The Pros and Cons of Central Europe's Joining the EU

Abstract

The paper starts with an account of trade reorientation of Central and Eastern European countries (CEEC) from East to West. Composition and evolution of trade flows between CEEC and the EU, and their respective comparative advantages are then discussed. An overview of the EU trade barriers and the impact of their liberalization under the Europe Agreements on bilateral trade flows, suggests that the EU's concessions were least important in sectors where CEEC enjoy a comparative advantage. This is particularly apparent in agriculture and food products. The protective effect of the EU's Common Agriculture Policy led to a three-fold increase in CEEC's imports of agriculture and food products from the EU while their exports to the EU increased only marginally. Integration of factor markets is progressing rapidly through foreign direct and portfolio investment, mostly from EU countries, however, the region's share of global FDI still remains relatively low. In order to increase needed inflows of foreign investment, CEEC have to further develop their capital markets and improve the business climate in order to make investment there not significantly more risky than in the EU. Except for small border areas, labor mobility is, and will likely remain, quite restricted owing to the large wage differences between the EU and CEEC. In exchange for membership in the European Union, CEEC will have to surrender a significant part of their autonomy in economic policy making. Some of the rules they will have to accept will not be in their best economic interest. This is unlikely to curb their resolve to enter the EU because the main reasons for integration are political.