big bang - smaller shocks, enlargement 2004's impact on eu policies and process

ENLARGEMENT 2004's IMPACT ON EU POLICIES AND PROCESS

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Table of Contents

ENLARGEMENT 2004's IMPACT ON EU POLICIES AND PROCESS

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FOREWORD……………………………................................................................................ 03

EXECUTIVE SUMMARY …………………………………...................................................... 04

INTRODUCTION / OVERVIEWIntegrating the New Member States ………………………................................................ 06 The Single Market: Impact at a Glance ……………………................................................ 09

SECTOR SPECIFIC Impact in ‘Sensitive’ Areas ..................................………….............................................. 10 Employment and Social Affairs .......................................................................................... 10Healthcare ........................................................................................................................ 13Pharmaceuticals ............................................................................................................. 14Consumer Protection ...................................................................................................... 15Environment ……………………….................................................................................. 16 Competition Policy ...............………………………………................................................ 18 Energy…......................................…………………………................................................ 19 Transport .......................................................................................................................... 21Agriculture …………………………................................................................................... 22Tax …………….................................................................................................................. 23Justice and Home Affairs ...................................................................................................24External Relations .............................................................................................................. 24The Compromise on the Financial Perspective ................................................................ 26

SOME CONCLUSIONS – BRUSSELS AND THE BROADER PERSPECTIVE ........................ 28

CONCLUSIONS FOR BUSINESS ........................................................................................ 30

Special thanks to Peter O’ Donnell for his contribution to this report.

Dear Reader,

Given the scale of expansion and the political and economicchallenges it presents, it is no surprise that there have beensome aftershocks. Overnight, the population of the EU roseby 75 million as ten new members from Central andEastern Europe and the Mediterranean1 joined, swelling theUnion to some 450 million people. The increased size of theinternal market led to a fall in the average wealth of EUcitizens, as the new members’ per capita GDP was roughlyhalf the average of the EU15. Unemployment was signifi-cantly higher in the ten new members (an average of 15.1%compared to the EU average of 7.5%). And eight of the tenaccession countries had made the transition from centrally-planned to market economies in just over ten years.

But despite the challenges to the EU’s core achievementsin the economic, social and political arena, the mostpessimistic predictions have not so far materialised. Thesingle market has not seized up, the economies of the newmembers have been able to take the strain of competition,and the EU decision-making process has not ground to ahalt. The claims that this expansion was well-prepared havebeen largely substantiated.

This report attempts to provide insight into both how theenlarged EU is adapting to its new circumstances and how

the Ten have impacted decision-making and in so doingare transforming themselves. It is based on interviewswith 50+ senior officials, diplomats and politicians, andwith businesses, consumers and non-governmentalorganisations – the people who have had to cope withthe changes.

Any opinions expressed within the main body of the reportreflect or summarise the views expressed in the interviewscarried out for the research and do not necessarilyrepresent the views of Burson-Marsteller.

As the EU continues to come to terms with the consequencesof perhaps its biggest experiment since its inception in1957, we hope that this report provides some usefulpointers to business and others working with the EuropeanUnion and its policy-making over the coming years.

Jeremy GalbraithChief ExecutiveBurson-Marsteller Brussels

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FOREWORD EXECUTIVE SUMMARY INTRODUCTION / OVERVIEW SECTOR-SPECIFIC FOCUS POLICY CONCLUSIONS CONCLUSIONS FOR BUSINESS 03

ForewordTwo years after the European Union undertook the most ambitiousenlargement in its history, it is possible to measure some of theresultant changes – for better and for worse.

1 Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia.

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FOREWORDEXECUTIVE SUMMARY INTRODUCTION / OVERVIEWSECTOR-SPECIFIC FOCUS POLICY CONCLUSIONS CONCLUSIONS FOR BUSINESS

The performance of the new member states has inmost evaluations exceeded expectations. Safeguardmeasures (e.g. on matters relating to food safety) havenot been invoked, most EU rules have been transposedand complied with, competition law has been by andlarge respected, and it was not until the end of 2005that a new member state was for the first time referredto the ECJ for non-compliance with a Directive (whenSlovakia was attacked over its inadequacies in trainingrequirements for heavy goods vehicle drivers).

The new member states have been absorbed into theinstitutions and the life of the EU albeit with occasionalproblems, and decision-making has not broken down,

nor become fundamentally divisive, around an East-Westfault-line. Certainly, there are many obvious commonfeatures among the new member states (EU10), andthese have led to a number of convergent positions -on questions such as the EU budget, the criteria for theeuro, economic reform, free movement of workers, oraccession to the Schengen area – underlined recentlyby a commitment to cooperate on EU matters by theVisegrad countries (Czech Republic, Hungary, Polandand Slovakia). At the same time, convergence of EU10views is much less evident in many other policy areas.The diversity of the size, location, wealth and manyother characteristics of the new member states tendsoften to lead them to adopt positions in Council that

Executive Summary

Slovenia will be the first new member state to hold the EU Presidency – in the first half of 2008. The CzechRepublic will be the next, in the first half of 2009; followed by Hungary in the first half of 2011, Poland in thesecond half of 2011, Cyprus in the first half of 2012, Lithuania in the second half of 2013, Latvia in the first halfof 2015, Slovakia in the second half of 2016, Malta in the first half of 2017, and Estonia in the first half of 2018.Bulgaria will have the first half of 2019 and Romania the second half. At present all bets are off on whether and when the list will be extended to include the names of other countries.

The 2004 enlargement turned out, for most people, to be only a small shock,and in many respects almost imperceptible, despite its huge significance.And in most respects it has proved a great success – despite some predictionsof catastrophic breakdown.

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reflect their own individual and particular interests, andto form alliances with others of the EU25 on that basis.Neither geography nor the date of becoming an EUmember plays much role in the choices behind thesealliances. In most policy areas, the EU is not an‘EU15+10’. It is, quite literally, an EU25.

For business this means that while the basic rules foreffective engagement with the EU institutions havechanged little, the greater complexity clearly mandatesthe earliest possible involvement in policy making, evengreater planning, more time and resource allocation,the need to reach out to a broader audience and theformation of coalitions – all while paying particularattention to linguistic preferences. Indeed, the draftingof simple arguments backed by facts, objective analysisand implications for specific national, if not regional,markets and agendas has also become all the morerequired. In other words it is now more important thanever before to design and implement sustained lobbyingstrategies across the three institutions and increasingly thenational capitals encompassing not only all governments,but NGOs, industry and other stakeholders.

In most policy areas,the EUis not an ‘EU15+10’. It is quite literally, an EU25.

Speaking in TonguesThe enlarged EU has created a unique multilingual regime, routinely deploying 20 or more languages, which hasprovoked a slow-down of procedure due to the translation and interpretation burden. Full interpretation coverageis provided for numerous plenary meetings. In other meetings, demand for Czech, Estonian, Hungarian, Polishand Slovenian interpreting has usually been met, but recruitment difficulties mean that half the requests forLatvian have had to be turned down, and three-quarters for Maltese. The 2005 cost of EU interpretation wasaround €175 million.

Translation has presented an additional challenge – and provoked emergency measures in the days afterenlargement, when it was apparent a crisis was brewing. The build-up of translation resources for the nine newlanguages (Cyprus is Greek-speaking) is due to be completed by the end of 2006, by which time the cost oftranslation will be around €800 million per year, up from €541 million in the year before the 2004 Enlargement.

The addition of languages spoken by only a few people – Maltese, or Slovene – provoked Ireland into a demandthat Irish should become the 21st official language of the Union, which it will, from 1 January 2007. In addition,from 2005, a number of regional languages have been allowed and employed, including Spain’s regional languages.

One of the most remarkable indirect impacts of enlargement is that – in order to ease the new translation burden- Commission departments were instructed to produce documents of no more than 12 pages, compared to thepre-accession average of 37 pages.

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Introduction / OverviewINTEGRATING THE NEW MEMBER STATES

At a mechanical level, the integration of the new memberstates has passed off relatively smoothly. The EU institutionshave adapted successfully to operating with more membersand more languages. That said, not all the politicians,diplomats and officials in the enlarged EU take the sameview of how well ten new member states and 15 oldmember states have created a new and fully-functioningEU25.

Within the Council, the tradition of consensus-building hasbeen maintained – although the larger number around the

table has made this more time-consuming, even thoughthe once-customary opportunity for every member stateto speak has become rarer. Council insiders say thatenlargement has had the effect of strengthening the role ofthe Presidency and of the Commission in brokering dealsin the more complex geometry of the EU25, where debateshifts further into the corridors. It has also been possibleto reach some previously elusive decisions – notably onthe statute for MEPs, where the previous blocking minoritywas rendered too small by enlargement.

The 25-strong Commission, to be 27 after the Romanianand Bulgarian accession in January 2007, has repeatedly

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shown that coordination is more difficult, despite its planto shift to greater collegiality. And appointing staff from thenew member states has not been easy. The Commission ison track – just – for its overall recruitment goal of some3,500 officials from the new member states by 2010. Butmaintaining geographic balance has been difficult. Of thesix most senior appointments at the time of writing, twoare Czech, two are Hungarian, one is Slovenian and oneCypriot. The appointment of a Czech deputy director generalfor external relations provoked the Polish prime ministerto write to the Commission President complaining ofdiscrimination. The quota of middle management positionsfor the new member states is still proving hard to fillbecause of insufficient numbers of qualified applicants.

Mechanically, the EU25 is functioning. New member statesare increasingly participating in – and influencing - EUprogrammes and policies; they host an EU agency (Frontexin Warsaw which co-ordinates the activities of the nationalborder guards to secure the EU’s borders with non-member states); and they are taking up senior positions inEU institutions.

Integration has not, however, been simply a mechanicalmatter.

New member states have often found themselves understress in coping with the rhythm of EU business. It hasbeen a particular problem in Council working groups,where diplomats, often with little EU experience, have beenunder obvious pressure with the mass of detail that has tobe mastered.

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In all the institutions, they have often had to discover forthemselves the arcane practices and procedures thatgovern EU affairs. Subtle forms of apartheid persist. Thenoble expressions of solidarity and historic opportunitythat flow from political leaders are not always echoedcloser to the ground. "We've got them, and we've got to putup with them", remarked one senior official from the EU15."Most of them don't know what they're doing yet, but atleast they don't cause us too much trouble." Similar viewsare frequently expressed in private, and, in heated momentson certain occasions, in public too.

The volatility that has characterised governments in manyof the new member states has often complicated matters.Although some administrations have now survived a fullterm, and some have even won re-election, abrupt politically-inspired changes among senior officials leave new memberstates with continuity gaps in EU business.

The presence of new member states in institutions alsodemands that time and resources are spent on training –and has often caused strain, and even resentment. "It's abig drain on us", said one official. "We're prepared to do itfor the moment, but after another couple of years weexpect them to start delivering". There seems to be arecurrent sense of mutual resentment between those whoconsider themselves part of an establishment underassault, and newcomers who feel they are being discri-minated against and even patronised.

It is at senior political level that frictions of this type becomemost evident, according to some of those interviewed.While conflict between national positions is the everydayroutine of the European Union, some interviewees say ithas assumed a “psychological” character since thisenlargement. Assertiveness by new member states has onnumerous occasions been viewed as “disruption” or evenoccasionally “impertinence” by those on the receiving endfrom the old member states. And the research shows thatthe affront felt by the new member states at any indication,

sometimes implied, that they are second-class memberstates is difficult to overstate. For some, it is clear thatthe sensitivity burned into their collective memory duringthe drawn-out, and often difficult experience of theirmembership negotiations has not yet been eradicated.Senior government figures in some new member statesclaim that their previous administrations were tooaccommodating to Brussels. And countries that haveundergone years of painful transition are frequently irritatedto receive what to them appears as lofty advice from (EU15)countries that have not suffered such dramatic recentchanges –including some who are reluctant themselves tobite the bullet on economic reform imposed by globalisation.

Rightly or wrongly, many of the clashes - over movementof workers, the Services Directive, accession to theEurozone or the operation of competition policy – havenurtured a feeling in the new member states that the oldmember states sometimes tend to apply the EU rules onlywhen it suits them.

Old member states too are not immune from resentment.Some of their senior political figures express a sense ofingratitude at the demands they feel increasingly subject tofrom the new member states. Confronted with the moreassertive approach of the new member states, now freedfrom the constraints of negotiation, regrets are sometimesheard that the EU failed to provide either adequate incen-tives or adequate controls to corral the behaviour of newmember states: "The self-discipline that is supposed totake over once candidates become member states is notalways enough to ensure the fastest and most effectiveintegration" is a typical comment.

It is against this sometimes charged background thatthe impact of the recent enlargement has taken place indiscussions in the main EU instititutions across a range ofpolicy areas.

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THE SINGLE MARKET – IMPACT AT A GLANCE

There is widespread relief that relatively few problemshave arisen over implementation of EU rules. In complianceterms, the new member states no longer constitute aconspicuously separate bloc: they operate – and occa-sionally fail to operate – like older member states. On-the-ground implementation and administrative practice isless than perfect, particularly in technical areas, critics say,highlighting the continuing need for efforts in competition,modernisation of infrastructure, development of capitalmarkets, rule of law and government effectiveness, andbroad action against corruption. They frequently identifyPoland as the chief offender - but officials in new memberstates are quick to respond that the record of the EU15 ishardly spotless.

Companies across the EU25 report that the extension ofthe internal market and the rapid integration of the newmember states into the EU economy have allowed them toincrease sales and expand operations thereby improvingprofitability through maximising cost and location advan-tages. And the widespread adoption of modern regulatoryframeworks in areas such as financial markets, companylaw, accounting or intellectual property has created a bet-ter environment for business and growth.

The numbers gameNew member states have won praise for their recordon transposing EU rules: at the latest count, they stillperform better than the “old” member states with anaverage transposition deficit of 1.5% compared to2.2% in the EU15. The EU25 average stands at a1.9% deficit with only Malta and the Czech Republicexceeding it (along with Belgium, Ireland, Portugal,Greece, Italy and Luxembourg.)

The Services DirectivePoland led the new member states' opposition towhat they saw as the dilution of the EU law to liberalise services. The amendments made in thecompromise reached in the European Parliament weakened the law's support for companies from the new member states operating in the old memberstates, they argued. Poland wanted stronger supportfor cross-border competition, but did not prevail: amajority of member states, the European Parliamentand the Commission had decided that discussionmust come to an end.

Although the new member states were solidly infavour of the greatest freedom for cross-border services, the debate – initiated even before they joined the EU – was conducted principally in terms of the pro- and anti-reformers in the EU15. Theinfluence of the EU10 proved to be too little and too late.

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Sector-Specific Focus

IMPACT IN ‘SENSITIVE’ AREAS

The impact of the new member states on policy discussionshas been much less than feared, particularly in the areas ofsocial, consumer and health policy, considered particularlysensitive during the accession negotiations.

In the run-up to enlargement, the EU15 made somestrenuous efforts to finalise some difficult dossiers beforethe acceding states could gain a voice in the discussions.And since then, the rate of legislative initiatives has slowedacross these fields – for reasons unrelated to enlargement.The scope for potential conflict or difficulty in operating asan EU25 in some of these sensitive areas has thereforebeen reduced for the moment.

But this is not the only reason why work in the Council inthese fields has not been impeded overall by the presencesince mid-2004 of the new member states. The recordshows that the newcomers have intervened relativelylittle in Council working groups, they have rarely beendetermining factors in blocking majorities or minorities,and they have not presented major objections to the busi-ness that has gone through the Council. "On the whole,they've kept their heads down" is a typical comment fromthose close to Council business.

At worst, the impact - in these fields and right across therange of Council business - has been purely mathematical.Discussion has occasionally been slowed simply because

the number of interventions has risen from 15 to 25. Buteven this has been less of a problem than anticipated. Onereason is that the new member states have frequentlypassed up their option to intervene. The other main reasonis that, as a response to the sheer numbers around thetable, Presidencies have chosen to decrease their use ofthe traditional table-round as a routine discussion methodfor Council business.

Another factor that has played into the operations of theEU25 Council – and blunted the risks of slowdown - is thatthe new member states have been (and freely admit thatthey still are) on a sharp learning curve. This, combinedwith their relatively limited resources, means they have notalways been in a position to intervene incisively in Councildebates. Compared to the EU15, the new member stateshave small Permanent Representations, with staff whooften have limited professional experience and limitedback-up from their ministries back home. The limited levelof intervention has been particularly noticeable in numerousCouncil working groups – and even more conspicuously inthe social, consumer and health fields, where the dossiersoften have a highly technical content.

EMPLOYMENT AND SOCIAL AFFAIRS

For all that, the impact of the 2004 enlargement in thearea of EU social affairs appears not inconsiderable. Theaccession of so many new member states that are still

After the brief outline of single market implications of enlargement, thepresent section provides an overview of accession’s impact on specific policysectors and issues.

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undergoing a demanding transition process has shiftedthe balance of forces in the EU's discussions of virtuallyits entire social agenda, right up to and including theLisbon strategy.

The consequence has not always been measured interms of direct impact on EU legislation or regulation –for instance, the major debates on free movement ofworkers or the Services Directive have not gone entirelyin the direction that most of the new member stateswould have wished. Nevertheless, the importance of thisnew influence on the overall EU approach to social affairsshould not be understated.

At a time when so many firmly-held beliefs among oldermember states have been coming under challenge –notably as a consequence of globalisation – the newmember states have been important factors in theemergence of an EU-wide consensus that the status quocannot be maintained if the EU is to remain prosperous.The EU is still seeking agreement on the most effectiveactions to undertake in response to that consensus (ahighly contentious discussion, likely to roll on formany years to come), but the proponents of focusingon competitiveness have found their ranks swelled byenlargement, at the expense of the proponents of a primaryfocus on cohesion.

As senior EU officials point out: "Most of the new memberstates are not afraid of unemployment, because they are in

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a phase of growth. They are prepared to countenancemore radical policies in pursuit of competitiveness".

The hunger for growth-led policies is driven by the newmember states’ much lower levels of prosperity. The latestfigures on inactivity (those not working as a percentageof the total available workforce) show a range from alow of 19.9% in Denmark to a high of 39.5% in Hungaryand 41.7% in Malta. And industrial hourly wages arecomparatively high in Denmark, Germany, and the UK,for instance, and relatively low in Latvia and Lithuania.The higher levels of unemployment and lower levels ofwages will continue to induce a strong push from thenewcomers for a generation, with a consequent inevitableimpact on EU policy formation.

The wide support the new member states brought formaximum liberalisation of services was insufficient towin the debate for liberalisers, but it did mean that thecompromise reached was further towards liberalisationthan it would otherwise have been. It is no accident that theEuropean Commission, which shared the disappointmentof the new member states (and some of the older ones)at the outcome, immediately came out with a clarificationof member states' responsibilities to facilitate the postingof workers.

Similarly, although most of the EU15 invoked theAccession Treaty to limit access to their labour marketsfor workers from the new member states of Central andEastern Europe, diligent lobbying by the newcomers overthe last two years and extensive studies discounting fearsabout floods of cheap labour or lengthened unemploymentqueues has led to a relaxation of controls in mostmember states in mid-2006: Italy, Spain, Finland,Portugal and Greece have now joined the UK, Ireland andSweden to lift theirs completely. Belgium, France,Luxembourg, and Denmark are easing restrictions. In

the Netherlands, a decision on the government's plansto open the labour market has been deferred to the endof 2006 because of strong parliamentary opposition.Only Germany and Austria have indicated they willmaintain their restrictions until 2009. Meanwhile, anecdotalevidence accumulates that workers are migrating only tothe areas where there is work.

In parallel the new member states have sometimes beenvociferous in their criticism of excessive regulation onworking time, or inappropriate focus on supporting lameducks – which is how many of them view the EU's projectedfund to soften the local impact of globalisation.

At the same time, efforts are being made – at national andEU level – to accelerate the inevitably long process of crea-ting an EU of equal standards across all its member states.For instance, the European Commission took action in2005 to highlight the need for safety in the notoriously dan-gerous construction industry in the new member states.The EU guidelines for employment 2005–2008, whileaimed at all 25 members of the European Union, make spe-cial provision to deal with some of the challenges that havearisen with enlargement in the areas of employment, socialintegration, and social and regional cohesion.

European Citizenship on HoldMeanwhile, it is difficult until existing European citizenship rights are in force in the new memberstates, to persuade politicians from new memberstates to consider how to develop European citizenship in future. Given this context, it is therefore not surprising, perhaps, that theEuropean Parliament was unable in January 2006 to agree on a report from its civil liberties committee on European citizenship.

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HEALTHCARE

The 2004 enlargement introduced at least two dramaticnew elements into the EU healthcare mix.

One is that a huge gap now exists between levels ofhealthcare spending across the EU25: the resourcesavailable for healthcare in the new member states are of adifferent magnitude to the average in the EU15, because oftheir markedly lower levels of prosperity. Over the shortterm, this has amounted to no more than the continuationof the pre-accession situation. But in an EU increasinglyseeking to equalise opportunity, even in areas where thereis only the most tenuous EU competence, the prospectsare that increased tensions will result from this gap.

Among the most salient practical consequences, there is adrain of healthcare skills from the new member states tothe old member states – where higher incomes present atempting incentive. The longer-term implications are thathealthcare provision in the new member states will conti-nue to suffer until they can offer comparable income levels.A reverse process, however, is underway in terms ofpatient provision: private (and in some cases public)healthcare organisations in the old member states are sen-ding patients to the new member states, particularly forsurgery, because standards are high and costs are low. Thesevere imbalance is lending new urgency to the EU'sattempts to forge a policy relating to freedom of movementfor patients – which was a complex subject even amongthe EU15, with their broadly similar levels of healthcareprovision, and threatens to become unmanageable in theEU25.

In policy terms, the EU is - for the moment - papering overthe cracks. In June 2006, the Council agreed minimalistconclusions on shared principles in EU health systems –which artfully recognised that member states' health sys-

Relocation

Amid signs that relocation is increasing, the indications are that it has on occasion shifted work from the old member states to the new member states, in part reflecting lower labourcosts in the latter. (Examples in Poland includeShell, Philip Morris and Volvo.) But there aremany other motivations too, ranging fromtransport logistics and access to markets furthereast and south, to attempts to induce greater flexibility and productivity in operations in the EU15. Volkswagen has successfully used relocation to improve productivity at its plantswithin the EU – but this has benefited old memberstates as well as new ones: VW has switched production from Spain not only to Slovakia, butalso to Belgium.

Concerns surfaced in Germany and Belgium thatEU funding to the new member states was beingused to attract companies to relocate there, obligingsenior Commission officials to publicly reject thesuggestion.

Figures suggest, however, that only a minor part of investment decisions by EU15 companies aresubstituting investments in the EU15 in favour of the new member states. Over 90% of theseinvestments represent “fresh money”, which companies would not have invested in the oldmember states in the first place. The Commissionhas produced figures suggesting that only 1.5% of all job losses in the EU are caused by off-shoring– and this at the level of global impact.

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tems "vary significantly" in how they respond to theneeds of the populations and patients that they serve.However, while divergences will persist – in everythingfrom healthcare entitlement and finance and deliverymechanisms to the mix between state provision andmarket mechanisms – there is some discernible shift(with which the new member states were content to goalong in the discussions on the conclusions) towardsconvergence on preventive measures, the area in which mostnew member states have until now been significantlylagging behind the EU15.

The second major new factor is that enlargement hasintroduced into the EU lower life expectancy and highermorbidity – including, conspicuously, localised highlevels of AIDS/HIV.

Only months after the 2004 enlargement, the Councilheld a debate on the need for a coordinated approach tothe fight against HIV/AIDS in the European Union and theneighbouring countries. It was already apparent that newcases of HIV infections were rising alarmingly in theBaltic states, particularly among young people, even ifepidemiological trends in Central and South-EasternEurope showed stabilisation at low levels.

PHARMACEUTICALS

It remains the case that the pharmaceutical industry inthe new member states consists almost entirely of gene-ric manufacturers, while the European research-basedindustry is almost entirely in the EU15 – with a conse-quent divergence of view over issues such as researchfunding and intellectual property. But because the majorreview of EU pharmaceutical legislation was completedjust before the 2004 enlargement, much of the scope forconflict over rights and procedures was averted between

old and new member states. Above all, protectionagainst generic copying was fixed at a higher level thanthe new member states wanted to see. And the toughsupplementary protection certificate terms the EU15imposed on the candidates to limit premature patentleakage have proved to be watertight so far, with far lessresearch industry concerns now than there were duringthe negotiations.

The erosion – even implosion - of the European pharma-ceutical market that EU15 pessimists predicted hastherefore not occurred. Enlargement has not provoked ameltdown, either commercially or in terms of safety.However, the accession of ten poorer countries has notsignificantly enhanced the market potential for westernfirms (who were in any case largely represented in thesecountries long before 2004, both for sales and forconduct of clinical trials).

In fact, for the research-based European industry,enlargement appears to have brought increased adminis-trative problems that are currently disproportionate tothe benefits to be gained. The mechanics of productlaunch in an additional ten countries – nine of them smallor very small – are complex, and pricing negotiationsnow have to take place with 25 member states instead of15. For pharmaceutical manufacturers the single marketis not functioning any better than it was, but enlargementhas provided some additional source channels forparallel distributors.

Research-based manufacturers still encounter frequentproblems relating to the imperfect implementation of EUrules – failings that are sometimes seen as accidental,sometimes as the consequence of a lack of administrativeor financial resources, and sometimes as deliberateobstructionism. Poland comes in for some particularlycritical comment in this regard. There are persistent

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failings across the new member states in compliancewith EU rules relating to negotiating reimbursement prices,with occasionally blatant examples of discrimination infavour of national products.

The main winners so far have been manufacturers in thenew member states that undertook the often painful taskof improving their positioning in preparing to meet moredemanding standards. In this respect, Poland is seen ashaving conspicuously lagged behind the others – partlybecause of insufficient communication between thedomestic industry and the country's negotiating team inthe years preceding accession. At the same time, thethriving generics industry in the new member states isfeeling increasingly vulnerable to competition from Indiaand China.

In terms of influence on EU policy, there have been fewlegislative initiatives since 2004 that have offered scopefor intervention by the new member states. But in generalthe profile of the pharmaceutical industry in the newmember states has not led them to urge strong supportfor research interests. They largely opposed the enhanceddata protection provisions in the paediatric medicinesregulation adopted early in 2006, and Lithuania andLatvia have even sought the right to take advantage ofthe Doha-inspired compulsory licence concessions theEU has agreed for developing countries for AIDS/HIVtreatments. While neither of these attempts provedsuccessful, the new member states are provingincreasingly successful at extracting linked trade-offs fordropping their demands. As one senior Europeanresearch-based industry executive commented: "Theysee everything differently from us: they're even trying totwist the EU's new research framework programme intopaying for their roads rather than for drug research!"

Enlargement is also having a clear impact in the on-goingdebate over stem cell research in Europe which remains

one of the most controversial in recent years – with manynew member states fiercely opposed to the technologyon ethical grounds. Whatever the rights and wrongs of thisdebate, one of the possible outcomes is that the EMEA’scentralised registration procedure for medicines could inthe future be trumped by ethical concerns held nationallyby governments which oppose stem cell research.

CONSUMER PROTECTION

Although the new member states have largely adoptedthe EU's consumer protection acquis with resultantimprovements in contract laws, statutory rights andproduct safety, many of the predicted challenges inimplementation remain to be overcome. The implantationof a culture of consumer protection appears to be aslow process, handicapped by limited resources and lackof expertise.

Most of the new member states have now managed adegree of consolidation among the numerous small andweak consumer protection organisations competing forattention and funding in the run-up to enlargement(Lithuania has not yet been able to create a single body torepresent it in the European consumers organisation, BEUC– the last of the new member states still in that situation).But there is a continuing lack of public awareness ofconsumer rights, making it hard to establish strongorganisations.

The European Parliament has been particularly energetic inurging greater support for consumer rights: an own-initiative report called specifically for assistance to countries"which have a less long-standing tradition of consumerprotection and consumer participation in policy-making";and the EP has focused strongly in its discussions ofgeneral EU consumer policy on the need to help the newmember states.

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Lack of a consumer tradition possibly explains some ofthe teething problems with the implementation of EUconsumer law. There has, for example, been sharp criticismof the new member states' performance with the RAPEX(Rapid Alert System for Non-Food Products) system ofrisk notifications under the general product safetyDirective. While Hungary has been the most active of allEU25 in serious risk notifications, and the CzechRepublic and Slovakia showed average performance,most other new member states were functioning at a lowlevel of reporting intensity, with Cyprus, Malta and Latviaway down the ranking. The very uneven distribution ofnotifications (and reactions) between member states"persists beyond any possible justification", say monitorsof the system, and "some member states urgently needto improve their participation".

ENVIRONMENT

Overall, the already-evident trend within the EU to temperenvironmental policy with pragmatism has been reinforcedby enlargement – but it would be wrong to claim thatenlargement has initiated the process. Since JoséManuel Barroso became President of the 25-strongEuropean Commission in 2004, environmental policyappears to have enjoyed less prominence: despite havingbeen added to the Lisbon Strategy in 2001, it was givenless attention in the Barroso Commission's revamp(“Working Together for Growth and Jobs”). Accordingly,the mid-2005 Commission agreement to launch seventhematic strategies for environment was accompanied bya health warning that this priority "must be compatiblewith other policies, notably those aiming to guaranteecompetitiveness".

The accession of ten member states, all facing challengingassignments in meeting existing EU rules, and many with

an unenviable legacy of environmental problems, onlyserved to attenuate still further the earlier emphasis givento environmental policy. The Commission's environmentalpolicy review published in early 2005 openly concededthat enlargement had changed the agenda, and promisedto introduce simpler legislation and to focus on areas whereimplementation of EU rules is proving most problematicfor the new member states.

The harsher economic realities of recent years had alreadystarted to dampen enthusiasm for expensive strategies,while growing member states’ concern with the perceivedintrusiveness of some EU legislation was raising supportfor subsidiarity and deregulation. As one EU figure closeto the evolution of environment policy expressed it:"while the 1990s were characterised by the drive to imposeenvironmental considerations on all EU policies, this decadeis now seeing the reverse: an insistence that environmentalpolicy should take account of all other EU policies."

An illustration of the discernible influence of enlargementon environment debate is offered by the agreement reachedin December 2005 on the Directive on extractive industries'waste. This demonstrated a shift - in the EuropeanParliament and in the Council - towards a more industry-friendly approach, attributed largely to the influence ofthe new member states, with their strong mining sectorsand their relatively low levels of regulation. For example,Poland and other new member states successfullyopposed measures in the extractive industries wastedirective which would have imposed strict safety require-ments on closed mines. Even so, Hungary voted againstthe Council's common position.

Similarly, the 2004 deadlock over ship pollution was brokenonly when the Council made concessions not only toGreece, but also to Malta and Cyprus. Maritime countriesamong the new member states contributed to an easing

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of requirements under the proposal to cut the sulphurcontent of marine fuels. In another example with regardto batteries legislation, most new member states werehappy to back the weakening of the Directive. And newmember states were also prominent in urging flexibilityin environment policy during the October 2005Environment Council's review of the relationship betweenenvironmental strategy and competitiveness. They stressedthe need to take account of regional geographic andclimatic differences in framing legislation: "what's rightfor the north-west of Europe is not necessarily right forthe south-east", said one minister.

Some differences remain in the political pressures drivingenvironment policy in the new member states and in theEU15: for instance, while climate change is one of theprincipal public concerns about the environment in WesternEurope, among the new member states it is wastedisposal that features high on the list – unsurprising,since Malta and Lithuania have no alternatives to landfillfor waste disposal, and Poland and Cyprus practicallynone. The predominance of smaller firms in the newmember states also influences their approach to manyenvironmental debates. Malta and Slovenia were keyplayers in generating the compromise text on REACH inlate 2005, which included their proposal to exempt smallamounts of manufactured or imported substances fromregistration (a subject of great importance to their smalleconomies). And Hungary was a key ally of the UK inproposing the "one substance, one registration" principle.Poland wanted the construction sector removed from thescope of the new legislation – notably so that cement wouldnot be covered – and there was strong support from newmember states for switching to case-by-case decisions onthe length of authorisation, rather than fixed blanket terms.

In addition there have been delays and deficiencies incompliance by new member states. Poland and the

Czech Republic were among the last four member statesto obtain approval for their national emission allocationplans under the EU’s emission trading system. BothMalta and Poland (along with Luxembourg) receivedwritten warnings in 2005 for failing to report their 2003greenhouse gas emissions – impeding the EU from fulfillingits reporting obligations under the Kyoto Protocol.Estonia, Latvia and Malta came under attack in mid-2005for failing to implement EU rules on noise limitation atairports. The European Eco-Management and AuditScheme has had a slow take-off in the new member states,with few incentives for companies to participate.

But it would be inaccurate to suggest that the impact ofenlargement has been a consistent and unremitting dilutionof environment-friendly pressures. Delays and deficienciesin compliance by old member states far outnumber thepeccadilloes of the newcomers. And throughout 2005,Hungary was one of the member states calling mostloudly for a more ambitious Directive on groundwaterquality. Estonia, Latvia, Lithuania, Poland and Sloveniawere among the few member states to meet the EUdeadline on public access to environmental information.Commission officials noted six months after enlargementthat the arrival of the new member states had not led toany significant increase in complaints about failures incompliance – just seven out of a total of more than 600for the EU25. And the highest investment levels in theenvironment are in the new member states, in order tocome into compliance with EU rules, according to thelatest indications from Eurostat.

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COMPETITION POLICY

Although competition is one of the few areas where thenew member states still lag behind the EU25 average intransposition of legislation, there has been little evidenceof dramatic deficiencies in the operation of EU competitionlaw in the new member states. The competition regimesthey set up over the years before accession have provedto be by and large in line with EU requirements, and tohave tooled up on staffing for effective enforcement. Thenational authorities have been fully integrated into theEuropean Competition Network, and efforts are underwayto strengthen national competition authorities in Estonia,Latvia and Slovenia.

The overall impact of enlargement on competition has beento provide companies and consumers with mechanismsto counter abusive behaviour in the new member states.

As regards Commission control of public subsidies, thelatest EU comparison showed state aid averaging 1.35%of GDP for the new member states, higher than the EU25average of 0.49%. Much of the EU activity has relatedto questions about the legitimacy of aid agreed priorto accession. The provisions of the Accession Treaty(under which certain existing aid measures in the newmember states were exempted from EU review) havebeen the object of continuing refinement, in the light ofspecific cases.

Assessment of aids for the restructuring of the bankingsystem in the Czech Republic, Hungary and Slovakia ledto largely positive judgements, but the Commission decidedto check measures for the Czech Agrobanka Praha andthe Hungarian Postabank which it suspected were appliedafter accession and incompatible with the common market.Similarly, a deal was reached over the derogation allowingSlovak tax concessions to US Steel Kosice until 2009:

when it became clear that the company had not respectedthe production cap imposed as a condition, theCommission cut the permissible aid. And Malta hasagreed to phase out preferential tax regimes for offshoretrading companies by 2010, following a Commissionrecommendation in early 2006. An investigation intorestructuring aid for major Polish shipyards demonstrated

Banking: Poland wanted to go it alonePoland's stand-off with the EU over an Italian-Germanbank takeover soured the integration atmosphere. On the grounds that Polish national interests were atstake, the Polish government tried to prevent themerger of two Polish subsidiaries (Pekao S.A. andBPH) caught up in the deal (involving UniCredito and HUB), despite the fact that the EU had alreadyapproved the merger. The Polish government citedfears of job losses – although resistance was alsoinspired by the desire to protect Poland's last state-owned bank from what would be a bigger newrival. The Polish banking market is already largelydominated, in its capital base and its assets, byforeign banks. The domestic manoeuvrings to impede the deal also brought the government intoopen conflict with the country's central bank, which ittried to pressure into blocking the takeover – raisingconcerns across the EU about the government's commitment to central bank independence. TheEuropean Commission formally attacked the Polishgovernment's action as a breach of competition lawand of the EU rules on free movement of capital, butin early 2006 the Polish authorities agreed a face-saving compromise with the Italian bank, winningsome local divestments and guarantees of job security. The case was also another indication that the desire for national champions is not confined to Western Europe.

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the complexity of verifying compliance when there aremultiple measures taken by multiple public authorities insupport of a restructuring process that stretches wellbeyond the date of accession: the Commission has putthe onus on Poland to demonstrate that a legally valid andbinding aid decision took place before accession.

The Commission has also been energetic in pursuing casesin the new member states. Within days of enlargement in2004, it launched an investigation into assistance forHuta Czestochowa, Poland's second largest steel company.In the event, the Commission cleared the new assistanceas an instrumental element in the company's sale, but itdemanded repayment of €4 million of what the investigationrevealed to be earlier and unauthorised state aid – thefirst subsidy recovery case in a new member state. Sincethen it has kept up a steady stream of investigationsand rulings, ranging from probes into long-term powerpurchase agreements in Poland, to requests to Hungaryto abolish restrictions on the provision of cable TV services.But the role of the national authorities in the new memberstates is also growing, under the new EU merger rules,and the Commission judges national authorities to beready to take on this task. The Tesco takeover ofCarrefour's stores in Slovakia was referred to the Slovakauthorities because of its predominantly local rather thanEuropean significance – the first time a transaction wasreferred to an authority in a new member state.

Particular areas of concern remain. Poland and the CzechRepublic still need to speed up restructuring of theirsteel sectors to achieve viability by the end of theirtransitional period for state aid in 2007, by means ofprivatisation, a switch to higher value products, andtougher cost-cutting. The menace hanging over backslidersis that they may be required to pay back state aid in2007 if they have not attained viability.

ENERGY

Enlargement has increased the EU's dependence onenergy imports just at the time when security of supply hasbeen driven to the top of the agenda notably by questionsover Russia's reliability as a gas supplier and the MiddleEast situation. The EU's greater needs are intensified by thefact that its new member states are both power-hungrybecause of their rapidly growing economies, and generallyless efficient in their use of energy.

Just how this increased dependence will translate into EUlegislation remains to be seen. As in so many other sectors,the experience, approach and influence of the new memberstates vary widely. Poland and Cyprus are, for instance,under attack for failures in promotion and use of renewableenergies – while Latvia, Slovakia and Slovenia have greenelectricity production targets and performances thatcompare well with the EU15, beaten only by Austria andSweden. The Czech Republic is one of the principal EUproducers of biodiesel (around 60,000 tonnes per year),although far behind Germany, France and Italy. Slovakiaand Lithuania are also small producers. And Poland is oneof the principal producers of bioethanol, although trailingFrance, Spain and Sweden. The Czech Republic, Hungary,Latvia, Lithuania and Slovenia are judged to be imposingsignificant administrative barriers to renewable energydeployment, with lengthy planning processes, conflictingand complex procedures, a lack of lead times to obtainnecessary permits, and insufficient consideration forpotential sites for renewable electricity production inspatial planning.

As concerns the single market for energy, the new memberstates were initially congratulated for moving faster thanmany of the EU15 in developing a competitive electricitysector, although opening their gas markets to competitionhad little impact on customer behaviour – because the low

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gas prices still enjoyed by households and smaller firmsprovided little incentive to switch. However, most of themare currently facing Commission accusation of failing totranspose the market liberalisation Directives properly.Poland, the Czech Republic, Latvia and Cyprus are alsounder attack for failures in the promotion and use ofrenewable energies. Oil stocks have been maintained atrequired levels by all the new member states exceptCyprus, which is now subject to Commission action.

The Context: Increased Dependence on Russia

Many of the new member states feel particularly vulnerablein energy terms. Conspicuously, the Baltics are a “gasisland”, linked only to and supplied only by Russia, and inparticular by just one company, Gazprom - provoking bothLatvia and Lithuania to request EU authorisation to delaytheir market opening. Lithuania was reminded sharply ofits vulnerability when Gazprom imposed a sudden 40%price increase in early 2006. MEPs and senior politicalfigures from the Baltic states openly accused Russia ofusing energy as a weapon. They urged rapid joint EU actionto ensure security of supply, and supported their case withlurid warnings of the threats from totalitarianism.

Many other new member states also rely heavily onRussian gas – and are, from their own history, wary ofMoscow's apparent readiness to deploy energy for politicalpurposes. Many of them also suffered supply cuts inearly 2006. In response, Poland, already deeply irked byexclusion from the Russian-German plan to build a gaspipeline under the Baltic Sea, renewed calls for an EU-wideapproach to energy, backed by Lithuania. Eight countriesof Central and Eastern Europe also put in a bid for EUfunding to create shared gas storage facilities, new liquidnatural gas terminals, and other fall-back mechanisms.So far, however, despite nominal endorsement of theconcept by the EU's spring summit in 2006, and generalEU acknowledgement of the need for diversification of

supply and strategic development of its energy networks,little progress has been made. The new German governmenthas given no sign of backtracking on the deal signed byits predecessor with Russia. And there is little impetusfor new cross-border interconnection, partly because ofresistance from local incumbents. Suggestions fromBrussels of greater regulatory intervention to open upthe energy market have so far received a cool responsefrom founding member states.

Other new dimensions have been added to the EU's energydebate by enlargement. It has brought with it coal fromPoland, one of the world’s largest producers, revitalisingEU interest in related technological development. Aftermore than half its 80 pits were closed, and employmentwas cut from nearly half a million to just over 100,000,a €1 billion investment programme has brought newefficiencies to the sector. However, while businessprospects improve in energy-shocked Europe, the profitsof Poland's mining operations were declining in 2006, inline with the fall in world coal prices and stiff competitionfrom Russian gas and coal imports from overseas. Coalrestructuring plans to 2010 have been approved forPoland and Hungary, and aid has been authorised forclosures to assure the Czech coal industry's viabilitythrough to 2030.

Enlargement has also brought new nuclear installationsinto the EU's power generation mix, and the debate isinfluencing and is influenced by the experience of thenew member states. The Czech Republic and Slovakiaeach bring six additional nuclear reactors; Hungarybrings four; and Slovenia and Lithuania one each (andRomania will add another one, and Bulgaria anotherfour). The largely successful experience with most ofthese (in the main western-designed) plants offers supportto the pro-nuclear camp. The Czech Republic is alreadyexamining the possibility of expanding its nucleargeneration capacity, and further investments are plannedat the Mochovce plant in Slovakia.

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Even the planned closure of the plants deemed unsafe hasbecome the subject of renewed discussion in the light ofchanged energy circumstances. The most audacious havecalled for review of the EU's pre-accession requirementsthat Lithuania must close Ignalina 2 by the end of 2009,and Slovakia must close Bohunice 1 by the end-2006and Bohunice 2 by the end-2008. (Similarly, Bulgariaresuscitated its requests for concessions on early closureof its Kozloduy plant.) All such entreaties have, however,been firmly rejected by the EU.

These nuclear debates also feed into calls for review ofGerman and Swedish decisions to phase out nuclearpower. Against this background Belgium and Italy arereviewing their positions on nuclear power, while the UKannounced in July 2006 plans to build new nuclear plantsas part of the government’s objectives to cut CO2 emis-sions by 60% by 2050 and to secure energy supplies.Opponents of nuclear energy however rapidly seized on thepotential hazards to reinforce their arguments, particularlywhen the Czech plant at Temelin had to be investigated forleaks just weeks after accession.

TRANSPORT:

Road Transport

New industrial activities in the new member states aregenerating demand for containerised transport on a largescale, which is being captured in the main by the roadtransport sector. Lorry traffic between Germany andPoland virtually doubled in the first year of enlargement.Road freight transport is expected to double by 2020 in thenew member states.

For geographic as much as political reasons, the newmember states have tended to side with other peripheralcountries (and the road transport lobby) in the debate overthe Euro-vignette road-user charge. Most have resisted the

internalisation of external pollution costs so as not toincrease costs for their transporters, obliged to travel longdistances – in opposition to the determination of morecentral countries to spread the costs engendered by theirsituation as transit countries. Estonia and Malta wereamong the countries that voted against the Council'scommon position in April 2005. France called in December2005 for tougher rules to limit road freight cabotage and toimpose driver attestation rules on EU member states –as a way of bringing the new member states back underthe closer control imposed on them before they joined.

Poland formed part of a blocking minority on harmonisationof driving licences in December 2005 (but more because itwas already introducing new licences at national level anddid not wish to have to repeat the exercise). Within days oftheir accession, Slovakia, Hungary, Czech Republic,Estonia and Malta joined forces with existing opposition tothe EU's proposed harmonised driving ban for lorries overweekends and holidays, assuring a blocking minority,and leading in 2005 to the eventual withdrawal of the1998 proposal.

Rail Transport

The rail lobby in the new member states – and in the EU15- has not been able to capitalise fully on enlargement'spotential for rail market growth. Despite increasedtrade, increased distances, and a stronger market posi-tion than in the EU15, freight traffic has seen a decadeof decline, only recently stabilising (except in the Balticstates, where Russian fuel exports have driven trafficgrowth). And crucially, the EU's mid-term review of itstransport strategy has shifted away from unconditionalsupport for a switch from road to rail, while the emergingEuro-vignette reveals similar EU reluctance to handicaproad freight.

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There are huge unmet investment needs to moderniserail systems in the new member states, and the vigorousrestructuring that accession has obliged governmentsto undertake has largely blunted any collective appetite forfurther radical liberalisation measures, particularly sincethey are already on a sharp learning curve in establishingEU-compliant public service contracts for passengerservices. The EU framework for public transportremains in any case uncertain as the difficult discussionsover compensation and exclusive rights have not advancedsignificantly.

Against this background, the new member states' inputto major rail discussions has not followed a clear pattern:the December 2005 Council agreement on the third railpackage – at a lower level than the European Parliamentwished – saw, for instance, Slovakia among the championsof liberalisation of international rail passenger transport(even – with the UK - favouring liberalisation of domesticservices), while Hungary sided with France and Belgium,the most virulent opponents. In fact governments fromthe new member states have shown very little interest inseeking any type of common position among themselveson rail transport issues.

Shipping

Enlargement has not only increased the size of the EUfleet (which now represents 25% of total world shipping).It has also pushed up the detention rate of vessels flyingEU member state flags, notably with Malta, Cyprus,Estonia, Lithuania, and Latvia at fault – provoking theCommission to propose a new package of maritimesafety rules in November 2005. On the Commission planto scrap the block exemption from EU competition rulesthat liner shipping conferences have long enjoyed, theBaltic states and Cyprus are aligning themselves withthe reticence of Germany, Italy and Denmark, the oldmember states most heavily involved. And theCommission is proposing tougher rules on employmentof seafarers, largely in response to Irish urgings, since

an Irish ferry company sacked its Irish staff andemployed cheaper labour – mainly from Eastern Europe.

AGRICULTURE

Despite the anxieties over bringing in new members with alarge farming sector, structural adjustments are reducingagriculture's share in GDP and employment. Nevertheless,at accession agriculture represented 4.1% of the GDPcompared to 2.1% in the EU15 and accounts for 12.5% oftotal employment in the EU10 (and up to 19% in Poland),compared with 4% in the EU15. Meanwhile, EU supportand foreign direct investments have helped to restructureand modernise agriculture and food processing. Andenlargement has boosted farmers' incomes in the EU10without damaging farmers' incomes in the EU15.

Against this background it is no surprise that the new mem-ber states learned rapidly how to make use of the EU facili-ties for which they had become eligible. Eight new memberstates (excluding Slovenia and Cyprus) using the single areapayment scheme won early direct payments – from Octoberinstead of December 2004, after pressure from Poland andHungary. Hungary received permission for crisis distillationof 50 million litres of wine in October 2005 – the first newmember state to obtain such authorisation (although in thewake of similar permits for France, Spain, Italy and Greece,for a total of 780 million litres). And Latvia sought EU aid forJanuary 2005 storm-damage to its forestry. But they alsolearned that they had to conform to EU procedures – asPoland found when it wanted to release wheat stocks ontothe market: it could not do so before receiving the authorisa-tion from the relevant EU committee.

With regard to agricultural policy, the high-point of the newmember states' involvement was perhaps in the debatesover the 2005 sugar reform, where Latvia, Lithuania,Hungary Slovenia and Poland (along with Greece, Spain,

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Ireland, Italy, Portugal and Finland), constituted a potentialblocking minority in Council in their opposition to the 39%cuts in support. But only Poland (which is the EU's thirdlargest sugar producer) and Latvia – together with Greece- remained hostile, while the rest settled for the last-minute compromise of 36%, with slightly higher compensa-tion and a longer phase-in period.

TAX

In the run up to enlargement, the liberal lobby in the EUwere excited by the prospect of wider support for theconcept of tax competition with the accession of newmember states with low taxes, but the same prospect pro-voked anger among member states with higher tax rates.As early as the autumn of 2004, there were French calls forretaliatory cuts in EU regional aid to new member statesthat entice businesses to relocate there by setting low taxrates. Fears spread among high tax countries of a down-ward spiral – intensified when Austria cut its corporate taxrate from 34% to 25% in early 2005, in an overt responseto the 19% rate introduced in 2004 by neighbouringSlovakia.

In the area of direct taxation the new member states havehad little chance so far to influence EU tax policy due notonly to the unanimity rule, but to the very long processunder way to put forward new proposals such as thecommon corporate tax base, not expected before 2007 atthe earliest.

Moreover, closer scrutiny reveals that while some of thenew member states have relatively low corporate tax rates,firms enjoy fewer tax loopholes. Slovakia introduced itsnew system to substitute simplicity for previous complexity:it has a wide tax base, and a standard 19% rate for people,companies and VAT, but offers no exemptions and nodeductible business expenses. The principal motivation

behind the lowered tax rates in most of the other countriesof Central and Eastern Europe was similarly to compensatefor the numerous loopholes that they were forced toabandon when accession made them subject to EU stateaid rules.

The VAT SpatSome of the new member states played a high-profile – if ultimately incidental - role in the EU's long-running debate over VAT levels. In early 2006,Poland, the Czech Republic and Cyprus becameembroiled in a battle over lower VAT rates forlabour-intensive services. A compromise, extendinguntil 2010 reduced rates on a limited list of activities,was agreed by 22 member states, after some strenuous negotiations had reconciled divergences,notably between Germany and France. But thesethree new member states refused to sign up to thedeal unless they obtained similar extensions tosome of the reduced rates they were granted undertheir Accession Treaty, but which expire in 2007. In the end, under strong pressure, including fromthe European Commission, they relented – withPoland the last to hold out, until it won some smallconcessions. But the episode generated strong feelings on both sides. New member states feltthey were being bullied and discriminated against,despite the flexibility they had shown over thefinancial perspectives deal. Old member states felttheir business was being disrupted by impertinentintrusions, and issued thinly-veiled warnings aboutthe consequences of non-cooperation.

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JUSTICE AND HOME AFFAIRS

Some of the toughest challenges for this enlargementarose from the sensitive areas covered by justice andhome affairs. Security concerns over new borders to thesouth and east, the emergence of large-scale terrorism inEurope, and the recent history of most of the newmember states – as well as the recent establishment ofnew areas of EU policy – had ensured maximum attentionto questions of law and order, migration, corruption, andorganised crime.

The new member states have taken on board EU ruleswith broad success – such as the framework decision onmoney laundering and confiscation of the proceeds ofcrime (although some of them are not responding rapidlyto identified gaps - such as Latvia's lack of a valueconfiscation procedure used when the proceeds of acrime cannot be confiscated). Poland had problems withthe European arrest warrant in 2005, because its ownimplementing law was held by the Polish constitutionalcourt to flout the ban on extraditing Polish nationals. Thegovernment is moving to rectify the problem, and thesystem proved its worth with the extradition of a suspectfrom Poland to Belgium in 2006 in a high-profile murdercase. (Note that the German Federal Court has alsodeclared the warrant void.)

But the new member states still remain outside theSchengen area of open internal borders: identity checksare still carried out on travellers crossing the internalborders between the new and old member states.Although they apply the Schengen acquis on police andjudicial cooperation, border controls can be abolishedonly when the EU says so – and that depends on havingthe new Schengen Information System II in place (whichcould happen in 2007), and on each of the new memberstates demonstrating it meets all the rigorous conditions(which may happen in 2008). The new member statesare keen to see progress: all of them except Poland urged

the Council in early 2006 to ensure that discussions onthe legislative proposals would not delay the adoption ofSIS II. Meanwhile, the Schengen Facility of more than€900 million for 2004-2006 is helping seven of the newmember states to finance initiatives at the new externalborders of the EU.

EXTERNAL RELATIONS

Arguably, it is in the area of foreign affairs that thisenlargement has been most influential. In virtually allother areas of EU activity, the EU15 were already well-resourced, and the added-value of new member stateshas not always been critical. But in this field, the newmember states brought expertise that the EU simply didnot possess – particularly in relations with EasternEurope, and above all, with Russia.

Within months of their accession, the new member stateshad the first major opportunity to bring their specialskills to bear, when rivalries over the contested presiden-tial election in Ukraine threatened to boil over intoserious civil unrest. It was the Presidents of Poland andLithuania who were in the vanguard of the internationalefforts to defuse the tensions. And a European Parliamentdelegation that went to Ukraine to monitor the Decemberre-run of the poll was led by Poland's former Europeaffairs minister Jacek Saryusz-Wolski, with SarunasBirutis of Lithuania, Grazyna Staniszewska of Poland, JiriMastalka of Czech Republic, Irena Belohorska ofSlovakia, and Latvia's former prime minister GuntarsKrasts. Their familiarity with the personalities, the issuesand the language enabled them to deal with all sides tothe dispute in a way which even the most seasonedexperts from the EU15 could not offer.

The new member states have also played to theirstrengths as honest brokers on subjects where the EU15have, for whatever reason, sensitivities. So it was that

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the Luxembourg Presidency pushed Slovakia into thelimelight in early 2005 by asking its prime minister to spellout the EU position on Iraq at the EU summit with USPresident George W. Bush – appropriately, since Bratislavathen hosted the Bush-Putin summit the following day.

In early 2005, when EU foreign affairs ministers heardCommission President José Manuel Barroso set out hisplans, only Slovenia's Dimitrij Rupel spoke, to urge earlydebate on the western Balkans and Kosovo – at a timewhen the EU was keeping quiet on the subject. And incountless exchanges with neighbours to the east, thenew member states of Central and Eastern Europe havebeen able to bring new expertise to the EU's reflections.Ján Kubis of Slovakia is the EU Special Representativefor Central Asia, and his compatriot Miroslav Lajcák is thePersonal Representative of the EU High Representativefor the Common Foreign and Security Policy onMontenegrin dialogue.

The new member states have also been able to offer anew sense of familiarity, even reassurance, about relationswith Russia. "They may not like us in Moscow," onesenior politician from a new member state commented,"but as sure as hell they know that we know them, andthat can make exchanges more effective". The cumulativeeffect of enlargement has also been to strengthen – veryslightly - EU resolve in dealing with Eastern Europe – somuch so that in the run-up to the 2006 EU-Russia summit,Russia's ambassador to the EU openly accused the newmember states of spoiling Moscow's relationship withthe bloc due to their "phantom pains of the past".

EU25 policy has also had to take account of the increasedAtlanticist tendency brought by new member states –born in part from the Cold War legacy and in part fromtheir diasporas in the US (and which makes all the moreanguished the resentment most of them feel at stillbeing denied the visa-free access that only Sloveniacurrently enjoys).

But there is no monolithic view brought to foreign affairsby the new member states - on the Ukraine, for instance,while Poland lost no time in 2006 in urging early EUmembership, Slovakia urges prudence and balance,emphasising the need for reforms to match closer relations.

Shifts in the Geopolitical Plate

A measure of just how far enlargement has shiftedthe geopolitics of 21st century Europe is evident froman apparently minor event like the European Securityand Defence Policy orientation course held in early2006 which brought together EU member states,accession countries and Russia, Belarus, Ukraine,Georgia, Armenia and Azerbaijan. This EU event,aimed at providing "a shared understanding of securi-ty and defence issues, and creating a common securi-ty culture", was held in Vilnius – a city which littlemore than a decade ago was a city within the USSR.This was the first such seminar to be held in a newmember state, and the first seminar aimed specificallyat Eastern European countries.

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THE COMPROMISE ON THE FINANCIAL PERSPECTIVE

High drama had been expected from the debate that beganshortly after enlargement over the European Union's nextfinancial perspective, setting out the budget framework for2007-2013. But few imagined in 2004 just how long andtough the talks would be – or guessed how influential thenew member states would prove to be in the outcome.

The saga of missed deadlines, distractions and histrionicsran right through three consecutive Presidencies of the EU.But it settled early into a fundamental confrontationbetween those who wanted to spend more and those whowanted to spend less. As beneficiaries, the new memberstates were naturally sympathetic to the camp favouringhigher spending. By the same token, as beneficiaries ratherthan contributors, their weight in the discussions was, atthat stage, minor.

Tensions started to rise when no agreement was forth-coming at the end of the Dutch Presidency in December2004, and the issue passed to the Luxembourg Presidency,with a new six-month deadline for political agreement. Butexternal events – not least the rejections in France and theNetherlands of the EU Constitution – diverted the EU'sattention in the run-up to the June 2005 summit. Inaddition the Visegrad countries (Poland, Hungary, theCzech Republic and Slovakia) and the Baltic states weredemanding a bigger share of the booty, while Greece,Portugal and Ireland were reluctant to see their sharedecreased. The nail in the coffin was, however, the incomingUK Presidency's insistence on a tighter and more focusedbudget than Luxembourg was proposing.

As the arguments rolled on, the priority of the new memberstates started to shift away from a generous settlement andtowards a settlement that would allow them to plan howthey would use the funding from the start of 2007. Polandoffered to give up €1.5 billion in the dying moments ofthe failed June 2005 summit, in a last-ditch bid to winagreement, and was immediately backed by Czech and

Hungarian offers – leading Jean-Claude Juncker to hisfamous comment that he felt "shame" at their willingness inthe face of other member states' intransigence.

Once the UK Presidency commenced (in July 2005), itshowed no urgency in re-opening discussions. In part itwas distracted by other matters (notably the July bombingsin London); in part, in some opinions, it was Machiavellian;and in part, it may have been simply negligent. But as earlyas June 2005, the inaction provoked the LithuanianCommissioner Dalia Grybauskaite to let her feelings showthrough in criticism of the UK delay. Hungary rapidlyproposed a stop-gap three-year financial perspective –although the Czech Republic dismissed such a solutionas too short-term to be of any use for developing theinevitably long-term cohesion policy projects such ashigh-speed rail.

Many of the new member states were critical of theconstraints attached to access to the new funding –particularly the calculation of absorption capacity. Breakingwith their aversion to presenting themselves as a bloc, thenew member states even mooted in November 2005 acommon letter to the UK on the urgent need for a deal. Justbefore the December summit, the Visegrad four actuallysent one - while outgoing Polish President AleksanderKwasniewski openly attacked the UK for a lack of solidarity.

The UK, emboldened by the evident willingness it hadperceived in June among the new member states to cuttheir benefits in pursuit of a deal, calculated that their needfor a deal would overcome their distaste at a lower figure.Accordingly, the Presidency finally proposed, little morethan a week before the crucial December (2005) summit, abudget sharply reduced by comparison with theLuxembourg compromise of six months earlier. It cutprovision for the new member states, but at the same timeremoved many restrictions on their use of EU funds. And,adroitly, on the very eve of the summit, it tabled animproved offer with a series of additional sweetenerstailored closely to the individual wishes of the new member

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states (as well as some tactical concessions designed tobuy off some of the old member states).

This high-risk strategy, hanging principally on an approachof neutralising the opposition of the new member states,and thus producing a majority ready to back budgetreform, proved successful – even if it succeeded largelybecause of the deus ex machina of the new GermanChancellor, Angela Merkel, who put enough into the kitty tosecure an agreement. The result was a step, even if timidand conditional, in the direction of reform: a smallerbudget, with some shift towards innovation and away fromagriculture, and with, crucially, the prospect of a morefundamental review of the entire focus of EU spending in2009. It would have been reached with much greaterdifficulty in the absence of the role played by the newmember states.

Generally speaking, do you think that (our country)’s membership of theEuropean Union is a good thing?

Lithuania 59% Poland 56%Slovakia 55%EU25 55%Slovenia 54% Czech Republic 52% Estonia 51% EU15 51%Cyprus 49% Hungary 49% Malta 44% Latvia 37%

Source: Eurobarometer 65Field Work: March – April 2006Publication: July 2006

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Some ConclusionsBrussels and the Broader PerspectiveAssessing the impact of the 2004 enlargement, two yearson and more, differs depending on the breadth of theanalysis undertaken. On the relatively narrow, Brussels-oriented policy and institutional front, which has been thescope of this report the overall effect seems to have been– despite occasional but not insignificant turbulence – oneof controlled absorption and mutual adjustment.

At the same time, it would be wrong as yet to talk in termsof stable equilibrium. Enlargement, both in its economicand political dimensions, appears to have contributed to anenlivened reflex of national interest. The widened disparitiesbetween the member states, not just in prosperity butalso in economic policy, have at times led to intensedisputes and acrimonious exchanges. However, by andlarge, enlargement has not critically undermined thefunctioning of the EU25.

Meanwhile, the business community across all memberstates is very largely supportive of enlargement. For mostof them, it appears to have been the win-win scenario thatadvocates of enlargement used to parade. The bulk ofinvestment (from both domestic and foreign sources) inthe new member states comes from companies in the oldmember states. For example, despite all the Brussels'anxieties over Hungary's deficit, it has nonetheless beena focus of fascination for EU15 investment funds.

However, in a broader perspective, few would disagree thatenlargement has helped force the EU into a fundamentaldebate on its future that it never intended to conduct at thistime, in this way, or on this ground.

The negative sentiment that has suffused the EU in the twoyears since enlargement – largely induced by the challenges

of globalisation, and crystallised by the French and Dutch“No’s” – has tended to target enlargement as a principalcause. The polarisation of views within the EU overhow to respond to globalisation has been transmutedinto polarisation over the merits of enlargement. In thisprocess enlargement has come to be seen as a regionalmanifestation of globalisation.

Now the risk is that the all too evident hesitations overfurther enlargement are reinforcing the hesitations over thereforms needed for the EU to face the challenges thatglobalisation is bringing. This political landscape of Europeis at a tipping point, and its borderless market sometimesappears to be under threat. Introducing protectionistmeasures inside the Union whose effect is to raise the costto enterprises of new investment in the new member statesundermines the very foundation on which EU marketintegration rests. The solution to the high unemploymentrates in some of the core economies in the Union willdepend on economic reforms, particularly on labourmarkets, on better education and training and higherinvestment in research and development.

There is a growing presentiment among some EU strategiststhat if the anti-enlargement camp prevails, it will not onlydelay economic reform, but will mark a reversal of the corevalues of the EU just as it approaches its 50th anniversary.Instead of opening borders it will close them. Instead offulfilling its commitments it will break them. Instead oflooking outwards it will look inwards. And instead of maxi-mising its potential for wealth creation, it will minimise it.

Optimists suggest that the debate triggered by enlargementcould serve to concentrate minds on where the real pro-blems of the EU are. Its inability to agree on a Constitution,

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on speedy economic or fiscal reform, on foreign policy hasnot sprung from the presence of ten new member states.The fundamental disagreements lie within the EU itself, andvery clearly would exist even if the EU still had only 15member states.

At the same time, the debate that is now taking placeseems certain to continue to be enlivened by the newmember states. Precisely because they are still muchpoorer than the EU15, their desire to speed growth willkeep the economic reform issue at centre stage. Theircompetitiveness and economic dynamism will drive thecompetitive pressure for the wider European economy. Thenewly emerging economy could, it is argued, supersede

the Lisbon agenda - which sometimes resonates withall the power of a failed cliché - with a new Tallinn orBratislava agenda.

If the debate aids a process of constructive reflection, itshould ease the process of continued enlargement andmay help swing EU member states increasingly towardsreform, thus allowing the EU’s fullest potential to beexploited in the face of globalisation. Business is alreadyahead of the curve, because it has the power to do whatgovernments tend not to be able to do – respond flexibly torapidly changing circumstances.

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FOREWORDEXECUTIVE SUMMARY INTRODUCTION / OVERVIEWSECTOR-SPECIFIC FOCUSPOLICY CONCLUSIONS CONCLUSIONS FOR BUSINESS

Conclusions for Business:Influencing the Enlarged EUAs we believe this report has shown, enlargement, for allthe turbulence, has been by and large a greater successthan envisioned, and has generated far fewer problems inthe everyday life of the institutions and their policies thanonce had been feared. But two and half years after the bigbang of the 2004 accession, the European Union hasdefinitely become a more complex entity. The new memberstates are injecting a new balance into EU policy prioritiesand complicating the mechanics of EU decision-making.

For business this means that while the basic rules foreffective engagement with the EU institutions have changedlittle, the greater complexity clearly mandates the earliestpossible involvement in policy making, even greaterplanning, more time and resource allocation, the need toreach out to a broader audience and the formation ofcoalitions – all the while paying particular attention tolinguistic preferences. Indeed, the drafting of simplearguments backed by facts, objective analysis and implica-tions for specific national if not regional markets has alsobecome all the more essential. In other words it is noweven more important than ever before to design andimplement sustained public affairs strategies across thethree institutions and increasingly the national capitalsencompassing not only all governments, but NGOs,industry and other stakeholders.

Against this background, the following sets out a fewgolden rules for lobbying in the enlarged EU.

1. EVERY VOTE COUNTS

In a community of 25, every vote counts. While in theEU15, it was often sufficient to focus on the “big five” to

achieve a desired result, Slovenia or Luxembourg’s fourvotes may make the crucial difference in today’s moremathematically complex EU, necessitating considerableextra time and resources.

2. THE EARLIER THE BETTER

Building cross-party and cross-national support requiresengagement in the decision-making process as early aspossible. Although this has always been the case, an EU of25 member states, soon to be 27, makes this mandatorywhether in the European Parliament, the Council ofMinisters – or, of course, the European Commissionwhence policy in most areas key to business first emerges.

3. COMPLEXITY MAKES POLITICAL GROUPS IN THEEUROPEAN PARLIAMENT ALL THE MORE IMPORTANT

The complexity of both the EU decision-making process andthe policies at stake have also reinforced the importance inthe European Parliament of group political advisors andcommittee coordinators who may be the first to master adossier and establish the initial group positions.

4. RESPECT LANGUAGE PREFERENCES

In this configuration, languages have become cruciallyimportant. While it has always been advisable and pre-ferable to speak in the language of the national official orMinister, respecting this rule in the EU10 becomes asimportant as in the UK or France. Moreover, whileEnglish is respected as the EU lingua franca, officials in theTen appear to prefer to talk on the basis of a writtensubmission – English is fine, but rare is the official whoreadily discusses an issue at first contact. The additionaltime this takes must be factored in.

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5. COOPERATE WITH LOCAL INDUSTRY AND NGOS

National officials like MEPs have a real sense that theyare in Europe to fight for the interests of their industry,workers or region. They therefore want to be sure thattheir interventions will be seen by and will benefit theirconstituencies. It is therefore all the more necessary tocooperate with national, regional or local industry orNGOs in alliances so that they speak on your behalf. Thismeans as well that it is crucial to understand national issuesand interests.

6. DEVELOP DIRECT LINKS TO NATIONAL CAPITALS

It is important to understand that restricted staffing in theEU10’s permanent representations in Brussels sometimesprevents active participation in every working group andfor every issue. This situation is exacerbated by rapid staff

turnover as positions in the European institutions orindustry open up. Whatever the causes of this currentstretched capacity, it points to a greater emphasis ondeveloping direct links to national capitals, governmentsand administrations.

7. ENSURE TOTAL TRANSPARENCY

This is a last but critical factor. The practice of public affairscan be complicated in some of the Ten by the perceptionthat associates lobbying with corruption (as of course canhappen in the EU15 as well). The importance of totaltransparency in relations with public authorities in the 2004accession countries cannot be overstated.

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Voting in the CouncilFrom 1 November 2004, the number of votes each country cast is as follows:

Germany, France, Italy and the United Kingdom : 29 Spain and Poland : 27 Netherlands : 13 Belgium, Czech Republic, Greece, Hungary and Portugal : 12 Austria and Sweden : 10 Denmark, Ireland, Lithuania, Slovakia and Finland : 7 Cyprus, Estonia, Latvia, Luxembourg and Slovenia : 4 Malta : 3TOTAL VOTES: 321

N.B. A minimum of 232 votes (72.3%) will be required to reach a qualified majority. In addition, a majority of member states (in some casestwo thirds) must approve the decision, and any member state can ask for confirmation that the votes cast in favour represent at least 62% ofthe EU’s total population.

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