Transcript EUROPEAN UNION AND CENTRAL AND EASTERN EUROPE

EUROPEAN UNION AND CENTRAL AND
EASTERN EUROPE
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For most of 20th century Eastern and Western Europe have been isolated from
each other
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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
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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)
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In 2002 after a decade of reforms per capita income in the CEE applicant
countries was less than 40% of EU average
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Many changes were required in applicant countries before membership of EU
could be considered
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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.
LEGACY OF COMMUNISM
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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
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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
AGENDA FOR REFORMS
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Task of privatisation has proven extremely challenging owing to the
precarious state of the European ex-socialist economies
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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
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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
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First necessary step is “economic stabilisation” which requires adapting
existing economic mechanism to standards of capitalist system
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Second element is a radical institutional refoem aimed essentially for
restoration of private property and competition, and ending of monopolistic
position of former producers
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Third element is “capacity restructuring” in the shift of capital and labour from
machine building to consumer goods and from industrial production to
services
EARLY DIFFICULTIES
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Immediate experience of marketisation proved to be quite disappointing with
problems e.g. falling output, rising unemployment, hyperinflation even greater
than anticipated
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Reforms included monetary and fiscal restrictions, price liberalisation,
devaluation of domestic currencies and wage guidelines
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“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
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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
CHALLENGES OF MARKETISATION
Three major adjustment problems
1.
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
2.
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
3.
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
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”.
EXTENDING EU MEMBERSHIP
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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
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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
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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
ANTICIPATED GAINS
In the long run the EU has much to gain from aiding the reconstruction process in
Central and Eastern Europe
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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.
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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
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Keener international competitiveness in both new and old member states
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Increased cross-border trade between new and old member states
CEECs now have potential for rapid growth as they progress towards market economy
EU AND RUSSIA
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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
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A number of unresolved political issues, confused legal environment and growing
protectionism leave a considerable gap between Russia and economies of EU states
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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
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Significant capital flight from Russia demonstrating lack of confidence in domestic
economy
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Natural resources (natural gas, oil and metals) only profitable sector accounting for
46% exports in 1996