# I. Introductior

The development of the European Communities<sup>(EC) over more than 30 years</sup> from a Customs Union of six countries<sup>to a Common Market of 12 countries for</sup> goods, services and production factors<sup>is bound to affect countries on its</sup> periphery more intensively than others. Hungary is in such a position. Moreover, the influence of the EC on Hungary's<sup>economy</sup><sup>**will**soon increase, partly</sup> because of the chax,ges which have<sup>taken place in Central Europe in the last two</sup> years, particularly in Hungary itself.<sup>The democratization of Hungary is being</sup> accompanied by economic reform, including<sup>a progressive liberalization of the</sup> foreign trade and currency regime, the<sup>promotion and protectior. of foreign</sup> private direct investment, and a<sup>reconsideration of the Council of Mutual</sup> Economic Assistance (CMEA).

The EC affects Hungary's economy both<sup>directly and indirectly.</sup> In the first category is the non-preferential trade<sup>and cooperation agreement concluded</sup> between the two parties in September 1988. This has heen partially superseded recently by several ad hoc measures in the<sup>form of u...lateral EC concessions--</sup> the inclusion of Hungary among GSP recipients,<sup>the elimination or suspension of</sup> QRs on Hungary's exports, and the expansion<sup>of textile quotas. In the financial</sup> realm, the EC is both the Chairman of<sup>a Consultative Group for emergency</sup> assistance to Hungary and Poland, contributing<sup>this fiscal year a 300 million ECU</sup> grant for both countries and a US$1 billion<sup>medium-term structural adjustment</sup> loan for Hungary. Indirectly, there are<sup>several processes by which the EC will</sup> affect Hungary:

- The Uruguay Round multilateral trade<sup>negotiations, scheduled to be</sup> completed in December 1990;

- The incorporation of the German<sup>Democratic Republic into the</sup> European Communities through German<sup>unification;</sup>

- The completion of the EC's internal<sup>market on December 31 1992; and</sup>

- The renewal, revision or establishment<sup>of trade schemes with</sup> different groups of countries (EFTA, Eastern<sup>Europe, Mediterranean</sup> countries, GSP and Gulf Cooperation Council).

The first three sub-regions are being<sup>singled out by the EC for further</sup> privileged treatment through what is called<sup>"proximity policy.",</sup> The tentative and changing nature of the<sup>EC-Hungarian relationship is</sup> apparent. What is also apparent is that EC relations<sup>with other groups of</sup> countries are also changing, and these<sup>changes will soon affect EC-Hungarian</sup> relations. While the present report will<sup>soon become outdated, it may be useful</sup> at a time the Hungarian government must<sup>think through the implications of</sup> different events: those over which it does<sup>not have any control and those for</sup> which different policy options are open to<sup>them.</sup>

# II. The EC and Hungary As Trade Partners

The economic importance of the EC-12 is<sup>impressive when compared to the</sup> USSR or the US, as shown in Table 1. In<sup>1987 the combined GNP of the EC-12 was</sup> almost as large as that of the US and<sup>larger than that of the USSR.</sup> The population c the Communities, however,<sup>is larger than that of the USSR or of the</sup> The authors express their appreciation<sup>to Monique Skruzny for some of the</sup> statistical work, and to Andras Inotai, Bela<sup>Balassa, Ron Duncan, Paul Meo, David</sup> Tarr, Chandrashekar Pant and Oli Havrylyshyn<sup>for comments on an earlier version.</sup> Aoence Europe, October 21, 1989.