Growth among the EU candidates in Central and Eastern Europe and the Baltic region has, in general, been relatively well sustained during the global slowdown. In most of these countries, growth rates of at least 2.5 to 4.5 per cent were recorded in 2002. Further strengthening is forecast for 2003 as the global economy improves. Regional activity has been supported by strong inflows of foreign direct investment, providing the major source of external financing and helping sustain domestic demand. Such inflows no doubt reflect the benefits of generally stable and credible macroeconomic policies as well as market-friendly business climates.
However, conditions and prospects differ from country to country: the Polish economy is still relatively weak, although it is showing some encouraging signs of recovery; the Czech Republic is suffering from a substantial fiscal deficit; Turkey remains vulnerable to changes in the financial market. Moreover, the region as a whole has not escaped the impact of the global financial market developments, with equity prices having fallen significantly – by 50 percent or more in most cases - since 2000. Over the same period, several countries – including the Czech Republic, Hungary, and Poland – have also experienced substantial effective exchange rate appreciations, although this has been partly reversed in Poland as a result of lower interest rates and an increase in policy uncertainties. While the Central European and Baltic countries’ access to international finance continues to be strong, most of these economies remain vulnerable as a result of their persistently high current account deficits.
The applicant countries hope that getting into the EU and consequently the monetary union will immediately produce an unprecedented economic boost. They hope that investors will no longer treat them as “emerging markets” with all the implied risks of corruption and ramshackle administration. The movement of goods across frontiers should become easier, and queues at the borders should disappear. Some businesses in the service sector will also be freed from irksome non-tariff barriers.
However, the applicant countries have already been given access to the EU markets before they formally join the Union. Having concluded free-trade agreements with the EU in the early 1990s, they are already enjoying most of the economic benefits of membership, in particular free trade in industrial goods. Around two-thirds of the Central and Eastern European countries’ trade fall on the EU. Foreign direct investment has also shot up because of these countries’ relatively low-cost production bases and their increasing access to the EU market. Full membership will not change the applicant countries’ economic prospects immediately. Agricultural trade will be liberalised, but that is unlikely to be much help to them in the short term, because their farm sectors are relatively backward and inefficient. Adopting the EU regulations – particularly in the social and environmental fields – may prove burdensome for the new members and increase their costs. Once the applicant countries are in, they become less competitive because they have to keep to social and environmental standards of Western Europe. Besides, the question arises as to whether the applicant countries will be able to live with the tight fiscal controls, such as limitation of budget deficits to 3% of GDP, and whether their banking systems will be able to stand them.
So, the European Union enlargement process will start in the near future. However, there will be an income gap among Central/East Europe and West Europe, which would amount on average to 30 years. Different countries would converge at different speeds. It might take Slovenia only ten years to catch up whereas Romania might face a 600-year haul. Within Europe the pull toward the European Union and the euro zone might eventually prove irresistible. Only in Britain, the European Union and the monetary union are viewed as permanently separable things.
