EUROPEAN UNION AND CENTRAL AND EASTERN EUROPE

1
EUROPEAN UNION AND CENTRAL AND EASTERN EUROPE

• For most of 20th century Eastern and Western
  Europe have been isolated from each other
• Collapse of Soviet style communism in early 90s
  however has led to radical shift in the
  relationship opening up prospects of a
  significantly enlarged EU
• Enlargement however not a straight forward task
  due to number of candidates for entry, the
  overall area involved (increase of 34) and
  overal poulation (105 ml)
• In 2002 after a decade of reforms per capita
  income in the CEE applicant countries was less
  than 40 of EU average
• Many changes were required in applicant countries
  before membership of EU could be considered
• Role of EU has been a little ambivalent
  alternating as between encouragement of reform in
  CEE countries coupled with a desire to protect
  existing members interests.

2
LEGACY OF COMMUNISM

• Closed nature of socialist economies
• - producers isolated from external competition
• - unable to benefit from foreign investment
• - currency values bore little relationship to
  market worth
• - rerstriction on exports to the West
• Crisis following collapse of Communism
• - as intra-COMECON trade was responsible for
  40-50 of industrial exports,
• there was a severe decline in overall
  trade due to lack of industrial
• competitiveness
• - erosion of financial position due to ending of
  hidden subsidies from Soviet
• Union
• - Kuwait war inflated world oil prices
  aggravating situation in CEECs
• - privatisation of inefficient state industries
  led to mass unemployment
• - the lifting of price controls led to
  considerable inflation in many countries
• - output initially declined sharply as
  inefficient economies became exposed to
• market forces

3
AGENDA FOR REFORMS

• Task of privatisation has proven extremely
  challenging owing to the precarious state of the
  European ex-socialist economies
• Problems ranged from technical difficulties such
  as lack of capital markets and credit systems to
  the need to change behavioural patterns at all
  levels of society
• Also involved the quick need to create jobs with
  high value added and wealth creating capacities,
  improving labour productivity and sustained
  technological progress to increase national
  competitiveness
• First necessary step is economic stabilisation
  which requires adapting existing economic
  mechanism to standards of capitalist system
• Second element is a radical institutional refoem
  aimed essentially for restoration of private
  property and competition, and ending of
  monopolistic position of former producers
• Third element is capacity restructuring in the
  shift of capital and labour from machine building
  to consumer goods and from industrial production
  to services

4
EARLY DIFFICULTIES

• Immediate experience of marketisation proved to
  be quite disappointing with problems e.g. falling
  output, rising unemployment, hyperinflation even
  greater than anticipated
• Reforms included monetary and fiscal
  restrictions, price liberalisation, devaluation
  of domestic currencies and wage guidelines
• Shock Therapy has been effective in eliminating
  pervasive shortages of consumer goods but poverty
  has grown while a relatively small group with
  very high incomes has emerged
• Manner in which measures have been applied has
  varied considerably from country to country with
  more succes achieved in Poland, Hungary and Czech
  Republic whose economies have grown rapidly since
  1994
• However even here they are now only returning to
  the their 1989 level of GDP

5
CHALLENGES OF MARKETISATION

• Three major adjustment problems
• Inflation
• - price liberalisation at an early stage caused
  dangerous levels of inflation
• in many countries e.g. in Bulgaria
  inflation was over 150
• - then attempted anti-inflationary policies
  added to industrial recession
• Unemployment
• - unemployment rates have risen dramatically
  creating social tensions in
• countries previously used to full
  unemployment rising from zero to over
• 7 ml. by 1995
• Deindustrialisation
• - dramatic drop in consumer demand due to tight
  fiscal and monetary policies
• - real wages dropped by 25-30 in several
  countries staying low since then
• - state enterprises found themseves deprived of
  traditional subsidies while being
• offered little time to adapt to
  market competition
• - securing new investment has proven difficult

6
PROBLEMS WITH PRIVATISATION

• Privatisation of state industry major issue in
  post-communist countries
• In 1990 share of industrial employment in
  state enterprises (employing more
• than 500) 43 in Czechoslavakia, 86.9 in
  Poland, 74.5 in Romania and
• 72.1 in Bulgaria
• - also very narrowly specialised with only one
  producer of most products
• Two main ways of handling problems
• Quick marketisation through using - as in Czech
  Republic - the voucher scheme
• through actions where billions of assets of
  state enterprises were distributed to
• millions of new shareholders
• - however many remaining difficulties
  associated with this approach
• Prior restructuring implicit in privatisation
  programmes of Poland, Hungary and
• Bulgaria
• In (East) Germany however is only example
  here of where a properly
• thought out approach existed where all stat
  companies were placed in care of
• a state agency The Treuhandandanstalt.

7
EXTENDING EU MEMBERSHIP

• Decision towards eastern enlargement of EU taken
  at Copenhagen Council in 1993 where any countries
  that desired would be allowed to become members
  of EU
• Three criteria laid down for future members to
  meet
• - stability of institutions guaranteeing
  democracy, rule of law, human rights and
• respect for minorities
• - the existence of a functioning market economy
  as well as capacity to cope with
• competitive pressure and market forces
  within the EU
• - the ability to take on the obligations of
  membership including adherence to the
• aims of political, economic and monetary
  union
• In 1998 the EU formerly launched the accession
  process covering 10 countries
• - has created strains in applicant countries
  through need to undertake costly
• deregulation measures
• - has had considerable implications fro EU
  reform of CAP and structural funds
• - also major implications in terms of
  institutional reform of Community

8
ANTICIPATED GAINS

• In the long run the EU has much to gain from
  aiding the reconstruction process in
• Central and Eastern Europe
• A strong boost to foreign direct investment which
  has already grown significantly leading to rising
  training and skills standards, productivity
  improvements, technology transfers, modernised
  plant and equipment etc.
• More confidence in the political and economic
  futures of the new member states with legal
  reforms enabling businesses to make longer-term
  decisions on strategy and investment
• Keener international competitiveness in both new
  and old member states
• Increased cross-border trade between new and old
  member states
• CEECs now have potential for rapid growth as they
  progress towards market economy

9
EU AND RUSSIA

• Though Russia is a huge country rich in resources
  and industrial capacity, its economy remains in a
  very precarious position with the transition to a
  market economy remaining extremely slow
• A number of unresolved political issues, confused
  legal environment and growing protectionism
  leave a considerable gap between Russia and
  economies of EU states
• Though foreign investment is increasing in Russia
  it is still small be comparison with investment
  among former socialist countries such as
  Hungary, Poland and the Czech Republic
• Significant capital flight from Russia
  demonstrating lack of confidence in domestic
  economy
• Natural resources (natural gas, oil and metals)
  only profitable sector accounting for 46 exports
  in 1996