Why Business Should Support a Risky Political Enterprise: Companies Need EU Enlargement in Order to Secure the Opportunities Which Have Flowed from Economic and Political Reforms in Eastern Europe. by Taking the Initiative Now They Can Be Good Corporate Citizens as Well as Wise Investors

Article excerpt

For two compelling reasons, executives of international firms should take an active interest in how the European Union manages its Eastern enlargement. The first is that despite the marginal role East European economies still play in world trade and investment, at least some--and, in the long term, potentially all--of them belong to Europe's most dynamic growth areas. Thus, they represent business opportunities. The increasing integration between East and West over the past decade has brought economic benefits to firms and consumers alike. East European firms are participating in EU-centred production hubs and have joined global corporate networks. Compared to large parts of Asia, Africa, and Latin America, the countries currently striving to join the EU are among the more stable emerging markets, and foreign investors have used them successfully to increase their global competitiveness in many sectors. Along the way, they have helped advance industrial modernisation and technological upgrading in the transition economies. This is good news.

The second reason is that the enlargement of the European Union is not the same thing as the economic integration of West and East. Put another way, without the prospect of enlargement, economic integration is ultimately bound to fall short of its potential. This could be bad news. Why that is so, and what businesses can do about it, is the topic of this article.

The economic transformations underway in Eastern Europe have had effects that--while not unfamiliar in most advanced industrial societies--could destabilise fledgling democracies. Take the misery of poverty for example: the European Bank for Reconstruction and Development (EBRD) estimates that the number of poor people roughly quadrupled during the transition. For young political democracies and emerging market economies, the discontent that results from deprivation makes for a bad bedfellow. The problem is that economic reform and growth alone will not eradicate poverty; indeed, they may exacerbate it. The European Union's enlargement to the East and South is an attempt at countering this risk of destabilisation. Given the wide disparities in economic capacity between the candidate countries and existing member states, and the difficulty of stabilising political regimes through the process of developing market economies, the task at hand is enormous.

Risk is contagious

Enlargement creates political risks for the EU even as it works to alleviate such risks elsewhere. It will upset old bargains at the heart of the EU's system of transfer payments, especially in agricultural subsidies and regional convergence. The EU will have to find new compromises, unpalatable to many, over an institutional set-up that would allow an enlarged Union to continue to function. To be sure, under current arrangements a united Europe and a workable Europe are a contradiction. Finally, a more complex and more complicated Union could lead to a de facto reduction in co-operation among the member states and, ultimately, to a loss of purpose for the whole edifice of European integration. These risks are real, and they are serious, notably so for firms who have benefited from the completion of the internal market over the last decade and a half.

Nevertheless, a failure to act would be even more perilous. Economic integration takes place piecemeal through the activities of firms and individuals. By contrast, European enlargement is a structured, formal process. To be brought to fruition, the opportunities associated with the former need the assurance of the rules and procedures that come with the latter. This will be successful only if business elites prod political leaders on both sides of Europe to show the political courage and wisdom to insist on EU enlargement as the most desirable formula for guiding integration toward prosperity and stability in Europe. Not only the effectiveness and the legitimacy of the European Union but also the competitiveness of Europe-based firms are at stake. …