The European Union is a unique, supranational entity that stands at the forefront of the world’s most prosperous economic region and wields substantial influence over the area’s political and economic governance. This sample essay explores how the European Union is incredibly weak as a governing body, and the process of admittance into the European Union is indicative of the bureaucratic barriers that exist in the organization.
Transition and the mutual Effects of European Union membership
As with the other Eastern European states that joined the European Union (EU) in 2004, Estonia had to transition from the Cold War Soviet-styled centralized state controlled economy and government to a market economy and open government. After declaring independence from the Soviet Union in 1991, Estonia embarked on a journey to success by looking to the EU as a target, taking steps first to throw off the chains of its state-run economic system with almost no private sector, and take the difficult path to membership in the EU by making every effort to meet the stringent requirements of accession. This required a complete change in economic and political systems, but no one has done it better or faster than Estonia. For this reason, it is looked to as a model and a success.
The European Union’s history
After World War II, in 1958, the European Economic Community (EEC) was formed among Belgium, West Germany, France, Italy, Luxembourg, and the Netherlands through the Treaty of Rome to foster increased economic cooperation among the members. The initial theory was that countries that did business together could better avoid conflict. The EEC grew into an entity that covered many different aspects of the relationship among the members, including development, environmental and human rights issues.
In 1973, Ireland, Denmark and the U.K. joined, and in the early eighties, Portugal and Spain. After the fall of the Soviet Union, East Germany became part of the EEC as part of a united Germany. In 1993 the name was changed to the European Union, and a few years later Austria, Finland, and Sweden joined. In 2004 ten countries joined, including eight former Soviet republics, among them Estonia.
Today, the European Union is comprised of 27 countries, governed now by the Treaty of Lisbon, effective in 2009, which strengthened the European Parliament, democratically elected by citizens of the EU, and enacted the Charter of Fundamental Rights, guaranteeing freedom in civil, political, economic, and social matters.
The Eurozone, with a single European currency (Euro), abolished border controls among EU members, allowing freedom of movement, making it easier to live and work “abroad”. The single internal market opens up competition, jobs, choices, and entrepreneurship among the member states, also providing a wider range of goods and services to EU citizens. Of course, this is not without some controversy, as some citizens of some member states still have their own views on “immigration”, who gets domestic jobs, and whether everyone is as welcome in each state as the EU system requires.
There are those EU citizens in states with lower standards of living who might relocate to states with jobs with higher wages to offer. For local citizens, there may be resentment of the immigrants and their low wages. After accession, of Eastern European members, there were in particular fears of an influx of poorer Eastern Europeans flooding wealthier European capitals.
Accession to membership in the EU
The basic requirements for joining the EU are set forth in the Copenhagen criteria, which were agreed to at the 1993 Copenhagen European Council. Among the requirements are:
- A functioning market economy which can compete within the Eurozone
- A stable democracy supporting human rights and the rule of law
- An agreement to accept the rights and duties of membership, including EU law
The principal issue any prospective member has is whether or not it complies with the conditions for accession set forth in the Copenhagen criteria. Because there is no objective test, the qualification of each prospective member is subject to approval by The European Council expressly based on its determination of eligibility in its discretion. Aside from Europe’s political considerations (e.g. rule of law, democracy, human rights), there are economic considerations.
Relevant to accession for former members of the Soviet Union is the key feature of a functioning market economy, which took some members of the former bloc a decade or more, and that businesses be able to compete in the Eurozone under competition and the natural forces of the Eurozone.
There are also requirements of economic stability set forth in the Maastricht Treaty of 1992, which specified five criteria: Inflation no more than 1.5% higher than a specified average, government budget deficits not exceeding 3% of the preceding year’s GDP, a specified government debt-to-GDP ratio, adoption of the specified exchange-rate mechanism, and specified long-term interest rates.
General accession issues affecting Eastern European members
Because the Eastern European members, including Estonia, who joined the EU in 2004 were all former members of the Soviet Bloc, there were not only some political concerns about these newly independent states but whether they were capable of meeting other requirements of admission. Negotiations for accession of the Czech Republic, Estonia, Hungary, Poland, and Slovenia started in 1997.
They were followed in 1999 by negotiations beginning with the other eastern European nations who became members in 2004. At the outset, before accession, a “Europe Agreement” is entered into with the Member states.
The agreement defines bilateral relations establishing “free trade in industrial products, and free movement of services, investment, and workers”. (“EU Accession and Land Tenure”).
Although the agreement calls for equality and approved market structure, the EU is required to liberalize trade faster, resulting in benefits to the applicant by having access to EU member’s markets earlier.
Real estate and natural resource markets in the European Union
An issue of particular interest involves the ownership by foreigners of farmland and natural resources. As part of the liberalization of trade, and as part of the development of a market economy, Eastern European countries were required to set up market economies, and that included ownership of real property.
In Eastern European applicant countries, this issue could be particularly difficult because of the fear that citizens from richer EU nations would use their greater resources to buy up the cheaper land and resources in Eastern Europe, driving up prices, and making acquisition impossible by locals. By way of example, the Europe Agreement with Hungary included a five-year transition period before EU entities could acquire land and resources through Hungarian companies. (Grover 6-7).
But this was not the only aspect of land ownership which was at issue. Estonia was one of the Eastern European countries that had restrictions on domestic land ownership as well, and this did not comply with EU requirements for accession.
“At issue is…whether the processes of privatization and restitution are complete, whether there is adequate protection of property rights, and whether the legal framework for the buying and renting of real estate …are adequately developed.” (Grover 7).
As a means of allowing for a smooth transition, Estonia was granted a 7-year restriction on the acquisition of agricultural and forestry lands by non-resident EU nationals. (Grover 8).
In addition to land acquisition, as part of accession, Eastern European states were assisted in the development of land use subsidy programs directed at specific pieces of land instead of in return for agricultural production, in particular in light of the lower per capita incomes there, and the resulting questions about whether future budgets would include aid to agriculture, and whether agricultural protectionism would continue to be supported worldwide. (Grover 10).
Eastern European immigrants and the EU’s open border policy
The open borders in the EU have resulted in vast emigration patterns from poorer EU countries to richer EU countries. This policy even tests international relations as is seen with recent entry of refugees entering the EU. There are business concerns from a variety of angles:
- Lowering wages by having so many willing to work for so little
- immigrants taking away jobs from domestic workers
- Alleged crime among immigrants
- Alleged cultural/religious clashes
Just this month an article appearing in the Daily Mail newspaper in England talking about immigration from Eastern Europe.
“Romanians and Bulgarians will get free access to UK jobs market next year”, a subheading blares.“The number of Eastern Europeans living in Britain is equal to 1.5 percent of the population of their homelands….This revelation effectively means that one in every 67 citizens of eight former communist nations has moved here. Poland, the Czech Republic, Hungary, Slovakia Lithuania, Latvia, Slovenia, and Estonia all joined the EU in 2004 – giving them unrestricted access to the UK’s labour market.” (Slack).
In May of 2012, Switzerland, which is not a member of the EU but has a treaty with the EU, restricted immigration from Estonia, among the other Eastern European EU states, to an exceedingly low number of several thousand. This restriction was in response to perceived unacceptably large immigration from Eastern Europe, and its effect on the Swiss jobs market. (Geiser). The concerns in England expressed in the Daily Mail article raised the same issues. (Grover).
History of Estonia
Estonia, just north of Latvia, West of Russia, and across the Gulf of Finland from Finland broke away from Russia after World War I, and initially declared independence in 1918. Following ten years of democracy, a coup resulted in an authoritarian government in Estonia until the onset of World War II. Estonia did not agree with many of Hitler’s military decisions during WWII, and it declared itself a neutral state.
Under threat from the Soviet Union, Estonia relented and signed a treaty with the Soviet Union under which Estonia was occupied by the Soviet army, and in 1940 Estonia was annexed into the Soviet Union. Estonia’s system of government was eradicated by the Soviet Union, and replaced with a centralized state-run system and economy. Estonia remained a somewhat unwilling part of the Soviet Union until its declaration once again of independence in 1991, and membership in the U.N. later that year.
Estonia accession into the European Union
Estonia applied to join the EU in March 1995 and began the long process negotiating entry into the EU. (“EU Enlargement Archives”). Some of the issues involved in accession were common to the other Eastern European former members of the Soviet Union, such as reform from a centralized State controlled economy to a market economy, and from a totalitarian government to a democratic system.
With Estonia in particular, as discussed above, there were accession issues regarding property ownership and state control of agricultural and forest lands, items which after lengthy negotiations, resulted in a seven-year restriction. In 2004, Estonia became a member of the EU and NATO. In 2011, Estonia became a member of the Eurozone and adopted the Euro as its currency. (“Estonia’s history”).
European Union and business connections in Estonia
Lumiste, et al., describe Estonia as having “established a solid basis for economic development” by the 2000s. (Lumiste, et al. 2). In addition, the hoops Estonia had to jump through in order to complete accession to the EU had a significant effect on Estonia’s business environment and its development of a free political and economic system.
Lumiste, et al. contend that by virtue of development of some aspects of Estonia’s industry in the 1980s, and in particular substantial investment and improvements made in the area of transportation infrastructure, such as the port at Muuga, Estonia had positioned itself to leap into a market economy once it had broken free of the Soviet Another fascinating aspect of the discussion about Estonia’s accession, and the changes needed to meet the EU’s requirements for membership are references made by researchers, such as Lumiste, et al., to Estonia have “regained” independence. (Lumiste, et al. 4).
In this respect, it is the fact that Estonia had already been an independent, democratic state (albeit not for almost a half century) that allowed Estonia to make the transition with less difficulty than perhaps other Eastern European states did. For example, Ukraine faced many similar issues when it implemented a democratic government following independence from the Soviet Union.
This, when combined with the need to reform aspects of the economy and the government, supports the view the EU was instrumental in guiding Estonia towards becoming not only a successful member of the EU, but a very successful competitor in the Eurozone.
“Estonia’s transition to market economy has been enhanced by the integration to the EU, the last process being very important in evolution of institutions during the last ten years before Estonia joined the EU, but also after achieving membership in 2004.” (Lumiste, et al. 2)
Lumiste, et al. goes on to say that “EU membership is considered as one important anchor and the fulfillment of a wide set of indicators for this membership definitely framed Estonia’s economy and political system.” (Ibid).
Economic liberalization in Estonia
For most planned economies under the Soviet model, some shock occurred in the course of liberalization, in particular changing the entire price structure, from fixed administrative prices and many types of common goods with subsidized prices.
As described by Lumiste, et al., “One specific feature in Estonia…has been huge jump in prices of oil and other resources, which had been relatively cheap in planned economies…” (Ibid).
And this process changing the price structure also resulted in some cases in steep inflation (often as a casualty of the rise in energy and raw materials, which pushed the price of related goods and services higher). The Estonia government used price controls to regulate common services such as electricity, telecommunications and transportation, and in this way could soften the blow of these adjustments to the ordinary citizen. By way of example, the Consumer Price Index in Estonia went from 1076% in 1992, just after the fall of the Soviet Union to 47.7% in 1994, 11.2% in 1997, and 3.3% in 1999. (Ibid).
Another liberalization method was introducing the new Estonian kroon as Estonia’s currency, and first setting an exchange rate in 1992, and then pegging the kroon to the Euro in 1999. Taking these steps was an important part of liberalizing and stabilizing the Estonian economy, and also was a key factor in helping Estonia on the fast track to economic development after independence in 1991. (Ibid 5).
During the same time, inflation ran rampant, and then slowly cooled in part due to some tax regimes required to bring the system in line with EU requirements (e.g. excise taxes on gasoline and alcoholic beverages). (Purju, et al. 164-168)
EU accession’s impact on Estonia’s economic structural adjustment
As a result of Estonia’s prior history, as described above, and the development of its industry despite its almost non-existent private sector and predominantly state-owned structure, substantial structural adjustments were required to its economy.
“The new private sector…formed as a result of… privatization…was a major engine of stabilization…and of further economic growth.” (Ibid 7).
In fact, by 2003, the nature of Estonia’s market had changed dramatically. Agriculture went from 16% of the economy to 5%. Industry went from 50% to 30% and services went from 34% to 65%.
As Lumiste, et al. noted, “The structural changes…are evidence of the fact that during 13 years the Baltic States transformed from…Soviet-style economies to modern market economies with a structure quite similar to the EMU member states.” (Ibid 8).
One conclusion from these ten years of adjustments is that the shock of independence from the Soviet Union (which of course led to tremendous turmoil in the Baltic States and in Russia), in fact was ameliorated, in particular in Estonia, as a result of the onerous process of becoming a member of the EU, and the EU in fact helped these states normalize their economies and establish true market economies. Perhaps this is one of the most significant effects that the EU had on business in Estonia since its accession, and even before. By making demands and offering opportunities, in fact partnership with the EU was created even before accession.
“Estonomics” as a model
One of the most significant effects that Estonia has had on the EU since accession has been its success. This may sound simplistic, but the term “Estonomics” might describe the special results Estonia has achieved during its accession process and since becoming a member of the EU. Siarkiewicz in his article on Estonia’s success, say
Since Estonia met the Maastricht criteria and introduced the euro, it has been referred to in Europe as an example of a responsible budget policy. Now that the Eurozone is plunged into crisis, Estonia has been shown in contrast to the heavily indebted member states and those which are facing serious financial problems. Estonia is reproaching the wealthier member states for their financial imprudence and living on credit and, at the same time, since it has the lowest public debt in the EU, it is using this to build its international image. (Siarkiewicz).
This success stands as a model for other Eastern European states yearning for membership, and provides some impetus for them to make every effort to comply with the Maastricht criteria. It has also provided a strong argument by the EU about how other aspiring new members can structure their own success
Whether it is because of its system during the latter years of the Soviet Union’s control, or because of the remarkably efficient steps taken to comply with the EU’s accession requirements, Estonia has become a model of success, not only in the EU process, but generally as Eastern European, or perhaps even European states go. Estonia’s tenure as a member of the EU is relatively short, and there is much more to be done. Its effect on the EU is it model, and the effect of the EU on Estonia is helping to bring it to that model. Mutuality, it turns out in the case of Estonia, is not a bad concept at all.
“Estonia’s history”. Estonia Ministry of Foreign Affairs: Estonia.eu. 2012. Retrieved from http://estonia.eu/about-estonia/history/estonias-history.html
“EU Enlargement Archives”. Negotiations. Retrieved from http://ec.europa.eu/enlargement/ archives/enlargement_process/future_prospects/negotiations/eu10_bulgaria_romania/index_en.htm
Geiser, Urs. “Swiss limit immigration from some EU states.” Swissinfo.ch. 2012. Retrieved from http://www.swissinfo.ch/eng/politics/Swiss_limit_immigration_from_some_EU_states.html?cid=32503746
Grover, Richard. “European Union accession and land tenure data in Central and Eastern Europe.” FAO Corporate Document Repository. 2006. Retrieved from http://www.fao.org/ docrep/009/a0464e/A0464E04.htm
Lumiste, Rünno. Pefferly, Robert. Purju, Alari. Estonia’s Economic Development: Trends, Practices, and Sources, A Case Study. Commission of Growth and Development. 2007. Retrieved from http://www.novalytica.com/estonomics/papers/purju.pdf
Purju, Alari. “Tax Reforms in the Baltic States and International Tax Competition”. In eds. Marek Dabrowski, Jaroslaw Neneman and Ben Slay, Beyond Transition: Development Perspectives and Dilemmas. 2004. Aldershot: Ashgate Publishing Ltd.
Siarkiewicz, Pawel. “Estonia in the Eurozone – a strategic success. Centre for Eastern Studies: OSW Commentary. 2011. Retrieved from http://www.osw.waw.pl/en/publikacje/osw-commentary/2011-06-20/estonia-eurozone-a-strategic-success
Slack, James. “A million migrants from East Europe now live in Britain: That’s 1.5% of the population of eight EU nations”. Daily Mail. London: Associated Newspapers, Ltd. December 4, 2012.