Europe should set the rules for an enlarged club

HELSINKI SPELLS trouble for the Government. Not merely because it has fallen out with the European Union's most powerful member over tax, or because it has been shafted by the second most powerful over beef. A much more fundamental issue is that - as at Rome in 1990 - this summit has launched the EU on intensive negotiations over its future constitution.

Ironically, the trigger for the next burst of redesign is a change that has been warmly supported by the British. It is somehow typical of the EU that it should be the least contented member of that club which has pressed hardest for its enlargement. Of course, the French and Germans reckon they perfectly understand why perfidious Albion should be so keen on opening the gates to eastern Europe. It must be because we assume that "widening" the union will prevent it being "deepened". One set of policies could not possibly fit countries at such different levels of development. So, the argument goes, an enlarged EU will have to be a much looser arrangement, with markets in common but not too much else.

If that has been our assumption (and of course it has), it is challenged by exactly the opposite assumption in Brussels. Among Eurocrats it has been taken as given that a union of over 20 members cannot possibly take decisions only if all agree, so that federal authority, or at least the power of the majority, will have to be "deepened" to keep the show on the road. And in Helsinki, Europe's leaders committed themselves to sorting out the furniture before newcomers are allowed past the door.

But this is not just a Brussels parlour game. The application list is full of new or reinvented countries whose democracies are hardly less fragile than their economies. Bosnia and Kosovo were reminders that Europe can still erupt into nasty local wars. Behind the manoeuvrings, there has been a more profound reason for supporting enlargement: the hope that it will bring stability to central and eastern Europe, the aspiration to replicate the economic and political transformation that EU membership brought most spectacularly to Spain.

Over the past decade since 1989 - that extraordinary year of liberation, of velvet revolution, of contested if not exactly free elections - central and eastern Europe has struggled with transition on the assumption that sooner or later it would lead to convergence with the affluent west. After Helsinki, there is no turning back. Another six countries, not counting Turkey, have been formally added to the queue. We will have to start making our promises good. Serious thinking, therefore, is needed about the economic terms on which we do.

All of the 13 applicants have now been put on an equal footing, supposedly free to qualify (under 31 "chapters") at the same time. Two - Malta and Cyprus - are so tiny that accession would be politically but not economically significant. The table shows the diversity in size and income level amongst the rest. Only the Slovenes are currently within spitting distance of the EU's income range; Bulgaria and Romania are right off the scale.

Of course, that is not the whole story. The three little Baltic republics are still poor, and held back by the miserable weakness of the Russian market, but (with Estonia clearly in the lead) they are remarkably high up the learning curve for countries that have been independent for less than a decade. On the other hand, the Czechs may be richer than the Poles or even the Hungarians, but have stumbled behind them in the transformation race. This has, for all of them, proved more of an obstacle course than excitable investors hoped. Amongst the bigger countries, only in Poland will real output this year be significantly - perhaps 20 per cent - higher than it was in 1989. Including Russia, the region as a whole saw incomes per head fall by an average 4 per cent a year over the past decade, a worse outcome even than in sub-Saharan Africa. But Slovenia, Hungary, Slovakia and the Czech Republic all came off the bottom in the early 1990s, and have achieved more or less continuous growth since. Inflation is still high by western European standards, but (mostly) in single figures. Fiscal deficits are respectably close to the Maastricht limit of 3 per cent of GDP. (On both those macroeconomic scores, Turkey stands out from the others like a sore thumb.)

Hungary has led the privatisation race, sufficiently successfully to draw in substantial private investment; Poland and the Baltics have scored well here too. Throughout the region, energy, water and telecoms utilities are being transformed, and in some at least, essential reform of the banking sector is under way. Greenfield investment is increasing, too. In Hungary, industrial production rose more than 14 per cent over the past year; in Poland, it rose 9 per cent. Access to markets in the European Union will accelerate investment in economies where (apart from Slovenia) wage costs are one-fifth or less of the EU average, especially since education standards are high). But there, of course, lies trouble.

EU leaders have already made it clear they are not prepared to give eastern Europe's farmers full access to even the "reformed" Common Agricultural Policy. But in a genuinely equal union, the structural and other income- related funds the EU pours into weaker regions would almost all have to be redistributed to newcomers. Since all members cling doggedly to these pay-backs (Tony Blair was claiming at the weekend that Britain has the best deal on structural funds of any member state), such a radical redistribution is hard to imagine. It is even more unimaginable that it should happen at a time when industry was relocating eastwards. At present, cyclical recovery in western Europe (aided by a weak euro) is obscuring that competitive pressure, making it a good time for negotiations. Further down the track, however, it is easy to imagine that western members will start setting conditions designed to prevent applicants competing too easily with their industries.

In these accession negotiations there are echoes to be heard, already, of the demands we heard in Seattle from American pressure groups, to the effect that market access should be subject to environmental and labour standards.

There is the same blend of high-mindedness and protectionism. Europe has, for example, been raising the clean-up standards that east European industries have to meet before their countries can be accepted for membership. Well and good, since eastern Europe is still stiff with environmental disasters waiting to happen. Less good would be any attempt to impose EU social legislation on applicant countries. Nor should any applicant country be in too great a hurry to prove itself Eurolandish by fixing its exchange rate. Macroeconomic adjustment safety-valves will be needed for many years yet.

Before any applicant gets a foot in the door, however, the EU must set the rules for a club with twice today's membership. These rules are still all to play for. Multi-dimensional chess, poker, beggar-my-neighbour - the similes have all been deployed by Whitehall to bring home the difficulties of Brussels negotiation. But Tony Blair will have come back from Helsinki well aware of the difficulty of achieving an outcome attractive to an increasingly sceptical electorate. Even with euro membership pushed quietly on to the back burner, in British politics Europe will keep boiling over.

Sarah Hogg is chairman of Frontier Economics