News Release

September 22, 2003

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Incoming EU Members Face Development Dilemmas
Access to common market is desirable, but Brussels brings costly new regulations

WASHINGTON--It's clear that the eight Central and Eastern European countries (CEECs) on track to join the European Union next year will benefit from reduced barriers to trade and investment and, by 2010, free movement of labor. EU membership, however, brings with it some serious disadvantages. The EU's 97,000 pages of rules and regulations and the taxes needed to implement them will make the accession countries less competitive, according to a new Cato Institute study, which outlines strategies these post-Communist countries should use to advance pro-growth policies.

The EU has become a powerful trading bloc that can determine conditions by which smaller, non-member nations gain access to the EU markets. In a protectionist fashion, which the EU touts as a desire to create a "level playing field," the EU forces poor member countries to adopt rules and regulations inappropriate to their level of economic development. Those burdens will result in suboptimal economic growth, argues Marian L. Tupy, assistant director of Cato's Project on Global Economic Liberty, in "EU Enlargement: Costs, Benefits, and Strategies for Central and Eastern European Countries."

"Unfortunately, the incoming EU members had to choose between the common market on the one hand and economic liberty on the other," Tupy writes. Complying with the EU's regulations on labor, agriculture, and the environment will raise production costs, while future harmonization of taxes looms as an additional threat to the new members' comparative advantages.

Tupy recommends a two-part strategy for the new entrants - the Czech and Slovak Republics, Hungary, Poland, Slovenia, Latvia, Lithuania, and Estonia. First, they should oppose further limits on tax competition that would make them less attractive to investors. Second, they should work to repeal regulations that are excessively stringent for their present level of development.

If the entrants follow these strategies and protect their economic liberty, they can demonstrate to the rest of the EU that market-friendly reforms are good for growth. As Tupy writes, "It is to be hoped that the CEECs will be able to supply such policy competition before they themselves begin to suffer the consequences of an overbearing bureaucracy in Brussels."