Joanne Irvine, fund manager emerging markets at Aberdeen Asset Management With the launch of the ...
Joanne Irvine, fund manager emerging markets at Aberdeen Asset Management
With the launch of the euro on 1 January 2002, the process of EU enlargement takes on a new dimension. Eight central and eastern European countries (Poland, Hungary, Czech Republic, Slovenia, Slovakia and the three Baltic states) are likely to conclude negotiations on membership by the end of 2002 and join the EU by the start of 2005.
In 2001, the EU made enlargement one of its top priorities. An informal roadmap between the EU and candidate countries should be concluded in 2002 and, following this, membership legislation needs to be ratified in the applicant countries and existing EU member states.
The EU then requires at least two years of relatively stable exchange rates and fulfilment of the Maastricht criteria before candidates can adopt the euro, implying the most advanced candidates have the possibility of achieving full financial convergence as early as 2007.
In 1993, the existing EU members committed themselves to enlargement. Since then, governments in countries where EU membership has been a priority have been pushing through reforms to transform themselves from centrally-planned economies to fully-integrated market economies within the EU.
In the past decade, sound macroeconomic policies, legal and institutional reforms, foreign direct investment and trade liberalisation have contributed to excellent GDP performance, together with significant improvements in productivity.
The difficult areas are agriculture, regional policies and labour mobility. The region has a larger but considerably less supported agricultural sector ' 4%-5% of GDP in Hungary and Poland, for example, compared with 2% of GDP in the EU.
The most contentious issue is the level of subsidy for new members who want their farmers to receive the same degree of support as existing EU farmers. However, this would have a material impact on the EU budget and has not been provided for in the existing seven-year budget framework through 2000 to 2006.
Existing regional policies, which distribute subsidies on the basis of relative per capita income, are also controversial as they potentially redirect subsidies from the south to central and eastern Europe.
In terms of investment opportunities, the countries with the most developed stock markets of the eight candidates are Poland, the Czech Republic and Hungary. Of these, Hungary is the most advanced in terms of negotiations while Poland is the least advanced, primarily because of the importance of its agricultural sector and labour mobility issues. However, although Poland has the most difficult issues to overcome, it is highly unlikely not to be admitted in the first wave.
Aberdeen's global and regional emerging market funds are significantly overweight in central Europe with a particular emphasis on the financial sector.
EU enlargement, which has been a long-term strategic objective of central and eastern European governments, is likely to be a reality in 2005. Since negotiations could be concluded as early as this year, the southern European experience means this is likely to be reflected in asset prices well ahead of the region's accession to EMU.
Further enlargement with launch of euro.
Sound macroeconomic policies across eurozone.
Hungary looking positive.
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Launching later in 2019
£80bn funds under calculation