DI DEBATE. EU enlargement KEEP THE TRAIN ON TRACK

DI DEBATE EU enlargement KEEP THE TRAIN ON TRACK

EU enlargement Keep the train on track November 2007

Preface In the Western Balkans enlargement is increasingly being compared to Santa Claus. People do not believe in him, but still they want their children to, goes a joke in the region. And despite signs of growing support for further enlargement, opposition is still significant among EU citizens, in particular on Turkey. Therefore there is still a strong need to spread the message that all the enlargements of the EU have been gigantic successes for both new and old members in political and economic terms. They have strengthened Europe in a globalised world, and European companies and citizens have benefited tremendously. I am convinced that one day history will show that the accession of the Western Balkans and Turkey has brought similar benefits to the rest of Europe. 3 preface If we were to cut off the Western Balkans and Turkey, we would miss an important opportunity to further secure a peaceful and prosperous Europe. The Western Balkan countries and Turkey should not become EU members before they live up to all EU requirements. But when they do, they should. I hope this publication will contribute to keeping future enlargements on track. November 2007 Published by the Confederation of Danish Industries (DI) Edited by: Henriette Søltoft. Printed by: P.J. Schmidt Grafisk ISBN 87-7353-677-6 1200.11.07 Hans Skov Christensen Director General, CEO Confederation of Danish Industries

4 contents Contents Enlargement a success story to be continued 7 Western Balkans Keep up the steam 8 Get Turkey back on track 11 Why future enlargements? 17 The Western Balkans fragile stability 25 From war to sustained peace and stability 26 Positive economic development but fragile 30 Keep the Western Balkan on track 32 5 contents Turkey do not derail the train 39 The glory days of 2004 39 One step back fade away of the glory days 41 Get the Turkish train back on track 43

6 enlargement Enlargement a success story to be continued Summary EU enlargements are among the biggest success stories of the EU. They have been cornerstones in the creation of modern, well-functioning democracies and market economies in Southern, Central and Eastern Europe. The enlargements have led to a stronger Europe with significantly increased political stability and strengthened economic development. The latest round of enlargements with the Central and Eastern European countries has despite many people s expectations and fears not resulted in flooded Western labour markets, unfair competition or the collapse of the economies in the new member states. 7 enlargement On the contrary, workers from the new member countries and new export and investment opportunities have brought in their wake significant economic benefits for both new and old member states. At a point of time when Western European companies were experiencing rapidly increasing competition from global markets, they were able to develop new trade and investment opportunities right on their own doorstep in Central and Eastern Europe. In short, the accession of the Central and Eastern European countries was just what the Western European companies needed to remain competitive in a globalised world. Despite these facts and despite some signs of increasing support for further enlargement, there is still widespread opposition to EU enlargement among many EU citizens. According to a Eurobarometer of June 2007, 39 per cent

8 enlargement of the citizens in the EU are opposed to further enlargement. Therefore, promoting the enlargement process continues to be an important task. velopment and stability. However, the overall picture is that since the end of the wars in the Western Balkans in the 1990s there has been positive political and economic development in the region. Croatia stands out from the rest of the Western Balkans in terms of political and economic development and approximation to the EU. It has initiated accession negotiations with the EU and has enjoyed positive economic development in recent years. 9 enlargement The Former Yugoslav Republic of Macedonia (FYROM) has been granted candidate status. FYROM, Albania and Montenegro have concluded a Stabilisation and Association Agreement (SAA) with the EU. Serbia and Bosnia and Herzegovina (BiH) have initiated SAA negotiations. Furthermore, the region has on average enjoyed significant economic growth in recent years and foreign direct investment (FDI) is growing. This does not mean that the concerns of the citizens should be disregarded. But all parties in favour of further enlargement should make an effort to show that the benefits of enlargement are enormous for citizens in both new and old member countries compared to the difficulties. And after the agreement on the Reform Treaty, the institutional set-up within the EU will be ready for the Western Balkan countries and Turkey, as soon as they live up to all EU requirements. Western Balkans keep up the steam! At the EU-Western Balkans Summit in June 2003, the EU confirmed its support for a European perspective for the Western Balkan countries. In other words, the EU promised that each of the Western Balkan countries could join the EU once they fulfilled the membership criteria. There are significant differences between the Western Balkan countries in terms of political and economic de- At the same time, most of the Western Balkan countries are still politically and economically fragile and many years of reform work are needed before accession can become a reality. There is an ongoing dispute about the future status of Kosovo, and there are still peacekeeping troops in Kosovo, which is also the case in Bosnia and Herzegovina. In all Western Balkan countries, despite considerable differences, administrative capacity and the judiciary are weak and corruption is widespread. In terms of economic development, the region is far behind that of the EU-27 average and there is a great need for further economic reform. Therefore the biggest challenge to the Western Balkans now is to sustain stability and firmly continue along the path of political and economic reform and reconciliation in the coming years and decades.

10 enlargement The main responsibility for this development lies with the Western Balkan countries and peoples. However, clear EU signals and support for this process, maintaining a clear membership perspective, is fundamental to securing stable political and economic development in the Western Balkans. The perspective of EU membership and the specific reform elements required in the EU approximation process are main drivers for positive change in the Western Balkans. 11 enlargement Nor should it be forgotten that European companies are vital for securing positive economic development in the Western Balkans. For European companies, stability and further EU approximation are important factors when making decisions on exports and investments. For companies, well-functioning administrative systems and judiciary, good and stable legislative frameworks and practices, non-acceptance of corruption etc. are essential. The perspective of EU membership is a main driver for positive change in the Western Balkans. Get Turkey back on track Between 2001 and 2004 Turkey went through what former Finnish President Ahtisaari has characterised as a silent revolution in terms of political, economic and governance reforms. The role of the military in political life was reduced, the legal system was improved, the death penalty was abolished, and there were improvements in the freedom of speech, assembly and the press, to mention just a few issues. Simultaneously, Turkey experienced high growth due to substantial economic structural reforms. This did not mean that Turkey was living up to all EU membership criteria or that violations of basic human rights no longer occurred. But the scale of the political, economic and governance reform that took place in Turkey during those years was without precedent.

12 enlargement However, the glory days of 2004 did not last long, and the EU-Turkey relationship cooled in December 2006. At the European Council, the EU heads of state and government decided to freeze eight chapters of the accession negotiations with Turkey because the country did not live up to all agreements with the EU regarding Cyprus. political, economic and legal criteria for EU membership would also show the rest of the Muslim world and the sceptics within the EU that democracy, human rights, market economy etc. can flourish in a country where a clear majority of the people are Muslims. 13 enlargement At the same time, Turkey s pace of political reform did not keep up the momentum of the previous years in 2006 and 2007. This was very much due to the parliamentary and presidential elections in 2007, which resulted in a crisis over the election of the president. The low public support for Turkish EU membership has led to some governments proposing halting accession negotiations with Turkey and changing Turkey s status vis-à-vis the EU from being a candidate country for EU membership to being a privileged partner without a membership perspective. European political leaders should stick to the obvious long-term benefits of continuing the accession process with Turkey. That, however, is not in the interests of the EU, and it was an important part of the EU agreement in December 2006 that accession negotiations should continue on other areas. It must be emphasised that Turkey like any other prospective EU member state should not become an EU member country without living up to all the EU requirements outlined in the Copenhagen criteria, e.g. human and minority rights and respect for all agreements concluded with the EU. Conditionality is a key principle of enlargement, and not sticking to that would undermine the credibility of the EU. At the same time, we should constantly remind ourselves that Turkish EU membership is an opportunity of huge dimensions that should not be wasted. In addition, the market potential in Turkey with its 70 million inhabitants and high economic growth is enormous for European companies. In other words, the Turkish market can bring significant prosperity gains to EU citizens. This, however, also depends on the pace of reform. Turkey is much further developed and more stable than most of the Western Balkan countries, and for many companies Turkey will also be an important market even if it is outside the EU. Still, progress in Turkey s EU approximation, which is a main driver for the reform process, is important for many companies decisions on trade and investments, because it makes things easier and less costly for the companies and it is a sign of increasing trade and investment security. A stable and democratic Turkey is a cornerstone for security in Europe, and Turkey is an important bridge to the Middle East. A democratic Turkey that lives up to all In short, there is simply too much at stake to just cut off accession negotiations with Turkey. Both Turkey and the EU have a responsibility to get Turkey back on track.

14 enlargement Instead of heeding short-term public sentiment, European political leaders should stick to the obvious longterm benefits of continuing the accession process. And, no doubt, a UN solution on Cyprus would be very helpful for the accession negotiations. But as for the Western Balkans, the main responsibility for securing the right development lies with the country that wishes to join the EU. With their new mandates, the Turkish government and president have a unique opportunity to step up political, economic and legal reform and to live up to all agreements concluded with the EU, to show to the EU and the rest of the world that Turkey belongs in the European Union. It will take many years, maybe even decades, before Turkey is ready for EU accession, but it is worth waiting for. Why continue EU enlargement with the Western Balkans and Turkey? To sustain peace and stability in Europe no more wars on the European continent To increase the European security zone To reap the economic benefits from trade and investments for both new and old member states in a bigger Internal Market To strengthen the EU and European companies in a globalised world To reinforce Europe s bridge to the Middle East 15 enlargement Enlargement Commissioner It is obvious that the EU accession process is no bullet train no Eurostar, pas de TGV. It is rather like the Orient Express, a train which takes its time, where the quality of the service and comfort comes first, before hurry. Yes, it is a slow, slow train coming, and not precisely up around the bend. But it is indeed essential that the train remains on track, and thus enables us to maintain our soft power of democratic and economic transformation in our future home territory. Enlargement Commissioner Olli Rehn, Brussels, November 2006

16 why future enlargements? Why future enlargements? Up to the present, the EU has undergone seven successful enlargements since the six initial member states signed the Treaty of Rome in 1957. In 1993, the European Union laid down the principles and conditions for countries wishing to join the community, the so-called Copenhagen Criteria. They stress that every applicant country has to live up to high standards of democracy, and that they must have a well-functioning market economy and a form of governance that characterises the EU. 17 why future enlargements? The Copenhagen Criteria Conditions for EU membership: A functioning democracy with free elections, the rule of law, respect for human rights, and respect for minorities. A well-functioning market economy that is capable of withstanding competitive pressure from market forces. The laws of the country are aligned with the body of EU law, the Acquis Communautaire. The two latest enlargements, in 2004 and 2007, added twelve new member states to the EU. Ten of these were countries of the former Soviet sphere of influence in Central and Eastern Europe. These countries have undergone tremendous reform since the early 1990s in political and economic terms. Democracy has flourished and the citizens of Central and Eastern European countries today enjoy stability and growing prosperity without historical precedent.

18 why future enlargements? The moves towards freedom and reform in Central and Eastern Europe have been the main drivers behind this. However, the accession process and integration into the EU have without doubt played a very important role in stimulating and speeding up the positive development. GDP per capita in per cent of EU-25 GDP (PPS) Slovenia 2005 Czech Republic 1996 Hungary Estonia EU enlargement has Slovakia stimulated economic Lithuania growth in Central Poland and Eastern Europe Croatia Latvia Romania Bulgaria Turkey 0 20 40 60 80 100 Per cent Source: Eurostat Note: No data for Romania 1996 Enlargement has not only benefited the new members, the existing members have also gained. Firstly, the consolidated security and stability zone has expanded remarkably. Secondly, new export and investment possibilities have boosted trade. Thirdly, citizens can travel, live and work in a much larger Europe, and consumers enjoy high standards and safety when they buy products in the entire EU. Our experience is that companies in Central and Eastern Europe are very competitive in terms of price, quality, lead-time etc. This, combined with the high level of skills in the companies, makes it very profitable to do business in Central and Eastern Europe. We can only recommend other companies to look in that direction. Group Sourcing Director Flemming Clement, Hardi International The Polish plumbers, Hungarian nurses or Latvian construction workers that created so much anxiety turned out to be very beneficial for the Western European labour markets and for securing growth in the western part of Europe, at the same time as they were badly needed in their home countries. 19 why future enlargements?

20 why future enlargements? Exports from the EU-15 to the EU-12 have quadrupled since the mid 1990s. Denmark s exports to the new member states are a telling example. From 2003 to 2006, Danish exports to the new member states increased by 74 per cent compared to overall Danish export growth of 27 per cent in the same period. Sound economic foreign direct investment (FDI) in the EU-12 has created thousands of jobs in Central and Eastern Europe while helping West European companies to remain competitive in a globalised world. Enlargement has also allowed the emergence of an increasing division of labour across Europe, limiting bottlenecks and helping to boost the Western European economies. 21 why future enlargements? EU-15 export to and import from EU-12 (index figures) 450 400 350 300 250 200 150 100 50 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Import Export Exports from the EU-15 to the EU-12 have quadrupled since the mid 1990s Source: Eurostat The Rockwool Group has business activities in many Central and East European countries and the area is a strong vehicle for our growth. EU approximation and enlargement have significantly enhanced the Rockwool Group s business opportunities in the region Senior Vice President Jakob Sørensen, Rockwool Group

22 why future enlargements? On the basis of this and in the light of the agreement on the Reform Treaty, which clearly defines the future EU institutional set-up and allows for further enlargement, there is every reason to continue along the enlargement path with the Western Balkans and Turkey. European Council Enlargement has proved a historic opportunity to ensure peace, security, stability, democracy, the rule of law as well as growth and prosperity in the European Union as a whole. Enlargement is equally helping the EU to become a more competitive and dynamic economy and be better prepared to meet the challenges of a globalised and changing world. European Council, June 2006 The Reform Treaty paving the way for new enlargements In recent years, one key question with respect to future enlargements has been whether the EU itself would be able to cope with new member countries. With the existing treaties, the EU had reached its limits in terms of decision-making efficiency and the number of member states after the accession of 12 new member states in the period from 2004 to 2007. Therefore, the agreement of the EU-27 heads of state and government on the Reform Treaty in 2007 was very important to future enlargements. The Reform Treaty will ensure that the EU can be governed efficiently after future enlargements. The new treaty will strengthen the decision-making structure in the Council of Ministers by increasing majority voting and changing the definition of qualified majority. The number of commissioners in the European Commission will be reduced from one per member state to two thirds of the number of member states. The size of the European Parliament will be a maximum of 750 members. 23 why future enlargements? Widespread opposition to further enlargements The Eurobarometer of June 2007 showed that overall European support for further enlargement had risen from 46 to 49 per cent compared to a Eurobarometer of July 2006. However, 39 per cent of the European population are still opposed to enlargement despite the clear political and economic success of previous enlargements. Scratching the surface, these figures reveal that opposition to the accession of Turkey is significantly stronger than that of the Western Balkan countries. The Eurobarometer from July 2006 showed that 48 per cent are opposed to and only 38 per cent in favour of Turkish EU membership even if Turkey fulfils the membership criteria. With regard to the Western Balkans, the figures are more or less the other way round.

24 the western balkans The Western Balkans fragile stability The Western Balkans consist of Albania, Bosnia and Herzegovina (BiH), Croatia, the Former Yugoslav Republic of Macedonia (FYROM), Montenegro, Serbia and Kosovo. Together they represent around 25 million inhabitants and cover a land area of 261,970 square kilometres an area approximately the size of the United Kingdom. Western Balkans an overview 25 the western balkans The Western Balkan region has come a long way since the wars in the 1990s. But it is still fragile. Country Inhabitants Status in 2007 (million) vis-à-vis the EU Croatia 4.4 Candidate country and accession negotiations. Former Yugoslav 2 Candidate country. Republic of Macedonia (FYROM) Albania 3.1 SAA signed. Bosnia and Herzegovina (BiH) 3.9 SAA negotiations. EU military troops are deployed. Montenegro 0.621 SAA signed. Serbia 7.4 SAA negotiations. Kosovo 2 European perspective. Under UN administration and 16,000 NATO-led troops deployed. Sources: European Commission and NATO

26 the western balkans Stabilisation and Association Agreement (SAA) The Stabilisation and Association Agreement (SAA) constitutes the framework of relations between the European Union and the Western Balkan countries. The agreements are adapted to the specific situation of each partner country while establishing common political, economic and commercial objectives. In the context of accession to the European Union, the agreement serves as the basis for implementation of the accession process. Today, at the end of 2007, Croatia and the Former Yugoslav Republic of Macedonia (FYROM) have been granted candidate country status and Croatia has opened accession negotiations. Albania and Montenegro have signed an SAA. Serbia and BiH are negotiating SAAs with the EU. 27 the western balkans From war to sustained peace and stability? The meltdown of the Republic of Yugoslavia led to wars in the region in 1990s. The wars in the former Yugoslavia caused the death and ethnic cleansing of thousands of innocent people, and the economy was set far back while social cohesion in the region suffered immensely. Peace was settled in Bosnia and Herzegovina (BiH) in 1995 after three years of war, but the problems did not fade away. In 1999, NATO intervened in the Kosovo conflict to prevent ethnic cleansing. NATO thereafter established a protectorate secured by international peacekeeping troops in Kosovo. In 2000, European heads of state and government granted the Western Balkan countries a perspective for future EU membership. This was reiterated in 2003. In the following years, the Western Balkan countries made considerable progress with regard to stabilisation, reconciliation, political and economic reform and regional cooperation. European Council Croatia getting closer the 28th EU member state? Croatia is a special case in the Western Balkans and in terms of approximation to the EU the country is second to none in the region. Croatia has developed in the direction of an advanced economy and a consolidated democracy and continues to make improvements. Growth is around 4 per cent and inflation is relatively low. The Croatian market is well integrated with the EU market with more than 60 per cent of its exports going to and 70 per cent of its imports coming from the EU. Croatia was officially accepted as an EU candidate country in October 2005. Accession negotiations have been opened, and two chapters provisionally closed. Therefore, Croatia is expected to be the next country entering the European Union. Although the Croatian government s accession target is 2009, no fixed date for accession has yet been set. Despite the level of development and progress, Croatia still has to carry out significant reform before EU accession can become a reality. The judicial and administrative capacity have to be strengthened, the fight against corruption stepped up, and economic reform, among other things on state aid, has to be carried out. So, on the one hand the region has come a long way and has undergone fundamental societal change in less than a decade. The European Council reviewed progress made in the acquis screening and welcomes the start of substantive accession negotiations with Croatia. [ ] In this respect, the European Council confirmed that the future of the Western Balkans lies in the European Union. European Council, June 2006 On the other hand, the countries are very different and the level of political and economic development and stability varies a great deal. There is still a UN-led administration (UNMIK) in Kosovo, and 16,000 NATO troops are deployed to guarantee peace. Despite comprehensive ne-

28 the western balkans gotiations under the auspices of the UN, a final solution on Kosovo has not been found. EU military troops are still stationed in BiH to monitor the peace process. In 2006, the European Commission also temporarily suspended SAA negotiations with Serbia because of the lack of Serbian cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY). The negotiations were reopened in June 2007. This clearly illustrates the fragility of the development in Serbia. Key political events in the Western Balkans 1991: Collapse of the Soviet Union and the Republic of Yugoslavia. 1991: War in Croatia breaks out. 1992: War breaks out in Bosnia and Herzegovina. 1995: Srebrenica massacre and the Dayton Agreement. 1999: NATO bombardments of Serbia and Montenegro. 1999: Kosovo as a UN protectorate. 2000: All Western Balkan countries get an EU membership perspective. 29 the western balkans In July 2007 the European Commission called on FYROM s governing party to engage in constructive dialogue with the ethnic Albanian minority party to solve an ongoing political rift. 2005: Accession negotiations with Croatia start. 2005: Candidate status for FYROM. 2006: Suspension of further SAA negotiations with Serbia. 2006: Peaceful independence of Montenegro. Furthermore, weak judicial systems, low levels of administrative capacity and high levels of corruption are general characteristics of all countries in the region. 2006: SAA signed with Albania. 2007: SAA negotiations with Serbia reopened. 2007: SAA signed with Montenegro.

30 the western balkans Positive economic development but fragile The countries in the Western Balkans, former socialist societies devastated by war, are still faced with the challenging task of converting to stable market economies. Economically, the countries are facing the huge challenge of catching up with the EU average, but overall the Western Balkan region has moved forward in terms of achieving macroeconomic stability. Moreover, widespread unemployment is still a problematic issue throughout the region, ranging from 13 per cent in Croatia to 30 45 per cent in BiH and Kosovo. The low labour market participation and the large informal sector prevent full realisation of the growth potential in the countries. 31 the western balkans Economic development in the Western Balkans has been generally favourable since 2000, with a fairly strong real growth rate of around 4.5 per cent and decreasing inflation. The legal framework for foreign direct investment (FDI) is improving, and FDI in the region has more than doubled since 2000. The region is also becoming increasingly integrated into the EU market. For instance, more than 60 per cent of Croatian exports and about half of the exports from Serbia and FYROM go to the EU market. The import figures are even higher. However, in general the economies are still very weak and uneven and the growth and FDI levels have to be measured against a very low starting point. In 2005 the GDP per capita of Croatia, the most prosperous country in the region, was on average half of the GDP per capita in the EU-25. The per capita GDP of Kosovo was as low as 7 per cent of the EU-25 average, and the trade balances are also negative. Western Balkans main economic indicators 2000 2001 2002 2003 2004 2005 Real GDP growth (per cent) 4.1 4 4.3 3.9 5.7 4.7 Inflation (average in per cent) n.a. 24.9 6.7 4.5 3.9 6.4 Exports (billion EUR) 9.5 10.2 10.2 11.1 12.9 13 Imports (billion EUR) 19.4 22.9 26.6 29 32.5 31.8 Trade balance with world -9.8-12.8-16.4-17.9-19.6-18.8 (billion EUR) Trade balance with EU -6.9-8.6-10.5-10.6-11.7-11.9 (billion EUR) Current account balance -3.9-5.3-9.8-8.5-8.8-8.3 (per cent of GDP) Foreign direct investment 1,649 2,317 1,796 3,572 2,397 3,854 (million EUR) Positive economic development in the Western Balkans The Western Balkan region has moved forward in terms of achieving macroeconomic stability. But the economies are still weak. Source: European Commission: Western Balkans in Transition, 2006

32 the western balkans Keep the Western Balkan train on track The EU is playing a very important role in the Western Balkans. A decisive factor for the ongoing reform in the Western Balkans is the perspective of EU membership, which has also been made clear by the European Commission: The European perspective provides a powerful incentive for political and economic reform and has encouraged reconciliation among the peoples of the region. Furthermore, the experience from the EU-12 enlargement clearly was that approximation to the EU creating a more predictable legal basis and investment climate had a positive effect on foreign direct investment. Looking at the FDI figures for the Western Balkans, a similar pattern seems to be emerging. The EU is also by far the largest aid donor to the region. According to the European Commission the total amount of direct financial assistance from the EU to the Western Balkans added up to 4.2 billion in the period from 2000 to 2006. The main objectives of the aid are promoting the free movement of goods, creating efficient institutions, developing trade, reducing crime and corruption and improving transport networks. All these areas are cornerstones in a democracy with a well-functioning economy. With the EU decision in 2000 to grant all Western Balkan countries a prospect of EU accession, reforms have been made easier for the peace-minded and pro-eu politicians and decision makers in the region. And while some decisions on important political and economic reform meet domestic resistance, the clear goal of EU membership is central to fighting off this resistance. 33 the western balkans A decisive factor for the ongoing reform in the Western Balkans is the perspective of EU membership.

34 the western balkans Therefore, it is also crucial that the EU does not send blurred signals about enlargement or gives an impression of enlargement fatigue. If the magnetism of the prospect of EU membership fades away and the EU acts without credibility towards the Western Balkans, the consequences can be incalculable. Feeding the radical forces is definitely not in the interests of the EU. That being said, the main responsibility for continuing political and economic reform lies with the Western Balkan countries. In the end, only they can ensure that EU approximation is realised and that they fully comply with the political, economic and legislative requirements of the EU. Sustained economic growth in the Western Balkan countries, which is fundamental for increased political stability and which will also bring economic benefits to the existing EU member countries, cannot be achieved without European companies. For European companies, political and economic stability is very important when making export and investment decisions, and so the companies closely monitor the EU approximation and reform processes in the Western Balkans. Carlsberg Western Balkans in the EU would be an advantage It would definitely be an advantage for Carlsberg if the Western Balkan countries became members of the EU. The markets in the region are relatively small, which is why on some products we supply neighbouring countries, e.g. Bulgaria, from Serbia. However, the costs of trading in the EU Internal Market are lower than trade with non-eu countries. Therefore it would be very beneficial for us if the whole of the Balkan region were inside the EU. No Western Balkan big bang The big bang enlargement of the EU in 2004 may have given the impression that it was a normal enlargement. It was not. It was extraordinary, and a big bang enlargement will not be the case regarding the Western Balkans. The countries are in very different states of political and economic development and thus also in their readiness to join the EU. Each country will be evaluated on its own merits and treated accordingly. That will also give the EU more time to adapt to new members and secure a smoother enlargement process. EU borders? From time to time the question pops up in the debate, Where do the borders of the EU lie, where does the EU end? The question is asked by those who are sceptical of enlargement, by people who see enlargement as a threat rather than an opportunity, people who do not recognise the success of previous enlargements. Taking into consideration the fact that all previous EU enlargements have been political and economic successes, it would be more suitable to ask how to continue the success. The answer is clear. First of all, make sure that an even further enlarged EU has an efficient decision-making system. The Reform Treaty is tailor-made to ensure that. Therefore, the final adoption of the Reform Treaty is the key to a further enlarged EU. Secondly, future enlargements will be realistic only in many years time, for some countries even decades. At that point in time, there will be new generations of voters and decision-makers. They should be allowed to make the decisions for their time. 35 the western balkans We had the same experience with the Baltic countries before and after the 2004 enlargement. The accession of the Central and Eastern European countries has had positive effects on our businesses in the region, not least due to a high GDP growth. We expect the same positive results if the Western Balkan countries become members of the EU. Commercial VP, Eastern Europe Lars Lehmann, Carlsberg Group

36 the western balkans Albania On 12 June 2006, as the third Western Balkan state Albania signed an SAA with the EU. Along with the SAA follow much better terms of trade and therefore economic gain that can boost the Albanian economy. Problems regarding the high level of organised crime and corrup- tion continue. That also keeps some European companies out of the market, which could benefit the Albanian economy. Albania is still one of the poorest countries in Europe. FDI is still low and the trade balance is problematic. However, Albania is on its way forward with current annual economic growth at around 6 per cent and low inflation. Bosnia and Herzegovina (BiH) Serbia The reopening of the SAA negotiations in 2007 was important for the development in Serbia. Stability and political commitment are crucial for a sound economic trajectory and some indicators have already given signs of improvements. Current GDP growth is between 5 and 6 per cent and inflation has been brought under control. But the country is still influenced by the former socialist system and the agricultural sector represents 40 per cent of Serbian GDP. Unemployment is also a problem that can be helped by economic improvements. Right now, nearly every second young person is unemployed. Corruption is also a major problem in Serbia. The FDI reached heights in 2006, and combined with more than 5 per cent growth the market development is on the right track. The Serbian market is well integrated into the European market, with more than half of the country s exports going to the EU. 37 the western balkans EU troops are still in BiH to monitor the process of gradual change towards firmly consolidated peace. In 2005 BiH started negotiating an SAA with the EU, but sufficient reforms have not yet been made to conclude it. In particular, difficulties in carrying out a police reform and administrative reforms more broadly are blocking the signing of the SAA. In spite of this, the prospect of an SAA functions as a clear goal and main priority for BiH. Economic growth is high at around 6 per cent and inflation has decreased sharply. However, the current account deficit is high at around 13 per cent of GDP. Former Yugoslav Republic of Macedonia (FYROM) FYROM acquired the status of candidate country in December 2005, a very important achievement. The country has come far in fulfilling the democratic and economic criteria but still has some improvements to make before it can fully cope with the competitive pressure from the EU on free market terms. Montenegro With a clear majority of the voters, in May 2006 Montenegro chose to become independent from Serbia. This created a state of around 700,000 inhabitants. In 2007 Montenegro signed an SAA with the EU. The SAA between the EU and FYROM entered into force on 1 April 2004. It provides the legal framework for relations between the EU and FYROM and also covers preferential market access to the European market. In particular, reform of the police, public administration and judiciary and the fight against corruption are important issues to be dealt with before a date for opening membership talks can be obtained. There are still many important reforms to be carried out in Montenegro. The judiciary still needs reform and organised crime and corruption remain problematic issues. Economic reform has gradually gained momentum and a sustainable macroeconomic situation is under way. This development has led to an increase in FDI, GDP growth in 2006 of 6.5 per cent and low inflation.

38 turkey Turkey do not derail the train Up until 2004, Turkey went through a silent revolution in terms of political and economic reforms. The discussions about Turkey s accession to the EU are not new. Turkey applied for membership of the European Economic Community (EEC) in 1959, and in 1963 Turkey signed an association agreement with the EEC, bringing the two sides closer to each other. In 1987, Turkey applied for membership and became a candidate country in 1999. The glory days of 2004 The positive signals from the EU were important for the reforms that were carried out in the following years. Up until 2004, Turkey went through what has been characterised as a silent revolution in terms of political and economic reforms. The role of the military in political life was reduced, the legal system was improved, the death penalty was abolished, systematic torture stopped taking place and there were improvements with regard to the freedoms of speech, assembly and the press. 39 turkey

40 turkey The revolution was particularly clear in the economic field. After a sharp downturn in 2001, strong economic growth took place as a consequence of comprehensive structural reform, in particular controlling inflation and public deficits. Turkey main economic indicators 2003 2004 2005 2006 Real GDP growth (per cent) 5.8 8.9 7.4 6.1 Private consumption (real growth) 6.6 10.1 8.8 5.2 Investments (real growth) 10 32.4 24 14 Inflation 25.3 8.6 8.2 9.6 Exports (per cent growth) 27.7 30.9 14.8 19.5 Imports (per cent growth) 37.6 39.4 21.6 19.5 Strong economic growth in Turkey since 2002 as a result of comprehensive economic reform Economic growth in Turkey and EU-27 GDP growth (real) Per cent 10 8 6 4 2 0-2 -4-6 -8-10 1999 2000 2001 2002 2003 2004 2005 2006 EU 27 Turkey The economic growth in Turkey is stronger than the EU average Source: Eurostat 41 turkey Current account (billion EUR) -8-15.6-22.6-31.7 Source: Confederation of Danish Industries This positive development culminated at the end of 2004 when accession negotiations on Turkish EU membership were initiated. This was not a blueprint for Turkey or a carte blanche for membership. However, it was a clear recognition by the EU of the large-scale political and economic reform that had taken place in Turkey. One step back fade away of the glory days Since the glory days of 2004, the accession negotiations with Turkey have unfortunately not been straightforward. The pace of reform in Turkey has slowed down, it could be said to have moved from revolution to evolution. Reforms are still being carried out, but not as fast as was expected by the European institutions. Among other things, Turkey still has to reduce the role of the military, make further improvements in the freedom of speech, fully abandon torture in prisons, and secure minority rights. In 2006 the relationship between Turkey and the EU cooled down, as Turkey did not fully comply with the Additional Protocol to the Ankara Agreement of July 2005 between Turkey and the EU, whereby Turkey had committed itself to removing obstacles to the free movement of goods, including transport restrictions. By the end of 2006, when the agreement should have been fully imple-

42 turkey mented, Turkey was still refusing to open its ports and airports to Cypriot ships and planes. As a consequence of this, in December 2006 the EU heads of state and government decided to freeze 8 out of 35 negotiation chapters on the recommendation of the European Commission. The decision by the EU to freeze 8 chapters was made as a compromise between those countries that wanted to suspend negotiations and those who wanted to go on with business as usual. The accession negotiations are continuing on other areas. Get the Turkish train back on track Under all circumstances, the existing phoney accession negotiation situation is not sustainable. It will only strengthen those governments within the EU who in reality wish to put an end to the accession process and continue along a path of privileged partnership for Turkey. And it stimulates growing sentiment against EU membership in Turkey. Privileged partnership is not a satisfactory solution. As Enlargement Commissioner Olli Rehn has said, Talk about privileged partnership only erodes the 43 turkey At the same time, Turkey did not keep up its pace of political reform in 2006. And in the first half of 2007, Turkey was caught up in a political crisis over the presidential elections. The Republican People s Party would not accept Abdullah Gül, who represents the Justice and Development Party (AKP), as president. Even though Abdullah Gül was finally elected president on 28 August, the political infighting led to a reform pace that was slower than it should have been in 2007. Turkey s long journey towards the EU 1959: Turkey applies for membership of the European Economic Community (EEC). 1963: Signing of an Association Agreement between the EEC and Turkey. 1980: Suspension of association agreement due to a Turkish military coup. 1987: Turkey applies for EC membership. 1996: Creation of an EU-Turkish customs union. 1999: Candidate status. 2004: Start of EU accession negotiations with Turkey. 2006: The EU freezes 8 of the 35 negotiating chapters. 2007: Opening of 2 more negotiating chapters. Enlargement Commissioner Let me be clear the EU means business. We are talking about Turkey s accession and nothing else. Enlargement Commissioner Olli Rehn, October 2006

44 turkey credibility and weakens the conditionality in Turkey. This reduces the political incentive for reforms and causes political backlash among ordinary Turks. It is time to move on. Almost 50 years of gradual approximation should not be wasted because of temporary disagreements. On the one hand, 50 years of still closer relations are not in themselves an argument for continuing the accession process. On the other hand, it might be asked why talks have continued for almost 50 years if an The European Council [ ] welcomes the start of substantive accession negotiations with Turkey [ ]. The European Council recalls, in line with previous conclusions, that the current negotiations are based on each country s own merits [ ]. European Council, June 2006 increasingly closer relationship is not very valuable? The answer is clear: there are a number of good reasons for continuing along the accession path. As a country geographically located both in the European continent and the Middle East, Turkey holds a unique position as a bridge for the EU. With Turkey as a member of the EU, the external dimension of the EU will be strengthened significantly. It could be a major contribution to decreasing instability in some of the regions bordering the EU. With Turkey as a member state, the EU would also act as a role model for cooperation between different cultures. A democratic Turkey that lives up to all political, economic and legal criteria for EU membership would show the rest of the Muslim world and the sceptics within the EU that democracy, the rule of law and respect for human rights can function without problems in a society where the majority of the population are Muslims. Finally, more than 70 million consumers in a Turkey with a young and increasingly well-educated labour force offers European companies a unique opportunity. With Turkey fully participating in the Internal Market, European companies will enjoy the benefits of a high-growth economy and a large population with rapidly increasing purchasing power. In 2006, Turkish imports of merchandise rose almost 18 per cent year-on-year. This made Turkey There is great business potential in Turkey. Turkey will be an important market for Grundfos in the coming years and decades, whether or not Turkey becomes a member of the EU. Most important to Grundfos is that Turkey continues along the path of political and economic reform. That being said, we regard further EU approximation and a membership perspective for Turkey as an important tool for the reform process in Turkey. To us, EU approximation is a sign of increasingly stable economic and political conditions. That is important for our company. Group Executive Vice President Søren Ø. Sørensen, Grundfos 45 turkey

46 turkey the EU s fifth largest export market in the world in 2006. Moreover, Turkey can function as a commercial bridge to the Middle East. The initiation of accession negotiations with Turkey also has a positive effect on the market. Turkey s gradual adaptation to the rules and standards of the Internal Market makes it more attractive for investors and companies to enter the market. An illustration of the market potential that a more liberal Turkish economy offers is the increase of EU export to and import from Turkey in the 2002 to 2006 period. In 2006 alone, exports to Turkey increased by 11 per cent while imports increased by 15 per cent. Net FDI in Turkey in 2006 was doubled. A European Commission study of market potentials in Turkey shows that the current economy can be boosted significantly. According Real GDP growth Per cent 8 6 4 2 0 2006 2007 f* 2008 f 2009 f 2010 f 2011 f * f = forecast High growth in Turkey in the coming years will benefit the EU member states Source: The Economist 47 turkey EU-25 export to and import from Turkey Million euro 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2000 2001 2002 2003 2004 2005 2006 Import Export EU-Turkey trade is growing rapidly Source: Confederation of Danish Industries to the study, exports to Turkey could be increased by 242 per cent, corresponding to 236 billion euros at the current level. Getting Turkey back on the right track is primarily Turkey s own responsibility. The country should step up its reform pace and live up to all agreements with the EU. It is, however, also very important that the EU sends clear signals about its strong commitment to moving the Turkish accession negotiations forward. The EU should underline that Turkey will not become an EU member state before it lives up to all EU requirements, including respect for human and minority rights. At the same time, the EU should stick to its conclusions of June 2006 welcoming the start of substantive accession negotiations with Turkey. Last, but not least, a UN solution on Cyprus would be helpful for the further enlargement process.

48 turkey 40 years of arguments against Turkish EU membership Too big? It is often argued that Turkey, with 70 million inhabitants, will put EU labour markets under pressure. Looking back at previous enlargements, there are no grounds for this argument. There was no flood of Portuguese or Spanish workers at the time of the accession of those countries. In fact, many Portuguese and Spanish people went back to Portugal and Spain after accession. Furthermore, the independent European think tank Friends of Europe has assessed that in the course of the first 15 years of Turkish EU membership only 2.5 3 million Turks will leave Turkey. This corresponds to about 0.5 per cent of the population of the EU in 2025. Too dominant? Another argument is that Turkey will become too dominant in the European institutions. This will not be the case. The Reform Treaty will ensure that at least 55 per cent of the member states representing 65 per cent of the EU population are needed to secure a majority. In the first instance, Turkey will have the same influence as Denmark, and in the second instance its influence will be equal to that of Germany. Too Muslim? A third argument is that Turkey cannot fit into the EU because it is Muslim and the EU countries are Christian. However, the EU is not based on Christianity. To become a member of the EU, an accession country is required to live up to the Copenhagen Criteria. This means that any EU member country must, among other things, be a functioning democracy with free elections, the rule of law, respect for human rights, freedom of religion, freedom of speech and respect for minorities, and it must live up to exactly the same legal framework as all other EU members. If and when Turkey does that, it will be as good a member state as any in the EU. Too expensive? A fourth argument is that Turkey will tie up a lot of funds in the EU budget. That is correct if the issue is viewed from the present budget perspective. However, it will not necessarily have to be so, and in the end it will be a political choice. One possibility is that decision makers restructure the EU budget, which is already needed today to reduce agriculture subsidies. It could also be decided to make a long-term transition agreement in this area.