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Global View: Europe heads east via Ireland

By IAN CAMPBELL, UPI Chief Economics Correspondent

Where is Europe heading? East, toward the former communist countries. And via where? Ireland, for the route was drawn up by Brussels bureaucrats.

Global View is being unfair. The planned expansion of the European Union, east, mainly, but also south, is something positive that has already brought benefits to Eastern Europe and will bring more. But what will it do for Western Europe? Where is the European project as a whole heading? Will enlarged Europe be more dynamic than the less than lively euro-zone of the past few years? These may be the more difficult questions.

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For the east, there can be little question that the journey toward membership of the EU is one worth traveling. As the Second World War drew to a close and Hitler's fall drew near, another tyrant stretched his hand across Eastern and Central Europe.

Stalin's acquisition of control of much of Central and Eastern Europe condemned more than one generation in these countries to political repression and economic failure. Under the command of communism, the East lagged behind the West, economically as well as politically. More than half a century on, those unhappy times are now being reversed.

Central and Eastern Europe is seeking to re-establish its ties to a west that was in the main more advanced half a century ago but that distanced the East during the communist era. Hungary, Poland, Estonia, Czech Republic, Slovenia, Latvia, Lithuania and Slovakia are countries that might be able to join the EU as soon as 2004.

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From the Mediterranean, Malta and Cyprus are other front-runners. Turkey is another would-be.

For the former communist countries, this rapprochement with Western Europe undoes half a century of frustration.

The process has already been positive for the East. The so-called "convergence trade" has been in place now for some years. Eastern governments have been able to sell their debt at much lower interest rates to international investors precisely because Eastern Europe has been seen as heading towards membership of the EU.

A process of catch-up has not just been expected but, in a perhaps dangerous way now for investors, anticipated. Eastern European assets and currencies have strengthened on the assumption that the re-uniting of east with west was inevitable.

It is the anticipation of this process of catch up that brings an element of risk for investors now. What if the process is derailed?

The danger comes in Ireland, which must ratify the Treaty of Nice that facilitates further expansion of the EU. For example, it removes a ceiling of 20 on the number of countries that can accede to the EU, and it provides a system of voting weights for the group of countries that will eventually emerge.

But the Irish rejected the Nice Treaty in June 2001 and might do so again Oct. 19. The threat comes not so much from antipathy to Europe nor to the potential new members of the club but from apathy.

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Nice offers little new for Ireland. And opponents say that some of the benefits Ireland has received will be diluted by the accession of poorer countries to the EU and that Ireland's traditional military neutrality will be compromised.

With little to gain for Ireland pro-voters may stay at home, leaving the opponents to win the day. It is one and a half thousand miles to the east that the decision matters most.

Perhaps that itself sounds a warning about the unwieldiness of Europe's decision-making.

If the Irish vote No, there is a risk that the accession of new countries will be delayed. The bonds of Poland, the Czech Republic and Slovakia, among others, are bound to fall.

The latest polls show a growing lead for the Yes vote, though a quarter of voters remain undecided. But what would an Irish No do? Charles Jenkins, European Director of the Economist Intelligence Unit in London, says little has been said publicly by European leaders on the impact of a No vote.

But he believes it would probably be wrong to see it as anything more than a temporary setback for the accession process. A route round the Irish obstacle would eventually be found, Jenkins thinks.

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The enlargement of Europe would bring little by way of immediate benefits to the East. The West, already in financial difficulty, with budget deficits challenging the 3 percent of gross domestic product stability pact limit in Germany and perhaps soon in France, has not been willing to make high levels of transfers to the East.

And in one of the most controversial areas, agricultural trade, the European Commission has so far offered to the east subsidies under the EU's Common Agricultural Policy that will be equivalent to one-quarter of the level paid to Western countries in 2004 but will rise to the same level by 2014. Western Europe's finance ministers have not yet ratified this offer.

It is in agriculture that the West could least afford to be generous. The CAP already has an annual budget of more than $35 billion.

It encourages over-production of food in Europe and therefore harms the environment. It reduces market opportunities for other countries, not least developing countries. And it has a cost, also measured in billions, to European consumers, who must, because of the CAP, pay higher prices for their food.

For at least half the 40-year life of the CAP, independent observers have argued that it has gone off the rails and must be reformed.

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But when the European Commission's agriculture directorate suggests in its mid-term review that by 2006, a $200 million saving will be made -- a fraction of the current cost of the program -- it can be seen that the nettle of reform has not been grasped.

Now, according to Jenkins, Britain and Germany are keen on reform of the CAP although Germany tends, he says, "to be schizophrenic on the issue."

The Chancellor is often in favor, Jenkins explains, but "the agriculture minister will tend to defend German farmers."

Jenkins, remember, is speaking of one of the friends of CAP reform. Meanwhile there are the enemies, like Spain and Portugal and France, countries where EU subsidies are popular indeed.

Will expansion east force the issue? Jenkins does not think so. In his view "the pressures for CAP reform are already there among existing EU members."

The phasing-in of subsidies for new members -- who themselves will not join before 2004 -- will delay any financial crunch for extending the subsidies east. But eventually, of course, a more extended Europe will be one less able to subsidize its farmers.

What does Western Europe gain from expansion of the EU? Jenkins thinks of the standard gains from trade of stretching the free trade area wider.

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But he mentions a cost: "Everyone thinks it is adding the larger countries that is a problem, but adding the smaller ones costs a lot for their size. More languages, more translations, more negotiations."

Europe's bureaucracy, already unwieldy, looks set to become still more complex.

But the momentum is there. Sooner or later the move east is going to come. And there are good sides to it. The European project is fostering trade and investment in formerly crushed economies. Opportunity will be created, poverty alleviated.

But a sense remains, too, that Europe could be a better project than it is. The CAP is the banner of that disappointment. Protectionist, anti-environmental, expensive, bureaucratic: it symbolizes the worst side of the European movement.

It is a movement born out of Europe's 20th century conflict and built on compromises.

"Europeans don't work as hard as Americans, have more leisure time and to some extent a better standard of living," says Jenkins. These are choices.

"Towards a policy that pleases everybody," is the title of a speech by the European agriculture commissioner, Franz Fischler, on the CAP in July.

The title seems typical of the spirit of the euro-club. It is socialistic and well-meaning. But in its unemployment and the obstacles it places to developing country exports, the eurozone has much to answer for.

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The EU's enlargement will not by itself make the eurozone more dynamic, a greater source of growth not only for itself but for the world economy.

For that to happen the EU needs to more than "please everybody." Protectionist industries and farmers and unions must be combated. So far those unpleasant fights have not been part of Europe's road.


Global View is a weekly column in which our economics correspondent reflects on issues of importance for the global economy. Comments to icampbell@upi.com

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