Effects of EU Membership On Latvia And Estonia

Article by Ivo Alehno, Maksim Greinoman

Co-authored by Janne Kairo

The accession to the European Union will considerably affect the economic policy of the Government of any Accession State. The question of how much a State has to intervene in the market has not been answered similarly in all the existing EU Member States until now. However, due to a very complex interplay of different EU policies, the overall direction of the development of the markets in different EU Member States is becoming more and more similar. Under the need to be competitive with the US economy, the markets in the EU are gradually becoming increasingly deregulated. The important difference between the EU and the USA is, however, the fact that the market economy in the EU countries contains a strong social flavour. This implies two very fundamental issues; firstly, market economy, i.e. the State (and the European Community) protects market mechanisms against distortion. Secondly, the balancing aspect of social responsibility of the State, i.e. the State (and the European Community) ensures that those who cannot participate in the interplay of market forces have, in any event, a certain level of social protection.

Some of the instruments protecting market forces in the EU are competition law, rules on public procurement and State aid, provisions regarding regulated areas of the economy (like energy, postal services, formerly also telecommunications) and financial market laws. Additionally, the creation of highly qualified governmental agencies in these areas and the role of the judicial power as the independent arbiter are also crucial.

EU membership and protection of market economy in Latvia

Latvia, a country that 13 years ago had planned economy with State-owned enterprises, has today a fully functioning market economy that is dominated by privately-owned enterprises. Similarly, most real estate is privately owned. The Latvian legal system has undergone a complete change to create a legal framework for free market economy and, at the same time, incorporate the acquis communautaire.

The Latvian State is protecting its market economy from distortion with the same instruments that have been developed earlier by the EU countries. The accession will affect the market forces in Latvia due to increased competition and Latvia will more clearly follow the common EU economic policy model. There are a lot of newly established and rapidly developing small and medium-sized...