Effects of EU Membership On Latvia And Estonia

The accession to the European Union will considerably affect the economic policy of the Government of any Accession State. The question of how much a State has to intervene in the market has not been answered similarly in all the existing EU Member States until now. However, due to a very complex interplay of different EU policies, the overall direction of the development of the markets in different EU Member States is becoming more and more similar. Under the need to be competitive with the US economy, the markets in the EU are gradually becoming increasingly deregulated. The important difference between the EU and the USA is, however, the fact that the market economy in the EU countries contains a strong social flavour. This implies two very fundamental issues; firstly, market economy, i.e. the State (and the European Community) protects market mechanisms against distortion. Secondly, the balancing aspect of social responsibility of the State, i.e. the State (and the European Community) ensures that those who cannot participate in the interplay of market forces have, in any event, a certain level of social protection.

Some of the instruments protecting market forces in the EU are competition law, rules on public procurement and State aid, provisions regarding regulated areas of the economy (like energy, postal services, formerly also telecommunications) and financial market laws. Additionally, the creation of highly qualified governmental agencies in these areas and the role of the judicial power as the independent arbiter are also crucial.

Latvia, a country that 13 years ago had planned economy with State-owned enterprises, has today a fully functioning market economy that is dominated by privately-owned enterprises. Similarly, most real estate is privately owned. The Latvian legal system has undergone a complete change to create a legal framework for free market economy and, at the same time, incorporate the acquis communautaire.

The Latvian State is protecting its market economy from distortion with the same instruments that have been developed earlier by the EU countries. The accession will affect the market forces in Latvia due to increased competition and Latvia will more clearly follow the common EU economic policy model. There are a lot of newly established and rapidly developing small and medium-sized enterprises in Latvia and it remains to be seen how these companies survive the competition within the single market. The understanding of the role of the market forces and their interplay is gradually spreading in society.

Since the conclusion of the Association Agreement with the EU, the Latvian rules relating to market control have gradually become compatible with the EC legislation. The Latvian competition act was drafted in line with the Articles of the EC Treaty and came into force on 1st January 1998. A slightly modified new act was entered into force as of 1st January 2002. The telecommunications sector in Latvia has been completely liberalised in the fixed line telecom services since 1st January 2003. Earlier, the monopoly rights were granted to one telecom operator that was partly privatised by means of a foreign investment. During the first four months of liberalisation, the regulator has issued approximately 100 licences to telecom companies for the provision of fixed lines services. The Latvian Government is also developing the area of electronic communications and the digitalisation of TV signals is also foreseen. In the regulated areas of economy, like the energy market, postal services market or water supply market, a single regulator is controlling prices.

The State aid control regime has been established in Latvia since 1997. A new State aid control was adopted in 2002, as a result of an obligation set forth by the EU for associated States to establish rules on State aid control and it contains clearer rules that are similar to the relevant EC rules. A special body, the Commission on State Aid Control, consisting of representatives of several ministries, has been established.

The public procurement regime has been developed very successfully. A special Public Procurement Bureau has been reviewing complaints regarding tenders since 1st January 2002. All EU directives in this area are transposed, i.e. companies from the other EU Member States cannot be discriminated in tenders.

Consequently, the development of the market economy in Latvia after the accession should be quite predictable. The only fear is that local companies and national champions will have to face competition within the single market, probably forcing many of them out of the market.

The agreements entered into between the EU and Estonia were only concerned with the EU law (acquis communautaire) enforced before 1st November 2002. The EU law enforced after this date is not subject to the said agreements. Before the accession takes place, Estonia and the EU will still have to agree on the implementation of the EU legal instruments that have come into force after 1st November 2002. To date, the process of harmonisation of Estonian law with the EU requirements is almost complete, although Estonia has negotiated transitional periods with regard to some areas of regulation which are briefly discussed below.

Firstly, Estonia and the EU have agreed on a transition period for agricultural issues until the end of year 2012. During this period, direct payments to the agricultural sector will be increased annually from 25% to 100% of the level of current Member States and Estonia will, at the same time, have the right to provide the farmers with supplementary direct aid. Secondly, until 31st December 2008, Estonia has been granted a transition period regarding the opening of the electricity market. Most importantly, Estonia may maintain its present corporate tax system until the same date.

Estonia will be able to fulfil all major requirements set by the EU by the time of its accession and the accession will not result in any substantial changes in the country’s legislation, except for tax laws.

The opening of capital markets may clearly be viewed as an extremely positive development in Estonia, as it enables effective direct investments and allows for higher specialisation between different Member States. Clearly, the EU accession would influence creditors’ perception of sovereign and currency risk, and reduce the risk premium on domestic interest rates, increase domestic investment and consumption, and thereby support economic growth. However, the progress of new Accession States has differed sharply. Thus, accession does not automatically guarantee rapid growth, but rather offers prospects for further trade and financial integration, institutional strengthening and reduction in risk premiums.

It would be a mistake not to analyse some serious negative consequences of joining the EU. Estonia will be obliged to establish common customs duties and quotas for goods imported from outside the EU. Clearly, introduction of tariffs and trade barriers could lead to trade diversion, reduced efficiency and welfare losses. Obviously, an increase in prices on agricultural products may be expected. Finally, in its recent research, the International Monetary Fund has pointed out that the harmonisation of the tax systems of the Baltic States with the EU systems will result in an increase of the tax rates and broadening of the tax bases, as has happened in Spain, Portugal and Ireland.

In conclusion, Estonia has taken all necessary measures to integrate the EU law into its national legislation. Accordingly, no serious reforms in terms of legislation will be required. The accession to the EU will probably result in a rapid economic growth and a higher living standard. Nevertheless, certain possible drawbacks described above should not be ignored.