Euro-centric monetary co-operation

As the possibilities of trade policy have been pretty well exhausted, the EU could try offering its poor neighbours greater co-operation in the field of monetary policy. Such an approach seems appropriate because international capital flows have substantially exceeded trade flows since the 1980s: in Germany, for example, the percentage grew from 59% in 1985 to 350% in 1995. The greater the progress made towards monetary union in the EU, the more sense it would make for this task to be given to a European institution. If the Maastricht schedule is met, the Euro will be the obvious support currency for the EU's neighbours: it will take over not only the already important function of the Deutschmark, but also that of other currencies with major roles in trade and capital transactions between the EU and its neighbours. The exchange rates of the neighbouring currencies against the Euro would be the central orientation point for the monetary policy of these countries.

It ought to be the objective of co-operation in monetary policy to provide neighbouring countries with reasonable access to capital and protect their exchange rates from speculative shocks, though allowing necessary adjustments to changes of the fundamentals. But ”providing reasonable access to capital” does not mean making good every overspend or foreign-exchange shortfall with no concern for the economic use to which the capital is put. But a workable growth process should not, if possible, fail because of a shortage of capital. Shortage of capital manifests itself in interest rates which are higher than potential investors' yield expectations, as a result of which investment does not take place.

In poor neighbouring countries the reluctance to invest at home often takes the form of the flight of capital. In Russia the figure is put at US$ 30 billion. Experts also think that large amounts of capital have flowed out of North Africa into accounts in ”safe” countries. The EU could - possibly in collaboration with authorities in neighbouring countries - try to identify this ”flight” capital, and then either repatriate it or impose special charges on it (like taxes or interest). But the effect would probably be to drive this capital to other financial centres. A better alternative is to improve investment conditions in the poor countries in order to entice flight capital back.

It makes little sense for foreign public institutions to make capital available if locals, with their superior market knowledge, do not. A more important exercise would be to create the conditions for positive reactions on the part of investors and the financial markets, viz. confidence, rational risk assessment, transparency, regulation of players and markets (stock exchanges, commercial banks etc.). But for this the EU depends on the co-operation of its neighbours, because market confidence largely depends on the public economic policies pursued there. But like the IMF seal of approval, an assessment by the EU (or the institution charged with responsibility for co-operation in the field of monetary policy) based on no less solid foundations could reassure the markets.

Co-operation in the field of monetary policy could include the following elements, starting with those requiring the least readiness to integrate:

• early and detailed publication of relevant data and statistics of good and internationally comparable quality, and of forecasts based on verifiable methods (modelling etc.);
• mutual notification and consultation among governments, central banks and other important bodies regarding the assessment and evaluation of economic developments and consequent economic-policy decisions;
• harmonisation of the most important features of regulatory systems governing national financial markets and international transactions, respecting the neighbouring countries' reservations regarding their control;
• harmonisation of institutional structures in the financial sector (two-level banking system, central-bank independence, banking supervision, deposit guarantees etc.);
• harmonisation of concrete measures and policy co-ordination (e.g. joint declarations on exchange-rate levels, central-bank intervention in the foreign-exchange markets, interest-rate policy, liquidity aids, fiscal policy, wages policy etc.);
• pegging the national currency to the Euro or, initially, to the ECU;
• linking monetary policy to that of the EU, in the extreme case by means of a currency board system as adopted by Estonia and under consideration by other states;
• establishing a European monetary fund to function in the neighbouring region in a similar fashion to the IMF.

The more strictly the neighbouring countries undertake to subject their economic policy to the integration criteria listed above, the more extensive the intervention obligations of the European central bank or other institutions of economic co-operation. The combination of prompt and comprehensive information, joint assessment by the economic decision-making bodies on both sides, the announcement and implementation of appropriate measures at national and, if need be, international level can be expected to stabilise the expectations of market participants, thus making actual intervention largely superfluous. In fact intervention would have to be considered more as a failure of co-operation, as it would not often be possible to implement the policy against the markets with any prospect of success.

In the context of monetary-policy co-operation of this sort, capital assistance in the classic sense would be contemplated with reluctance and scepticism. It increases the indebtedness of the borrower, and it can lead to overvaluation of the currency - and hence to a deterioration in price competitiveness and to the inflationary expansion of the money supply in the country importing the capital. The most widespread form of capital ”assistance” - export credits or state guarantees of export credits - is particularly problematical. They directly increase the imports of the peripheral country and in certain circumstances can contribute to a rise in the balance-of-payments deficit. It would be of more help to poor neighbours if the EU were to finance imports from its neighbouring countries by granting favourable credits to its own importers.

The fact that a policy like this provokes amazement and disagreement is an indication that growth strategies of the centre and the periphery are not conflict-free. If both regions pursue export-led growth, either they must have access to an open third market (as the USA was for East Asia, i.e. Japan and its poor neighbours) or the centre must sacrifice its short-term economic interests in pursuit of long-term, higher objectives, as the USA did for the benefit of Western Europe after the Second World War. In the interests of accelerated growth the shrewd hegemonial power also accepts increasing penetration of its own markets by imports from the periphery, since this also improves prospects for its own exports and growth and - more importantly in the long run - stabilises its neighbouring countries.

Even with open markets and secure demand, neighbours still need help

A situation characterised by the policy options set out above (as has also been proposed by Fontela) offers the poor neighbouring countries opportunities and incentives to develop:

• Exporters can rely on relatively secure, open markets.
• Monetary policy hardly ever prevents the financing of investments.
• A marginal undervaluation protects price competitiveness.

But not even all these advantages in combination will guarantee success if there are no products fit for the world market. Shoddy products cannot be sold at a realistic price on the world market, except to a few enthusiasts. The generosity of the rich cannot make up for the low productivity of the poor. Defenders of the present Brussels trade policy - which, no matter what anybody says, is often protectionist - are fond of pointing out that even in sensitive fields the poor countries enjoying EU preferences do not make full use of their quotas because they cannot produce suitable goods.

Low costs due to low wages and a weak currency can attract investors, but on their own they do not constitute a long-term foundation for growth. In Central and Eastern Europe there are already increasing signs of a decline in investment, and occasionally even cases of relocation to old high-wage locations. Investors are disillusioned by the political and administrative environment, the skills and attitudes of the work force, the low degree of integration of the local and regional economies, the poor availability of services and/or other circumstances in the host country which make it difficult to improve productivity.

These problems are often accompanied - and aggravated - by a revaluation of the periphery's currency in real terms, brought about by higher inflation than in the centre with a relatively constant nominal exchange rate. The background to this phenomenon is often a rise in wages, which cannot be made up for by devaluation because the workers' consumer goods (wage goods) have a high import content, which devaluation makes more expensive - thus necessitating wage rises. In countries with heavy food imports (North Africa) this restricts the opportunities for an undervaluation strategy. What is needed is expansion and productivity rises in the wage-goods industries as one element in a long-term improvement of the manufacturing location.

This would be a strategic task for technical assistance. Many different projects have been developed to deal with these problems, e.g. promotion of small and medium-sized enterprises, the adaptation of technology to local conditions, vocational training, export promotion, development banks etc. Meyer-Stamer suggests integrating these more or less unconnected initiatives into a single concept for fostering manufacturing locations based on the latest insights into the factors which determine international competitiveness (Porter, Esser et al.).

Technical co-operation would therefore have to focus on systemic competitiveness, both taking the wider social and political environment of businesses into account and aiming to encourage particular industrial branches, clusters and wealth-creation chains. These business networks often transcend national frontiers. Export-oriented development on the periphery depends on the strengthening of such production associations, as they constitute the foundation for an increasing proportion of international trade.

A further starting-point for EU aid arises from considerations of trade policy, particularly in the event of an expansion of the European Economic Area or even of the single market. The neighbouring countries will need assistance with the adaptation of their regulatory bodies, for the mutual recognition of product standards is possible only if the regulations and the institutions enforcing them have more or less attained the EU level.

The combination of conditions favourable for foreign trade and efficient aid opens up favourable prospects of poor neighbouring countries achieving export-led growth. But it remains a sine qua non that politics and society in those countries do their bit to encourage this process rather than interfere with it. Unfortunately, as has been noted above, in most countries it cannot be taken as read that the ruling élites will abandon their previous practices of rent-seeking and patronage, instead embracing competition, innovation, modernisation, improving manufacturing locations and an equable distribution of the fruits of growth.

From the outside it is very difficult to bring about a change in behaviour on the part of the government or the élites from which it comes. Diplomacy is structured so as not to interfere in another country's internal affairs, and to seek a settlement only in the event of a direct conflict of interests, which as a rule requires concessions from both sides. However, many international treaties now offer additional opportunities to criticise national policies, for example in the context of the policy dialogue for which the association agreements provide, in the course of credit negotiations (IMF, World Bank etc.) or - where human rights are concerned, for example - of the OSCE or Council of Europe.

The international community in general, and the EU in particular, have made use of these intervention facilities with modest success. Many of the reforms and liberalisation measures implemented so far, as well as rhetorical commitments made by governments, can be attributed to this. Pressure must be maintained in order to secure the progress which has been achieved to date and make further progress possible. In addition, attempts can be made to improve the social conditions for a modernisation policy by non-governmental co-operation:

• parties and politics: strengthening reform-oriented, democratic forces, mostly in opposition but also within the élites, and weakening fundamentalist and nationalistic forces.
• society: the international integration of human-rights and environmental pressure groups and other non-governmental organisations so they can monitor the commitments made by their governments to the international community
• trade unions: a transition to productivity-oriented wages policy in order to protect the marginal undervaluation of the currency
• aid to the poor: giving marginalised sections of society access to the labour market by helping them to gain qualifications and/or subsidising their living expenses, with the overall effect of reducing their wage expectations to a level below their marginal productivity.

These initiatives also contribute to the defusing of another problem which has increasingly bedevilled relations between the rich centres and their poor neighbours: migration.

Migration: a two-edged sword

Migration processes can be divided into two types, depending on their causes or emigration motives:

• Political migration/ flight: many people leave their homeland because they are persecuted there for political or ethnic reasons. In extreme cases they flee from war and the threat of genocide.
• Economic migration: in this case the emigrants are attempting to escape a poor economic situation in their homeland, the host country offering prospects of a better income. In the 1950s and 1960s Europe's rich nations actively recruited guest workers; since the 1970s entry has been largely halted (except for the repatriation of ethnic Germans from the East), but there are ways of getting round this - notably by the fact that members of immigrants' families are still permitted to join them.

In both cases the only lasting way of restricting migration is to improve conditions in the country of origin. Democratisation and peace avoid or reduce the political pressure to migrate, while growth, by offering the prospects of employment and income, alleviates the economic pressure.

It is instructive that in South-East Asia, the most successful peripheral region, migration to the centre plays a relatively minor role. Japan has admitted hardly any guest workers, which - being an island - it found easy enough. There has been migration among the poor countries, notably from the Philippines and Indonesia, and emigration to the USA (mainly by Koreans). But enormous numbers of Mexicans and citizens of other Central-American and Caribbean states have emigrated or fled to the USA. Fear of immigration played an important role in the NAFTA negotiations.

Neither NAFTA nor the EU's association agreements create integrated labour markets with freedom of movement and domicile for workers, though the NAFTA agreement, for example, contains provisions relating to managers and the European agreements provide for the freedom of businesses to establish branch operations. Only full EU membership - because it includes the freedom of domicile - offers opportunities for migration, which is why the accession of countries with a high emigration potential is regarded with particular circumspection. This is a major reason for Turkey's non-admission to the EU.

Where growth and modernisation in the neighbouring countries is concerned, migration plays a two-edged role:

• The foreign-exchange flow which can be expected from guest workers' remittances is an advantage. It is equivalent to earnings from the export of services. Also the migrants contribute to development when they return home with their newly-acquired qualifications (including the civic experience of living in an advanced democratic society) and apply them to their advantage.
• But the loss of qualified people (the brain drain) has a negative effect. When they leave they take with them the human capital invested in their education. Political emigration weakens the opposition at home.

In the receiving countries the advent of immigrants has often provoked xenophobic feelings and acts. They compete mainly with the poorer indigenous population for housing and welfare benefits, though according to empirical surveys the competition for jobs is not as great as is often supposed - owing to their differing qualifications and skills. But the fact remains that in purely quantitative terms the larger labour force increases unemployment, unless the same number of new jobs has been created. In these circumstances the wages of unskilled and semi-skilled indigenous workers fall, and there is a redistribution in favour of capital. The extra profits, if invested, can produce growth. But there is plenty of evidence that this redistribution does not trigger any growth stimuli worth mentioning, simply because internal demand stagnates. The immigration which is often said to be necessary in order to safeguard the pension system can only achieve the desired effect if the immigrants - without displacing locals - find jobs which contribute to the social-welfare system.

If we wish to restrict economic migration, the best prospects are offered by a strategy of pursuing export-oriented growth in the countries of origin, based on undervaluation of the currency. If it works, it exports the labour of the local population in the form of goods and services rather than in the form of workers. Germany's successful undervaluation and export strategy produced a shortage of workers which led to the recruitment of immigrants. When full employment was achieved, instead of revaluing - stimulating imports and thus triggering a structural shift in the direction of higher-earning sectors - the Federal Republic of Germany imported guest workers.

Influence through openness, not demarcation

With the best will in the world on the part of the EU, it is overwhelmingly the efforts of the neighbouring countries themselves on which the success of development programmes depends. The meagre results achieved so far are less due to deficiencies in co-operation by the EU than to massive vested interests in the neighbouring countries in structures and policies which are ultimately hostile to development. Counterforces certainly exist in most of these countries, and these should be strengthened by foreign assistance. But there are also important interests in the EU which are sceptical, if not about the objective of increasing the economic power of its neighbouring countries, then certainly about the costs and possible consequences of the policies which could achieve it.

• Companies and employees who come under pressure to adjust to the results of growth in neighbouring countries and their exports to Europe expect protection, or at least the discontinuation of aid to those countries.
• Trade unions are critical of neighbouring countries which withhold important rights from their workers, calling for trade-policy measures (social clauses) to put pressure on their governments and/or companies.
• The environmental lobby reacts similarly when neighbouring countries pollute their own or the global environment in order to externalise costs.
• Human-rights activists and democrats are pained when they see authoritarian regimes benefiting from diplomatic and commercial relations.

Understandable and/or justified though these opinions and attitudes may be, they are often a symptom of myopia concerned with values rather than results. In the long run it is growth in the neighbouring countries, provided it is not too unequally distributed, which is the best guarantee of recovery from all their other infantile disorders. The more prosperous - and hence well-educated - the population becomes, the more value it attaches to its rights, to its environment and to sophisticated goods from richer countries.

If these premises are accepted, the first priority must be to accelerate growth processes in poor neighbouring countries. We have already considered far-reaching policy options for achieving this - from a free-trade area to monetary co-operation, development policies designed to encourage the creation of production facilities and social forces exerting pressure to reform. But there are various types of objection to all these options which must not be overlooked:

• Primacy of national policy: if the governments of the neighbouring countries have no proper development policies themselves (good governance]) there is not much point in Europe making efforts in that direction - unless they help to put the élites on the right track.
• Effectiveness: Politics can achieve little without co-operation from the major private players - now largely deregulated - in the globalised economy, and even less in the face of opposition from them. The taxpayer's hard-earned cash is likely to have been wasted if investors do not invest and companies fail to take the opportunities they are offered.
• Efficiency: the successes achieved by the proposed policies may well be modest in comparison with their costs - in the form of state expenditure, adjustment costs and political energy.

If these by no means unjustified concerns prevail, the result would be a generally distant relationship with our neighbours with selective intervention. The EU would then leave these countries to stew in their own juice, waiting for globalisation to force them to adopt growth-promoting policies or face ever more profound impoverishment. Where the EU saw significant advantage it would seize its opportunities (markets, imports of raw materials and semi-finished products), and where it saw significant dangers it would intervene with specific measures (in cases like dangerous nuclear power-stations in the Ukraine and the influx of refugees from Albania).

And indeed, the attitude adopted by the governments and peoples of the EU is generally reactive. Not until crises - in the form of recession, bankruptcy (particularly of their own investors), electoral victories by forces seen as dangerous or civil war - appear imminent or have actually occurred does the world of politics make any attempt to shut the stable door after the horses have bolted. Intervening at this stage is often more expensive than offering our neighbours preventive assistance in advance. In the final analysis the choice between a reactive policy of detachment and an active policy of involvement depends not only on cost-benefit considerations, but also on a fundamental assessment of the relationship with the country in question.

The more highly developed the sense of responsibility for neighbours is amongst voters, élites, the civil services and governments, the greater the chances that an active strategy can be pushed through politically. However, the EU and the individual member states view their neighbours from very different perspectives. The countries of Central and Eastern Europe have quickly established closer relations to the EU than the Mediterranean countries which have been associated to the EU for much longer. The rapid progress of the reform process in Central and Eastern Europe indicate that the prospect of EU membership is one of the most powerful incentives for all neighbouring countries to accelerate the reform process.

Even if it does not appear particularly appropriate the EU should not definitively rule out the long-term option of accession for any country. The prospect of admission - even in the remote future - is the most persuasive reason for many countries to make persistent efforts to reform, and not only in the Mediterranean region. Opponents of this view advance arguments which hardly stand up to closer examination:

• Europe's geographical border is hard to define in the East, and only superficially easier in the Mediterranean region. Areas of the southern littoral have always been part of the territory of member states, as have more remote locations (the Azores, the Canary Islands, French overseas territories). Should Cyprus not rather be thought of as part of the Middle East? Geographical counter-arguments are normally advanced in order to legitimate differentiations which are really ethnic, cultural or religious.
• From the historical viewpoint, when the EEC was established there were still Algerian members sitting in the French parliament - and the Treaty of Rome contained the intention of admitting Libya, Morocco and Tunisia as associate members. The 1963 association treaty with Turkey offered it the prospect of full membership. To this day broad sections of the populations - and particularly the political élites - of these countries consider themselves part of European culture and society. Close relations with Central and Eastern Europe, in contrast, are of comparatively recent origin.
• Ethnic grounds also make an unsuitable basis for demarcation. They contradict the citizenship principle (jus solis) of major member states. Millions of people living in the EU originally come from countries which would be excluded on ethnic grounds.
• Similar objections apply to demarcation on religious grounds. Hostility to Islam was given a boost when the Cold War ended. In the struggle against communism and the Soviet threat, political Islam was a much-courted ally. Geographical and religious frontiers rarely coincide: thanks to migration and Ottoman domination there are numerous Islamic communities in Europe (Bosnia, Albania, large minorities in France, Germany, Bulgaria, the rump of Yugoslavia and so on). Many non-Islamic population groups live in Europe's southern neighbouring states.

An open - or, which would perhaps be still more dangerous, subliminal - insistence on these demarcation criteria strengthens fundamentalist and nationalistic forces in our neighbouring countries, which build identification with their regimes with a policy opposed to democracy, the market economy and Europe, i.e. the very opposite of what the EU preaches.

Political and economic criteria - as formulated at the EU's Copenhagen summit for Central and Eastern Europe - should be applied instead: democracy, human rights, acceptance of the EU's objectives (economic, monetary and political union), the market economy, competitiveness and integrability into the EU. Countries satisfying these criteria should not in principle be refused accession if more than half of their foreign trade is transacted with the EU, if their per-capita income - which should not be too unequally distributed - has reached a certain level (e.g. half that of the poorest member state) and if they are living in peace with their neighbours.