London Office

The Friedrich-Ebert-Stiftung, founded in 1925, is a political non-profit making, public-interest institution committed to the principles and basic values of social democracy in its educational and policy-orientated work.

The London office of the Friedrich-Ebert-Stiftung aims to contribute to the knowledge and understanding of current political, economic and social issues in Anglo-German relations and to promote contacts between our partners in both countries.

The views and opinions expressed in publications of the Friedrich-Ebert-Stiftung London Office do not necessarily represent the views of the Foundation but are those of its respective authors.

Friedrich-Ebert-Stiftung London Office

22/23 Gayfere Street, London SW1P 3HP

Michael Dauderstädt is Research Officer in the Department of Industrialised Countries, Friedrich-Ebert-Stiftung, Bonn

Barbara Lippert is Deputy Director of the Institute for European Politics, Bonn

This is an updated version of a working-paper by the same authors published by the Friedrich-Ebert-Stiftung, Bonn under the title "Differenzieren beim Integrieren" 1995.

Published February 1996 by the Friedrich-Ebert-Stiftung London Office

Translation by Brigitte Puhl

Printed by MGA Advertising, 2 Vincent Street, London SW1P 4LD

Contents

Foreword 3

1. Summary 4

2. Germany_s interest 8

3. The position of the EU and the member states 10

4. The position of Central and Eastern Europe 14

5. Accession strategy 16

6. Cooperation on politics and security 22

7. Pre-accession aid through partnership in transformation 25

Foreword

So far, the European Union (EU) has absorbed new members and more than doubled its membership from the original six signatories to the Treaty of Rome. This has not been done without difficulties. But it has been done without radical changes to the institutional structures of the EU. Generally, the existing members have shared a common historical, political and economic culture and the framework of the EU has been able to accomodate the tensions which have inevitably existed. The recent accession of Austria, Sweden and Finland have challenged the EU but did not necessitate changes in the relationship between, and the structure of, the institutions by which it is governed.

This will not be true for future enlargements of the Union. The smooth continuum witnessed so far will not be possible in the future. The decision to enlarge the European Union to the Eastern European Countries (EEC), which has effectively been taken, will challenge the existing arrangements to a greater extent than any enlargement undertaken so far. And it seems far from certain that the existing institutional framework of the European Union will be able to meet this challenge unchanged.

So, substantial reforms of the European Union are required. This includes, above all, adapting the mechanisms for the governance of the Union as well as coping with the adjustment costs of accession. Besides that, far-reaching political changes are neccessary in areas like Common Agricultural Policy and Common Foreign and Security Policy. But how these reforms can be achieved is still an open question in the ongoing debate within the EU of exactly how to accomodate new Eastern European members.

This paper discusses the benefits and problems of enlargement from a specific German perspective and analyses the political and economic interests of both the EU and the EEC. Its publication will hopefully inform and contribute to the debate on enlargement specifically in Britain.

Heinz Albert Huthmacher February 1996

Director

Friedrich Ebert Stiftung

London Office

1. Summary

A scaled enlargement of the EU is in the interest of the Federal Republic of Germany. But it can and should only be realised in the medium-term together with - and not against the wishes of - the EU partners. In the forseeable future it can only apply to the three to five Central and Eastern European (CEE) countries which have succeeded in implementing profound transformations.

It can only be achieved through a parallel reform strategy which on the one hand needs to advance reform within the EU, and on the other transformation within the Central and Eastern European countries. In addition the EU must give meaning to its partnership with Russia.

The German Interest

Politically and economically Germany will profit greatly from an expansion towards the East. She stands to benefit most from stability in the CEE countries and their economic integration. Destabilisation would constitute a direct threat. EU membership provides the best opportunities for stability and integration.

If it were not for an Eastern enlargement, Germany probably would - and maybe should - try to promote stability and integration in the Central and Eastern European Region (CEER) through national action. This would create a politically dangerous situation for the Federal Republic of Germany within Europe. With a view to her existential economic and political links with the West, the Federal Republic can pursue its Eastern policy only in line with her EU neighbours and - particularly when it comes to security policy - with the United States.

Framework conditions

A rapid Eastern enlargement without taking into account the progress of internal reform within the EU will be counter-productive due to likely political and economic 'boomerang' effects. Should the EU maintain its current institutional rules and provisions, its agricultural policy as well as its structural and cohesion funds, an enlargement towards the East would have dramatic effects on the budget and the decision-making process within the Union. On the other hand, the EU constitutes the only anchor providing stability and integration for the CEER.

A European Union inclusive of the CEER would require profound institutional reform as well as an enhanced identity for its member states in the fields of foreign and security policy. Only a Union which in the course of its debate on enlargement manages to achieve clarity as to its 'final orientation' will be able to attempt seriously to tackle - and maybe solve - the problems involved with an enlargement towards the East.

Strategy

The Eastern enlargement must be achieved through a scaled approach and in the medium term. An 'emergency accession' of the countries of the Central and Eastern European Region would only be acceptable in a true crisis (e.g. a reactionary change in Russia).

After the decision during the summit in Essen to extend association to the Baltic States and Slovenia, there is hardly any reason not to conclude European Agreements (EA) with Albania and later the successor states of Yugoslavia as long as they pursue a democratic domestic policy and a peace-oriented foreign policy. On the other hand it is necessary to differentiate within this group of states. In any case, for the foreseeable future Germany should limit herself to advocating the entry of the potentially eligible neighbouring Visegrad countries plus Slovenia rather than risking losing her credibility by supporting big bang enlargement options.

The formula should read: The EU supports reform processes in all of the CEE countries. Towards the most successful countries it follows a pre-accession strategy that links aid towards reforms with the promise of membership, and below the level of full membership it stengthens cooperation links by opening perspectives for an overall European internal market and the promotion of regional cooperation.

New accents

It is in Germany's interest to pursue a parallel reform strategy involving a reform of the EU plus enabling the CEER to achieve successes in its transformation process. Only after considerable progress with their reforms can the EU membership for the CEE countries be successfully concluded. Thus preparing the CEE countries for EU membership will prove very costly for the EU even before the enlargement. If the EU wishes to exclude the possibility of a 'discounted membership' of the CEE countries it will have to contribute to the costs of restructuring before membership and thus prove it means business when it declares an interest in enlargement.

Priority should be given to the EU's institutional reform and its economic prowess. Continuously high unemployment and a lack of competitiveness impede progress in the deepening as well as the widening of the Union. Enlarging the EU to include the Visegrad countries does not require the existence of a CFSP.

For the CEE countries EU membership means an increase in security. This is still true if the development of a common defence policy in the wake of the CFSP reform takes place only after an enlargement towards the East. EU membership is a stepping-stone towards membership within the WEU, but not within NATO. For security reasons it would also be feasible for the CEE countries who do not yet fulfil the economic preconditions for EU membership to merely become members in the WEU (or NATO) and thus enjoy the support of the WEU (or NATO) partners. It is particularly in this field that transitional arrangements which are flexible enough to adapt to the state of security in the whole of Europe as well as policies strengthening other organisations are far more appropriate than a strict link of EU and NATO membership.

Implementing a parallel reform strategy will meet with difficulties. The CEE countries react with scepticism to all strategies which assume patience. As far as many of the partners within the EU are concerned the challenge of the 'Eastern enlargement' does not provide sufficient arguments for the required far-reaching reforms within the EU. For this reason the Federal Republic of Germany needs to provide additional incentives for a deepening of the EU with a view to the inter-governmental conference in 1996. A Franco-German initiative as well as cooperation during the Inter-Governmental Conference are called for.

2. Germany's interest

Vital interests and a special vulnerability

Germany has a vital security interest in an economic recovery in the CEER and the strengthening of its democratic structures. Out of all EU member states, her geographical position provides Germany with the greatest opportunities for economic and trade involvement with the CEER, while at the same time it makes her more vulnerable should there be political instability and economic decline in the region.

Against this background one can easily understand the special interest in a preventive policy which, very early on, recognises and tackles 'spill-over-risks', such as a continuous migration from East to West. Other risks, e.g. catastrophes in power plants, would equally affect both Germany and Western Europe, however this type of threat is much more vividly perceived in Germany.

It is for her own interest that Germany pursues an active preventive policy within the EU combined with a number of bilateral consultation and support measures - a policy for which she needs the acceptance by the EU partners for political reasons and a sharing of the burden with the G 24 states for financial reasons.

In addition there are far-reaching political statements in which the Federal Republic of Germany recognises her particular responsibilty and in which she undertakes - frequently on the basis of treaties - to show strong political as well as economic involvement in the societies in transformation and to advance their participation in the European integration process.

Amongst other things, Germany's support becomes evident in the granting of financial aid to the tune of 37.5 billion DM since 1989 which far exceeds that of other countries. Also when it comes to trade and direct investments, Germany ranks top in the EU, and out of the OECD countries Germany is the most important trading partner with ca 50% of CEER-EU trade. For these reasons the EU partners consider a reunited Germany as the prime benificiary of the present association and future enlargement policy of the EU.

Germany neither can nor does she want to shy away from economic and political involvement with the CEER, but she has to proceed on the basis of Western integration. With a view to the concerns relating to Germany going it alone and the formation of a German sphere of influence in the CEER, an EU enlargement towards the East could consitute a confidence-building measure vis-à-vis both the East and the West.

A parallel reform strategy

Due to structural economic problems and political divergencies the political and economic environment for pursuing an optimal strategy, i.e. to deepen the integration process in order to be able to widen the Union, has become considerably more difficult. However, the arguments in favour of such a strategy are still relevant. Yet it needs to be defined by concrete steps over a prolonged period of time and to be linked to a parallel reform strategy. The intergovernmental conference of 1996 needs to be set against the backdrop of such a parallel reform strategy. The EA states could be offered observer status during the conference. If nothing else, multilateral dialogue in the framework of structured relations between the EA states and the EU institutions could provide a forum for the voicing of interests and proposals.

Germany generally advocates an EU enlargement even if her vital interests are not immediately obvious, as is the case for the Baltic states. This kind of policy brings about a credibility problem as she cannot grant the membership wishes of CEE countries without the approval of her EU partners but at the same time it compounds concerns about German dominance within the EU and Europe. Germany's interest in individual CEE states is much more differentiated than her general advocacy for membership leads to believe. A 'Realpolitik' perspective advocates a pivotal function for Germany as an EU member in order to relay the interests of the CEE states to the EU and at the same time to underline their dependence on the EU to provide an anchor for modernisation and stabilisation /stability. What is needed is to place a stronger accent on reform aid in order to improve the CEER's eligibility for membership. The pressure to carry out the enlargement will decrease in line with the success of reforms in the CEER before membership.

With a view to an Eastwards expansion not all the integration steps relating to all of the three pillars are equally important. In this connection, too, Germany would need to revise her catalogue of demands and proposals for the Inter-Governmental Conference and to set priorities.

The main priority for Germany's European policy remains the drive to deepen the integration in which the cooperation of France has to be harnessed. A single-handed approach or an isolated position by Germany on Eastern enlargement would be dangerous. What Germany needs is a balanced European strategy which advances reforms within the EU in parallel with supporting CEE reforms towards democracy and a free market economy. The Eastern enlargement is first and foremost an investment in the future viability of EU-Europe for political (and security) reasons. Should the EU prove unable to come up with sustainable solutions for the CEER the far-reaching political project of 'European Union' would increasingly lack credibility.

3. The position of the EU and the member states

The policy of the EU, and in particular that of the Commission, more or less coincides with the German interest in a rapid integration of the CEE states. The summit in Essen met most of Germany's wishes. However, one can see that the initial efforts have been concluded with the summit and that the Latin presidencies show a greater dedication to the problems surrounding the Mediterranean. From a German perspective such an involvement must not be at the expense of Eastern enlargement.

The EU's main instruments in the relations with the CEER remain the European Agreements (EA) opening a perspective for membership as promised in Copenhagen and Essen. The EU Commission acts as the motor for the activities to implement and complement the association agreements. The EAs operate within an organic structure which assumes the successive integration of the CEE countries as democracies according to the OECD profile.

In the medium term, all rules and provisions within the economic, legal and political communities of the EU are to be applied to the most successful reform states without exception. By adding a multilateral level to the bilateral association relations (Copenhagen 1993) which affect the EA states without privileging the Visegrad countries, the EU operates with a type of safety net. The complexity as well as the amount of interaction give rise to enormous problems of coordination and management when it comes to achieving optimum efficiency and effectiveness in the measures taken. Incremental improvements can only be successful if - beyond stategic objectives - both parties have agreement on and confidence in the willingness to implement the relevant measures.

The EU's policy to conclude treaties is differentiated on the basis of geostrategic aspects according to which the so-called PHARE recipients (11 at present, potentially 15) are all dealt with equally - with the exception of Russia and the Ukraine (and eventually all the other CIS republics) with whom partnership and cooperation agreements have been signed and to whom a special programme of technical aid (TACIS) applies.

From a trading perspective the CEE region does not play a major role for the EU despite the export successes in recent years. The commercial exchange between the CEER and the EU corresponds to that of the EU with Switzerland. Things have not changed since the EFTA states became members of the EU. Only Austria, with about 9% exports to and 5.7% imports from the CEER, has the same trade interests in the region as Germany whose trade volume is higher compared to Austria. Finlands 'former COMECON trade' is mainly geared to Russia, while Norway and Sweden have no considerable trade interests apart from perhaps with the Baltic countries.

Most advanced are the association relations between the EU and the four Visegrad states. One of the potential newcomers in the group of the successful reform states is Slovenia. When it comes to implementing the European agreements the coherent application of a number of EU instruments is indispensable:

- e.g. PHARE; trade, competition, economic and monetary policy, as well as environmental and social policy, etc. (EU competences/ pillar 1);

- e.g. political dialogue, joint measures; harmonisation on CSCE and UN level as well as other international conferences (CFSP/ pillar 2);

- e.g. asylum and immigration policy; fight against crime (coopeartion in matters of domestic policy and justice/ pillar 3 of the EU including intergovernmental cooperation).

When it comes to operational matters the association bodies are particularly useful.

Problems of consensus with the member states

With a view the Eastern enlargement there are several cleavages within the EU states which would either have to be balanced internally - as has traditionally been the case - or decided unilaterally:

- The North-South cleavage confronts the Southern countries with the potential new net recipients from the East in the fight for limited resources from the structural and cohesion funds.

- The 'finalité cleavage' characterises the dissent surrounding the identity of the European Union and runs between the 'Intergovernmentalists vs the Integrationists', between the supporters of the internal market and free trade vs the Unionists who strive for an EU which ressembles a nation state.

The question of Eastern enlargement could become a potential cleavage for latent 'historical' dissent. The question as to 'whether' and 'how' the Eastern enlargement will take place can define the 'final orientation' of the EU framed in much more absolute terms compared to previous enlargements. Here lies the historical dimension. However, the arguments about Eastern enlargement can also lead to the EU impeding itself which would postpone setting the agenda - perhaps even permanently. The latter option would be in line with the history of integration up to now.

An opinion poll in May 1994 showed that in most EU member states there was a majority of 60% in favour of accepting the Visegrad countries (V 4). Even in the countries where those in favour were clearly below the 50% mark (as in Denmark, Greece, Portugal and Luxembourg), those voting against were in a clear minority.

For the EU an Eastwards expansion means a severe shift towards Central Europe which will strengthen Germany's political, economic and geographic role in the centre. On the other hand on the Southern flank, the EU member states around the Mediterranean have a growing concern relating to developments in the Islamic Maghreb countries. The Union can afford less and less to close its eyes to such developments.

In case of an Eastern enlargement the EU would gain low output countries on the periphery and lose homogeneity. With the membership of the four Visegrad countries (V 4), particularly Poland, the Union would assume traits of a development community. France especially could see herself as being marginalised. The present EU countries on the periphery - Portugal, Spain, Greece and Ireland - are concerned about their income from EU transfers and fear the competition from low wage countries in the East.

Germany's European policy tries to counteract this perception through initiatives like the 'Weimar triangle'. The interests of all 15 EU states converge in general political and security interests. However, implementation deficits in the EAs show that cost-intensive measures need to be constantly renegotiated within the EU. The German strategy on the development and the deepening of the Union must take into consideration the reform requirements resulting from an enlargement towards the East.

4. The Position of Central and Eastern Europe

Eastern and Central Europe was and still is a heterogeneous region which now comprises 15 states. From an eligibility for membership point of view each of the now associated 10 countries has its particular portfolio of problems. Slovakia, Bulgaria and Romania are at the bottom end of the top group for economic and political reasons. Due to its size and the importance of its agricultural sector (1/4 of all wage-earners) Poland causes institutional as well as structural problems for the EU. Different levels of progress in the reforms as well as different economic backgrounds give rise to a broad variance in macro-economic indicators (inflation, growth, unemployment, etc.) as well as in competitiveness in the sense of a modern structure of companies which are viable in the world's markets.

Three motives drive the CEE states to an EU membership:

1. EU membership symbolises entry into the Western wealth and security community and thus provides a guarantee against a return to Russia's influence. The security dimension becomes the more important as the possibility of membership of NATO against Moscow's wishes becomes more remote.

2. EU membership is the best way to secure access to the EU's internal market. It is true that association and membership of the European Economic Area provide the same type of access but not in an irreversible way as full membership does which also includes the right to participate in decision-making. Tying-in with the EU enables the CEER to find a way out of its relative underdevelopment and to become integrated into the world economy. From the perspective of the CEE states there is no alternative to the EU as an anchor for modernisation.

3. The governing élites see EU membership as a political guarantee against an end or a revision of the reforms towards 'democracy plus market economy', a concept which is of fundamental interest to Germany as well as the EU. A rejection by the EU would weaken the Western oriented forces in the CEER and strengthen the nationalists who seem to be gaining influence due to the growing disappointment with the reform process in the CEER.

What the young democracies need is economic success. For this reason they call for fair treatment as economic and trade partners as well as membership of the Union as equal partners. As EU members the CEE countries will strengthen the 'Intergovernmentalists' rather than the 'Integrationists'.

Initiatives for regional cooperation set up after 1989 are very much limited in their present impact as well as in their potential. They do not constitute an alternative but merely a sensible addition to a linking to the EU or to integration. The EU member states and/or the EU Commission as well as the EFTA states do participate in some of the cooperation organisations as is the case in the Baltic Sea Cooperation Council and the Initiative for Central Europe. Within the framework of Visegrad Cooperation, the Central European Free Trade Area (CEFTA) has been agreed which contains complementary provisions to the free trade arrangement within the EA framework.

However, not even the four CEFTA member states share the same integration philosophy. Moreover, at the present moment they do not have any plans to extend CEFTA membership to the associated CEE countries Bulgaria and Romania. This is however something that the EU should promote.

EU membership will further divide the Eastern and Central European area and it potentially creates new frontiers between poor and rich, secure and insecure countries farther east. Each type of expansion policy needs to deal with this very problem and find ways to avoid a destabilisation of the rejected CEE countries and to offer them appropriate alternative forms of relations with the EU.

5. Accession strategy

Criteria for accession

During the Council meeting in Copenhagen the EU quoted the following criteria for accession:

- stable democracy (human rights, rule of law, etc);

- ability of the candidate to fulfil the requirements laid down in the acquis communautaire;

- functioning market economy;

- agreement with the aims of the Political, Economic and Monetary Union;

- competitiveness within the European Union;

- ability of the Community to take in the candidate without endangering the dynamics of the integration within the Union.

What is remarkable about this list - which otherwise the Union could have also presented to other candidates - is the fact that it contains a criterion concerning the EU's ability to absorb new members - something which concedes the need for reforms within the Union. With a view to foreseeably long deadlines before accession and open developments regarding EU integration the CEE candidates are concerned that they are unable to predict the kind of Union they will eventually join.

The criteria lay down qualitative conditions, whose evaluation is a question of discretion and negotiation. Institutional solutions such as the evaluation by the joint association bodies on operational matters seem to be appropriate. Thus for example full membership in the Council of Europe provides democratic legitimacy.

As to the economic criteria, it seems to be more feasible to use quantitative indicators such as the degree of privatisation or the share of non-administered prices as an indication for progress in setting up a market economy, or in the current account on goods and services, the external value of the currency, productivity and per capita income as indications of competitiveness. Here, too, there are problems in measuring these data as national statistical offices can easily manipulate data for political reasons. However, these indicators could give a first indication as to the economic situation and thus, indirectly, to the structural problems within the CEER and the possible costs arising for the EU. The decisive factor would be whether the CEE countries are eligible for membership in the EEA (European Economic Area) which can be measured by the extent to which the provisions laid down in the internal market project - which also have to be adhered to by the members - have been taken up. The treaty of Maastricht, too, raises similar requirements for the members of the Economic and Monetary Union (EMU) in connection with inflation, the budget deficit and the public sector borrowing requirement.

The Visegrad countries do accept these criteria in principle. However, they consider the political ones to be fulfilled, and as for the economic ones they emphasise that it is not a question of the level of income but of the 'health' of the economy. The Visegrad States underline the progress made in macro-economic stability while the EU has turned the micro-economic essentials for an internationally competitive economy into a criterion for eligibility. The CEE countries call for an evaluation by 1996 in order then to be able to start immediately with the membership negotiations. While the Visegrad countries want to carry out part of the structural changes after becoming members, the EU insists that these are a precondition for membership.

Costs and benefits of an Eastern enlargement

Assuming an expansion on the basis of predominantly unchanged EU rules, the costs for the Eastern enlargement would arise in different areas:

- Direct costs for the EU budget result from the new member countries' access to structural funds and their membership of the Common Agricultural Policy. According to current estimates (House of Lords 1992; CEPR 1992; study on behalf of the EU Commission) transfers to the CEER would amount to ca 13 billion ECU (= ca 26 billion DM) for the six presently associated countries and 86 billion ECU (= 172 billion DM) for the CEER plus the CIS. With a German net contribution to the EU budget of 30% this would mean an additional expenditure of 20 to 55 billion DM. However, there would be a reduction for the German budget to the extent of which bilateral aid to the CEER would become obsolete. Yet considering that aid towards the South of the EU is twenty times as high as the PHARE volume, savings would not be substantial. In the case of an increase in structural funds in the wake of a more intensive EU cohesion policy this amount could increase even further. On the basis of the experience with the Southern enlargement it is likely that there will be special programmes for weaker member countries (e.g. Slovakia) as was the case with PEDIP and PEDAP for Portugal. It is safe to assume that the EU would have to pay these types of transfers for a number of decades to come.

- Adjustment costs for EU producers occur in areas where CEE countries push into the market. However, these costs are not a direct result of membership as they already arise in connection with the opening of the markets envisaged in the association and trade agreements. All in all, the trade volume is rather low (below 5% of all EU imports) and only one third of CEE exports consist of sensitive products such as steel, coal and textiles. The costs in the agricultural sector are considerably higher. Modernisation of agriculture in the CEER would put pressure on agricultural prices. Adapting the CEER's agricultural markets and their order to the Common Agricultural Policy (CAP) would constitute a destructive development. The white paper on CAP reform, which the EU Commission is to table by the end of 1995, should be used to initiate an EU-wide discussion on structural changes which have been dragging on for a long time.

- Freedom of movement and of residency could lead to mass migration due to great differences in income between the countries. There will be additional costs relating to unemployment benefit in those countries of the EU where migrating or commuting CEE citizens push EU citizens out of their jobs. Moreover, this would lead to considerable social and political problems.

- The EU institutions which after the EFTA enlargement have become rather unwieldy would need to be drastically reformed in order to avoid overburdening them. Council, Commission and Parliament in the EU of the '15 plus' would need new rules as well as new composition and decicion-making processes. It would take even longer for the presidency to rotate. A decrease in Community institutions' efficiency as well as in their ability to generate decisions and policies will undermine their legitimacy in the medium term.

The benefit of an EU enlargement towards the East is rather of a qualitative nature and can be largely achieved through association without full membership:

- Due to high transfers to the CEE states their possible contribution to the EU budget would be negligible.

- The economic advantages for the EU would be quite considerable. Up to now there has been enormous growth in exports and with successful development in the region they will further increase. Favourable terms of trade create welfare gains for EU consumers. By employing cheap CEE labour, companies can lower their costs and thus increase their competitiveness. In the case of full membership it would be even easier to invest in the CEER and - to a large degree - hedge against political interference.

- Political benefit is the decisive factor. Unlike association, full membership can be expected to stabilise and to secure democracy in the CEER. (After having been associated in 1961 Greece became a dictatorship in 1967). However political stability needs to be created before membership. A country is not stable because it is a member, rather it is a member because it is stable. It is characteristic that the EC did not take the Southern Europeans in during the turbulent phase after the fall of the dictatorships but only in 1985 when the democracies had already strengthened. And finally from a geostrategic perspective, an Eastern enlargement would avoid creating a grey area between the CIS and the EU. The Central European countries have clearly committed themselves to look to the West - something which membership of the EU would cement.

Types of membership

EU accession could be achieved in various forms. Already in the past the accession process has been carried out in different forms and at different speeds:

- As to the Southern enlargement, several years elapsed between application and negotiations as the Community doubted the eligibility of the applicants. In the case of Portugal it even set up a special programme for pre-membership aid. After the accession there were long transition periods (in some sectors of up to 10 years). Apart from aid through regular funds, Portugal received aid in the form of special programmes for the modernisation of its industry and agriculture. However, in principle the Community did not depart from the demand that new members had to transpose the acquis communautaire in full.

In contrast, hardly any time elapsed between the applications of the EFTA countries from the beginning to the conclusion of the negotiations as their eligibility was never in doubt. However, Austria's application of 1989 was not processed until the EFTA accession round started. As members of the EEA, the EFTA countries had to bring about only minor structural changes. And yet there were lengthy negotiations over a period of two years about questions of agriculture, fishery and transit.

The European Economic Area extends the internal market to the EFTA countries and sets up special institutional and decision-making structures. It does not amount to partial EU membership and does not give access to EU institutions and decision-making. It is the eligibility to participate in the internal market which is the biggest hurdle for the CEER. The EEA constitutes an alternative for those states desiring market integration without political integration.

Given the structural problems and the relative poverty of most CEE economies, an accession process in line with the Southern accession seems more likely. Should formal accession be accelerated for political reasons one needs to assess to what extent the EU should move away from insisting on a complete adoption of the acquis communautaire ('discounted membership'). In turn the Union could demand an accession country initially to give up some of the principal rights of full membership (e.g. freedom of movement) which again would create a more even balance between rights and duties. In fact such a 'discounted membership' would be tantamount to partial membership.

Such a partial membership would be important for the CEE countries as it goes beyond the current structures of their relations with the EU. It would allocate rights and duties which would meet the interests as well as the abilities of the CEE countries without affecting EU interests. Thus one might envisage CEE states participating in various Union bodies (Parliament, Council Committees on economic and social affairs) with their status varying from body to body (e.g. observing, consulting, limited voting). However, concrete implementation of participation on the various levels and in the different units (groups, committees, COREPER, etc.) could prove rather difficult. CEE countries with a stable currency could be tied into closer monetary cooperation.

A proposed accession deadline for the CEE countries - e.g. by the year 2000 - might exert certain pressure on both sides to carry out necessary reforms, it is however not very realistic. If important interests stand to be violated no-one will feel bound to such a date. A better slogan would be: 'As rapidly as possible, as slowly as necessary'. Connected to the question of timing is the issue of which CEE countries could and should become members. Should there be no major setbacks one can easily imagine Slovenia or the Czech Republic becoming members by the end of the decade. The Balkan and the Baltic states will certainly need a great deal more time.

Apart from the accession of Greece, all 'enlargement rounds' have taken place in groups of countries. This approach makes sense if the applicants have close economic links and political ties - even though they might be in competition in which case the EU does not want to advantage or disadvantage anyone. This seems to be the case for the CEE countries although their trade relations and regional integration appear to be rather weak. Parts of the political élite in the Visegrad countries see themselves caught in a race for membership of the EU. Accepting a single country would certainly overshadow the relations to other - temporarily -rejected countries. A procedure of single accessions would delay the overall process and strengthen the negotiating position of the EU.

6. Cooperation on politics and security

Key players and their CEE strategies: EU, WEU, NATO

The EU, the WEU and NATO are the central players in the cooperation on politics and security with the CEER. Even after the Budapest summit the OSCE is still equally under-used by both the Western states and the CEE countries and needs to be developed from an operational point of view. The principles laid down in the Charter of Paris are, however, the most far-reaching codex for security and cooperation in Europe which covers the largest number of states.

Relating to the CEE countries, the EU, WEU and NATO pursue a policy of involvement through special arrangements and by keeping the option for membership open which needs to be decided on the basis of the future division of roles and tasks between EU, WEU and NATO. Up to now the EU has entered into the most far-reaching commitment towards membership, while the 'Partnership for Peace' initiative and cooperation within NACC and the WEU Consultative Forum are clearly geared to a long-term interim solution.

Under the two primordial strategies to secure peace - collective security and democratisation - the EU, as a civil power, offers largely instruments and forms of cooperation which aim at democratisation through welfare development and political involvement. The stability pact is an important tool of the EU's preventive security policy which lends itself to an intensive Franco-German cooperation.

The WEU, as an 'integral part of EU development' and the security component of the CFSP, grant the CEE countries access to the Western European assistance pact from which Russia will remain excluded. Neither these institutions nor the member states have a clear understanding of the future relations between EU and WEU. The problem lies in the different composition of the two institutions and in the status of EU members within WEU and NATO. While all members of the former EU of the 12 (apart from Ireland and for the WEU apart from Denmark) belong to NATO, the NACC, the WEU and the WEU Consultative Forum, the three new EFTA members neither belong to WEU nor NATO. In contrast all Baltic and associated CEE countries form part of NACC and the WEU Consultative Forum.

These incongruities, too, stand in the way of a link between EU and NATO enlargement from a point of view of time as well as content.

Perspectives

Only EU membership provides a security gain even without a defence component within the EU. With a view to bringing the applicants closer to a CFSP, the special WEU status ('associated partners') for the six EA states and the Baltic states (Kirchberg Declaration) can constitute a sensible and confidence-building step. It is important for EU members to create a common identity in foreign and security policy. The criteria for full membership of the WEU must be that the automatic commitment to assist one another is credible in relation to a new member. For the CEE countries EU membership will entail membership in the WEU as has been implied for the EFTA members within the EU.

While CFSP eligibility for the CEER is by and large uncontroversial, the position on Russia could cause conflict between the old EU members and the CEER members. The CEER and the EU have a common interest in partnership and cooperation with Russia in matters of foreign and security policy but not at the price of a veto for Russia. For this reason the EU has declared that a CEE involvement - and perhaps membership - in the WEU forms part of the EU association process and not the enlargement of the Western alliance.

The picture changes when it comes to NATO membership which most CEE countries strive for and consider a matter of priority. CEE membership in NATO becomes a problem for the EU once they have become members of the EU. Everyone's interests would be best served if the WEU (as a part of the EU) were to develop into the European pillar of NATO providing a clear identity for the EU and NATO. These questions will be raised for the first time as of 1995 when the new neutral members have a say in CFSP and indirectly in the direction the WEU will take.

7. Pre-accession aid through partnership in transformation

Apart from security cooperation, trade and aid will form the central areas of cooperation between Western Europe and the CEER. In both areas the EU will need to change its priorities if it wishes to promote a sustainable transformation in the CEER.

Opening of the market and pan-European internal market

Since 1989 the EU as well as the CEE countries have considerably lowered their trade barriers and increased trade. The aims of trade and economic policy should be to strengthen further the growth in trade. In this context a further removal of trade barriers seems less important than accelerating and simplifying the administration of import procedures impeding the exchange. Both sides should avoid petty protectionism (as has been the case for Polish cherries). The European Agreements provide the opportunity to agree accelerated procedures to settle trade conflicts.

In this respect an expansion of the internal market to the CEE countries might be beneficial. However, it would need to carried out asymmetrically, as the CEER is not yet equipped for open competition. Nonetheless, the CEE countries could quickly transpose EU rules on the internal market into their national laws. As a consequence, CEE products which satisfy these rules would have to be treated like EU products on the EU market. In line with the preparation strategy the EU Commission has been working out a restructuring schedule.

In coordination with the CEER such a step-by-step pan-European market could also liberalise trade between the CEE states. The rules of origin laid down in the European Agreements allow for an accumulation of added value in different CEE states when exported to the EU, but do not stipulate it for trade within the region.

The Central European Free Trade Area (CEFTA) only covers the four Visegrad countries (Poland, Hungary, the Czech Republic, the Slovak Republic) and Slovenia. Other associated countries like Bulgaria and Romania remain excluded. Without wanting to force an artificial integration in the region, the EU should keep a close eye on how the more advanced Visegrad countries treat their less competitive neighbours. They can hardly expect to be treated better by the EU.

More important are measures which increase trade volume in the medium term:

- From a general economic point of view, trade volume increases with general growth. Due to the recession CEE exports into the EU have decreased since 1992. 1% more growth in the EU helps CEE more than a 1% reduction in tariffs. Moreover when the cake gets bigger it is easier for EU producers to leave a bigger slice to the CEE competitors without calling for protectionist measures.

- Leaving trade with third countries aside, the CEE countries - in the long run - cannot import more from the EU than they export. Hence it must be in the EU's self-interest to see imports from the CEER grow. The CEER must laboriously finance each EU export surplus by higher indebtedness or by export surpluses with the rest of the world.

- The CEE countries must strengthen their export promotion systems. They lack institutions and policies for financing and insuring trade as well as for marketing (information on markets, exhibitions, etc.). In contrast the EU members dedicate a large part of their 'aid' to CEE to de facto export promotion.

- Transport and communication infrastructures need to be extended in order to cope with higher trade volumes. In this context opposition by environmentalists against large scale projects such as motorways is to be expected.

Ultimately, trade growth depends on the cooperation of companies with the CEER. As is the case for international trade as a whole, trade between the EU and the CEER will be governed by supply relations within transnational production networks. Direct foreign investments, supply structures, subcontracting, production under licence and other forms of cooperation with the CEER countries are not yet developed.

These cooperations could contribute a great deal to the modernisation of the CEE economies. In the few successful reform states, the reform process to date has merely led to macro-economic stability, a market economy order and first moves towards privatisation (but many countries have not even achieved that). However, these reforms have hardly changed production structures, applied technologies, capital resources or management structures. Yet it is on these factors that the urgently-needed increase in productivity and competitiveness depends.

To the present day direct foreign investments have contributed only modestly towards modernisation. Despite the large number of joint ventures only little capital has been genuinely invested. In the majority of cases existing companies have been taken over in order to maintain and secure markets. 'Green field' and export-oriented investments clearly play only a minor role. The overall investment volume is rather modest: only ca 5% of German foreign investment has gone to the CEER (including the former Soviet Union).

Nonetheless, a shift of production towards the CEER due to the recession endangers jobs both in Germany and the rest of the EU. Considerable wage gaps (1:15) cause companies to move labour and wage intensive production steps to the CEER. This lowers the costs for the overall production and helps secure their other high wage jobs. However, on balance jobs for less qualified labour in the EU are lost - the same group which is also exposed to commuting and migrant workers.

Within the EU present low wage countries on the periphery like Portugal, Ireland and Spain must feel threatened when these simple production processes are moved to the CEER. Off setting growth, e.g. in the investment goods industry, rather benefits Germany and other central economies. Without stronger growth in general there will be a net redistribution of production and jobs at least from the periphery to the CEER.

On the one hand such a division of labour might enhance Europe's competitive position as it will entail a lowering of costs. The EU could enter into a division of labour scheme similar to the ones which already exist between the US and Mexico, and Japan and South East Asia. On the other hand the EU would need to accompany such a process with measures which at least partially compensate the disadvantaged regions and segments of the labour force.

In order to facilitate the political as well as social acceptance of such a new division of labour it would be useful to undertake a continuous revision of the economic policies which:

- limit the undervaluation of CEE currencies;

- link increases in productivity to increases in wages;

- combine incentives for direct investments (e.g. risk insurance) with securing the rights of workers and trade unions.

Aid in need of reform

Western aid up to now has concentrated on the promotion of its exports to the CEER. Other important measures were writing off debts (Poland) as well as balance of payments support or loans to achieve macro-economic stability, all of which - at least as a side effect - also strengthen the CEER's ability to import. A large part of 'aid' consisted in loans which increased the CEE's indebtedness. The resulting scepticism on behalf of the CEE recipients is probably one of the reasons why only a small portion of the committed funds have been absorbed. A sincere 'partnership for transformation' must replace this kind of aid.

Apart from EIB loans, EC/EU aid has been characterised by the fact that it has consisted of grants which were used to finance technical aid and consultancy. The volume of the PHARE programme increased from 500 million ECU in 1990 to over 785 million ECU in 1991 and 1 billion both in 1992 and 1993. Aid programmes were coordinated with the receiving states and put to public tender. Thus in principle they meet requirements and demand, and are in line with competition.

The present criticism of PHARE is based on the slow movement of funds, lengthy appropriation and implementation processes as well as high fees for Western consultants. As is the case with development aid, this type of criticism does not really address the problems. Rapid flows of funds and superficial project assessment often generate projects which have unwanted or only minor effects. Frequently the practice of granting aid is caught somewhere between criticism of bad projects and laborious procedures.

Rapid and meticulously planned aid is probably the best recipe. All inputs should be procured as cheaply as possible and - if available in good quality - in the CEE countries. Comprehensive consulting reports without applicable results are too expensive at any price. It would be helpful to link the PHARE and TACIS units with experienced sectorial departments within the Commission.

More relevant is the criticism relating to the composition of aid. Some recipients are now talking about 'overconsulting' and expect further investments or at least a link between consulting projects and investments. On occasions, PHARE has cooperated with investors like the EIB or the EBRD and could continue to do so in further pilot projects. In addition one might consider earmarking funds for insuring the risks of private investors. In doing so one must however avoid Western investors shuffling off their risks to state budgets ('moral hazard'). An EU-wide harmonisation of incentive rules should counteract a race for subsidies as has been known for export incentives in the past.

In the region aid should reach out from the capitals into the 'provinces' as the capitals are already foci for contacts and financial flows. Transborder projects could contribute to a closer cooperation between the CEE states. The EU should link its regional and sectoral distribution of aid to transparent criteria which have been agreed with the partners.

Given the criticisms voiced, there should be priority for types of cooperation which can be more easily justified in the West and which meet with less criticism. For some countries writing off their debts would be more useful than new loans. This should however be linked to political conditions. Non-repayable financial aid should be geared to projects which immediately serve German and European interests: i.e. stabilising democracy, reactor safety, environmental protection, energy conservation, the fight against nuclear proliferation.

Direct subsidies geared to the social networks might aid social and political stability. It seems appropriate to link Western payments to the CEE's progress in democratisation. Yet such a policy can be counter-productive if nationalists in the CEER are able to denounce their democratic opponents as 'mercenaries of the West'.

Each aid programme uses up scarce resources, each step towards opening the markets costs jobs in sectors which are vulnerable to imports. The West would be better advised to invest in its own restructuring through employment and industrial policies as opposed to granting questionable large scale loans to CEE governments. If the West concentrates in putting its own house in order it will destroy the paralysing notion for the East that the West might be able to solve the East's problems. Less Western interference will also counteract anti-Western tendencies in the CEER which fight against too much influence from abroad. Ultimately, it is a prospering Western Europe which benefits the CEE countries most.