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 90’s 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 CEEC’s - 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