Gregson, Jonathan, Global Finance
Prospective future entrants to the EU have been watching with interest the progress of the 10 countries that joined the union a year ago.
A year has passed since the European Union's enlargement of May 2004 when 10 new member countries, eight of them former Soviet bloc nations of Central and Eastern Europe, formally joined the world's largest single economic area. How they have fared within an enlarged EU is providing valuable lessons tor the countries next in line for full accession, starting with Bulgaria and Romania.
The transformation they experienced did not happen overnight, although as soon as they joined, they gained access to EU structural and regional funds. The benefits of free access to EU markets were already in place beforehand. The largest impact on trade patterns, according to Walter Demel, economist at the Austria-based Raiffeisscn Bank, has been a sharp increase in the exchange of goods and services between the new entrants now that remaining barriers have been dismantled. "The Czech Republic's trade with other accession states leapt by more than 30% last year, whereas previously it had been growing at less than 10% annually," Demel says. "Poland and Hungary experienced a similar surge in trade with their neighbors in 'New Europe'."
Most macro-economic or structural change had already taken place prior to accession, however. Each country set out on the process of EU harmonization from its own starting point. Each had its own mountain to climb. And since all of the 10 accession states' economies have been steadily integrating over the past 15 years or so, further changes occurring over the past 12 months have been largely the result of continuing momentum.
"Going through the accession process meant that the countries involved had already made the effort," says Nicolas Doisy, economist at the European Bank for Reconstruction and Development (EBRD). "After that, there's no reason to expect formal entry into the EU to have that strong an impact."
Yet formal accession has made inward investors more confident. Tim Green, partner at private equity group GMT Communications, which specializes in telecom buyouts in the region, with some 25% of deals done in Central Europe, defines these markets as "still quite small and relatively immature." That means they also present good investment opportunities for those prepared to accept a higher risk/reward profile. "Since we did our first deal in the Czech Republic in 1996, we have seen substantial shifts in attitude, legislation-especially the harmonization of telecom laws to EU standards-and corporate governance issues," he says. Doing business has generally become easier, with less concern over legal ownership and intellectual property rights, all of which makes the markets more attractive to inward investment.
"There has also been a substantial change in the quality of local management compared to 10 years ago," says Green. "Over the past two years they have begun to look seriously at the financing possibilities of rapidly developing capital markets." For instance, GMT Communications' refinancing of Invitel, Hungary's second-largest fixed-line operator, included launching a large tranche of high-yield bonds. "It involved considerable structural issues," says Green, "as this was only the second time a high-yield bond had been successfully launched in Hungary."
Assessing the Benefits
So a year after formal accession to the EU, are the citizens of'New Europe' experiencing real and tangible benefits? Certainly their economies have been growing much faster than those of Germany or France, which constitute the core of Old Europe'. The new entrants have enjoyed year-on-year GDP growth of around 4%, with central and eastern European countries achieving nearly 5% on average in 2004. That is more than twice the growth rates achieved by eurozone countries. Moreover, that has been built on strong exports, with Polish and Czech exports up by nearly a quarter last year in euro terms. …