The Nice summit and the publication of the progress report by the commission cast a new light on the two main aspects of the enlargement process, the EU’s readiness for enlargement and the candidates’ preparations. The results of the Nice summit have fallen far short of what is possible or required. The positive aspect is that the government conference concluded in formal adherence to the timetable in which the EU regards itself as ready for enlargement from 2002. However, the reforms hammered out in Nice can hardly guarantee an enlarged EU’s capacity to act in the long term. While the new distribution of votes in the council of ministers has improved the balance between large and small member states, the unanimity principle was not abolished except in a few areas. The complex and non-transparent provisions for majority decisions will hardly streamline the decisionmaking process. However, it has become easier for the member states to cooperate more closely with one another. In 2004 another government conference is to deal with the problem of how the competencies of the different levels of government in Europe are to be delineated. This will be an opportunity to improve the Nice result.
Despite the justified criticism, the Nice summit is likely to boost the preparations of the Central and Eastern European candidates. A big hurdle on the way to accession has fallen. The countries’ individual preparedness will again be the main focus. In this respect the EU commission’s progress report that was published in early November has painted an overall positive picture.
Good marks for accession preparations
According to the Commission’s report, all countries have come closer to fulfilling the three Copenhagen criteria since the last year, yet substantial differences between the countries remain. The main findings:
- Political criteria: Democracy, the rule of law and protection of minorities have been further strengthened in all countries, which consequently continue to fulfil the basic political criteria. Concerns were noted only with regard to the high level of corruption and the weakness of the judiciary and public administration in some countries.
- Economic criteria: Real economic convergence advanced in the past year backed by the restructuring made possible by firm growth in most CEEC. Privatisation of large enterprises and the financial sector has progressed, while trade integration with the EU has further intensified. The candidates are now the EU’s second largest trade partner after the US. Remaining weak spots are high inflation rates in some countries (Poland, Hungary, Romania) as well as considerable current account deficits (Poland, Baltic countries) and rising unemployment due to economic restructuring.
- Assumption of the obligations of membership (acquis communautaire): Concerning this crucial point for the enlargement process, the Commission underlined a growing discrepancy between the legislative adjustment, which has proceeded well, and the actual implementation and enforcement of the laws, which has lagged behind. The weak performance of regulatory institutions and the limited effectiveness of the public administration have burdened the preparations and increased the need for transitional periods. The required convergence with the Common Agricultural Policy and the need for timely liberalisation of capital movements continue to be a stumbling block for many countries, whereas internal-market and transport legislation are generally adopted more quickly.
Clear differentiation between countries is missing
Despite the voluminous country-by-country studies, the Commission again avoids giving a very differentiated (or comparative) picture of the preparedness of the individual countries. Only with regard to the economic criteria did the Commission present a more detaile d picture: the so-called Luxemburg countries (Poland, Czech Republic, Hungary, Slovenia, Estonia) will be able, it is said, to withstand the competitive pressures of the common market “in the near term” due to their good pace of economic modernisation. Slovakia, Lithuania and Latvia are expected to be ready only “in the medium term”. This corresponds with our convergence indicator ranking (see chart) which also sees the Luxembourg group ahead. With regard to the overall country assessments (including the implementation of the acquis communautaire), the Commission report has brought little that is new or surprising.
For Poland the Commission presented a largely political assessment underlining the progress that has been made in regional policy, consumer protection and the institutional co-ordination of the accession preparations. As far as the standstill in the negotiations in agriculture is concerned (the dispute about the liberalisation of agricultural trade soured relations), the Commission only noted the absence of progress. In view of a number of unresolved core issues, the positive assessment can be read as an indication that a first enlargement round without Poland still seems unfeasible to the Commission.
The Czech Republic’s remarkable progress over the last 12 months has been possible thanks to considerably more stringent legislative work and the economic turnaround. Yet postponed reforms of the public administration and neglected regulative reforms are still causing problems. Hungary, Estonia and Slovenia have all maintained a good pace of adjustment and continue to profit from their relatively well developed institutional framework. All three seem set to be among the first countries to join. Slovakia got most praise for the progress achieved over the last 12 months in economic and political reforms. It could soon be the first country to bridge the gap between the Luxembourg and Helsinki country groups. In Latvia and Lithuania the alignment to the acquis has continued, especially with regard to the modernisation of the public sector. Bulgaria and Romania are not yet considered functioning market economies despite their having achieved some reform targets.
Subdued market reaction to Nice summit and progress report
Market reaction to the Nice compromise was subdued, as it had been to the progress report in early November. The fact that targeted entry dates before 2004/05 have become unrealistic in view of the ratification periods had been realised some time ago. However, the largely positive outcome of the Nice summit for the enlargement process should stabilise investor confidence in the medium term. Investors could also focus more on the prospects of Helsinki-countries such as Slovakia or Latvia, where the convergence assumptions are not yet priced in to the same extent as in other countries.
The political reactions to the progress report varied in the individual countries. In Poland, there was relief at the positive basic tenor, for the report might have focused more heavily on the need for further adjustment. This relief outweighed disappointment over the fact that the officially targeted accession date, 2003, has become unrealistic in light of the Commission’s time framework. In the Czech Republic the report initially met with fierce criticism as people objected to the impression that the country lagged behind Poland economically. But the annoyance faded on a closer reading of what is basically a very positive report on the country.
How to deal with requests for transitional periods
Weaknesses in administrative structures – which the Commission emphasised for all accession countries – complicate the full adoption of the complex body of EU law. However, transitional arrangements, which can provide temporary relief, are a double-edged sword:
- They are extremely difficult to implement and monitor in a borderless single market.
- It is doubtful whether the necessary legal and planning certainty for business and investors could be achieved with a broad spectrum of individually designed transition periods.
The Commission is confronted with roughly 510 requests from the candidates for transitional arrangements (mostly, namely 340, concerning agriculture). In responding, the Commission will distinguish between three categories:
- acceptable: these are measures mainly of a technical nature that are limited in time and scope;
- negotiable: where requests have a more significant impact, e.g. in terms of competition or the internal market; and
- unacceptable: i.e. requests which are likely to pose severe problems and will thus be rejected.
On most of the issues, the EU has not yet reached agreement on a common negotiating position of its own members, and this is substantially slowing down negotiations. In other words, the EU’s internal co-ordination process is still in the early stages. The Commission’s invitation to the member states (and the candidates) to take up the substantial issues in the negotiations is therefore more than justified. However, a more concrete strategy on how to deal with the various transition periods in agriculture or the free movement of capital and persons would have been welcome in order to speed up the necessary co-ordination of EU policy. The bold statement that “The Commission reserves the possibility, where appropriate, to propose transitional measures in the interest of the Union” is not very helpful for progress with the negotiations.
A road map to advance negotiations
On the whole, detailed negotiations on sensitive subjects raising substantial economic, political or social issues or dealing with requests for transitional measures have not yet begun. The ”numbers game”, i.e. a purely quantitative view, on how many chapters (topics) have been dealt with, does not reflect the substance. Real advancement depends more on the quality of progress each applicant has made in the critical areas than on the number of chapters opened or provisionally closed.
In order to push negotiations towards the crucial points the Commission has proposed a ”road map”. This road map – which deals with chapters still subject to negotiation, notably because of requests for transitional measures – identifies priorities for negotiations in the next three semesters: it suggests that the accession conferences take up most of the outstanding chapters in the course of 2001. In the first half of the year most internal-market-related matters, social matters and the difficult environmental sector are to be dealt with, with the aim of provisionally closing these chapters in the second half of the year. Only issues with major budgetary implications would be addressed later. They are to be tackled in the first half of 2002, along with the “institutional” chapter (into which the reforms to be adopted in Nice have to be incorporated) and remaining unresolved issues. With the road map, the Commission wants to ensure that by June 2002 all chapters have been opened, the common positions of the member states have been formulated and the candidate countries have given the necessary replies and commitments.
The schedules (see boxes) are indicative and can, as the Commission stated, be adjusted to the individual candidate’s preparedness – be it in the sense of bringing forward the agenda or of slowing it down. For some candidates, the chapters listed have in fact already been provisionally closed, or it is clear that the negotiations can progress more rapidly. The Commission even considers it possible that in the course of 2001 talks will be opened on all chapters of the acquis with the most advanced countries in the Helsinki group (negotiations with this group started only in February 2000; with the exception of “Institutions” and “Other matters” all chapters have already been opened with the countries of the Luxembourg group). Monitoring of all candidate countries will continue to establish whether commitments concerning the adoption and, especially, the implementation of the acquis have been fulfilled. This is particularly important in fields such as competition where the actual enforcement track record is considered to be primordial for the definitive closure of the chapter.
The Commission states that this timetable should make it possible to conclude negotiations with the most advanced candidates in 2002 thus repeating its conclusion from last year’s report. This in turn should allow the attainment of the EU’s objectives of welcoming new member states from 2003 on.
Commission’s road map might be overrun by reality
Generally speaking, the Commission’s timetable for the negotiations seems plausible. However, the ratification of the accession treaties alone will take at least 18 months, allowing accession by 2004 only if accession talks with the best performers are finished in 2002. This seems very optimistic. Yet even this time schedule deals a blow to the hopes of countries such as Poland or Hungary that have been publicly targeting 2003 – and continue to do so.
More significant are the impediments caused by the domestic policy agenda of EU member states, such as the parliamentary elections in France and Germany (spring and autumn 2002, respectively). The Commission’s road map tries to avoid the most critical phases: the free movement of persons, for example, is to be addressed early in 2001, while talks on agriculture are to be held later, after the French elections. However, it seems almost impossible to avoid debates and negotiations on these most contentious issues coinciding with the runup to the elections. Since the attitude of EU citizens towards enlargement is ambivalent it is rather doubtful whether governments will risk negotiating seriously on these issues in 2001/2002. Furthermore, the hope that the topics can be concluded one after the other might also be disappointed. It is more likely that the negotiations will be concluded in “high-noon” manner with a large package deal combining requests and contentious issues from the various areas, hence the Commission’s deadline will probably be overrun.
Recommendations for exchange rate policy
The candidate countries have also received guidance from another quarter. Parallel to the strategy paper of the Commission, recommendations were issued by the Economic and Finance Minister (ECOFIN) Council for a three-stage exchange rate strategy:
- During the pre-accession stage exchange rate strategies – which can essentially be chosen at the candidate countries’ discretion – should help to ensure progress on real economic convergence with the EU and the fulfilment of the economic criteria.
- In the second phase, after accession, new member states will be expected to join the exchange rate mechanism II (ERM II). The Council finds that the ERM II is sufficiently flexible to accommodate different existing exchange rate regimes. It regards as clearly incompatible with the ERM II, however, fully floating exchange rates or pegs to anchors other than the euro (currency board system). This means that of the exchange rate regimes of the ten CEEC candidates only the euro-based currency boards of Estonia and Bulgaria are currently compatible with the ERM II. Hungary’s fluctuation band against the euro constitutes a certain degree of alignment with EU exchange rate policy.
- In the third phase the new members finally adopt the euro provided they comply with the relevant Treaty requirements.
“Euroisation” is explicitly rejected. Unilateral adoption of the euro by a candidate country cannot be seen as a way to circumvent the three phases of currency convergence. The ECB has in the past already stressed that candidate countries definitely must have a two-year track record of stability.
EU summit in Nice approves strategy paper
The European Council adopted the road map for the enlargement process (together with the other elements of the strategy paper) at the summit in Nice. The European Council, once again, showed no readiness to discuss concrete accession dates. However, once the schedule is publicly debated, it could well become a type of benchmark for the willingness of the EU to proceed swiftly with the enlargement process, and exert pressure on its member countries. The road map is also welcome for another reason: any more concrete formulation of the enlargement schedule can possibly help to speed up the modernisation process underway in Central and Eastern Europe.
The recommendations of the ECOFIN Council on exchange rate policy, which have also been adopted by the heads of state and government in Nice, provide the candidate countries with greater clarity on the requirements associated with accession to the EU and EMU.
After the lukewarm approach of the French EU presidency towards enlargement, fresh impetus can be expected from Sweden‘s EU presidency, which follows in the first half of 2001. Enlargement will be the priority and Sweden intends to push ahead with a broad economic and financial policy dialogue (including questions of exchange rate strategies between the respective EU bodies and the accession countries). Since Sweden does not have special stakes in sensitive areas such as free movement of persons, agriculture or regional policy – and obviously not in EMU membership – it may be a good moderator of diverging interests both between the applicants and the EU and within the EU itself. The European Council will examine what progress is being made under the enlargement strategy in Göteborg in June 2001. It cannot be ruled out that concrete accession dates will be discussed then for the first time for the candidates that have made the greatest advances.
With no new insights on group formation...
Since the progress report avoids comparing the countries’ different degrees of preparedness with regard to the implementation of EU legislation, it gives no new information on the likelihood or composition of any entry groups. According to the report, neither have the candidates come closer together, nor have greater differences developed between them. The old differentiation between the candidate countries on the basis of the economic criteria alone is only a weak substitute since it fails to take into account the politically sensitive and technically complicated issues, such as the integration of countries into the Common Agricultural Policy or the structural policy. In this sense, the stance of the Commission should be seen as a compromise, leaving the door open for a big-bang scenario but without taking peer pressure off the candidates’ shoulders.
... the report backs our main scenario for accession
However, in our view the accession of one large group consisting of all current candidates with the exception of Bulgaria and Romania continues to have major political and institutional advantages vis-à-vis the formation of smaller groups or successive accessions. We expect negotiations to end in the first half of 2003 at the latest. This will then be followed by the ratification of the accession treaties. Most candidates will hold a referendum, which could prolong the process. Nevertheless, it should be possible for this large group of candidates to become members by 2005. While the Nice summit voiced the “hope” that the first candidates would join in time for the elections to the European Parliament in mid-2004, this seems to be based on very optimistic assumptions.
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For in-depth analysis, see the Deutsche Bank Research
Enlargement Monitor.