The European Union: Eastern Enlargement and Taxation

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Introduction

It is quite common to talk about Europe, the European Union, Western Europe, Central and Eastern Europe, and South-Eastern Europe. However, it is not quite clear what most of these terms mean. The exception is the European Union, which is not a geographical notion but a well-defined political concept resulting from its membership of 25 countries (as of May 1, 2004). The other terms--Europe, Western Europe, Central and Eastern Europe, and South-Eastern Europe--are geographic rather than political in character and are less clear than they seem at first sight. For example, Israeli and Turkish football clubs participate in European soccer competitions. The Eurovision Song Festival also includes participants from Israel and Turkey. This suggests that Israel and Turkey are European countries. However, it seems likely that many people would not consider these countries part of Europe. Yet, Turkey is a candidate-member country of the European Union even though most of it's territory is located in Asia [van der Hoek, 2003a, p. 44].

The European Union has not defined its limits in geographical terms. The Treaty on European Union says in Article 49 that "any European State which respects the principles set out in Article 6(1) may apply to become a member of the Union." Article 6(1) states that "the Union is founded on the principles of liberty, democracy, respect for human rights and fundamental freedoms, and the rule of law, principles which are common to the Member States." The European Union has granted Bulgaria, Romania, and Turkey the status of candidate-member countries. Bulgaria and Romania are expected to join the European Union in 2007, whereas Turkey hopes to receive a preliminary entry year by the end of 2004. If so, this will most likely be a year in the mid 2010s. Moreover, the European Union has identified the countries of the West Balkans region, including former Yugoslav republics, as potential candidates.

The Copenhagen European Council has made the principles set out in Article 6(1) of the Treaty on European Union more concrete. These so-called Copenhagen criteria comprise a political criterion, an economic criterion, and the ability to take on the acquis communautaire:

1) Stability of institutions guaranteeing democracy, the rule of law, human rights, and respect for and protection of minorities;

2) The existence of a functioning market economy, as well as the ability to cope with competitive pressures and market forces within the EU;

3) The ability to take on the obligations of membership, including adherence to the aims of political, economic, and monetary union.

Enlarging the European Union

Following the definition used by the European Bank for Reconstruction and Development (EBRD), this paper refers to regions in Europe that comprise the following countries: Central and Eastern Europe: Croatia, Czech Republic, Hungary, Poland, Slovakia, and Slovenia; South-Eastern Europe: Albania, Bulgaria, Yugoslavia, Macedonia, and Romania; Baltic States: Estonia, Latvia, and Lithuania; and Newly Independent States: the 12 former Soviet Republics excluding the Baltic States.

Table 1 shows some basic characteristics of the ten accession countries in Central and Eastern Europe in the mid 1990s, that is, at the time of their applications for European Union membership. Their combined population amounted to 28 percent of that of the European Union of 15 member states. However, their combined GDP amounted to only 4 percent of that of the EU-15 at current prices, or 9 percent at purchasing power standards. GDP per capita in the applicant countries amounted to 13 percent at current prices or 32 percent at purchasing power standards. Thus, the applicant countries are poor relative to European Union member states. Though their population is sizeable, their economic weight is very small.

Figure 1 shows GDP levels in the individual accession countries in Central and Eastern Europe and South-Eastern Europe relative to the European Union average, both in 1995 and 2002. …