Round table: Bigger and broader, but will it be better?

By 2004, if all goes according to plan, the European Union will expand from 15 to 25 members. Is this a vital step on the road to the full unification of the European continent? Or is it the start of the collapse of the EU in its current form? What effects will enlargement have on the EU’s structure and its decision-making process, the European economy, its finances and its struggling currency? How will it affect Europe’s need to speak with a single, authoritative voice in world politics? And what other opportunities, risks and challenges – politically, economically and socially – does enlargement present? Global Agenda asked leading practitioners – bankers, economists, lawyers, consultants and academics – from member and candidate countries for their views  –

GLOBAL AGENDA Have the Irish referendum on the Nice Treaty and the Copenhagen Summit removed the last major obstacles to EU expansion?

KASPER BARTHOLDY The Irish yes vote on the Nice Treaty in October removes the most important obstacle to enlargement, and I certainly believe there is an overwhelming likelihood now that the remaining obstacles will be overcome.

MAURICE FITZPATRICK Probably not – various obstacles still remain. First, the countries seeking EU membership have to complete chapters required to demonstrate convergence in terms of various micro issues such as legal matters and regulations. Some countries still have several chapters open.

Second, most of the entrants must hold referenda before they can join. Past experience on this side of the old Iron Curtain suggests that referenda on anything to do with the EU are unpredictable beasts.

ROSS DENTON The yes vote has removed a significant obstacle from the EU side but the EU still has to settle a number of important constitutional and institutional questions relating to how to run an enlarged EU. Until the EU has in place a structure to run itself fairly and effectively a big obstacle will remain. The accession states also have a say in the matter, and if they do not get a deal they like, or if they see problems inside the EU, then I would counsel them to wait until they can get the deal they want.

ANNA KIUKAS Ratification of the institutional arrangements for an enlarged EU that the Nice Treaty entails is a necessary condition to enlargement but on its own is insufficient for an unobscured path to enlargement. Enlargement must also be supported by decisions on the Common Agricultural Policy (CAP) and regional aid, and each of the current and new member states has to ratify the Accession Treaty, either in a referendum or through a vote in parliament – over 30 votes in total. So we should not ignore the potential risks to enlargement from these sources.

GA Will enlargement create a new and improved Europe or will it destroy the existing Europe?

DENTON My heart says it has to be a new, improved Europe. My head is not so sure, particularly since the EU does not have a clear structure to run this enlarged Europe. Although the accession states will most likely join in any event, there must be some risk that the EU will become gridlocked.

KIUKAS The success of a wider Europe largely depends on whether EU institutions can adapt to an enlarged union. Already, with 15 members, decision-making can be politically complex – this will not become any easier after enlargement. Nonetheless, the EU has been creating value through its explicit task of guaranteeing peace and stability in Europe.

The prospect of joining the EU has been the driving force behind the vast structural reforms that the central and eastern European (CEE) nations have undergone in the past decade. Foreign direct investment inflows to the EU candidates in CEE have totalled $105 billion since 1989, productivity and real wage growth in CEE has been significant and the private sector share of these nations’ GDP has risen in many cases above western European levels. These advances must not be stifled or overlooked.

KAREN SMITH If enlargement results in a membership of 25 states, the EU will be a very different organization. On top of this, the EU is unique: it started as a customs union but its remit now extends to policy-making in areas as diverse as the environment, foreign and defence policy, asylum and immigration policy, and combating crime. A single currency circulates in 12 of the 15 member states. Community law is supreme over national law.

But more important, the grease of the integration process is reciprocity and mutual trust between the member states: they must trust that each will play by the rules and implement collectively agreed laws. Trust could be more difficult to maintain in a larger EU because it will include countries whose capacity to implement the rules is still under development, and because the current member states and applicant states might feel the conditions of accession were unfair.

A period of instability affecting the decision-making process is likely following accession; how long it lasts will depend on how well the member states can build the necessary trust between them.

MARIA WISNIEWSKA Enlargement will inevitably intensify the need for structural changes within the EU. From this point of view the enlargement could be perceived as an engine accelerating the EU’s modernization. The modernized – more flexible and effective – union seems a model of a new improved Europe.

BARTHOLDY Enlargement will lead to an overall improvement in the welfare of the citizens of Europe. The continent as a whole will benefit economically from enlarging the area within which trade and investment can flow freely. There will be examples of individual employees and companies that will lose out but there will be many more examples of employees and companies that will gain from EU enlargement.

The expansion of the EU will also help force the EU to undertake much needed reform of its scandalously detrimental CAP. The main negative consequence of enlargement is that decision-making within the EU will become even more of a mess than in the past.

FITZPATRICK In economic terms, enlargement should be good for trade, which in turn improves prosperity. Trade has been the cornerstone of the overall increase in global prosperity over the past 200 years or so. Overall, EU enlargement should boost prosperity in the existing 15 and probably even more so in the new 10, thus contributing to a new improved Europe.

In a wider sense, the feeling of people of my generation, born, say, five to 15 years after the end of World War II, that somehow countries east of the old Iron Curtain were not really part of Europe, should finally be eliminated, which has to be a good thing.

GA What is a realistic timetable for expansion and should Turkey be included in this timetable?

WISNIEWSKA As far as the 10 candidate countries are concerned, the accession timetable envisaged by the EU Council seems reasonable and justified. All the applicants fulfil the political criteria and are recognized as functioning market economies.

Bulgaria and Romania need more time to prepare to cope with the demands of the single market. Turkey has made notable advances in human rights protection and democratic reforms (for example, in August 2002 a law was passed scrapping the death penalty). Accession negotiations with Turkey could last for some time, but there shouldn’t be any non-resolvable obstacles.

SMITH This inevitable but indeterminate period of instability makes it quite difficult to predict when the next waves of enlargement will take place. It will be virtually impossible for the EU not to fulfil its promises to expand to Bulgaria, Romania and Turkey – and to the countries of south-eastern Europe (Albania, Bosnia-Herzegovina, Croatia, Macedonia, Serbia and Montenegro) – if they meet the conditions but making good on those promises will nonetheless be difficult.

KIUKAS Some delay in the first accession round – scheduled for January 2004 – is quite possible, given the issues relating to agriculture, competition policy and the ratification process.

The subsequent dates for enlargement largely depend on the progress that Bulgaria, Romania and Turkey make in adopting EU policies and amending their legislation. Turkey’s newly elected government will play a crucial role in this process. Encouragingly, the AK party has announced that EU accession is the main priority of the government programme. Even so, a clear roadmap towards accession will be crucial in order to maintain the reform momentum, which will ultimately benefit all parties. Otherwise, EU membership might not seem a credible aim.

BARTHOLDY There is now little doubt that 10 countries (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Malta and Cyprus) will join the EU in 2004 and that most of these countries will be able to adopt the euro as their currency a few years later.

The EU has now formally approved 2007 as the target date for Bulgarian and Romanian EU membership, and this looks realistic, especially in the case of Bulgaria. For Turkey, the EU seems to have become ready to open membership negotiations as soon as the country has made a bit more progress on human rights reforms.

DENTON The first wave should be over by 2004 and the next wave, which should include Turkey, should be around the turn of the decade. Given Turkey’s strategic role, the west, in particular the EU, cannot isolate it, but Turkey must realize that if it wants to join, certain principles must be adhered to, including respect for human rights and government by civilian authorities.

GA Is there any point in the Stability and Growth Pact any more?

FITZPATRICK Yes, but not in its current form. The Stability and Growth Pact has to be made more flexible. First, it should apply over an economic cycle, allowing larger deficits to be run when an economy is producing below trend capacity. Second, it should be more related to a country’s aggregate public debt/GDP ratio. Finally, borrowing should be allowed to fund investment.

It is particularly crucial that the Pact is linked to the economic cycle, since the effect of the one-size-fits-all European Central Bank interest rate, now at 3.25%, is that countries in recession have no opportunity to respond by relaxing monetary policy (by cutting interest rates). The only possible reaction to recession is via fiscal policy (by governments borrowing more, which device is of course blocked by the Pact).

This is particularly relevant to Germany, which – because it accounts for about one-third of Euroland output – has a decisive effect on all the economies around it. We calculate that the German economy needs an interest rate of around 0.6%, less than one-fifth of its actual interest rate. Denied any monetary policy flexibility, the German government desperately needs to reflate the German economy via fiscal laxity but is totally prevented from doing so by the Pact.

DENTON Not only is there a point in the Pact but it is vital to the long-term security of the euro and ultimately the EU itself. Unless politicians in the member states have strong and external constraints on their fiscal policy, they will simply adjust it to meet political needs, particularly in the run-up to elections.

KIUKAS Clearly, some kind of compromise is necessary here because it doesn’t make sense to expect new member states to limit their fiscal spending in the near term for the sake of the Pact. Nor do we think it’s excessive for these states to run a fiscal deficit above 3% of GDP given their stage of transition. Instead, a solution should be found to allow these countries to focus on growth without losing sight of lowering their deficits over the long term.

BARTHOLDY Something akin to the Pact is needed so that the eurozone can have some sort of framework for fiscal policy coordination. But the performance criteria in the Pact need to be redesigned to take into account a number of considerations that were ignored when it was introduced. One such consideration is that the tolerance limit for the fiscal deficit in a particular country should be linked to a measure of where that country is in its growth cycle.

WISNIEWSKA Important aspects of the Stability and Growth Pact – especially regarding fiscal policy – are not being fulfilled in Portugal and Germany, and there is a real danger of similar developments in other countries, especially France. However, it doesn’t diminish the role of the Pact as an important reference point or standard-setting mechanism. The members of the Union should be more observant as far as the Pact is concerned; attempts to soften the obligations imposed by the Pact don’t seem the right answer to today’s fiscal problems.

GA How will the issue of agricultural subsidies be resolved?

DENTON I hope that we take a sensible and pragmatic view that agricultural subsidies impoverish everyone except EU farmers. Farming is a business and has to treated like any other. Society in the EU will not collapse if we are allowed to import more and cheaper food. Maybe some politicians will lose their jobs but that is a small price to pay to open new markets for third-world farmers. However, I recognize that the supports cannot be withdrawn overnight or entirely. But they must be reduced dramatically in magnitude and coverage.

FITZPATRICK Farm subsidies paid via the Common Agricultural Policy soak up nearly one half of the EU’s ¤100 billion annual budget. Great strain will obviously be put on this budget as a result of new entrants. A wholesale review of the CAP was planned for summer 2004. But, as a result of a bilateral agreement between German chancellor Gerhard Schröder and French president Jacques Chirac in October, this review has been put back to 2006.

Additionally, Schröder and Chirac agreed that the total CAP budget should be kept within ¤50 billion a year in 2013, following a rise of just 1% a year in cash terms from 2006 to 2013. Since the new entrants will be entitled to ¤5 billion a year, the CAP budget will be under strain from 2004 onwards. In practice, in the absence of wholesale reform, which would probably be blocked by Chirac for domestic political reasons, I would be surprised if the CAP budget in 2013 is as low as ¤50 billion a year.

KIUKAS The Franco-German compromise reached at the end of October only caps the CAP expenditure in real terms at the 2006 level until 2013, with direct payments to the new members being phased in gradually. We don’t see this as a sustainable solution and EU accession candidates may well reject it. However, nor does there seem to be political will within the EU for a radical rethink of agricultural policy.

BARTHOLDY I think the most likely outcome is a fudge in the short run – a fudge that will defer any serious decision-making on this by another two years.

GA Will enlargement strengthen or weaken the euro?

BARTHOLDY In the long run, I think enlargement will strengthen the euro, as the new members are countries that have relatively strong productivity growth – countries whose currencies will appreciate in real terms not only against the incumbent member-countries of the eurozone but also against the US.

KIUKAS Enlargement is likely to have a weakening impact on the euro but over a long period of time. Legally, the countries cannot adopt the single currency during the first two years of EU membership and in practice it is likely to take at least three to five years, depending on the country. When the new countries eventually join the eurozone, the degree of weakening will depend on the nature of enlargement and how it will have affected the following:

• how much closer to the eurozone level the new members’ per capita incomes have grown. Nominal convergence without real convergence in the new member states would complicate monetary policy decisions for the ECB;
• whether there is a real reform of the Common Agriculture Policy;
• and how the Stability and Growth Pact is enforced.

What’s more, considerable uncertainty on all these issues seems likely to persist over the coming years, which could make the currency more vulnerable.

WISNIEWSKA Enlargement will create new investment opportunities in Europe. Thus enlargement could generate larger capital inflows to Europe and contribute to euro strengthening.

DENTON Enlargement will not strengthen or weaken the euro to any significant degree. The euro stands or falls by the overall strength of the EU economy, and that is not going to be affected significantly by enlargement. The euro may be more in demand as the EU market will now be more important, but, for example, we are not going to see countries adopt the euro as a reserve currency simply because the number of EU consumers has increased. If there is any marginal effect, I would expect the euro to strengthen.

GA Will enlargement make Europe a stronger or weaker force in world politics?

KIUKAS For the enlarged EU to be a stronger force in world politics, its decision-making process has to be more efficient. Furthermore, as long as some member states remain neutral – outside Nato – we doubt that military issues could be decided by majority voting. However, we believe that in other areas such as trade negotiations, climate talks and foreign aid coordination, the EU’s role will be strengthened.

BARTHOLDY From a short-run perspective (two to three years), enlargement will probably make the EU a weaker voice in international politics, simply because of the decision-making mess that enlargement will create. However, there is a fair chance that this mess will help push along the work on constitutional reform within the EU, possibly paving the way for a more effective decision-making process in the future.

FITZPATRICK It will make Europe stronger, since virtually the whole continent will be able to speak via one forum.

SMITH Enlargement could have both negative and positive effects on the EU’s role in the wider international system. On the one hand, enlargement increases the size of the world’s largest trading bloc, expands and strengthens its worldwide network of relationships, and could augment its voice in international negotiations and organizations.

On the other, it increases the number of potential vetoes of any common action and the possibility that the lowest common denominator of agreement will be even lower.

DENTON Enlargement is irrelevant to this political issue. The size of the market says nothing about the degree of influence on the political stage. The EU can only match the US, Russia, and China when it learns to speak with a single and authoritative voice.