December 2004 (Last Edition)

Centre for European Reform

Turkey’s fulfilment of the EU’s first set of political criteria qualifies the country to start negotiations. But EU membership is much more demanding than most of Turkey’s political and business elite realise. They hope that they can bargain away many of the onerous requirements for EU membership. But the accession process is not about finding common interests between equal partners. Rather, it is about agreeing a timetable for the candidate country to apply the EU’s laws at home. Most Turks will welcome the start of accession negotiations as confirming their country’s identity as a modern, European country. The political elite hopes that it will ensure Turkey’s future as a democracy with a stable economy.

But the Turks will find that the EU is not just a club based on a shared identity, but also a huge set of rules and regulations. Its day-to-day business is not about values but about fire safety in shops and hygiene standards in dairies. European integration reaches deep into a country’s policies and institutions. It affects not just high politics but daily life: how animals are slaughtered, how sewage is treated, and what products can be advertised on billboards. The EU covers foreign and security policies too, many of which are very sensitive in Turkey. For example, Turkey will have to demand visas from countries on the EU’s black-list, including from the Russian and Iranian tourists which contribute significantly to the Turkish economy.

Turkey will also have to align its policies towards neighbouring countries such as Iran, Syria and Armenia with those of the Union. Turkey will find it hard to accept such a strong external influence. The practical consequences of membership negotiations will be difficult, but the change in mentality required will be even harder. The Ottoman Empire was a great power. Britain’s experience shows how hard it can be for ex-empires to accept sharing sovereignty in the EU, especially if they go on thinking that it is primarily an economic union. The Turkish Republic created in the 1920s is a proud, nationalistic state with an established role in most international institutions. Its circumstances are different from the countries of Central and Eastern Europe, which were actively seeking outside help with their post-communist transformation when they applied for EU membership.

Turkey needs to enter the negotiations with its eyes wide open. The technicalities of preparing for EU membership will require an enormous effort. But the Turkish and EU governments also have to persuade the European public and the Turkish people that accession will benefit them in the long run. The eastward enlargement of the EU was an elite-led project that succeeded despite the half-hearted support of much of the public. Turkey’s accession cannot follow that example, because it poses much greater challenges and the negotiations will start amid unpopularity. EU leaders have to support their decision to start negotiations with a public campaign on why Turkey should eventually join. And Turkey’s leaders have to start explaining to their country that the long road to EU membership will be hard, but the destination will be worth it

Notre Europe

The analysis of the three fundamental documents of Franco-German co-operation enables us to make a sketch of three scenarios which seem to show the major directions of common action during the past years.

Firstly, Franco-German actions are motivated by different national interests and traditions. This divergence of interests may result in constructive common European policies under the condition that both partners share a joint goal for their political and economic projects. In this case, they are capable of drawing up “compromises by proxy” and of obtaining the support of most of the other member states. In the history of European integration, this has been the case for the implementation of the European Coal and Steel Community as well as of the Monetary Union. But the French-German initiative for ESDP at the European Convention had received a large majority and only failed due to the determined resistance of the United Kingdom. This counter-example and the outcome of the Franco-German propositions in economic and monetary policy – which were hardly constructive – underline the importance of a common vision.

Secondly, Paris and Berlin pursue a policy based on converging – if not identical – interests without, however, feeling the necessity to formulate compromises by proxy. The example of the Iraq crisis has shown the risk both countries run in case they end up as a minority and lose their influence unless they seek closer co-operation with their partners. Within the Union of 25 member states, an “offensive Franco-German harmony” requires a counterbalance by way of the deliberate integration of other partners. Otherwise, Paris and Berlin may harm European community achievements (such as in the debate on the SGP), or even their own legitimacy as the driving force of European integration.

Thirdly, as it will be difficult to reach compromises by proxy in the future due to the diversity of national interests in a Union of 25 and more, and considering that it will become impossible to force a policy deriving from Franco-German bilateralism upon 20-something partners, the only possible scenario will be the opening of this very bilateralism towards others. Such is the scenario of “foresighted compromises and initiatives” on the basis of flexible co-operations depending on the characteristics of each policy. The choice of Romano Prodi as a successor to the presidency of the European Commission is another example for a simple bilateral proposition having less and less chances of succeeding. Nevertheless, the development of ESDP in 2003 represents an example for the successful opening of the French-German co-operation.

We should not be misguided by all this: the bilateral capital evolved from the reconciliation between France and Germany from the 1950s on is unequalled in Europe. The European Union needs a Franco-German bilateralism capable of developing its institutional structures as well as of conceiving bilateral and European political projects. There is no question of replacing the Franco-German driving-force by a Paris-Berlin-London triangle or by an exclusive co-operation of the prominent member states. Adapting the Franco-German driving-force to the Union of 25 will require a systematic research of adequate partners depending on the political issues. Approaching one another in the search of common political and economic goals for the Union; considering the diversity and the legitimacy of interests held by other member states, be they large or small; building a solid foundation with partners without neglecting its own renewing forces: these three conditions build the framework for the maintenance of the legitimacy and the efficiency of the Franco-German driving-force within the enlarged European Union.

http://www.freedomhouse.org/pdf_docs/repucci.pdf

Turkey’s EU membership application is fraught with more difficulties than that of any other country to apply. The EU has been unwilling to rule Turkey out, but at the same time it has not fully committed to accepting Turkey as a member. At this point there is no definitive way to determine whether the EU has dealt with Turkey as it would with any other country with a similar human rights record but less controversy. It is only possible to evaluate what data exist and estimate where that should place Turkey in the accession process. By looking at data from Freedom House’s Freedom in the World survey of political rights and civil liberties, this article suggests an alternative way of evaluating Turkey’s position with respect to the EU. The evidence here suggests that Turkey is not yet as advanced in democratic reforms as other candidate countries have been, and therefore the EU cannot be blamed for its hesitance thus far. But it also indicates that Turkey is in a position different from all other candidates and that it could benefit from more active engagement than the EU is now offering. Turkey is a valuable ally to Europe and the West as a whole, and the EU should encourage positive trends in any way it can.

http://www.sussex.ac.uk/sei/documents/wp81.pdf

The first European Parliament elections in the new member states in Central and Eastern Europe demonstrated a profound paradox in terms of being a feedback process of European integration. At the elite level, the accession to the European Union has offered political parties and their leaders both new opportunities as well as a new set of issues with the emergence of a significant divide over the meanings of European integration. At the mass level, however, the first European Parliament elections were ignored by a vast majority of voters. This paper serves as a systematic analysis of the subject. Its objective is three-fold: to explain a lack of interest in the polls, to examine the domestic political dynamics leading to the elections and to consider the implications of the elections for the workings of the enlarged European Union. As for the prospects for European integration, it is important to note that one may no longer assume a supportive cross-party consensus in the new member states on the EU. Rather, popular antipathy towards the EU is expected to rise.

http://ec.europa.eu/economy_finance/epc
/documents/2004/candidate_countries_final_en.pdf

The economic gap between the EU and three candidate countries - Bulgaria, Romania and Turkey - is significant. Living standards, as measured by GDP per capita at PPP, are less than one third of the level prevailing in the former EU-15 – and about half of the average level in the new member states. Catching up with the rest of Europe in terms of income levels and productivity will thus be a very long term process.

The growth performance in the three candidate countries in the most recent years has been solid, after crises and turbulences in the second half of the 1990s. In 2003 real GDP growth reached 4.5% of GDP in Bulgaria, 4.9% in Romania and 5.8% in Turkey. Growth in Turkey has, for many years, been fluctuating sharply.

So as to preserve stability and prevent any recurrence of the crises of the past, the candidate countries will need to manage the remaining macroeconomic imbalances – relating mainly to inflation, government deficits and current account deficits – and complement that by addressing the remaining deep-rooted structural problems that may impair their capacity to stay on a path of strong growth, paving the way for improved allocation of resources in the economy at large.

There has been considerable progress on structural reforms in all three countries. It is vital at this stage that the authorities avoid the risk of backtracking on individual reforms already achieved, and that they maintain a momentum in securing effective implementation, in particular in terms of privatisation and restructuring, institution building, the improvement of the business environment, the upgrading of the legal system (including contract enforcement), the labour market, agricultural reform and the integration of the shadow economy into the formal sector. The financial sector also remains a challenge.

http://www.ecb.eu/pub/pdf/other/
bondmarketnoneumember_accctr2004en.pdf

The ECB has an obligation to provide statistical information of the highest quality to the public and this third edition of the publication “Bond markets and long-term interest rates in non-euro area Member States of the European Union and in accession countries” serves to contribute to the performance of this task. This publication aims to inform policy-makers and the general public about recent developments in and the current structure of the national bond markets. As a consequence of the enlargement of the European Union on 1 May 2004 when ten new member states joined, the coverage of this third edition has been extended to include all thirteen non-euro area EU member states and two accession countries, Bulgaria and Romania. Therefore, statistics for Denmark, Sweden and the United Kingdom have been included for the first time.

The publication now includes 15 national chapters, each of which is divided into five sections. Section 1 covers the size of the debt securities market by original maturity, sector of the issuer and currency of denomination. Section 2 provides an overview of activity in the primary and secondary markets, in terms of the methods for primary placements and the values and numbers of market transactions. This section also provides information on the liquidity of the secondary market. Section 3 focuses on certain features of
individual long-term debt securities issued by the general government. Section 4 covers interest rates in order to obtain information on potential proxies. Finally, Section 5 briefly addresses issues related to securities market regulation. Data included in this publication have been reported until the end of September 2004.

http://www.oecd.org/dataoecd/4/2/33923819.pdf http://www.oecd.org/dataoecd/4/1/33923878.pdfhttp://www.oecd.org/dataoecd/50/21/33934472.pdf

Following accession to the European Union the big issue for the Czech Republic is to strengthen growth prospects. Growth potential at present is somewhat above 3%, implying a moderate pace of catch-up to living standards in the EU and elsewhere. There is room for greater ambition in growth performance, and it is welcome to see this reflected in the programme of the new Czech government. This Survey underscores four main challenges. Fiscal consolidation is the dominant challenge for macroeconomic policy, and is not only necessary to cope with ageing and to bring down the tax burden but is also needed to fulfil euro-area entry conditions. A welcome programme of fiscal reform has begun, including proposals for a system of multi-year aggregate spending ceilings and significant expenditure cuts. However, to date, mainly revenue-raising measures have been implemented while the full impact of expenditure measures is yet to be realised. The attempt to secure broad political consensus on pension reform is commendable, but it must be underscored that whatever reform is finally implemented, it will have to bring considerable fiscal savings. Health-care reform also has to deliver savings, but concrete proposals have yet to be made. To facilitate assessment of the true fiscal position, extra-budgetary funds need to be more fully integrated in mainstream government budgeting procedures. Also, with the further decentralisation of public services, the need for good budgeting practices and accountability in regional and municipal governments is all the more important.

The Central Bank and the Ministry of Finance have formulated a transparent strategy for entering the euro area, that foresees minimising the time spent in ERM II. Annual reports will assess the economic conditions in relation to the Maastricht criteria and a request to enter ERM II will only be made if the probability of a positive first assessment by the EU authorities is high. The choice of a 3% inflation target for the run-up to euro entry is justifiable on medium-term grounds. However, there may be some difficulty communicating the consistency of this target with the Maastricht criterion for price stability. The Czech authorities should therefore pay close attention to how the Maastricht criteria are interpreted and applied by the European Commission and the ECB and adjust their communication strategy accordingly. Most of the catch-up in living standards will have to come from boosting productivity growth. This means swifter re-allocation of resources across firms as well as stronger in-firm productivity growth. While the Czech Republic is a strong competitor for attracting foreign direct investment, policy towards poorly performing firms and business start-ups has problems, slowing down the exit and entry of firms. Bankruptcy procedures are cumbersome, often long and usually end up in liquidation, with asset stripping not uncommon.

Reforms have long since been planned, and it is welcome that new legislation looks finally set to go ahead. The legislation aims at strengthening the role of creditors, speeding up proceedings and allowing composition to play a bigger role. Likewise, efforts to streamline business registration are welcome and should be implemented as soon as possible. The general business climate is also damaged by issues in network industry competition, as some services, notably the internet, are expensive in international comparison. Mobility between jobs and regions is weak. Administrative extensions of collective wage agreements, strict employment protection legislation (EPL) on individual dismissals, rent control, severe poverty traps (particularly for families) and a high tax wedge have contributed to considerable long-term unemployment. The Roma population is hit especially hard in this respect. Migration is to some extent mitigating the labour market rigidities with Slovaks filling skilled vacancies and other Eastern Europeans (mainly Ukrainians) taking up unskilled jobs that are unattractive for locals. Tackling the unemployment problem requires measures across a wide front, but most notably a social benefit reform is needed along with reduction in the tax wedge as well as easing of EPL. The widespread social and economic exclusion of the Roma needs more attention, particularly in the education system. A more open immigration policy is needed to address immediate issues such as the inconsistency between granting work permits as well as for better alignment of immigrants’ skills with those needed on the Czech labour market.

http://wiiw66.wsr.ac.at/cgi-bin/t3cgi.exe
/publ/lastpubl.taf?_function=
detail&BERICHTLAND_uid1=RR311&rabatt=&_
UserReference=8916A9BE124B487C41B1CB49

Since the late 1990s investors have been faced with new challenges due to changing locational characteristics in the Central European transition countries. Export demand became the main driving force of manufacturing FDI as opposed to local-market penetration in earlier years. In addition, increasing production costs drove investors to relocate or upgrade their subsidiaries. FDI effects on structural upgrading can be traced by using a combination of various approaches and sources of information: microeconomic, sectoral and macroeconomic. In the microeconomic approach, we rely on findings of case studies showing the close connection between the competence of a subsidiary and its chances for upgrading. At the macro level, changes in the industrial distribution of FDI stocks are analysed. For further industrial characteristics we rely on a database comparing the performance of foreign investment enterprises and domestically owned enterprises. Shifts of capital, labour and investment of foreign investment enterprises support the existence of a 'flying geese' development model. Transnational companies located low and low-medium-tech export-oriented subsidiaries in the low-cost Central European transition countries during the 1990s. Later on they moved the subsidiaries further to the East and rarely upgraded these activities in the more advanced countries. Manufacturing FDI in the new EU member states increasingly concentrated in the most internationalized industries such as the automotive industry and electrical engineering, which provide greater opportunities for upgrading and networking. The new EU member states successfully moved from low-tech to medium-high-tech industries, but their performance in the high-tech sector has been uneven and recently also hindered by the crisis in the electronics industry.

http://shop.ceps.be/downfree.php?item_id=1176

The European Union now faces an existential dilemma in the apparent choice to be made between over-extending the enlargement process to the point of destroying its own governability, versus denying one of its founding values to be open to all European democracies and possibly generating negative effects from the exclusion of countries in its neighbourhood. The newly emerging European Neighbourhood Policy (ENP) seeks a way out of the dilemma. This policy seems to pass through a familiar three-stage process for major EU initiatives: first the important idea enters political discourse, second the EU institutions take modest initial actions that are not up to the task and third, the EU accepts the need for credible action at a level commensurate with the challenge. The ENP has passed rapidly from the first to the second stage, with potential to move to the third stage, without it yet being clear whether the institutions will now go on to sufficiently develop their proposals. This issue presents itself as one of the most precise and significant challenges facing the new Commission presided by Mr Barroso. The new member states represent the EU’s newest resource, which could greatly contribute to a successful ENP.

http://shop.ceps.be/downfree.php?item_id=1173

Over the last few years, the EU’s discourse concerning border controls has presented a paradox – on the one hand, the EU promotes good neighbourly relations, while on the other hand it emphasises the need to strictly implement the Schengen acquis on border controls and visa regimes. The main underlying obstacle to a good and open partnership between the EU and the candidate states, and in turn between the enlarged EU and its neighbours, is a lack of trust towards the EU’s neighbours. One major challenge now for neighbours such as Ukraine, Moldova and Belarus is how to convince the EU that they can be good partners in fulfilling the objectives of Schengen and protecting the EU’s interest with respect to who comes in and out of its external borders.
The two main questions on which this working paper is centred are: To what extent can there be flexibility in implementing Schengen rules to prevent marginalising the new EU neighbours as a result of fears about ‘threats’ moving westwards across borders? What can the EU neighbours do in the short, medium and long term to promote trust and to one day hope to come off the Schengen ‘negative list’ with respect to freedom of movement?