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Speech by Patrick Zurstrassen,
Managing Director and President of the Executive Committee of Crédit Agricole Indosuez Luxembourg,
on 27 November 2000

Excellencies, Ladies and Gentlemen, good evening.

It is a great honour to have been invited to speak this evening and I must admit that it was also something of a challenge. Although I like to think that I am something of an expert in certain areas of the financial services industry I do not think that even my most loyal friends would claim that I had more than a pedestrian knowledge of Eastern Europe.

Enlargement of the European Union to the East is vital to the long term peace and prosperity of Western Europe. In the next quarter of an hour I shall try to outline the key issues relating to enlargement and incline the state of readiness - on both sides - for this event.

The quotation that you see above me was made recently by Günter Verheugen, the member of the European Commission responsible for enlargement: "Enlargement is both a historical opportunity and an obligation for the European Union and therefore one of its highest priorities".

Indeed enlargement has been a constant feature since the foundation of the European Economic Community in 1958. The EU has experienced four rounds of enlargement: in 1973, with the accession of the United Kingdom, Ireland and Denmark; Greece in 1981; Spain and Portugal in 1986 and, most recently, Austria, Finland and Sweden in 1995.

Thirteen states are currently lined up at the door. Of these all but Turkey began the official accession process on 30 March 1998 but their admission will be negotiated individually. The candidate countries can be split into two groups of six: the so-called "Luxembourg" Group, which began accession negotiations in 1998: these comprise Hungary as well as Cyprus, the Czech Republic, Estonia, Poland and Slovenia; and the "Helsinki" Group, where negotiations were formally opened this year with Bulgaria, Latvia, Lithuania, Malta, Romania and the Slovak Republic.

The enlargement facing the EU today poses a unique challenge since it is without precedent in terms of scope and diversity: in the number of candidates, the geographical area (an increase of 34%), the population (an increase of 105m, or 30%) and the variety of histories and cultures.

The accession process has been based on four elements: firstly, the implementation of European Agreements, such as the transition to Free Trade; secondly, implementation of the European Directives, collectively known as the acquis communautaire (this runs to no less than 100,000 pages!); thirdly, programmes of financial assistance such as the Phare Programme, designed to bring Eastern European economies more in to line with those of the West; and, lastly, the dialogue with existing EU Member States concerning issues of common interest.

The European Commission has just published its Regular Report on candidate countries for the year 2000. These annual statements provide an audit of the state of readiness of each candidate country and make interesting reading (incidentally they are available on the internet*). In top position behind Malta and Cyprus lie Hungary, Poland and Estonia, forming a trio of countries, which are considered to be the strongest candidates from Eastern Europe. According to the Report, these jurisdictions already meet the required criteria in terms of democracy and market economy and will soon be ready in terms of their ability to survive open economic competition. The Czech Republic and Slovenia should achieve this in the near future. If they succeed in implementing the reforms that are under way.

Therein lies the rub. The single biggest issue holding up progress on enlargement to the East is the relative weakness of public administration. Most of the countries are sufficiently motivated politically to be able to pass the required legislation. However, here is no point in passing a law on Noise Pollution if you cannot implement it in a manner worthy of a modern First World country. That is, there must be a code of practice and inspectors and these inspectors must not use guns. In short there must be a professional civil service of motivated and responsible administrators who can demonstrably implement the EU code of practice. In certain respects this is very unfair. Neither Belgium nor Italy - nor indeed any other EU state - would, I venture to say, meet all the administrative criteria we are setting for Eastern Europe, and the candidates are not slow in pointing this out. That is the advantage of being inside the club.

A second major issue is the question of free labour movement; an issue which is particularly sensitive in Germany and Austria which are in the front line for migrant labour. The fact that Western Europe, with its stagnant birth rates and ageing population desperately needs this labour is a difficult political message to get across. Today, Austria has technically full employment at 3.1%. Germany's unemployment rate is falling steadily, though still at 9.4% in September (West: 8% / East: 17%).

However, it is not surprising that Western Europe is dragging its feet a little. Europe has its own difficulties, brought on by economic globalisation, and countries have been forced to abandon their over-generous social programmes in order to remain competitive. For the candidate countries, much of the cost of joining the EU is the price of joining the real world.

If we look at demographic figures for Hungary, Poland and the Czech Republic, these countries are facing exactly the same problems as we are in the west. All three have zero to negative growth rates and, unlike the populations of Western Europe, populations are actually expected to fall over the next 25 years. Life expectancy is currently some five years shorter than in Western Europe but this gap is expected to close. Eastern European countries will experience the same pension difficulties as ourselves. To take the example of Hungary, people aged 65 and over represent 15% of the population today. This will increase to 22% by the year 2025. This compares with 23% for Germany and 22% for France at the same future date. A net movement of labour in the early years in the direction of western Europe will in fact benefit western Europe most of all.

In nursing countries towards accession the European Commission plays the role of examiner and friend. It must fight the impatience of the candidates and the reluctance of some Member States. This role requires both honesty and diplomacy, standards which sometimes conflict. However, I am informed that Hungary is a "model pupil". For instance, the country adopted a strategy of fully repaying the debt inherited from the socialist era, and resolutely opened its economy to foreign investment. Moreover, Hungary does a greater share of its trade with the European Union than any other Eastern European country, accounting for 77% of exports in the first half of 2000.

The economic figures for Hungary are impressive. According to our own internal analysis at Crédit Agricole Indosuez, GDP growth since 1996 has risen steadily from 1.3% to an estimated 5.7% for the year 2000. Over the same period, inflation has fallen from 19.8% to 9.2%. Exports have grown from USD 14.2 billion to an estimated USD 26.9% billion for 2000. As the standard of living has risen imports have grown at a similar rate, but the overall trade balance has remained impressively flat, shrinking slightly to an estimated 2.3% for 2000. Debt servicing, expressed as a percentage of GDP, has fallen from 5.3% in 1996 to an estimated 3.4% for 2000.

If the European Council adopts the findings of the Regular Report at the Intergovernmental Conference in Nice this December, the proposals it contains will outline the way forward. The Report is surprisingly concrete; identifying which issues could be tackled under which Presidency. On this timetable, at the very best, accession for the first members could be achieved by late 2003, early 2004.

Such a delay gives the existing Member States 2-3 years to get their house in order. The issue of internal institutional reform is, of course, a major sticking point: how many Commissioners should there be? How will the seats be allocated? On what basis will decisions be taken? The French Presidency has devoted some energy to resolving this deadlock and will gain a great deal of political credibility if it succeeds.

We must not lose sight of the very high political cost of a failure to achieve at least partial enlargement within a reasonable time frame. The Eastern European countries are eager to join the club and are serving a long apprenticeship. These countries will not wait eternally for accession. They are proud of their own histories and feel they should enter the Union as equal partners. The challenges of enlargement are great, not least the cost that unification is going to place on existing Member States. Against this we must set the desirability of political stability within Europe, the creation of a globally competitive market place and the fact that Member States have posted a trade surplus with the candidates for the past decade, notably Germany and Austria. The previous generation was faced with the rebuilding of Western Europe after the Second World War. We have inherited the wealth they created. Our challenge now is tighten our belts, accept some medium term hardship and set as our goal something which maybe only our children will fully benefit from.

Excellencies, Ladies and Gentlemen, thank you very much.

Sources:
Enlargement: European Commission
Economic data: European Commission / Crédit Agricole Indosuez / Economist
Demographic data: US Census Bureau statistics

 
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