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Last Updated: Friday, 30 April, 2004, 06:23 GMT 07:23 UK
EU expansion: The end of the beginning
By James Arnold
BBC News Online business reporter

Latvian song contest
Is everyone singing from the same hymn sheet?

It may smack of cliche to point out that expansion of the European Union is not the end of a process, but rather a station along the way.

For the past decade, a batch of (mainly ex-communist) European states have been re-tuning their laws, upgrading their bureaucracies, selling off state property and generally aligning their economies as closely as possible to EU norms.

Their entry into the EU is a sign that this process has been successful.

But only up to a point: with a few slick exceptions, Central Europe does not look or feel Western yet, and the deeper you dig into the region's political and economic structures, the more obvious it becomes that the process of catching up has barely begun.

After the elation of 1 May, sticking with the programme is going to prove increasingly tough.

Could do better

At least they know where they stand: for years now, the performance of every EU aspirant has been measured against a yardstick known as the acquis communautaire - Brussels-speak for the union's entire corpus of directives, regulations and treaties.

In theory, a country cannot join the EU without having implemented the acquis in every particular; in practice, however, all 10 new members are joining with gaps in their record.
Warsaw street scene
Adjusting to a new pace of life

(Click here for a report card on the applicants' progress)

For the most part, these are distinctly minor: Poland is chided for its neglect of potato ring rot and wart disease, Lithuania for its sloppy fisheries inspection.

Painstaking bilateral negotiations over the past few years have secured get-outs and grace periods - Hungary, for example, does not yet have to allow foreigners to buy land.

Differences of opinion

These wrinkles will soon be ironed out. But more worrying, by comparison, are three potential clouds of trouble:

  • Labour markets are arguably the best-known area of concern.

    For most Westerners, the issue is one of keeping cheap and hard-working East European workers from pinching their jobs; most countries have accordingly raised temporary barriers against unrestricted immigration.

    Riga shipyard worker
    East and west, economies work differently
    The next step here will be problematic enough, not least because some new EU members may see freer labour markets as a way of siphoning off their legions of unemployed - at least one-fifth of the workforce in many places.

    The issue runs much deeper than the current migration scare, however. In the longer term, Central Europe is torn between two conflicting worries: that Brussels-mandated deregulation could cost thousands of jobs in its smokestack industries; and that fussy German-style labour rules could put off investors who value the region's flexibility and low costs.

    Agreeing a common position on labour among the 15 existing EU members has not yet proved possible; Eastern Europe, with its experience of communism, strong trade unions and high unemployment, is likely to be tougher still.

  • Expect a similar escalation of complexity in agricultural policy.

    Slovenian farmers
    For Central Europe's farmers, the outlook isn't pretty
    The EU-15 have at last reached some understanding that their historic subsidy policy cannot continue, but the same logic cannot be applied to the East's farmers.

    Central Europe does not subsidise its agriculture in the same production-oriented way as the West; instead, farmers tend to be exempted from vast swathes of regulation and taxation - an incentive for inefficiency and fiddling. Polish analysts reckon that only one-third of the country's 2.5 million registered farmers are actually working the land.

    Brussels worries that Central Europe has largely left its rural areas to fend for themselves. Its latest set of reports of acquis compliance are full of criticisms about insufficient farm regulation and low food-safety standards.

  • Most tricky - and arguably least publicised - of all is the region's progress towards adopting the euro.

    On the face of it, this looks pretty straightforward.

    Central Europe is keen on the euro, having little historic fondness for its kroons, zloty and forints. Few of the region's currencies deviate much from the euro; some are pegged to it. The eurozone's fiscal and monetary criteria are not too much of a stretch for most new members, especially since there will be at least another two years before they can join. And Central Europe's extensive trade links with the West are seen as a indicator that its economies are in lockstep.

    Fiscal deficits
    But there are difficulties. For a start, convergence may not be as close as many assume.

    Although the EU consumes the lion's share of Central Europe's exports, business cycles east and west are hopelessly out of synch. A working paper published last year by the European Central Bank found that only Hungary was perceptibly aligned, and the Baltic states showed no correlation at all.

    Fiscal policy could prove a stumbling block, too.

    Progress is being made in reducing deficits towards the eurozone's ceiling of 3% of gross domestic product.

    But to bring their economies up to scratch, new EU members need far more thorough fiscal reforms - cutting spending on inefficient state enterprises, raising spending on welfare and infrastructure. The region's tax base needs to broadened - legalised evasion is still rampant - and income-based taxes applied more fairly.

    In particular, Central European governments may have to reverse their policy of cheerfully slashing taxes to attract investment; Germany warned in March that it was sick of EU aid money being used to subsidise the low corporate tax rates that lure Western companies east.

Ups and downs

The political will to tackle these and other controversies is probably still there - although maybe not as firmly as at the height of euro-mania, four or five years ago.

Slovakian Audi factory
Will investors be spooked by EU-style reforms?
It may fade fast, however, especially if taxes rise and unemployment refuses to fall.

There are already signs of thinning patience. Slovakia's presidential election earlier this month was a run-off between two nationalist candidates (the milder of whom eventually won).

In Vaclav Klaus, the Czech Republic already has a Eurosceptic and tough-talking president. The far right is on the rise in Romania, and the agrarian left in Poland.

And although no out-and-out Eurosceptic party looks likely to form a government in Central Europe soon, the region's ceaseless pendulum swings in public opinion mean no government is given long to push through meaningful reforms.

There is still a long way to travel, and the road ahead looks beset with danger.

EU enlargement report card
What's good What's not
Czech Republic Economy and administration in sound shape Welfare and pension reforms required
Estonia Almost everything, especially free-market reforms Could improve labour law and equal-rights rules
Hungary Economic reforms are 'credible' Could do more to fight inflation; agriculture reforms still lacking
Latvia Free-market reforms almost complete Outmoded tax/customs regime; problematic environment for enterprise
Lithuania Free-market reforms almost complete Administrative standards need to be raised
Poland Strong tax and commercial law systems Many concerns over agriculture and fisheries; public expenditure must be reduced
Slovakia Rapid progress in free-market reform Worries over stability of financial system and fiscal policy
Slovenia Almost everything, especially free-market reforms Could do more to fight inflation
Source: European Commission reports

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