No miracles for EU candidates

  • 2003-02-27
  • Jean-Luc Testault

Future EU members from Eastern Europe can look forward to strong economic growth in years to come, but analysts warn there will be no "Celtic miracle" and it could take them decades to catch up with the West.

The 10 countries that are due to join the European Union in May 2004 do not appear capable of achieving the double-digit growth that Ireland had managed.

Though Poland experienced an economic boom in the mid-1990s, growth in Central Europe has in recent years at best been two percentage points higher than in the EU.

In 2003, growth in the region ranged from 1.3 percent in Poland to 3.9 percent in Hungary, according to the Vienna Institute for International Economic Studies, or WIIW, an authority on Eastern Europe.

The European Commission believes, however, that integration will be a shot in the arm for the 10 new EU members.

It predicted in 2001 that the eight former communist countries will achieve an average growth rate of 4.6 percent in the four years following enlargement, compared with only 2.9 percent if they had not become EU members.

The commission notably envisages that enlargement will finally convince those investors who have so far avoided Eastern Europe.

The aspirant EU members have since the start of the 1990s already been benefiting from a strong increase in foreign direct investment, the key ingredient for economic development.

According to WIIW, direct investment in the eight former communist countries totaled 134 billion euros at the end of 2001. However, privatization projects are running out, especially in Hungary, where foreign investment has decreased.

Concerned analysts point out that the Eastern European countries lack the national savings or credit structures to sit out a decline.

But Edward Teather, an economist at UBS Warburg, is more optimistic.

"There is fair abundance of capital in the EU, and stability and confidence will increase upon enlargement," he said.

Teather stressed that with the help of the EU, the public sector in the new member countries should be able to launch big infrastructure projects.

"There will be setbacks, but by and large the future looks bright for these countries," Teather said.

But the 10 aspirants will still only dream of matching the economic miracle Ireland pulled off.

In 1990, Ireland's per capita income was 25 percent lower than that of France, but today it ranks as the 10th richest country in the EU.

"It will be very hard to do what Ireland has done," warned Anne Beaudu, an economist at Credit Agricole.

Part of the secret of Ireland's success has been its language and cultural ties with the United States, where a number of big companies used Ireland as a springboard into the EU.

But Ireland also went about creating the right conditions for an economic take-off at the end of the 1980s. The country first got its public finances in order by curbing spending, and then drew investors by keeping company taxes low and simplifying the procedures for setting up businesses.

Estonia has successfully followed part of this recipe, but most of the other countries set to join the EU next year still have a lot of homework to do in the line of tax cuts, labor reforms and down-sizing the public service.

For this reason a number of analysts claim Eastern Europe's accession to the EU is more likely to resemble that of Portugal and Spain, which, 17 years after having joined the EU, still lag behind the rest of Europe.