Vilpisauskas, Ramunas

Policy Documentation Center

Assessing Impact of EU Membership on the Baltic States
Presented at the conference
"European Integration: Economic and Security Implications for Central and Eastern Europe"
Vilnius, Lithuania, May 20 - 22, 2001
by Ramnas Vilpišauskas
Mr. Chairman, Ladies and Gentlemen,
Let me start by saying that it is always an honour and a pleasure for me to speak in the same panel with
Dr. Andras Inotai who is one of the best-known experts in this field. First, I have been planning to present
an overview of the results of the research conducted recently in the area of integration impact
assessment. However, I think it would be more interesting and hopefully more provoking to structure my
presentation around the statements on what I see as the main tendencies in this area.
1. The competitive forces of the EU are less of a problem in the accession countries than used
to be widely feared.
The ability to withstand the forces of competition after EU accession is one of the main criteria for EU
membership. While many analysts, and EU officials in particular, expressed concern that the economies
of the accession countries have not been ready judging by this criteria, the recent tendencies prove to be
contrary. These tendencies are the following.
First, the openness of the accession countries and Baltic States in particular. The openness is usually
measured by a share of foreign trade to country's GDP which in the case of the Baltic States is around
100 percent or more. Also, the level of trade protection is another illustrative measure of openness to
foreign competition. Differently from some Central European countries, all Baltic States are less
protectionist than the EU. This is most evident in the case of Estonia but also true in the cases of Latvia
and Lithuania. The most recent studies in Lithuania illustrate that the level of protection would increase
after joining the EU (if one is to use data from 1999, the imports from 14 third countries would become
more expensive by 90.15 million Litas and some would become cheaper by a total of 10.83 million Litas),
while exports would also become more expensive (respectively 27.9 million Litas and decrease by 0.37).
Second, constant increase in exports to the EU also indicates the ability of companies in the accession
countries to compete in the Single market. This is particularly notable in the case of Lithuania where the
national currency has been fixed to the US dollar which has been appreciating against euro after its
introduction.
Third, as surveys of foreign investors indicate, the benefits of trade liberalization between the accession
countries and the EU and the resulting competition have been already quite visible. Interestingly, some
investors say that most benefits of economic integration have already been achieved.
So, one could conclude that competition, except in some protected sectors like agriculture, presents
benefits rather than threats and some candidate countries are more open to competition than some
members states. Therefore it is interesting to note that some EU member countries are increasingly
concerned about "harmful competition" from some candidate countries.
2. The economic impact of adopting EU acquis communautaire regulating economic activities
in the candidate countries seems to have been underestimated.
It seems that with progress in negotiations and corresponding need to provide estimates of investments
necessary to meet EU rules and norms, there is a growing apprehension of the size of investments
required in the candidate countries. We can quote different estimates and exact numbers but they are not
so important here. What is important is the implications of these investments. First, they imply increasing
need for financing the adoption of standards of products and production processes. This in turn means
that some comparative advantages of businesses in accession countries are likely to be lost in the
process of harmonization. As the most recent issue of The Economist claims, "By encouraging trade and
investment, enlargement will certainly contribute to prosperity. But by obliging the applicant countries to
adopt laws that may be inappropriate for them, it could also neutralize that potential benefit". Investment
needs also imply higher budgetary expenses. Finally, while the regulatory costs are becoming quite
noticeable (and this is probably one of the reasons of decreasing EU popularity in some accession
countries), benefits will become apparent only in the longer-term and will depend to a large extent on
policies of regulatory institutions.
It is interesting to note that with the progress in economic integration and adoption of the acquis, the
technique called regulatory impact assessment has been increasingly applied in some countries. This is
particularly the case in Lithuania, where the qualitative regulatory impact assessment has been
conducted for some 2000 EU norms. The need for the RIA is justified by the need to better prepare the
negotiating positions, to inform the population and also to understand better the impact of EU regulations.
However, the RIA also has its limits and is sometimes overshadowed by political aspects of adopting EU
norms.
3. There seems to be exaggerated expectations concerning the benefits of the EU funds for
the candidate countries.
The most popular explanations of EU benefits focus on EU funds. It is understandable because it seems
easier to sell this to population. For example, according to a recent study, the net balance of receipts from
the EU budget to Lithuania (and this was considered to be a "realistic scenario") would constitute around
279 million euro, or 2 percent of the country's GDP. However, here one has to be aware of several
important political and economic implications. First, there is a danger to create unreal expectations, which
can be already observed in the case of long promised SAPARD program. Second, in many cases EU
funds are likely to benefit concrete groups of population but with co-financing required this might result in
higher budgetary needs. The co-financing together with Lithuania's payments to the EU budget would
almost equal the receipts from the EU budget (the co-financing only would constitute around 238 million
euro). Third, potential supply of funds is likely to mobilize interest groups and to create stronger incentives
for corruption and distortion of investment incentives. The latter problem can be illustrated most clearly by
dilemmas facing accession countries in the reform of agricultural sectors. One might ask what credible
incentives farmers in the accession countries might have to restructure and increase their efficiency when
the EU itself provides a role model of how to rely on support from state budget and protection from
external competition.
4. The general economic impact of EU membership will to a large extent depend on the
autonomy of state institutions to demands of interest groups.
This is an important aspect which has been noted in previous enlargements as well. Accession into the
EU implies increased regulation of economic activities and most probably additional regulatory
institutions. This, together with a potential increase in financial support from the EU, creates incentives
and possibilities for the "regulatory capture" and "administrative corruption" in these countries. Therefore,
transparency of the regulatory process, simple rules and clearly defined functions are very important. With
the period of "extraordinary politics", to use the phrase of L. Balcerovitzs, gone in the past and
institutionalisation of channels of interest representation, the ability to resist demands of interest groups is
becoming more difficult. This is particularly important in the sectors that are still in the process of reform
like agriculture or the energy sector.
5. What does exactly EU membership entail?
Here it is useful to remember two well-known methodological problems of any precise scientific efforts
aimed at estimating the impact of EU membership. First, integration measures versus general reforms in
the accession countries. Although some already claim that the transition process is over, reforms in the
sectors such as agriculture or energy form part of both EU accession and creation of conditions for
market economy (although it is more evident in the energy sector than in agriculture). So, we will be
always facing this problem of separating what we are doing specifically for the sake of joining the EU.
This is not only a methodological challenge but can also become a politically sensitive issue when
populations in these countries have to be informed about benefits and costs of EU membership.
Second, there is also an old and well-known problem of the "moving target". Although the EU is rather
conservative and slow to change, it is likely that its enlargement will eventually change the EU itself. We
already know the proposals of the German government which include specific ideas on the division of
competences between EU institutions, EU institutions and member states and devolving some policies,
like agriculture or infrastructure, to the level of member states or regions. We also know the ongoing
debates, for example, taxation policies in the EU, on the one hand, and deregulation of financial markets
and energy markets, on the other. This means that in some five years the EU might look quite different
from its current form. While this is clearly the topic for a separate discussion, it also means that eventually
the impact of EU membership might involve some aspects which cannot be observed at the moment.


Assessing impact of EU membership on the Baltic States

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