The Hindu Business Line : A May Day with a difference

MAY DAY is traditionally a day for celebration for labour unions. May 1, 2004 was, however, another kind of May Day — a day for celebration of another event, the enlargement of the European Union (EU) by the addition of ten nations, including eight former Communist states. The enlargement of EU marks the near-culmination of a dream of Pan-European unity, started in 1951 with the formation of a European Coal and Steel community, consisting of Germany, France, the Netherlands, Italy, Belgium and Luxembourg.

This was, in a sense, driven by the vision of a French economist and financier, Jean Monnet, who tried to see Europe's future in the erasure of political and economic barriers. He had had a successful career in the New York financial community and saw the strength of the US built on its large size and united market. What began as a Customs Union between the nations became the European Economic Community in 1973 with the addition of Britain, Denmark and Ireland. In 1981, Greece joined. The year 1986 saw the addition of Spain and Portugal, and 1995 the inclusion of Austria, Sweden and Finland into a club that had become known as the European Union.

The latest addition to the EU is, however, symptomatic of a bigger trend. The EU is enlarging itself by adding on ten countries, many of which are distinctly poorer than the existing ten. In a sense, it is an enlarged, and hopefully better-planned, replay of German unification of the 1990s when formerly Communist East Germany joined the liberal economy of the more prosperous Western Germany.

In the present case, accession of the new entrants to the European monetary system is to wait a while. Meanwhile, the new entrants have to set their fiscal house in order, bring their deficits down to the prescribed 3 per cent of GDP, as laid down in the Maastricht Pact, and also reduce their debt.

Until then, the membership of EU will mainly confer benefits in the form of free trade and entitlement to budgetary aid from the EU's rather magnanimous devolutions to its member-states. Immigration rights are expected to follow; as we will see later, they are deleted in practice.

The inclusion of the ten countries in the EU is, however, a calculated gamble. Many of the accession countries are suffering from high unemployment and poor infrastructure, besides fractious politics. The total population of the new accession countries is 74 million, nearly 19 per cent of the EU (15), which has a population of 380.7 million.

The Enlargement has, of course, some advantages. Access to a larger, albeit poorer, market; a larger-trained labour pool; and the extensive natural resources are tempting. But economic integration at best of times is a difficult process even between countries in the same level of development. Only the future can tell how EU enlarged will fare in the global competition. Much depends on whether it can shake off its sclerosis and burst into growth. But that is too much to hope.

One would have expected the expansion to be accompanied by freedom for labour movements from the new states to the richer markets of the EU (15). After all, labour is free to move within the existing EU's ten members. But prejudices against immigration die hard. The existing EU countries have taken advantage of transitional arrangements and put elaborate restrictions on the free movement of labour from the new countries to countries of EU (15) for periods extending up to ten years.

The question of jobs being lost to immigrants is a pressing political issue, especially given the EU's low rate of generation of jobs. No wonder, in spite of enlargement, the new countries find themselves faced by a "no entry barrier".

This is in spite of the fact the countries, like UK, are heavily dependent on immigrant labour for many of their jobs, especially the low-paid ones. It is a mystery how this need for labour has not helped overcome the prejudice against immigrant labour.

The accession of the new countries is expected to give a fillip, albeit a limited one, to growth. The former Communist countries have shown remarkable enthusiasm for economic reform. Analysts point out that these new accession countries are "tigers" within the enlarged EU, with growth rate outpacing that of the somnolent existing members. However, these countries are also significantly poorer in terms of GDP than the EU (10). Their addition, it is pointed out, will not add significantly to markets for existing manufacturers inasmuch as their purchasing power is rather low. But their labour is both highly skilled and cheap. This offers potential opportunities for "direct investment" inside the EU itself. Investment from EU (15) to the new countries is likely to improve particularly because of structural reform for which potential in EU (10) is great.

It has, however, to be admitted that the new EU members have shown fatigue with reform, which is already deep-seated and exhibits itself in political instability. Many Governments face political disruption. As has been evidenced lately, economic reform is not guaranteed to win votes.

The expansion of EU is bound to create more fissures in Brussels because of the demand from the new member countries for greater aid from EU. This is likely to give rise to resentment not only in the richer countries of existing EU which have to find the excess flows but also incumbent recipients of aid, like Spain and Portugal, which have to share the largesse with more countries.

The possible consequences of expansion of the EU for the rest of the world are mixed. For one thing, the dream of the EU's founders of making it a competitive force against the US has to take a backseat.

Weighed down by the poorer cousins that have joined it, the EU will find it harder to match the economic prowess of the US within a reasonable timeframe. For countries in the developing world, there has emerged a potential rival for the aid and investment flows from the EU's richer countries. The emerging Asian countries will have to try harder to earn the FDI that flows out of Germany, France, the UK, Sweden and Italy.

The new entrants to the EU have closer cultural ties to the EU's richer countries. India, in particular, has had special relations with a number of the new countries that were members of Comecon.

It will be a new experience for India to find strong competition for outsourcing for both goods and services from these EU (10) countries that have better access to EU (15)'s markets.

There are rumblings about the EU's further possible expansion, both southwards and eastwards. Southwards is the possibility of Mediterranean countries, like Algeria and Egypt joining the EU.

There is bound to be attraction since France has had traditionally a high level of interest in Algeria, which it once governed. But the question of cultural mix may be a fractious issue. Already, Algerian immigration is posing a potential threat to security in France, both in terms of poverty levels and terrorist implications. But the attraction of petroleum and other resource base in Algeria may be overpowering and may well force a southward extension of the EU to the northern tip of Africa.

One related issue is the tangled question of admission of Turkey into the EU (10). While Turkey's present regime has made its overtures to Brussels, there has been a rather arrogant response in the form of denial of admission from the French President, Mr Jacques Chirac.

He seems to have felt and expressed the view that it would be difficult for the essentially Christian centre EU countries to accommodate the non-Christian incumbents, which Turkey represents. But once the economic logic of the EU's enlargement in terms of markets and natural resources is admitted, Turkey's entry cannot be for long eschewed. That will pave the way for Algeria, Tunisia and even Egypt in due time.

There are lessons for India in the EU's expansion saga. For one thing, there is no smooth path for the integration of diversified economies, even if integration is confined to trade or monetary policy.

In this context, the suggestion made by the former Prime Minister, Mr Atal Bihari Vajpayee, about a South Asian economic community has to be examined in the background of current and future difficulties faced by the EU. The suggestion was, of course, a well-meant idea, but it is fraught with political and practical difficulties. One hopes it will be thought through thoroughly before further costly experimentation is begun.

Turning to the EU itself, what does the future hold? A EU that encompasses Egypt, Jordan and even Russia? That is a prospect difficult to envision now, but may very well come to happen, in view of the tremendous natural resources that Russia and other countries have.

That entry of Russia by itself into the EU may, however, prove to be proverbial camel in the Arab's tent. After absorbing Russia, the will no longer be the "European" Union, but a Russian Union. The framers of the EEC had tried valiantly to forestall such an event from happening.