Eastern Europe's challenge to the EC THE period from the summer of 1989 through 1990 was one of internal political turmoil within the East European states and international honeymoon — in public at any rate - between the West, and the European Community (EC) in particular, and the new polities of Eastern Europe. During this phase a clear rift opened up between the political dynamics of the Balkans and of East Central Europe; in the former area, domestic politics was governed by the crisis of the electoral victors, as both the Bulgarian Socialist Party (BSP) and the Romanian National Salvation Front (NSF) found themselves denied the fruits of electoral triumph and plunged into crisis amidst mounting anti-Communist mobilization. But in East Central Europe the new regimes have been increasingly associated with the West, and have faced mounting domestic criticism of their Westernizing transition policies. It is, thus, in the three countries with leaderships most acceptable to the EC — Poland, Czechoslovakia and Hungary - that the strains were most serious from the ther issue of labour migration became another major sticking point because of the restrictive EC attitude.12
The same basic problems stalled the negotiations with Hungary. The fourth round of talks with Brussels foundered on agriculture, textiles and migration.13 "Fundamental differences still existed in June 1991 with deadlock on textiles and 'radically different approaches to the free movement of workers'. " 14
The greatest difficulties seem to be between the EC and Poland. While Commissioner Andriessen envisaged Hungary and Czechoslovakia as achieving Association status by the end of 1991, he could hold out hope only for 1991 for Poland. 15
The prospect of full trade liberalization alerted the EC lobbies most vulnerable to an East European export drive, notably textiles and steel.
The European Community's textile and clothing industry employs some three million people and has an annual turnover of some $150bn. Its output has been in decline since 1980, especially in clothing and the EC's trade deficit in textiles in 1989 stood at $10bn. The industry occupies a particularly important place in the economies of the South European EC member states.
Western point of view.
The EC Commission proposed as a concession examining agricultural issues product by product and reducing the transitional period for steel products to five years. A Council meeting on April 21 accepted the Commission's proposals for a gradual removal of customs duties and non-tariff barriers over five years on stel, but required a specific arrangement for coal; it continued to insist on a ten year tariff transition for textiles while suggesting that non-tariff aspects should be settled within the Uruguay Rounds; on agriculture it offered the removal of all quantitative restrictions but required agreements on specific goods deemed specially important for the East Central European countries' exports, subject to reciprocal effort on their part. 6
For the CSR the key problems were tex tiles and steel, agriculture being largely a non-export industry? By the end of the third round at the end of March, the negotiations were still stalled. 8
Poland's main demand upon the West throughout 1990 and the first months of 1991 had been for a drastic reduction in its debt obligations, but in February 1991 its economic supremo, Leszek Balcerowicz, indicated that the trade issues in the Association negotiations were its other dominant concern. When the external affairs Commissioner Hans Andriessen returned from Warsaw in March he high-
16, 1991 lighted textiles, agriculture and coal as the key stumbling blocks. 1°
At the end of the third round of ECPolish negotiations in March, Poland's Secretary of State for External Economic Relations, Olechowski, was publicly scathing about the EC's stance. He noted that Poland's market is fully open to EC products and he called for full reciprocity on the part of the EC. Yet the EC was continuing to insist on trade protection for its own markets. Instead of asymmetry in favour of Poland, the result was "inverted asymmetry" in favour of the EC. Since the EC is not willing to liberalize in textiles, steel and agricultural products, liberalization in fact covers only half of Polish exports. Mr. Olechowski said no government could submit such a draft agreement to parliament for approval in Poland.
He also emphasized that "this agreement will determine Poland's fate. During the fourth round in April, the fur1. Although it was used against Soviet and Albania n ferro-chromium and against a few Yugoslav an d Czechoslovak products. Intra-community surveillance procedures were granter by the Commission to Spain to monitor linen and oth er textile imports into the EC from the USSR. See Europe, March 3, 1991. 2. Europe, April 4, 1991, p. 7. 3. Europe, April 13, 1991, p. 8. 4. Ibid. 5. The present series of discussions in the framework of the General Agreement on Trade and Tariffs
The threat of cheap labour
The industry is highly decentralized, involving about 100,000 companies, but the EC lobby, ELTAC (The European Largest Textile and Apparel Companies) Largest Textile and Apparel Companies) has been clamoring since the start of 1990 about the threat from Eastern Europe which, together with the USSR, has about thrce times the EC's capacity and lower wages. ELTAC's leadership has argued that concessions could not be made to both Eastern Europe and Asia.
Some Western governments, notably the Italian, have argued that ELTAC's warnings are much exaggerated because of the poor quality of East European output. And the EC Commission has tried to argue that the opening of trade relations with Eastern Europe even offers new opportunities for the EC industry in the export field. But ELTAC has been successful in insisting upon a protracted transition (over at least ten years) towards full trade liberalization, a stance repudiated early on by all three East European governments negotiating on Association as unacceptable.16
West European steel interests, a much more tightly organized industrial group, (GATT). 6. Europe, April 22, 1991, p. 7. 7. Ibid, March 23, 1991, p. 3. 8. Ibid, March 26, 1991. 9. Ibid, February 13, 1991. 10. Ibid, March 12, 1991. 11. Ibid, March 21, 1991. 12. Ibid, April 24, 1991. 13. Ibid, May 3, 1991. 14. Ibid, May 31 1991. 15. Ibid, March 11, 1991. 21 16. Ibid, March 20, 1991, p. 9.
OLIVER MACDONALD - July 1
EASTERN EUROPE
1989 Steel Capacities
TABLE 1:
Europe together in the new European division of labour typify the approach of the private sector industrial giants of
Western Europe.
Draw steel capacity
EE and Soviet 260m tons
EC 190m tons Source: Europe, March 3, 1991. were swiftly put on guard because of a Council decision to increase the quota of East European steel imports into the EC by 15% for 1990. Five meetings of Coreper were needed to approve a draft negotiating mandate to maintain this quota for 1991.1 Experts for some member states feared that this could allow East European industries to concentrate their exports in a few, particularly sensitive products and thus create disorder in the market. The Commission responded that member states could apply the safety rules if this happened.1
At the same time, stricter regulations for monitoring these imports were instituted, requiring the exporting countries to provide greater information before an import document is issued." But the Commission's efforts to lift the quota on pig iron were rejected by France and Spain, the EC's main pig iron producers.20
To appreciate the scale of the "threat" from East European steel, we should note the figures for total steel production (Table 1).
The total quota for steel from Eastern Europe (excluding the USSR) for 1991 was set at 2,657m tons - just one percent of total EC raw steel capacity. Flood of East European steel unlikely
The prospect of East European steel producers being able to flood West European markets if import barriers are removed does not seem to be borne out by research. One German study of the problem argues that high transport costs would prevent a major influx. Projections of EC economic growth in the 1990s would suggest that the extra steel rolled steel steel consumption capacity
200m tons 160m tons
145m tons 112m tons how for updating their technology and such know-how transfer requires acceptance of consensus on trade matters.22
The alternative proposed by the EC steel lobby is for the East European steel industry to be restructured. The big Western steel companies would be happy to cooperate in this and massive Western credits should be offered for the whole operation. In return for technical and financial aid, the East European countries will have to agree to reducing overcapacity and to either privatizing or at least adopting the management principles of privatized companies in those that remain nationalized. EC steel companies could train both the managers and the work forces of Eastern Europe, and Western experts could advise steel companies there on restructuring via on-site consultations. At the same time East European steel experts could be integrated into the West's steel organizations and participate in the work of their technical bodies.
The meaning of such proposals for restructuring has already been demonstrated in the former GDR. During 1991 output there has been reduced to 54% of its 1988 level. The workforce in the East German steel industry, which stood at 67,000 on July 1, 1990, will have dropped by 60% to 30,000 by the end of 1991.2
The German steel lobby's proposals for fitting the industries of the two halves of 17. Europe, April 4, 1991, p.6. Coreper is the committee of top officials of the 12 that shadows the Council of Ministers. One reason for the delay was that the Commission insisted on the East European countries being allowed 30% flexibility between categories of steel products in 1991. 18. Europe, February 21, 1991. 19. Ibid, March 11, 1991. 20. Ibid, February 26, 1991. The UK and Denmark
The same general approach has been advanced by the Chemical industry lobby, CEFIC (European Chemical Industry Council), which has warned that efforts to achieve free market economies in Hungary, Poland and Czecho-
Slovakia "*must not be at the expense of the long-term viability of Western
Europe's own chemical industry." It called on EC and EFTA governments to establish "imaginative" financial support structures for Western companies moving into Eastern Europe, including investment guarantees, systems of tax relief and subsidized loans. The chemical industries of the West should ensure the creation in the East of legally constituted trade federations on the pattern of the industry in the West.24
Such ideas mean in practise maintaining export barriers to the West while the EC's private sector decides which chunks of their East European counterparts to buy up and absorb into their own international operations.
The remainder of the given East European industry will then be scrapped with generous arrangements for redundancies, funded by Western aid. The enclaves of continuing East European output will then be modernized, again with public sector aid for the new Western owners of the East European plant. Such schemes avoid the risk of the future place of East European industry in the international division of labour being decided either on the market or through public planning by East European governments. The planning would be done by the private sector in the West.
EC deadlock poses political problems
Despite their resistance during the Association negotiations, East European were supporting higher steel quotas in general; France, Belgium, Italy and Luxemburg wanted to lower the 1990 quotas. 21. Helmut Wienert: "Die Stahlindustrie Osteuropas - Entwicklung, aktuelle Struktur, Probleme und Perspektiven" RWI-Mitteilungen, Jg 40, 1989. 22. Europe, March 3, 1991, p. 10. 23. Ibid, May 1, 1991, p. 13. 24. Ibid, April 25, 1991, p. 14.
1990s would suggest that the extra steel capacity in the East could be absorbed.
But this is not the view of the EC's steel lobby. The President of the German Steel Association (The Wirtschaftsvereinigung Eisen und Stahl) spoke out in March against any rash liberalization of trade for East European steel. He declared that there was now huge over-capacity in steel across Europe and that rapid liberalization of imports would lead to massive defensive measures in the context of the 22 GATT. He pointed out that the EC states are dependent on West European know-
TABLE 2:
Annual Capital Flows in Billions of US$ over Ten Years
Pessimistic
Middle
Optimistic
Eastern Europe
18
12
24
55
Eastern Germany
30
90
Source:
S. Collins and D. Rodrick: Eastern Europe and the Soviet Union in the World Econo my (IIE, Washington DC, 1991) quoted in the Economist, July 6, 1991.
International Viewpoint #212 • September 16, 1991
EASTERN EUROPE with Association TABLE 3: agreements with the Total foreign investments EC is being resolutely (registered at end of 1990) resisted by the 12 EC member states. They Country Number of foreign investments are already facing high USSR 3,000 levels of structural Poland 2,180 unemployment in their Czech and Slovak Rep. 1,600 own countries, Romania 1,350 increasingly signifiBulgaria 140 cant political backHungary 5,000 lashes against the social effects of the Source: The UN Economic Commission for Europe's long-term economic
2.5 to 4 million Gypsies in Romania and Yugoslavia. 26
There have been further worries about che danger of a mass exodus from the USSR or Romania as a result of near-total economic collapse. During the Cold War one of the most insistent human rights demands of the West on the Soviet government was for freedom of travel and emigration for its citizens; the demand was still being made a precondition for normalizing trade relations in the USA in 1991. But the Soviet government's readiness to legislate such freedom in the
East-West Venture News, no. 7 (Geneva). governments will probably have to accept this approach so long as they continue to pursue integration into the Western market. But for Poland and Hungary, the deadlock with the EEC is probably more serious politically and also more difficult to overcome in the long-term. The agricultural sector is important economically and politically in both countries. Hungarian agriculture has been an outstanding success story in productivity terms since the 1960s and both countries would hope to gain substantially from the removal of tariff barriers on their exports to the West (Czechoslovak agriculture is far more geared to import substitution and the domestic market).
Yet agricultural tariffs are integral to the EC's Common Agricultural Policy (the CAP), the EC farm lobby is immensely strong, is facing a major challenge from the USA in the Uruguay Round G-> of the GATT negotiations and is in no mood to sacrifice the CAP for East European farmers. The EC-wide farmers organization COPA (the Committee of Agricultural Professional Organizations of the EEC) has made this very clear.25 The agricultural issue also poses major problems for any transition to full EC membership for a country like Poland.
The Eastern European governments, also facing a mounting social and political crisis as a result of their first moves towards a capitalist market, blocked in key export sectors by EC tariff barriers and being offered restructuring projects involving huge redundancies for their still state-owned industries, see one way of easing their difficulties through gaining free movement of labour into Western Europe. Such an open door could ease the unemployment crisis (and the fiscal crisis linked to it), could gain hard currency earnings and could improve skill levels amongst temporary workers in the West returning to their country of origin.
But the principle of free movement of labour westwards on the part of countries crisis in Western Europe in the 1980s the waves of riots in France in 1990-91 being one sign of this) and a growing far right mobilization around the theme of immigration (the Front National in France, the Republikaner in Germany, the Lombard League in North Italy, the Vlaams Blok in the Antwerp region of Belgium and so on).
In addition, the EC is already predicted to face a large increase in political migrants from the east. According to expert estimates, between 3.7 and 8 mil lion people in this category are likely to move westwards in the coming years,
Before we go on; what exactly are your plans,
Mr. Gorbachev? though not by any means all will be aiming to settle in the EC. The EC Commission estimated in January 1991 that some 800,000 politico-economic refugees could leave Eastern Europe for the Community each year between 1991 and 1996. The figures break down as follows: 1.3 million Germans from Poland and Romania and another 1.7 million from the USSR; 1.5 million Jews from the USSR (although few are expected to stay in Europe); a large movement of perhaps as many as nine million Armenians from Azerbaijan and Georgia (most wanting to go to the USA or France); and refugees from political violence against minorities brought on by economic hardship and nationalist ferment, especially against the 25. Ibid, May 25, 1991, p. 14. 26. Ibid, January 16, 1991. 27. Ibid, January 26, 1991, p. 15. 28. Polish agreement to this was made a precondition for the abolition of visas by the Dutch and Belgian govemments. See Europe, March 26, 1991, p.7.
spring of 1991 caused some alarm in the West. The Soviet representative at a Council of Europe conference on migra-
"we have learned through diplomatic channels that it would be appreciated if we slowed things up" over the passing of the legislation.?
Against this background the EC has been taking a very restrictive stand against migrant labour from those states currently negotiating association agreements. The Shengen countries (Germany, France, Italy and Benelux) have agreed to the scrapping of tourist visas for Poles and to allowing them to enter for three months provided that they don't work.
But this agreement has been possible only because the Polish government has promised to accept the forced repatriation of Poles trying to stay beyond the time limit or to gain regular employment.2 There has been strong criticism of the EC's stance on migration by human rights' lawyers. A conference in Brussels on January 29 on the problems of refugees orga nized by the European Parlia ment's Committee on Development and Cooperation and by the UN High Commissioner's Office for Refugees heard strong criticism on this score. Professor d'Oliveira from the European University Institute in Florence claimed the EC was developing a whole series of instruments violating the Geneva Convention which itself represents only minimal protection.29 The Council of Europe has also attacked the EC's immigration policy, notably for its effects on youth mobility in Europe. 30
The prospects of gaining growth and modernization motors through diplomatic leverage with the European Community thus look bleak, especially for Poland and the Balkan states. The other dimension of economic relations with the West lies in the response of Western private capital to 29. Ibid, January 30, 1991, p. 13. 30. The Secretary General of the Council, Catherine Lalumière, made this point forcefully, as well as criticizing the EC's entire attitude as restrictive. See the report of the Council of Europe's Vienna conference in 1994,r 1916. this subject in Europe, January 25, 23 1991, pp. 15-16.
EASTERN EUROPE / CZECHO-SLOVAKIA the new opening in Eastern Europe.
It is very difficult to make predictions about future capital flows from the West, but some general points are clear. First of all, the lion's share of Western investment will now go to the former GDR; it is likely to receive substantially more than all the rest of Eastern Europe put together over the next ten years. One study by the Washington based Institute for International Economics offers three estimates of capital flows, a pessimistic scenario, an optimistic scenario and a middle variant. (Table 2).
The authors consider that even the most optimistic scenario will leave Eastern Europe far behind the West in ratios of capital per worker after a decade.
In the meantime, East European governments have been seeking to involve Western capital through joint ventures and through the direct sale of state industries. There has been a substantial rise in the numbers of joint ventures since 1989. The most remarkable breakthrough has been in Hungary, where the number of joint ventures rose from only 1,000 at the start of 1990 to 5,000 at the end of the year. There has also been a noticeable increase in interest on the part of US companies in the USSR. The figures for joint ventures are given in table 3.
Joint ventures have little impact
But it is impossible to assess the significance of these totals, above all because many, in fact most, registered joint ventures are not, in fact, operational. The proportion in operation has risen from 25% at the start of 1989 to 42% by the end of 1990. But despite this growth, it seems that such joint ventures will not have a major macro-economic impact on any of these countries for some years.
Those attempting to lead the countries of Eastern Europe down the road of a rapid transition to capitalism are now under enormous social and political pressure in both Poland and Hungary as the social crisis and public disillusionment spreads. The social and political situation is perhaps less volatile in Czecho-Slovakia, but there is even more tension throughout the Balkans.
Awareness of this increasingly critical situation is probably most intense within the European Commission. Its external affairs officers have therefore been searching for ways of holding the line in Eastern Europe, especially by offering a more definite political perspective of eventual integration into the EC. But throughout the first half of 1991 the EC's Council of Ministers refused to give the three northern tier countries what they asked for: a definite commitment to their eventual membership.
The furthest that the Council would go 24 allow the preamble to agreements to refer in the Association negotiations was to to accession as an ultimate, though not an automatic, objective for the three countries. And conditions would have to be clearly spelt out: political (multi-party democracy, human rights) and economic (market economy) conditions will be in the preamble and the association council established will check that they are stuck to.31
The External Relations Commissioner has indicated a distinction between Czecho-Slovakia and Poland, saying that full Polish membership will not be possible "before the end of the decade at least" while hoping Czecho-Slovakia might become a full member before the end of the nineties.32
Faced with the Council's intransigence, Andriessen has floated the notion of a so-called "Affiliate Membership", raising this possibility in April 1991, apparently off his own bat.33 He suggested modifying the Treaty of Rome to allow this status; it would involve the rights and obligations of membership in some fields but not in others during a period of transition. The promise of affiliate status ne altilate would have a place at th Council of Ministers on an equal footin and adequate representation in other institutions such as the European Parliament. Such affiliates could rapidly take part in two fields; political cooperation and monetary affairs; they would gradually extend their participation to other fields such as transport, energy, environment, research, according to a case by case procedure.
In subsequent talks with Bulgarian Prime Minister Popov, Andriessen said that his concept of affiliate member would fit Bulgaria perfectly.34
It seems that the German and Dutch governments have now also accepted the need to offer at least some of the East European states a definite commitment to eventual membership. The Dutch Foreign Minister, Hans van der Broek, has called for the East European states to be offered the perspective of joining the EC by the year 2000.35
It is hard to imagine, however, that such a political commitment from the EC will be enough to reverse the trends towards political disintegration and social unrest in most of eastern Europe. It is more likely that the course upon which the Western countries have pushed the new regimes in eastern Europe will gencrate powerful political backlashes, whether of the right (pro-capitalist populist authoritarian forces) or of the left. Tensions are rising in Eastern Europe by the month. * 31. Ibid, April 22, 1991, p. 7. 32. Ibid, March 11, 1991. 33. In a speech before the Eurochambers of Commerce Assembly. See report in Europe, April 20, 1991, p. 12. 34. Ibid, April 29, 1991. 35. Ibid, March 11, 1991, p. 4.
International Viewpoint #212 • September 16, 1991
Society feels free"
TWENTY months after the
Velvet revolution of November 1989, the big decisions on the future of