EU embraces East out of enlightened self-interest

Date: 13/03/1997

WHATEVER other reasons the EU may have for expanding into central and eastern Europe, one stands head and shoulders above the rest - money.

The sudden appearance of ten high-skill low-cost economies on the Union's doorstep in the Nineties has raised the prospect of a bonanza the scale of which is only just beginning to sink in.

While central and eastern Europe's 100 million consumers pale in significance next to the huge populations of Asian nations, they are better educated, closer and - perhaps most importantly - still full of goodwill towards their western cousins.

It is a cocktail that few politicians can ignore, and one which has been driving them to ever-greater shows of support over recent years.

Bringing countries of central and eastern European (CEECs) into the Union should certainly reap some lucrative rewards.

Their entry into the internal market will offer western companies greater and simpler access to burgeoning markets which eclipse sluggish growth at home. And the political stability which comes with EU membership should (politicians hope) provide potential investors with the long-term security they need, shoring up the still fragile democracies against any return to Communism.

But none of this should be overestimated. Whether or not enlargement goes ahead, business will continue to head eastwards not because the CEECs have been brought back into the western European fold, but because they offer the promise of big bucks.

The governments of central and eastern Europe have all, to a greater or lesser extent, opened the bidding for some prime sectors of their state-owned industries and the auction houses are filled with westerners.

The region offers both cheap production centres for sales (usually of base products) back to western Europe, Russia and the Middle East, and also a rapidly growing domestic demand for infrastructural development.

As central and eastern Europeans cry out for all the trappings of the 20th century dream - a house, a car and a television - market opportunities in information technology and consumer goods are beginning to emerge in abundance.

In fact, many of the applicant countries are embracing free markets and liberal economics with a vigour that puts the EU itself to shame.

Clearly, Union support has made a difference. Its Europe Agreements with the East offer reduced tariffs on exports to the EU in many sectors and membership requirements provide a strong incentive to change. But that is far from the whole story.

“We look at market opportunities; we do not look that much at the European institutional framework,” says ABB Europe's president Eberhard von Koerber, who is in charge of 30,000 employees in the region.

“Enlargement was only one small part of the equation,” says an executive from Bass, explaining his company's reasons for advancing into the Czech beer market.

In short, “we do not need a country to be part of Europe to do business there”, explains Olivier Monfort of Belgium's Solvay, which is about to purchase 60&percent; of Bulgaria's biggest soda ash plant.

What businesses do need, however, is companies to buy up, and a regulatory and fiscal environment which encourages joint ventures and new start-ups.

According to the European Bank for Reconstruction and Development's transition report for 1996, most of the applicant countries score close to top marks on investment rules (sometimes even better than the West), although there is significant room for improvement in a few.

Potential investors also need reassurance that their money will be safe, whether from corruption, crime, economic collapse or regional upheaval. This is especially true of smaller enterprises, which need to invest proportionately more money and are more vulnerable to local tensions and difficulties.

The signs on this front are encouraging, according to Joseph Smolik of the United Nations' Economic Commission for Europe, who says greenfield investment and joint ventures by smaller companies are beginning to pick up, especially in the more advanced CEECs.

“At the beginning, the dominant trend was investment in large privatisation. That is still true to an extent, but smaller enterprises are becoming more important,” he says.

Finally, companies need to feel that their long-term investments will be secure from backtracking governments, and that they will be bolstered by an ongoing commitment to development as a whole. Particularly important are improvements in basic infrastructure, such as transport and telecommunications.

It is quite clear that, by these criteria, not all the ten applicant countries of central and eastern Europe are in the same boat.

In the early days, investors rushed to Prague and Budapest, encouraged by the comforting western appearance of these capital cities and the headlong rush - especially in Hungary - to sell off the family silver.

Growth and a new-found commitment to liberalisation in Poland have also made it extremely popular in recent years while, in per capita terms, Estonia and Slovenia are well up the scale.

On the other hand, continuing resistance to reform in Bulgaria and Romania has hitherto put them in last place in commercial circles, even though their crucial positioning next to the Black Sea and the Arab world could give them a key role.

It will be interesting to see how that changes. Although Bulgaria is likely to continue its fight for economic survival for some time, Romania is already shaping up as the next big target for investors. A new reformist government, the country's 23 million inhabitants and its Latin language are raising high expectations among the multinationals.

That would give a major boost to the region and there is no reason why it should not pay off, given that levels of education are high and technical skills generally excellent in the whole of central and eastern Europe.

True, most central and eastern European industries are in need of more modern production lines. But their real challenges lie in improving management, sales and marketing techniques.

After the collapse of COMECON (whose supply routes have all but disappeared, say business sources) many heavy industries were left all dressed up with nowhere to go. They are crying out for the sophisticated networks and efficient management structures to which western companies can introduce them.

This is no empty hope. There is a real opportunity for partnership between the two regions and this realisation is driving away traditional fears of western domination. Stories of firms which buy factories merely to strip their assets and close off competition can still be heard, but are diminishing fast.

However, a major obstacle to free commerce still remains. While Europe's politicians mouth endless platitudes about the emergence of the East, they have consistently failed to open their own markets to the region's agricultural produce and textiles.

And the persistence of non-tariff barriers to manufactured goods, such as the failure to recognise each other's standards and certification, is causing difficulties not only for the CEECs' economies but also for western European companies which have set up shop there.

“That is the criticism which is voiced in eastern Europe, by government and industry - that the EU is over-protective and too slow in opening up its markets,” says ABB's Eberhard von Koerber.

“This is more than opening the door. This has to be a process of growing penetration. But at this moment it is not in balance. Eastern Europe is more open to western Europe than western Europe is to the East.”

This is an extremely serious concern and one which CEEC diplomats raise time and time again.

Recent statements by Trade Commissioner Sir Leon Brittan have given some cause for hope with his suggestion that the EU might show more flexibility in applying its anti-dumping regulations as enlargement negotiations progress.

Talks over mutual recognition agreements are also grinding on.

But all of this is taking an extremely long time, and critics say it is a bad advertisement for a Union nominally committed to free trade.

In the short term at least, there seems little the applicant countries can do. They can complain, but not too loudly for fear of jeopardising their entry chances. And while western consumers stay silent, their governments see little reason to change.

“After all, we are a business - not a charity,” said one Brussels diplomat.