EU Enlargement.
No ‘big bang’, but a smooth transition

On 1 May, the Single Market expanded to 25 countries and more than 450 million people, further reinforcing the EU’s position as a major world trading bloc.

For the ten new countries – Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia – joining the EU marks the culmination of more than a decade of economic and political reforms. For the economies of Central and Eastern Europe, it marks a major step along a journey that began with the fall of communism, was accelerated through the EU transition process launched at the Copenhagen Summit in December 1993, and was concluded with the Accession Treaty signed in Athens on April 16th 2003, leading to formal membership in May of this year.

Considerable effort

Yet this enlargement has not been accomplished without enormous effort. Many of the accession countries have had to transform their economies from a command based system to a market system. All of them have had to take on board the imposing body of EU legislation, the 80,000 pages of the “Acquis communautaire”.

Central to the EU’s approach during negotiations with the accession countries has been the determination that enlargement must enhance the Single Market, not detract from it or undermine it. This underlying philosophy is reflected in EU insistence that any transition periods are minimal, and that effective implementation is vital.

Smooth transition

From a customs union and trade liberalisation perspective, preparations for Enlargement already started in the 1990s with the elimination of trade barriers through the ‘Europe Agreements’. These provided for bilateral free trade (with minor exceptions in the field of agriculture and processed agricultural goods). Trade with the new Member States was thus largely liberalised even before accession.

In relation to the Single Market the new Member States have had to complete a process of economic reform and industrial restructuring, together with the transposition of EU legislation and the establishment of the structures necessary to implement and enforce it.

The ‘accession-driven’ PHARE programme with an annual budget of €1,577 million has helped accession countries’ administrations acquire the capacity to implement the body of EU law, and helped them bring their industries and basic infrastructure up to EU standards.

Adapting to EU standards

Throughout the accession process the Commission has closely monitored the progress of the ten countries. Where necessary it has dealt directly with countries in bilateral meetings to help accelerate them in translating EU law into national legislation.

By 1 May, considerable progress had been made by the new Member States in transposing the EU Directives and Regulations into national laws, although inevitably there were some areas where laws or implementing regulations were not fully in place by the accession date.

Some accession countries have made more progress than others. Some states have even made more notifications of the transposition of EU Directives than some of the EU-15. Others still have a transposition deficit although it is unclear in some cases whether the problem is lack of complete transposition or, more simply, a lack of notifying legislation on time.

Corporate preparedness

In anticipation of accession, many EU businesses have invested heavily in the region. There has been a dramatic increase in the volume of trade between the accession countries and the EU.

Indeed, some of the benefits of enlargement are already flowing. The opening of markets and economic restructuring of economies in preparation for EU membership has in many cases led to strong economic growth.

A study undertaken just prior to Enlargement by Eurochambres and the Slovenian Business Research Association* indicated continuing strong support among the Central European business community for accession (89%), and an increased compliance with EU legislation.

Companies have made major progress in preparing for compliance with the relevant legal provisions of the EU. The percentage of companies that had not yet started their preparations decreased from 51% in 2003 to 41% in 2004.

The large companies, particularly those with export interests, have naturally made greatest effort to find out what is required under EU law. Companies in Slovenia, the Czech Republic and Estonia believe that they are best prepared. The Czech Republic and Hungary lead the field in the area of compliance with the general provisions of EU law, according to the survey. Preparations appear to be the most advanced in the sectors of financial services, agriculture, and manufacturing.

Benefits to all members

The expanded Internal Market offers businesses access to a very large trading area which itself should encourage investment. Increased domestic competition will force entrepreneurs to shape up and become more efficient.

The adoption of higher regulatory standards, notably in the protection of intellectual property rights, access to government procurement markets or in the field of competition, will better safeguard the interests of investors and traders in the new Member States.

Foreign direct investment in the new Member States can be expected increase.

With lower labour costs and in some cases lower corporate taxation than in the EU-15, the new EU members are, for the time being, very attractive to European as well as international companies seeking lower cost locations to serve the EU’s 455 million consumers.

Clearly, Enlargement should therefore result in a win-win situation: not only will the ten new members benefit from an enlarged Internal Market, existing members can also benefit over the coming years from the enormous opportunities, either by investing, or through access to a larger market.

Next steps

Despite this optimistic outlook, it is also clear that the ten new members still have some homework to do in the form of finalising their alignment to EU legislation and in enhancing their administrative capacity. The EU Commission will be closely monitoring this across the various sectors concerned and has also set aside support funding through the so-called Institution Building Facility which make available a total of €380 million over the next three years.

Whilst the new Member States settle in, negotiations with Bulgaria and Romania are continuing, with the intention that these two countries will join by 2007. Several Balkan Countries are under the Stabilisation and Association process and are also being prepared for European integration, whilst Croatia and FYROM have already applied for membership.

Negotiations with Croatia will formally open in 2005, but the preparatory work has already begun at full speed. Finally, a decision on Turkey’s application will be taken by the European Summit in December.

There is indeed a lot of work ahead of us and Enlargement will be part of the Brussels’ agenda for many years to come.

* fourth annual survey on corporate readiness for EU membership www.eurochambres.be