Economic renaissance of the Baltic Sea region

13 January 1993

Doc. 6734

1403-7/1/93-5-E

REPORT

on economic renaissance of the Baltic Sea Region

(Rapporteur: Mrs VON TEICHMAN,

Germany, FDP)

Problem

The Baltic Sea Region - comprising several Nordic countries, the Baltic states, Poland and parts of Russia and Germany - is free again to develop in unison, following the end of the cold war and the democratisation of Central and Eastern Europe. However, the legacy of communism also presents major challenges, on the Baltic's eastern and southern shores in particular - in the form of economic underdevelopment, environmental damage, a still imperfect and incomplete legislative and administrative framework, and absence of a transport and communications infrastructure.

Solution

The Assembly calls on the governments and parliaments of the Council of Europe member states to extend any conceptual and material assistance possible to the former communist countries in the Baltic Sea Region; and on the latter inter alia to pursue steadfastly their efforts to reform their economies, to maintain and strengthen pluralist society and democracy, and to ensure protection of minorities, in conformity with Council of Europe standards and international conventions.

I. Draft resolution

1. The Baltic Sea Region - comprising several Nordic countries, the Baltic states, Poland and parts of Russia and Germany - is free again to develop in unison, following the end of the cold war and the democratisation of Central and Eastern Europe. In this sense, the region is a test case for European East-West co-operation as a whole, proving the willingness to achieve greater integration.

2. The Assembly's Colloquy on Economic Renaissance of the Baltic Sea Region, held in Stockholm and Tallinn in March 1992, provided political impetus to this process, building as it did on similar initiatives taken by the Nordic Council, the Foreign Ministers of the region who in March 1992 created a Council of Baltic Sea States, and international institutions such as the European Community, the Organisation for Economic Co-operation and Development (OECD) and the European Bank for Reconstruction and Development (EBRD). The vitality of the region, and its history, are also demonstrated in the Council of Europe Hansa Cities Route.

3. The potential of the region is undeniable: a linking Baltic Sea, a qualified work force, rich natural resources and proximity to central European markets. However, the legacy of communism also presents major challenges, on the Baltic's eastern and southern shores in particular - in the form of economic underdevelopment, environmental damage, a still imperfect and incomplete legislative and administrative framework, and absence of a transport and communications infrastructure.

4. Solving these problems through international co-operation is important to the prosperity not only of Northern Europe, but to a large extent of Europe as a whole, for the future of democratic institutions and economic development are closely intertwined in the former communist countries.

5. The Assembly in consequence calls on the governments and parliaments of Council of Europe member states:

i. to extend any conceptual and material assistance possible to the former communist countries in the Baltic Sea Region;

ii. especially to ensure favourable trade conditions for these countries through such bodies as the European Community, European Free Trade Association (EFTA) and the General Agreement on Tariffs and Trade (GATT) - by opening markets for their exports, including agricultural products, by allowing them to protect temporarily their "infant industries" and to utilise their comparative advantages, in particular low labour costs;

iii. to consider providing within the Council of Europe a framework for pan-European co-operation on economic issues - including transport, communications and infrastructure - with the participation of the European Community, EFTA, the United Nations Economic Commission for Europe, the European Bank for Reconstruction and Development and other relevant bodies. Such a framework could also facilitate co-operation and co-ordination of economic policy among the growing number of newly democratised countries not belonging to the European Community or EFTA.

6. Furthermore, the Assembly calls on the governments and parliaments in the Baltic Sea Region:

i. to pursue and intensify the promising initiatives they have taken, inter alia, through the creation of the Council of Baltic Sea States or via the Nordic Council;

ii. to stimulate contacts at all levels - such as the exchange of students and faculties between universities and other educational institutions, between companies, in particular through the newly established Baltic Chambers Organisation, and in the cultural field through bodies such as the Ars Baltica;

iii. to give special priority to telecommunications and to the establishment of a modern transport infrastructure by sea, by rail and road - including the "Via Baltica" project by which Germany, Poland, Russia (St Petersburg and Kaliningrad) and the Baltic states would be linked;

iv. to tackle urgently environmental problems in particular by ensuring the safety of Soviet-built nuclear plants in the former centrally-planned economies, to help implement measures for energy conservation, to emphasise ecology-oriented forms of energy generation, and to establish a cross-border network of energy exchange permitting a more efficient use of this resource;

v. to realise the enormous tourism potential of the region, not only through measures such as the above, but also through investment, for example in accommodation facilities and the restoration and preservation of the cultural heritage, while taking into account the impact of tourism on the environment;

vi. to initiate a reform of the health-care system in the former communist countries of the Baltic Sea Region, thereby enhancing the quality of life of their populations;

vii. to pay particular attention to the unique and difficult situation of the Kaliningrad enclave - cut off from the rest of Russia and with an economically insufficient hinterland -so that it may overcome these handicaps and enjoy full economic integration with neighbouring countries.

7. Finally, the Assembly encourages the former communist countries in the region:

i. to pursue steadfastly their efforts to reform their economies, paying particular attention to the need to enact clear legislation governing business, including foreign investment, a fair and authoritative juridical system, a privatisation programme which both benefits the people and ensures the competitiveness of firms, and the formation of a functioning banking and financial sector, fundamental to any sustained economic development;

ii. to realise fully the trade and development potential of all their neighbours, including former communist ones, and to seek inspiration in so doing from successful co-operation efforts in Europe in the past, such as the Benelux Union or that among the Nordic countries;

iii. to continue the privatisation of their agriculture, not least by supporting co-operative initiatives;

iv. to promote the introduction of environmentally friendly methods of production in agriculture and industry;

v. to maintain and strengthen pluralist society and democracy, and to ensure protection of minorities, in conformity with Council of Europe standards and international conventions.

II. Explanatory memorandum

by Mrs VON TEICHMAN

Contents

Page

I. Introduction 5

II. The need for intensified regional co-operation 6

III. The institutional framework of change 10

IV. Trade rather than aid: priority areas for economic co-operation 12

V. Co-operation for a better infrastructure 14

VI. Meeting of the Committee on Economic Affairs and Development

in Berlin and Mecklenburg-West Pomerania (September 1992).

The special case of the Kaliningrad enclave 14

VII. Concluding remarks 15

I. Introduction

1. The aim of the present report is to draw the main conclusions from the colloquy organised by the Parliamentary Assembly of the Council of Europe in Stockholm and Tallinn on 16 and 17 March 1992 on the theme "Economic Renaissance of the Baltic Sea Region", and to envisage a strategy of co-operation for the Baltic Region.1 The report also draws on a visit carried out by the Assembly's Committee on Economic Affairs and Development to Berlin and Mecklenburg-West Pomerania in September 1992.

2. Indeed, the Baltic Sea area, which until very recently was split in two by ideological, military and political confrontation, has the potential to join Europe's other "economic regions" and to again become the cradle of economic growth and cultural and human contact that it once was during the centuries of the Hanseatic League. Provided, that is, that it moves quickly to overcome the obstacles and handicaps posed by recent history, and that it works in unison within a mutually agreed framework. In that sense, the region can become a test case for Europe's overall capacity to remedy the wounds of recent history.

3. The nine countries bordering the Baltic Sea - Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Poland, Russia and Sweden - underwent divergent patterns of development after the end of the second world war. The Baltic Sea Region was divided into two: one part - the NATO allies and the neutral countries - developed in a market economy context, while the other part was subject to central planning introduced by the Soviet Union and was either subjugated by (Poland and the former German Democratic Republic) or integrated into (the three Baltic states) that country. This situation considerably restricted trade and political relations between the members of the two groups.

4. The historic changes that have taken place in Central and Eastern Europe in the last two years - in particular the democratisation process, the independence of the Baltic states and the disappearance of the Soviet Union - have opened up prospects for the development of particularly close relations in this part of Europe. Indeed, the countries which have recently joined the democratic fold - Estonia, Latvia, Lithuania, Poland, Russia and the former East Germany through German unification - are now in a position to establish more intimate ties with their Baltic Sea neighbours.

5. In the context of co-operation for the establishment of a Baltic Economic Area (BEA), or however one might name it, certain fields require special attention, such as the institutional framework of transition, trade, transport and environmental issues. The social and economic revival of the new democracies and the establishment of close relations around the Baltic will, to a large extent, depend on the success of the policy pursued in these four sectors.

II. The need for intensified regional co-operation

6. At a time when Europe is integrating, it is important to underline that there is, concurrently, a need for regional co-operation. Moreover, co-operation in the Baltic Sea Region is vital as a means of bringing about greater political stability in a strategic part of Europe. What the continent least of all needs is another area of strife and unrest, to be added to the existing unstable ones, such as the Balkans, the south-western part of the former Soviet Union, or other parts of the Commonwealth of Independent States.

7. In fact, the Nordic countries ( Denmark, including the Faroe Islands, Finland, Iceland, Norway and Sweden) have long-standing traditions of regional co-operation, notably through the Nordic Council. However, co-operation in the Baltic Sea area can also be built on a number of initiatives of the recent past, such as the Mare Balticum conference organised by Estonia in Tallinn in November 1991, the Conference of Foreign Ministers of the Baltic Sea States, held in Copenhagen in March 1992, and the parliamentary conference of the Nordic Council on Baltic Sea co-operation in Oslo in late April 1992.

8. Co-operation with the states of the Baltic in transition is coordinated and carried out by many existing organisations. OECD supports, inter alia, these countries in helping to create a national accounting system. The European Bank for Reconstruction and Development, the International Monetary Fund and the World Bank all have set up their own programmes for technical assistance and investment, and the Council of Europe assists the new democracies in modifying their constitutional, administrative and legislative foundations.

9. At the invitation of Denmark and Germany, the Foreign Ministers of the Baltic Sea Region had met in March 1992 in Copenhagen in order to co-ordinate their support for the reform process in the eastern Baltic Sea countries, and to create better conditions there for the transition to democracy and a free market economy.

10. The Foreign Ministers of Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Norway, Poland, Russia and Sweden jointly decided, in the presence of a member of the Commission of the European Community, to establish the so-called Council of Baltic Sea states. This council is meant to serve as a regional co-ordinating body, designed to react flexibly and largely without a formalised institutional framework to meet, in particular, the urgent needs of the new democracies.

11. Indeed, the economies of the countries recently released from the communist system still bear deep scars from the constraints to which they were subjected for such a long period of time - and this despite valiant efforts at reform. On the other hand, what one might in simplified terms call the "western rim" of the Baltic Sea - Denmark, Finland Germany and Sweden - belongs to one of the richest and most highly developed areas in the world and has been able to achieve substantial economic integration. The duality of this situation around the Baltic Sea is rather unique, providing both a challenge and an opportunity.

12. In the region there are up to seventy million inhabitants, well-educated by international standards and with major cities and regions waiting to open up to each other. The human potential, so necessary for successful economic development, is definitely there, and one should use it. Very important for the transformation of the formerly communist countries will be the exchange of information and experiences with each other and with people from the established market economies.

13. Chambers of commerce can fulfil a particularly important role in this regard. Thus, the Baltic Chambers Organisation, uniting representatives of ten Baltic Sea countries, was set up in 1992. Altogether twenty-three Chambers of Industry and Commerce have permanent committees for training, education and management, infrastructure and transport. Political foundations can also provide valuable assistance for the shaping of democracy and viable political parties essential to it.

14. Furthermore, the Land of Schleswig-Holstein has created a highly popular Summer University specialising in economics and business administration. And the Economic Academy of Schleswig-Holstein, with fourteen affiliate institutions, trains 14 000 participants yearly from Germany and abroad. In addition, the Ars Baltica is active in the cultural field, with exhibitions, concerts and symposia.

15. Finally, your Rapporteur may be forgiven for being a little proud of the fact that her native city Hamburg has established a partnership with St Petersburg. And she was moved to see how Hamburg school-children took such a keen interest in the problems of St Petersburg, preparing gift parcels and urging their parents to do the same. Human contacts and local initiatives are a sine qua non in this and other help initiatives.

16. Care must be taken that the remarkable human potential is not jeopardised by political instability. Such unrest could arise in particular from tensions between majority and minority populations in a region of considerable ethnic and religious diversity. The protection of minorities' rights within the national consensus of each country is therefore a necessary prerequisite for progress, and one which the Council of Europe with its long experience with human rights could help to ensure. The creation of a convention for the protection of minorities would be an essential element in this process.

17. Development could, however, not happen without the investment of capital, on a long term basis, that is to say: not without the assistance by the richer countries to the poorer ones. Priority areas, which your Rapporteur shall return to later, include rebuilding of the fully insufficient public health sector and the rehabilitation of the pharmaceutical industry, the running and security of technical installations including power stations, and the elimination of various bottlenecks, for instance in the transport sector.

18. But again, the political conditions must be right as well. Capital for investment will not flow to countries pursuing an isolationist, closed-door policy - or which are unable or unwilling to ensure peace and stability by coming to terms with national or religious minorities within their borders.

19. Baltic Sea co-operation will have to meet another external challenge that has developed along with the fragmentation of Eastern Europe. There is a non-negligible danger that nationalism and ethnic conflicts might flare up again, resulting, at worst, in civil strife and major flows of refugees. The war in the former Yugoslavia, the problems in Moldova and the conflict between Armenia and Azerbaijan are cautionary examples of this. In order to avoid even the slightest danger of open ethnic conflicts, it is important that any problems be approached timely by all parties concerned.

20. Baltic Sea, and international, co-operation is an essential component in the economic transition in Central, Eastern and South-Eastern Europe and the successor states of the Soviet Union.Failure of the economic reforms started or planned would permanently destabilise these countries. As a result, Europe as a whole would be torn by a long-term division between rich and poor countries.

21. Inevitably this transition will bring about a reduction of unproductive, superfluous jobs created under communism for the sake of full employment. The social hardships resulting from such a reduction must be taken very seriously and help is required to overcome it. In the medium-term, however, only productive jobs are safe jobs and only efficient, competitive enterprises can create the economic surplus which is needed to pay for social benefits on a wide scale. Thus, a temporary reduction in employment may be a necessary evil on the way to a socially-balanced market economy. It is the obligation of those who are better off to help the victims of economic upheaval. This is a moral imperative as well as a political and economic necessity.

22. Another priority task should be the environment. Under communism, the environment was not only neglected but seriously damaged, largely because the economic system was so inefficient, so "under-performing", that it was not able, unlike the market economies, to create the "surplus value" which could be used for environmental measures.

23. Moreover, there is a looming danger of ecological catastrophes, such as Baltic Sea pollution or accidents resulting from inadequate safety at nuclear power plants in most of these countries. The Baltic itself has, sadly enough, become one of the most polluted seas in the world and - because of its shallowness and limited connection with the Atlantic - among those least capable of purifying themselves. All countries bordering it are culprits, but the poorer ones are in the greatest need of assistance in an enterprise which, if successful, would benefit all, but which, if permitted to fail, will hurt all alike. Other forms of pollution in the reforming countries also need to be checked: of agricultural soil, rivers and urban industrial centres. Finally, the risks that would arise from uncontrolled proliferation of nuclear weapons and know-how from the territory of the former Soviet Union should not be underestimated.

24. No-one in the West can escape these dangers, they are right at our doorstep. Therefore, we must provide a common European response also in the Baltic Sea Region. One immediate problem of common concern is the safety of existing Soviet-built or Soviet-designed nuclear power stations of various types in the area. Environmental protection also in a broader sense will be essential for all countries bordering the Baltic. So would the development of a reliable transportation and telecommunications infrastructure. In this field, the German-Russian co-operation could serve as a precedent: a centre for management and marketing has been established, and numerous joint ventures in the sphere of environmental protection have been set up.

25. The Committee on Economic Affairs and Development of course will have to consider such issues as a suitable transport infrastructure in the Baltic Sea Region - for instance as part of its long-standing co-operation with the European Conference of Ministers of Transport - or ways of facilitating trade. However, it will also have to address the question of what type of institutional framework might be recommended to the former command economies on the eastern and southern shores of the Baltic.

26. The role of the Council of Europe and its Parliamentary Assembly in the Baltic Sea Region, and in particular in the formerly communist countries, has been important and could be even more so. The Council of Europe oversees elections, assists with advice as constitutions are drawn up, fundamental legislation is prepared, principles for local government are established, and the rights of minorities protected. The Council's so-called Demosthenes Programme for assistance to the countries of Central and Eastern Europe is fully under way, and one of the organisation's main vocations has become to integrate these countries in peace and prosperity with the rest of the continent.

27. However, there is a paradox in the present situation, in the sense that the Council of Europe can offer little in certain areas of great concern to the formerly communist Baltic countries and to Central and Eastern Europe in general - namely economic co-operation, infrastructure, transport and communications.

28. The Council, it will be remembered, abandoned much of its work in these domains already in the 1950s, as they were taken up by such organisations as the OECD (previously the OEEC forming part of the Marshall Plan), the newly formed European Community and EFTA, the United Nations Economic Commission for Europe, the European Conference of Ministers of Transport or the European Civil Aviation Conference (ECAC).

29. The Parliamentary Assembly meanwhile continued its work in the economic and transport field, notably through its Committee on Economic Affairs and Development. And this explains the particularly close co-operation which the Parliamentary Assembly has developed over the years with for instance the OECD and, more recently, with the European Bank for Reconstruction and Development (serving as these organisations' parliamentary counterpart) not to mention the other organisations just cited.

30. The Council may grow in future to comprise forty or more members states, the majority of which will not belong, for some time at least, to either the European Community or EFTA. The need therefore arises to provide such countries with a proper forum, where they can discuss such matters among themselves, as well as with the European Community and EFTA and their respective member states, in preparation of eventual membership in either of these organisations. The advantage of such a forum would be that major questions could be addressed in a political and global way with a view to enhancing new forms of co-operation in the above-mentioned fields, whether they are ultimately undertaken within or without the Council of Europe's framework.

31. The Council would be the most appropriate forum for such discussions, since it will in future embrace all democratic European nations and has a strong, established, parliamentary dimension. President Mitterrand's speech to the Parliamentary Assembly in May 1992, in which he called the Council of Europe a "crucible" of a future European confederation, was certainly an encouragement in this direction.

32. The Assembly should, in the Rapporteur's opinion, reflect seriously on this idea as it traditionally deals with such matters as economic co-operation, agriculture and transport. Furthermore, the Council could play an important role in facilitating future membership of the European Community on the part of the countries concerned, especially if the European Community were to be represented on the Committee of Ministers of the Council of Europe, as advocated by the Assembly and the European Parliament (and as also foreseen in the arrangement of June 1987 covering the co-operation between the Council of Europe and the Commission of the European Communities).

III. The institutional framework of change

33. Foreign aid alone is not a guarantee of successful development. The efforts of the countries concerned themselves are the key to progress. Hence, among the first priorities for the countries in transition is the need to establish institutions and structures capable of ensuring the creation of a smoothly functioning market economy, and of attracting foreign investment; clear and unambiguous laws and regulations governing business, both foreign and domestic; a well-defined and authoritative juridical system; a privatisation scheme favouring the many and not the few (it is, after all, the "property of the people" which is handed out); and a functioning banking and financial sector, fundamental to any sustained economic development.

34. The inception of stable and independent financial institutions and, in the case of the three Baltic states, the introduction of national currencies to replace the poorly managed ruble - the Estonian "kroon", the Latvian "lats" and the Lithuanian "litas" - are prerequisites for the countries concerned to carry out an independent economic policy. In fact, in June 1992, Estonia became the first former Soviet republic to introduce its own currency and tie it to the D-Mark - with a likely positive effect on economic development, provided that the measures in the monetary and other domains are closely coordinated with those of neighbouring countries.

35. It is fair to assume that the success or failure of the Estonian monetary reform (prepared with the full support of the IMF) will have a wider significance, in that it will respectively encourage or discourage the introduction of other national currencies in the former Soviet Union. Yet, the growing tension in the country's relations with Russia and how this conflict will be resolved will have a crucial impact on investment conditions in Estonia and, ultimately, on the fate of the kroon. In other words, to attract greater flows of foreign capital, Estonia (and the other Baltic states) need to establish as constructive relations with Russia as possible.

36. In this regard, the dominant issue is the withdrawal of ex-Soviet troops from the territories of Estonia, Latvia and Lithuania. Even if it is argued that this cannot be done immediately for social reasons, it is hardly acceptable that the presence of the troops has not yet been regulated in any bilateral agreements. Both sides must also agree on a clear schedule for the withdrawal. Russia sometimes expresses concern about human rights in the Baltic countries when it comes to its own minorities living there. However, she should not be allowed to use these doubts as a reason to delay agreement on troop withdrawal.

37. New constitutions in the Baltic countries also remain to be finalised. And in this context the citizenship issue must be resolved. The governments appear anxious to comply with the requirements of the Council of Europe's European Convention on Human Rights and Fundamental Freedoms. At any rate, it is important to differentiate between, on the one hand, those who form a minority according to international law, and those, and the other, who came as migrant workers. It is, however, of critical importance that those who at the time did not qualify for citizenship but received a permanent residence permission are not discriminated against.

38. Estonia has been the first of the three Baltic states to adopt a new constitution, in July 1992, which represents substantial concessions to the Russian speaking population including the status of Russian as the second working language in public institutions in areas where Russian is spoken by a majority, and the right to vote in local elections even for those Russians who choose not to take up Estonian citizenship.

39. Security, human rights and democracy will be more and more interlinked in the new Europe. They are inseparable from the freedom of economic activity, without which no successful market economy is possible. They also form an essential precondition for any single country aspiring for membership in the Council of Europe or the European Community. Accordingly, the former socialist countries, for their part, ought to live up to these standards and should be under close scrutiny with regard to their fulfilment. Human rights and the treatment of minorities can no longer be considered simply as internal matters of sovereign and independent states, but constitute a legitimate common concern of the international community as a whole. This includes monitoring of policies on citizenship, taking in to account the specific historic circumstances particularly in the Baltic countries.

40. The Baltic Sea countries in transition also need sustained long-term investment and aid from the European Community, the rest of Western Europe and the industrialised world as a whole. While humanitarian motives and solidarity could and should play a part in bringing this about, it should be stressed that this endeavour is also very much in the common interest of Europe - for the future of democratic institutions and economic development are closely intertwined in this region. Therefore, the industrialised market economies both in the Baltic Sea Region and in Europe bear a particular responsibility for economic development in the countries in transition. As a precondition for investment both sides should be prepared to conclude double taxation treaties and agreements for investment protection.

41. Finally, it has to be remembered that most of the countries in the area are small in population (if not always in size), and that they cannot therefore hope to enjoy prosperity unless they trade and co-operate intensely with all their neighbours, both to the West and to the East.

42. It would be a mistake for them to embark on a protectionist, inward-looking course to try to "go it alone". Economic co-operation, the coordination of fiscal, monetary and trade policies are needed to strengthen and fully develop the potential of the region. The Benelux union may serve as an example of a successful co-operation of this sort.

43. The three countries forming the Benelux Union - Belgium, Netherlands and Luxembourg - are all small or medium-sized countries which have learnt to work together, and whose experience in this regard might well be of value to the three newly independent Baltic states in particular, in the co-operation that they envisage among themselves and with the rest of Europe. This should include a custom's union and visa free travel.

IV. Trade rather than aid: priority areas for economic co-operation

44. It is evident that a substantial level of co-operation is needed between the different countries if the development of the region as a whole is to be carried forward harmoniously. Indeed, without the support of the "wealthier" countries, the "poorer" ones will not be able to achieve economic expansion. In order to bridge the disparities, it will be necessary to develop, first and foremost, those spheres which will provide the countries lying on the eastern shores of the Baltic Sea with the opportunity to establish diversified ties with the other nations of the region.

45. The economic characteristics of the two areas are largely complementary. Indeed, one major "comparative advantage" of the less well-to-do countries is their lower cost of labour. Accordingly, the richer countries should allow them to use this advantage for the export of labour-intensive products, even if this were temporarily to the disadvantage of certain domestic industries in the former. Low labour costs are one of the few "trumps" possessed by the former command economies. To deprive them of its use would be contrary to the long-term interests of all. Foreign direct investment undertaken to exploit this advantage should be encouraged, both by "home" countries of investing companies, and by potential "host" nations.

46. Generally speaking, the disparity in wealth in the region can give rise to a circle which is either "vicious" or "virtuous". In other words, either the richer areas do not let in products from the poor ones and the gap will remain or even grow (the "vicious" case); or open trade policies are followed and substantial economic assistance is given to build up economies (the "virtuous" case).

47. It is only natural that almost all countries of Central and Eastern Europe seek to build up ever closer links to the European Community, undeniably (with the EFTA countries) the "economic powerhouse" of Europe. The countries emerging from economic mismanagement and Soviet-type institutions look toward the European Community for economic assistance, investment and guarantees for the security of their fragile democracies. Most of them regard membership of the Community as the best means to achieve these objectives.

48. Gearing up the economy of these countries for membership in the European Community may take some time, depending in each case on the degree of development they achieved in transforming their economies. In the meantime, it would be essential for the Eastern and Central European countries, including the Baltic states, to enjoy open trade access to Western Europe. Trade relations should be developed with the aim of incorporating these countries as fully-fledged partners in the international system of multilateral free trade. The West should grant access to its markets while accepting the right of the less developed partners for a reasonable measure of protection, which should not be understood as being of a permanent nature. Markets are like an umbrella. They function only when they are open, whereas when they are closed, they become a weapon.

49. While the desired end result must of course be completely free trade in the region, such as realised within the European Community-EFTA "European Economic Area", for a transitional period a sort of "non-reciprocity" clause similar to that industrialised market economies observe in their relations with the Third World - for instance in the European Community's Lomé Convention with ACP (African, Caribbean, Pacific) countries - and, more recently, in the European Community association agreements with Czechoslovakia, Hungary and Poland, could well be suitable for trade links also in the Baltic Sea Region. Appropriate forms of ensuring these countries access to Western markets must, at any rate, be found urgently both with the European Community and EFTA countries.

50. Indeed, the recent efforts of the European Community and the EFTA member countries to create an European Economic Area constitute an important step towards the future integration of the countries in transition.

51. Finally, it is important, for the countries in transition, to realise that they should not cut off trade unnecessarily with their former trading partners simply because western markets have opened up. Poland, the Baltic states and Russia are "predestined" by their proximity to each other to remain intimate trading partners, an argument which is reinforced by their similar state of economic development. This is, of course, not at all in contradiction with the need to develop, in parallel fashion, the closest possible links with the already established market economies along the Baltic.

V. Co-operation for a better infrastructure

52. Another fundamental requirement is the establishment of an efficient transport system capable of rapidly moving goods and people, and of communication facilities commensurate with growing trade and investment. While the more affluent countries in the region possess a comparatively modern and highly developed transport network, roads and railways in the poorer countries are both insufficient and in need of repair and improvement.

53. This includes road infrastructure such as petrol stations, motels etc., the modernisation of harbour facilities, terminals, airports and air traffic management systems. The "Via Baltica" project would link by motorway Lübeck and Szczecin and, perhaps later, go up through Poland and the Baltic states to St Petersburg. Combined with the existing Swedish and Finnish road network - and with future bridge connections between Sweden and Denmark and between Denmark and Germany - the whole Baltic Sea Region would be interlinked. Even more important, and environmentally more suitable, is the construction of a modern railway system linking the same area.

54. The development of transport and communications, and better protection of the environment, would also promote the prospects of tourism in the region. Many beautiful - but sadly decaying - cities and towns abound, from Mecklenburg-Western Pomerania in the south (for example Schwerin, Wismar and Stralsund) to the east (for example Tallinn, Riga, Vilnius and St Petersburg). Add to this the many long and sandy beaches and all but forgotten islands, and you have a potential European tourist paradise. To achieve this, however, investments in hotels and restaurants are needed on a massive scale. One aspect of this development is the need for a rapid emptying of the military bases of the former Warsaw Pact in the area (for example around Kaliningrad), as a result of which additional parts of the country-side could be made available for tourism.

VI. Meeting of the Committee on Economic Affairs and Development in Berlin and Mecklenburg-West Pomerania. The special case of the Kaliningrad enclave

55. The Committee on Economic Affairs and Development carried out a most useful visit to Berlin and Mecklenburg-West Pomerania (Schwerin and Rostock) in September 1992. Its purpose was not only to learn about the economic situation in the "new Länder" following unification, but also to see how economic reconstruction in North-Eastern Germany fits in with the overall development of the Baltic Sea Region.

56. The Rapporteur believes it is fair to say that the committee was both awed by the difficulties to be overcome after so many decades of communist mismanagement, and at the same time greatly impressed by the dynamism and determination shown by everybody it encountered. On the one hand the obstacles are daunting. And if they are so for a region so intensively supported by Germany as a whole, how much greater must they be for other countries in the region which cannot count on the same degree of assistance (although Germany gives, together with many other countries, considerable help also to Central and Eastern Europe).

57. On the other hand the signs of progress are already there, pointing to the need for endurance in the assistance effort. Economic growth in Eastern Germany is now higher than in the Western part of the country, though admittedly starting from a lower level. And, as has been stressed throughout this report, there is no reason why the region, together with others around the Baltic, should not be able to "take off" rapidly with the many human and other resources available to it. And there seems no reason why, for example, the experiences of the German "Treuhand" - the body responsible for privatising the former GDR's state-owned enterprises - should not be made available to other countries in the region. Estonia has already asked for, and been offered, such a sharing of knowledge.

58. One region along the Baltic deserves special mention, because it is in such a unique situation: the Kaliningrad enclave. Sandwiched between Poland in the south and Lithuania in the north, it is part of the Russian Federation, yet cut off from the rest of that country. The plight of the Kaliningrad enclave has been raised in a recent (October 1992) motion for a resolution presented by Mr Atkinson of our Assembly, and others (Doc. 6707).

59. In their motion, the authors draw attention to the extremely difficult economic situation of the Kaliningrad Region, and urge that it be "included in all considerations concerning the improvement of the situation in the region of the Baltic Sea". The Rapporteur warmly supports this proposal, and she hopes the Assembly will do the same. As the authors of the motion point out, the Russian government "has declared the region of Kaliningrad a free trade area. Details concerning the implementation of this plan are not yet known. As a free trade area, the region of Kaliningrad could make an important contribution to the economic development of the whole region of the Baltic Sea, if the efforts of Russia are supported and promoted in a spirit of solidarity by all neighbouring states, by the European Community and by the member states of the Council of Europe.

60. The motion goes on to suggest that the Council of Europe should "use its function as a bridge between the countries of the European Community and newly emerging democracies in Eastern Europe to elaborate, in co-ordination with the Russian government, proposals on the shaping of a free trade area of Kaliningrad and on the future economic development of this region, and should submit them to the governments of the member countries requesting their active support and promotion".

VII. Concluding remarks

61. The road leading to a universally prosperous Baltic Sea Region will be difficult - requiring sacrifice and generosity by some, patience and perseverance by others, and vision by us all. For it is evident that the transition from a command economy to a free and social market economy is complex and connected with considerable risks and dangers. All the same, it is essential to understand that economic recovery and political stability of the whole region depend on the effectiveness and boldness of the reforms under way.

62. The industrialised market economies both in the Baltic Sea Region and in Europe as a whole bear a particular responsibility for economic development of the countries in transition. However, the main responsibility remains with these countries themselves, which have a foremost duty to create a favourable environment for further economic and social development. In addition to the necessary reforms in the economic realm, this endeavour should also include measures designed to ensure internal peace, for instance by protecting the rights of minorities.

63. The "Mare Balticum" was a reality in medieval Europe, creating greater prosperity for the Hanseatic and other cities and regions involved. Today and tomorrow, it should be allowed to form an equally prosperous, and even more peaceful, "northern tier" of a Europe yearning for stability and co-operation.

Reporting committee: Committee on Economic Affairs and Development.

Budgetary implications for the Assembly: None.

Reference to committee: Resolution 955 (1991) and Doc. 6707; Reference No. 1824 of 5 November 1992.

Draft resolution: Unanimously adopted by the committee on 15 December 1992.

Members of the committee: Mr Holtz (Chairman), Dame Peggy Fenner, Mr Lotz (Vice-Chairmen), MM. Aarts, Auken, Gudmundur Bjarnason, Bokov, Bloetzer (Alternate: Columberg), Bonnici, Brach, Brennan, Csepe, Davis, Demiralp, Efraimoglou, Fabra, Flückiger, Garcia Sanchez, Gasperoni, Gassner, Goerens, Mrs Haglund, MM. Hellström, Kempinaire, Kiliç, Kittelmann (Alternate: Böhm); Albrecht Konecny, Koritzinsky, Leccisi, Le Grand, Lewandowski, Mesoraca, Paire, Pinto, Rehn (Alternate: Särkijärvi) Rodrigues, Rokofyllos, Schwimmer, Mrs von Teichman, MM. Townend, Valleix, Mrs Verspaget (Alternate: Dees), Mr Wintgens.

NB: The names of those members who were present at the meeting are in italics.

Secretaries to the committee: Mr Torbiörn and Mr Mezei.

1 ¹ 1. The Rapporteur in this context wishes to thank the Swedish and Estonian parliaments for having hosted - in Stockholm day one and in Tallinn day two - the colloquy in such a generous way. Her gratitude also goes to the many speakers and participants - from institutions such as the Nordic Council, the European Community, the European Bank for Reconstruction and Development to mention a few - who did so much to ensure the success of the colloquy, the full minutes of which can be obtained from the Council of Europe.