The price of EU membership

In less than two weeks, Latvia will hold national elections, the outcome of which will significantly affect my country's terms of entry into the European Union and establish how Latvia contributes to greater stability between West and East.

There is a tendency on the part of observers and officials from Europe and the West to regard the forthcoming accession of the Eastern European and Baltic states to the EU as an unalloyed blessing and benefit to its prospective new members.

In Latvia, however, this is not the case. Our country is quite sharply divided on whether the benefits will outweigh the costs. We have a small, fragile middle class of small- and medium-size entrepreneurs, and 40 percent of our population still lives in the countryside and is dependent on agriculture.

For both groups, and particularly farmers, who will most likely be entitled to only 25 percent of the subsidies their Western counterparts receive from Brussels, the prospect of accession has raised the specter of being completely disadvantaged by the new terms of trade. They fear they will be unable to compete on quality with Western imports, and unable to export at sufficiently competitive prices.

Latvians face difficult questions in coming months. First, how high a price, figuratively speaking, will Latvia have to pay for its accession; and might that stretch so far as to include the country's hard-won economic and political sovereignty? And second, who should pay most of that price - Latvia's farmers and small-business men, the same class of entrepreneurs who struggled so fiercely against the ravages of Soviet communism? Or might it be possible to find creative solutions that could ease the burden they fear will fall on them? I believe it is.

The arguments in favor of EU accession are clear enough: more long-term military, economic and social security; bigger markets and easier access to them; freer movement of capital and labor; relative currency stability and lower interest rates (for the time being); greater investment; and increasing standardization of education and professional qualifications.

For these reasons Latvia will, and should, go ahead with accession. We are certainly too far along the track to turn back now and the alternative - our relative isolation - is much bleaker.

Nonetheless, it is not clear that Latvia's economy is ready to face the full blast of competition from Europe. Its industry and agriculture need strengthening. Its production costs are high because of our taxation policies and the very strong lat (national currency). Our middle class, which should be the single most important factor in creating jobs, is too small - thereby placing a relatively high burden on the state to solve social problems.

The difficulty of meeting Maastricht requirements for accession has been overdone in Latvia's case. We have a budget deficit of only 1 percent to 2 percent, similarly low inflation (1-2 percent), and a national debt of only 10 percent of GDP - way below our real capacity to borrow. Our currency is strong. While we may be experiencing GDP growth of 7-8 percent a year, our GDP per capita is still barely a tenth of that of Germany or Denmark, and only one-sixth of the Czech Republic's. Under such conditions it seems far more likely that accession to the EU will push up the cost of living for most Latvians much faster than any possible growth in GDP per capita, likely resulting in more social problems than we have now.

As for joining the euro, there are major implications for our sovereign control over the economy, from setting interest rates to running a monetary policy. But let me confine myself here simply to the matter of our fiscal and monetary independence, of which we will be asked to sacrifice an important part, especially insofar as it affects budget planning, setting interest rates, or issuing state debt. At the very least, I do not think we could go in without first gradually devaluing the lat.

Otherwise export growth (and economic growth) would be stifled, particularly once Latvia opens up to full competition inside the EU.

The next Latvian government must reach agreement with Brussels on some vital issues before moving to finalize the accession process, as it is doing with nine other candidate countries. We need timely access to the EU's structural funds. We also need temporary protection for certain areas of our market such as farming in order to achieve greater compatibility between the Latvian economy and the EU; temporary subsidies (direct or indirect) for agriculture, and small- and medium-size business; and some adjustments to the fiscal criteria (e.g. the budget deficit), for euro membership. Lastly, since Latvia and its Baltic neighbors (as well as Poland and Slovakia) will now make up the EU's eastern frontier, the bloc should move to fully cooperate with us on customs procedures and open up the exchange of information to better clamp down on smuggling as soon as possible.

Success on these issues would represent the sort of creative solution that is possible and needed in Latvia, as well as the other leading candidates for EU membership. It would certainly make our accession rather less painful a business than it is going to be under the current set of arrangements.