The Market, not Funds, are Important to the EU

Senior Policy Analyst of the Lithuanian Free Market Institute Ramunas Vilpisauskas thinks that every one of us will join our own imaginary EU, therefore later this understanding may have to be altered or one will have to become accustomed to the fact that some people’s lives might not change…

– What kind of challenges do you see Lithuania facing in the first years of EU membership? Many people are somewhat frightened by this uncertainty.
– First I would draw the attention to the challenges faced by the state institutions which have a say in what impact membership will have on business and society itself. It is most important to ensure that Lithuania, having joined the EU, will not be a second-rate state in regard to the implementation of EU policy measures, those of the internal market in particular. This is a common fear which is partially justified keeping in mind the established transitional periods for politically sensitive fields for EU states.
Equally important is the fragmentation of the internal market which will persist at least for some time – it should be remembered that border barriers will not be removed immediately after joining the EU. The abolition of internal barriers will directly depend on how Lithuania will protect its outside borders. Therefore, for a period of time restrictions on the movement of people and the exchange between old and new EU member states will remain, and the main challenge is to achieve that these restrictions are not permanent.
The ongoing discussion in the EU Convention shows numerous intentions to further expand integration in the groups of small member states. In this instance, the question arises of Lithuanian and other nations being left out on the side. The debates in the Convention still demonstrate certain scepticism regarding EU enlargement – a desire to retain this cosy circle of states which will not be that cosy after the enlargement, while the variety of interests will increase. Dealing with this variety and dovetailing respect for differences among states and societies with the general rules governing the common market is the biggest challenge both for the EU and Lithuania. This is an enormous political challenge which means, first of all, the ability to define Lithuania’s interests (since former key goals – membership of the EU and NATO – are becoming the means for the implementation of so far vaguely defined interests) and the ability to represent Lithuanian interests inside the EU. During the initial years, it will be most crucial to balance the wish not to lag behind the integration vanguard with the understanding that Lithuania is less economically developed, that there are cultural and political differences which may render the implementation of certain proposed harmonized measures too costly.
– You touched upon an important topic – the ability of politicians and civil servants to represent Lithuania’s interests. How much influence will this have on business?
– There is both a direct and an indirect effect. Clearly, the success of the Lithuanian business in the Single market will depend on its abilities to compete in the first place. However, the Lithuanian representatives in the EU institutions and their ability to negotiate will also determine how quickly and smoothly the Lithuanian business will take advantages of the opportunities offered by the internal market. Will sufficient diplomatic efforts be put forth if the European Commission tends to make use of the envisaged measures of market protection? Will the impact of newly proposed EU norms on the Lithuanian business and economy be properly evaluated? After joining the EU and while participating in the adoption of new legal acts, for example, regulating environmental issues, the question will always arise of whether they are not too expensive for Lithuanian companies.
Another sensitive issue is tax harmonization. If direct taxes were harmonised, for example, the profit tax, it is hardly probable that the minimum were set lower than the tariff in Lithuania. This would have a direct influence on business conditions and competitiveness. In the meantime, however, tax harmonisation is not very likely to happen. Business competitiveness will also directly depend on how strict the production standards – environmental protection and labour safety – are going to be in the future.
I would also like to highlight another challenge – the ability to use properly EU funds without increasing taxes and without reducing funding of other important internal policy areas in Lithuania on which the EU has no direct influence (internal security, police, maintenance of order, reforms of the health care, social security and education). Even now, Lithuanian businesses increasingly concentrate on the EU structural funds, although business support is not their goal. Structural funds, as cynics claim, is payment to those who are discontent with what is happening in Europe and in the world in general, to those who are unable to compete. They are used to induce loyalty and to attract market participants’ attention to the EU.
In economic terms, the primary goal of the funds is to finance projects that are too big for individual enterprises to undertake or for national budgets to finance, and which have an external influence, mainly on two or more member states (transportation infrastructure and environmental protection projects), but not to provide a general support for business which is what many in Lithuania suppose them to do. By putting too much emphasis on structural funds and imprudently distributing budget revenues, on the one hand, non-realistic expectations may be created and private incentives and market investments distorted, while on the other, too little attention may be paid to such areas as the health care and social security and the reform of these systems which are unfinished yet.
– How would you evaluate business opportunities to take over the means of the structural funds at the outset of membership? What opportunities, in your opinion, do smaller businesses have and will this support be an impulse that will promote business growth?
– This money will not be the main impulse to business growth; it is just a certain aid for solving specific problems – for raising or changing qualification, modernization of equipment and so on. EU support in the EU itself is not seen as the main impulse to business development. Support from structural funds is provided for specific activities, however, the success of business has always depended on business itself and it will continue so. It is a fallacy to assume that the survival of enterprises and their success in competition will depend on EU support. EU support may help some people indeed, for example, business consultants, who will have more work and will earn more. Or it may help farmers whose income will increase significantly because of this support. However, EU’s main purpose from the outset has been and remains the creation of more favourable conditions for trade and exchange between its member nations.
– Can it be stated that as a result of EU support some enterprises will operate at a larger profit, while others will encounter distorted competition?
– This will probably not be a major factor in determining who will go bankrupt and who will hold out and compete in the Single market. The common market is the organization’s foundation. Talking of it, when a common market is created and the rules of economic activity are harmonised, general norms are most favourable for large enterprises that have developed economies of scale. For small enterprises this is not very topical. If an enterprise provides services or produces goods for its own town, membership of the EU may not be relevant in its view.
Funds that are allocated for small business to some extent take part in solving specific business problems (lack of information, lack of funds for investment, etc.), and to some extent only show rhetorical attention. An opinion prevails in the EU itself that the market must decide which enterprises are able to complete and which are not. But not funds. However, providing funds can and most likely will distort competition and market incentives.
– Does this mean that structural support is like bait – politicians have exalted and presented it as the primary reason for membership?
– In essence, yes. Giving too much prominence to structural support does not portray the true nature of the EU. Other things are also given more significance than they deserve. We see advertisements that the EU will create new jobs and that people will have jobs. The EU is not related with job creation; it regulates economic exchange. And this is not an organization that rules everything in peoples’ lives.
In part this means that the EU is becoming a normal object of political discussion, just like any other object which gives us trouble in finding the truth. In joining the EU, many will join their own organization which will differ greatly from other peoples’ imagined EU. This is an inevitable political discussion, and politicians are trying to turn, deliberately or not deliberately, the discussion and create an image suitable for them. If great expectations are created, later great disappointments may occur, and people will have to alter their understanding or get accustomed to the fact that the EU may not bring marked changes in some peoples’ lives because the biggest benefits of EU membership will not be easily expressed in a monetary form.
– How would you evaluate the readiness of the administrating system to take over EU support?
– It is so far difficult to evaluate this, since not everything is functioning yet, and I doubt that anyone in Lithuania is clear on how this system is going to function. Specific procedures are not finished yet, it is unclear how much funding will finally be allotted for specific areas, and requirements and rules are being prepared in the meantime. However, the readiness to administrate money in general will reflect traits and difficulties of public administration.
It is, however, likely that because of a heightened attention of the society and the European Commission to these institutions, there may be less difficulties. This attention will force institutions to report for their actions more responsibly and to provide more information before making decisions. Of course, when we talk about big sums of money, there will always be people who will want to turn it in a direction that they desire.
– How do you think the situation in the agriculture will change in light of modified financing? What consequences should be awaited? What can farmers expect?
– It is hard to forecast general changes, however, it can be firmly stated that the production of items which will receive support will grow. Quotas set for a number of products, for example, milk, are bigger than what is produced now, and this will be a strong incentive for farmers to reach the level of quotas. In this way, the strongly-regulated common agricultural policy clearly builds certain expectations and encourages economic activity in areas where funding, rather than market demand, is expected. Production of items that the EU will not fund directly should not increase significantly. In agriculture, the supply of support plays larger role than the preferences of consumers.
– However, we are talking about products that are of a certain quality – and quality is mainly attained in the largest farms. Will quality requirements and support be much more advantageous for larger farms? What awaits the smallest ones?
– Large farms, whose products’ quality already meets EU norms, will have it easier. Small farms, which have just a couple of cows, may have either to invest heavily, cooperate or discontinue operation. But even now, their operation can hardly be called commercial. Agriculture is often an additional source of income. And those, who claim that people will not be able to slaughter pigs or do what they do now for their own needs, are wrong. No one will prohibit doing so; simply those products which do not meet the standards will not be supplied to the market. Small, or semi-subsistence farming in Lithuania is more of a way of life and an addition to ones’ income than a commercial activity which can go bankrupt in the real sense of the word.
– Perhaps they will change the direction of their trade?
– It is hard to say. On the one hand, rallies and protest actions show that many people expect the most not from their own activity, but rather from what the government will decide (and politicians do not seek to lessen these expectations). They do not want to try various activities and if one fails try another, but rather blame the government. This shows that farmers associate their activity with government policies and that changing their profession and trying new activities is not a widespread phenomenon in the country side. On the other hand, those protesting are not the majority of rural inhabitants; although they represent a substantial opinion, there are other people who develop business, tourism and engage in alternative activities. Especially since part of the funding for agriculture is projected for the development of alternative activities. The very existence of these funds can entice people to think about a different occupation.
– To what extent will support for agriculture spur the restructuring processes in the country side?
– Probably after about three years clear results will become apparent. It is likely that many quotas will not be used up entirely. Agricultural support is quite extensive, therefore, many people residing in the country side will attempt to produce one product or another that is supported and to make use of the funding provided. If discussing unemployment, I would refrain from forecasting; besides, government policy will not be of less importance than EU membership; for example, in creating conditions for sale of land and in the coming of foreign investment to agriculture.
Restructuring and employment will depend on people’s entrepreneurship and conditions for its expression. I would not associate membership of the EU with increased unemployment in agriculture. The number of people employed in agriculture would probably decrease; however, I am not certain that the existing statistical data is correct or meaningful. Suppose, those, who out of different motives want to emphasize their activity, claim that agriculture may contain up to one-third of the work force. However, those people can continue residing in agricultural areas, but take up a different activity.
Supposing that the number of the employed decreases, naturally, the question of what other people will be doing arises. Part of the people will be of the retirement age, so they will not be formally employed, others will attempt to develop other activities funded by the EU, and others can set off for seasonal employment in other EU member states or attempt to change their profession.
Interviewed by Giedre Bielskyte