EU entry offers economic pain and gain for the East

The makers of Malma, one of Poland's most popular pasta and frozen pizza brands, look forward to vying for consumers with their Italian rivals after European Union enlargement.

But they fret that they cannot take proper advantage of Poland's membership in the wealthy western bloc and may not survive the fierce competition of the EU's vast food market.

"We can cut prices and boost profitability at the same time, when Poland joins the EU and all trade barriers vanish," said the company's managing director Robert Mrozinski.

"But our roads are not good enough to transport perishable fresh foods... And we fear being treated unfairly during quality controls even though our products are good," he said.

Mrozinski's fears of rough treatment from trade bureaucrats may be unfounded, but the success of companies like his will be vital to ensure the EU's most ambitious enlargement will be an economic as well as a political victory.

Throughout the former Soviet bloc, hopes for economic prosperity after years of post-communist poverty clash with fears that fierce competition will hold back the 75 million east and central Europeans set to become EU citizens in 2004.

The EU expects Western money, freer trade and new job opportunities will soften the blow of the tough social and industrial changes likely in the first years of membership.

But analysts warn a generation will pass before Poles, Czechs and Slovaks enjoy Western living standards.

"In terms of GDP per capita, the catching up will take 30 to 40 years," said Heather Grabbe, research director at the London-based Centre for European Reform.

This puts the EU's new eastern regions at risk of a sweeping disillusionment and a new euroscepticism that will pressure politicians to delay painful but necessary reforms and tempt them to squander EU aid on buying social peace.

"There could be a backlash even though expectations are not very high," said Grabbe.

The EU is offering just E45 annually per each new citizen for the first three years of their membership. Critics complain enlargement is being done on a shoestring.

Central and eastern Europeans hope they can repeat the transformation of Ireland and Spain in the wake of EU entry from underdeveloped, rural backwaters into economic powerhouses.

But analysts warn the economic impact on post-communist entrants will be much less than for their predecessors, and much will depend on how wisely they target the aid they will receive.

Building infrastructure, training workers in the skills of hi-tech industry and promoting investment through low labour costs and tax incentives were key to Ireland's success.

Those are hard prescriptions to follow for many of the EU hopefuls, who still instinctively veer to the statist economic principles of job protection through intervention and subsidy.

Analysts foresee incremental economic improvements rather than an explosive catch-up in wealth, especially as many trade barriers have already been removed in the run-up to accession, leaving largely agricultural tariffs still in place.

The eight east European states set to win enlargement deals at the EU's Copenhagen summit in December direct 70 percent of their trade to the EU now, up from a third in 1989.

But the combined gross domestic product (GDP) of the eight, as well as Cyprus and Malta, amounts to less than five percent of the current members' economy. Their GDP per capita, even adjusted for lower prices, is less than half the EU's average.

That gives them plenty of scope to grow, though they still face hefty costs in meeting EU product and environmental standards, scaling back their remaining loss-making heavy industries and consolidating unprofitable rural smallholdings.

"There is no particular reason why EU membership should lift GDP. Reforms, opening of markets and privatisation do, but a lot has been done already," said Erik Nielsen, a research director at Goldman Sachs in London.

Despite the problems the EU expects new investment, direct aid and the confidence boost from membership to raise the growth rates of new entrants by between one and two percentage points per annum as a direct result of joining the bloc.

The candidates hope enlargement will stimulate fresh foreign direct investment and portfolio cash into bonds and stocks.

The jury is still out on how great an acceleration in private inflows will occur. Some analysts expect EU expansion to the east to finally give many smaller Western firms the confidence to venture beyond the old Iron Curtain.

The candidates will have to wait some time to get hefty structural aid from the EU's public coffers to refurbish their dilapidated infrastructure, modernise obsolete farm sectors and train workers to compete.

Malma pasta makers want the EU to repair Poland's lamentable road network to enable them to transport fresh foods to Germany, 325 kilometre west of their northern Polish base.

Under current proposals on financing enlargement, the 10 entrants will get just E10 billion net in aid in the first three years of membership. Once inside the EU they will be able to bargain hard for more generous aid for the 2007-2013 period.

The E10 billion, well short of the 40 billion euro headline gross aid figure trumpeted by EU politicians, will barely build one road from the Estonian capital Tallinn to Poland, far from where prosperous western consumers live.

"The candidates have to learn to use the aid money wisely," said Rafal Trzaskowski, analyst at a Polish EU think-tank.

"Estonia has an incredibly liberal economy and it is likely to invest the cash well. But Poland is more protectionist and there is a risk the money will be wasted."

Economists say east Europeans need to seek long-term gains to their economies from productivity-boosting job training and infrastructure development as well as promoting a better investment climate through liberalisation and deregulation.

The 10 states set to join the EU in 2004 are Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia.

Many citizens and businesses in the candidate states are sceptical or misguided in their expectations of enlargement, surveys show.

A PriceWaterhouseCoopers report warns both international and local businesses have not yet recognised the strategic value of enlargement and are inadequately prepared to profit from it.

A small Polish company that makes jam from hibiscus fruit and rose petals, Polska Roza (Polish Rose), shows just that.

"I don't expect to sell anything in the European Union," said the firm's owner Ernest Michalski. "What the EU's food stores offer is tragic. No one will buy my honest, clean food." (Reuters)

Between 20 and 30 per cent of Hungarians, Poles, Czechs and Slovaks expect dole queues to lengthen after EU entry, according to Polish polling agency CBOS, even though analysts predict little direct effect on unemployment.

Every other Pole and as many as 76 percent of Hungarians fear higher public transport costs. Again analysts expect little change here as more competition and liberalisation offset the higher costs of environmental protection.

"In the first years people will not feel a huge difference," said Grabbe. "But after five years there will be a change. New roads, bridges and power stations will appear. The EU has to work to keep the new entrants keen on membership until the benefits start to show up."