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EU: The Economic Realities Of Enlargement

Prague, 25 March 1998 (RFE/RL) -- The European Union next week (March 30-31) will begin its long-promised process of enlargement to 10 nations in Central and Eastern Europe.

Five of those nations -- the Czech Republic, Estonia, Hungary, Poland and Slovenia -- will, along with Cyprus, start substantive membership negotiations with the Union immediately. The other five -- Bulgaria, Latvia, Lithuania, Romania and Slovakia -- will have to wait until what the EU calls its "screening" process finds them eligible.

Four of those ineligible candidates are still not considered economically advanced enough to meet EU standards for substantive talks. Slovakia is not considered democratically advanced enough for EU standards.

The EU's expansion to the East will get under way more than eight years after the collapse of communism in Eastern Europe, and more than five years after a Union summit in Copenhagen made the decision in principle to open to the East.

It was only last week that the EU's Executive Commission spelled out in budgetary detail the reforms of its costly farm and regional subsidy programs necessary for a smooth enlargement. Consensus among EU members on the commission's proposals is far from assured, even though they have almost two years to achieve it.

With this kind of evidence, few analysts believe that any of eastern candidates will become full EU members before well into the next century. One analyst, Philip Stephens in the "Financial Times," wrote earlier this month that both today's eligible and ineligible eastern candidates "will remain second-class (EU) citizens, condemned to long transition periods before they enjoy the full privileges of the club."

Even so, to many officials and citizens in the East, EU membership is worth waiting for. They have long seen it as a promised land that will, eventually, integrate them economically with a more prosperous Western Europe. Many know that today national incomes in the former Communist states are about one-third the level of the EU average. Not many know, however, that some of the five eastern candidates chosen to begin talks next week are rapidly catching up with less prosperous EU members such as Greece, Portugal and Spain. In a series of reports, RFE/RL will look at the economic realities of the EU in 1998 that will seek to take account of its growing problems as well as its achievements. At the center of the EU's problems is its chronically high overall unemployment rate, currently estimated at 10.5 percent of the work force.

Some members, notably Spain, come close to doubling the EU average jobless rate, while others like Britain (about seven percent) and the Netherlands (about four percent) are well under it.

These figures are provided by officials in the EU's 15 member states. But in reality, according to some officials in Brussels, joblessness in the EU may be much greater.

The EU's Commissioner for Employment and Social Affairs, Padraig Flynn of Ireland, says there could be as many as 27 million unemployed throughout the EU, not the generally cited 18 million figure that is based on official national estimates. In a recent telephone interview with RFE/RL (Mar. 20), Flynn also said that one in seven people in the EU today live at or below the poverty line --defined as one-half the average industrial wage in each EU member.

Many analysts say that the EU's high joblessness is a result of its "social model," which provides generous and long-term benefits to the unemployed and to those in need of welfare assistance.

In many continental West European societies, employers must pay correspondingly high social costs -- in France, more than 40 percent of a worker's salary. That tends to discourage the creation of jobs at home, where labor markets are rigid and encourage their export to countries where work costs are far less onerous, including central and eastern European nations.

The result is a vicious economic circle. Few elected officials are willing to risk their political lives by reducing welfare-state disbursements, with only Britain and the Netherlands having done so in past 20 years. It is worth noting that those two countries, along with Ireland, are major exceptions to today's common EU economic woes.

Another effect of chronically high unemployment in most EU members has been the creation of what one social-policy analyst calls "something akin to the American underclass" -- the price the U.S. pays for its low unemployment rate (under five percent) and what economists call its "flexible" labor market.

In a recent article (in the U.S. quarterly "The National Interest," Winter, 1997-98), Cait Murphy defined the West European underclass as "a small minority of people, perhaps two percent of the population, cut off from the economic and social mainstream with seemingly little chance of ever joining it or seeing their children join it." And he added that, "if European cities have been spared thus far from the most hideous effects of American-style blight, they are heading in that direction, and on a huge scale."

The launching in less than nine months' time of the EU's Economic and Monetary Union (EMU) is not likely to halt the trend. Many analysts say that when EMU comes into effect, with its new "euro" single currency, it will make it harder, not easier, to treat economic woes within a member state and correct economic imbalances within the Union at large.

They argue that, in the words of the British weekly "Economist" (April 5, 1997), EMU "will mean that local economic slow-downs can no longer be dealt with by local monetary policies (or other measures)."

Analysts are predicting greater economic growth this year overall for the EU, which for the past several years has had low growth -- 1.5 to 2.5 percent. But Commissioner Flynn says that at least three percent economic growth for a sustained period of five years is one essential condition for making any real inroads into EU joblessness.

Until now, most EU members have not been able to respond adequately to the increasing competitiveness of what is called the "globalization" of the world's economy. Prospects are dim for their doing so in the foreseeable future. But unless they do, some analysts say, the EU's social model will surely be threatened in coming years.