OP:3. The European Community and Eastern Europe After 1992
Author(s): Richard Portes
Publication Date: October 1990

Abstract: 1    The strong attraction of the European Community for Eastern Europe suggests constructing the market economy from the outset with attention to the need of compatibility with the Community and its developing EMU. They need not adopt any specific model of market capitalism. But the EC directives already promulgated or in process for '1992' should be required reading for those creating new legal and institutional frameworks for the Eastern economies. And our technical assistance should promote this compatibility in taxation, company law, social security, capital market regulation, competition policy and monetary affairs.

2    Eastern Europe cannot grow, nor make substantive progress in economic integration with the Community, unless we liberalize access for their goods. The CAP is still a key obstacle; and when they adopt realistic (undervalued) exchange rates and begin to penetrate our markets more seriously, there will certainly be new calls for protection against East European 'cheap labour' and 'dumping'. If we are at all sincere in our political welcome, we must maintain and extend our economic welcome.

3    The Community should take the transformation of the East as a stimulus to develop EC institutions and economic integration faster. Even to come to a common policy on widening , the EC will have to deepen. This need not mean excluding Eastern Europe. 'Deepening v. widening' is here even more clearly than elsewhere a false opposition. And there is no satisfactory intermediate model: EFTA as a halfway house, core and periphery, concentric circles - all have obvious flaws. The urgency of a coherent response to the East requires accelerating unification of the Community. This is particularly important in the EMU process: the external shock from Eastern Europe to the EC economy seriously threatens the EMS in its present form.

4    We should be deeply concerned about the short run. The experience of Poland in 1981 shows how the interaction of economic and political disintegration can lead to disaster, when prompt and massive aid might create a virtuous rather than a vicious circle. The current PHARE effort coordinated by the Commission appears to be proceeding well, within its limits, but these are not overwhelmingly generous or visionary. We could offer major help with strong economic and political conditionality, but we would have to deliver both aid and access.

5    The argument that technical assistance is most important, while substantial financial aid would just be wasted, holds for the USSR but certainly not for Eastern Europe. The USSR is in any case too big for Western financial assistance to make much difference. They must solve their own problems: until they do, financial aid will go down the 'black hole'; when they do, their strong resource base will make it unnecessary. In Eastern Europe, the balance of payments prospects are potentially disastrous. Although wide-ranging technical assistance is indeed essential, untied financial aid will be at least as important - in large amounts, and with the maximum share of grants for the severely indebted countries (as well as debt relief). Finance for a 'social fund' could mitigate the consequences of restructuring while stressing our commitment to it.

6    The 'window of opportunity' now open may close quickly. we should act purposefully and generously, before resentments accumulate; before democracy and the European Community lose their attraction for the Eastern citizens of Europe; before the healthy nationalism that sparked the exit from Soviet domination gives way to the negative and destructive nationalism that has before made Eastern Europe disturb the peace of western Europe. The relations of the EC with Eastern Europe after 1992 will depend greatly on what we do before 1992.

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