Note #3 – March 2005

From Partnership and Cooperation Agreement to Action Plan
by Galina Şelari

The New Neighbourhood Policy identified by the European Commission within the concept of the “Wider Europe – Neighbourhood: A New Framework for Relations with our Eastern and Southern Neighbours” (March 2003) and described in more detail in the European Neighbourhood Policy: Strategy Paper (May 2004) provides for the interests of both the EU and its new neighbours. There is an aspiration to mitigate possible negative effects of enlargement for neighbouring countries and to eliminate the perception of the creation of a “European Fortress”. Additionally there is a desire to form around the enlarged European Union a ‘circle of well-managed countries‘. Neighbouring countries have been asked to cooperate with the EU on the basis of an agreed Action Plan. The implementation of such an Action Plan must prove that the country is able to collaborate with the EU and can demonstrate concrete progress in reform and management.  

Up until the Action Plan, the relationship between Moldova and the EU was based upon the Partnership and Cooperation Agreement (PCA). The economic component of the PCA was based on the establishment and extension of four economic freedoms, the movement of goods, services, capital and people. Implementation of the PCA arguably served as an underpinning for the new Action Plan that according to the communiqué issued by the European Commission allows for a more complete integration of the countries in the region into all market structures, even if, at present, their membership in the EU is not being considered[1].  

The experience in the implementation of the PCA between Moldova and the EU since 1998 affords the following summary.  

·        The PCA played a positive role as the first working document, which set a formal relationship between the EU and Moldova;

·        It demonstrated its effectiveness, in the alignment of national legislation to EU norms, facilitated access for goods and services to the European market, strengthened Moldova’s judicial system and customs and became the basis for the accession of Moldova to the Stabilisation Pact for South-Eastern Countries;

·        The volume of foreign direct investment into Moldova’s economy at the end of 2004 was about $1 billion, including 40% from EU countries. The areas of European investment are telecommunications (France Telecom), textiles (Germany - Steilmann, and other Italian and Belgian companies), tanning industry (Esastampa, Italy), construction materials (Lafarge, France and Knauf, Germany), sugar (Südsucker, Germany), oil products (Mabanaft, Germany), electricity (Union Fenosa, Spain), and equipment for the service sector.

·        Monitoring of PCA was carried out by means of a dialogue between the parties within the three institutions: Cooperation Council, acting at the level of government; Cooperation Committee and its Sub-Committees, including the representatives of state structures of EC and Moldova, and Parliamentary Cooperation Committee formed by members of the European and Moldovan Parliaments.  

Nevertheless, Moldovan EU relations, particularly in the economic sphere remain small and continue to evolve slowly. The PCA, in comparison with European agreements with Central and Eastern European countries, had no clear country orientation. Similar agreements in 1994 were signed with all the CIS countries (except Tajikistan). Despite the substantial differences between the countries (political, economic and geographic) each PCA included a standard set of goals and mechanisms for implementation. The PCA did not envisage, even in the distant future, full EU membership. Therefore it did not set any priorities in terms of reforms to be implemented, or the terms, consequences and the quality of implementation. This meant that implementation came down to the desire and ability of the country itself to implement thoughtfully and coherently the philosophy of the agreement into its political and economic practice. The main attention (both political and economic) of the European Union was directed to those countries that were potential members. For Moldova this has proved negative because even though its development was no less important than the candidate countries, it has tended to be put into the shadow by the EU. In many respects even today the relationship between Moldova and the International Monetary Fund and the World Bank are still the main criteria in the assessment of on-going transformation, technical assistance and financial aid.  

At present, PCA implementation is carried out in five priority directions: i) harmonization of legislation, ii) customs and cross-border cooperation, iii) fight against crime, iv) study of approaches to the cooperation between the parties within the free trade area, and v) investment 

Let us consider the two areas that are of vital importance for Moldova – trade and investment.  

The agreement contains an important statement on the possibility to deepen further relationships between Moldova and the EU, and with Europe as a whole, by means of the creation of a free trade area (FTA). Since 2002 it has been one of the priorities for PCA implementation. The creation of a free trade area between Moldova and the EU should be a crucial step in integration towards Europe. It is obvious, that at every stage of liberalization the situation in the specific sectors of the Moldovan economy and their readiness for free trade should be taken into account[2].  

The Study on the Economic Feasibility of an EU-Moldova Free Trade Area carried out in 1999 upon the request of the European Commission, identified that due to the existing legal, administrative and economic conditions, Moldova could not obtain advantages from the creation of a free trade agreement. Since then the situation has not changed significantly. However, the European Commission, in its communiqué on the Wider Europe policy, noted that “for Moldova, which does not currently possess the competitive strength or administrative capacity to take on reciprocal obligations of an FTA, the EU is ready to consider developing new initiatives to grant better market access, in line with WTO obligations.”[3] 

For Moldova it is supposed that the implementation of free trade agreements with countries that are members of the Stability Pact (the first bilateral agreement was signed with Bosnia and Herzegovina in December 2002, but the last one – with Bulgaria in May 2004) should become a “school” for successful integration into the European market. For the time being, unfortunately, it is not always possible to use effectively the advantages of free trade areas. For example, Moldova’s agreement with Romania that was signed back in 1994 has not led to genuinely free trade.  

Now that EU enlargement is a reality, Moldova’s economic and technical instruments still do not correspond either to European requirements, or to WTO norms. In order to keep existing export markets in Europe and to diversify external trade it is necessary to develop more actively export-oriented sectors. For Moldova, full participation in regional free trade areas created within the framework of Stability Pact is also important.  

The provision of sustainable economic growth is not possible without the attraction into the country of a substantial volume of foreign investment. It is obvious, that the creation of a favourable investment climate is mostly a domestic concern. However, taking into consideration its importance, it is also the priority of the EU-Moldova PCA implementation.  

While the overall value of foreign direct investment has been increasing gradually – from US$ 102 million in 2001 to US$ 123 million in 2004 - Moldova still has one of the lowest rates of investment per capita standing at around US$ 50. 

The World Investment Report for 2004, prepared by the UN Conference on Trade and Development (UNCTAD) used the share of foreign direct investment in the growth of fixed capital formation as one of the indicators of the effectiveness of state policy in attracting foreign capital. In the countries of Central and South Eastern Europe this figure is about 25% and for Moldova it is more than 40%. However, this "leading" position reflects a very low GDP per capita level and the small size of the internal market. 

Two other indicators are used in the UNCTAD Report. These are the Inward FDI Performance Index (the ratio of a country’s share in global foreign direct investment flows to its share in global GDP) and Inward FDI Potential Index (based largely on the structural economic factors – the rate of growth of GDP, per capita GDP, share of exports in GDP, telephone lines per 1000 inhabitants, commercial energy use per capita, share of research and development expenditures in gross national income, share of tertiary students in the population and country risk). These indicators allow one to abstract the size of the internal market (Inward FDI Performance Index) and to rate countries based on their potential in the field of attracting foreign direct investments (Inward FDI Potential Index). 

According to the Inward FDI Performance Index, Moldova is included in the group of countries with a high index value. This means that the country attracted more foreign direct investment than could be expected relative to GDP. According to the Inward FDI Potential Index the situation is, unfortunately, different. If for the period 1992-1994 the value of the index was 0.233 (40-th place among 140 countries), in 2000-2002 the value of the index considerably decreased and constituted only 0.129 (110-th place for Moldova, respectively). 

Moldova was among the “front-runners” countries in 1992-1994, but in 2000-2002 the country is referred to the group of the “above potential economies”, which means that in order to attract foreign direct investment further structural economic transformations reform is required. Foreign investment is attracted to countries that pursue reform, and the presence of foreign investors is itself a spur to further reform. 

An assessment of the results of the reform effort is published by the European Bank for Reconstruction and Development (EBRD) each year[4]. Compared to the other countries of the region (neighbours and main trade partners) reform in Moldova is slower and not always consistent. This complicates the accession to the European single market and worsens the country’s investment image.

With regard to Moldova’s possible European integration, it is necessary to foresee the price that will be necessary to pay for this, and in particular, not only within the process of a preparatory period, but also after full EU membership. In the EU-15 countries prices are nearly the same. At the same time, only the introduction of higher excise duties on oil products, which is subject to strict control, leads to an increase in prices for transportation or public utilities. Besides, along with the introduction of a single European currency, as the experience of the EU-12 countries suggests, prices go up by 20-25%.  

Therefore, during the elaboration of the national programme for implementation of the Moldova EU Action Plan (targets and terms of their achievement - intentions and possibilities) it is possible and necessary to address the experience of EU countries. In the nineteen fifties the founding fathers of the European Community appealed for a small steps strategy rather than a grand design. Such an approach can lay the foundation for Moldova’s European integration strategy. Only the broad involvement of a lively, interested, including financially solvent, “player” will make the approaching really meaningful. It is important that there is social support. In particular, it is crucial that most of the population is involved in the process of democratic and structural reforms and the creation of a state based upon the rule of law. The movement towards European integration will become more intensive only when all its participants – government, business and civil society are ready for integration and are aspiring towards it.