Monsieur Jacques Attali
President, European Bank for Reconstruction and Development
On: A CONTINENTAL COMMON MARKET
Delivered to the European-Atlantic Group on May 12th 1992
A CONTINENTAL COMMON MARKET
Monsieur Jacques Attali,
President, European Bank for Reconstruction and Development
May 12th. 1992
In taking over the Presidency of the European Community in July, the United Kingdom is faced with the challenge of taking stock of where the Community, indeed the entire Continent, is heading. It is a unique opportunity for us all to try to capture the essence of what is happening in Europe today and to discuss the key concepts that will pave the way ahead. In 1992 and 1993, the European Community will have to deal with many substantial internal problems: the progressive stages of EMU in particular, through the creation of a European Monetary Institute; the Delors 2 package; the further reform of the Common Agricultural Policy; political union and subsidiarity, to name but a few.
But after the ratification of Maastricht, a central Presidency issue will be that of enlargement. What kind of enlargement should take place? This issue is fundamental to the future of the Community. Essential questions must be answered: how many countries – 13 or 40? How long should it take – one year or 20 years? And how should we proceed – with or without changes to Community institutions?
It is my premise that Central and Eastern Europe cannot be excluded, and that the creation of a Continental Common Market will be crucial to European development.
Apart from issues concerning its own enlargement, the Community also has responsibilities in its relations with the rest of the world. It must reach an agreement on GATT; it must play its part in establishing global environmental standards in Rio and beyond; it must help deal with North-South relations and the problems of developing countries, making sure they are not forgotten among today’s priorities; it must contribute to solving the problems of the Middle East; and it has an essential role to play in international monetary cooperation. It will be crucial for the Community, along with other industrialized countries, to agree on measures for coordinated recovery amongst themselves, because the present recession is making matters worse, and because renewed growth would generate resources and serve as a model and an anchor for the efforts required in Eastern Europe and elsewhere.
As Western Europe faces new issues it cannot avoid considering Eastern Europe as part of its own future. To begin with, there will be no other way to strengthen peaceful relations in the region and to reach settlements in areas where repressive ideology can no longer quell nationalist sentiment and ethnic rivalry. The euphoria of 1989 has given way to violence: minorities are victimized, borders contested and barbarity rekindled. Fighting continues today in Bosnia, Croatia, Armenia, Turkmenistan, Moldova and elsewhere. Situations such as these led to two world wars, and therefore directly concern Western Europe.
Secondly, there are environmental problems that by definition transcend boundaries. One example is the extreme fragility of nuclear safety in Central and Eastern Europe. There are 16 RMBK nuclear power plants, similar to Chernobyl and Sosnovy Bar, which are in urgent need of closure, and many others out of the 60 in all, which require immediate repairs and revamping. Billions of ECU will be needed to address the problem of this veritable time bomb, and billions more to develop alternative sources of power generation in a region that depends so heavily on nuclear energy. This problem is a clear expression of Europe’s interdependence, and graphically illustrates the need for solidarity as well as enlightened self-interest.
Thirdly, if measures are not taken to enable Central and Eastern European countries to develop economically, to become integrated into the European and world economy and to service their debts, massive social and labour problems, signs of which we have already seen, will ensue. Without growth, large-scale migration will become inevitable.
Fourthly, if the institutions of the market economy are not given a chance to develop with our help in the eastern part of Europe, nascent forms of mafia capitalism will grow to alarming proportions. Traffickers of all sorts have already discovered what they hope will become a new haven for money laundering, not to mention the mushrooming of local black economies. It is singularly short-sighted to claim that such developments are healthy because they will lead eventually to ‘normal’ capitalistic behaviour. Nothing could be farther from the truth.
The European Community needs to address the problems of Central and Eastern Europe, because these problems, either directly or indirectly, could undermine the Community itself. But Eastern Europe can also provide the means for Community success. The potential of a single European land mass with 700 million consumers is tremendous. Full economic integration of Central and Eastern Europe into the Community is the only way forward, which implies the opening of trade on a Continent-wide basis. Otherwise the necessary investments will never be made, and Europe will remain lop-sided, dragged down by its own inability to join forces.
European integration will lead to unity which in turn needs democracy and the market economy in place throughout the region: EC, EFTA and Eastern Europe in its entirety. To ensure that all European countries follow the same logic they must build the institutions, machinery and infrastructure to enable the market and democracy to work, to inform each other through the free interchange of goods, ideas and information. They must introduce the necessary macro and micro economic reforms to stabilize their economies and liberalize their markets. Effective tax and legal systems and democratically accountable systems of Government must be established. The elimination of uneconomic and environmentally unsound productivity and its replacement by a market driven, consumer oriented economy will create austerity; hence the importance of maintaining a popular consensus in favour of transition.
The democratic process is not sufficiently developed in Eastern Europe to deal with the tensions caused by stringent economic reforms; and democratically representative associations and institutions, such as trade unions and other interest groups, do not exist to play the essential role of intermediaries in negotiating agreements between the major actors of the economy and the body politic. Recent events have shown us, may I add in passing, that social dialogue is not only lacking in the East. Representative bodies are the most effective means available to democracy to dampen conflict and channel the threat of violence. Particularly in Eastern Europe, the threat of political instability is real, along with the temptation to resort to the democratically immature methods of populism or even authoritarian alternatives.
Western Europe needs to assist Eastern Europe in confronting these difficulties. The magnitude of the task is immense. It requires decisive and simultaneous action at many different levels. Much depends on the efforts of individual countries, of course, but much depends as well on the response of the international community as a whole and, given its geographical proximity, on the European Community in particular.
Assistance must come first in the form of finance, bearing in mind that real assistance means integration. Individual countries and multilateral institutions have begun to provide substantial emergency aid. The $ 18 billion or ECU 15 billion in balance of payments support recently agreed for Russia, excluding of course the Stabilization Fund, is a significant gesture, but will not cover the balance of payments requirements of the other countries of the region. It is estimated that the emerging democracies of Central and Eastern Europe, including the former Soviet Union, will need over ECU 30 billion in balance of payments support in 1992. These needs must be addressed in the coming months by the international community.
But balance of payments support does not deal with the long-term problem of revitalizing these economies in order to reduce imbalances between the two sides of Europe. The key to this revitalization is investment. Investment needs to be mobilized to transfer skills and know-how, to finance the restructuring and privatization of viable enterprises, the development of export industries. the conversion of the defence industry, the upgrading of the safety conditions in nuclear power stations and the rebuilding of infrastructure in these countries. Some estimate these needs as high as ECU 4, 000 billion.
The amounts that are being spent by Western Germany to help Eastern Germany are telling. Last year it transferred to the East between 180 and 200 billion marks, two thirds of which went into consumption rather that investment. Much was used to soften the effects of rising unemployment actually close to 40 per cent. Because of this, Germany’s DM 104 billion surplus in 1989 became a deficit of 34 billion in 1991. If one tried to extrapolate the DM 9, 000 per head spent on the East German population last year to the 414 million people in all of Central and Eastern Europe, that would mean something like DM 3, 700 billion annually. These needs are not being met.
Private investment in the region has remained low: less than ECU 4 billion in Central and Eastern Europe and less than ECU 400 million in the former USSR. Translating vision into the nuts and bolts realities of investment and business is no easy task. Western companies have not sought as many opportunities as they were expected to do after the euphoria of 1989, because of the lack of stability, infrastructure, local management skills and convertible currency. But there is another problem which can be remedied far more easily:
The lack of open markets
Open markets are needed to foster the growth of investments that will create European unity, which in turn will further these flows. This is the driving force behind the need for enlargement, and the reason why it is essential to create a Continental Common Market, the only way of building this unity on the basis of democracy and the market economy.
It is not possible to build up an economy or to privatize an enterprise if that enterprise has no markets. It is not possible to invest, to build market shares, to build networks, to establish a basis of operations without the prospect, even if not the certainty, of outlets. Grant aid without market access does not assist recipients in their endeavour to join the world economy. It does not help them produce tradable goods. It only leads to a permanent subvention of their consumption-enabling them to buy imports in excess of what they can finance through their permitted exports. This is certainly not development nor integration, and is costly to others. If the Western half of Europe fails to provide market access for East European exports, these countries will be unable to reimburse or even service their debts, their currencies will not become convertible and this will in turn provoke a financial crisis in the West.
Market access is also the means of rectifying the distorted trade patterns we see in Europe today. In the Eastern half of Europe the collapse of the structural links between the former COMECON countries has already produced a 30% fall in trade between the countries of the region and this is bound to continue, at least in the short to medium term. Trade with the rest of the world does not make up this shortfall – in fact only 3% of OECD imports come from Eastern part of the Europe.
The West is responsible for these distortions. Trade barriers are heavily weighted to the disadvantage of our eastern neighbours, with those relating to sensitive sectors such as agriculture reaching up to 160%. The removal of all barriers to trade is of course not a feasible option for the European Continent but the process towards this ultimate goal must begin now. It is becoming increasingly disingenuous for the Western community to advocate rigorous and painful stabilization policies and radical restructuring in the East, whilst at the same time postponing the integration of the region into the world economic system, on the basis that this would cause hardship to the West.
For example, industrialized countries demand a lowering of subsidies in Eastern Europe, while spending $250 billion on agricultural protection alone – a figure that represents about five times the total devoted by the industrialized countries to official development finance.
The successful transition and integration of Eastern Europe will, therefore, necessitate a fundamental rethinking of certain Community policies such as the Common Agricultural Policy. There is little doubt that it would be impossible to finance present levels of support with the substantial increase in agricultural produce to which it would apply. What is required is a radical recasting of principles underlying this policy, so that farmers’ rights to an income, as role and a status independent of the surplus they produce, would be recognised. Such barriers also serve to aggravate other factors that have contributed to the steep decline in exports from Central and Eastern Europe. These include a dramatic fall in production in all countries of the region for the past two years; the present price instability that makes exporting a very risky business; the prevalence of severe payment difficulties in the absence of an adequate baking system and trade financing; and the lack of business confidence because of the uncertainties of transition.
The benefits of free trade are well known. Classical trade theory based on comparative advantage and competitive markets, shows clearly that tariff and non-tariff barriers involve efficiency losses, both in terms of consumer surplus and resource allocation. New trade and growth theories also point to additional benefits of free policies based on the reduction of monopoly powers, economies of scale and increased product diversity. Obviously, any free-trade deal involves costs and benefits for both the countries concerned and the world economy. The benefits in favour of creating a free trade zone within Europe, however, far out-weigh any costs that might be incurred.
First, the benefits of geographical proximity, cultural compatibility and comparable educational standards are of paramount importance. Accessibility by land is an important factor to take into account, even in this technological age. Secondly, creating a free trade zone within Europe will enhance the process of liberalization of world trade, so long as this process does not subvert GATT negotiations In fact, in terms of GATT principles and the EC’s own experience, the formation of regional trading groups actually provides an important contribution to the final goal of a multilateral free trade system. Dismantling trade barriers on a global scale can often be problematic because of the wide diversity of economic conditions – but when attempted on a regional basis the process can be achieved more quickly and in a more coherent fashion.
Thirdly, cost-benefit analysis of the impact of free trade indicates that modest Western concessions, even when sectorally concentrated, will have substantial benefits for the Eastern half of Europe, albeit in the medium to long-term. The so-called costs for the West will be more than offset by the expansion of markets and increased prosperity in the East. Given the present major asymmetry in the sizes of trade flows between the two groups of countries, with up to 50% of East European imports coming from the West European market and only 6% of EC imports originating in Central and Eastern Europe, the adjustment costs for the West will be limited to a small number of sectors, and are likely to be further contained by the small level of imports from the region.
For Central and Eastern European countries to become modern economies requires a greater opening of markets, than is provided in the present Community Association Agreements. When closely inspected these Agreements are far from adequate. They maintain a substantial level of protection on crucial Central and Eastern European exports for at least the next half decade. In those sectors in which the Eastern countries have a comparative advantage, namely agriculture, textiles, iron and steel and chemicals, the agreements largely institutionalize what has previously been granted, while this is precisely where greater openness is required most.
More importantly for the long run, the Agreements contain provisions on export quotas, safeguards and rules of origin which seriously undermine their capacity to be the cornerstone of complete Central and Eastern European integration into the world trading system. The safeguard provisions alone are powerful enough to reverse the trade liberalization aspects of the Agreements. The restrictive “rules of origin” will hurt both Western and Eastern firms alike, as European Community firms will be unable to invest in well-located plants, or take advantage of potentially more efficient part-makers.
What is needed is a unified and transparent framework in which barrier reductions can be negotiated. The European Community is not at present able to fulfil this role, as the prolonged negotiations and results of the recent Association Agreements have shown. I believe progress would be made far more quickly if multilateral negotiations among the 40 or so countries of Europe were to take place within the framework of a Continental Common Market, in which the removal of trade barriers between all European countries would be the recognised goal. Membership of all countries would be immediate and automatic. This would not mean that the EEC would become dissolved into some larger entity. On the contrary, the Community would be represented in such negotiations by one body, the European Commission, and in fact, such an undertaking would make the reasons for deepening more compelling. These arrangements would not undermine the greater economic and political integration envisaged in the Maastricht treaty. That would proceed on one level, while multilateral negotiations would continue within the Continental Common Market framework.
The framework I envisage would enable negotiations to start immediately, with the aim of reducing all trade barriers over a five to ten years period. Specific aims and dates would be set by which barrier reductions would be completed, a precedent set by the signatories of the treaty of Rome. The choice we face today is clear: do we want to create a European economic space or Continent-wide political disorder? With or without a Continent Common Market, the dangers are too great not to act decisively. The limited actions of the European Community so far do not augur well – Western Europe appears to be creating a Maginot line. The result will be a Europe overshadowed by the threat of conflict, or labour migration, of instability, a rising nationalism and of environmental disaster. The aspirations for the European Community will founder under this weight, as will Europe’s strategic role in the world economy. The courage of 300 million people to the East will remain unrewarded.
Opening up markets between the Community and its neighbours is, of course, directly related to the broader issue of Community enlargement, to the effects that enlargement would have on existing Community structures and to the possible methods of enlargement. Answers to these questions depend partly on the political will to come to grips with the new Europe, and partly on an assessment of the relative advantages and disadvantages of alternative strategies.
In particular, could enlargement of the Community be pursued on the basis of the present “acquis communitaire”, or would it bring in a “critical mass” requiring a new approach? On the basis of the number of countries involved, of population, GDP, total exports and transition periods, only a simultaneous enlargement to the northern Mediterranean and to the Central and Eastern European countries by the year 2007 would create a critical mass (18% of trade) similar to the one experienced with the first enlargement. Secondly, net structural fund transfers should not need to increase to an unbearable degree, with appropriate phasing.
If the Community were to enlarge, it could proceed either by groups of countries or all at once. The gradual approach has the distinct disadvantage of creating an administrative nightmare, with overlapping transitional periods, derogations and special measures, not to mention the humiliation of protracted negotiations and probable rivalry. This would not help fledgling Democracies which desperately need binding rules and a firm framework. Worst of all, an excessively long-term frame for Membership could undermine the dynamic potential for integration that now exists, and rekindle the threat of division and conflict. I would therefore say that the Community must be enlarged to include all the 40 or so countries of Europe; that the process should be staggered over a twenty year period; but that a Continent Common Market with all 40 should be established now, with immediate enlargement to the three pending applications.
Community institutions would need to be gradually reformed, to enable the establishment of a Community of 40. The institutional consequences of such an enlargement would be considerable. With three more countries, it would be possible to leave things as they are, but not with 40. The Commission, which deals primarily with economic affairs, would not be able to represent all Members directly, because it would be impossible to have so many Commissioners. The Community would probably need to be elected by the European Parliament. The Council of Ministers would certainly need to shift to further qualified voting. The European Parliament itself would have to include directly-elected Members from all countries concerned, and the European Political Cooperation mechanism could thus become a forum to discuss foreign policy issues. But because economic matters would continue to be decided without the participation of new Members, there would initially have to be two basic structures: one for political cooperation and one for economic issues.
The practical process of integration must begin in the economic sphere. It is through economic activity that borders are first overcome; closer unity will then follow. The creation of a Continental Common Market would make it possible to build on the achievements of Maastricht within a framework that could embrace the hopes, aspirations and potential of the entire Continent. In building this unity, it will be important to bear in mind the role of other institutions in Europe and their links with the Community. NATO, WEU and the CSCE in particular have been crucially important to Europe’s defence, security and democratic development, and bear witness to the role that the United States has played and must continue to play in Europe.
As the Community grapples with the implications of unity, of deepening, of widening, it must also address the contradictions that exist between democracy and the market economy, usually assumed to be two sides of the same coin. The market, by definition, thrives best when markets are open to the free flow of goods, ideas and people, and thus knows no borders. Democracy, on the other hand, usually functions within a local or national setting, within borders and on the basis of a given electorate. If Europe is to have a wider, democratically representative basis for its integration, it will be necessary to deal with issues as voting rights for foreigners, and the development of the right to interfere when Human Rights are violated. The capability and the means of the EC responding to crises – Yugoslavia is a particular case in point – poses profound questions for EC members and for the EC’s relations with the rest of the world. A democracy without borders will need to develop further.
It will also be necessary to come to terms with the fundamental relationship that exists between democracy, the state and the nation. France and England, for example, learned that to build a nation, they first needed to build a state. The state provided a structure for nationhood, for national identity and for democracy. Elsewhere, when the nation and the state emerged together, it led to a rejection of democracy and to dictatorship. This intimate link between the state, the nation and dictatorship, fed by nationalism, is, I believe, the very reason why Europe, since the war, has been trying to subsume the idea of the nation into something larger, the European Community. Germany and France launched the quest for European unity after the war largely to exorcize their past and, with others, to make a return to totalitarianism impossible. In my opinion, the United Kingdom was not pro-European at first because it had not collaborated with the Nazis, had no guilt to assuage, and had natural rather than ideological boundaries with the rest of Europe.
The Eastern part of Europe has also begun to dismantle nations to rid itself of a dictatorial past, but instead of bringing them into a larger whole, it is breaking them up into smaller units. The danger is therefore of more borders instead of less, more room for parochial nationalism and less room for democracy. Hence, the future of democracy in Europe lies in its ability to evolve beyond national borders, throughout the Continent, in its ability to transcend narrow national allegiances and to embrace the multiplicity of identifications that are the core of a European identity. It is the only way to deal democratically with the problems of nationalism, with the issues described above that concern all of Europe, with the need for political, defence and foreign policy coordination and action at a supranational level, and with the imperative necessity of opening borders to trade, to investment and ultimately to growth and prosperity. Otherwise we will only see more recession, more unemployment, xenophobia and conflict.
What is needed above all is vision and foresight. Britain has always been a forthright spokesman for openness and free trade, and can play that role today in the wider Europe. The pioneering spirit, which made Britain great, can be mobilized for the good of a greater Europe, a stable Europe, not threatened by division or adversity. On 16th February 1846, Sir Robert Peel spoke in these terms on the second reading of the Bill for the Repeal of the Corn Laws:
“I counsel you to set the example of liberality to other countries. Act thus and it will be in perfect consistency with the course you have hitherto taken. Act thus and you will provide an additional guarantee for the continuing contentment and happiness and well being of the great body of people. Act thus and you will have done whatever human sagacity can do for the promotion of commercial prosperity”.
I would add that this openness will also be the engine of growth and the key to vexing problems of unemployment and an ultimately far more effective division of labour in Europe. It will also be a powerful incentive for democracy. A democracy without borders, responsible for problems beyond the scope and grasp of individual nations, more directly accountable to the citizens of Europe, more in keeping with the cultural richness and diversity of the Continent. Openness, indeed, both in democratic and economic terms, is the key to Europe’s ability to deal effectively with its own problems, and thereby to play more fully its role on the world stage.