NEW EU MEMBERS OF CENTRAL A ND E ASTERN EURO PE Europe Agreements (Association) Tibor Palánkai

2. NEW EU MEMBERS OF CENTRAL AND EASTERN EUROPE Europe Agreements (Association) Tibor Palánkai Emeritus Professor Corvinus University of Budapest Master Course 2014 Prof. Palánkai Tibor

3. Genesis of Europe Agreements Officially association offered in April 1990 in Dublin based on Article 238 of Rome Treaty. Offer for six countries: Bulgaria, Czechoslovakia, Hungary, Poland, Romania and Yugoslavia Negotiations start on December 19, 1990, only with Czechoslovakia, Poland and Hungary. Mandate for association - term ‘Europe Agreements’ was introduced. Three agreements were signed on December 16, 1991.

4. Genesis of Europe Agreements The trade policy part of three agreements (the Interim Agreement) valid from March 1, 1992; Other parts came into force after the ratification (Hungary and Poland on February 1, 1994). After 1992 separation of the Czech and Slovak Republics, the association was renegotiated. In 1993, EU signed similar agreements with Bulgaria and Romania, In 1995 with Baltic countries (Estonia, Lithuania and Latvia). In 1996 with Slovenia. Ten countries signed.

5. Content of Europe Agreements Many new features: New element - political dialogue and cooperation (regular contacts and consultations, common positions in major international issues), Political transformation (based on common values and aspirations), -political conditionality but proper sanctioning lacking.

6. Content of Europe Agreements Europe Agreements - free trade, with long term commitment to ‘four freedoms.’ (European Economic Area model) Concrete obligations only for two (movement of goods and capital). In trade of goods – with the exception of agricultural products – the aim was to establish completely free trade by December 31, 2000.

7. Content of Europe Agreements • Free flow of goods, without customs tariff burdens, other financial costs or quantitative restrictions. • Liberalization of trade is implemented reciprocally, but in asymmetrical way, (CEEcs were granted a grace period till 1995 for opening their markets). For agricultural goods concessions. • Maximum transition period of ten years, in two successive steps, each lasting for five years.

8. Asymmetries of Free Trade Associate countries were entitled to protect new or restructuring industries up to 12.31.2000 by unilateral market protection measures in form of tariff increases: In the case of structural reorganization, of social tensions, protect infant industries, and of balance of payments The measures could not affect more than 15% of import and no tariffs higher than 25%.

9. Asymmetries of Free Trade EU level of tariffs abolished tariffs was about 3 – 5% on average, with little effect on trade, By contrast, the CEE’s tariffs were about 8-10% in 1991, with considerable protective effects. Delay in liberalizing certain ‘sensitive’ goods (steel, textiles) where associate countries had considerable surplus export capacity was unjustified. Dumping procedures allowed. Asymmetries because of weak industrial and consumer protection and non-tariff instruments.

10. Four Freedoms Direct capital investments, repatriation of profits and capital was immediately guaranteed, Changeover to the free flow of capital prescribed by the Community was implemented. Freedom to set up a business, generally prescribed as ‘national treatment’. With regard to trade in services, the aim was liberalization, but left to the future. 1995 White Paper, gradual adjustment to the single market measures.

11. Four Freedoms Liberalization of movement of labour was left to bilateral treaties concluded with members. The Agreement guaranteed social non-discrimination for workers of associate countries. Free movement of labour remained only a theoretical possibility, due high unemployment in member countries. Hungary had bilateral agreements of this kind only with Germany and Austria.

12. Financial Assistance Concerning financial assistance only vague obligations. No financial protocols were attached to the Europe Agreements. Aiding was assigned to the PHARE framework. The grants received(about €1bn annually) in the framework of PHARE have indeed contributed to the process of transformation, stabilization and modernization. The association agreements did not contain specific monetary prescriptions.

13. Question of „Evolution” Aiming four freedoms, the possibility of certain "evolution" was included into the Europe Agreements to a European Economic Area type of cooperation. No similar commitment for evolution to full membership was made, like in case of Greece, Turkey, Cyprus and Malta. The case of full membership was accepted only later.

14. Frameworks of European Free Trade Parallel, free trade agreements were concluded with the EFTA countries, and theycame into force on October 1, 1993. When Austria, Sweden and Finland joined the EU in 1995, the EFTA agreements only affect trade with Iceland, Switzerland and Norway. In 1992, Czech Republic, Hungary, Poland and Slovakia created the Central European Free Trade Agreement (CEFTA), which was enlarged to Slovenia, Romania, Bulgariaand Croatia. In 1993, Estonia, Latvia and Lithuania signed the Baltic Free Trade Agreement.

15. Impacts of Associations The associations had substantial positive effects on the development, transformation and modernization of the CEE countries. Europe Agreements assured rapid trade increase of associated countries. Between 1991 and 2004: GDP increase of CEE candidates was 120%, their trade with EU increased about 1000%, while total EU trade only by 250%.

16. Impacts of Associations They made possible rapidly to reorient their trade towards EU as main partner. In 1989, about 25-30% of trade of Candidates was with EC, by 1993 this share was 50%, and by 2004, it increased in New Member’s export to 67%, and in their import to 64%. The trade integration reached the high level, characteristic to the EU member countries. Trade integration of CEE was the major factor in the rapid export-led growth and from 2000s real economic convergence (1,5-2% growth “surplus) of the CEE region.

17. Impacts of Associations Associations improved the region’s international position and reputation both in international forums and among foreign capital investors. Obviously the associations served as a condition of later membership of the OECD and NATO. As the major trends of the following years proved, association was necessary but not sufficient condition from the point of view of foreign investment.

18. Structural Modernisation Association agreements contributed to structural modernization. Modernization requires four important factors: · The adoption and application of up-to-date technology (acquired through FDIs); · Dynamic markets (not fulfilled, because slow growth, but EU dynamic export market); · Development resources (capital) (through FDIs, but limited official transfers, €1bn from PHARE); · A skilled, highly-motivated workforce (comparative advantage of CEE).

19. Structural Modernisation The modernizing effects of associations can be well demonstrated by the drastic re-structuring of the CEE foreign trade in just few years. The share of high-tech product in export grew from 0 to 25% by early 2000, in H.) Increase of share of manufactures in CEE export: 1990-2001. Pl: 15% -40%, Cz: 25%-50%, H: 20% to 65%.

20. Asymmetries There have been ‘dependence asymmetries’ in trade between the EU and the associates. count Till early 1990s CEE candidates were marginal partners (in 1989 the share of 10 associates was less than 3%). This share grew about 12-13% by 2004, above the minimum dependency threshold (10%) However, about 2/3 of Visegrad countries trade from EU falls on DE, AT and IT (H. above 50%).

21. Trade Balances In the first years, liberalizations were accompanied by serious deterioration of trade balances of the new associate countries. Balanced trade before 1990. Between 1992-97, nearly 65bn ECU cumulative surplus of EU with 10 Candidates and 8bn with Hungary. After 1997, in most years Hungary and many others produced surplus with EU.

22. Association - Transformation The association agreements promoted the process of transformation in CEE. Transformation proceeded very dynamically after 1990, with regard to both privatization and the development of market institutions. The process got impetus by Copenhagen accession criteria.

23. Summary In summary, it must be stressed that despite the early deficits, trade integration was a positive-sum game for the associate countries as well, because without their export to the EU these countries would hardly have been able to stimulate and restructure their economies. Association contributed to the stabilization, modernization and convergence of the CEE.

24. END Thank you!