EU enlargement offers a vision for Europe

By Erik Berglof

It is perhaps the biggest measure of its success that 10 years after EU enlargement on 1 May 2004, Estonia, Latvia, Lithuania, Poland, the Czech Republic, the Slovak Republic, Hungary, Slovenia, Malta and Cyprus are today universally recognised as fully integrated European countries. What was once a truly historic step has become the new normality. This is an enormous achievement, one that is being put into relief by the current sea change in East-West relations.

Over the past 10 years the countries of central and eastern Europe not only became an integral part of Europe again, they also served to restore Europe’s “missing middle” which had been gouged away by the Iron Curtain. The redevelopment of Europe’s centre of gravity is illustrated by hard economic facts: shedding the vestiges of the past, all countries have redirected their trade flows and EU members have become their most important trading partners.

This would not have been possible without a radical transformation of the local economies. Offering attractive conditions, the countries were successful in winning foreign direct investment, much of it long term, with associated benefits like know-how transfer and the introduction of international best practice in corporate governance. Subsequently, EU membership was vital in establishing and safeguarding the rule of law and fair and transparent administration.

EU membership also meant unprecedented access to funding from Union coffers: over the past 10 years Poland alone has received €92 billion. A whole new structure (often building on historic foundations) of traffic and transport links is under construction all over Europe, connecting and integrating businesses and people.

The economic upheavals since the end of communist command economies have led to huge progress in the convergence of the central and eastern European countries with the West. Poland’s income per capita reached 62 per cent of the EU average last year, up from 30 per cent in 1992. The steady increase in living standards – following a period of economic reform associated with individual hardship – and the loss of unsustainable welfare systems were crucial in garnering support for the process of integration.

However, the global financial crisis of the late 2000s unveiled the downside of rapid financial integration: foreign funding had become the driver of credit booms and made the development of local capital markets seem expendable. But when in 2008-09 foreign funding suddenly dried up or went into reverse through deleveraging (a process which is still ongoing) the countries’ economic performance went into steep decline.

This raised questions about the resilience and sustainability of a growth model largely based on external funding and where integration carried the danger of contagion. Compelling answers were needed as the economic slump led to a marked rise in public disaffection and an increase in populist, nationalist and anti-European sentiment.

While one lesson from the crisis was clearly that the new EU countries should strengthen their local economic fundamentals, the main conclusion was that what was needed to overcome the crisis was not less but more Europe: early in the crisis the concerted and coordinated effort (Vienna Initiative) of key players prevented a precipitate withdrawal of parent banks with potentially disastrous consequences for the region. Joint European action protected individual states.

As Europe is cleaning up its banking sector and a new regulatory and supervisory structure is taking shape, more and closer European cooperation and coordination again are the order of the day. The new EU countries and the businesses committed to the region again need advocates such as the EBRD to ensure that their concerns are taken into account. Much has been achieved, but a lot remains to be done – from strengthening local capital markets to promoting energy and resource efficiency, to name just two examples. The EBRD has been part of this effort, and remains the region’s committed partner.

Ten years of EU enlargement has brought significant progress, but there is neither time nor reason to rest on our laurels. The global crisis and the eurozone crisis that followed in its wake have weakened popular support for the European project as a whole. Regaining the trust of citizens will involve renewed commitment, but the success of Eastern enlargement shows the way. Deeper democracy, better functioning institutions and fairer and more flexible markets provide an engaging vision for the future of Europe.