EU Expansion Moves Closer to Reality

Step by step, a Europe once divided by an Iron Curtain is inching ever closer together.

Faculty members at Wharton and other analysts say the planned enlargement of the European Union looks increasingly certain  with the admission of 10 countries in 2004, most of them former communist nations in Eastern Europe  although serious hurdles remain to be overcome.

 Smaller countries need the EU, says Bruce Kogut, professor of international management at Wharton.  Some of these countries are still in the process of defining themselves. They know they don t want to be Russian, but they are not sure about their national identities. If not for the EU, it s hard to see how they can make it.

 The expansion of the EU into the former Soviet bloc has been on the table for the past decade, adds Geoffrey Garrett, a former management professor at Wharton and now vice provost and director of the UCLA International Institute in California.  The main impetus to Eastern expansion is to reintegrate Europe politically after the Cold War.

The uncertainty that always seems to surround the nature and pace of EU expansion was evident in the last few weeks. On Oct. 8, Romano Prodi, president of the European Commission, the EU s executive arm, announced that the commission expected that 10 countries would meet certain criteria and be able to join the EU by 2004. The 10 include former communist countries  the Czech Republic, Hungary, Poland, Slovenia, Lithuania, Estonia, Latvia and Slovakia  plus Malta and Cyprus.

Prodi s statement made worldwide headlines, but doubts immediately arose about whether the project was in jeopardy.

Voters in Ireland were scheduled to vote in a referendum on Oct. 19 whether to approve the Treaty of Nice, which sets the rules for EU expansion. (Ireland is the only EU country required by its constitution to hold such a vote.) The Irish in 2001 had rejected the treaty, by 54% to 46%, which led to apprehension in Europe s capitals that another no vote could be in the offing  a vote that could derail expansion. But the Oct. 19 vote was overwhelmingly in favor of the treaty. Some 63% gave their approval following an intense campaign. The vote means that all 15 members of the EU have ratified the treaty.

According to Bertie Ahern, Ireland s prime minister, the vote ensures that Ireland  remains in the heart of Europe, where we belong. Leszek Miller, Poland s prime minister, announced he would drink a toast to Ireland.

But there are still potholes to be negotiated if the EU is to increase its membership from 15 to 25 in one  big bang in less than two years time. For instance, the Netherlands, an existing EU member, has shown some signs of opposition. The Dutch government  now being led by a caretaker prime minister following the collapse of a three-party coalition on Oct. 16, in part over how to pay for EU enlargement  has voiced concern about whether some of the 10 applicants meet the political and economic criteria for admission.

In addition, negotiations over how the EU will finance the accession of the 10 candidates must still take place. It also is far from certain that current EU members will welcome the 10 newcomers with equal fervor. These issues and others related to enlargement were expected to take center stage at an EU summit set to begin on Oct. 24.

 The important thing to say about the political and economic criteria is they can be negotiated; some countries have long met these criteria, Garrett notes.  But admitting these countries is really going to upset some pretty fragile compromises in the existing countries.

One problem, according to Garrett, is the controversial Common Agricultural Policy (CAP), under which the largest portion of EU s budget is spent on farm price supports.  The money goes to prop up arguably quite inefficient agricultural enterprises in some large countries, most notably France. If you admit Poland, which has lots of farmers, you can t give them the same agricultural supports that you give to existing members, or else you break the budget. This internal pressure on the CAP is a very big deal.

Wharton finance professor Franklin Allen says he hopes that the EU will eventually reform the CAP, which he calls  one of the worst things that we have in the world. The U.S. is bad enough, with President Bush s recent farm bill, but the Europeans are far, far worse. It s much more efficient to be growing wheat in Argentina than Europe but because European farmers are so heavily protected, it just doesn t happen. The West always says globalization is great, but in an area where emerging countries excel  like agriculture   they are closed out of the rich world s market.

Another problem is subsidies. The second largest component of the EU budget gives development assistance to parts of the Union. Ireland s economy has been a major beneficiary of such assistance  which has accounted in large measure for Ireland being touted as the  Celtic Tiger in recent years  but Spain, Portugal, Italy and Greece have also benefited.

 If overnight, Eastern countries are admitted they would be eligible for all this assistance as well, Garrett says, and that makes some current EU members uneasy. Indeed, EU officials and representatives of the 10 countries applying for admission recently expressed disagreement over subsidies to struggling Eastern European industries.

A third obstacle centers on politics. EU countries are given weighted votes when it comes to deciding EU policies, and under the Nice treaty more voting power is to be given to large countries. Admission of the 10  will dramatically change the balance of political power and create new coalitions, Garrett suggests.

In the new EU, Poland and Spain would be the fifth and sixth largest members and would receive the same voting weight, just a bit behind Italy, France, Germany and the United Kingdom. If the newly admitted Eastern European states voted as a bloc with southern European countries, they could veto policies favored by the powerful countries in northern Europe.

 This is potentially very destabilizing for current EU, says Garrett.  These internal dislocations largely explain why this accession process has been so drawn out.

Although all 10 countries want to join the EU, some may find drawbacks to becoming part of a heavily bureaucratic organization, according to Daniel J. Mitchell, senior fellow in political economy at the Heritage Foundation in Washington, whose research focuses on tax policy and economics.

 A lot of these new countries, like the Baltic states [Estonia, Latvia and Lithuania], have free-market policies; Estonia doesn t even have a corporate income tax, Mitchell says.  They ve had tremendous economic progress by following this market-oriented path. And there s no question that these countries are going to lose some of that cutting-edge, free-market policy entrepreneurship once they join the EU. I have great admiration for what a lot of the Eastern European nations have done and I worry that once they join the EU it will be like getting traction in mud because of interference by Brussels, the EU s headquarters.

A larger, more muscular EU could mean increased friction with the United States, adds Mitchell.  There s already [significant] tension between the U.S. and Europe. A lot of it would exist whether or not there is something called the EU. Europeans have an almost cult-like belief in multi-lateralism now, which expresses itself in Europe s dealings with the U.S. We re fighting over an international criminal court, tax harmonization, the Kyoto treaty on global warming. No single issue is a major conflict but all of them together are signs that the U.S. and Europe aren t as buddy-buddy as they used to be. The bigger the EU gets, the more aggressive it s going to be to offer a counterweight to our Anglo-Saxon economic model. The bigger the EU, the more likely we ll have conflicts with Europe  not as enemies but in having different priorities and different values.

Asked if an enlarged EU would be good for the U.S., Wharton s Kogut responds:  It depends on what you think is the right role for the U.S. in the world. If there is a larger Europe with a potentially united currency zone, it would have influence on international monetary policy and the role of the dollar in world trade. But it s always in the interest of the U.S. to have countries growing. If expansion has a positive economic impact, it s good for the U.S. It s not a zero-sum game. The U.S. won t lose with that.

UCLA s Garrett says a larger EU would result in  presumably unmitigated good for the U.S.  Europe has benefited enormously from foreign investment since the 1980s because mostly American money has decided that the European market is big enough to make it worth investing in. That would be even truer [with a bigger EU]. Some of these countries are really on the take-off curve in industrialization. The model may be like Portugal, which has done well in foreign direct investment in recent years.

But Garrett has reservations about whether the EU will be able to keep its timetable for expansion by 2004.  I don t know whether that date will happen, he says.  It s good that there s a committed date on the table and I imagine it will happen, probably on this timeline. But they haven t worked out the details. Really, the only deal that s acceptable to the current members is a deal in which the new entrants do not receive the same terms as the current members. Maybe the rules of the political institutions will have to be changed. Will the same institution designed for [the original] six countries of the EU work the same for 25 countries? Doing something about that will be remarkably difficult.

For his part, Wharton s Allen says that, despite the sometimes nasty disputes that arise in trying to enlarge the EU, the enterprise is worthwhile  for economic reasons, to be sure, but more so for political security.

 In terms of the economy, I think enlargement is a good thing in the long run. Most of these countries have very educated populations, and in 10 or 20 years it s quite possible we ll see them being right at the EU averages [in statistics that measure economic progress.] Think about what s happened in Ireland in the last 10 to 15 years. It s truly astonishing. It also will help solve many of the countries problems with pensions, particularly Germany. One could see over the next 10 to 20 years a large amount of immigration from Poland, Hungary, the Czech Republic and Slovakia into Germany. That will solve the skewed population problem that creates the pension problem  too few young people in the workforce for each retiree.

Mostly, Allen adds,  I think it s a good thing politically. It takes Europe back to where it was before all the terrible troubles of the 20^th century.