of scale associated with access to a large market. But it does not explain the variation among CEECs, since neither market access nor provisions concerning the right of establishment discriminate across EA signatories; these are roughly the same. Such observations seem to suggest that EU integration is at most a necessary, but not sufficient, condition. It serves as a credibility-enhancing mechanism insofar as the government is committed to liberalization of the economic regime. And it also provides insurance against government policies that are potentially hostile to foreign investors.

66No firm links about the benefits of integration can be established concerning macroeconomic performance. All first-wave negotiators adopted a radical approach (often misleadingly referred to as “shock therapy”) to economic reform, with some caveats. The Czech Republic implemented a radical macroeconomic stabilization program but did not extend it to microeconomic restructuring. So did Slovenia. On the other hand, Hungary followed gradualism in macroeconomic stabilization but adopted a radical approach to microeconomic restructuring. Estonia and Poland followed relatively radical paths in both policy areas. The EU did not seem to weigh in these strategic decisions.

67While inflation has been on the decline in all countries (as demonstrated in Table 17.1), Bulgaria and Romania, the only two countries that have yet to achieve a modicum of macroeconomic stability, still face triple digit inflation rates. Not all CEECs have been consistent growth performers (see columns 3 and 4 in Table 17.1). Even among the radical reformers, the Czech Republic, having recovered from the “transformational recession” in 1993, recorded a contraction in GDP in 1998. This appears to be the price for delays in microeconomic adjustment. Other first-wave entrants have been consistent growth performers and significant recipients of FDl.

  • 45 The Maastricht criteria include inflation, interest rates, budget deficit, government debt, and ex (...)

68Thanks to their growth performance, all first-wave entrants should be able to meet the Copenhagen criterion of adherence to the aims of the European Monetary Union. While not a single applicant would be able to meet the Maastricht “convergence criteria” in the near future, they all seem to have the macroeconomic underpinnings that assure price stability on a long-term basis45. These underpinnings include control of public expenditure as well as sufficient budget flexibility to deal with real shocks in a countercyclical fashion. In 1997 all first-wave negotiators would have met the public debt/GDP criterion, Hungary would have flanked on the fiscal balance/GDP criterion, and none of them would have met the inflation or long-term interest rate criterion. Both inflation rates and long-term interest rates remained stubbornly high.

69Although it would be impossible to assess the value of preferential market access in terms of contribution to the expansion of exports from CEECs, it seems that the impact has been significant. Since CEECs un-dertraded with the West before 1989, a sizable reorientation would have occurred with or without preferential agreements. This alone, however, probably does not explain the magnitude of the increase. Consider, for instance, that between 1989 and 1993 the value of aggregate exports of the Czech Republic, Hungary, and Poland doubled. Between 1993 and 1997 the value of exports of first-wave negotiators roughly doubled again from $25 billion to $50 billion

70l

Table 17.2 Exports of First-Wave Negotiators to the EU, Shares in Total (%), 1992-97

Table 17.2 Exports of First-Wave Negotiators to the EU, Shares in Total (%), 1992-97

71Source: Derived from EU trade statistics in UN COMTRADE database.

72Duty-free access gives an extra edge over competitors equal to the MFN tariff rate for a given item. Admittedly, the EU has an extensive web of preferential arrangements with many of its trading partners. Consequently, a number of preferred partners compete in EU markets on the same footing with products originating in CEECs. These agreements, however, do not cover such formidable exporters as East Asian countries (including China), Canada, the United States, and exporters with the potential to compete in many similar products, such as states that emerged from the dissolution of the Soviet Union. Exporters from these countries are subject to MFN treatment.

Conclusions

  • 46 It may be tempting to argue that NATO addresses the national security issue. NATO deals with binar (...)

73In one stroke the end of the cold war transformed the geographical location of CEECs from a liability into an asset. The dismantling of central planning has activated their reintegration into world markets driven not exclusively by politics but mainly by economics. The policy-induced process of “deeper integration” into the EU has provided them with the unique opportunity to shift to modern market-based democracies and simultaneously participate in European political and economic structures. Its notability stems from the full overlap of the economic interests of deeper integration into the EU with political and national security considerations46. This is a “win-win” situation for CEECs, but they have yet to capitalize on opportunities offered by EU integration.

  • 47 Schiff and Winters, “Dynamics and Politics”.

74In contrast to regional integration among countries at a similar level of development, which often entails economic cost to the participants though deemed desirable on political grounds47, the potential returns to integration into the EU combine both political and economic gains. The size of these gains does not depend on the EU’s “generosity”. It critically hinges on how a country approaches the integration process. When the process moves to a higher stage, the pressure on acceding countries to harmonize their regulatory frameworks not only accelerates, but becomes more structured.

75The discussion in this paper gives empirical support to the findings of research on north-south integration. The conclusions are presented along the dimensions of potential returns to a developing country entering into policy-induced integration with a “rich” country or a regional bloc composed of highly developed economies.

Liberal Reforms and Credibility of Commitment

76Policy-induced integration into the EU does not seem to have had a significant impact on reforms in CEECs. First, the EAs, establishing the process of deeper integration, were signed after CEECs launched their stabilization-cum-transformation programs. Second, the Association Agreements were devoid of incentives to reward CEECs for moving quickly in their transitions to market-based democracies. Rather, they offered easy exits and lacked a well-defined promise of membership. Finally, one finds both laggards and quick reformers among countries that have signed the EA.

77For slow and vacillating reformers, the “EU factor” has amounted to geographical proximity and market access provisions. For instance, such countries as Bulgaria and Romania have failed to take advantage of the opportunities offered by the EA. They not only moved slowly toward implementing the requirements of the acquis driven by the EA, but also failed miserably in achieving macroeconomic stability and micro-economic restructuring. If anything, this shows the congruence of transition and EA requirements.

78These observations seem to corroborate two findings of integration theory. First, in order to obtain high returns thanks to the enhanced credibility of reforms, a government has to be strongly committed to a liberal economic regime from the start. Second, the agreement has to be deep and extensive and contain transparent punishment mechanisms. Third, its initial impact works mainly through the “regional” liberalization of foreign trade.

Reduction of Risk and Foreign Investment

79Combined with the additional incentives of improved market access, the EAs have probably stimulated foreign investment inflows. There has been considerable variation among CEECs in terms of attracting FDI. Market access provisions and those related to the right of establishment for foreign firms have provided an incentive to FDI. But the EA was only a necessary condition. Microeconomic environment friendly to private business, the mode of privatization, and improvements in the rule of law seem to explain the variation in FDI flows to CEECs.

Impact on Foreign Trade

80Due to its size and geographical proximity, if not its policies, the EU was destined to influence developments in the European, formerly communist countries. For all of them the EU was a potential trading partner and source of capital and technology. However, this potential was not explored, and the members of the Council for Mutual Economic Assistance were their primary partners. With the collapse of central planning, the EU quickly emerged as their largest trading partner. This outcome was bound to occur with or without a network of special preferential arrangements.

81Yet policy-driven integration has helped CEECs shift their trade to EU markets, despite the rather timid initial response of the EU to the collapse of communism. It offered exporters preferential status vis-a-vis MFN suppliers. Expanding exports eased the pain of transformation, led to economic recovery in CEECs, and generated resources to buy imports.

Improved Macroeconomic Performance

82It seems that the EAs have had a positive impact on the macroeconomic situation, albeit only in countries which followed the path of radical reforms. Radical reformers experienced the fastest reorientation of foreign trade towards the EU and recovery of economic growth. Larger exports to the EU and larger inflow of FDI have contributed to higher growth of GDP.

Notes

1 The author gratefully acknowledges very helpful comments from Maurice Schiff.

2 CEECs here denote Central European countries, which formally applied for membership in the EU. These are Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.

3 D. Marsh and L Barber, “Morsels from a Groaning Table”, The Financial Times, 7 June 1993.

4 J. Pomfret, “Is Another Curtain Descending on Europe”, The Washington Post, 27 April 1993.

5 Václav Klaus, “The Ten Commandments of Systemic Reform” (occasional paper 43, Washington, D.C., Group of Thirty, 1993), 7.

6 Quoted in Maurice Schiff and L. Alan Winters, “Dynamic Politics in Regional IntegrationArrangements: An Introduction”, The World Bank Economic Review 12:2 (May 1998): 275.

7 Vincent Furchart, “An Analysis of the Logic of European Enlargements” (Paper presented at a conference, Bloomington, Indiana University, 14 April 1998).

8 Christopher Preston, Enlargement and Integration in the European Union (London and New York: University Association for Contemporary European Studies, 1997).

9 This does not apply only to North-South integration, as a failed coup in Paraguay illustrates. Presidents of Mercosur-member countries, acting upon a clause of the Treaty of Asuncion stipulating that democracy is a necessary condition of membership, threatened to oust Paraguay from Mercosur (THE Economist, 12 October 1996).

10 Composite paper reports on progress towards accession by each candidate country (Brussels: European Commission, 1999), 3.

11 See, for example, Patrick A. Messerlin, “The Association Agreements between the EU and Central Europe: Trade Liberalization vs. Constitutional Failure”, in Trade, Payments and Adjustment in Central and Eastern Europe, eds. J. Fleming and J.M.C. Rollo (London: Royal Institute of International Affairs and European Bank of Reconstruction and Development, 1992) and Patrick A. Messerlin, “The EU and Central Europe: The Missed Rendez-Vous of 1992?”, Economics of Transition 1:1 (1993); L. Alan Winters, “Should Eastern Europe Feel Privileged with Its Limited Market Access to the European Community?”, Transition, The World Bank 4:8 (1993); and Alan Winters, “Expanding EC Membership and Association Accords: Recent Experience and Future Prospects”, in Regional Integration and the Global Trading System, eds. K. Anderson and R. Blackhurst (New York: Harvester Wheatsheaf, 1993).

12 Winters, “Limited Market Access”.

13 This should not imply transplanting all institutions, but only those that would enhance potential for economic development.

14 With the benefit of hindsight, it is rather ironic that mass media and many politicians in both East and West examined the EA solely in terms of market access, thus ignoring its larger significance. See, for instance, Klaus, “Ten Commandments”.

15 Gerhard Pohl and Pirita Sorsa, “European Integration and Trade with the Developing World”, Policy and Research Series No. 21 (Washington, D.C.: The World Bank, 1992), 56.

16 H. Kramer, “The European Community’s Response to the ‘New Eastern Europe,’” Journal of Common Market Studies 31:2 (1993

17 These institutional and regulatory requirements are similar to the treaty between the EU and EFTA, establishing in 1992 the European Economic Area. In a marked contrast, however, the Europe Agreements proscribe the free movement of labor during the first five years and, after that time, promise only an examination of the situation.

18 Messerlin, “The EU and Central Europe”, 98.

19 According to this view, the EA has granted the EU almost unlimited opportunities to use nontariff barriers. See for instance Sylvia Ostry, The Threat of Managed Trade to Transforming Economics (Washington, D.C.: Group of Thirty, 1993); Sandor Richter, “East-West Trade Under Growing Western Protectionism”, WIIW Forschungsberichte No. 198 (Vienna: The Vienna Institute for Comparative Economic Studies, 1993); Jim Rollo and Alasdaire Smith, “The Political Economy of East European Trade with the European Community: Why so Sensitive?”, Economic Policy (April 1993).

20 Brian Hindley, “Exports from Eastern Europe and Contingent Protection”, in Trade, Payments and Adjustment in Central and Eastern Europe, eds. J. Fleming and J.M.C. Rollo (London: Royal Institute of International Affairs and European Bank of Reconstruction and Development, 1992).

21 For an extensive discussion of the impact of the EA on foreign trade policies of first-wave entrants, see Bartlomiej Kaminski, Trade Policies in Central European Countries: Protectionist Temptation and the EU Facto (Geneva: World Trade Organization, 1999).

22 Note that even today many members are not in compliance with all provisions of the 1986 Single Market Program. The Maastricht criteria are not part of the Copenhagen criteria, although the adherence to its objectives is. Nor has the EC indicated that these would become part of them.

23 The essential internal market legislation of the White Paper is divided into twenty-three areas. These cover the free movement of capital, the free movement and safety of industrial products, competition, social policy excluding the social chapter of the Maastricht Treaty, agriculture, transportation, audio-visual, environment (with certain exceptions), telecommunications, direct taxation, the free movement of persons, public procurement, financial services, personal data, company law, accountancy, civil law, mutual recognition of professional qualifications, intellectual property, energy, customs and excise, indirect taxation, and consumer protection.

24 Bernhard Seliger, “Integration of the Baltic States in the European Union in the Light of the Theory of Institutional Competition”, Communist Economies and Economic Transformation 10:1 (1998): 95-109

25 The exceptions were Romania, which enjoyed lower tariffs thanks to its GSP status, and the former Soviet Union, whose exports were subject to more restrictive controls (Kaminski and Yeats, 1993). GATT membership did not make a difference because the EU conferred MFN status on all countries. CEEC exports were subject to the same tariffs as EU imports from non-European industrial economies, which, in turn, were considerably higher than those applied on imports from developing countries, or European OECD economies. Moreover, their exports were subject to restrictions imposed only on centrally planned economies. Because of the state monopoly of foreign trade, CMEA countries—including those which were GATT members—were defined as “state trading countries” exempt from GATT’s Article 13 abolishing quantitative restrictions. See Andreas Tovias and Sam Laird, “Whither Hungary and the European Communities?”, Policy, Research and External Affairs Working Papers (Washington, D.C.: International Trade, WPS 584, The World Bank, 1991), 15.

26 An important caveat is that many of these imports are subject to GSP preferential rates within limits and above them to MFN rates. As a result, their significance may be overstated.

27 Kaminski, “The Significance of Europe Agreements for Central European Industrial Exports”, Russian and East European Finance and Trade 31:1 (1995): 9-48

28 Inotai, 1993

29 Winters, “Expanding EC Membership”.

30 Elzbieta Kawecka-Wyrzykowska, “Poland”, in From Association to Accession: The Impact of the Association Agreements on Central Europe’s Trade and Integration with the European Union, eds. K. Mizsei and A. Rudka (New York: Institute for East-West Studies, 1995).

31 There were some notable exceptions. Poland suspended tariffs on all imports for almost a year in 1990. Estonia eliminated them entirely, while the Czech-Slovak Customs Union inherited relatively low tariff rates courtesy of the concessions made by the Czechoslovak communist governments in multilateral trade negotiations of the GATT (Kaminski, Trade Policies).

32 Philippe G. Nell, “Extension of the European Union/EFTA Regional Trading Bloc to Central and Eastern Europe”, World Competition 3 (1997): 131-

33 For the latter point, see Messerlin, “Association Agreements”.

34 Rollo and Smith, “Political Economy”.

35 Hindley, “Exports from Eastern Europe”, 145.

36 The impact of the rules of origin on trade between the CEECs and the EU is difficult to assess. They provide an extra incentive to trade within the Europe Agreements “preferential area”. The extent of trade diversion depends on differences in external barriers (Ann O. Krueger, “Free Trade Agreements as Projectionist Devices: Rules of Origin”, NBER working paper No. 4352 (Cambridge, Mass.: 1993). Since the CEEC economies probably have a higher effective rate of protection, one may expect CEECs’ importers to shift more to EU suppliers than vice versa.

37 Winters (1993), 13.

38 Nell, “Extension of the European Union”, 142.

39 A panel of experts for The Wall Street Journal Europe prepared these. See “Central European Economic Review”, The Wall Street Journal Europe (July/August 1998

40 Pietro Garibaldi, et al., “What Moves Capital to Transition Economies?”, (paper presented at the IMF conference, “A Decade of Transition: Achievements and Challenges”, Washington, D.C., 1 February 1999).

41 It is interesting to note that Russia has been the only net exporter of capital among transition economies over the whole period from 1992 to 1997 (Garibaldi, et al., “What Moves Capital”.

42 Garibaldi, et al., “What Moves Capital”.

43 Stijn Claessens, Daniel Oks, and Rossana Palastri, “Capital Flows to Central and Eastern Europe and Former Soviet Union” (Washington, D.C.: The World Bank (1998).

44 Bartlomiej Kaminski, “Foreign Trade and FDI in Hungary and Slovenia: Different Path-Different Outcomes”, Transition 6 (1998): 22-26

45 The Maastricht criteria include inflation, interest rates, budget deficit, government debt, and exchange rates. Consumer Price Index inflation should not exceed the three best performing countries in the EU (3-3.5 percent in 1996) by more than 1.5 percentage points. The interest rates on long-term government securities should not exceed the average of the foregoing economies by more than 2 percentage points. The general government deficit should not exceed 3 percent of GDP; gross debt of the general government should not exceed 60 percent of GDP; and the exchange rate (ER) must be held within the normal fluctuation range of the European Exchange Rate Mechanism (ERM) for two years without a realignment.

46 It may be tempting to argue that NATO addresses the national security issue. NATO deals with binary situations: war and peace. Membership in the EU—an economic superpower, after all—provides both a powerful shield against the use of economic statecraft by another country and tools of influencing developments outside the EU.

47 Schiff and Winters, “Dynamics and Politics”.

Table des illustrations

Titre Table 17.1 Performance of Central and East European Countries: Selected Characteristics
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Titre Table 17.2 Exports of First-Wave Negotiators to the EU, Shares in Total (%), 1992-97
URL http://books.openedition.org/ceup/docannexe/image/1897/img-2.jpg
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Auteur

Bartlomiej Kaminski is associate professor of government and politics at the University of Maryland and is affiliated with its Center for the Study of Post-Communist Societies. He also serves as a consultant for DECRG-Foreign Trade, World Bank.

© Central European University Press, 2000

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