EUROPEAN UNION: New members may find EU loses allure

Analysis

The ten new members of the EU have already become part of the Single European Market owing to steady trade liberalisation and foreign direct investment (FDI) from Western Europe over the past 15 years. The immediate impact of accession on their economies will thus not be dramatic: they have been competing in industrial trade since about 1998, and FDI is already at 4-7% of many countries' GDP, so is unlikely to spike after joining. However, over the longer term, their fast-growing economies and low-cost labour forces are likely to attract steady inflows of investment (see EASTERN EUROPE: Region well placed to attract FDI - August 9, 2002), and they should benefit greatly from EU membership. The greatest challenges in the short to medium term will be in fiscal policy.

Fiscal troubles. Fiscal pressures in Central and Eastern Europe are not primarily the result of EU accession. Governments have to reform their relatively generous and badly targeted welfare systems to put their public finances on a sustainable footing in the medium to long term (see EASTERN EUROPE: Fiscal challenge for Visegrad four - May 28, 2003). However, the new member states will now also have to spend more on the things the EU wants, such as environmental standards and infrastructure, making less money available for popular items such as education and healthcare.

In addition to making contributions to the EU budget, the new members' finance ministries will have to find additional money to co-finance investment and aid projects under the structural and cohesion funds. Farm subsidies under the Common Agricultural Policy (CAP) often have to be pre-paid from the national budget and it can take time before Brussels reimburses the money, while the Polish and Lithuanian governments have promised to top up the subsidies to farmers with funds from their national budgets.

At the same time, the new members will be trying to qualify for euro-area membership. They will have to reduce their budget deficits to the 3% of GDP required for euro-area entry from their current levels of around 5-7%. The new members cannot join the euro-area for at least two years after EU accession -- and they are likely to join at different times, with some not adopting the euro until after 2010 (see EASTERN EUROPE: Euro-area entry risks further delay - October 29, 2003). Their finance ministers will find it extremely difficult to reconcile the additional expenditure pressures from accession with the need to consolidate public finances to prepare for the euro. The fact that the fiscal crunch will coincide with accession could cause voters to blame the EU for spending cuts, even if much of the trouble is homegrown.

Policy preferences. A few issues unite the Central and East European members -- they are all likely to favour financial transfers to poor regions, for example -- but they have different views on many others. The unifying factor of being candidates will dissolve after accession. Other splits in the EU -- for example, between big and small, Atlanticist and European -- are likely to become much more important than old versus new members (see EUROPEAN UNION: Enlargement brings reform into focus - May 3, 2004).

The new members are unlikely to be interested in all areas of EU activity. They are finding it difficult to define their interests in many EU policies, and it will take a few years before they are fully engaged in every part of EU business. They are unlikely to form a bloc on most issues (see EASTERN EUROPE/EU: Candidates want bigger budgets - December 17, 2002). Rather, they will team up with existing members depending on the issues at hand. Enlargement could thus change the debate in areas such as tax harmonisation or defence policy. For example, Poland will join the United Kingdom in opposing tax harmonisation and supporting NATO, but could be a friend of France in wanting to maintain a large EU farm policy.

It is already clear that the new members are unlikely to be always meek 'policy-takers', especially Poland. They will bring new ideas and priorities to a number of areas:

• The budget debate over the next two years will be the first big test of how feisty they will be as member states (see EASTERN EUROPE/EU: Members-to-be fear funding squeeze - February 16, 2004).
• They have a decade of experience of economic reform and democratisation -- so could become impatient with the EU's slow progress in structural reform.
• Several of them have active relationships with the Unions' new neighbours, which will be an asset in EU foreign policy. Poland's engagement with Ukraine will make Warsaw a strong advocate of a more active eastern policy for the Union, while Hungary will contribute to EU thinking on its southern neighbours in the Balkans.
• The new members are instinctively Atlanticist, although cautiously supporting the development of European foreign and security policies (see EASTERN EUROPE/EU: New members reluctant on EU defence - November 13, 2003).
• In their approaches to European integration, the new members are unlikely to be as federalist as the Benelux countries. Most of them are concerned to ensure that the large member-states do not dominate the Union.

Initially, the new members might behave rather like the Netherlands, generally following mainstream opinion in the Union, but occasionally fighting for issues that really concern them. However, as their experience of the EU grows and their policy preferences become clearer, they are likely to upset many of the long-standing political alliances in the Union, on issues ranging from foreign policy to agriculture. In all of these areas, governments will find it harder to compromise with their EU partners if populist parties at home demand tough stances.

Populist politics. Populist parties are gaining ground in several new member states, and many of them are winning support by campaigning against elements of EU membership. In Poland, for example, Andrzej Lepper's anti-EU Samoobrona (Self-defence) party has moved from the fringes of party politics to top some recent opinion polls (see POLAND: Widespread discontent favours nationalists - April 14, 2004).

The fringe parties which attacked the EU in the 2003 referendum campaigns (see EASTERN EUROPE: Right to tap accession disappointment - August 12, 2003) have had considerable success in frightening the most vulnerable sections of the population -- the poor, the elderly, and rural voters -- into thinking that prices will rise as a result of EU membership. The EU will be an obvious target after accession as few of the benefits of membership will be immediately obvious to the public (see EASTERN EUROPE/EU: Doubts increase as accession looms - April 6, 2004).

At the same time, the costs of membership will become more visible soon after accession (see EASTERN EUROPE/EU: Accession poses risks and rewards - January 20, 2003). The Commission is still working hard to ensure the implementation and enforcement of EU rules and regulations. It is even threatening to use the 'safeguard clauses' negotiated at the Copenhagen summit -- for example, it can suspend trade in agricultural products if hygiene standards do not improve in East European abattoirs and meat-packaging plants (see POLAND: Food firms ready to compete in enlarged EU - April 22, 2004) -- although this would be very much a last resort. These costs -- alongside the fiscal problems -- will provide a ready target for opportunist politicians who want to blame the EU for their countries' economic woes.