Elena VARTENIUC

Romania

September 2006

Expectations about the enlargement to the East never had a unified color. The optimists deemed this experiment as a winner.  It is however too early to assess the truthfulness of that belief. It is also widely recognized that placing the discussion on integration in the framework of a cost-benefit analysis is not an easy job to do; it is, if we can call it like this “a moving target”. After all how should one decide through a plain answer: yes integration is good, or no, away with integration? No matter where the right answer lies, one should still be able to say yes or no because in democratic societies, people should be able to discern and decide, if only merely through a vote, about the future of their country. How smooth this process of expressing its will and actually giving it room to happen is a matter of harsh debate nowadays when more and more surveys show that people around the “integrated Europe” do not know very well what the whole story is about.

Trying to make a parallel between the veterans of integration and the new member states is maybe not the most suitable approach, although certainly some may have already flirted with this idea. Why is that the case? Well, we are dealing with old market economies with a longer history of openness and cooperation. By contrast most of the new member states are former communist countries with little practice of economic integration. It is therefore understandable why so much has been written about the “widening versus deepening” dilemma of European integration. There were endless discussions about what an iron clad on the old Europe’s shoulders a precipitous enlargement to the East would entail; those supporting that thesis are those believing also that an optimal economic area is limited and even more so is the optimal monetary area. If those skeptics were true in their fears it is reasonable to conclude that the benefits of integration should not be perceived the same way as it was the case with the first waves of enlargement like in the case of Spain, or Portugal or Greece. On the same grounds we might as well think that having the chance nowadays to talk about the irreversible EU 25 is the result of a predominantly political consensus, and not the result of a well defined and understood cost-benefit economic assessment. This is maybe one of the advantages politicians have always had over economists: politicians decide before economists can say whether it is wise or not to proceed with the enlargement.

In societies weary with corruption, poverty and inequality the idea of redemption through the integration into a big, wealthy and civilized family is more than appealing. This is what maybe also explains the increased optimism that Romanians share about their future in Europe. The poor regulatory framework and deficient implementation of law have made it very difficult for a meaningful breakthrough of reforms. In a country where politicians have repeatedly failed to deliver on their promises (willfully or not) the old story of salvation may still work and may still indeed apply to a certain extent in reality. But in countries where this contrast is not felt so violently and where the economic vigor is not smothered so much by sticks in the wheels of the law, the benefits of integration are maybe assessed with more cold-blooded and therefore reasonable arguments (I am referring here to the new member states, of course). But, be it in the case of take-more-and-give-less of those like Romania or in the other case of a more balanced take-and-give process (most of the new members), at the end of the day, integration may still imply more of an overall plus than a minus.

However, it is enough to look towards the West and see that the things are not as “pink”-colored as they may appear to the day-dreamer’s eye. The Lisbon Agenda is in great danger of being compromised by the sluggish economic performance of the EU core members. Their economies are marred by lack of structural reforms in the labor market and by poor fiscal performance. Fiscal and labor policies fall in the area of the national agenda and because these are very politics-sensitive fields, the European Commission has very little say in their respect. This is not to say that the European Commission would, on the other hand, do a better job either.

In this context and that of the difficult consensus reached for the common European budget it becomes a little bit clearer that the benefits spillover is not automatic in the European Union. Suffices to say that the cohesion funds allocated by the member-states have squandered recently and that the volumes and the distribution of those, are largely dictated by the political and strategic interests of the contributors.

After all, integration is not a gift; it is a dynamic process of give and take, of negotiation for the sake of the better results of concerted rather than competitive actions. But when making the case for European integration we should not keep a narrow-vision. Globalization is a reality and the European Union should be able to face the increased competition at the global level. This is where the wisdom “united we are stronger” comes from in the first place, and this is the framework in which we should perceive the cost and benefit analysis of enlargement to the East.

The opportunities are multifold and they go both ways. Even before politicians could convince us that this is the right way to go, businesses with their sense of profit have quickly grasped the understanding of the valuable opportunities lying ahead. The impressive emergence of foreign investment fashion on the Central-Eastern European markets has made the proof for the potential of these economies. Of course, to keep on the safe side, this process is not without risks, but certainly not those envisaged by the early transition years, where adverse sentiments towards foreign investments were mingled in a blurry discussion about the danger of selling the country to foreigners. Rather the risks may be related to the increased competition that threatens the survival of small businesses, otherwise promising in terms of economic efficiency (the economic literature is rich in studies on the protection of the emerging industries in relation with the Latin-American experience). However, in practice, this situation is difficult to prove. In this sense some relief comes from the development of the European competition policy.

Other risks come from the rapid infusion of capital which may consist heavily of hot money (i.e. speculative flows). This is why many of the countries wishing to increase financial integration have resorted to a gradual approach to capital account liberalization. The negative experiences with currency crises in the emerging markets even in the presence of strong economic fundamentals have made the case for gradualism which has helped relieve some of the speculative pressures.

Otherwise, together with the foreign direct investment came the expertise and the know-how, the use of new technologies and the, why not, the managerial skills. Although not easily quantifiable these are major and decisive factors for the prospects of future sustainable growth. The foreign investors have proven an impressive flexibility by adapting to the local “customs”, even where those customs implied a lengthy judicial process and a frustrating lack of transparency in the enforcement of law. This is of course a double-edged sword which in the long run may prove to be the “Damocles sword”. It all depends on the dynamics of adaptation of those local “customs” to the “Common” ones.

All these developments should work towards the so called convergence which in the day to day life can be translated into the Easterners’ dream of rejoicing the same standards of living as the Westerners. But if the convergence clubs prove to be a reality, one may find reasonable that expectations have to be adjusted. Accordingly, economies converge to different steady state equilibrium corresponding to full employment, which means the level of GDP per capita in two countries belonging to different convergence clubs will never meet. Convergence is needed for setting in place the great project of an Economic and Monetary Union. The discussion on the feasibility of the latter is endless also. One of the many doubts comes from the mere fact that business cycles are difficult to harmonize. Similarly, convergence can be questioned on different grounds. In their quality of transition countries, the potential growth of these economies is of great interest given the younger work-force living there.

The rigidity of labor markets in the developed economies has been long debated and it is labeled as one of the main reasons for the economic stagnation in the EU 15. The protests in France earlier this year are a telling story about the difficulty of implementing reforms in societies with well-established mentalities. This is also why migration laws have received so much attention lately. Increasingly, low-skill work-force migrates towards the West. This in turn has multifold consequences. While an important revenue item in the balance of payments statistics of a country like Romania, remittances can be an unreliable source of finance. Moreover they play a marginal role in the balance of payments of other countries.  However, other than the financial side of the story, migration involves other uncomfortable elements like the need for social integration in the receiving countries or the danger coming from the importation of felony and law infringements from the sending countries and so on.

If we keep in mind all the time the reality of globalization then we may get a different grasp of the future lying ahead of us, a less idealized but more realistic one. That is to say integration into the European Union is not a less bumpy road than the actual road of reform of transition economies. It has been recognized in several instances that the promise of integration worked rather as a stick and carrot stimulus than as a genuine working mechanism. For example, the observance of the Maastricht criteria has played a major role in achieving the much desired price stability. However, the governmental budgetary positions are shaky in the case of most of the newcomers which suggests more fundamental reforms are needed like that in the pension area.