• Europe's artificial borders are melting away
• The ideal neighbour is rich, democratic and peaceable
• How other poor neighbours became rich
• A ring of semi-reformed planned and patronage economies
• Brussels trade policy: a pyramid with hub and spokes
• Growth and monetary policies are the best trade policies
• Euro-centric monetary co-operation
• Even with open markets and guaranteed demand, neighbours still need help
• Migration: a two-edged sword
• Influence through openness, not demarcation

Summary

1 Following the collapse of the communist system Europe's borders must be redefined. Even after the next enlargement round the EU will still be surrounded by a ring of poor neighbours wanting to join or linked with it by associations, customs unions, trade and co-operation agreements or partnership contracts. For various reasons on both sides there is no immediate prospect that these countries will become full members. Even so, the EU cannot be indifferent to their fate - for Europe's peace, security and prosperity are particularly dependent on what happens in these neighbouring countries.

2 The EU has no very effective instruments with which to influence the fundamental security-policy dimension of its relations with its neighbours. But security is intimately linked with stability, democratisation and prosperity. For in the long run the best neighbours are rich neighbours. Economically, however, the EU has considerable power: it is a super-heavyweight in comparison with its immediate neighbours, whose total national income is about equal to Italy's.

3 A comparison with North America (NAFTA) and South-East Asia shows that Japan's Asian periphery (and with it Japan itself) has grown fastest. But the huge differences within each group of countries show that in fact national efforts are decisive in bringing about developmental success. But in most poor countries the successful policy mix of export orientation, thrift, a high investment rate, a relatively equitable distribution of income and state-promoted development founders when it comes up against the interests of anti-reformist élites.

4 The regions neighbouring the EU are characterised by societies in which reforms have got stuck at various different stages. The countries which used to be communist are often dominated by nationalistic or authoritarian forces which, on top of that, have appropriated to themselves control over major portions of the national wealth - with the exception of a few rapid reformers which in any case will probably soon join the EU. In the Arab countries, the classic rent-seeking and patronage economy has largely collapsed with democratisation and liberalisation only occurring at a superficial level.

5 Brussels trade policy does not offer its neighbours the best conditions for export-oriented development. Its preference pyramid is flattening out, and the hub-and-spokes system of a number of separate trade agreements favours the centre. Unlike NAFTA there are no precise rules to give exporters and investors security. An expansion of the European Economic Area, including agriculture, would be the most welcome development to our neighbours. But trade policy is only one factor stimulating trading volumes, and world-wide liberalisation is constantly weakening it.

6 The volume of trade depends more on growth rates and the exchange rates between the currencies of the economies involved. Faster growth in the EU itself would be the best way of supporting its neighbours: despite relative success the growth process in some peripheral countries (e.g. Mexico, the Czech Republic, Thailand) sometimes fails under the pressure of balance-of-payments crises because the financial markets react too late and too violently to errors of economic policy.

7 Closer co-operation on matters of monetary policy, particularly after European monetary union, could prevent such crises and ensure the constant availability of capital for our neighbours. Its principal objective must be to stabilise investors' expectations by means of information, transparency and policy harmonisation. This will also have the effect of reducing the widespread flight of capital. Additional financial assistance to neighbours, however, should be treated with caution because of the problematical side-effects (debt, revaluation).

8 Trade liberalisation, an assured demand and exchange-rate stabilisation are of little use if there is no competitive supply of goods for export. An appropriate aid strategy here might be one aimed at improving the quality of manufacturing locations. Political co-operation should try to strengthen forces opposed to anti-reformist élites and to create the societal conditions necessary for a development-oriented policy.

9 An export-oriented development policy would be the best way to prevent migration, the effects of which are not unambiguously positive - either for the countries of origin or for those of destination.

10 A prophylactic policy (opening up markets, currency co-operation, assistance in creating manufacturing locations) may cost a lot of money, but it is not necessarily more expensive than what is euphemistically called reactive crisis management - i.e. muddling through. Ideally it should be based on a fundamental understanding of responsible neighbourliness and openness on the part of the EU to all its neighbours. At present, unfortunately, this is being undermined by ethnic and cultural prejudices which - particularly in the Mediterranean region - are creating new and unjustifiable borders.

Europe's artificial borders are melting away

Until the collapse of the communist bloc Europe's borders seemed to be permanently fixed. In the East the Soviet-dominated area hardly counted as Europe, from which it differed fundamentally both politically and economically. This is why, from 1989 onwards, one of the demands of the victorious democratic oppositions was a ”return to Europe”. In the South the Mediterranean formed a geographical border. Only the special case of Turkey disturbed this image: though socially and culturally alien, it is a NATO ally - which is trying, if not always without opposition, to develop into a western-European democracy and aspires to the EU membership which it has been promised.

Within these borders there were only democratic market economies, which either belonged to the EU or, as EFTA members, were closely integrated with the EU or actually on the road to membership. This Europe was linked with the southern Mediterranean countries by treaties of association, which - though bilateral - followed a uniform pattern of asymmetrical trade liberalisation and financial protocols. In the East the Soviet Union and COMECON, which it dominated, refused to establish links with the EU.

The fall of communism and the transformation of Central and Eastern Europe opened up these Eastern borders. During the 1990s, after initial hesitation, the EU concluded treaties of association with ten of the new democracies. These so-called ”Europe treaties” provided for a high degree of free trade (not including agriculture), political dialogue and the option of full EU membership. The EU also offered assistance through the PHARE programme and the EIB. Since 1995 the associated countries have submitted membership applications, which are being considered by the EU Commission in advance of actual negotiations. The EU has concluded trade and co-operation treaties - which also combine trade liberalisation with aid (the TACIS programme) and co-operation in various fields - with most of the other countries of Central and Eastern Europe.

German unification and the accession of the EFTA countries - Austria, Sweden and Finland - reinforced the EU's reorientation towards the East. The concerned south-west of the Union then called for equal attention to be paid to its southern neighbours, and the EU took account of this in the new Euro-Mediterranean partnership, which was concluded in Barcelona. In 1996 the EU agreed to form a customs union with Turkey, which the Turks - but not the EU - see as a further step towards full membership. In exchange for the consent of Greece to customs union the EU agreed to begin accession negotiations with Cyprus. Discussions with Malta, which had been agreed at the same time, were postponed in 1996 at the request of the island's new government.

But which countries will join the EU, and when, is still wholly uncertain. Cyprus is a divided island - and while there are ideas about how it could be integrated, there is no consensus. The dangers of confrontation with Turkey cannot be ignored. As for Central and Eastern Europe, there is a high degree of consensus for full membership between the élites of the candidates for accession and those of the EU - at least as regards the most advanced reform states. But there remain problems with the detail. The Amsterdam summit failed to make sufficient progress with the necessary EU reforms, particularly of its institutions. Some candidates in Central and Eastern Europe, notably Bulgaria and Rumania, are still deeply involved in the transformation crisis. Even in the case of model pupils like the Czech Republic it can be seen that good marks in certain fields, such as employment, were achieved by sleight-of-hand in privatisation and the restructuring of the enterprise sector. Weak productivity, low competitiveness and high balance-of-trade deficits are now becoming discernible.

So it is certain that not all ten candidates will be admitted to the EU in the first round. The accession negotiations will become a lengthy process. When tough conflicts of interests are raised, both sides will need a steadfast political will in order to be able to accept the economic and social costs of accession. Successful integration into NATO, which will alleviate security concerns and fears of isolation, could weaken that political will.

Even after the next expansion round the EU will thus still be surrounded by a ring of poor neighbouring countries linked with it by accession ambitions, associations, customs unions, trade and co-operation agreements or partnership contracts. For all sorts of reasons there is no possibility of full membership for these countries in the near future. Despite this, however, Europe cannot be indifferent to their fate - because its peace, security and prosperity is particularly dependent on developments in these neighbouring countries.

The ideal neighbour is rich, democratic and peaceable

The interests of the EU with regard to its neighbours are many, diverse - and contradictory. Rarely do the various member states - let alone the various social groups within them - pursue the same objectives. The official position, as expressed in communiqués from the Parliament, the Council and the Commission and in treaties and declarations, emphasises security, peace, stability, democracy, development and prosperity. But this does not rule out the possibility that in specific conflict situations other interests, for example those of individual producers in the EU, may take priority.

Apart from exceptions like this, diplomatic declarations do largely represent Europe's real interests in its neighbours. To a large extent, security, peace, stability, democracy and prosperity are mutually interdependent. Democracy, in the long run, brings stability and peace. Prosperity nourishes and preserves democracy, while poverty and social crises weaken it. But unlike stability, democracy is not a necessary precondition for economic development. And rapid growth can have a destabilising effect - socially, culturally and politically.

The EU benefits from having stable and prosperous neighbours mainly because they create fewer problems like migration, crime and environmental pollution. Prosperity makes it easier to solve conflicts by compensating the disadvantaged. In the final analysis, however, if conflict does arise, poor and shattered countries are less dangerous. But Europe's interests in peaceful, conflict-free relations with its neighbours sometimes clash with conflicts among those neighbours or even between them and individual EU members - such as Greece and Turkey, Israel and its Arab neighbours, Serbia-Bosnia-Croatia.

But security policy is not a classic domain of the EU. The Amsterdam summit hardly moved on at all from the cautious steps taken in Maastricht towards a Common Foreign and Security Policy (CFSP ). This remains overwhelmingly a matter for the national states and for bodies specifically concerned with security policy, like UNO, OSCE, NATO and the WEU. And the Europeans seem unable to make up their minds between collective security systems, which have seldom proved themselves in crisis situations, and defence alliances guaranteeing the security of their members from outside threats. The EU inevitably concentrates on external economic relations and on political dialogue, which increasingly addresses questions of human rights, democracy and the quality of government.

Our neighbours largely share Europe's objectives, and they have signed joint declarations accordingly (Barcelona, the European Convention on Human Rights and other agreements). Sometimes they may understand them differently. Representatives of political Islam in North Africa or authoritarian nationalists in Central and Eastern Europe have concepts of stability and democracy which differ from those of the EU. But with most of our neighbours consensus can be reached at the relatively abstract level of ultimate objectives. It is not so easy when it comes to less exalted objectives and specific policies. Though most poor countries now see the market economy as the best and quickest route to greater prosperity, few of them would still prefer this way of doing things if it failed to deliver the promised success.

Europeans, too, must weigh up the benefits of peace, stability, democracy and prosperity in their neighbourhood against the costs of the policies which must be pursued in order to bring them about. The EU would certainly not be prepared, in order to assist with its neighbours' development, to bear burdens proportional to those which West Germany accepted in order to improve living conditions in East Germany. And these costs do not consist solely of state expenditure: they also include the cost of adjusting the economy in the wake of the opening up of markets, the social consequences of immigration and the like.

This cost-benefit analysis is easier for the EU to carry out than for its neighbours, because they are less important to the EU than it is to them. For most of our neighbouring countries the EU is by far their most important economic partner, while most individual neighbours account for only vanishingly small percentages of the EU's external trade: even taken together they are responsible for only about 15% of its total exports and imports. This imbalance is mainly due to the difference in national incomes between the rich EU and its poor neighbouring countries. All the Barcelona states (i.e. the Mediterranean countries which are not EU members) plus the whole of Central and Eastern Europe (including all of the former Soviet Union) have a combined gross domestic product roughly equal to that of Italy, with ten times its population.

These comparisons make it clear that the potential of our neighbours to make trouble is not so much economic as social and political. The intervention potential of the EU, on the other hand, is mainly economic - not least because its competencies in the economic field are so much greater than in those of social and foreign policy, which are overwhelmingly determined at national level. What foreign economic policy on the part of the EU - given moderate and acceptable costs - would contribute most to promoting its neighbours' economic development and hence making them more stable, democratic and peaceable?

How other poor neighbours became rich

In our quest for an answer it may be worth looking at other economic regions. Europe's international competitors, the US and Japan, also border on poor neighbouring countries which are heavily economically dependent on them. But they differ widely in the structure of their relationships and in the growth achieved.

• NAFTA - the approach adopted by the USA - is one which regulates trade and direct investment with far greater precision than the EU association agreements. However, the NAFTA agreement neglects the economically and politically important capital flows (except for direct investment) from the USA to Mexico, as well as the heavy migration in the opposite direction. The USA's massive commitment during the 1994 peso crisis - it made available a US$ 40 billion support package - was thus outside the framework of the NAFTA treaty. The USA is also supporting the process of political and economic liberalisation in Mexico. With its Caribbean Basin Initiative - which is similar to the EU's approach - the USA has offered the smaller Central-American and Caribbean countries a mixture of aid and preferential market access, which it combines with its traditional interventionist foreign policy (El Salvador, Nicaragua, Haiti, Cuba etc.).
• Japan has built up a network of bilateral relationships with its East-Asian neighbours which is oriented towards the furtherance of Japanese economic interests - above all its supplies of raw materials and, since the 1980s increasingly, the relocation of labour-intensive production processes. Japan's principal instruments have been development aid and direct investment. It has hardly admitted any immigrants. But the East-Asian countries benefited substantially from the political protection, the relatively open markets and the monetary-policy orientation of the USA. Regional co-operation agreements like APEC, which therefore include the USA (and numerous other countries), are still in their initial stages. Politically Japan has largely kept itself to itself, putting up with conditions in its neighbouring countries which are not always democratic.

The development performance of the neighbouring regions of the USA, Japan and the EU has also varied widely.

Source: World Bank - World Development Reports 1988 and 1996

The table confirms that on average the South-East-Asian countries grew much faster than either of the other regions. The figures for Central America and the European periphery are broadly similar. It is difficult to draw comparisons with Eastern Europe, because the data in the planned-economy statistics up to 1990 were not really comparable, and the generally negative new incomes data (not included except in the case of Hungary) mainly reflect the effects of the transformation crisis. Poor member-countries of the EU, on average, achieved better results - but without achieving East-Asian figures, except for Ireland since 1985.

But the differences within groups of countries are also substantial. Among the East-Asian countries the Philippines are clearly the laggard. In Central America political turbulence and - in the case of Mexico - the oil price are especially important. Oil-price movements are also partly responsible for growth and crisis in Algeria. The example of Greece shows that even joining the EU is not a guarantee of growth.

The wide variations between countries shows that international framework conditions and external influences such as market access, aid or investment are not the determining factors. They support development processes which are already taking place successfully in suitable internal conditions, but without those internal preconditions they do not of themselves create growth - except, perhaps, for pure raw-material economies, whose national income arises almost entirely from the sale of oil or other commodities. Strong, competitive economies need no assistance from the donor states in order to attract foreign investment and win markets.

In terms of development of peripheral regions the East-Asian region was by far the most successful. And Japan itself, until the 1990s, grew faster than the EU and the USA. The successes of the East-Asian tiger economies were also due primarily to their own policies, not those of Japan. Geography, size and natural resources - not to mention political and social factors - led the ”tigers” to pursue different development strategies. Even so, a policy mix can be distilled from their experience which no country has applied in this pure and complete form, but which offers the best opportunities for development and modernisation. The features of this successful development policy are as follows:

• The state takes an active role in economic development, without sacrificing this objective to the perpetuation of the privileges of the élites. The state encourages modernisation in the private sector, but without protecting it from the need to make necessary adjustments. State expenditure is concentrated on education and infrastructure.
• The objective of monetary policy is a firm and marginally undervalued currency. This exchange-rate policy is supplemented by a restrictive fiscal policy in order to achieve balance-of-payment surpluses.
• Direct foreign investment is not a necessary precondition for success, as Japan itself, Korea and Taiwan have shown - though Singapore derived substantial benefit from it.
• A stable currency and a high savings quota mean low interest rates, which favour investment and growth. Domestic savings and foreign-exchange revenue are channelled into investment in growth sectors.
• Companies are not subsidised indiscriminately, but are exposed to fierce competition in the internal market in order to toughen them up for the world market. At the same time trade policy pursues a strategy of protected export promotion.
• Income disparities remain relatively low - often in consequence of an agrarian reform. This gives rise to a climate of stability and balance, and economically to a larger market for simple consumer goods allowing economies of scale for domestic industry.

Most poor countries would pursue policies like these only after major political and social changes. Underdevelopment is mainly the product of powerful interests, particularly of the privileged élites and ruling classes which benefit from it. Political and economic liberalisation can free the markets from this domination, but initially it can enable the old élites to exploit the new freedom in order to smash the last remaining protection of the poorer and weaker sections of the population. Democratisation makes it possible to control the élites and distribute the fruits of growth more equably. In the final analysis the quality of government depends on the extent to which the political process and the civil service can be protected from the dominance of special interests, and are thus in a position to safeguard property rights and organise and regulate competition.

But even a development-oriented economic policy is no absolute guarantee of success. The problems of many countries - like Mexico in 1994 and certain South-East-Asian countries and the Czech Republic in 1997 - show that success can bring foreign-trade problems which are not easy to solve by purely national measures, even if a different national policy (such as a prompt devaluation) might have averted the crisis, or at least make it less severe.