Costs and Benefits of Accession to the EU: Attempts at Measurement in Four Applicant Countries 15

EU-12 0.49 0.94 1.17

Source: "Economic Evaluation of he Internal Market", European Economy 1996, No.

4., p. 90.

In summary, no strong conclusions can drawn from the available evidence on the effects of integration and the single market on the peripheral countries of the Union. The picture is very patchy: certain tiles of a mosaic-like picture are visible, while others are not. Analysis of the evidence presented here and further investigations should focus on policies that help avoid the emergence of the trajectory followed by Greece and establishing the conditions for achieving a trajectory that resembles that of Portugal.

2.2 Costs and Benefits of Accession to the EU: Attempts at Measurement in Four Applicant Countries¹⁵

The literature on costs and benefits of enlargement of the EU has shown a striking asymmetry: much more is written on the costs and benefits of enlargement from the viewpoints of the incumbent member countries than from the viewpoints of the East European candidate countries. This induced a group of economists back in 1996 to start a Phare-ACE research project on four countries (Czech Republic, Hungary, Poland and Slovenia) with the title “The Measurement of Costs and Benefits of Accession to the EU.”

This two-year project started with the elaboration of country reports, which has been completed, and is now in its second stage, which is devoted to preparing comparative studies. The final report will possibly include, among other things, recommendations on the possibilities of measuring the costs and benefits of accession for the candidate

15 This section summarizes the presentation by Sándor Richter.

countries. The presenter reported in his talk about the preliminary results of this Phare-ACE project.

After considering more ambitious plans, eventually the participants in the project decided to examine the costs and benefits of accession in the following five areas: (1) comprehensively summarizing the research that had already been carried out on those costs and benefits (in a strictly economic sense) in the individual countries; (2) taking a macroeconomic approach to the assessment of the costs and benefits related to EMU;

sectoral analyses of (3) agriculture, (4) foreign trade, and (5) regional policies.

If one looks at the ongoing research activities in the candidate countries with regard to EU accession, one finds that in three of the four countries under investigation (Hungary, Poland, and Slovenia), groups of experts had already prepared so-called strategy papers.

In Poland, the early version of that paper was updated annually. In Hungary the work was so comprehensive that perhaps every third economic researcher in the country was involved in one or other working group of the so called Strategic Task Force for Integration. Until the summer of 1998, no such strategy paper was elaborated in the Czech Republic, although the new government is making every effort to prepare such a document.

A characteristic feature of the strategy papers was that neither of them has drawn up a comprehensive approach to the costs and benefits of accession. The question of whether on purely economic grounds it is worth joining the EU was not raised in them, and consequently, this question was not answered. The reason for this lack of inquiry was that the decision on accession is considered to be primarily of a political character.

Another reason may be that from the historical point of view it is easy to see the benefits of accession: there is no doubt that in the long run accession will be beneficial for the East European countries. However, the interesting questions are (as the title of this workshop indicates), what impact does the time pattern of the emergence of costs and benefits have on the countries, and what are the short- and medium-run aspects of these costs and benefits?

One can apply a rough, common sense approach: if we take only two elements, access to the large EU market and receipt of EU transfers, one can surely conclude that the accession will bring overwhelmingly benefits.

There are serious methodological hurdles as well. Several contributors to the project stressed that the transition to the market economy is not yet over, and the factors related to transition and EU integration are impossible to separate from one another. In addition, the accession process is so complex that it makes any comprehensive modeling effort almost futile. A further difficulty is that the benefits of accession with respect to military positions and foreign security are almost impossible to measure in quantitative terms.

Contributors to the project also stressed that if we take growth only as the measuring rod of costs and benefits, it is again impossible to separate the factors that impact growth through integration and through other channels. It is also difficult to find a

“common denominator” for measuring the costs and benefits in such fields as agriculture, regional policy, and others. Moreover, a certain development can be beneficial for one group in society and detrimental to another group, so it is difficult to arrive at a net cost or benefit for society as a whole. An example of this comes from agriculture: higher agricultural output prices (a probable outcome of accession) may be beneficial for the farmers, but harmful to consumers.

The inability of policy makers and researchers to make a comprehensive assessment of the costs and benefits of accession has significant consequences. One of such consequence is that the candidate countries have not devised an alternative economic strategy for the case of non-accession. Such a scenario would become necessary if the introduction of the euro were not so successful as expected in Europe and turbulence followed in its wake. Alternatively, it could happen that the internal reforms of the EU will not reach the scale necessary to prepare the Union for further enlargement, or consensus may not be reached in the controversial field of EU transfers. Obviously, the world would not come to an end if these unexpected developments materialized; the candidate countries must have plans to carry on with reform and enhance growth in such a case. If such an alternative, non-accession strategy is not available, then a protracted accession process would be seen by the candidate countries as a tragedy.

A further implication of the lack of comprehensive calculations on costs and benefits is that the candidate countries have not considered any “crash scenarios.” Such scenarios would emerge if the economies of the candidate countries would collapse within two to three years of accession due, for example, to increased competition, unsustainable trade deficits, social and political tensions, or unbearable adjustment costs. This means that the candidate countries have not developed early warning systems, so that they will not be able to take the necessary steps in time to avoid these scenarios.

Even in the absence of a comprehensive cost and benefit analysis, we can ask the question: how can a country approach joining the EU in such a way as to gain the most and lose the least in the process? Partial analyses can help suggest the answer to this question

The presenter went on to focus on one particular issue, namely transfers from the structural and cohesion funds to the new members. The Agenda 2000 document laid out the following framework: an upper limit of 4 percent of GDP for each country for the sum of all transfers; a phasing-in process; and a precondition of 2.5 percent average annual growth of GDP within the EU. Most of the analyses of this issue take into account gross figures on total transfers from the EU to the new member countries.

However, net figures, obtained after deducting the contributions to the EU budget by new members, are more informative.

Member country contributions are fixed according to rules and are non-negotiable.

However, transfers hinge on many conditions, such as the absorption capacity of the recipients, the availability of good projects, and the country’s co-financing capacity. A doomsday scenario here could emerge: in the first three years of membership, EU transfers are of limited size due to the phasing-in principle, while membership fees are fixed. This means that in the years most crucial from the point of view of a possible crash, the new members would hardly receive any assistance from the EU.

The experiences of earlier new members show that in the first years of membership it was not easy for them to obtain EU funds. In Austria, for example, applicants for agricultural funds forgot to fill in some forms, which led to demonstrations by farmers who had not received the transfers that they were due, or had obtained them only with considerable delays, because of the inexperience of the relevant government agencies.

The danger of such instances will be much larger in the East European countries, which have considerably less efficient administrations than Austria.

In conclusion, the presenter presented a list of derogations that seem feasible for the candidate countries to apply for in the accession process (see Table 2.2). These are in

fact packages of derogations, each consisting of from dozens to hundreds of measures under one item in the table. There are two groups of motives for the CEECs to apply for these derogations. The first three items in column 2 derive from the fact that the CEECs are at much lower levels of development than the EU average and may not compete successfully within the EU in various areas. The other group relates to standards the achievement of which may be hard to finance for the candidate countries in the near future.

Table 2.2. Possible Areas Where the Easter EU Applicant Countries may Require Derogation

DEROGATION MOTIVES OF THE

CEECs

IMPACT ON THE EU