Winners and Losers of EU Integration in Central and Eastern Europe:
The Case of the Baltic States
Economic part
Ramunas Vilpisauskas
Guoda Steponaviciene[1]
Vilnius, October 1999
Economic
integration, i.e. merging of economies by way of eliminating barriers to free
movement of goods, services, capital and labor, conduct of common policies, and
pooling of decision-making authority, implies significant changes in the
patterns of economic activities in the participating states. Integration
changes the political and economic environment in which production and economic
exchange take place. It redraws the boundaries between the state and the market
in general and produces concrete benefits and losses for economic groups in
each country. Support for or opposition to further integration depends on
expectations of the balance between the benefits and costs that different
economic groups are likely to experience.
Integration
of the Baltic States into the European Union proceeding in parallel with
implementation of the rules and institutions of market economy and democratic
governance has a significant impact on the political economy of these three
countries. Several factors contribute to the degree and distribution of
benefits and costs in the Baltic States resulting from integration into the EU.
(1)
Since the beginning of reforms each Baltic country has been conducting economic
policies the character of which has been influenced by the ideological
orientation of the government, domestic interest groups, external actors, etc.
Although the goals of reforms have been the same, concrete economic policy
decisions differed in each state. Thus, in some cases distribution of winners
and losers might be different in each country depending on general economic
policies pursued since the beginning of the decade (for example, adoption of
the EU external trade policy means increasing trade barriers for Estonia while
decreasing or not altering significantly in the other two countries).
(2)
In some cases economic policies were in line with integration policies (for
example, liberalization of trade), while in other cases accession into the EU
involves changes in economic regimes (for example, regulation of the agricultural
sector or regional policies). This implies that in some cases effects of
transition to market economy and integration into the EU on distribution of
winners and losers are difficult to distinguish. In more general terms this is
an issue of to what extent meeting EU membership criteria is consistent with
the objectives of transition and policies conducted in the candidate countries
[2].
The general requirement of having a functioning market economy is what the
Baltic States are aiming at irrespective of integration into the EU.
However,
assuming the obligations of membership involves adoption of the Union’s acquis. This involves investments, which
can be divided into two categories. First, the setting up of institutional
structure, administrative institutions to oversee and monitor the
implementation of acquis requires
budgetary spending. These costs, the bulk of which is likely to be covered by
tax payers, will be short-term, while likely benefits will appear in the
long-term.
Second,
adoption of EU regulations has a direct impact on the activities of economic
actors. Enterprises will face compliance costs, part of which are likely to be
shifted on to consumers. Here, the difficulty of identifying winners and losers
lies in the choice of the basis for comparison. Does the anti-mode, or
non-integration scenario, need to be considered? Are the current policies a
proper starting point for comparative analysis? In the latter case, the
difficulty of analytical distinction between transition and integration remains.
The ideal of market economy characterized by liberalized prices and trade,
competition and private property could serve as a point of reference. On the
one hand, this, for example, would imply that abolishing state aid is a matter
of implementing market economy, and enterprises that lose their rents are not
losers resulting from the process of integration itself. On the other hand,
however, if these countries were not aiming at EU membership, some reforms,
such as trade liberalization or restructuring of the agriculture, might have
been postponed or even reversed
[3].
Of major importance is how the policy-makers present their choices to the
public, and if the EU is not presented as a scapegoat for unpopular decisions.
(3)
Integration is a long-term process extending far beyond the formal act of
accession, while its impact depends on the issue area and economic group.
Integration of the Baltic States into the EU started with the liberalisation of
trade and removal of other barriers to economic exchange and proceeds with the
adoption of acquis. Importantly, the
timing of effects of integration-related measures might result in concentration
of costs in time and area. As some analysts have maintained, “the costs of
converging to the EU are not evenly spread across the societies in transition
countries and emerge at various stages of accession process”
[4].
The
analysis of actual and potential economic/fiscal/regulatory impact of
integration on acceding countries, their economy and interest groups has
important political implications for public policy. Although the Baltic States
are constrained by the EU norms they are committed to adopt, there is still
enough room for policies aimed at reducing the number and extent of losers and
creating conditions for increasing the scope of winners. Moreover,
understanding likely effects of integration measures on national economies and
their sectors is necessary for membership negotiations and rational
policy-making.
This
study aims at addressing general issues of the political economy of the Baltic
States’ integration into the EU. It addresses the following issues: (1)
identification of the economic groups that might benefit and the ones that
might lose from integration of the Baltic States into the EU; (2) presenting
the dynamics of gains and losses in time; (3) addressing possible political
consequences of the economic effects of integration, and political measures
that could be taken in order to reduce negative impact of integration on
economic groups.
The
study does not attempt to estimate quantitatively the economic effects of
integration on the Baltic economies and concrete economic groups or to provide
a balance of macroeconomic costs and benefits of EU membership. Rather, it
provides a structured qualitative analysis of integration effects and resulting
emergence of the groups of winners and losers in the three countries. It
focuses on the effects of removal of barriers to economic exchange between the
EU and the Baltic States and implementation of common EU policies and
regulatory environment in the Baltic countries.
The
main dimensions of analysis are (1) the measures of economic integration in
selected areas and (2) the time dimension which distinguishes between the time
frame of the effects of these measures on economic groups in the Baltic States
(short-term and long-term) and the timing of implementation (stages of
integration). Both dimensions are detailed below.
The
areas discussed include removal of barriers to trade in goods and services,
removal of barriers to circulation of capital, removal of barriers to movement
of labor, regulatory measures in line with EU acquis in the area of internal
market, common rules in selected sectors such as agriculture, economic and
monetary union (EMU), and external trade policy. The areas and sectors are
selected on the basis of their economic and political significance to the
Baltic States (agriculture, for example) as well as depth of their integration
inside the EU (EMU, for example). The choice of analyzing the effects of “four
freedoms” is based on the assumption that they form the basis of the EU. The
selection of certain areas and sectors limits the extent of the analysis. This
is inevitable for such a type of study, although other, more general aspects of
political economy of integration are touched upon in the text.
The
study provides the assessment of the likely effects of the above mentioned
measures based on theories of economic integration, international economic
relations and insights from studies of regulation. As it was noted before,
integration-related measures need to be analytically differentiated from
transition measures or other measures of integration into the world economy
that are to be implemented independent of integration into the EU. Therefore,
the analysis focuses on integration measures set in the bilateral agreements
between the EU and the Baltic States as well as EU treaties and legal norms,
unilateral documents and opinions.
The
study assumes that other factors – EU policies, WTO policies, etc. – are
constant. This implies that EU policies are implemented in their present form,
although in some cases such as CAP it is not likely. Another important
assumption concerns the transposition and enforcement of integration-related
measures. The complexity of EU acquis as well as the limited administrative
capacities of the applicant countries provide opportunities for
misinterpretations of the acquis and creating winners and losers that would not
have emerged otherwise. While analysis of such cases when “transmission noises”
distort the original message might be interesting and illustrative of
decision-making in the Baltic States, it is assumed here that principles of the
acquis are introduced properly.
The
temporal dimension of positive and negative effects of integration is important
for several reasons.
First,
estimating likely temporal patterns of costs and benefits to the economic
groups in these countries has implications for the economic policies in these
countries. While most costs are likely to be short-term, benefits might occur
only in the long-term and vice versa.
Second,
the integration measures are distributed in time – some, for example,
liberalization of trade, have been implemented since the bilateral free trade
agreements between the Baltic States and the EU were signed, some have been
implemented since the entry into force of the Association agreement, others
have been introduced on the basis of the White Book, still others will be
introduced before the membership, and some might result in transition periods
after the accession. This has political implications in terms of the impact of
the membership itself and in influencing the distribution of benefits and costs
in time. Therefore, in this respect, the implementation of integration measures
will be discussed along several temporal stages – (1) the start of economic
relations with the EU and signing of the first economic agreements, (2)
pre-accession measures, (3) membership itself and likely transition periods.
The
comparative analysis is presented in tables where integration measures in
selected areas are presented, their effects on the main groups in short and
long-term are evaluated (see Annex 3). The groups identified differ depending
on the integration measure and include consumers, exporters, importers, local
manufacturers, farmers, financial institutions, etc. For the sake of
simplification, the effects are evaluated as positive, negative, neutral or
controversial.
The
paper first presents a brief description of dynamics of economic relations
between the EU and the Baltic States since the beginning of this decade.
Afterwards, possible emergence of winners and losers in selected areas as a
result of integration policies is discussed. These analytical findings are also
supported by results of opinion polls conducted in the Baltic States, business
attitudes and economic statistics. The identification of likely impact of
integration on economic groups in the Baltic States and their likely reactions
towards actual or anticipated integration effects will provide the basis for
suggesting policy recommendations. The paper concludes with general remarks,
policy recommendations and presentation of directions for further research. The
main text is supplemented by annexes presenting with overview of bilateral
agreements between the EU and the Baltic States, trade and FDI data, GDP
structure of the three countries, and tables with evaluation of political
economy of integration effects in selected areas.
Economic
relations between the Baltic States and the EU began developing at the start of
the decade. Soon after the recognition of the three countries by the EU in
September 1991, the bilateral Trade and Cooperation agreements were signed.
They came into force in 1993 providing for the Most Favorite Nation status and
non-discrimination in trade relations. The EU has extended its Generalized
System of Preferences to the Baltic States (see Annex 1). Economically more
significant have been the Agreements on Trade and Trade Related Matters which
Baltic States signed with the EU in July 1994, and which are in force since
January 1995. They provided for the establishment of a free trade area between
the parties. Certain products including agricultural goods, fisheries and
textiles were excluded from the general provisions. The EU has committed itself
to free trade in industrial products from the entry of the agreements. Estonia
declined to apply any transition period while Latvia and Lithuania received
four and six year transitional periods respectively during which they agreed to
gradually liberalize trade with the EU.
The
next stage in the integration process of the three followed after signing of
the Association (Europe) Agreements in June 1995. These agreements upgraded the
status of the Baltic States to the one of the other Central and Eastern
European candidate countries by explicitly acknowledging their wish to become
EU members, although they came into force only in February 1998. The Baltic
States joined the implementation of the pre-accession strategy, consisting of
the Association Agreements, the White Book on preparing the CEECs to join the
internal market and the Phare program. In the second half of 1995 the three
states officially applied for the EU membership. In 1997, after the Commission
announced its Opinions on individual candidates, the European Council decided
to invite Estonia to start accession negotiations while Latvia and Lithuania
were relegated to the group of “pre-ins”.
Their status did not change in 1998, although the EU reinforced its
measures aimed at helping the candidate countries to prepare for the membership
and assume its obligations.
In
October 1999, the newly formed Commission invited Latvia and Lithuania together
with remaining “pre-ins” to start accession negotiations and join the first
group of the countries. The Commission maintained, however, that these
negotiations should follow a “differentiated” approach taking full account of
each candidate’s progress in meeting membership criteria. Assuming that the EU
will undertake reforms necessary for the enlargement by 2002, it will be up to
each candidate country to decide on the speed of integration.
Currently,
the Baltic States participate in a number of bilateral and unilateral
arrangements facilitating their integration into the EU including the
implementation of Association Agreements, the White book provisions, Accession
partnerships, National programs of acquis
approximation, Screening, Twinning, etc. These arrangements impact
significantly on national economic policy-making and institutional structures
of the three countries. At the same time, economic relations between the Baltic
States and the EU have developed relatively fast. The EU has become the most significant
trading partner of the three and the main source of Foreign Direct Investment
(FDI) in the Baltics (see Annex 2).
The
liberalization of trade has so far been the most advanced area of integration
between the EU and the Baltic States. Except for trade in “sensitive” products,
free trade has been the main principle and objective of economic relations
between the EU and the three countries since 1995. Free movement of goods
implies a number of measures in respect of mutual trade – the abolishion of
quantitative and qualitative import and export restrictions, applying the same
regime to domestic goods as well as imported from other parts of the free trade
area (principle of non-discrimination).
Dismantling
barriers to trade reduces distortions of competition and protection of domestic
producers. The main losers are domestic producers competing with imported
products, while the main winners are consumers, exporters and producers using
imported goods as intermediary products in their production processes and
participating in the intra-industry trade with EU. As some researchers
maintain, the share of the latter is rapidly increasing in the Baltic States
[5].
Estonia has the largest share of intra-industry trade with the EU, which in
1996 was estimated to equal around 35 percent of trade with the EU. The shares
of Latvia and Lithuania were accordingly 19 percent and 17 percent
[6].
If this tendency continues, the scope of winners among producers will be the
largest in Estonia. The scope of winners will also depend on the intensity of
overall informal integration. The EU has been the main trading partner of the
Baltic States for several years (see Annex 2). Economic crisis in Russia has resulted
in further increases of EU share in the Baltic exports. Estonia is leading with
exports to the EU and imports from it accounting respectively for 70 percent
and 74.3 percent of its foreign trade at the end of June 1999
[7].
If
concrete groups of products are analyzed, in the case of Estonia most of
intra-industry trade is conducted in such goods as electronics, footwear, wood,
clothing, and parts of machinery for lifting. In the case of Latvia, most of
intra-industry trade with the EU is taking place in such products as electric
transformers, inductors, leather, clothing and accessories. Most of
intra-industry trade between Lithuania and the EU is conducted in footwear,
woven cotton fabrics and some fishery products
[8].
Producers of these goods are likely to benefit from further integration. The
selection of concrete product groups should be treated with caution, however,
as markets structures are rapidly changing, in particular in transition
economies.
The
size of the Baltic economies, the share of foreign trade in their GDP and the
importance of outward processing taking place in these countries provide ground
to believe that the scope of winners is relatively large in all three
countries. However, due to the collective action problem such groups as consumers
have less impact on policy-making while domestic producers are better organized
and in case of Latvia and Lithuania proved to be able to ensure the
introduction of trade barriers to trade with third countries. This has been the
case with agricultural producers in these two countries who exert considerable
pressure on the governments, in particular after the economic crisis in Russia.
Latvian and Lithuanian farmers have been the largest lobby groups, which
managed to receive import protection even when it contradicted international
obligations of the country
[9].
Membership in the EU will provide such domestic producers with new targets for
lobbying for common external protection, although the results of the lobbying
on the EU level are likely to be more modest.
The
impact of integration on domestic producers is likely to differ depending on
the destination of their production. Those exporting to the EU are likely to
benefit from free movement of goods, especially after the EU faces out
anti-dumping and other protection instruments it is able to currently threaten
Baltic producers.
In
1998, the main products exported by Estonian producers to the EU include
machinery, mechanical appliances and electric equipment, wood and articles of
wood, textiles, and base metals and articles of base. The main Latvian exports
to the EU included similar products – wood and articles of wood, textiles,
mineral products, base metals and machinery and mechanical equipment. The main
Lithuanian exports to the EU included textiles, products of the chemical and
related industries, machinery and mechanical equipment, wood and articles of
wood, and base metals
[10].
Re-exports from Russia constitute a large share of the exports indicated above.
The
other aspect of free movement of goods is harmonization of basic standards and
mutual recognition. The adoption of the acquis in this field is taking place as
a part of pre-accession measures on the basis of the White paper and is
prioritized according to the individual needs of each candidate. The adoption
of these principles is likely to involve large short-term costs related with
upgrading the product and process standards (“EU conformity costs”). Although
it is likely to be beneficial in the long-term, the costs of regulatory load
might prove to be long-term.
Free
movement of goods is one element of the Single market. The other one is the
common external tariff, which is applied uniformly and forms part of the EU
external trade policy. The common external tariff will most probably be adopted
only after the formal accession of a candidate country into the EU. The balance
between the winners and losers in this respect depends on whether an applicant
state has been applying more or less liberal trade regime before acceding into
the EU. Estonia, which has been applying a zero tariff foreign trade regime,
will have to raise external protection implying benefits for domestic producers
but costs for consumers and importers from the third countries. The changes in
its external trade regime are likely to be introduced in 2000. The likely
impact of common external tariff on Lithuanian and Latvian economies is less
clear and will probably depend on concrete product groups as the average
customs tariffs in these countries are somewhat close to the EU average or
lower. In 1999, the average customs tariff reported by Lithuania was 2.5
percent, the average customs tariff for non-agricultural goods applied by
Latvia was 3.71 percent
[11].
Producers of some goods such as agricultural products were protected by higher
import duties.
Adoption
of autonomous and conventional measures that make part of EU external trade
policy is likely to have divergent effects on producers and consumers in the
Baltic States. It is likely that the level of protection might increase if regulatory
barriers applied in high-standard EU countries are extended
[12].
The EU has been characterized by the WTO as “one of the most frequent users of
anti-dumping procedures”
[13].
Domestic producers in the Baltic States might benefit from relevant protective
measures applied at the EU level at the expense of consumers. As some have
noted, it was “a safe bet that without Community, the United Kingdom and
Germany would not have footwear protection today, that UK agricultural
protection would be lower, that Denmark would not have am arrangement on
Japanese cars, etc.”
[14]
On
the other hand, more complicated procedures of initiating protection at the EU
level as well as control of state subsidies and other forms of aid for local
producers by the Commission might reduce the power of domestic producer lobbies
in Latvia and Lithuania. As some observers have suggested, EU membership
entails a major shift in the balance of power between national lobbies
strengthening the power of such groups as consumers and exporters whose interests
are often neglected in political decisions on trade policy
[15].
Free
movement of labor is likely to become one of the sensitive negotiation issues
because of widely spread fears in the EU member states concerning possible effects
of migration into the richer EU countries from the poorer candidates. Although
the Baltic States have a comparatively small population (around 8 million all
together), this general attitude might impact on the terms of their accession
as well and could result in transition periods.
The
Europe agreements signed between the EU and the Baltic States contain
provisions on non-discrimination of legally employed nationals from the other
parties to the agreements. However, free access to the labor market in the
territory of the Union involves recognition of education degrees and
professional qualifications, the right to transfer social security payments and
freedom of establishment and service supply. The White book contains provisions
on mutual recognition of education diplomas and qualifications in selected
fields such as medical treatment or transport. The Baltic States are
implementing these provisions during the current stage of integration; they are
included into the national acquis approximation programs.
The
free movement of labor is beneficial to both employees and employers in the
Baltic States. They are likely to benefit from the most measures related with
free access to the labor market providing with more choice when looking for a
job or an employee. Some measures such as adjustment of training and activity
rules for certain professions will require investments and might be costly in
the short-term. There is a possibility of brain-drain from the Baltic States,
however, its actual negative effects are not likely.
The
free movement of labor, and of people in general, is one the most visible
result of integration. Visa-free regimes agreed recently by the Baltic States
and members of the Schengen zone provides an example of winners encompassing
potentially all citizens of the candidate countries.
The
free movement of services is closely related with the movement of labor. It
implies freedom to establish enterprises or subsidiaries in other members of
the Union and provide services under the conditions laid down for the nationals
of the host state. The treaty of the EU has provisions specifically for
transport and financial services. Measures in the field of providing these two
kinds of services are also detailed in the White book.
In
the area of transport, mutual recognition of qualification certificates is
beneficial to both service providers and consumers. More controversial is the
adoption of safety and environmental requirements for vehicles and operation as
well as adjusting technical requirements, administrative procedures and meeting
other requirements for entry into market. These measures require initial
investment, and domestic service providers are likely to bear the costs or
these might be shifted on to consumers. The likely magnitude of costs can be
illustrated by calculations done in Lithuania. The cumulative investments
needed to align environmental acquis in the field of air pollution alone will
amount to 2,283 million ECU by year 2020. Even when regulation in this field is
omitted, the cumulative costs of the approximation of the remaining
environmental regulation are estimated to amount to about 15.2 percent of 1996
GDP
[16].
The national environmental institutions estimate that for Estonia to reach the
compliance by 2010 would cost around 2.21 billion euro. For Latvia, relevant
public investments are estimated to reach 1.2 billion euro and the cost for
private sector – 305-742 million euro to reach compliance by 2015
[17].
The
winners in this area are service exporters that are already operating on the
basis of higher standards. The requirement to separate transport infrastructure
and operation are likely to be beneficial for consumers as it is expected to
introduce more competition and abolish the distortions resulting from state aid
provided to this sector.
In
the field of transport the establishment of specialized agencies is necessary
to oversee the implementation of directives. This type of agencies in this and
other fields are likely to be financed from the budget. Although in some cases
part of funds might be contributed by the EU, the consumers are likely to
finance indirectly the setting up of a regulatory institutional network.
Bussines will bear the regulatory costs.
Integration
into the EU also requires adopting concrete measures in the field of financial
services. The Baltic States have to implement EU norms governing banking,
securities and insurance services, aiming at reducing the risks related with
providing these services. The supervisory institutions have been created
irrespective of integration. Detailed requirements for market entry and
operation of financial service providers are set in the EU norms, and require
specific measures to be taken in the Baltic States. Meeting such requirements
as information disclosure, minimal capital and deposit insurance might involve
costs for service providers, although consumers are likely to benefit. However,
as it was noted before balance of costs and benefits depends on the
interpretation of EU norms in the Baltic States. As the cases of money
laundering prevention measures or setting up the norm of payments for mandatory
insurance of deposits adopted in Lithuania illustrate, EU norms can be
interpreted in a way biased towards more restrictions imposing costs on economic
operators.
Free
movement of capital implies abolishing barriers to payments and investment
among the candidate states and the EU. Both business and consumers benefit from
these measures. Although some might lose because of competition from foreign
investors, domestic business attracting investments will benefit.
Common
agricultural policy (CAP) is one of few policies harmonized at the EC level
since the establishment of the organization. Around half of the EU budget is
used for CAP purposes and acquis in this field covers about 40 percent of total
EU acquis. This area is characterized by a very strong lobby of farmers in some
member-states and resistance to reforms despite high costs of the CAP to EU
consumers, international disagreements with WTO partners and potential
budgetary costs of extending CAP to acceding countries.
Adoption
of EU norms regulating the agricultural sector implies both complying with
veterinary and other standards related to the free movement of agricultural
products inside the Union, and extending support measures to farmers in the
Baltic States. The former group alone represents about 1000 measures aimed at
ensuring product quality, setting labeling requirements, standards of farming
processes including raising of cattle, growing of plants, using fertilizers,
delivering products to consumers, etc. About 160 measures have a status of the
essential requirements. Necessary for the implementation of these measures is
the setting up of administrative infrastructure including veterinary agencies
and other institutions of certification and inspection.
Investing
into necessary infrastructure and supporting its functioning is financed from
the national budgets with some assistance coming from the EU. Implementation of
EU standards will increase opportunities to export to the EU, although most
exporters are likely to adopt standards before the accession. Currently only
some agricultural producers, mostly in Lithuania where twelve establishments
are authorised to export milk and diary products and one company is authorised
to export processed game meat, have been certified to export to the Union.
Growing regulation of agricultural production and trade also provides
opportunities for domestic producers to use the product standards, as
non-tariff barriers as it was the case in the end of 1998 and 1999 in trade
disputes between the Baltic States
[18].
There
have been some estimates made of the effects of joining the CAP on agriculture.
It has been calculated that if Lithuania joined the EU in 1999, its payments to
the EU budget (VAT and GDP based) would equal 407 million litas, while receipts
from the CAP would reach around 459 million litas, from the Structural funds –
3.8 billion litas, and from the Cohesion funds – 760 million litas
[19].
However, the perspective that current rules of CAP will be extended to the new
member states is very unlikely.
Projecting
the political economy of joining the CAP is based on the assumption that
reforms discussed in the Agenda 2000 are implemented. Extending CAP to Baltic
States is likely to have significant effects on farmers and consumers, in
particular in Latvia and Lithuania where around a fifth of labor force is
employed. Farmers in all three states are likely to benefit from CAP measures,
which include import duties from third countries, export subsidies, structural
funds, price support and direct income payments. Agricultural policy is likely
to change most in Estonia, where the first major changes in increasing support
for agriculture were undertaken already at the end of 1998.
It
is difficult to distinguish concrete groups of agricultural producers that are
likely to benefit or to lose. It seems that small farmers will lose from
increased pressure of competition, while the large farms might win. According
to some estimates, milk and beef producers in Lithuania would win
[20].
Balance of trade in agricultural and food in all three countries in trade with
the EU is negative, while it is highly positive in trade with the CIS. However,
current market distortions in agriculture deprive of a more reliable basis for
predictions of concrete agricultural product groups in which the Baltic
economies are likely to have comparative advantage. Suppliers of agricultural
equipment are likely to benefit.
At
the same time, clear losers of implementing CAP measures are consumers.
Although the Baltic States are likely to receive more funds than they will
contribute to the EU budget, implementation of CAP will redistribute resources
from consumers to farmers. Some economic groups are likely to have a mixed
record. Food producers using imported products from third countries are likely
to lose from most CAP measures and a resulting increase in prices. Food
producers will benefit from upgraded quality of agricultural raw products
supplied inside the EU. Producers exporters are likely to benefit from export
subsidies.
In
1999, the third stage of the Economic and monetary union (EMU) began with the
participation of eleven member-states. Accession of the new countries raises
the question of their membership in the EMU. The EMU criteria are not formally
treated as the membership criteria to be accepted into the EU, and it is very
likely that candidate countries will join the EMU after a certain transition
period, which would allow new members to participate for a defined period of
time in the Exchange rate mechanism (ERM2).
The
participation of the Baltic States in the EMU will be judged on the basis of
the same convergence criteria that current EU members willing to join the EMU
had to meet. Meeting convergence criteria will have an impact on the Baltic
States economies. The countries will have to maintain low levels of inflation,
restrict budget deficit and state borrowing. Currently the Baltic States meet
the fiscal criteria. If this situation remains, meeting convergence criteria is
not going to involve major policy change in these countries. It will, however,
limit the possibilities for borrowing which is high on the agenda in the Baltic
States after the period of economic slowdown and budgetary deficits following
the economic crisis in Russia. Targeting fiscal criteria might also limit
spending on integration related measures and public investments needed to co-finance
resources provided by the EU (SAPARD and ISPA programs).
Enterprises
doing business in the euro zone are likely to win. The impact of joining the
EMU on the Baltic economies will depend on the intensity of trade and capital
flows between the latter and the euro zone, and the degree of production factor
mobility
[21]. While the
economic links between the Baltic economies and the euro zone have been
expanding rapidly (see Annex 2), labor mobility might remain low, especially if
the EU applies transition periods. Another case of divergent forces at work
that result in loses of domestic producers might be the regulation of wage
setting and participation in the euro zone. The model of wage setting by a
trilateral council, which is imported from the EU, might result in a rise of
wages exceeding the growth of productivity, thereby damaging the
competitiveness of producers. Finally, lower productivity and per capita income
in the Baltic States cautions against quick joining of the EMU. Economic
operators will benefit from elimination of exchange rate uncertainty and
reduction of transaction costs. The benefits will be higher, the more intense
is informal economic integration between the Baltic States and the EU.
The
participation in the EMU implies loss of national monetary and exchange rate
instruments. The governments will lose the autonomy to conduct independent
monetary and exchange rate policies. This in all three Baltic States will not,
however, involve a major policy change as all apply monetary policies based on
fixed exchange rates. Estonia and Lithuania currently have currency board
regime in place, which constrains national monetary policy. The change is also
limited because currently, i.e. during the preparation for accession, euro
plays a major role for the Baltic economies. Estonia’s kroon is directly pegged
to euro, the value of the Latvian lats is determined by a basket of currencies
with heavy euro weighting foreseen in the next revision in 2000, Bank of
Lithuania announced in October 1999 about plans to peg litas to euro in 2001.
The
powers to conduct monetary policy will be transferred to the European Central
Bank (ECB). The likely effects of its policy on business and consumers will
depend on its autonomy, accountability and transparency of the ECB policy. The
powers on national banks, especially in Estonia and Lithuania, are likely to
increase when they join the ESCB and implement monetary instruments such as
repo tenders, purchases and sales of debt instruments, intervening in foreign
exchange markets with swaps, lending and deposit facilities for commercial
banks
[22].
Finally,
joining the EMU implies introduction of the new currency euro. The loss of
national currencies might cause adaptation problems for consumers. In the short
run they include psychological adaptation as well as costs of adjustment which
might be shifted on them by banks
[23].
However, there will be benefits for those travelling in the Euro zone. Adoption
of the common currency might exert a downward pressure on prices of imported
goods. In the short-term, the adoption of the new currency and resulting
adjustment of payments and the banking system are likely to impose costs on
commercial banks but in the long-term they are likely to prove beneficial. The
transition might prove to be smoother if subsidiaries of euro zone commercial
banks have a significant presence in the Baltic economies.
The
broad picture that emerges from the analysis of the political economy of
integration can be characterized shortly as gains from increased opportunities
versus the costs of compliance. The
main winners are likely to be competitive enterprises able to exploit
comparative advantages and having established economic links (trade, production
chain, investment) with the EU
[24].
They will have increased market access as a result of removal of non-tariff
barriers, which are distorting trade between the Baltic States and the EU
despite the principle of free trade. Farmers, mostly large ones, are another
category of winners, which are likely to receive higher levels of support,
although at the same time they experience the increase in competition. The
enterprises still receiving state support as well as those trading with third
countries (Russia, for example) are going to lose. The former will lose economic
rents, the latter are likely to have the transaction costs raised.
Compliance
with the EU regulatory system involves high costs for the Baltic economies. The
costs of compliance or of “attaining EU conformity” include changing economic
and legal system, EU norms and standards, institutional structure of regulation
and administration overseeing the compliance with regulations governing
economic activities
[25].
The economic and fiscal impact of investing into this system imposes (at least
in the short-term) costs on economic operators and consumers. A need for
continuos administrative state institutions fulfilling obligations of EU
membership will remain in the long-run, and will have to be financed by tax
payers. Introduction of environmental or social regulations will impose costs
on economic operations while setting up of institutional structure to oversee
their implementation will have to be financed from the national budgets. The
compliance with EU norms might impose further limits on the already strained
Baltic economies and national budgets.
Consumers
in the Baltic countries are likely to benefit from increase of the competition
after joining the Single market, although part of regulatory costs will be
shifted on to consumers. Consumers are also likely losers from the introduction
of the CAP. Population having links with the EU and frequently commuting to the
Union is likely to benefit most.
The
above said applies to all three countries. The economic structure of the Baltic
States is relatively similar, and the balance of costs and benefits is not
likely vary to a high degree. There are some differences grounded in the
inherited industrial structure (Ignalina nuclear power plant in Lithuania the
closing of which might impose high costs on the economy; bigger share of
agriculture in Latvia and Lithuania) or economic policies implemented during
transition reforms (more liberal foreign trade policy in Estonia, or more
powers to intervene into the monetary affairs by the Central Bank in Latvia).
However, the governmental integration strategies are likely to be the most
significant factor in determining the balance of costs and benefits and their
distribution in time.
Optimal
integration strategies require systematic understanding of accession impact on
the country’s economy in the context of transition. The analysis of abolishing
barriers to economic exchange and regulatory impact of adopting EU norms in
separate areas as well as the whole economy is a precondition for sound
integration strategy.
First,
it will reduce the chances of costly (mis)interpretations. The EU regulation
norms are formed for solving particular economic and social problems. Automatic
adoption of EU norms in the Baltic States without considering the objectives of
regulation and their adequacy for the Baltic economies increases chances of not
achieving the objectives and imposing costs on economic operators. Analysis of
the regulatory impact is a priority area for further research and has clear
implications for improving policy-making in the Baltic States
[26].
Second,
a well-informed policy-making will reduce the costs of uncertainty for business
which arise from this complex and changing regulatory environment.
Third,
understanding of accession impact on economies and concrete economic groups
allows government to make a better information campaign and to avoid making
promises that later would not be fulfilled. The problem of expectations can be
minimized if analysis of the impact is undertaken and presented to the public.
Fourth,
the integration strategy should aim at maximizing the scope of winners and
minimizing losers taking into account possible future scenarios. Returning to
the introductory assumptions, the most relevant basis for reference and for
policy proposals seems to be the situation of an implemented market economy.
The consumers are the policy target group respresenting the interests of the
majority. Examples of such strategic policy decisions are the following.
(1) Reducing the economic rents of
enterprises before the act of accession. This would create incentives for them
to transform, which is necessary sooner or later, and would eliminate the
seeming connection between a decrease in state support and the EU membership.
In similar vein, the agricultural sectors should be reformed before the
accession to provide conditions for markets to function. CAP reforms will in
any case take place and the governments of candidate countries should
anticipate the change by creating necessary conditions before the accession.
(3) The Baltic negotiators should aim at avoiding transition periods for free
movement of labor, as this is one the most visible benefit of integration and
is crucial to the smooth functioning of the EMU. (4) The economic gains and
scope of winners will be larger the higher is the intensity of trade and
investment flows between the EU and the Baltic States at the time of
enlargement. Functioning markets and informal integrated economic exchanges
create conditions for expanding the scope of winners of EU membership. The benefits
of joining the EMU will be larger the closer is the level of productivity and
per capita income in the Baltic States to the one in the euro area. The last
two points raise politically sensitive issue of the speed of integration. On
the one hand, large disparities in the above mentioned characteristics would
necessitate longer pre-accession periods. On the other hand, long periods
before the accession and belonging to the second wave candidate countries might
result in the integration fatigue and lower attractiveness for investments. The
decisions concerning the speed of integration and implementing acquis should be
taken after considering both types of arguments.
Annex
1.
Agreement |
Signed |
In force |
Main
provisions
|
|
Trade and Cooperation Agreements
|
11.05.92
|
01.02.93
(for Latvia, Lithuania)
01.03.93 (?) (for Estonia)
|
Most favorite nation status, non-discrimination; extension of EU generalized system of preferences; economic cooperation in some areas
|
|
Agreements on Trade and Trade related matters
|
18.07.94
|
01.01.95
|
Liberalization of trade based on GATT principles; free trade in industrial goods (CN 25-97); 4 years transition period of gradual liberalization given to Latvia, 6 years transition period of gradual liberalization given to Lithuania; standard protection clauses; Joint committees to oversee the implementation of the agreements
|
|
Association (Europe) Agreements
|
12.06.95
|
01.02.98
|
Objectives
of Estonia, Latvia and Lithuania to become EU members acknowledged; the
provisions of free trade agreement incorporated; political dialogue; economic
cooperation in areas such as competition policy (EU rules), movement of
services, capital and labor, establishment, protection of intellectual
property rights, consumer protection, approximation of laws, cooperation in
other areas such as industrial policy, science and technology, energy,
environment, etc.; Association Council to supervise the implementation of the
agreement and Association Committee
|
|
Instrument
|
Main
features
|
|
Pre-accession
strategy
|
|
|
(1)
Europe agreements
|
See
table 1.
|
|
(2)
Phare program
|
Technical
assistance for transition and pre-accession measures in applicant countries.
|
|
(3)
White paper on preparation of the associated CEECs for integration into the
Internal Market of the Union
|
Identifies
key measures in each sector of the Internal Market and suggests a sequence in
which the approximation of legislation with EU acquis should be undertaken.
|
|
Accession
partnerships
|
Define
country specific need in order to support the applicant country in its
preparation for the membership. Measures are based on the needs identified in
the Opinions and aim to meet accession (Copenhagen) criteria. Provide
financial assistance needed for further implementation of priority measures.
|
|
National
Programs for the Adoption of the Acquis
|
Define
actions needed to reach objectives set out in the Accession partnership.
Structurally are based on the Opinions and Progress Reports.
|
|
Screening
|
Analytical
examination of the acquis.
|
|
Twinning
|
Aims
at reinforcing institutional and administrative capacity. Consists of
technical assistance, training programs, exchange of experts, participation
of applicant countries’ officials in the EU programs.
|
|
Accession
negotiations
|
Aim
at agreement between the EU and a candidate country on terms of accession
(essentially, number and length of transition periods). Currently are taking
place between the EU and Estonia. It is expected that Latvia and Lithuania
will start negotiations in Spring 2000.
|
Annex 2.
|
|
Estonia
|
Latvia
|
Lithuania
|
|
Agriculture,
hunting and forestry
|
4.6
|
4.5
|
11.7
|
|
Fishing
|
0.4
|
0.2
|
0.0
|
|
Mining
and quarrying
|
1.4
|
0.2
|
0.5
|
|
Manufacturing
|
14.2
|
20.2
|
20.5
|
|
Electricity,
gas and water supply
|
5.5
|
3.9
|
4.2
|
|
Construction
|
4.7
|
5.2
|
7.7
|
|
Trade
|
15.6
|
17.5
|
16.5
|
|
Hotels
and restaurants
|
1.1
|
1.0
|
1.8
|
|
Transportation,
storage and communications
|
14.2
|
14.2
|
9.6
|
|
Financial
mediation
|
4.7
|
3.2
|
2.4
|
|
Real
estate, renting and other commercial activities
|
12.6
|
5.9
|
7.2
|
|
State
governance, national defence and mandatory social security
|
4.7
|
10.0
|
5.9
|
|
Education
|
5.6
|
6.6
|
5.5
|
|
Health
and social care
|
4.0
|
3.4
|
3.6
|
|
Other
communal, social and personal services
|
6.7
|
4.0
|
3.0
|
Source:
Statistical Office of Estonia, Latvian Statistical Office, Lithuanian
Department of Statistics
|
|
Estonia*
|
Latvia
|
Lithuania
|
|
Agriculture,
hunting and forestry and fishing
|
9.5
|
18.7
|
19.3
|
|
Manufacturing,
mining and quarrying
|
23.0
|
19.2
|
19.5
|
|
Electricity,
gas and water supply
|
2.7
|
2.4
|
3.1
|
|
Construction
|
7.5
|
5.6
|
6.9
|
|
Trade
and different repair works
|
14.0
|
14.6
|
14.7
|
|
Transport
and communications
|
9.3
|
7.9
|
6.7
|
|
Other
services
|
34.1
|
31.7
|
29.8
|
1998,
2nd quarter
Source:
Source: Statistical Office of Estonia, Latvian Statistical Office, Lithuanian
Department of Statistics
|
|
Estonia
|
Latvia
|
Lithuania
|
|
GDP
per capita in current prices, US $,
|
3591
|
2611
|
2887
|
|
GDP
per capita in PPS expressed as % of
the EU15 average
|
37
|
28
|
31
|
|
Gross
foreign debt as a share of projected GDP, %
|
36.8
|
10.8
|
15.0
|
|
State
budget deficit or surplus as % of GDP
|
0.3
|
0.3
|
-
1.2
|
|
State
debt as % of GDP
|
55.0
|
9.9
|
22.4
|
|
Export
of goods and services as % of GDP
|
79.8
|
47.7
|
47.4
|
|
Direct
foreign investment, mil. US $ (cumulative)
|
1811
|
1488
|
1625
|
|
EU
share in direct foreign investment, %
|
75.5
|
40.1
|
60
|
|
Current
account deficit, %
|
8.6
|
11.1
|
12.1
|
Source:
Statistical Office of Estonia, Latvian Statistical Office, Lithuanian
Department of Statistics
|
|
Estonia
|
Latvia
|
Lithuania
|
|
ES
|
54.8
|
56.6
|
37.4
|
|
CIS
|
20.9
|
19.0
|
36.2
|
|
Baltic
countries
|
12.4
|
11.9
|
13.9
|
|
Other
|
11.6
|
12.5
|
12.5
|
Source:
Statistical Office of Estonia, Latvian Statistical Office, Lithuanian
Department of Statistics
|
|
Estonia
|
Latvia
|
Lithuania
|
|
ES
|
60.1
|
55.3
|
47.3
|
|
CIS
|
14.2
|
16.0
|
26.0
|
|
Baltic
countries
|
6.1
|
12.9
|
3.3
|
|
Other
|
19.6
|
11.5
|
23.4
|
Source:
Statistical Office of Estonia, Latvian Statistical Office, Lithuanian
Department of Statistics
* -
August, 1999
Source:
Statistical Office of Estonia, Latvian Statistical Office, Lithuanian
Department of Statistics
* -
August, 1999
Source:
Statistical Office of Estonia, Latvian Statistical Office, Lithuanian
Department of Statistics
Annex
3
The
following tables present simplified classification of likely winners and losers
in selected areas. The estimated impact is based on the principles and EU norms
that the Baltic States have to adopt to be accepted into the Union. The
documents used include bilateral free trade agreements, association agreements,
the White book, the Treaty of the EU and national programs of acquis approximation
Evaluation:
"+" - positive, "-"- negative, "0" - neutral,
"?" - controversial
S-term:
short term (1 to 5 years), L-term:
long term
Producers_Ex: producers for which import terms are relatively unimportant, Producers_Im: producers that import capital and
intermediary goods important for the production.
Sphere:
I. Free movement of goods
|
Measure
|
Interest
Groups
|
|
|
|
|
|
|
|
|
Importers
|
Producers_Ex
|
Producers_Im
|
Consumers
|
|
|
|
|
|
|
S-term
|
L-term
|
S-term
|
L-term
|
S-term
|
L-term
|
S-term
|
L-term
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
Abolishment of import duties & quotas
|
+
|
+
|
-
|
-
|
+
|
+
|
+
|
+
|
|
2.
Abolishment of export duties & quotas
|
0
|
0
|
+
|
+
|
+
|
+
|
0
|
0
|
|
3.
Harmonisation of standards and rules
|
-
|
+
|
-
|
+
|
-
|
+
|
?
|
?
|
|
4.
Mutual recognition of standards and rules
|
+
|
+
|
-
|
+
|
+
|
+
|
+
|
+
|
|
5.Non-discriminatory
regime
|
+
|
+
|
-
|
-
|
+
|
+
|
+
|
+
|
|
6.
Abolishment of customs inside of single market
|
+
|
+
|
-
|
-
|
+
|
+
|
+
|
+
|
|
7.
Common external tariff
|
?
|
?
|
?
|
?
|
?
|
?
|
?
|
?
|
Point
3. Positive: possibility of increased safety, negative: possibility of limited
choice - existing products that will not meet higher required standards
disappear from the market, the consumers with lower demands and low income will
be disadvantaged.
Point
7 depends on the present tariff level. In the case of Estonia, it would mean
raise of tariff and benefits for producers-exporters and looses for other
groups (consumers). In the case of Latvia and Lithuania it would differ
depending on concrete product groups.
Sphere:
II. Free movement of labour
|
Measure
|
Interest
groups
|
|
|
|
|
|
|
Employers
|
Employees
|
State
|
|
|
|
|
|
S-term
|
L-term
|
S-term
|
L-term
|
S-term
|
L-term
|
|
|
|
