• II. The Need for Internal and External Reform
  
  • 1. Europe since 1989: more Diverse, more Open and more Uncertain
    • 1.1 United Germany: Europe's new centre
    • 1.2 Current state of affairs: The Treaty of Amsterdam and the Luxembourg Summit
    • 1.3 Growing Euro-scepticism within Member States
    • 1.4 Different basic orientations towards integration within the EU
    • 1.5 Growing differentiation in the EU
    • 1.6 The EU economy: Stable, but unemployed
    • 1.7 Accession candidates: Progress, but no completion yet
    • 1.8 'Poor' neighbours between reform and systemic crisis
  • 2. Aims: Germany's Central Position and National Interests
  • 3. Problems and Risks: Disintegration in the EU, Instability around the EU
    • 3.1 Euro-scepticism, stagnation, or a step backwards in the integration process
    • 3.2 The need for reform in different policy fields in the face of enlargement
    • 3.3 Market-biased integration and social deficits
    • 3.4 Risks to political stability in the accession countries
    • 3.5 Crises in the remaining countries

II. The Need for Internal and External Reform

1. Europe since 1989: more Diverse, more Open and more Uncertain

1.1 United Germany: Europe's new centre

The collapse of communism and the dissolution of the Eastern bloc have altered the basic parameters of European integration and of Germany's European policy. A new historic role as the continent's guarantor of order lies ahead of the EU. The disintegration of the Eastern bloc and the Soviet Union have also perceptibly altered domestic political situations in Europe. Pressure for agreement within societies has eased. On the one hand, this reveals itself in a harder stance towards those who are socially weaker; on the other, in an intensification of regional conflicts (as, for example, in Italy).

Even if some political forces and groups assert the virulence of new global threats (Islam, China, the 'clash of civilisations'), these are not currently real and convincing enough to subdue the centrifugal tendencies in Europe and the West.

With unification, Germany simultaneously completed the first eastward enlargement of the EU. Following its foreign policy tradition, Germany bought the agreement of neighbours and others affected, predominantly through financial concessions, but also - particularly in the French case - through its agreement to rapid monetary union. For the most part, Germany has assumed these burdens herself, but she has also involved the EU (through regional support for the new Bundesländer etc.).

Following the EFTA enlargement in particular, unified Germany’s size and position make it more powerful politically than the old Federal Republic, in the context of the EU. Economically, however, it is - at least temporarily - weaker. Germany's interests have diversified eastward; so, in comparison to 1991, the EU's share in German foreign trade has decreased from 63.1 percent (exports) and 59.5 percent (imports) to 55.5 percent and 54.1 percent respectively, while the corresponding shares for Central and Eastern Europe have risen from 5.6 percent (exports) and 5.1 percent (imports) in 1991 to 9.3 percent and 9 percent respectively in 1997. At the same time, however, the limits of foreign policy by fiscal means have become apparent. Germany needs to be embedded in Europe in order to deal with the risks of this new central position and to share out the costs of stabilisation policies in her Eastern neighbours.

1.2 Current state of affairs: The Treaty of Amsterdam and the Luxembourg Summit

The Amsterdam Treaty and the decisions of the EU summit in Luxembourg represent the interim highpoint of the EU reform process of adapting to the changed situation.

Widening: With the EU, under continuous German pressure, having gradually become accustomed to the idea of Eastern enlargement - the European Agreements and also decisions from the Copenhagen and Essen summits were important stages -, it has been certain since December 1997 that the EU would begin intensive accession negotiations with five CEEC countries and with Cyprus in 1998. The five countries whose accessions have been temporarily put back ('Pre-ins') receive additional pre-

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accession aid for this period leading in to the EU and take part in a European Conference which includes the 15 Member States and 12 applicant states (including Turkey) (see Table 1).

Deepening: The Amsterdam Treaty is the result of several years of inter-governmental conferences and represents a continuation of the Maastricht Treaty. However, it did not bring the hoped-for reforms which are necessary for enlargement. The decision-making processes have only been selectively simplified. Increased flexibility has been made possible, but only within very narrow confines. Schengen has been transferred into the first pillar. The UK has signed the Social Charter.

1.3 Growing Euro-scepticism within Member States

Fewer and fewer citizens consider their countries' EU membership to be a positive thing. In 1997, an EU average of just 46 percent gave positive responses to this question (compared with over 70 percent in 1990). Germany is leading this trend with an above-average 70 percent in 1990 and a below-average 36 percent in 1997. Similarly, although less pronounced, the number of those questioned who accept that their country benefits from EU membership decreased: 41 percent in 1997 compared with almost 60 percent in 1990 (see Table 2).

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1.4 Different basic orientations towards integration within the EU

Deepening and widening find different supporters among the Member States. Commitment to deepening is easiest to see with monetary union: Above all, the United Kingdom and Denmark and, to a lesser extent, the new member Sweden are holding back, whilst the Mediterranean countries have made great efforts in order to be able to participate in the third phase from the very beginning. On the other hand, all EU Member States recognise that EMU is a political project and an opt-out will clearly limit their influence in the EU. In Germany, a new emphasis is becoming apparent, which attaches less weight than before to institutional questions and more to questions relating to the field of politics. Three founding members of the EC, France, Italy and Belgium, openly favour deepening - including the extension of majority voting - ahead of widening. Indeed, Germany agrees but wishes to avoid a linkage between EU reform and the enlargement agenda. In other Member States, it is the concrete arrangements which are controversial, and not the need for reform itself. With regard to widening, however, the UK sees possible associated set-backs allowed to happen because of deepening, and stresses the strategic and foreign policy significance of widening, whilst the south-west of the Union is sceptical because of the financial and economic consequences. The Spanish attitude towards EU finances is typical of this: No fixed upper limits so that the volume of redistribution is not restricted, and the rejection of any acceptance of poor CEE countries at the expense of regions currently favoured.

1.5 Growing differentiation in the EU

Even before enlargement, the EU is not a homogenous area for integration. Differentiation and flexibility, i.e. procedures and treaty agreements which correspond to individual interests and problem areas (15 minus x), were already there prior to the Amsterdam Treaty.

These include:

• EMU: Multi-speed and variable geometry within the EU (opt-in for the UK and Denmark);
• An opt-out Social Protocol for the UK;
• Authorisation for the use of higher (environmental) standards according to Article 95 of the EC Treaty;
• Limited, and rarely lasting, derogations from the Acquis Communautaire within the framework of the accession treaties;

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• Following the completion of the internal market, not all countries have, as yet, translated all EUregulations into national law, which leads to an actual differentiation and formally represents a treaty violation (see Table 3).

On top of this, differences can be seen in both the CFSP and the third pillars with regard to WEU membership and participation in Schengen.

The following factors intensify the pressure towards differentiation:

• EU enlargement: Those candidates with accession promises (12 in all) are predominantly small and relatively poor countries; the range of heterogeneity (political, economic and cultural) will increase;
• Economic divergence;
• Variable memberships of, and participation in, functional regimes and regional groups outside the EU;
• 'Eccentricity' of individual Member States;
• Changes in the balance of power within the EU: (a) in the course of German unification, (b) in the course of enlargement;
• Interest in further structuring of the system and concern over immobility.

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1.6 The EU economy: Stable, but unemployed

The EU continues to suffer from weaknesses in growth and high unemployment. Price competitiveness has increased thanks to the revaluation of the US-dollar, but there is a lack of export-intensive high-tech sectors. Low and converging inflation and interest rates in the EU are to be viewed positively (see Table 4).

1.7 Accession candidates: Progress, but no completion yet

The ten accession candidates can be distinguished by a patchy but successful transition in comparison with other countries in the East and South-Eastern Europe. Yet the currency crisis in the Czech Republic has made it quite clear that the supposed model pupils still have massive problems. The five 'Pre-ins' of the second round are weaker in political and economic aspects. Foreign trade has, for the most part, anticipated accession to the EU. Germany is the most important trading partner of almost all of these countries, already concluding almost 10 percent of its foreign trade with the region. One cannot speak of a completed transition in any of these countries (see Table 5). Above all, the modernisation of the business and banking sectors requires even greater efforts. Historically high unemployment will also increase further. Unemployment, poverty and an ever more unequal distribution of income and wealth will endanger social consensus. Politically, party systems and voter behaviour are still characterised by large fluctuations, which could also prepare unpleasant surprises in the wake of social crises.

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1.8 'Poor' neighbours between reform and systemic crisis

Even after an eastward enlargement, the EU as it is today will remain surrounded by a ring of 'poor' neighbouring countries who are linked with it through the desire to accede as well as through association, customs unions, trade and co-operation agreements or partnership treaties. The EU is the most important economic partner of these countries, even if they are of little economic significance for the EU. Their growth rates, weak in comparison with the peripheries of the EU's competitors, the USA and Japan, also put a brake on EU growth.

These states are characterised by societies which are stuck in different phases of reform. The former communist countries are frequently dominated by nationalistic or authoritarian forces who, on top of everything else, have acquired control over important parts of the national wealth. In the Arab countries of the southern Mediterranean, the traditional crony economies have to a considerable extent collapsed, but they have only been superficially democratised and liberalised. Crises in these countries tend to be systemic crises encompassing politics and the economy, which expose Europe to even stronger migratory pressures (e.g. Algeria and Albania).

2. Aims: Germany's Central Position and National Interests

In their general form, Germany's national interests do not differ from those of other countries:

• Peace and stability:Alongside NATO and the OSCE, the EU should ensure peace and stability in Europe. Primarily this is valid internally, but also increasingly externally. In order to achieve this, Germany needs an EU capable of action, in which decision-making processes and institutions are not blocked by an excessively wide diversity of diverging interests, and which has at its disposal sufficient political competence and financial resources to pursue common policies.

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• Prosperity:Germany's prosperity is dependent upon open markets for German exports which go predominantly to other parts of the EU. Central aims of German economic policy can only be achieved in the EU, most recently with monetary union. Until now, Germany has paid for this role played by the EU, which is important to her interests, by being a net contributor. The Kohl government has placed this German contribution in doubt. German interest in a good cost-benefit relationship from EU membership is certainly justified, i.e. higher EU output in return for Germany's financial input and so on.
• Enlargement:During enlargement negotiations, Germany's position has demonstrated special interests and 'sensitivities'. On the one hand, Germany is the most important economic partner of Central and Eastern Europe, and is particularly interested in securing the liberalisation achieved up to now through accession. On the other hand, Germany also has specific fears relating to freedom of movement, which would particularly affect the German labour market. These fears are strongest in relation to Turkish accession. Besides, Germany must also bear its relationship with Russia in mind when considering enlargement to the East.
• Social and environmental Europe: Alongside Germany's general national aims, a new emphasis must be placed on the social, environmental and civil rights dimensions of integration. Liberalisation of the markets must not be paid for by giving up social and environmental goals.

However, Germany's particular geographic location in the centre of Europe and its historical responsibilities after two failed military attempts to rule Europe demand a particularly thoughtful pursuit of these aims. For this, it must find a balance between its main security and economic interests, namely West European integration, and other interests which are of growing importance, namely Eastern Europe, relations with Russia and the trans-European dimension (the USA, the global economy and the Mediterranean).

Also, just after unification, Germany needs the EU for this. In fact, unified Germany, thanks to its stronger position, could pursue its interests on its own to a greater extent (e.g. monetary policy), but would run the risk of being perceived as a threatening hegemon by its neighbours. Germany's political expectations of the EU are for it to be embedded within Europe, Europeanising its national interests and then bringing these into accord with the national interests of its neighbours.

3. Problems and Risks: Disintegration in the EU, Instability around the EU

Failure of the aforementioned aims will result in problems and risks for German policy. At the same time, the definition of German interests is still subject to an adaptation process which is problematic in itself. Nevertheless, it can be assumed that for the foreseeable future the main risk for Germany lies in a breakdown of the (West) European integration process and a creeping return to historical conflict patterns - the encircling of Germany by weaker countries who feel threatened. The dangers of instability in neighbouring regions and in Russia are also a threat.

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3.1 Euro-scepticism, stagnation, or a step backwards in the integration process

The social crisis in many EU Member States, in the form of growing unemployment and overloaded welfare systems, with the consequent increase in poverty and social exclusion has, in some Member States, strengthened extreme political forces, which are hostile to democracy in their own countries and also to the EU. They blame the EU, and the associated opening of the national economy and society, for these social problems. In many cases, they favour protection from foreigners and often the expulsion of foreign citizens already resident, as well as withdrawal from the EU.

The most important and powerful elites in the EU Member States until now, i.e. businesses, unions, governments and important parties, are friendly towards the EU, as it corresponds to their interests. This could change, particularly in the field of politics, if voter opinion continues to diverge more and more from elite opinion. The democratic, system-supporting parties still hesitate to take up the anti-European mood of voters. But if Euro-sceptic positions retain lasting importance among the electorate, either the major parties will take up elements of this into their manifestos or smaller parties on the anti-European ticket will be strengthened (see Table 6).

With these smaller parties essential as coalition partners, they can force a less constructive policy with regard to European integration upon the governments dependent on them. In an extreme case, this means that individual national interests increasingly make the formulation of common and community policies more difficult. Integration, then, will no longer progress or may even regress. The 'bicycle model' of the European integration process supposes that an EU without progress towards integration will 'overturn'. This 'over-turning' could range from a hardening of the decision-making processes to a more or less systematic violation of EU treaty conditions by individual Member States or even withdrawal or exclusion of individual Member States.

Such individual action on the part of EU Member States could result from a lack of the EU’s ability to act, if EU Member States see important national interests threatened and the EU incapable of achieving a common reaction. Models for such problem areas would be akin to the scourge of Mad Cow Disease inside the EU or, externally, the crises in Bosnia, Albania or Algeria.

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3.2 The need for reform in different policy fields in the face of enlargement

Numerous policies which have developed along with the EU are in need of reform. They contribute little to the aims originally pursued by them, are excessively expensive, undermine the legitimacy of the EU and damage important interests inside and outside the Member States. Among the most significant are:

• The Common Agricultural Policy:Even after the MacSharry Reforms, this is still an extremely expensive policy which is not needed to this extent in order to secure the supply of foodstuffs in the EU. This strains relations with third countries and is biased in favour of rich producers, whose methods of production are generally less environmentally (and especially animal) friendly. The CAP today serves aims such as social security of farmers and care of the countryside, which lie outside its actual remit.

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• The Structural Funds:Although these objectives are more important than ever, the means are of questionable quality. After decades of its application, the differences between EU regions have hardly decreased. The example of Ireland does indeed show that the climb from assisted area (Objective 1) to growth champion of the EU is possible, but it remains debatable whether this success owes more to a skilful strategy of attracting foreign investment. The administration of funds needs more efficiency, tighter control, a graduation mechanism and innovative approaches beyond their main focus of investment in infrastructure.
• Finances:The system of contributions and distribution has an unfair effect and gives rise to constantly recurring arguments. The British rebate can hardly be justified and invites other Member States to make similar demands. The legitimacy of the EU would be strengthened by a fair and transparent financial procedure. Keeping to an irrevocably fixed upper limit (1.27 percent of the GDP, i.e. 84 billion ECU) demonstrates a distrust with regard to the use of funds rather than sensible financial control. This distrust is concentrated less on specific policies (where it was appropriate) and more on national returns (where it is a sign of a sceptical attitude towards integration).
• The Institutions:Designed for a Community of Six, the institutions have now reached a scale where cost and benefit are grossly unbalanced. The large number of parliamentarians, Commissioners and languages will have to be scrutinised. The cycles of the presidency are already too long in the EU of 15. The Commissioners view themselves too often as representatives of their Member States. The democratic legitimacy of MEPs is undermined by the enormous differences in the number of votes needed to win a seat in each country. Democratic control by the parliament is weak. The division of powers - in so far as it exists at all - is poorly balanced.

With an EU of 21 or 26 these problems would increase disproportionately. The possible coalitions of different interests in working out package deals would be unimaginable. The EU presidency cycle would exceed ten years. As the new Member States would all be clearly poorer than the current EU average, they would have to receive considerable financial transfers if current regulations were to be applied (see Table 7). The agricultural sectors of Central and Eastern Europe would also place extreme demands on the Agricultural Funds. Without restricting the claims of existing members and without considering the absorption capacity of the new members, the EU budget would clearly have to increase.

A majority in favour of reform and enlargement within the EU is rare, in spite of these obvious problems. The states for whom enlargement is most beneficial are indeed also relatively enthusiastic about reform. But their enthusiasm for reform has its limits (e.g. the long-standing German aversion to a reform of agricultural policy and more majority voting). But this pro-enlargement/pro-reform group consists solely of Germany and the Netherlands. The other supporters of enlargement (the UK, the Scandinavians) are more reserved towards reform. The opponents of enlargement do not want any financial reforms.

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Source: Arbeitsgruppe Europäische Integration der FES: 'Die Kosten der Osterweiterung der EU werden überschätzt", Bonn, Dezember 1997

3.3 Market-biased integration and social deficits

The crises of EU economies and societies hide behind the growth of national egotism within the EU and the reservation towards enlargement (and the burdens of adjustment associated with it). Their roots lie in the weakness of growth and the mass unemployment that accompanies it. The EU did indeed show a positive trend in this field from 1985 to 1990, but has not rediscovered that path again. Hopes were associated with the beginning of monetary union that this route would be permanently recovered, if obstacles to growth such as inflationary risks and exchange rate turbulence were eliminated or weakened.

The integration process in the EU proceeds through market liberalisation and policy harmonisation. Liberalisation increases the scope for action - mainly of firms but also, secondly, of consumers. Governments and employees have to adjust. The harmonisation of policies should prevent businesses playing governments off against one another, but it frequently comes down to a harmonisation on a very small common denominator of the lowest standards. Social and environmental aims are paid considerably less attention in EU policy than economic and monetary union. So the consolidation associated with noticeable cuts in the budgets of the Member States for the fulfilment of the Maastricht have, at least in the short term, increased unemployment and reduced social benefits.

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3.4 Risks to political stability in the accession countries

The political systems of the new democracies have not yet assimilated the social and political consequences of the systemic change. The severe transformation crisis has set most countries so far back that they are only today slowly regaining the per capita income of 1989. For the time being, voters have penalised the reform governments of this first period. Meanwhile, in some countries the reform communists elected to power at the time have been sent back into opposition. In spite of the instability and weaknesses of the party systems, most of them complete the alternance of power in an ordered and democratic fashion and extreme parties cannot register any alarming gains.

This could change with the re-ordering of the political agenda during the course of accession. Individual parties could make the question of accession into a theme for the election campaign. In particular, a referendum on accession to the EU would inevitably cause a polarisation which, as is often the case in Western Europe, can cut across previous party cleavages. It is not only forces who fear social disadvantages and losses of income who could be against accession, but also anti-liberal, national conservative groups who reject Westernisation and fear a loss of sovereignty as well as a threat to national values as a result of EU membership. Many Central-Eastern Europeans distrust the Western model and want a development on the basis of their own values and traditions (63 percent in the Czech Republic, 58 percent in Slovakia and 63 percent in Hungary).

3.5 Crises in the remaining countries

In comparison with the accession countries and their crises of stability, the other countries in the vicinity of the EU still find themselves deep in the reform process with severe deficits in democratisation as well as economic development. In many cases, these are pseudo-democracies, i.e. de facto dictatorships with simulated democratic processes and institutions. Their political economy functions according to the clientilistic system of patronage known from the Mafia, in which rent-seeking elites concentrate the national wealth at the top and then distribute it hierarchically downwards to their own supporters. Income is earned through political control, rather than through work or entrepreneurial innovation. As external economic sources of pensions are sinking because of decreasing raw material prices and the end of the ideological competition between donor states, these systems are entering a crisis as the loyalty of supporters can no longer be 'bought': Increased repression sharpens tensions; economic crisis and political suppression raise the pressure of migration, above all into the EU. A similar development threatens to overtake Russia. In view of its size, population and military potential, Russia’s stabilisation must be of particular interest to Germany. At present, the dangers resulting from the political instability of an unpredictable government in Moscow, or one incapable of action, are greater than the economic risks.