26 and as indicated in our simulations (see below), closer relations could lead to substantially greater trade. Indeed, some Hungarian economists predict that the EC could replace the USSR as an outlet for Hungarian goods.' However, there is no question that Hungary also faces considerable supply constraints, since at least in the short term a shift of industrial exports from CMEA to Western markets can be done only at high cost. Much of the embodied technology and physical capital is unadapted and would have to be scrapped altogether. The transportation infrastructure is geared to trade with CMEA countries. But there is currently substantial uncertainty on the kind of institutional links that Hungary should strive for with Western European economies. Prime Minister Antall, expressed the wish in mid-April 1990 that his country become<sup>a member of</sup> the EC between 1992 and 1995.4' The possibility of applying for membership in EFTA was evoked by the president of the Hungarian Socialist Party<sup>in June 1989,</sup> as a stepping stone for EC membership later on." Although this view<sup>is rejected</sup> by the EC, the idea has some merit from another perspective. As a member of EFTA, Hungary would also become a member of the European Economic<sup>Space which is</sup> currently being negotiated between the EC and EFTA members. Membership in EFTA may not affect relations with the USSR, given the Finnish precedent.<sup>49</sup> However, membership in EFTA is not so attractive as it seems for Hungary since (1) agriculture is not covered by EFTA nor by present and pending EC-EFTA agreements, (2) the only important EFTA market for Hungary is Austria, which may<sup>soon opt out</sup> of EFTA to enter the EC. EFTA members, moreover, have not shown a particular interest in fostering links with European developing countries and may<sup>perceive</sup> an enlargement of EFTA as a distraction from their plans to reach an agreement on the EES with the EC. There are other reasons why EFTA may be reluctant to admit new Eastern European members. Their currencies are not convertible; their economies are not market oriented; and EFTA rules do not facilitate<sup>the entry of</sup> new members. The reason membership in EFTA is proposed by Hungary is often political: EFTA is more "neutral" than the EC, less political and more economically focussed; not at all linked with NATO.

Barring EC or EFTA membership, the possibility of defining a new kind of relationship with the EC is currently being examined in different quarters. To start with, the EC has some experience in dealing with developing countries in its periphery (which incidentally EFTA has not). The Yugoslavia-EC agreements might be a modei to be followed. Other possible models are the Greece-EC or Turkey-EC association agreements of che 1960s. This would be only a second-best, however, since discrimination in EC markets is largest for Hungarian agricultural (both horticultural and meat) exports. The main advantage of association is that it would send a very important signal to foreign investors looking for easy access to large markets.

The EC may be preparing to negotiate with each CMEA country what are called "special association agreements," which place CMEA countries somewhere in<sup>between</sup> EFTA and the Mediterranean nonmember countries in the pyramid of preferences.

**4e** See International Herald Tribune, March 24, 1989. The FRG had guaranteed a $1 billion loan to Hungary much before the EC did in early 1990. The FRG is already well represented in Hungary's cultural and academic life when -7ompared to other EC countries (Goethe Instituce, F.Naumann Foundation). German firms are deemed to be eager to expand subcontracting activities they have already with many Hungarian firms. This can be facilitated by offering to Hungary a generous EC trade agreement. About half the joint ventures of Hungarian firms are with West German firms. Financial Times, March 23, 1990.

- **4'** Aaence Europe, April 18 1990.

- 4 See Kostrzewa,W. and Schmieding,H.(1989),p.514.

- 49 Kostrzewa, W.and Schmieding, H.(1989)