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Briefing No 32
The European Economic Area (EEA) and the enlargement of the European Union

The views expressed in this document are not necessarily those of the European Parliament as an institution.


2. AGREEMENT ON THE EUROPEAN ECONOMIC AREA

The EEA Agreement anticipated the establishment of an internal market covering the European Community (EC) and its Member States on the one hand, and the countries of the European Free Trade Association (EFTA), on the other. The Agreement was signed on 2 May 1992 in Oporto between the then 12 EC Member States and the 7 EFTA members: Austria, Finland, Iceland, Liechtenstein, Norway, Sweden and Switzerland. Switzerland, however, failed to ratify the Agreement as a result of a narrowly adverse referendum in December 1992. Because of their de facto economic union, the fate of Liechtenstein was initially linked to that of Switzerland. The Agreement came into force at the beginning of 1994, covering therefore 17 countries ( 1). Since then, three of the original EFTA members — Austria, Finland and Sweden — have become full members of the European Union. The Principality of Liechtenstein managed to join the EEA on 1 May 1995, under the condition of certain adaptations to the customs union agreement of 1993 between the two states. The EEA Agreement therefore now applies to the 15 EU and the 3 EFTA Member States: Iceland, Liechtenstein and Norway. Switzerland, though not a member of the EEA, remains nevertheless a member of EFTA ( 2).

The above complex situation is the result of several changes in relations between the EFTA and EC countries over the years ( 3). The UK had promoted EFTA in the late 1950’s as an intergovernmental alternative to the supranational EC. The limits of EFTA, which sought mainly to establish free trade in industrial goods, were emphasized however by the British applications for EC membership in the 1960’s. When the UK and Denmark eventually joined the EC in 1973, the future of the EFTA construction seemed in doubt. Therefore, with the second enlargement, each of the remaining five EFTA members negotiated bilateral free trade agreements with the enlarged Communities. The aim of these agreements, namely to abolish import duties on industrial products, was mostly achieved by 1977.

The idea of a European Economic Area dates back to a joint EFTA-EEC ministerial meeting in Luxembourg in 1984, which adopted a declaration pledging a closer EC-EFTA cooperation, leading eventually to the establishment of a "European Economic Space" (later "Area"). The Declaration, however, yielded disappointing results and the EC-EFTA cooperation rather struggled to keep up with the EC’s Single Market programme. EFTA’s fears of economic marginalization and the EC’s reluctance in acquiring new members before the creation of the impending Single Market led Jacques Delors, the then President of the Commission, to propose a new form of partnership in 1989. The idea was taken up by the EFTA side with enthusiasm and formal negotiations on the EEA began in 1990. At the beginning of the negotiations, the EFTA states, apart from Austria, saw the putative EEA Agreement as a way to enjoy the benefits of the Single Market without necessarily joining the EC. Yet two years later, at the end of the negotiations, it had become clear for most of the EFTA members that close economic integration without decision-making powers was second best to membership itself. Designed as a sort of waiting-room for the neutral EFTA states, the EEA Agreement was thus to some extent overtaken by history even before the first day of its existence.

2.1. Scope of the EEA Agreement

The aim of the EEA Agreement, as laid down in article 1, is to:

"...promote a continuous and balanced strengthening of trade and economic relations between the Contracting Parties with equal conditions of competition, and the respect of the same rules, with a view to creating a homogeneous European Economic Area".

In order to attain these objectives, the EEA Agreement entails the elimination of (mainly technical) barriers for the free movement of goods, services, capital and persons between the EU and EFTA states. This constitutes the "four freedoms" through which the Single Market of the current 15 EU members is extended to apply to Norway, Iceland and Liechtenstein, as already mentioned above. In addition to rules concerning the so-called four freedoms, the Agreement entails application of competition rules. Furthermore, the EEA Agreement also covers so-called "flanking and horizontal policies",with the intention of strengthening the internal market,. These additional fields of cooperation include social policy, consumer protection, environment, education, research and development, statistics, tourism, small and medium-sized enterprises, culture, information, and audio-visual services. Cooperation between the European Community and the EEA-EFTA states outside the four freedoms is covered by Protocol 31 of the EEA Agreement. The EEA-EFTA partners participate in EC programmes in the aforementioned fields and have a voice in their development and management through participation in their committees. Legislative steps have currently been taken to facilitate the full participation of the EEA members in the Community programmes concerning cultural cooperation.

The EEA, however, differs from the EC Single Market in that its coverage does not extend to all EU policy sectors; the Common Agricultural Policy (CAP) and the Common Fisheries Policy are the major areas excluded in principle from the scope of the Agreement. The EEA does not cover indirect taxation (VAT and excise duties) neither, nor has it a common external economic and trade policy (Common External Tariff, anti-dumping measures, etc.). Consequently, the EEA does not constitute a fully "frontier-free" market, nor a true customs union. Yet it provides for fundamentally improved free trade. Though border controls amongst the EEA- EFTA and EU states exist, they are greatly facilitated. Over 80% of the Single Market legislation (some 1,500 directives, regulations, decisions at the time of signature of the Agreement) applies within the EEA, as will most future Single Market legislation. Furthermore, because of practical considerations agreements have also been needed in fields formally outside the EEA, notably on various aspects of trade in agricultural and fisheries products. Although the Agreement does not cover common commercial policy, the EEA-EFTA states have often concluded trade agreements, parallel to those of the EU, with third countries.

Generally speaking, the provisions of the EEA Agreement constitute a retranscription of those concerning the four freedoms as laid down in the EC Treaty. However, one of the special features of the EEA Agreement is that it is continuously updated by adding new EC legislation. Given the large output of new internal market legislation, this is necessary in order to maintain the homogeneity of the EEA. Community legislation, 'acquis', of EEA relevance is therefore incorporated on a monthly basis into the Agreement by decision of the EEA Joint Committee. As for the Community's decision-making process, the Agreement provides for information and consultation procedures at all stages.

2.2. Institutional framework

In order to reconcile the requirements of both the EC and EEA-EFTA sides, the institutional framework under the EEA Agreement is conceived in two pillars with certain joint bodies for decision-shaping, decision-making and dispute settlement. Of the joint bodies, the EEA Joint Committee is the body responsible for the day-to-day management of the EEA Agreement. The Joint Committee, who generally meets once a month, is made up of ambassadors of the EEA- EFTA states and representatives of the EU Member States and the European Commission. The Joint Committee is assisted by five sub-committees, which carry out the detailed work of aligning legislation: (I) free movement of goods, (II) free movement of capital and services, (III) free movement of persons, (IV) horizontal and flanking policies, and (V) legal and institutional matters.

The highest political body is the EEA Council, which consists of ministers from each of the 18 states as well as representatives of the EC Commission. The EEA Council provides political impetus for the development of the Agreement as well as guidelines for the Joint Committee. EEA Council meetings take place at least twice a year. Decisions are taken by consensus, and the EU and EFTA are separately responsible for implementation in accordance with their own procedures. The EEA Joint Parliamentary Committee (JPC), comprising Members of the European Parliament as well as MPs from the EEA-EFTA states, provides democratic supervision. The Joint Parliamentary Committee has the power to issue reports and to pass formal resolutions on EEA matters. Moreover, the Agreement establishes an EEA Consultative Committee in order to enhance social dialogue within the EEA. Like the JPC, the Consultative Committee may express its views in the form of reports or resolutions. The EC Commission, on the one hand, and the EFTA Surveillance Authority (ESA), on the other, provide practical supervision of the application of the Agreement. In addition to general surveillance of compliance, the ESA has powers in relation to competition, state aid and public procurement. Judicial control with regard to the implementation, application and interpretation of the EEA rules as well as dispute settlement is provided by the EC and the EFTA Courts of Justice.

2.3. Recent developments: Amsterdam Treaty and EMU

The Treaty of Amsterdam, signed on 2 October 1997 and waiting to be ratified, will not directly affect the EEA Agreement as it does not seem to necessitate amending it. The new Treaty is, however, likely to have a variety of indirect effects on the Agreement and its functioning, as well as on the EEA- EFTA states and their relationship with the EU. The EEA-EFTA states are either expressly referred to or implicitly concerned in relation with the implementation of areas such as the Common Foreign and Security Policy (CFSP), visa, asylum and immigration, as well as the removal of border controls (Schengen). Furthermore, the new treaty will change the institutional balance within the EC by both simplifying and increasing the use of the co-decision procedure, thus strengthening the role of the European Parliament. Parliamentary cooperation in the EEA could thus be affected in future by an increased need for dialogue on specific legislative proposals.

As regards the CFSP, the Amsterdam Treaty gives the Western European Union (WEU) a more active role as the EU's operational arm. The possibility of actions involving the WEU will affect the two EEA states which are associate members of the WEU: Norway and Iceland. The possible integration of the WEU into the European Union would confront these states with the problem of whether to continue with the present form of WEU association. Moreover, the new treaty requires the EU to adopt common rules applicable to third countries in the areas of visa, asylum and immigration issues.These rules will affect the three EEA states. The EEA Joint Parliamentary Committee stressed in its resolution on the Amsterdam Treaty and its implications for the EEA, adopted at its 10th meeting in Vaduz last May, that the EEA-EFTA states should be consulted before common EU rules are introduced as regards change of visa requirements for citizens of EEA-EFTA countries and changes within the passport-free area among the Nordic countries. Since the Amsterdam treaty incorporates the Schengen acquis into the EU framework, Norway and Iceland have to re-negotiate their current association agreements signed in Luxembourg in December 1996. The EU is nevertheless committed to preserving the status of these states as agreed in Luxembourg ( 4). The 10th meeting of the EEA Council ( 5), which took place in Luxembourg last October, recalled its determination to keep the impact of the new treaty on the EEA Agreement under joint review. The Council also noted that an informal meeting of the EU and EEA-EFTA Ministers of Environment is being considered. As the new treaty integrates environmental considerations into all policies and actions undertaken by the Community, the EEA side has been calling for greater cooperation in this field.

With regard to the reform of the treaty, the EEA-EFTA states are closely following major EU projects, such as European Monetary Union (EMU) and the fifth enlargement process. The 10th EEA Council welcomed the initiation of the third stage of EMU and pointed out that the success of EMU would be important for the good functioning of the internal market and the prosperity of Europe as a whole. The 10th EEA Council noted also foreign ministers’ discussion, within the framework of the political dialogue, on the general direction and future development of European integration including the enlargement process, as well as specific foreign and security policy issues of common interest like Russia, Kosovo, Albania and the Middle East. Within the EU—EEA political dialogue, the EEA-EFTA states have been welcome to join the statements of the European Union in the field of the Common Foreign and Security Policy. The EEA-EFTA states have joined numerous CFSP statements, in 1998 for example on progress towards a legally-binding protocol to strengthen compliance with the Biological and Toxin Weapons Convention (BTWC), on restrictive measures against the Federal Republic of Yugoslavia, and on the EU Code of Conduct on arms export.

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3. EASTERN ENLARGEMENT - IMPLICATIONS FOR THE EEA

3.1. Legal aspects of EEA accession

Membership of the European Union implies full acceptance of the EU’s existing body of legislation, the so-called acquis communautaire. This acquis, covering all EU commitments and policies, such as the Agreement on the European Economic Area, should be applied by the candidate countries of Central and Eastern Europe at the time of their EU accession. As for the EEA, the candidates will adhere to it in any case after their EU accession. The legal basis for this is given in article 128 of the EEA Agreement:

  1. "Any European state becoming a member of the Community shall, or becoming a member of EFTA may, apply to become a party to this agreement. It shall address its application to the EEA Council.
  2. The terms and conditions for such participation shall be subject of an agreement between the contracting parties and the applicant state. That agreement shall be submitted for ratification or approval by all contracting parties in accordance with their own procedures."

Basically, the EEA accession of the candidates is a just matter of extending the internal market. The fact that acceding countries have to apply to become members of the EEA arrangement as well means nevertheless that everything that has been agreed with the candidates during the negotiations will concern the three EEA-EFTA states as well, as far as EEA related matters are concerned. Any transitional arrangements on EEA relevant issues in the enlargement negotiations will thus concern the EEA-EFTA side as well. The results of the accession negotiations, e.g. transitional periods and exceptions, should normally apply to both EEA-EFTA and EU sides alike. If problems would arisem for example as regards transitional periods, they could possibly also be negotiated with the EEA-EFTA states.

The acquis screening has revealed that the candidates are willing to apply it; yet the question is, whether they will be able to cope with its implementation and application, given the insufficient administrative and legal structures in many of the candidate countries. The starting point being the unconditional application of the EU acquis, transitional periods are merely the only way of supporting the efforts of the acceding countries. In any case, the Commission has reminded the candidate countries, during the acquis screening, that a state becoming a member of the European Union, should request accession to the EEA Agreement as well.

3.2. Previous EFTA enlargement

Differences between the upcoming eastern enlargement and the EU's fourth enlargement are evident. When joining the EU at the beginning of 1995, Austria, Finland and Sweden were already members of the European Economic Area, and they had most of the internal market acquis already in place. At the risk of marginalization, however, most EFTA countries had implemented voluntarily the Single Market legislation in order to remain internationally competitive. Moreover, the EFTA countries met all the membership criteria and, from the EU's point of view, enjoyed the advantages of having sound and performing market economies - being thus probable net contributors - as well as special "European" cultural and political affinities. The three EEA- EFTA members could thus join the Union with shorter transition periods than for previous new members ever.

The applicant countries of Central and Eastern Europe, though progressing with the structural transformation of their economies, still suffer from the heritance of the communist planning economy. The criteria for joining the Union entails thus a tough negotiating process in which the candidates must prove their political, economic, legal and administrative capacities as well as the capacity to take on other obligations of membership. Though the EU has been supporting the candidates in technical, administrative as well as financial terms through a substantive preaccession strategy, there is still a lot work to be done before the applicants reach a state of readiness for accession. The applicant countries of Central and Eastern Europe are likely to be granted transition periods in order to implement the amount of Community legislation involved in the membership. Nevertheless, it is probable that by the time they eventually join the Union, current candidates will not have reached a similar level of integration into the EU construction as that of the EEA EFTA states of the previous enlargement.

3.3. Benefits of further enlargement

Already with the creation of the European Economic Aream the world's largest and most integrated regional market had become reality. This huge internal market of some 380 million consumers will be expanded and strengthened further, as the current applicant countries eventually join the EU. With the accession of the CEECs, the Single Market will be extended to cover approximately half a billion people, thus becoming the largest free trade area in the world. Ever since the establishment of EFTA in 1960, the EC has been, by far, its most important trading partner. At present, the European Union accounts for 67% of EFTA's exports. EFTA, on the other hand, is the EU’s second largest trading partner, after the USA, accounting for around 12% of the EU’s trade. EFTA has concluded Free Trade Agreements with all Central and Eastern European countries applying for EU membership. These FTA partners (including Morocco and Turkey) already cover 11% of EFTA's non-EU exports (1996) ( 6).

With the upcoming enlargement, the EEA-EFTA states are, in most cases, likely to have market access to the candidate countries on terms more favourable than those of the present Free Trade Agreements. As the scope of the EEA Agreement is broader than that of the FTAs, there are prospects of growth as regards trade and other exchanges by the accession of new members to the EEA. However, as trade in fisheries products under the EFTA free trade agreements takes place under more advantageous conditions than in the EEA, the possibility of trade losses also exists ( 7). Expanding markets in the acceding countries will also offer the EEA-EFTA countries broadened investment opportunities. The fact that enlargement will result in the creation of a wider and larger Single Market, covered largely by the same regulations, will have considerable benefits both for the Member States involved and for the enlarged free trade area on the whole. In theory, a larger internal market will enable greater economic gains, resulting both from increased specialization and the removal of artificial barriers that distort the market by protecting inefficient operators.

As the internal market is the cornerstone of the economic interest of enlargement, conditions for a concurrent enlargement have to be ensured. Greater legal security, removal of distortions of competition, improved market access as well as strengthened division of labour at the European level will enhance Europe's competitivity at the global scale and increase its economic welfare.

3.4. Problems of enlargement

Taking into account their different political and legal systems as well as their general market economy backwardness, the integration of the candidate countries in the EU/EEA structures will be a true challenge, both for the candidates as well as the current Member States. Although enlargement in general will benefit the contracting parties, its economical implications are not just positive. Larger markets and thus greater opportunities for expansion of economic activities will be accompanied by an increased competition on the European-wide scale, resulting among other things in lower labour costs in the applicant countries. In the short term, transitional problems are thus likely to arise, affecting both the newcomers as well as the EEA- EFTA states. These problems will probably be more serious with the upcoming enlargement than with the previous one, given the substantial differences, for example, wages and standards of living between the applicant countries and the current EU/EEA members.

For the time being, it is too early to evaluate possible negative implications of the enlargement on the EEA Agreement and the trade and economies of the EEA-EFTA states. As for example many of the current EU members will be confronted with the integration of the agriculture of the applicant countries into the CAP, this issue is not of EEA relevance, the CAP being outside the scope of the Agreement. In general, it is rather unlikely that the eastern enlargement would present major problems for the EEA-EFTA members. Sensitive areas of negotiations from the viewpoint of the EEA-EFTA states are also the same as for the EU side (eg. free movement of persons/labour). It is thus rather unlikely that there will be more than a few cases where the EEA- EFTA states would have problems other than those which current EU members have. As to concerns of the EEA- EFTA side, the nordic members Norway and Iceland, for example, could be confronted with possible problems in trade of fisheries products. Certain trade in fisheries products exist under the EEA Agreement, where duties are still applied when exporting to the EU. This is due to the fact that during the EEA negotiations, the EEA-EFTA side did not succeed in negotiating a separate free trade agreement in fisheries with the Union. However, the possibility exists under the EEA Agreement for compensations in similar cases. Some other concerns of the EEA- EFTA side have already been identified in the areas of standardisation and programmes. The EEA- EFTA states stress the importance of the candidates being able to comply with European standards. In general, the participation of the CEECs in different EU programmes might also affect the EEA- EFTA states' participation.

3.5. Financial aspects

The upcoming enlargement necessarily presupposes an overall reassessment of the EU’s financing system and especially the expenditure on the Common Agricultural Policy (CAP) and Structural Funds. As to the EEA Agreement, the financial obligations agreed upon in the EEA context — the Financial Mechanism — may be indirectly affected by these considerations. With the aim of contributing to reducing socio-economic disparities between the regions of the EEA, the Agreement (articles 115-117, as well as Protocol 38) foresaw the establishment of a Financial Mechanism to support development projects in the so-called cohesion countries (Greece, Ireland, Northern Ireland, Portugal and Spain). During its five-year life-span, ending in December 1998, the mechanism will have provided for making ECU 500 million available for grants, as well as interest rebates on loans of ECU 1500 million from the European Investment Bank (EIB), for projects stimulating economic cohesion and development ( 8).

The mechanism was initially funded by the participating EFTA states. Since 1995, the obligations of the three new Member States have been financed out of the general EU budget. Contrary to the conception of the cohesion countries who have been insisting on the perpetuation of the mechanism, other EU members have considered it more as an "admission fee" to be paid just once. According to the EEA-EFTA side, no legal obligation exists for perpetuation of the mechanism beyond 1 January 1999. The EU Council does not share this standpoint, backed especially by the Scandinavian Member States, and is rather of the opinion that the Financial Mechanism should be renegotiated. The EEA- EFTA states have, however, shown willingness to discuss the possibility of a new coordinated effort aiming to reduce socio-economic disparities in the context of a balanced framework of mutual rights and obligations, taking into account the challenges and needs of further European integration. This presentation was deemed unsatisfactory by Spain which, backed by Greece and Portugal, has been requesting extension of the mechanism. The future of the Financial Mechanism has recently been linked by the cohesion countries to the possible strengthening or extension (for example Schengen, environment) of the scope of the EEA Agreement itself. The Spanish position is likely to come within a wider context of financial negotiations underway in the context of the Agenda 2000 ( 9). Because of this controversy, the 10th EEA Council simply noted in its conclusions the exchange of views on the issue and invited the appropriate EEA body to discuss the matter rapidly ( 10). It is expected that the EEA Joint Parliamentary Committee will discuss the question of the Financial Mechanism in its upcoming 11th meeting in Luxembourg on 23 - 24 November. The EEA- JPC has been backing the general EEA-EFTA position on the expiration of the mechanism.


( 1) OJ L 1, 3.1.1994.

( 2) In addition to their EEA membership, Iceland and Norway have bilateral free trade agreements with the EU. Switzerland has a bilateral agreement with the EU, which covers also Liechtenstein along with its EEA membership.

( 3) For a detailed analysis on the development of the EFTA-EC relationship, see Norberg et.al.: "The European Economic Area. EEA Law. A Commentary on the EEA Agreement", Fritzes, Stockholm 1993, pp. 35-70.

( 4) European Economic Area Joint Parliamentary Committee: "Draft report on the Amsterdam Treaty and its implications for the EEA", PE 226.519, 7.5.1998, pp. 2 - 6; European Economic Area Joint Parliamentary Committee: "Resolution on the Amsterdam Treaty and its implications for the EEA", Annex to minutes from the 10th meeting of the EEA Joint Parliamentary Committee on 25 - 26.5.1998 in Vaduz - Liechtenstein, 14.8.1998.

( 5) Conclusions of the 10th meeting of the EEA Council, Press Release: Luxembourg (06-10- 1998) - Nr. 1605/98 (Presse 330).

( 6) For general information on the EEA-EFTA trade relations, etc., see EFTA homepage on the internet: http://www.efta.int.

( 7) European Economic Area Joint Parliamentary Committee: "Draft report on the enlargement of the European Union and its effects on the EEA", EP 227.368, 10.11.1998.

( 8) European Commission: «The European Economic Area Financial Mechanism.«, Third annual report from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of Regions, COM(97) 567 final, Brussels, 27.11.1997.

( 9) Agence Europe: "(EU) EU/EEA: Possible later developments of the EEA Agreement are suspended because Spain calls for financial support from EFTA countries to continue for "cohesion countries", No. 7317, 7.10.1998, p. 10.

( 10) Conclusions of the 10th meeting of the EEA Council, Press Release: Luxembourg (06-10-1998) - Nr. 1605/98 (Presse 330).


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© Enlargement: 17 November 1998