Eu Wannabes: Not Now. Maybe Later

Nations awaiting EU admission won't be getting in anytime soon

It was trumpeted as the next great phase in Europe's ongoing reinvention: The 15-member European Union's planned acceptance of as many as 12 new members--10 from Eastern and Central Europe, two from the Mediterranean. Enlargement, as the plan is called, holds immense promise for the candidate countries--a promise of greater economic and political stability, increased investment, freer trade. It's the final chapter of the drama that began when the Berlin Wall fell and Eastern Europeans joyfully reached out to their Western cousins.

An alluring vision. But it seems to be one that's receding. The target entry date for the first applicants from the east was 2003. Now, it looks highly unlikely that the promise of EU membership will be fulfilled by then. "The signs are we're talking 2006 at the earliest," says Peter Foltin, chief executive of Vienna-based European American Bank and an expert on Eastern Europe.

Such a delay could prove damaging economically and politically dangerous--especially for Poland, the Czech Republic, and the other three countries designated for fast-track membership: Hungary, Estonia, and Slovenia. These and other Eastern and Central European nations lined up to join are eager to secure their nascent democracies and their westward tilt in foreign and security policies. For all 12 applicants, postponing membership means they have to go that much longer without free access to the EU's single market. Reforms encouraged by the prospect of membership are likely to slow. Some economists say delayed acceptance could hold back annual economic growth among candidate countries by half a point a year.

DANGER AHEAD. Delay could also harm companies on both sides of the EU fence. Customs documentation and regulatory requirements that membership eliminates will continue to absorb corporate resources. Applicant countries are also likely to spend less on needed infrastructure improvements until they join. And the uncertainty of the EU's schedule will complicate strategic planning. "Slower accession will affect companies' ability to export to each other's markets," says Riccardo Barbieri, head of emerging market research at Morgan Stanley Dean Witter in London.

No EU official has yet said that the window to the east has been temporarily shut. But the consensus is clearly shifting. On May 22, Pedro Solbes Mira, the European commissioner in charge of economic and monetary affairs, told the annual meeting of the European Bank for Reconstruction & Development, held in Riga, that the EU would start accepting new members on schedule. But four days later, Enlargement Commissioner Gunter Verheugen said in Brussels that it was "unlikely" that entry dates would be set this year--a clear hint that a delay is inevitable. "They are definitely dragging their feet," says Alar Streiman, Estonia's chief EU negotiator.

It now seems apparent that when they first started to think about it in the early 1990s, EU planners underestimated the complexity of expanding to the east. It's now clear that the union must reshape its decision-making institutions to accommodate a dozen new members or risk falling into administrative paralysis. More decisions must be subject to majority vote; fewer issues can be subject to the right of veto.

OPPOSING FORCES. Members hope to reach agreement on new EU structures by the end of 2002. But it is proving a controversial process--a classic example of the problem. And it pits the likes of German Foreign Minister Joschka Fischer, who favors a federal Europe, against the likes of Prime Minister Tony Blair, only the latest British leader to oppose the idea. There's reluctance in other quarters, too. The cost of EU farm subsidies would rise substantially if they were simply extended. Germans and Austrians fear a flood of low-wage migrants. Political stability is another worry.

But delay will cause other problems. Economists and execs say that anything more than a delay of two years will reduce pressure on applicants to make their economies as open, transparent, and well-regulated as the EU's. Prague has passed nearly 40 harmonization bills this year--covering everything from medical qualifications to accounting standards--to protect its application. Delays will slow that momentum.

While few Western companies in candidate countries would pull out, newcomers could be deterred by a slowdown in the admission process. "You're investing in the country as opposed to the business," says Chris Lacey, head of sales for General Motors Corp. in Central and Eastern Europe. Portfolio investors, warns the Institute for International Finance in Washington, might withdraw a portion of the $33 billion in equity and fixed-income investment that poured into Central and Eastern Europe last year. Local investors have their own fears. Andrzej Samolej, a marketing director for the Stachura car accessory store in Krakow, worries about the red tape exporters and importers face until the door swings open.

Delay could also stir anti-EU feeling in candidate countries. And it's not hard to see why. If growth slows even a fraction, it would hinder candidates as they try to close the huge gap between their living standards and those of EU members. "We all know these countries will be admitted sooner or later," says a Danish Finance Ministry official. "A country as big as Poland could make life difficult if it joins with a chip on its shoulder." The EU has a tough choice: Risk enormous disruption by bringing in new entrants too fast, or damage the applicants by waiting too long. Reinventing Europe is no easy task.

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