TCS Daily

A Wind From the East

By Tomasz Teluk - August 7, 2003 12:00 AM

Poles recently gave a resounding 'yes' to EU membership. But without deep internal reforms, it will not be possible for them to profit from integration.


The public EU debate in Poland was about emotion: fears and expectations, theology, philosophy, history and culture. It was hard to see the economic and political arguments. So why did citizens buy into the EU as it stands? They have been persuaded by the publicity. They have made the decision on the same principle they would use to buy a car or a new home. They expected to be able to travel without passports, not knowing that Poland did not sign up the Schengen Agreement. They thought about free trade, but politicians have delayed acceptance of European Economic Area documents. "Poland's place is in Europe," said Pope John Paul II, and many people believed it.


Welcome to the Superstate?


For the countries of New Europe, the shape of the EU Constitution and the proposed system of voting are crucial. Poland, Spain and 16 other countries opposed the replacement of the Nice Treaty by the new system promoting the biggest European states.


The Constitution will be ready for signing on 9 May 2004, a week after the new countries are admitted. The EU-critical movements suggested that the draft of the document is fundamental for a centralized superstate. The future Constitution transfers more legislative powers to the EU by increasing Union competence. In fact, for smaller countries, it will be very difficult to get enough votes to block any decision backed by France, Germany and Italy. Local parliaments might lose their traditional functions.


Even though the word "federal" is not used in the draft, the character of the document limits the sovereignty of EU members. Defining foreign and security policy, common trade, monetary (for countries that have introduced Euro) and economic policies and some strategic internal areas of social policy, citizen liberties, healthcare, and also agriculture, transport, energy, and environmental protection are the functions of the new European State. The position of the European Commission and EU President, proposed by the Convention, is simply too strong.


Costly Membership


The fact is that, from 1 May 2004, Poland will be a partner of equal rank among the community countries. It is important for the market, which represents more than 70 percent of the foreign trade turnover.


But the integration will probably cost taxpayers. Independent studies show that costs of the integration for the state budget are bigger than profits transferred from the EU institutions. The Gdansk Institute for Market Economics (IBnGR) reported that Polish fees for EU membership would cost the state €7.25 billion. Poland has the right to €14.25 billion in financial assistance, but it is impossible to use it completely. Poland will have difficulties absorbing the EU money.


The European Integration Committee (UKIE) disclosed that use of pre-accession (PHARE and others support programs) funds is only around 40 percent. The College of Europe reports that the public sector balance will be negative. Decentralization of public funds management will be realized after 2007. The state is currently being forced to reform an ineffective public sector financing system. The only solution is immediate and radical pro-market orientation, not more and more money to defraud. Without internal reforms, it is impossible to keep 5 percent annual GDP growth, something that is indispensable to profiting from the integration.  


Go West


It is interesting to analyze the map of the Polish EU referendum. The process of political decision-making underlines the historical division of the state. The east of Poland stayed at home, not sure of their choice. The west went further west. They have always been in Europe and are happy to come back to its political structures (the other important signal is that society has had enough of leftist Warsaw politicians; the left-wing elites from the capital are corrupt, irresponsible and resistant to change). Many people from west provinces of Poland are closer to Berlin, Vienna and Prague than to centrally situated Warsaw.


Now that Polish EU admittance is inevitable, entrepreneurs and employees expect internal deregulation, political decentralization, free trade and no duties. The future economic situation is in the hands of local decision makers. The quality of laws and regulations will determine if companies will profit from the integration or if they will pay for ineffectiveness by higher taxes.


For more than 40 years Europe has experimented with the welfare state; however, this system failed and all EU countries will suffer those consequences. Euro-enthusiasts believe that Poland will repeat the quick success of Spain, Portugal and Greece. But now financial support is divided between 12 new countries, and current EU states are in a crisis of stagnation. The richest countries have spent 30 percent of GDP for social aid. Today the welfare state is waiting for re-engineering. The illusion of prosperity has become too expensive.


The public sector needs a fast transformation and new EU countries will take part in this process. But the key is internal reform of member states. A proper solution towards reinforcing competitiveness in countries of the New Europe is a low, fixed and linear tax, introduced in almost all countries of the region (except Poland). Maybe this is the wind of change that will come from the East?


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