Big Bang - Smaller Shocks, Enlargement 2004's Impact on EU Policies and Process

BIG BANG smaller shocks ENLARGEMENT 2004's IMPACT ON EU POLICIES AND PROCESS

smaller shocks

ENLARGEMENT 2004's IMPACT ON EU POLICIES AND PROCESS

Table of Contents FOREWORD……………………………................................................................................ 03 EXECUTIVE SUMMARY …………………………………...................................................... 04 INTRODUCTION / OVERVIEW Integrating the New Member States ………………………................................................ 06 The Single Market: Impact at a Glance ……………………................................................ 09 SECTOR SPECIFIC Impact in ‘Sensitive’ Areas ..................................………….............................................. 10 Employment and Social Affairs .......................................................................................... 10 Healthcare ........................................................................................................................ 13 Pharmaceuticals ............................................................................................................. 14 Consumer Protection ...................................................................................................... 15 Environment ……………………….................................................................................. 16 Competition Policy ...............………………………………................................................ 18 Energy…......................................…………………………................................................ 19 Transport .......................................................................................................................... 21 Agriculture …………………………................................................................................... 22 Tax …………….................................................................................................................. 23 Justice and Home Affairs ...................................................................................................24 External Relations .............................................................................................................. 24 The 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.

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

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Foreword Two years after the European Union undertook the most ambitious enlargement in its history, it is possible to measure some of the resultant changes – for better and for worse.

Dear Reader, Given the scale of expansion and the political and economic challenges it presents, it is no surprise that there have been some aftershocks. Overnight, the population of the EU rose by 75 million as ten new members from Central and Eastern Europe and the Mediterranean1 joined, swelling the Union to some 450 million people. The increased size of the internal market led to a fall in the average wealth of EU citizens, as the new members’ per capita GDP was roughly half the average of the EU15. Unemployment was significantly higher in the ten new members (an average of 15.1% compared to the EU average of 7.5%). And eight of the ten accession countries had made the transition from centrallyplanned to market economies in just over ten years.

But despite the challenges to the EU’s core achievements in the economic, social and political arena, the most pessimistic predictions have not so far materialised. The single market has not seized up, the economies of the new members have been able to take the strain of competition, and the EU decision-making process has not ground to a halt. The claims that this expansion was well-prepared have been largely substantiated.

This report attempts to provide insight into both how the enlarged EU is adapting to its new circumstances and how 1

the Ten have impacted decision-making and in so doing are transforming themselves. It is based on interviews with 50+ senior officials, diplomats and politicians, and with businesses, consumers and non-governmental organisations – the people who have had to cope with the changes.

Any opinions expressed within the main body of the report reflect or summarise the views expressed in the interviews carried out for the research and do not necessarily represent the views of Burson-Marsteller.

As the EU continues to come to terms with the consequences of perhaps its biggest experiment since its inception in 1957, we hope that this report provides some useful pointers to business and others working with the European Union and its policy-making over the coming years.

Jeremy Galbraith Chief Executive Burson-Marsteller Brussels

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

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Executive Summary 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 predictions of catastrophic breakdown.

The performance of the new member states has in most evaluations exceeded expectations. Safeguard measures (e.g. on matters relating to food safety) have not been invoked, most EU rules have been transposed and complied with, competition law has been by and large respected, and it was not until the end of 2005 that a new member state was for the first time referred to the ECJ for non-compliance with a Directive (when Slovakia was attacked over its inadequacies in training requirements for heavy goods vehicle drivers).

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

nor become fundamentally divisive, around an East-West fault-line. Certainly, there are many obvious common features among the new member states (EU10), and these have led to a number of convergent positions on questions such as the EU budget, the criteria for the euro, economic reform, free movement of workers, or accession to the Schengen area – underlined recently by a commitment to cooperate on EU matters by the Visegrad countries (Czech Republic, Hungary, Poland and Slovakia). At the same time, convergence of EU10 views is much less evident in many other policy areas.

The diversity of the size, location, wealth and many other characteristics of the new member states tends often to lead them to adopt positions in Council that

Slovenia will be the first new member state to hold the EU Presidency – in the first half of 2008. The Czech Republic will be the next, in the first half of 2009; followed by Hungary in the first half of 2011, Poland in the second half of 2011, Cyprus in the first half of 2012, Lithuania in the second half of 2013, Latvia in the first half of 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.

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reflect their own individual and particular interests, and to form alliances with others of the EU25 on that basis.

Neither geography nor the date of becoming an EU member plays much role in the choices behind these alliances. 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 for effective engagement with the EU institutions have changed little, the greater complexity clearly mandates the earliest possible involvement in policy making, even greater planning, more time and resource allocation, the need to reach out to a broader audience and the formation of coalitions – all while paying particular attention to linguistic preferences. Indeed, the drafting of simple arguments backed by facts, objective analysis and implications for specific national, if not regional, markets and agendas has also become all the more required. In other words it is now more important than ever before to design and implement sustained lobbying strategies across the three institutions and increasingly the national capitals encompassing not only all governments, but NGOs, industry and other stakeholders.

In most policy areas,the EU is not an ‘EU15+10’.

It is quite literally, an EU25.

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

Introduction / Overview At a mechanical level, the integration of the new member states has passed off relatively smoothly. The EU institutions have adapted successfully to operating with more members and more languages. That said, not all the politicians, diplomats and officials in the enlarged EU take the same view of how well ten new member states and 15 old member states have created a new and fully-functioning EU25.

table has made this more time-consuming, even though the once-customary opportunity for every member state to speak has become rarer. Council insiders say that enlargement has had the effect of strengthening the role of the Presidency and of the Commission in brokering deals in the more complex geometry of the EU25, where debate shifts further into the corridors. It has also been possible to reach some previously elusive decisions – notably on the statute for MEPs, where the previous blocking minority was rendered too small by enlargement.

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

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

INTEGRATING THE NEW MEMBER STATES

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

Translation has presented an additional challenge – and provoked emergency measures in the days after enlargement, when it was apparent a crisis was brewing. The build-up of translation resources for the nine new languages (Cyprus is Greek-speaking) is due to be completed by the end of 2006, by which time the cost of translation 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 demand that 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 the pre-accession average of 37 pages.

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shown that coordination is more difficult, despite its plan to shift to greater collegiality. And appointing staff from the new member states has not been easy. The Commission is on track – just – for its overall recruitment goal of some 3,500 officials from the new member states by 2010. But maintaining geographic balance has been difficult. Of the six most senior appointments at the time of writing, two are Czech, two are Hungarian, one is Slovenian and one Cypriot. The appointment of a Czech deputy director general for external relations provoked the Polish prime minister to write to the Commission President complaining of discrimination. The quota of middle management positions for the new member states is still proving hard to fill because of insufficient numbers of qualified applicants.

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

Integration has not, however, been simply a mechanical matter.

New member states have often found themselves under stress in coping with the rhythm of EU business. It has been a particular problem in Council working groups, where diplomats, often with little EU experience, have been under obvious pressure with the mass of detail that has to be mastered.

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In all the institutions, they have often had to discover for themselves the arcane practices and procedures that govern EU affairs. Subtle forms of apartheid persist. The noble expressions of solidarity and historic opportunity that flow from political leaders are not always echoed closer to the ground. "We've got them, and we've got to put up with them", remarked one senior official from the EU15.

"Most of them don't know what they're doing yet, but at least they don't cause us too much trouble." Similar views are frequently expressed in private, and, in heated moments on certain occasions, in public too.

The volatility that has characterised governments in many of the new member states has often complicated matters.

Although some administrations have now survived a full term, and some have even won re-election, abrupt politicallyinspired changes among senior officials leave new member states with continuity gaps in EU business.

The presence of new member states in institutions also demands that time and resources are spent on training – and has often caused strain, and even resentment. "It's a big drain on us", said one official. "We're prepared to do it for the moment, but after another couple of years we expect them to start delivering". There seems to be a recurrent sense of mutual resentment between those who consider themselves part of an establishment under assault, and newcomers who feel they are being discriminated against and even patronised.

It is at senior political level that frictions of this type become most evident, according to some of those interviewed.

While conflict between national positions is the everyday routine of the European Union, some interviewees say it has assumed a “psychological” character since this enlargement. Assertiveness by new member states has on numerous occasions been viewed as “disruption” or even occasionally “impertinence” by those on the receiving end from the old member states. And the research shows that the affront felt by the new member states at any indication,

sometimes implied, that they are second-class member states is difficult to overstate. For some, it is clear that the sensitivity burned into their collective memory during the drawn-out, and often difficult experience of their membership negotiations has not yet been eradicated.

Senior government figures in some new member states claim that their previous administrations were too accommodating to Brussels. And countries that have undergone years of painful transition are frequently irritated to receive what to them appears as lofty advice from (EU15) countries that have not suffered such dramatic recent changes –including some who are reluctant themselves to bite the bullet on economic reform imposed by globalisation.

Rightly or wrongly, many of the clashes - over movement of workers, the Services Directive, accession to the Eurozone or the operation of competition policy – have nurtured a feeling in the new member states that the old member states sometimes tend to apply the EU rules only when it suits them.

Old member states too are not immune from resentment.

Some of their senior political figures express a sense of ingratitude at the demands they feel increasingly subject to from the new member states. Confronted with the more assertive approach of the new member states, now freed from the constraints of negotiation, regrets are sometimes heard that the EU failed to provide either adequate incentives or adequate controls to corral the behaviour of new member states: "The self-discipline that is supposed to take over once candidates become member states is not always enough to ensure the fastest and most effective integration" is a typical comment.

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

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THE SINGLE MARKET – IMPACT AT A GLANCE

The Services Directive

There is widespread relief that relatively few problems have arisen over implementation of EU rules. In compliance terms, the new member states no longer constitute a conspicuously separate bloc: they operate – and occasionally fail to operate – like older member states. Onthe-ground implementation and administrative practice is less than perfect, particularly in technical areas, critics say, highlighting the continuing need for efforts in competition, modernisation of infrastructure, development of capital markets, rule of law and government effectiveness, and broad action against corruption. They frequently identify Poland as the chief offender - but officials in new member states are quick to respond that the record of the EU15 is hardly spotless.

Poland led the new member states' opposition to what they saw as the dilution of the EU law to liberalise services. The amendments made in the compromise reached in the European Parliament weakened the law's support for companies from the new member states operating in the old member states, they argued. Poland wanted stronger support for cross-border competition, but did not prevail: a majority of member states, the European Parliament and the Commission had decided that discussion must come to an end.

The numbers game New member states have won praise for their record on transposing EU rules: at the latest count, they still perform better than the “old” member states with an average transposition deficit of 1.5% compared to 2.2% in the EU15. The EU25 average stands at a 1.9% deficit with only Malta and the Czech Republic exceeding it (along with Belgium, Ireland, Portugal, Greece, Italy and Luxembourg.)

Companies across the EU25 report that the extension of the internal market and the rapid integration of the new member states into the EU economy have allowed them to increase sales and expand operations thereby improving profitability through maximising cost and location advantages. And the widespread adoption of modern regulatory frameworks in areas such as financial markets, company law, accounting or intellectual property has created a better environment for business and growth.

Although the new member states were solidly in favour 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. The influence of the EU10 proved to be too little and too late.

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Sector-Specific Focus After the brief outline of single market implications of enlargement, the present section provides an overview of accession’s impact on specific policy sectors and issues.

IMPACT IN ‘SENSITIVE’ AREAS The impact of the new member states on policy discussions has been much less than feared, particularly in the areas of social, consumer and health policy, considered particularly sensitive during the accession negotiations.

In the run-up to enlargement, the EU15 made some strenuous efforts to finalise some difficult dossiers before the acceding states could gain a voice in the discussions.

And since then, the rate of legislative initiatives has slowed across these fields – for reasons unrelated to enlargement.

The scope for potential conflict or difficulty in operating as an EU25 in some of these sensitive areas has therefore been reduced for the moment.

But this is not the only reason why work in the Council in these fields has not been impeded overall by the presence since mid-2004 of the new member states. The record shows that the newcomers have intervened relatively little in Council working groups, they have rarely been determining factors in blocking majorities or minorities, and they have not presented major objections to the business that has gone through the Council. "On the whole, they've kept their heads down" is a typical comment from those close to Council business.

At worst, the impact - in these fields and right across the range of Council business - has been purely mathematical.

Discussion has occasionally been slowed simply because

the number of interventions has risen from 15 to 25. But even this has been less of a problem than anticipated. One reason is that the new member states have frequently passed up their option to intervene. The other main reason is that, as a response to the sheer numbers around the table, Presidencies have chosen to decrease their use of the traditional table-round as a routine discussion method for Council business.

Another factor that has played into the operations of the EU25 Council – and blunted the risks of slowdown - is that the new member states have been (and freely admit that they still are) on a sharp learning curve. This, combined with their relatively limited resources, means they have not always been in a position to intervene incisively in Council debates. Compared to the EU15, the new member states have small Permanent Representations, with staff who often have limited professional experience and limited back-up from their ministries back home. The limited level of intervention has been particularly noticeable in numerous Council working groups – and even more conspicuously in the social, consumer and health fields, where the dossiers often have a highly technical content.

1 EMPLOYMENT AND SOCIAL AFFAIRS

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

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undergoing a demanding transition process has shifted the balance of forces in the EU's discussions of virtually its entire social agenda, right up to and including the Lisbon strategy.

The consequence has not always been measured in terms of direct impact on EU legislation or regulation – for instance, the major debates on free movement of workers or the Services Directive have not gone entirely in the direction that most of the new member states would have wished. Nevertheless, the importance of this new influence on the overall EU approach to social affairs should not be understated.

At a time when so many firmly-held beliefs among older member states have been coming under challenge – notably as a consequence of globalisation – the new member states have been important factors in the emergence of an EU-wide consensus that the status quo cannot be maintained if the EU is to remain prosperous.

The EU is still seeking agreement on the most effective actions to undertake in response to that consensus (a highly contentious discussion, likely to roll on for many years to come), but the proponents of focusing on competitiveness have found their ranks swelled by enlargement, at the expense of the proponents of a primary focus on cohesion.

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

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

The hunger for growth-led policies is driven by the new member states’ much lower levels of prosperity. The latest figures on inactivity (those not working as a percentage of the total available workforce) show a range from a low of 19.9% in Denmark to a high of 39.5% in Hungary and 41.7% in Malta. And industrial hourly wages are comparatively high in Denmark, Germany, and the UK, for instance, and relatively low in Latvia and Lithuania.

The higher levels of unemployment and lower levels of wages will continue to induce a strong push from the newcomers for a generation, with a consequent inevitable impact on EU policy formation.

the Netherlands, a decision on the government's plans to open the labour market has been deferred to the end of 2006 because of strong parliamentary opposition.

Only Germany and Austria have indicated they will maintain their restrictions until 2009. Meanwhile, anecdotal evidence accumulates that workers are migrating only to the areas where there is work.

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

The wide support the new member states brought for maximum liberalisation of services was insufficient to win the debate for liberalisers, but it did mean that the compromise reached was further towards liberalisation than it would otherwise have been. It is no accident that the European Commission, which shared the disappointment of the new member states (and some of the older ones) at the outcome, immediately came out with a clarification of member states' responsibilities to facilitate the posting of workers.

In parallel the new member states have sometimes been vociferous in their criticism of excessive regulation on working time, or inappropriate focus on supporting lame ducks – which is how many of them view the EU's projected fund to soften the local impact of globalisation.

Similarly, although most of the EU15 invoked the Accession Treaty to limit access to their labour markets for workers from the new member states of Central and Eastern Europe, diligent lobbying by the newcomers over the last two years and extensive studies discounting fears about floods of cheap labour or lengthened unemployment queues has led to a relaxation of controls in most member states in mid-2006: Italy, Spain, Finland, Portugal and Greece have now joined the UK, Ireland and Sweden to lift theirs completely. Belgium, France, Luxembourg, and Denmark are easing restrictions. In

At the same time, efforts are being made – at national and EU level – to accelerate the inevitably long process of creating an EU of equal standards across all its member states.

For instance, the European Commission took action in 2005 to highlight the need for safety in the notoriously dangerous construction industry in the new member states.

The EU guidelines for employment 2005–2008, while aimed at all 25 members of the European Union, make special provision to deal with some of the challenges that have arisen with enlargement in the areas of employment, social integration, and social and regional cohesion.

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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 labour costs in the latter. (Examples in Poland include Shell, Philip Morris and Volvo.) But there are many other motivations too, ranging from transport logistics and access to markets further east 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 plants within the EU – but this has benefited old member states as well as new ones: VW has switched production from Spain not only to Slovakia, but also to Belgium.

Concerns surfaced in Germany and Belgium that EU funding to the new member states was being used to attract companies to relocate there, obliging senior Commission officials to publicly reject the suggestion.

Figures suggest, however, that only a minor part of investment decisions by EU15 companies are substituting investments in the EU15 in favour of the new member states. Over 90% of these investments represent “fresh money”, which companies would not have invested in the old member states in the first place. The Commission has 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.

2 HEALTHCARE

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

One is that a huge gap now exists between levels of healthcare spending across the EU25: the resources available for healthcare in the new member states are of a different magnitude to the average in the EU15, because of their markedly lower levels of prosperity. Over the short term, this has amounted to no more than the continuation of the pre-accession situation. But in an EU increasingly seeking to equalise opportunity, even in areas where there is only the most tenuous EU competence, the prospects are that increased tensions will result from this gap.

Among the most salient practical consequences, there is a drain of healthcare skills from the new member states to the old member states – where higher incomes present a tempting incentive. The longer-term implications are that healthcare provision in the new member states will continue to suffer until they can offer comparable income levels.

A reverse process, however, is underway in terms of patient provision: private (and in some cases public) healthcare organisations in the old member states are sending patients to the new member states, particularly for surgery, because standards are high and costs are low. The severe imbalance is lending new urgency to the EU's attempts to forge a policy relating to freedom of movement for patients – which was a complex subject even among the EU15, with their broadly similar levels of healthcare provision, and threatens to become unmanageable in the EU25.

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

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Relocation

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tems "vary significantly" in how they respond to the needs of the populations and patients that they serve.

However, while divergences will persist – in everything from healthcare entitlement and finance and delivery mechanisms to the mix between state provision and market mechanisms – there is some discernible shift (with which the new member states were content to go along in the discussions on the conclusions) towards convergence on preventive measures, the area in which most new member states have until now been significantly lagging behind the EU15.

The second major new factor is that enlargement has introduced into the EU lower life expectancy and higher morbidity – including, conspicuously, localised high levels of AIDS/HIV. Only months after the 2004 enlargement, the Council held a debate on the need for a coordinated approach to the fight against HIV/AIDS in the European Union and the neighbouring countries. It was already apparent that new cases of HIV infections were rising alarmingly in the Baltic states, particularly among young people, even if epidemiological trends in Central and South-Eastern Europe showed stabilisation at low levels.

3 PHARMACEUTICALS

It remains the case that the pharmaceutical industry in the new member states consists almost entirely of generic manufacturers, while the European research-based industry is almost entirely in the EU15 – with a consequent divergence of view over issues such as research funding and intellectual property. But because the major review of EU pharmaceutical legislation was completed just before the 2004 enlargement, much of the scope for conflict over rights and procedures was averted between

old and new member states. Above all, protection against generic copying was fixed at a higher level than the new member states wanted to see. And the tough supplementary protection certificate terms the EU15 imposed on the candidates to limit premature patent leakage have proved to be watertight so far, with far less research industry concerns now than there were during the negotiations.

The erosion – even implosion - of the European pharmaceutical market that EU15 pessimists predicted has therefore not occurred. Enlargement has not provoked a meltdown, either commercially or in terms of safety.

However, the accession of ten poorer countries has not significantly enhanced the market potential for western firms (who were in any case largely represented in these countries long before 2004, both for sales and for conduct of clinical trials).

In fact, for the research-based European industry, enlargement appears to have brought increased administrative problems that are currently disproportionate to the benefits to be gained. The mechanics of product launch in an additional ten countries – nine of them small or very small – are complex, and pricing negotiations now have to take place with 25 member states instead of 15. For pharmaceutical manufacturers the single market is not functioning any better than it was, but enlargement has provided some additional source channels for parallel distributors.

Research-based manufacturers still encounter frequent problems relating to the imperfect implementation of EU rules – failings that are sometimes seen as accidental, sometimes as the consequence of a lack of administrative or financial resources, and sometimes as deliberate obstructionism. Poland comes in for some particularly critical comment in this regard. There are persistent

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The main winners so far have been manufacturers in the new member states that undertook the often painful task of improving their positioning in preparing to meet more demanding standards. In this respect, Poland is seen as having conspicuously lagged behind the others – partly because of insufficient communication between the domestic industry and the country's negotiating team in the years preceding accession. At the same time, the thriving generics industry in the new member states is feeling increasingly vulnerable to competition from India and China.

In terms of influence on EU policy, there have been few legislative initiatives since 2004 that have offered scope for intervention by the new member states. But in general the profile of the pharmaceutical industry in the new member states has not led them to urge strong support for research interests. They largely opposed the enhanced data protection provisions in the paediatric medicines regulation adopted early in 2006, and Lithuania and Latvia have even sought the right to take advantage of the Doha-inspired compulsory licence concessions the EU has agreed for developing countries for AIDS/HIV treatments. While neither of these attempts proved successful, the new member states are proving increasingly successful at extracting linked trade-offs for dropping their demands. As one senior European research-based industry executive commented: "They see everything differently from us: they're even trying to twist the EU's new research framework programme into paying for their roads rather than for drug research!"

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

one of the most controversial in recent years – with many new member states fiercely opposed to the technology on ethical grounds. Whatever the rights and wrongs of this debate, one of the possible outcomes is that the EMEA’s centralised registration procedure for medicines could in the future be trumped by ethical concerns held nationally by governments which oppose stem cell research.

4 CONSUMER PROTECTION

Although the new member states have largely adopted the EU's consumer protection acquis with resultant improvements in contract laws, statutory rights and product safety, many of the predicted challenges in implementation remain to be overcome. The implantation of a culture of consumer protection appears to be a slow process, handicapped by limited resources and lack of expertise.

Most of the new member states have now managed a degree of consolidation among the numerous small and weak consumer protection organisations competing for attention and funding in the run-up to enlargement (Lithuania has not yet been able to create a single body to represent 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 of consumer rights, making it hard to establish strong organisations.

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

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

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Lack of a consumer tradition possibly explains some of the teething problems with the implementation of EU consumer law. There has, for example, been sharp criticism of the new member states' performance with the RAPEX (Rapid Alert System for Non-Food Products) system of risk notifications under the general product safety Directive. While Hungary has been the most active of all EU25 in serious risk notifications, and the Czech Republic and Slovakia showed average performance, most other new member states were functioning at a low level of reporting intensity, with Cyprus, Malta and Latvia way down the ranking. The very uneven distribution of notifications (and reactions) between member states "persists beyond any possible justification", say monitors of the system, and "some member states urgently need to improve their participation".

ENVIRONMENT Overall, the already-evident trend within the EU to temper environmental policy with pragmatism has been reinforced by enlargement – but it would be wrong to claim that enlargement has initiated the process. Since José Manuel Barroso became President of the 25-strong European Commission in 2004, environmental policy appears to have enjoyed less prominence: despite having been added to the Lisbon Strategy in 2001, it was given less attention in the Barroso Commission's revamp (“Working Together for Growth and Jobs”). Accordingly, the mid-2005 Commission agreement to launch seven thematic strategies for environment was accompanied by a health warning that this priority "must be compatible with other policies, notably those aiming to guarantee competitiveness".

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

an unenviable legacy of environmental problems, only served to attenuate still further the earlier emphasis given to environmental policy. The Commission's environmental policy review published in early 2005 openly conceded that enlargement had changed the agenda, and promised to introduce simpler legislation and to focus on areas where implementation of EU rules is proving most problematic for the new member states.

The harsher economic realities of recent years had already started to dampen enthusiasm for expensive strategies, while growing member states’ concern with the perceived intrusiveness of some EU legislation was raising support for subsidiarity and deregulation. As one EU figure close to the evolution of environment policy expressed it: "while the 1990s were characterised by the drive to impose environmental considerations on all EU policies, this decade is now seeing the reverse: an insistence that environmental policy should take account of all other EU policies."

An illustration of the discernible influence of enlargement on environment debate is offered by the agreement reached in December 2005 on the Directive on extractive industries' waste. This demonstrated a shift - in the European Parliament and in the Council - towards a more industryfriendly approach, attributed largely to the influence of the new member states, with their strong mining sectors and their relatively low levels of regulation. For example, Poland and other new member states successfully opposed measures in the extractive industries waste directive which would have imposed strict safety requirements on closed mines. Even so, Hungary voted against the Council's common position.

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

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Czech Republic were among the last four member states to obtain approval for their national emission allocation plans under the EU’s emission trading system. Both Malta and Poland (along with Luxembourg) received written warnings in 2005 for failing to report their 2003 greenhouse gas emissions – impeding the EU from fulfilling its reporting obligations under the Kyoto Protocol.

Estonia, Latvia and Malta came under attack in mid-2005 for failing to implement EU rules on noise limitation at airports. The European Eco-Management and Audit Scheme has had a slow take-off in the new member states, with few incentives for companies to participate.

Some differences remain in the political pressures driving environment policy in the new member states and in the EU15: for instance, while climate change is one of the principal public concerns about the environment in Western Europe, among the new member states it is waste disposal that features high on the list – unsurprising, since Malta and Lithuania have no alternatives to landfill for waste disposal, and Poland and Cyprus practically none. The predominance of smaller firms in the new member states also influences their approach to many environmental debates. Malta and Slovenia were key players in generating the compromise text on REACH in late 2005, which included their proposal to exempt small amounts of manufactured or imported substances from registration (a subject of great importance to their small economies). And Hungary was a key ally of the UK in proposing the "one substance, one registration" principle.

Poland wanted the construction sector removed from the scope of the new legislation – notably so that cement would not be covered – and there was strong support from new member states for switching to case-by-case decisions on the length of authorisation, rather than fixed blanket terms.

But it would be inaccurate to suggest that the impact of enlargement has been a consistent and unremitting dilution of environment-friendly pressures. Delays and deficiencies in compliance by old member states far outnumber the peccadilloes of the newcomers. And throughout 2005, Hungary was one of the member states calling most loudly for a more ambitious Directive on groundwater quality. Estonia, Latvia, Lithuania, Poland and Slovenia were among the few member states to meet the EU deadline on public access to environmental information.

Commission officials noted six months after enlargement that the arrival of the new member states had not led to any significant increase in complaints about failures in compliance – just seven out of a total of more than 600 for the EU25. And the highest investment levels in the environment are in the new member states, in order to come into compliance with EU rules, according to the latest indications from Eurostat.

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

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of requirements under the proposal to cut the sulphur content of marine fuels. In another example with regard to batteries legislation, most new member states were happy to back the weakening of the Directive. And new member states were also prominent in urging flexibility in environment policy during the October 2005 Environment Council's review of the relationship between environmental strategy and competitiveness. They stressed the need to take account of regional geographic and climatic differences in framing legislation: "what's right for the north-west of Europe is not necessarily right for the south-east", said one minister.

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COMPETITION POLICY Although competition is one of the few areas where the new member states still lag behind the EU25 average in transposition of legislation, there has been little evidence of dramatic deficiencies in the operation of EU competition law in the new member states. The competition regimes they set up over the years before accession have proved to be by and large in line with EU requirements, and to have tooled up on staffing for effective enforcement. The national authorities have been fully integrated into the European Competition Network, and efforts are underway to strengthen national competition authorities in Estonia, Latvia and Slovenia.

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

As regards Commission control of public subsidies, the latest EU comparison showed state aid averaging 1.35% of GDP for the new member states, higher than the EU25 average of 0.49%. Much of the EU activity has related to questions about the legitimacy of aid agreed prior to accession. The provisions of the Accession Treaty (under which certain existing aid measures in the new member states were exempted from EU review) have been the object of continuing refinement, in the light of specific cases.

Assessment of aids for the restructuring of the banking system in the Czech Republic, Hungary and Slovakia led to largely positive judgements, but the Commission decided to check measures for the Czech Agrobanka Praha and the Hungarian Postabank which it suspected were applied after accession and incompatible with the common market.

Similarly, a deal was reached over the derogation allowing Slovak tax concessions to US Steel Kosice until 2009:

when it became clear that the company had not respected the production cap imposed as a condition, the Commission cut the permissible aid. And Malta has agreed to phase out preferential tax regimes for offshore trading companies by 2010, following a Commission recommendation in early 2006. An investigation into restructuring aid for major Polish shipyards demonstrated

Banking: Poland wanted to go it alone Poland's stand-off with the EU over an Italian-German bank takeover soured the integration atmosphere.

On the grounds that Polish national interests were at stake, the Polish government tried to prevent the merger of two Polish subsidiaries (Pekao S.A. and BPH) caught up in the deal (involving UniCredito and HUB), despite the fact that the EU had already approved the merger. The Polish government cited fears of job losses – although resistance was also inspired by the desire to protect Poland's last state-owned bank from what would be a bigger new rival. The Polish banking market is already largely dominated, in its capital base and its assets, by foreign banks. The domestic manoeuvrings to impede the deal also brought the government into open conflict with the country's central bank, which it tried to pressure into blocking the takeover – raising concerns across the EU about the government's commitment to central bank independence. The European Commission formally attacked the Polish government's action as a breach of competition law and of the EU rules on free movement of capital, but in early 2006 the Polish authorities agreed a facesaving compromise with the Italian bank, winning some 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 Commission has also been energetic in pursuing cases in the new member states. Within days of enlargement in 2004, it launched an investigation into assistance for Huta Czestochowa, Poland's second largest steel company.

In the event, the Commission cleared the new assistance as an instrumental element in the company's sale, but it demanded repayment of €4 million of what the investigation revealed to be earlier and unauthorised state aid – the first subsidy recovery case in a new member state. Since then it has kept up a steady stream of investigations and rulings, ranging from probes into long-term power purchase agreements in Poland, to requests to Hungary to abolish restrictions on the provision of cable TV services.

But the role of the national authorities in the new member states is also growing, under the new EU merger rules, and the Commission judges national authorities to be ready to take on this task. The Tesco takeover of Carrefour's stores in Slovakia was referred to the Slovak authorities because of its predominantly local rather than European significance – the first time a transaction was referred to an authority in a new member state.

Particular areas of concern remain. Poland and the Czech Republic still need to speed up restructuring of their steel sectors to achieve viability by the end of their transitional period for state aid in 2007, by means of privatisation, a switch to higher value products, and tougher cost-cutting. The menace hanging over backsliders is that they may be required to pay back state aid in 2007 if they have not attained viability.

ENERGY Enlargement has increased the EU's dependence on energy imports just at the time when security of supply has been driven to the top of the agenda notably by questions over Russia's reliability as a gas supplier and the Middle East situation. The EU's greater needs are intensified by the fact that its new member states are both power-hungry because of their rapidly growing economies, and generally less efficient in their use of energy.

Just how this increased dependence will translate into EU legislation remains to be seen. As in so many other sectors, the experience, approach and influence of the new member states vary widely. Poland and Cyprus are, for instance, under attack for failures in promotion and use of renewable energies – while Latvia, Slovakia and Slovenia have green electricity production targets and performances that compare well with the EU15, beaten only by Austria and Sweden. The Czech Republic is one of the principal EU producers of biodiesel (around 60,000 tonnes per year), although far behind Germany, France and Italy. Slovakia and Lithuania are also small producers. And Poland is one of the principal producers of bioethanol, although trailing France, Spain and Sweden. The Czech Republic, Hungary, Latvia, Lithuania and Slovenia are judged to be imposing significant administrative barriers to renewable energy deployment, with lengthy planning processes, conflicting and complex procedures, a lack of lead times to obtain necessary permits, and insufficient consideration for potential sites for renewable electricity production in spatial planning.

As concerns the single market for energy, the new member states were initially congratulated for moving faster than many of the EU15 in developing a competitive electricity sector, although opening their gas markets to competition had little impact on customer behaviour – because the low

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the complexity of verifying compliance when there are multiple measures taken by multiple public authorities in support of a restructuring process that stretches well beyond the date of accession: the Commission has put the onus on Poland to demonstrate that a legally valid and binding aid decision took place before accession.

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gas prices still enjoyed by households and smaller firms provided little incentive to switch. However, most of them are currently facing Commission accusation of failing to transpose the market liberalisation Directives properly.

Poland, the Czech Republic, Latvia and Cyprus are also under attack for failures in the promotion and use of renewable energies. Oil stocks have been maintained at required levels by all the new member states except Cyprus, which is now subject to Commission action.

The Context: Increased Dependence on Russia Many of the new member states feel particularly vulnerable in energy terms. Conspicuously, the Baltics are a “gas island”, linked only to and supplied only by Russia, and in particular by just one company, Gazprom - provoking both Latvia and Lithuania to request EU authorisation to delay their market opening. Lithuania was reminded sharply of its vulnerability when Gazprom imposed a sudden 40% price increase in early 2006. MEPs and senior political figures from the Baltic states openly accused Russia of using energy as a weapon. They urged rapid joint EU action to ensure security of supply, and supported their case with lurid warnings of the threats from totalitarianism.

Many other new member states also rely heavily on Russian gas – and are, from their own history, wary of Moscow's apparent readiness to deploy energy for political purposes. Many of them also suffered supply cuts in early 2006. In response, Poland, already deeply irked by exclusion from the Russian-German plan to build a gas pipeline under the Baltic Sea, renewed calls for an EU-wide approach to energy, backed by Lithuania. Eight countries of Central and Eastern Europe also put in a bid for EU funding to create shared gas storage facilities, new liquid natural gas terminals, and other fall-back mechanisms.

So far, however, despite nominal endorsement of the concept by the EU's spring summit in 2006, and general EU acknowledgement of the need for diversification of

supply and strategic development of its energy networks, little progress has been made. The new German government has given no sign of backtracking on the deal signed by its predecessor with Russia. And there is little impetus for new cross-border interconnection, partly because of resistance from local incumbents. Suggestions from Brussels of greater regulatory intervention to open up the energy market have so far received a cool response from founding member states.

Other new dimensions have been added to the EU's energy debate by enlargement. It has brought with it coal from Poland, one of the world’s largest producers, revitalising EU interest in related technological development. After more than half its 80 pits were closed, and employment was cut from nearly half a million to just over 100,000, a €1 billion investment programme has brought new efficiencies to the sector. However, while business prospects improve in energy-shocked Europe, the profits of Poland's mining operations were declining in 2006, in line with the fall in world coal prices and stiff competition from Russian gas and coal imports from overseas. Coal restructuring plans to 2010 have been approved for Poland and Hungary, and aid has been authorised for closures to assure the Czech coal industry's viability through to 2030.

Enlargement has also brought new nuclear installations into the EU's power generation mix, and the debate is influencing and is influenced by the experience of the new member states. The Czech Republic and Slovakia each bring six additional nuclear reactors; Hungary brings four; and Slovenia and Lithuania one each (and Romania will add another one, and Bulgaria another four). The largely successful experience with most of these (in the main western-designed) plants offers support to the pro-nuclear camp. The Czech Republic is already examining the possibility of expanding its nuclear generation capacity, and further investments are planned at the Mochovce plant in Slovakia.

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internalisation of external pollution costs so as not to increase costs for their transporters, obliged to travel long distances – in opposition to the determination of more central countries to spread the costs engendered by their situation as transit countries. Estonia and Malta were among the countries that voted against the Council's common position in April 2005. France called in December 2005 for tougher rules to limit road freight cabotage and to impose driver attestation rules on EU member states – as a way of bringing the new member states back under the closer control imposed on them before they joined.

These nuclear debates also feed into calls for review of German and Swedish decisions to phase out nuclear power. Against this background Belgium and Italy are reviewing their positions on nuclear power, while the UK announced in July 2006 plans to build new nuclear plants as part of the government’s objectives to cut CO2 emissions by 60% by 2050 and to secure energy supplies.

Opponents of nuclear energy however rapidly seized on the potential hazards to reinforce their arguments, particularly when the Czech plant at Temelin had to be investigated for leaks just weeks after accession.

Poland formed part of a blocking minority on harmonisation of driving licences in December 2005 (but more because it was already introducing new licences at national level and did not wish to have to repeat the exercise). Within days of their accession, Slovakia, Hungary, Czech Republic, Estonia and Malta joined forces with existing opposition to the EU's proposed harmonised driving ban for lorries over weekends and holidays, assuring a blocking minority, and leading in 2005 to the eventual withdrawal of the 1998 proposal.

TRANSPORT:

Rail Transport

Road Transport New industrial activities in the new member states are generating demand for containerised transport on a large scale, which is being captured in the main by the road transport sector. Lorry traffic between Germany and Poland virtually doubled in the first year of enlargement.

Road freight transport is expected to double by 2020 in the new member states.

For geographic as much as political reasons, the new member states have tended to side with other peripheral countries (and the road transport lobby) in the debate over the Euro-vignette road-user charge. Most have resisted the

The rail lobby in the new member states – and in the EU15 - has not been able to capitalise fully on enlargement's potential for rail market growth. Despite increased trade, increased distances, and a stronger market position than in the EU15, freight traffic has seen a decade of decline, only recently stabilising (except in the Baltic states, where Russian fuel exports have driven traffic growth). And crucially, the EU's mid-term review of its transport strategy has shifted away from unconditional support for a switch from road to rail, while the emerging Euro-vignette reveals similar EU reluctance to handicap road freight.

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

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There are huge unmet investment needs to modernise rail systems in the new member states, and the vigorous restructuring that accession has obliged governments to undertake has largely blunted any collective appetite for further radical liberalisation measures, particularly since they are already on a sharp learning curve in establishing EU-compliant public service contracts for passenger services. The EU framework for public transport remains in any case uncertain as the difficult discussions over compensation and exclusive rights have not advanced significantly.

Against this background, the new member states' input to major rail discussions has not followed a clear pattern: the December 2005 Council agreement on the third rail package – at a lower level than the European Parliament wished – saw, for instance, Slovakia among the champions of liberalisation of international rail passenger transport (even – with the UK - favouring liberalisation of domestic services), while Hungary sided with France and Belgium, the most virulent opponents. In fact governments from the new member states have shown very little interest in seeking any type of common position among themselves on rail transport issues.

Shipping Enlargement has not only increased the size of the EU fleet (which now represents 25% of total world shipping).

It has also pushed up the detention rate of vessels flying EU member state flags, notably with Malta, Cyprus, Estonia, Lithuania, and Latvia at fault – provoking the Commission to propose a new package of maritime safety rules in November 2005. On the Commission plan to scrap the block exemption from EU competition rules that liner shipping conferences have long enjoyed, the Baltic states and Cyprus are aligning themselves with the reticence of Germany, Italy and Denmark, the old member states most heavily involved. And the Commission is proposing tougher rules on employment of seafarers, largely in response to Irish urgings, since

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

AGRICULTURE Despite the anxieties over bringing in new members with a large farming sector, structural adjustments are reducing agriculture's share in GDP and employment. Nevertheless, at accession agriculture represented 4.1% of the GDP compared to 2.1% in the EU15 and accounts for 12.5% of total employment in the EU10 (and up to 19% in Poland), compared with 4% in the EU15. Meanwhile, EU support and foreign direct investments have helped to restructure and modernise agriculture and food processing. And enlargement has boosted farmers' incomes in the EU10 without damaging farmers' incomes in the EU15.

Against this background it is no surprise that the new member states learned rapidly how to make use of the EU facilities for which they had become eligible. Eight new member states (excluding Slovenia and Cyprus) using the single area payment scheme won early direct payments – from October instead of December 2004, after pressure from Poland and Hungary. Hungary received permission for crisis distillation of 50 million litres of wine in October 2005 – the first new member state to obtain such authorisation (although in the wake of similar permits for France, Spain, Italy and Greece, for a total of 780 million litres). And Latvia sought EU aid for January 2005 storm-damage to its forestry. But they also learned that they had to conform to EU procedures – as Poland found when it wanted to release wheat stocks onto the market: it could not do so before receiving the authorisation from the relevant EU committee.

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

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TAX In the run up to enlargement, the liberal lobby in the EU were excited by the prospect of wider support for the concept of tax competition with the accession of new member states with low taxes, but the same prospect provoked anger among member states with higher tax rates.

As early as the autumn of 2004, there were French calls for retaliatory cuts in EU regional aid to new member states that entice businesses to relocate there by setting low tax rates. Fears spread among high tax countries of a downward spiral – intensified when Austria cut its corporate tax rate from 34% to 25% in early 2005, in an overt response to the 19% rate introduced in 2004 by neighbouring Slovakia.

In the area of direct taxation the new member states have had little chance so far to influence EU tax policy due not only to the unanimity rule, but to the very long process under way to put forward new proposals such as the common corporate tax base, not expected before 2007 at the earliest.

Moreover, closer scrutiny reveals that while some of the new member states have relatively low corporate tax rates, firms enjoy fewer tax loopholes. Slovakia introduced its new 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 no deductible business expenses. The principal motivation

behind the lowered tax rates in most of the other countries of Central and Eastern Europe was similarly to compensate for the numerous loopholes that they were forced to abandon when accession made them subject to EU state aid rules.

The VAT Spat Some of the new member states played a highprofile – if ultimately incidental - role in the EU's long-running debate over VAT levels. In early 2006, Poland, the Czech Republic and Cyprus became embroiled in a battle over lower VAT rates for labour-intensive services. A compromise, extending until 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 these three new member states refused to sign up to the deal unless they obtained similar extensions to some of the reduced rates they were granted under their Accession Treaty, but which expire in 2007.

In the end, under strong pressure, including from the European Commission, they relented – with Poland the last to hold out, until it won some small concessions. But the episode generated strong feelings on both sides. New member states felt they were being bullied and discriminated against, despite the flexibility they had shown over the financial perspectives deal. Old member states felt their business was being disrupted by impertinent intrusions, and issued thinly-veiled warnings about the consequences of non-cooperation.

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

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JUSTICE AND HOME AFFAIRS Some of the toughest challenges for this enlargement arose from the sensitive areas covered by justice and home affairs. Security concerns over new borders to the south and east, the emergence of large-scale terrorism in Europe, and the recent history of most of the new member states – as well as the recent establishment of new areas of EU policy – had ensured maximum attention to questions of law and order, migration, corruption, and organised crime.

The new member states have taken on board EU rules with broad success – such as the framework decision on money laundering and confiscation of the proceeds of crime (although some of them are not responding rapidly to identified gaps - such as Latvia's lack of a value confiscation procedure used when the proceeds of a crime cannot be confiscated). Poland had problems with the European arrest warrant in 2005, because its own implementing law was held by the Polish constitutional court to flout the ban on extraditing Polish nationals. The government is moving to rectify the problem, and the system proved its worth with the extradition of a suspect from Poland to Belgium in 2006 in a high-profile murder case. (Note that the German Federal Court has also declared the warrant void.)

But the new member states still remain outside the Schengen area of open internal borders: identity checks are still carried out on travellers crossing the internal borders between the new and old member states.

Although they apply the Schengen acquis on police and judicial cooperation, border controls can be abolished only when the EU says so – and that depends on having the new Schengen Information System II in place (which could happen in 2007), and on each of the new member states demonstrating it meets all the rigorous conditions (which may happen in 2008). The new member states are keen to see progress: all of them except Poland urged

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

EXTERNAL RELATIONS Arguably, it is in the area of foreign affairs that this enlargement has been most influential. In virtually all other areas of EU activity, the EU15 were already wellresourced, and the added-value of new member states has not always been critical. But in this field, the new member states brought expertise that the EU simply did not possess – particularly in relations with Eastern Europe, and above all, with Russia.

Within months of their accession, the new member states had the first major opportunity to bring their special skills to bear, when rivalries over the contested presidential election in Ukraine threatened to boil over into serious civil unrest. It was the Presidents of Poland and Lithuania who were in the vanguard of the international efforts to defuse the tensions. And a European Parliament delegation that went to Ukraine to monitor the December re-run of the poll was led by Poland's former Europe affairs minister Jacek Saryusz-Wolski, with Sarunas Birutis of Lithuania, Grazyna Staniszewska of Poland, Jiri Mastalka of Czech Republic, Irena Belohorska of Slovakia, and Latvia's former prime minister Guntars Krasts. Their familiarity with the personalities, the issues and the language enabled them to deal with all sides to the dispute in a way which even the most seasoned experts from the EU15 could not offer.

The new member states have also played to their strengths as honest brokers on subjects where the EU15 have, for whatever reason, sensitivities. So it was that

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In early 2005, when EU foreign affairs ministers heard Commission President José Manuel Barroso set out his plans, only Slovenia's Dimitrij Rupel spoke, to urge early debate on the western Balkans and Kosovo – at a time when the EU was keeping quiet on the subject. And in countless exchanges with neighbours to the east, the new member states of Central and Eastern Europe have been able to bring new expertise to the EU's reflections.

Ján Kubis of Slovakia is the EU Special Representative for Central Asia, and his compatriot Miroslav Lajcák is the Personal Representative of the EU High Representative for the Common Foreign and Security Policy on Montenegrin dialogue.

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

EU25 policy has also had to take account of the increased Atlanticist tendency brought by new member states – born in part from the Cold War legacy and in part from their diasporas in the US (and which makes all the more anguished the resentment most of them feel at still being denied the visa-free access that only Slovenia currently enjoys).

But there is no monolithic view brought to foreign affairs by the new member states - on the Ukraine, for instance, while Poland lost no time in 2006 in urging early EU membership, 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 shifted the geopolitics of 21st century Europe is evident from an apparently minor event like the European Security and Defence Policy orientation course held in early 2006 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 security and defence issues, and creating a common security culture", was held in Vilnius – a city which little more than a decade ago was a city within the USSR. This was the first such seminar to be held in a new member state, and the first seminar aimed specifically at Eastern European countries.

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the Luxembourg Presidency pushed Slovakia into the limelight in early 2005 by asking its prime minister to spell out the EU position on Iraq at the EU summit with US President George W. Bush – appropriately, since Bratislava then hosted the Bush-Putin summit the following day.

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THE COMPROMISE ON THE FINANCIAL PERSPECTIVE High drama had been expected from the debate that began shortly after enlargement over the European Union's next financial perspective, setting out the budget framework for 2007-2013. But few imagined in 2004 just how long and tough the talks would be – or guessed how influential the new member states would prove to be in the outcome.

The saga of missed deadlines, distractions and histrionics ran right through three consecutive Presidencies of the EU. But it settled early into a fundamental confrontation between those who wanted to spend more and those who wanted to spend less. As beneficiaries, the new member states were naturally sympathetic to the camp favouring higher spending. By the same token, as beneficiaries rather than contributors, their weight in the discussions was, at that stage, minor.

Tensions started to rise when no agreement was forthcoming at the end of the Dutch Presidency in December 2004, and the issue passed to the Luxembourg Presidency, with a new six-month deadline for political agreement. But external events – not least the rejections in France and the Netherlands of the EU Constitution – diverted the EU's attention in the run-up to the June 2005 summit. In addition the Visegrad countries (Poland, Hungary, the Czech Republic and Slovakia) and the Baltic states were demanding a bigger share of the booty, while Greece, Portugal and Ireland were reluctant to see their share decreased. The nail in the coffin was, however, the incoming UK Presidency's insistence on a tighter and more focused budget than Luxembourg was proposing.

As the arguments rolled on, the priority of the new member states started to shift away from a generous settlement and towards a settlement that would allow them to plan how they would use the funding from the start of 2007. Poland offered to give up €1.5 billion in the dying moments of the failed June 2005 summit, in a last-ditch bid to win agreement, and was immediately backed by Czech and

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

Once the UK Presidency commenced (in July 2005), it showed no urgency in re-opening discussions. In part it was distracted by other matters (notably the July bombings in London); in part, in some opinions, it was Machiavellian; and in part, it may have been simply negligent. But as early as June 2005, the inaction provoked the Lithuanian Commissioner Dalia Grybauskaite to let her feelings show through in criticism of the UK delay. Hungary rapidly proposed a stop-gap three-year financial perspective – although the Czech Republic dismissed such a solution as too short-term to be of any use for developing the inevitably long-term cohesion policy projects such as high-speed rail.

Many of the new member states were critical of the constraints attached to access to the new funding – particularly the calculation of absorption capacity. Breaking with their aversion to presenting themselves as a bloc, the new member states even mooted in November 2005 a common letter to the UK on the urgent need for a deal. Just before the December summit, the Visegrad four actually sent one - while outgoing Polish President Aleksander Kwasniewski openly attacked the UK for a lack of solidarity.

The UK, emboldened by the evident willingness it had perceived in June among the new member states to cut their benefits in pursuit of a deal, calculated that their need for a deal would overcome their distaste at a lower figure.

Accordingly, the Presidency finally proposed, little more than a week before the crucial December (2005) summit, a budget sharply reduced by comparison with the Luxembourg compromise of six months earlier. It cut provision for the new member states, but at the same time removed many restrictions on their use of EU funds. And, adroitly, on the very eve of the summit, it tabled an improved offer with a series of additional sweeteners tailored closely to the individual wishes of the new member

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This high-risk strategy, hanging principally on an approach of neutralising the opposition of the new member states, and thus producing a majority ready to back budget reform, proved successful – even if it succeeded largely because of the deus ex machina of the new German Chancellor, Angela Merkel, who put enough into the kitty to secure an agreement. The result was a step, even if timid and conditional, in the direction of reform: a smaller budget, with some shift towards innovation and away from agriculture, and with, crucially, the prospect of a more fundamental review of the entire focus of EU spending in 2009. It would have been reached with much greater difficulty in the absence of the role played by the new member states.

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

Lithuania Poland Slovakia EU25 Slovenia Czech Republic Estonia EU15 Cyprus Hungary Malta Latvia Source: Eurobarometer 65 Field Work: March – April 2006 Publication: July 2006

59% 56% 55% 55% 54% 52% 51% 51% 49% 49% 44% 37%

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

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

Some Conclusions Brussels and the Broader Perspective Assessing the impact of the 2004 enlargement, two years on and more, differs depending on the breadth of the analysis undertaken. On the relatively narrow, Brusselsoriented policy and institutional front, which has been the scope of this report the overall effect seems to have been – despite occasional but not insignificant turbulence – one of controlled absorption and mutual adjustment.

of globalisation, and crystallised by the French and Dutch “No’s” – has tended to target enlargement as a principal cause. The polarisation of views within the EU over how to respond to globalisation has been transmuted into polarisation over the merits of enlargement. In this process enlargement has come to be seen as a regional manifestation of globalisation.

At the same time, it would be wrong as yet to talk in terms of stable equilibrium. Enlargement, both in its economic and political dimensions, appears to have contributed to an enlivened reflex of national interest. The widened disparities between the member states, not just in prosperity but also in economic policy, have at times led to intense disputes and acrimonious exchanges. However, by and large, enlargement has not critically undermined the functioning of the EU25.

Now the risk is that the all too evident hesitations over further enlargement are reinforcing the hesitations over the reforms needed for the EU to face the challenges that globalisation is bringing. This political landscape of Europe is at a tipping point, and its borderless market sometimes appears to be under threat. Introducing protectionist measures inside the Union whose effect is to raise the cost to enterprises of new investment in the new member states undermines the very foundation on which EU market integration rests. The solution to the high unemployment rates in some of the core economies in the Union will depend on economic reforms, particularly on labour markets, on better education and training and higher investment in research and development.

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

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

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

There is a growing presentiment among some EU strategists that if the anti-enlargement camp prevails, it will not only delay economic reform, but will mark a reversal of the core values of the EU just as it approaches its 50th anniversary.

Instead of opening borders it will close them. Instead of fulfilling its commitments it will break them. Instead of looking outwards it will look inwards. And instead of maximising its potential for wealth creation, it will minimise it.

Optimists suggest that the debate triggered by enlargement could serve to concentrate minds on where the real problems of the EU are. Its inability to agree on a Constitution,

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on speedy economic or fiscal reform, on foreign policy has not sprung from the presence of ten new member states.

The fundamental disagreements lie within the EU itself, and very clearly would exist even if the EU still had only 15 member states.

At the same time, the debate that is now taking place seems certain to continue to be enlivened by the new member states. Precisely because they are still much poorer than the EU15, their desire to speed growth will keep the economic reform issue at centre stage. Their competitiveness and economic dynamism will drive the competitive pressure for the wider European economy. The newly emerging economy could, it is argued, supersede

the Lisbon agenda - which sometimes resonates with all the power of a failed clichĂŠ - with a new Tallinn or Bratislava agenda.

If the debate aids a process of constructive reflection, it should ease the process of continued enlargement and may help swing EU member states increasingly towards reform, thus allowing the EU’s fullest potential to be exploited in the face of globalisation. Business is already ahead of the curve, because it has the power to do what governments tend not to be able to do – respond flexibly to rapidly changing circumstances.

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

Conclusions for Business: Influencing the Enlarged EU As we believe this report has shown, enlargement, for all the turbulence, has been by and large a greater success than envisioned, and has generated far fewer problems in the everyday life of the institutions and their policies than once had been feared. But two and half years after the big bang of the 2004 accession, the European Union has definitely become a more complex entity. The new member states are injecting a new balance into EU policy priorities and complicating the mechanics of EU decision-making.

For business this means that while the basic rules for effective engagement with the EU institutions have changed little, the greater complexity clearly mandates the earliest possible involvement in policy making, even greater planning, more time and resource allocation, the need to reach out to a broader audience and the formation of coalitions – all the while paying particular attention to linguistic preferences. Indeed, the drafting of simple arguments backed by facts, objective analysis and implications for specific national if not regional markets has also become all the more essential. In other words it is now even more important than ever before to design and implement sustained public affairs strategies across the three institutions and increasingly the national capitals encompassing not only all governments, but NGOs, industry and other stakeholders.

Against this background, the following sets out a few golden rules for lobbying in the enlarged EU. 1 EVERY VOTE COUNTS 1.

In a community of 25, every vote counts. While in the EU15, it was often sufficient to focus on the “big five” to

achieve a desired result, Slovenia or Luxembourg’s four votes may make the crucial difference in today’s more mathematically complex EU, necessitating considerable extra time and resources.

2 THE EARLIER THE BETTER 2.

Building cross-party and cross-national support requires engagement in the decision-making process as early as possible. Although this has always been the case, an EU of 25 member states, soon to be 27, makes this mandatory whether in the European Parliament, the Council of Ministers – or, of course, the European Commission whence policy in most areas key to business first emerges.

3 COMPLEXITY MAKES POLITICAL GROUPS IN THE 3.

EUROPEAN PARLIAMENT ALL THE MORE IMPORTANT

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

4 RESPECT LANGUAGE PREFERENCES 4.

In this configuration, languages have become crucially important. While it has always been advisable and preferable to speak in the language of the national official or Minister, respecting this rule in the EU10 becomes as important as in the UK or France. Moreover, while English is respected as the EU lingua franca, officials in the Ten appear to prefer to talk on the basis of a written submission – English is fine, but rare is the official who readily discusses an issue at first contact. The additional time this takes must be factored in.

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5 COOPERATE WITH LOCAL INDUSTRY AND NGOS 5.

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

6 DEVELOP DIRECT LINKS TO NATIONAL CAPITALS 6.

It is important to understand that restricted staffing in the EU10’s permanent representations in Brussels sometimes prevents active participation in every working group and for every issue. This situation is exacerbated by rapid staff

turnover as positions in the European institutions or industry open up. Whatever the causes of this current stretched capacity, it points to a greater emphasis on developing direct links to national capitals, governments and administrations.

7 ENSURE TOTAL TRANSPARENCY 7.

This is a last but critical factor. The practice of public affairs can be complicated in some of the Ten by the perception that associates lobbying with corruption (as of course can happen in the EU15 as well). The importance of total transparency in relations with public authorities in the 2004 accession countries cannot be overstated.

Voting in the Council From 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 : 3 TOTAL 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 cases two thirds) must approve the decision, and any member state can ask for confirmation that the votes cast in favour represent at least 62% of the EU’s total population.

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