The Baltic States in the European Union

Introduction

Discussion

Economic integration refers to non restricted movement of goods within a trading bloc of merged economies with common policies and central. These policies when placed together signify important changes in the patterns of economic activities in the partnering states. Integration has great influence in terms of transforming the business environment. It could involve redesigning of the boundaries between the state and the market. Integration also extends concrete benefits and losses for economic groups in each state. Further, economic integration is open among states and likely to influence all regions belong to the regional bloc (Linz, 1996).

In this paper, I will discuss integration of the Baltic States into the European Union: explaining what it means to the people living in the Baltic states to become part of the EU population, including advantages and disadvantages; free movement of goods; free movement of services; free labor movement; Common Agricultural Policy; Economic Monetary Union; domestic change; and evolution of this integration.

Integration of the Baltic States in the EU

Free Movement of Goods

Free movement of goods has been the most advanced area of integration between the European Union and the Baltic States. Since 1995, free trade has been the main principle and objective of economic relations between the European Union and the Baltic States. Through trade liberalization, a number of measures for mutual trade, such as abolition of quantitative and qualitative barriers of imports and exports and the use of the same regime to domestic goods as to imported goods from other parts of the free trade area.

Hence, the removal of these trade restrictions reduced protections to domestic producers and increased competition in the Baltic States. The most affected were domestic producers who had to compete with imported products, currently not protected by non-tariff barriers. However, the majority of people who benefited in this arrangement were consumers, exporters, and producers using imported goods as intermediate products in their production processes and participating in the intra-industry trade with the European Union (Tang, 2000). Estonia has the largest share of intra-industry trade with the European Union compared to Latvia and Lithuania.

The scope of the people expected to benefit from the integration depended on the intensity of the overall informal integration. The European Union has been the Baltic States main trading partner for several years. The Russian economic crisis had resulted in further in the European Union’s share of Baltic exports. Estonia led with exports to the European Union and imports from it, accounting respectively, for 70% and 74.3% of its foreign trade at the end of June 1999 (Tang, 2000).

Product groups analyses indicated that for Estonia, most of the intra-industry trade with the European Union was taking place in such products as electric transformers, inductors, clothing, leather, and accessories (Offe, 1996). Lithuania conducted most of her intra-industry trade with European Union in footwear, woven cotton fabrics, and some fishery products. Producers of those products were likely to benefit from further integration.

However, the product selection would have been treated with caution as market structures were rapidly changing, particularly in transitional economies. The small size of the Baltic economies, the large foreign trade share in their Gross Domestic Products, and the significance of outward processing in those countries offered grounds to believe that the scope of beneficiaries were relatively large in all the three states.

Groups such as consumers have less influence over policy making due to the collective action problem while domestic producers are better organized and Latvia and Lithuania had been able to have trade barriers introduced (Spurga, 2005). The farmers from Lithuania and Latvia, the largest lobby group in the two countries, had managed to receive import protection from their respective governments, even when such protection was contradicted international obligations of the countries (Tang, 2000).

Free Movement of Services

European Union allows free movement of services which implies member states, including Baltic States, have freedom to establish companies or subsidiaries in other member states and provide services under the conditions the host country sets for its nationals. European Union integration treaty contains provisions specifically set for transport and financial services. In transport services, there is mutual recognition of qualification certificates that benefits both service providers and consumers.

However, the adoption of safety and environmental requirements for vehicles and operation, adjusting technical requirements, administrative procedures, and meeting other requirements for market entry is more controversial to member states. These measures require initial investment, and domestic service providers are likely to bear the costs or they might shift them to consumers (Tang, 2000). The beneficiaries in this issue are the service exporters already operating on higher standards. The European Union provisions that separate transport infrastructure and operation are likely to benefit consumers because they are expected to generate more competition and abolish the distortions resulting from state aid provided to this sector (Offe, 1996).

Free Movement of Labor

Integration has also enabled free movement of labor within the Baltic and other member European Union States. The agreement signed between the European Union and the Baltic States contains provisions that bar discrimination against legally employed nationals by the other parties to the agreement. Free access to the labor market within the European Union involves recognition of education degrees and professional qualifications, the right to transfer social security payments, and freedom of establishment and service supply. The provisions on mutual recognition of educational diplomas and qualifications in selected occupations, such as medical treatment and transport are exclusively contained in the White Paper.

Therefore, employees and employers from the Baltic States have benefited immensely from the free movement of labor in the European Union as both the labor force and firms are free work or employer within the membership. They have benefited from the most measures related to free access to the labor market that offers them with more choice when looking for employment or an employee. However, Baltic States had to incur short time costly investments in adjustment of training and activity rules for certain professions. Integration also posed the danger of brain drain from the Baltic States although on a minor scale (Linz, 1996).

Common Agricultural Policy (CAP)

The European Union has harmonized common agricultural policy. The Union uses about half of its budget for Common agricultural Policy purposes, and the agricultural budget covers about 40% of the total European Union budget (Tang, 2000). Integration in the European Union has enabled the Baltic States to comply with the European Union norms regulating agricultural sector. This implies that the Baltic States has complied both with veterinary and other standards related to free movement of agricultural products within the European Union and extension of support measures to farmers.

Norms regulating agriculture represents about 1000 measures aimed at ensuring product quality, and setting labeling requirements and standards of farming processes, such as, cattle raising, growing plants, fertilizer application, and delivering products to consumers (Tang, 2000). To implement these measures, EU members require setting up administrative infrastructure, including veterinary agencies and other institutions of certification and inspection (Borzel, 2000).

European Union requires individual member states to invest in the necessary infrastructure and support of its functions financed from their own budgets, with some assistance from the Union. The implementation of the European Union standards has raised opportunities for Baltic States to export to the European Union. The majority of these agricultural producers come from Lithuania, where more establishments are authorized to export milk and dairy products, and processed game meat (Spurga, 2005).

The growing European Union regulation of agricultural production and trade has also offered the opportunities for Balkan States domestic producers to use the product standards as non-tariff barriers. The extension of the Common Agricultural Policy in the Baltic States has had significant impact on the farmers and consumers, especially in Latvia and Lithuania, where about a fifth of the labor force is employed in the agricultural sector in each country (Linz, !996).

Common Agricultural Policy measures will benefit all the three Baltic States farmers. This Common Agricultural Policy measures include import barriers against third countries, export subsidies, structural funds, price support, and direct income payments. The prediction of how of trade picture will change under the Common Agricultural Policy in the Baltic States is not easy. The situation also makes it difficult to predict groups of agricultural producers in the Baltic States who would likely benefit or lose under Common Agricultural Policy (Tang, 2000).

Economic and Monetary Union

The European Union provisions partially informally require new members to satisfy the Economic Monitory process before being allowed full accession to the Union. This allows new members to participate for a defined period of time in the exchange rate mechanism. As participants in the Economic Monetary Union, Baltic States are evaluated on the same convergence criteria that current European Union members willing to join the Economic Monetary Union had to satisfy (Tang, 2000).

The EU requires that the countries maintain low levels of inflation and restrict budget deficits and state borrowing. The Baltic States sufficiently meet these criteria. Joining Economic Monetary Union would enable the Baltic States eliminate exchange rates uncertainties and reduce transaction costs for economic operators. The degree of economic integration is reflected in the intensity of trade and capital flows between the Baltic States and the Euro zone and the degree of production factor mobility. On the negative side, joining the Economic Monetary Union can result in losses for domestic producers from the regulation of wage settings and participation in the Euro zone itself.

It also means loss of monetary and exchange rate instruments. Governments lose the autonomy to conduct independent monetary and exchange rate policies. This does not involve a major policy change for the Baltic States because they had already applied monetary policies based on fixed exchange rates (Tang, 2000). Estonia and Lithuania already had currency board regimes in place, which constrain national monetary policy. The change was also limited because, during their preparation for accession, the Euro was playing a major role for the Baltic economies (Borze, 2000).

From the mid 1990s, Baltic States have been preparing to join membership with the European Union. This has been the major issue that has given direction and pace for reform and change of the Baltic society. Change of civil society in the Baltic States has been as a result of integration into the European Union. The civil society elements have been influenced in many ways. The role of the civil society was less important compared to older member states; this was during the period of accession in 2004 (Offe, 1996).

The preparation of the Baltic States to join the European Union has been a major factor that has determined the direction of reforms and societal transformation. By the same breadth, the Baltic States integration into European Union has also been a major influence in the transformation of civil society in these states (Linz, 1996).

According to Kubicek (2005), the European Union placed great emphasis to promotion of democracy as a significant component in European foreign policy. This policy was adopted by other EU members after they attained independence and commenced political and economic reforms with the purpose of integrating into the structures of Europe. The Copenhagen European Council laid down the political and economic accession criteria for states wishing to join the European Union comply with.

The path to qualification call for institutions that are firm founded, stable and democratic, governed by the rule of law, and respects both human and minority rights. The adoption of these criteria by the Baltic States was much beneficial to the civil society as they were able to have democratic institutions, human rights were respected, and minority rights were protected (Kubicek, 2005).

The Baltic States have undergone reform for the past 15 years. Civil societies in Western States have been developing considerably in a long process, and the tenets of democracy have been changing under the circumstances of market economy. In the Baltic States, dictatorship was transformed to democracy, economic reforms was used to transform the economy from socialist leaning to capitalistic leaning. All these have been implemented concurrently in the Baltic States (Offe, 1997).

Since 1997, the Baltic States have undertaken a record number of reforms required to harmonize laws pf the Baltic States with those of the European Union. All these was commendable, however, the establishment of most institutions was rushed and therefore not immune to perturbation and defects. Additionally, it is impossible to initiate constructive discussions on the legal acts for reform, consider opinion of non-governmental experts, and interest groups. In a big part, this has led to disillusionment of the civil society players in the Baltic States (Spurga, 2005).

The Domestic Change

Borzel (2000) explained the process of Europeanization using a sociological institutional perspective as the emergence of new rules, norms, practices, and structures of meaning to which member states should be exposed and which they have to adopt in their structures (Kubicek, 2005). Socialization processes need participants to internalize the new norms and rules in order to qualify as members of international community. The Baltic States have adopted socialization and learning as the basis for the building of the civil society. International aid was dependent upon whether the transition to democracy and capitalism has support and legitimacy among locals.

Therefore, the Baltic States have been recipients of this aid in view of the above requirement. Estonia, Latvia, and Lithuania strive to join the European Union has been consistent since 1988 and has had a broad support in societies (Offe, 1996). The authority of the European Union has been dependent on the economic success of and the developed social system of Western European states. There has been a feeling in the Baltic States that the success of the European Union is related to a democratic regime (Linz, 1996). Democracy is viewed as a precondition for European Union membership.

Evolution of Baltic States Integration in the European Union

The Baltic States consist of three countries in northern Europe, namely, Estonia, Latvia, and Lithuania. These three states are members of the European Union since 2004. There membership in the European Union marked the culminated return of the Baltic States to Europe. The onset of integration transition in the European Union coincided with deep economic crisis, hyperinflation, shortages, and the collapse of the Soviet market.

The three states had been fully integrated into Soviet economic planning, and their trade relations with the rest of the world were negligible. However, they had a problematic relationship with Russia, and security was the main concern. They had four major challenges whish were; border disputes, presence of large Russian minorities in Latvia and Estonia, presence of Russian troops, and Russian access to Kaliningrad through Lithuania. The Baltic State’s integration to the European Union, in proportion with adoption of the rules and institutions of a market economy and democratic governance, has had a significant impact on the political economies of Estonia, Latvia, and Lithuania (Spurga, 2005).

In the 1990s, the European Union developed commitment to make enlargement work and this became manifest when it developed extensive array of cooperative mechanisms in order to prepare candidate states for accession. The initial approach of the European Union the Baltic States was uniform in relation to each state (Tang, 2000). The initial agreement for cooperation was negotiated and signed by Brussels with the Baltic States almost in unison, because it viewed the three states as a block and accession was distant.

The European Union leaders made a decision on the eastern enlargement, and increasingly treated the three countries separately, a stance encouraged by Estonia, which believed it had best advantage of rapid accession and wanted to distance herself from her southern neighbors for fear of being weighed down (Offe, 1996). Thus, the European Commission included Estonia among the first batch of states with which concrete accession negotiations would start in 1998, to the dismay of Latvia and Lithuania.

However, the differences were erased by 2001 when it became clear that enlargement would take place one large wave. The three states were again seen as a block, as part of the entire group of ten candidate states slated to join the EU in 2004 (Tang, 200).

Conclusion

In sum, what comes out from the analysis of the political economy of integration can be characterized shortly as gains from increased opportunities compared to the costs of compliance. The main beneficiaries are likely to be competitive firms able to exploit comparative advantages and having established economic links with the European Union. The elimination of restrictive tariffs within the European market that affect smooth business between Baltic States and European Union will encourage more market access. Most large scale farmers will also form another category of beneficiaries because they are likely to receive higher levels of support, although, at the same time, they will experience more competition.

Compliance with the European Union regulatory system involves higher costs to the Baltic States economies. There are many costs the European Union new members need to incur to comply with the set requirements of the European Union, these include; transition costs of transforming economic and legal regimes, of adopting the standards and norms of the European Union, and of building a regulatory institution and administration to supervision.

The economic and fiscal effect of investing in the compliance of European Union system imposes costs on the operators and consumers. Consequently, the institutions that ensure compliance of to European Union provisions are critical in the administrative functions. The tax payers will have to finance them. The introduction of environmental or social regulations will impose costs on economic operations, while setting up institutional structures to oversee their implementation will have to be financed from the national budgets ((Tang, 2000).

Integration in the European Union market will assist Baltic State’s consumers due to more liberalized market with plenty of affordable commodities in the EU market. Nevertheless, the consumers will partly incur the regulatory costs. The introduction of Common Agricultural Policy (CAP) will cost the consumer. Those groups in the population with relationships with European Union and who frequently commutes to the Union are likely to benefit the most. This effect applies to the three Baltic States. The Baltic States economic structures are relatively similar, and the balance of costs and benefits is not likely to vary much (Tang, 2000).

References

Borzel, T., & Risse, T. (2000). When Europe Hits Home: Europeanization and Domestic Change. European Integration Online Papers (EloP) vol. 4, no 15.

Kubicek, P. (2005). The European Union and Democratization in Ukraine. Communist and Post Communist Studies, Vol. 38, no 2, pp. 14-33.

Linz, J., & Stephen. (1996). Problems with Democratic Transition and Con Solidation –Southern Europe. Baltomore, London: The John Hopkins University Press.

Offe, C. (1996). Varieties of Transition. Cambridge: Polity Press.

Spurga, S. (2005). Lithuanian Interest Intermediation and Communication of Interest Groups at EU level. Information Sciences, vol. 35, pp. 136-50.

Tang, H., & World Bank. (2000). Winners and Losers of EU Integration. New York: World Bank Publications.

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