The Eastern Enlargement of the EU

The EU and Regional Integration Exam paper 06.06.11 The Eastern Enlargement of the EU - Three Dominant Perspectives Name CPR STU count: 21,232

2 Table of contents INTRODUCTION... 3 INSTITUTIONAL PERSPECTIVE... 3 BUSINESS PERSPECTIVE... 5 Increased political and economic stability... 6 Increased Foreign Direct Investment (FDI)... 6 Increased international competitiveness... 7 Increased cross-border trade... 7 THEORETICAL PERSPECTIVE... 8 Rational choice institutionalism... 8 Constructivism... 9 Critique... 10 Critique of rational choice institutionalism... 10 Critique of constructivism... 10 CONCLUSION... 11 REFERENCES... 12

3 INTRODUCTION Ten countries mainly from Central and Eastern Europe (CEE) were granted accession to the European Union (EU) in 2004, referred to as EU-10. This became known as the Eastern Enlargement. This particular enlargement distinguished itself by being the most extensive enlargement ever done in the EU. To understand why such an enlargement was desired, we choose to examine the politics and business perspectives. In particular we aim to identify and discuss what have been the dominant political and business reasons for the EU-15 and for EU-15 businesses for embracing the Eastern Enlargement of the EU in 2004 and describe how this enlargement has required changes in the institutional framework of the EU. We do not focus on whether or not enlargement as a policy is desirable for the EU, but solely focus on reasons as to why this particular enlargement was embraced by the EU and by businesses. We take a point of departure in the EU-15 and focus on their reasons for embracing the enlargement. Consequently, this leaves out the question of why the ten applicants wished to join in the first place. Neither is the objective of this assignment to verify or reject theories on EU but simply to apply and discuss the contributions that they can or cannot provide. In the following we will present first an overview of the changes in the institutional framework in relation to the enlargement. Then we will take a business point of view and present the four main arguments for why the enlargement will increase business opportunities. Finally, we will identify and discuss dominant integration theories that can help explain the rationale of the enlargement. INSTITUTIONAL PERSPECTIVE The reasons for conducting the enlargement will be discussed later. This section will focus on explaining the political and economic problems within the EU that were related to the Eastern Enlargement. The aforementioned problems can be divided into two categories: policy and institutional problems. One of the EU s major policy areas that were affected the most with the enlargement was the Common Agricultural policy (CAP). Furthermore, a series of questions regarding the institutions of the EU arose with regards to the expansion. The enlargement caused the population of the EU to

4 grow by approximately 75 million. Thus, questions related to the EU s institutions came naturally. These questions include: (Bache, George & Bulmer 2011) How should votes be weighed under Qualified Majority Voting (QMV)? What should be the size of a blocking minority? Should national veto rights be abandoned? In 1997 the Commission issued a report entitled Agenda 2000 concerning the readiness of the applicant states as well as the challenges posed to the EU if it were to entail ten additional member states. This report outlined the reforms needed if the EU were to expand eastwards (Bache et al. 2011). These reforms were negotiated in the Treaties of Amsterdam (1997) and Nice (2001). The Amsterdam treaty, although rather modest, brought about some institutional changes in order to make the EU more flexible thus paving the way for the accession of the EU-10. First of all, the EP was granted more power through co-decision, i.e. the right to amend or reject legislation, in further areas. Furthermore, changes were applied to the three-pillar system 1 (Bache et al. 2011). The Treaty of Amsterdam changed the first pillar so that member states can further integration in a policy area even if other member states do not consent provided that the Council approves under QMV. However, each member state retained the right to veto a motion, if the state insists that further integration would harm vital national interests. With regards to the second pillar, the concept of constructive abstention was introduced. This means that a group of member states can take joint action in the name of the EU, while other member states can abstain from voting, thus neither partaking in the action nor actively opposing it. The third pillar was reformed, introducing freedom of movement for every individual within the EU while immigration and asylum policy became subject to unanimity. These changes made the EU more flexible which was essential if the EU-10 were to join the union since a near doubling of the number of member states would have potentially paralyzed the EU decision-making process. The pillar architecture was dissolved with the Lisbon treaty. (Bache et al. 2011) 1 The Maastricht treaty divided the institutional framework of the EU into three pillars; the first pillar concerns the European Community. This pillar covers the common policies and the Economic and Monetary Union. The second pillar deals with the Common Foreign and Security Policy, whereas the third pillar covers the justice and home affairs, including judicial and police cooperation.(bache et al, 2011)

5 The Treaty of Nice removed veto from a 29 out of 70 policy areas. QMV was also subject to reform under the Treaty of Nice. The weight of votes shifted in favour of the larger member states. In order to compensate the smaller states, it was enacted that a majority of member states was required to achieve a qualified majority. Finally, a total of governments representing at least 62 % of the EU s population also became a requirement in order to secure a qualified majority (Bache et al. 2011). As previously mentioned, the Eastern Enlargement also brought problems to the CAP. Seeing as agriculture accounted for approximately 25 % of GDP of the EU-10 it would become very expensive to include these states in the CAP. Furthermore, the CAP could provide the farmers from the EU-10 countries with incentives to overproduce. The solution to these problems was to introduce compensatory payments for a lowering of the prices on agricultural products in the EU to match world prices (Bache et al. 2011). CAP funds were accredited at a flat rate to member states that would then distribute the funds to farmers based on their own criteria, except for production subsidies, in order to lower incentives for overproduction. The flat rate system was first introduced in the EU-10 that received a flat rate amounting to 25 % of the CAP funds distributed in the EU-15. This was done in order to prevent inflation in the EU-10, as food prices were significantly lower in these countries than in the EU-15. Thus, the macroeconomic stability of the EU-10 was ensured. The system was introduced for the entire EU-25 in 2005, with the possibility of individual member states to negotiate postponement up until 2007 (Bache et al. 2011). BUSINESS PERSPECTIVE Having established the institutional changes to the EU we now look at business point of view on the Eastern Enlargement. Even though the organisation has undergone a great integration process, the interests and perspectives of business remain a key focus. In the following section we will present the business perspectives on the Eastern enlargement of the EU. We will take a point of departure in the four main beneficiary outcomes for businesses expected to arise from the enlargement as identified by the European Roundtable of Industrialists (ERT) 2 in 2001. We hereby assume that the interests of the ERT can be perceived as representative of the business interests of European companies in general. 2 The ERT is an advocacy group constituted by 45 multinational companies with origins in Europe that advocates nationally and on EU-level for the enhancement of business opportunities in Europe.

6 Increased political and economic stability The ERT argues that since the EU-10 agreed to adopt the acquis communautaire of the EU, i.e. the full body of the EU law, the standardisation of business regulations resulting from this would be beneficial for business opportunity across Europe. This is due to the fact that the homogenisation of the regulatory framework surrounding the business environment across the 27 member states would make the legal and administrative conditions for doing business in the Central and Eastern European countries much more transparent. The ERT thus concludes that the standardisation of regulations would create a stable environment for business which would make them more willing to make longer-term decisions on strategy and investment in the accessing countries (Grabbe 2001). Furthermore, the adaption of the acquis communautaire also includes the commitment to meet the macroeconomic standards spelled out in the Stability and Growth Pact (Bache et al. 2011). The SGP requires the member states to have balanced budgets, a maximum debt to GDP ratio of 3 %, and a gross debt of no more than 60 % of GDP (Mankiw 2007). Such requirements aim at stabilising the economy of the member states and thereby also ensure the fiscal stability desired by businesses when entering new markets. Increased Foreign Direct Investment (FDI) The clear expectation of the ERT report is that the CEE countries admission into the EU would increase the FDI inflows in the EU-10. This is partly due to the regulatory and economic stability expected to result from the accession, as explained above, and partly due to the untapped potential of the region. Specifically, the size of the populations, the vast natural resources, and the unfulfilled market demand constitute a great potential for businesses. However, this potential has been restricted by the low growth in the region as well as pitiable infrastructure and poor regulatory framework. All of these three barriers for fruitful FDI inflows were expected to be relieved with the accessions (Grabbe 2001). Empirically, the expectations of an increase in FDI are based on observations of FDI flows made since 1994 when the EU committed to enlarging to the East. The CEE has benefitted from their status as EU applicants ever since and has experienced an increased interest in investments. Furthermore, there has been a correlation between how far along a given potential member state was in its application process and the inflow of FDI (Grabbe 2001)

7 Institutionally, it can be argued that the accession of the given CEE states will create a more beneficial framework for FDI in the new member states. This is due to the fact that the newly accessed states achieve access to the decision-making processes of the EU and thereby retrieve the ability to advocate for a beneficial political, social and economic environment for FDI from within the institution (Kalotay 2006). Increased international competitiveness Many of the CEE countries have previously focused their production on labour-intensive goods. As competition on wage levels from emerging markets in Asia and Africa increases, it becomes ever more difficult to compete. The enlargement was expected to lead to an increase in FDI and thus the markets could evolve to develop a more future-proof human capital-intensive production structure through modernisation of industry, agriculture and infrastructure (Grabbe 2001) However, a significant challenge for the CEE economies was the low productivity. In order for these countries to be able to compete directly with the old member states, the workers in the CEE had to improve their skills relatively to the old member states. As the EU-10 become increasingly competitive the entire EU will benefit because the increased competitiveness, both within and outside the EU, will benefit the related businesses and create new jobs (Grabbe 2001). Increased cross-border trade The accession of the Eastern European countries into the EU has the immediate effects that travellers and goods can move fast, and without visa and customs regulations, across borders. The enlargement will thus ease the market access for businesses across Europe. Since 1989, with the fall of the Berlin Wall, the CEE have engaged in exporting to the Western European market, but the EU have been reluctant to import such goods, especially within the agricultural field due to heavy protectionist policies in the area. As the new member countries adapt the acquis communautaire such discriminatory barriers will be eliminated and the potential for extensive cross-border trade can be fulfilled. Consequently, the CEE economies could expect gains in GDP due to the increased economic integration which specifically entails increased trade, economies of scale as well as the increased competitiveness as described in the previous section (Grabbe 2001).

8 THEORETICAL PERSPECTIVE Having discussed the business perspective we now turn to the political aspect of the Eastern Enlargement. We will do this by looking at a two branches of new institutionalism; namely Rational Choice Institutionalism and Constructivism. Rational Choice Institutionalism Rational Choice Theory sees self-interest and materialism as the primary drivers of international relations. States are the primary unit of the international system, and their preferences are based on their self-interest and the relative bargaining power of the government. Hence integration only occurs when all states have something to gain. Looking at the Eastern Enlargement with a rational choice perspective inevitably make us look into a cost benefit analysis of the enlargement. (Bache 2010) Having established the analytical framework we move on to the analysis of the costs and benefits of the EU. Baldwin, Francois and Portes (1997) argue that the main benefit of the Eastern Enlargement will be the change in the geopolitical security setting following the end of the cold war. According to that rapport, the net benefits of the enlargement would be 10 billion euro 3. However costs can also be political, e.g. member states may lose relative power when EU-10 are integrated in the EU institutions (Moravcsik 2003). However, from a rationalist point of view the benefits are perceived to outweigh the costs for the EU and hence the enlargement was realised. Baldwin et al. s research does not deal with gains of each member state and hence cannot explain why all member states agreed to the enlargement. Since every member state is a veto player, they need to have a relative gain in order to agree on the Eastern Enlargement. In other words, having established that a net benefit of the enlargement exists, the member states need to redistribute benefits to member states whose costs will exceed their gains. Plümber et al. argues that this was actually the case in the bargaining process of the Eastern Enlargement. France would for instance be the subject of economic loss if another agricultural state like Poland were to receive CAP to the same extent as France. Therefore, France demanded restrictions in CAP for the EU-10 which illustrate the redistributive gains from Poland to France. 3 These benefits arise primarily because of the reasons pointed out in the business perspective analysis above. However, this number is the incremental net benefit in the long run and hence costs can occur at the time of accession which is what member states are afraid of.

9 These concerns are not only held by governments but also the population of the member states. Karp et al. (2006) conclude that citizens of the EU are motivated by self-interest. Farmers are for instance more reluctant to let in new members than other groups of citizens. Since governments are accountable to their citizens at elections they have to take these conclusions into account when negotiating the enlargement. This is why governments demand redistribution of gains so losers in the enlargement are compensated by the net beneficiaries which are EU-10 and northern EU states (Moravcsik 2003). These observations lead to a confirmation of the Rational Choice Institutionalism. Constructivism Having discussed the rational approach we now turn to the integration theory called Constructivism which explains the reasons for the Eastern Enlargement quite differently. Constructivism deals with states cultural identity, norms and values as the elements that govern international relations. Applied to the EU, Constructivism explains integration by the nations common European identity and norms. Thus, it is not primarily economic, security or other self-interests that motivate the close relations between the European countries (Bache 2010). Generally, member states would be positive towards accepting EU-10 into the EU. For the member states the enlargement will not constitute a major political change but merely an extension of the already existing norm and value system in the EU. This applies as long as EU-10 are perceived to share the collective identity and values of the member states. Applicant states, however, face a restructuring of the political system because of the need to adopt the acquis communautaire. Thus, according to Constructivist thinking, the question of enlargement should be more difficult for applicant states to agree on than for old member states to accept. (Schimmelfennig and Sedelmeier 2002) Norms and values may be altered over time as new situations arise where the consisting norms cannot be applied or are unclear. The change of norm is a product of arguing and a common understanding between member states and applicant states (Schimmelfennig et al. 2002). In line with the discussion of Constructivism one may point out that Constructivists will argue that as long as outside countries exists, which have norms, values and collective identity in common with the existing EU member states, the process of enlargement will continue.

10 Critique Rational Choice Institutionalism and Constructivism are definitely the two major competing perspectives in the enlargement literature. To some extent these theories are opposed to each other and to some extent complementary. We now turn to a general criticism of the two. Critique of Rational Choice Institutionalism Rationalism places very little emphasis on non-state actors, and Moravcsik (1995) for instance concludes that the EU Commission plays no significant role in the enlargement process. However, research by Werner and Lennecke (2009) shows that the Commission played a significant role because of the complexity, long duration of the process and large number of actors involved. This gives power to the Commission in the form of knowledge and experience through managing the process. Another major point of criticism is the negligence of external factors e.g. globalization. Globalization plays a major role in the regional integration processes around the world (Bieler, 2002). According to Bieler (2002) the globalization of production methods has lead to demands for regional integration. Neglecting these external factors may lead Rationalists to incorrect conclusions according to Bieler. Rationalism does not take cultural identities and norms into account as Constructivism do. This makes sense for the Eastern Enlargement because the common cultural identity is implicit. When turning to future enlargement such as Turkey, Rationalist scholars face problem explaining the reluctance to admit Turkey into the EU. According to Pedrafita and Torreblanca (2005), member states are reluctant about Turkish membership not because of economic losses but because of cultural differences and a non-existing common identity. In line with that argument, common identity ranks higher than economic benefits as explanatory factor of enlargement. Critique of Constructivism Likewise there is also critique of the Constructivist approach. In this concrete case of the Eastern Enlargement few of the theoretical points of the Constructivist approach does not seem to comply with empirical observations; one being the process of arguing. Research (Plümber et al. 2007) and empirical observations (Guldbrandtsen 2011) show that the negotiation process was characterized by bargaining between member states and EU-10.

11 Moreover, Constructivist theory suggest that applicant countries should have more concerns regarding applying for EU-membership than current member states should have towards admitting them into the EU. However, the opposite has been the case (Moravcsik 2003). The fact that EU-10 accepted rather harsh admission terms and also had large economic gains (Baldwin et al. 1997) points to the fact that EU-10 were eager to join whereas member states hesitated and demanded restrictions (Plümber et al. 2007) In the end the agreement was a product of intergovernmental negotiations and the result did according to Plümber (2007) mirror the preferences of national governments and their respective voters (Karp, 2006) hence disregarding the argumentation of Constructivism. CONCLUSION In this paper we have identified the institutional changes caused by the Eastern Enlargement and examined the enlargement through a political and a business perspective. We conclude that the enlargement has required major institutional changes including changes to the voting procedures in the Council of Ministers, changes to the CAP entitlement procedure and changes to the pillar architecture of the EU. These changes were necessary in order to accommodate the largest enlargement in the history of the EU. From a business perspective the benefits of the Eastern Enlargement include enhanced economic and political stability, increased FDI flows, improvement of the competitiveness of the EU and boosted cross-border trade. This has made EU-15 businesses very positive to this enlargement. Whether this can be considered one of the dominant reasons depend on what theoretical perspective you apply. Seen from a Rationalist point of view the business interest is a part of the cost/benefit analysis made by the member states. However, from a Constructivist perspective the enhanced business opportunities do not constitute the main driver for the Eastern Enlargement. Instead Constructivists emphasize the role of common identity in between old and new member states as the main reason for the enlargement. Both of the paradigms have been criticized for overemphasizing their particular focus. However, we support the conclusion by Schimmelfennig and Sedelmeier, among others, that the two paradigms are complementary rather than mutually exclusive.

12 REFERENCES 1. I. Bache, S. George, S. Bulmer (2011): Politics in the European Union. New York: Oxford University Press 2. R. E. Baldwin, J. F. Francois & R. Porte (1997) The Costs and Benefits of Eastern Enlargement: The Impact on the EU and Central Europe. Economic Policy, 24: 125-176 3. Bieler, A. (2002): The struggle over EU enlargement: a historical materialist analysis of European integration. Journal of European Public Policy, 9(4): 575-597 4. ERT: Home [Web Page ]. URL http://www.ert.be/home.aspx [first accessed May 2011] 5. Grabbe, H. (2001) Opening up the Business Opportunities of EU Enlargement. European Business Journal, 13(3): 127-148 6. Gudbrandsen C. (2011) Præsidenten, off-air recording, 12 April, video 7. Kalotay, K. (2006) New Members in the European Union and Foreign Direct Investment. Thunderbird International Business Review, 48(4): 485-513 8. J. A. Karp & S. Bowler (2006) Broadening and deepening or broadening versus deepening: The question of enlargement and Europe s hesitant Europeans. European Journal of Political Research, 45: 269-390 9. K. Lass-Lennecke & A. Werner (2009) Policies, institutions and time: how the European Commission managed the temporal challenge of eastern enlargement. Journal of European Public Policy, 16(2): 270-285 10. Moravcsik, A. (1995) Liberal Intergovernmentalism and Integration: A Rejoinder. Journal of Common Market Studies, 33(4): 611-626

13 11. Moravcsik, A. (2003) National Interests, State Power, and EU Enlargement. East European Politics & Societies, 17(42): 42-57 12. S. Piedrafita & J. I. Torreblanca (2005) The three logics of EU enlargement : interests identities and arguments. Politique européenne, 15: 29-59 13. T. Plümper & C. J. Schneider (2007) Discriminatory European Union Membership and the Redistribution of Enlargement Gains. Journal of Conflict Resolution, 51(4): 568-587 14. F. Schimmelfennig & U. Sedelmeier (2002): Theorizing EU enlargement: research focus, hypotheses, and the state of research. Journal of European Public Policy, 9(4): 500-528