Hard work awaits the eight countries joining the EU in May if they are to live up to European standards.

The accession at the beginning of May of eight transition countries from central and eastern Europe to the European Union is an important milestone but it is not the end of the transition process.

Slovenia apart, the remaining countries of Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Estonia, Latvia and Lithuania were all part of the Soviet bloc and suffered under communism and the excesses of central planning. Liberalisation and market reforms over the past decade or so have been painful but the economies of the accession countries are beginning to bear fruit and the 3.5% real GDP growth in 2003, well ahead of the EU’s 0.5%, demonstrates the positive impact of reform.

Financial strength

Critical to the success of these states is the strength of their financial sectors. At the start of the 1990s, most states struggled with too many poorly run, poorly capitalised banks with too many non-performing loans. However, foreign banks grasped the opportunities available and, through a spate of acquisitions during the 1990s, they now control the bulk of the financial sectors in central Europe.

While this foreign invasion may have ruffled some nationalistic feathers, it has helped to strengthen systems and bank management significantly and brought much greater solidity to banking sectors. And this has provided a strong platform for economic growth.

The European Bank, in its latest report, classifies all eight states as having made “substantial progress”. Hungary is given the highest banking reform rating with “significant movement of banking laws and regulations towards BIS standards; well functioning banking competition and effective prudential supervision; significant term lending to private enterprises; substantial financial deepening.”

But the European Bank for Reconstruction and Development also acknowledges that reforms will have to continue, especially in the financial sector, in public administration and in the business environment, if these countries are to be competitive in the single market.

Euro criteria

And once in the EU the next hurdle is joining the euro. To do this, the so-called convergence criteria need to be met. At present the Baltic states and Slovenia meet the 3% public deficit criteria, all except Latvia and Poland meet the exchange rate criterion and all except Hungary, Slovakia and Slovenia meet the inflation criteria.

A few countries are expected to join the euro in 2008 but most will have a longer wait. Getting into the EU team is important but new entrants will still need to work hard, especially in the financial arena, to reach and maintain European standards.

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