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EU: Eastward Expansion Poses Threats And Prospects To Portugal's Prosperity

Portugal, one of the European Union's poorest member states, is facing the prospect of sharp competition for investment and funding with EU candidate countries in Central and East Europe. RFE/RL correspondent Breffni O'Rourke, who is in Portugal for the EU summit, looks at how local industry is meeting the challenge.

Porto, 20 June 2000 (RFE/RL) -- On the steep hillside above the Douro River, Porto's old quarter lies slumbering in the midday heat. The scene is peaceful on a summer's day in this northern Portuguese city.

But Porto is a city under siege, even though the forces arrayed against it are neither martial nor visible from the banks of the Douro.

As a major industrial center in one of the European Union's poorest member states, the city is facing a massive rise in competition from the Central and Eastern European countries that are expected to start joining the union in the next four or five years.

Porto's traditional exports, such as the famous port wine which takes its name from the city, will not be much affected by the entry into the EU of countries like Hungary, the Czech Republic, Estonia, and Poland. But beyond Porto's old town are industrial plants producing tires, chemicals, electrical equipment, auto parts, textiles, leather goods, silk, footwear, soap, canned goods, and more.

These will be thrown into direct competition for markets and investment with producers in Central and East Europe. Portugal suffers multiple disadvantages, geographical and historical, as a competitor against the best of the newcomers. It lies not in the heart of Europe, but on the far-western fringes. Under authoritarian rule for much of this century, it was notoriously backward, with low levels of education and a largely rural population.

EU membership, achieved at the same time as Spain in 1986, has brought great benefits. Average annual per capita income has more than doubled, from $5,000 to $11,000. Unemployment has fallen to 5 percent. After accession, private investment flowed in, as did massive EU funding. Along with Greece, Portugal is the EU's highest per capita beneficiary under the EU's regional development program, with funds of $18 billion dedicated to Portugal alone in the present seven-year aid period.

But now inward private investment flows are declining, and billions of dollars of future regional aid are being put in question as the East Europeans stake their own claim to regional assistance.

Local industry is well aware of the threat and is moving to counter it. The director of the international department of the Portuguese Business Association, Francisco Quesado, spoke to RFE/RL about it:

"We have been having lots of meetings with Portuguese companies, and with some authorities and some specialists from Poland, Hungary, the Czech Republic, and other countries, and we can see this matter in two ways. Firstly, of course, there will be higher competition both in terms of the funds from the EU, and in the more complicated marketing facing our companies. But on the other hand, we can see this as an opportunity, because Portuguese companies will have a new market and the possibilities of making interesting partnerships with companies from the Eastern countries."

Quesado says the challenge will be for local companies to use their design, quality control, and marketing expertise. Those are the skills which they have particularly developed in the last 10 years.

He acknowledges that the Eastern European countries have some advantages over Portugal, notably in the education and technical skill of their workers. But he suggests the two sides can work together to complement each other successfully as partners, rather than becoming commercial enemies.

In addition, financial analysts say Portugal also has some advantages over prospective rivals. One is its established membership of the common currency, the euro, which gives price stability within the huge EU single market.

Deutsche Bank expert Elka Speidal-Waltz spoke to RFE/RL from Frankfurt. She says the euro makes Portugal more attractive than countries outside the eurozone:

"The fact that there is no uncertainty on currency developments is a big advantage, particularly since currency development in Poland and Hungary still has some risk, and it is still not very clear how things will develop [there]."

Speidal-Waltz estimates that such advantages will help Portugal hold its position for some years to come.

And the EU's Executive Commission in Brussels says that eastwards expansion poses no immediate threat to Portugal's regional aid benefits under the "cohesion" policy, which runs to 2007.

European Commission spokeswoman Laurence Auer said the benefits given to Portugal, Spain, and Greece will not diminish if the first candidate countries become members, as expected, in 2004 or 2005. That's because there is a reserve of extra money which is being kept for the new member states to help them until 2006.

Auer says, however, that what happens after that date is still unknown:

"The big question mark is what we are going to do as a cohesion policy after 2006? That is something the Commissioner [for Regional Development] Michel Barnier is working on right now."

She says the internal discussion about regional funding for the next period, from 2006 to 2013, will start by the end of this year.

Portugal, as EU president in the first half of this year, has helped to drive forward the eastwards expansion process -- even though for it, the price of success in that expansion may be high.