New Europe, New Problems

New Europe, New Problems

Mini Teaser: Sure, the countries of "New Europe" are friends of the United States right now--but what happens when Brussels gets a hold of them?

by Author(s): George J. Viksnins

ON JULY 1, 2003, the United States suspended military aid to more than thirty nations, among which were six of the seven countries scheduled to join NATO next year. With the exception of Romania, the other countries so recently lionized as "New Europe"--including the three Baltic states, as well as Slovakia, Slovenia and Bulgaria--have refused to sign the pledge giving immunity to U.S. military personnel and civilians serving abroad from prosecution by the International Criminal Court (ICC).1 U.S. efforts to sign bilateral agreements with new NATO member-states have been stymied by pressure being exerted on these states in their roles as EU candidate countries. Indeed, on June 24, the EU Presidency issued a statement declaring that prospective members are expected to follow the official EU position on the ICC. It is certainly true that the amounts of foreign military aid the United States earmarked for these countries in FY2003 and 2004 are relatively small in terms of the overall U.S. defense budget. (Latvia, for example, was only to receive around $3 million this year.) Nevertheless, these funds represent vital "seed monies" for integrating the defense ministries of these NATO candidate countries with the institution's force structures.

This nasty little episode demonstrates quite dearly the growing tension the countries of "New Europe" face as both American allies and prospective members of an enlarged European Union. Most of these countries deeply value their cultural and security ties to the United States. This is particularly true of the Baltic States. All three enlisted early in President Bush's "coalition of the willing", earning a haughty scolding from Monsieur Chirac for "acting childishly."2 All three have sent personnel to Iraq and Afghanistan. Yet it is not inconceivable that "Old Europe" might require the Baltic countries to curtail their active support of the United States as a final price for full integration into the EU.

In addition to difficulties over Iraq and the ICC, the transatlantic rift seems to be widening in four other areas, as well. First, the EU is setting up a competing military organization designed to operate outside of NATO, and an initial deployment is already underway (in Macedonia). Second, a trade dispute may be brewing over civilian aircraft, with Boeing losing out to the subsidized Airbus planes. (Airbus is also launching a $23.7 billion project to develop A400M military transport planes.) Third, European companies appear to be setting up independent telecom operations that are (perhaps deliberately) incompatible with American technologies--including a global positioning system that would not use U.S. satellites. An unusual shared venture between the European Space Agency and the EU, which will be run by a private firm, the Galileo Operating Company, will begin operating a twenty-year concession in 2008. The organization will be based in Brussels, have operating costs of around 220 million euros and will serve 1.8 billion people by 2010 (double that by 2020). Last but not least, the dollar has been falling noticeably against the euro, from around $0.85 two years ago to about $1.11 in mid-August. This development has left our "friends" in OPEC talking about pricing oil in euros rather than dollars.

The countries of "New Europe", and the three Baltic States in particular, are thus beginning to face what only a few years ago would have seemed an unthinkable dilemma: having to choose between the United States and Europe. Furthermore, this dilemma is only exacerbated by the fact that Washington is still viewed as the region's primary security provider, while the region's economic destiny lies with Europe.

THE BALTIC diaspora has long been a force in American politics. After all, Chicago is said to be the second largest Lithuanian city in the world after Vilnius, Lithuania's capital. Senator Richard Durbin of Illinois (allegedly of Lithuanian stock) heads the bipartisan Baltic caucus in the U.S. Congress, which has 15 Senate and 75 House members. The Latvian diaspora was particularly active in lobbying the U.S. government to catalyze the disintegration of the USSR and to establish a pro-Western, market-oriented government in Latvia during the early transitional years. A large number of North American Balts then returned to serve in the governments of their newly independent homelands--even at the highest levels. Vaira VikeFreiberga, president of Latvia since 1999, was formerly a psychology professor from Montreal, while Valdas Adamkus, president of Lithuania from 1998-2003, had been an environmental expert from (where else) Chicago.

Initially, the Baltic States thus believed they possessed a "special relationship" with Washington. After all, the United States withheld de jure recognition of the incorporation of Estonia, Latvia and Lithuania into the USSR after World War II and did not repatriate Balts to their Soviet homelands after the war. (The forcible repatriation of a small group of Latvian legionnaires by Sweden, however, is an ugly blotch on that country's history.) The Clinton Administration contributed significantly to the withdrawal of Russian troops--a process completed on August 31, 1994--and to the removal of ex-Soviet military facilities from Baltic territory. (The demolition of Latvia's Skrunda radar base, for example, was financed by the United States and supervised by American technicians.) The United States, further, strongly championed the NATO candidacy of former Warsaw Pact members and refused to let Moscow veto the decision. Washington's position was firm despite considerable grumbling in the Russian establishment: one prominent Moscow-based expert even declared, "The day Estonia joins NATO, we send the tanks...." Most recently, the U.S.-Baltic relationship was reaffirmed when President George W. Bush met with all three Baltic presidents in Vilnius after the fall 2002 NATO summit in Prague, where a large Lithuanian audience applauded him loudly and enthusiastically. That this reception was considerably more positive than any he received in "Old Europe" goes without saying.

Because of security interests and diasporic ties, the U.S. government has been remarkably proactive in trying to promote American economic interests in the region. In 1990, under the auspices of the Southern and Eastern Europe Democracy program, the Commerce Department set up the Central and Eastern Europe Business Information Center (CEEBIC), mandated to aid American investment and trade in 15 countries. In 2001, the center concluded that American firms are likely to have an advantage in finding customers in the Baltic markets for technically sophisticated items associated with information technology, telecommunications, pollution control and, above all, defense. Hence, such big-ticket items as dealing with the nuclear facility at Salaspils, Latvia, and modernizing air-traffic control systems may well involve American contractors in the near future.

Despite these efforts to promote economic ties, the reality is that American trade with, and investments in, the countries of "New Europe" remains relatively miniscule. American exports to Central and Eastern Europe are around 4 percent of this country's total exports, and imports are only slightly higher. This tendency is even more pronounced when one examines U.S. economic ties to the Baltic States. U.S. exports to all three Baltic countries totaled less than $300 million in 2001, while imports were around $500 million.

Even these statistics can be misleading. For example, U.S. Census Bureau data tends to include goods that are not of Estonian origin but are shipped from other post-Soviet states via Estonia. Kristjan Prikk of the Estonian embassy explained that the U.S. import figure of $573 million includes $503 million in the category of "Mineral Fuels, Lubricants, and Related Materials", the production of which is close to zero in Estonia. This figure reflects the use of Estonia for re-exports of such products from Russia. As reported by the Estonian Statistical Office, the remaining $70 million reflects the number of goods actually produced in Estonia and exported to the United States. While the U.S. statistic for its Latvian imports was $287 million in 2000, the Latvian statistic for that same year shows exports to the United States totaling only $58 million, thus reflecting a similar discrepancy. In terms of Baltic imports from the United States, it is estimated that about 80 percent of American brand name goods consumed there are produced by European subsidiaries. Only about 20 percent are actually exported directly from the United States.

In terms of foreign direct investment (FDI), one would expect that, given the close ties between the Baltic countries and the United States, American firms would predominate. This, however, is not the case. Estonia has a total FDI stock of more than $3 billion, of which only about 10 percent comes from the United States. Lithuania's total FDI measured $2.7 billion until Williams International, a critical American investor in the main refinery at Mazeikiu Nafta, sold its holdings last August to the Russian oil company YUKOS and withdrew from Lithuania altogether.

But while U.S. investors seem to be uninvolved or fleeing, Scandinavian investors possess a great deal of financial sway in the Baltic States. Ultimately, 18 percent of FDI in Lithuania comes from Sweden, with another 10 percent each coming from Finland and Denmark. This can be juxtaposed with the roughly 13 percent of FDI in Lithuania that originates in the United States. A similar pattern of Scandinavian predominance in investment can be observed in Latvia, whose total FDI amounts to $2.3 billion. Furthermore, many dominant financial positions in the Baltic States are held by Scandinavian investors: Sweden's Wallenberg family, for example, controls the leading banks in all three Baltic countries. This begs the inevitable question: Will Scandinavia's economic influence nudge the Baltic States further into the European camp?

It is not entirely clear that it will. Last fall, on the eve of the EU summit in Copenhagen, support for joining the Union barely registered 30 percent in Estonia. Uno Silberg, chairman of Estonia's "No to the EU" campaign, says: "The European Union is very like a disguised Soviet Union--a form of federal bureaucratic socialism." Many Baltic peoples fear the consequences of being treated like second-class citizens: subsidy payments to farmers, for example, will be only about 40 percent of what is paid to the farmers of current member countries. In addition, EU competition will hurt hundreds of thousands of near-subsistence farmers who will not be able to compete, either in terms of quality standards or production costs. Small businesses will struggle to meet the extra cost of fulfilling EU regulations on such things as workplace safety and environmental protection. As if all of these drawbacks were not enough, Uldis Osis, Latvia's former finance minister, pointed out a potentially more serious problem in the pages of Diena, Latvia's largest daily:

In the accession process, the EU itself gains a number of favorable outcomes. It gains new  consumer markets, albeit presently with limited purchasing power. Furthermore, there are no limits on their investments. Profitability of investments in the candidate countries is generally many times greater than in the donor countries. Indeed, this profitability is likely to improve as economic development in the candidate countries accelerates. Thus, the EU, often creating problems for the candidate  countries, is itself making money here quite nicely.3

Despite these issues, Lithuanian voters approved accession to the EU this past May: Of the 63.3 percent of eligible voters who cast ballots, 91.06 percent voted for joining the Union. The outcome of the referenda in the other two Baltic States, however, is much more uncertain. Up from the anemic 30 percent figure mentioned above, support has been rising in Estonia, as well: While only 48 percent indicated they would vote in favor of EU membership in July, that figure had risen to 62 percent by August. Nonetheless, a solid 38 percent are resolutely opposed to EU membership. In Latvia, however, polls conducted by Latvijas Fakti indicate support for EU membership has recently been dropping, from 57 percent in June to 49.6 percent at the end of July.

Yet, despite a vocal and well-organized Euroskeptic opposition, it is likely that both Latvia and Estonia will join Lithuania to vote to enter the Union. Too much of the Baltic States' economic future is tied to the fate of the EU, and there is no alternative to greater integration with Europe. Whether by helping to close the nuclear plant at Ignalina, Lithuania (which shares the same design as the doomed Chernobyl facility), or by contributing funds for the "Via Baltica" (a highway linking Scandinavia with Central Europe), the EU will become the prime donor and investor in the region. As Thomas Ilves, the former Estonian foreign minister, has said, "petty rules and painful changes" are the price to be paid for club membership, which promises to bring billions of dollars in restructuring funds that will continue until the new members' economies reach 75 percent of the EU average.


Indeed, the Baltic States will receive about 1.5 times more in EU assistance on a per capita basis than the other new members. In its first three years after joining in May 2004, Latvia can expect a transfer payment from the EU totaling 1.6 billion euros, which is about five times larger than that country's contribution to the EU budget (284 million euros). There will also be a special donation of about 70 million euros for border control and improvements in the judicial system that will approximately double the budgetary resources currently allocated to those areas.

Estonian and Latvian negotiators were also satisfied with outcomes in the fisheries and agricultural areas. The Gulf of Riga will be subject to the fishing quotas already enforced, and it will only be used by Latvian and Estonian fishermen. There were significant increases gained in both milk and grain production allotments, since both countries had significant output being traded in the shadow economy that was not covered by official statistics. Subsidy payments to farmers, which had caused a very negative reaction when proposed by the EU in January 2002, were doubled in the final agreement. Latvian farmers are scheduled to receive 73 million lats (more than $100 million, depending on the exchange rate) in 2004, which is three times more than the Latvian government is able to allocate today. All in all, these are significant transfers of aid from the EU to the Baltic States, dwarfing any assistance packages ever proposed by the United States.

DOES BALTIC integration into the EU, however, mean a greater divergence with the United States? Not necessarily. Even though subsidies from the EU budget will be welcome, public opinion will probably not become increasingly favorable to the EU over time. Benefits will be taken for granted and compliance costs to regulations increasingly resented. Furthermore, CEEBIC concluded that EU integration will actually benefit multinationals by standardizing regulations and operations for the region. Professor Erika Sumilo, Director of the North American Studies Center at the University of Latvia, says she is optimistic about the creation of new opportunities for both American and Baltic businessmen after accession. Greater mobility of labor and capital promises significant efficiency gains for the whole region. It seems likely that U.S. and west European firms will move factories eastward in search of lower labor costs, for GDP per capita in the Baltic States is much lower than the EU average.

One such company is Microsoft, which describes Eastern Europe, including the Baltic States, as the hottest market in the world, with annual sales growth greater than 30 percent. Microsoft presently estimates that 700 software developers from east European and Baltic countries are now employed at its headquarters in Redmond, Washington. Another burgeoning industry in eastern Europe is telecommunications, which is expanding equally as rapidly as computer software firms. Though the region had about 50 million mobile phone users by the end of 2001, a reliable estimate projects that figure to jump to about 140 million by 2006--an annual growth rate of 16 percent. Moreover, the number of wireless customers is expected to grow by 34 percent in eastern Europe over the course of this year alone, compared to just 7 percent in the West.

But the seeds of future tensions exist. One potentially problematic area concerns intellectual property rights, especially in the rapidly expanding field of information technology. The Washington Post recently reported on the three Estonian computer programmers who developed Kazaa: an online, file-swapping system that enables people to trade movies, television videos and music. With 160 million reported users, Kazaa is the most popular such system in the world. Its explosive popularity has led a coalition of entertainment companies to file suit in the U.S. District Court in Los Angeles--a strategy that shut down another online, file-sharing colossus: Napster. Lawyers for the entertainment industry refer to Kazaa as an "intricate international shell game aimed at evading the U.S. court's jurisdiction." The Kazaa group claims the case has no merit and that "recent European law is on their side." Jaan Tallinn, one of the thirty year-old programmers, said the involvement in U.S. courts is "a baffling situation from our point of view. The technology has been declared perfectly legal" in Europe.

Moreover, as the Baltic States become integrated into west European culture, broadly speaking, anti-Americanism will likely become the status quo of public opinion. In 1992, the Baltic countries avidly accepted American advice, and their governments tried to adopt American-modeled institutions. Today, the public relations spin is quite negative, and a handful of examples help explain this. A recent newspaper story that reported on the suspension of military aid over the Article 98 dispute generated some 600 e-mail responses in a few hours from local Latvians, nearly all of which were anti-American. At last count, there are quite a few McDonald's outlets in the Baltic capitals, but they may become targets for anti-American and anti-capitalist demonstrators, as elsewhere in Europe, rather than harbingers of a new market-oriented society. A young marketing specialist in Riga wrote to me that drinking Coca-Cola is no longer considered cool by the younger generation, and that Marlboros have a negative image because they are American. Latin American soap operas greet Latvian television viewers over a late breakfast, and most are tuned either to Russian or west European television networks (despite CNN's general availability). Finally, there is always the possibility that the EU could use "local content" legislation of some sort to muscle the newcomers into broadcasting more heavily subsidized French films. Of all things, this will surely not advance America's cause in "New Europe."

EVEN though "New Europe" may tend to be pro-American, the United States should not adopt a policy of trying to divide them: Europe will be able to do that on its own, thank you. There are enough areas of potential conflict among the existing members--not least of which are over U.S. foreign policy--that will lead to shifting alignments among old and new members alike. (For example, the requirements of the Stability and Growth Pact are presently being questioned by Germany.)

This is why the United States should not think that the "special relationship" between the Balts ended once it and the latter achieved NATO membership. American foreign policy officials, regardless of their own political affiliations, have steadfastly maintained their support of the Baltic States. Bipartisan support for both economic and military aid, the activities of the Peace Corps and numerous educational programs (the Pew Economic Freedom Fellows program at Georgetown University is a fine example) have strengthened the center-right forces in Baltic politics and helped make EU membership more easily attainable. In other words, the great irony is that, though U.S. support was critical for preparing the Baltic States for rapid integration into Europe, it could ultimately undermine Baltic advocacy of future U.S. foreign policy initiatives.

Certainly, the Baltic countries' ties to the United States have paid off handsomely. This is why the Baltic leadership has supported U.S. anti-terrorism efforts quite enthusiastically--even while doing so carries considerable risk of domestic backlash. This would suggest that it is unlikely that the Balts would now concentrate on elaborating their role in the EU and abandon Uncle Sam. The ICC and intellectual property rights issues obviously demonstrate that areas of friction exist. Yet there is no reason for the relationship suddenly to become antagonistic, especially when the Baltic States are working closely with the United States in pacification and democratization efforts in the Iraq. Moreover, prospects for an increase in trade appear quite positive all around. The Baltic States, therefore, appear to be very comfortable moving into a position that allows them to play the role of interlocutor between Washington and "Old Europe." That the Balts's future commitments to Europe, however, will sometimes lead to disagreements with the United States must not sour this historically positive relationship, the steadied cultivation of which is a shared national interest.

1 Article 98 of the International Criminal Court provides for bilateral non-extradition agreements. The United States has been concerned that the ICC might bring politically-motivated prosecutions of U.S. leaders and military personnel, and thus has been actively seeking agreements with other states that would shield U.S. citizens from ICC jurisdiction.

2Of course, France is the most politically correct or "progressive" nation in "Old Europe"--the Paris Metro still has a station called Stalingrad!

3 Certainly, the EU would benefit from the higher growth rates in the Baltic States. The Eurozone area had an anemic 0.8 percent growth rate last year. In comparison, 2001 was a very robust year for the Baltic countries, with growth rates of 7.9 percent in Latvia, 5.3 percent in Estonia and 5.1 percent in Lithuania.

George J. Viksnins has just retired as professor of economics at the Walsh School of Foreign Service, Georgetown University. He wishes to thank Kadi Kriit, Ingrida Rosa, and Ruta Kropiene for helping with this article.

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