Section 3. Europe
1-1. EC Integration
Since the mid- 1980's, the European Community (EC) has been toiling to remove all impediments to economic activities across the borders of its member states by the end of 1992. As a result, a large economic entity with a population of 340 million and a GNP of approximately $6 trillion (about three times Japan's population and double its GNP) is about to emerge.
The philosophy behind this integrated EC market is to strengthen the EC's influence upon the building of the international order in the 21st Century, through revitalizing Europe and reducing technical and industrial gaps with Japan and the United States. In addition, inter-governmental conferences began in December 1990 aiming at establishing economic and monetary union as well as political union. Moves toward deeper integration including security issues are becoming active.
(1) Economic Aspects of the EC Integration
(a) Current Situation of the EC Market Integration and Future Prospects
As of June 1991, or 18 months away from the targeted deadline date of the end of 1992, two thirds of the items to accomplish the integration stipulated in the 1985 White Paper entitled, "Completing the Internal Market" were already approved by the EC Council. Moreover, of those approved items, almost three quarters of those requiring separate legislation in each country have been processed domestically. The EC Commission expects that all the items will be approved by the Council by the end of 1991 and concrete measures will be implemented by January 1, 1993. So far, several areas, which include the free cross border movement of people or indirect tax harmonization, will require some more adjustments among the member countries, making this target difficult to attain. But the EC member countries' political will on the market integration is strong, and a majority of the initial objectives is expected to be achieved by the end of 1992.
The present economic focus of the EC integration is on the further integration of economic and monetary union following the market integration. Along with this process of further integration, the EC's geographical expansion is also progressing. Specific illustrations are Sweden's application to join the Community following that of Austria, negotiations to conclude the European Economic Area (EEA) agreement between the EC and the European Free Trade Association (EFTA) countries and negotiations to conclude association agreements with the Eastern European countries whose communist regimes have collapsed. Therefore, when considering Japan-Europe economic relations, in addition to paying attention to the integration at the EC level, it has become necessary to take a perspective that encompasses the future of a larger European Economic sphere.
(b) Economic and Monetary Union
The Treaty of Rome, which established the EC, declared as one of its objectives the completion of market integration in the future. As the process of market integration is approaching its completion, it turns out that the move cannot end there. The economic situation in each country greatly and directly influences the integrated market as a whole. For instance, when there are large gaps among the member countries in economic growth rates, inflation rates or interest rates, this would result in speculative movements of capital which would destabilize foreign exchange markets, thus hindering free intra-regional trade which was the primary objective of the EC. As a result, in order to sufficiently utilize benefits of the market integration, a need for further integration and further harmonization of economic and monetary policies among the member countries has become more urgent.
Under these circumstances, the European Council, convened in Madrid, in June 1989, approved the Delors Commission Report, which draws a path toward economic and monetary union in three stages, as the basis for future work. In this report, the first stage included the strengthening of policy coordination among the member countries in the economic and monetary areas, as well as fortifying the functions of the conference of central bank governors. The second stage covered the establishment of a European Central Bank and the further strengthening of monetary and fiscal policy coordination. The third stage involved the realization of a single monetary policy by the European Central Bank and the transition toward a single currency. Thereafter, the United Kingdom fully joined the European Monetary System (EMS) in October 1990, which met one of the major conditions for stage one. The focus of the economic and monetary integration shifted to stage two.
All member countries, except for the United Kingdom, have already agreed to implement the second stage on January 1, 1994. However, its realization requires the partial transfer of authority on economic and financial policy from the member countries to the EC, and amendments to the Treaty of Rome have become necessary. This is why an inter-governmental conference on amending the Treaty of Rome has been held since December 1990. In order to implement stage two on January 1, 1994, the revised Treaty should be signed as soon as possible and allow the necessary time for ratification procedures in each member state. The reality is that consensus among the members has not been reached yet on the items to be implemented or the implementation methods: Italy and France are positive, the United Kingdom is negative and Germany and the Netherlands are cautious.
(c) Relations with EFTA Member Countries and Central and Eastern European Countries
While the movement toward integration is intensifying within the EC, moves to become closer to the EC are amplifying among neighboring countries. Since the 1985 Luxembourg Declaration, the EC and the EFTA had many consultations on the construction of a large free trade zone that encompasses both areas. Aiming at the completion of the EEA by January 1, 1993 simultaneously with the completion of the EC market integration, official negotiations started between the two organizations in June 1990. Initially, the goal was to sign the EEA agreement by the first half of 1991. However, negotiations continued since no concessions could be made in some areas, such as those involving fisheries or truck passage through the Alps region. At the joint ministerial meeting between the EC and the EFTA held in Luxembourg in 1991, the final conclusions were reached at last and the agreement will be signed and ratified. In parallel with the EEA negotiations, Sweden submitted its application to join the EC in July 1991, following the Austrian application made in July 1988. As a result, there is a strong possibility that at least two out of the seven EFTA countries will join the EC in the future. Behind these moves, one can surmise the situation of the EFTA countries which have been largely dependent economically on the EC countries and which wanted to be involved in some form with the integration process of the EC. Since they could not be satisfied with the result of the EEA negotiations, which should have served as a way to further involvement, they are searching for total involvement in the EC integration process through full EC membership. For some EFTA countries such as Austria or Sweden, which could not opt to apply for an EC membership due to their neutral principles or neutral policies, political factors have exerted a major impact in that the significance of neutrality has changed through the collapse of communism in Central and Eastern Europe and of the East-West Cold War structure.
Furthermore, the Central and Eastern European countries, which are pursuing their transition toward market economies, have the strategy to smoothly integrate their economies into the world through strengthened relations with the EC. In particular, Poland, Hungary and Czechoslovakia, whose economic reforms are relatively advanced among the Central and Eastern European countries, have already started negotiations to establish an association with the EC on the premise of constructing a free trade zone with the EC. They are making efforts to gain a foothold toward future EC membership.
(d) Direction of the EC Economic Integration
As explained above, the EC is not only promoting an intra-regional economic integration but is increasing its centripetal force within Europe as a whole. In the coming few years, with the completion of the market integration, the focus will shift toward adjustments on the social aspect, correction of economic discrepancies among the member countries, promotion of structural adjustments and the realization of economic and monetary union. However, its success largely depends on the extent to which the member countries are prepared to transfer their national sovereignty to the EC. In this sense, it may well be the case that the direction of discussions on political integration may influence the progress of economic integration.
On the other hand, the further the economic and political integration of the EC advances, the more difficult it will be for the neighboring countries which want to join the integration process. In other words, for those countries which are now applying for EC membership, the precondition for them, naturally, is to adopt all of the measures concerning the market integration. Furthermore, they must consolidate their domestic systems so that they can implement the obligations arising from the economic and monetary union or from the political union, including security affairs if they were to progress. On the other hand, observing the EC situation, opinions have been converged as yet neither on the economic and monetary union nor on the political union. Since the enlarged EC might complicate the issues further, the increase of membership is becoming a delicate problem in relation to the EC integration, particularly the political union.
(2) Political Aspects of the EC Integration
At the European Council meeting of December 15, 1990 held in Rome, the future direction concerning the political integration of the EC was made clear. On the same day, the first Intergovernmental Conference (IGC) on the political integration was held. Since then, aiming at ratification before the end of 1992, proposed revisions of the Treaty of Rome related to the political integration have been deliberated.
The focus of the EC political integration debate is placed on setting the basic principle and a mechanism which will enable the 12 EC member countries to take a common stance or policy on international political matters. The greatest issues in the IGC discussions are in which areas and how to implement this common foreign policy.
Particularly problematic in the common policy areas are the security and defense fields. Regarding the security issues, among the problems to be discussed in international organizations, the areas with which the EC jointly copes are to be expanded in stages. For the time being, the following areas have been indicated as subject to common policy: arms control and disarmament, CSCE-related matters, peace-keeping operations of the United Nations, economic and technological cooperation in the armaments field, armaments export policy and non-proliferation.
On defense issues, a consensus among the member countries has been reached that the EC should play a more active role in Europe's defense and that a common foreign and security policy is impossible without a common defense policy. But opinions differ on specific measures, particularly on the defense organization, the positioning of the West European Union (WEU) and the relationship with the North Atlantic Treaty Organization (NATO).
On the institutional aspect, such as the decision-making procedure on common foreign policy, the European Council meeting in December 1990 in Rome suggested an institutional framework, such as making the Council the sole decision-making center or reinforcing the role of the EC Commission and a decision-making process that does not involve a clear expression of consensus.
Other points related to the political union discussed at the Intergovernmental Conference include the strengthening of the power of the European Parliament in the legislative process of the EC and the enlarged scope of a specified majority decision-making process at the European Council.
Recent specific examples of common foreign policy include the reaction to the Iraqi invasion of Kuwait. On August 4, 1990, two days after the invasion, a conference of the Political Director-Generals of the European Political Cooperation (EPC) was held in Rome. It adopted a resolution of six-item sanctions against Iraq, including the prohibition of the EC to import crude oil from both Iraq and Kuwait and the freezing of Iraqi assets. The meeting also decided on many other measures to persuade Iraq to withdraw from Kuwait by the European Council Foreign Ministerial Meeting. Moreover, on intensifying civil strifes in June 1991 in Yugoslavia over the independence of the Republics, the EC immediately sent a mission of the Troika (former, current and next chairing countries) Foreign Ministers to act as an intermediary between Croatia and Slovenia, on the one hand, and the Yugoslavian federal government on the other. Later, within the framework of the CSCE, an observer mission to monitor the cease-fire was sent by the EC.
1-2. Japan-EC Relationship
(1) Political Relationship
While the international community as a whole is searching for a new order, strengthened cooperation between Japan, the United States and Europe, which share common values and ideals such as freedom, democracy and free-market principles, is becoming increasingly important. In particular, it is indispensable to dramatically strengthen relations between Japan and Europe, which are relatively weak in comparison with Europe-U.S. or Japan-U.S. relations.
In view of the fact that the EC is moving from a regional market integration to an economic and monetary union and further to a political union with increasing international importance, Japan considers that strengthening bilateral relations with the EC member countries as well as with the EC itself is important.
However, Japan-EC relations have tended to excessively concentrate on the confrontational dimension in the economic sphere, as epitomized by trade frictions. In order to break this situation, the EC and Japan should recognize that they share political and economic values, bear great responsibilities toward the international community both politically and economically and share a common interest in terms of security. Based on this recognition, both parties should transform their relationship into a more comprehensive one as global partners through constructing cooperative relations in many areas beyond trade and economy and through the strengthening of policy consultations. As a specific measure to accomplish this objective, Japan proposed to issue the Japan-EC Joint Declaration to establish a regular Japan-EC Summit Consultation and to construct a cooperative relationship as global partners. The EC agreed to this proposal, and after negotiations on drafting the joint declaration, the first Japan-EC Summit Consultation took place on July 18 at the Hague, the Netherlands, the current EC presidency, immediately after the London Summit. Prime Minister Tosbiki Kaifu, Prime Minister Rudd Lubbers of the Netherlands, and President Jacques Delors of the EC Commission participated in the Consultation, and the Japan-EC Joint Declaration was issued on the occasion. This precisely symbolizes the arrival of a new era in the Japan-EC relations.
The Joint Japan-EC Declaration upholds the philosophy of cooperative relations between the EC and Japan as true global partners sharing the same political values and ideals, including freedom, democracy, the rule of law and human rights, as well as the same economic values and ideals, such as the market principles or the objective of developing the world economy based on the multilateral free trade system. It also declares the political will to promote cooperative relations in many areas and to strengthen policy consultations. Moreover, the annual Summit Conference established in this joint declaration provides a forum for the leaders to consult on major international issues at the highest level, in addition to the existing ministerial-level consultations. Japan-EC relationship has made a leap forward in terms of its quality.
In order to realize the objectives set by this Joint Declaration, the major future task for both Japan and the EC would be to enlarge and strengthen their cooperative relations as global partners through the framework of these consultations, including the Summit, and to promote dialogue and cooperation in such broad areas as politics, economy, environment, development assistance, science and technology, and culture.
(2) Economic Relations
Japan-EC economic relations have been characterized by friction over specific economic problems for many years. In this background was the fact that the trade imbalance alone enlarged while the overall Japan-EC relations have been shallow and narrow. However, while Japan has been attaining economic growth led by domestic demand for the last several years, the EC began to appropriately acknowledge the Japanese market. And through the issuance of the Joint Japan-EC Declaration, the stance of both parties to strengthen their relations also in the economic field as equal partners has become clear.
(a) Current Situation of Japan-EC Economic Relations
Trade between Japan and the EC since 1986 has expanded with Japan's imports showing a larger growth rate compared with exports, and Japan's trade surplus against the EC is on a declining trend (from $22.8 billion in 1988 to $18.5 billion in 1990, with declines recorded in both 1989 and 1990). However, there is still a large trade imbalance between the EC and Japan and since November 1990, Japan's trade surplus has conspicuously increased against the previous year ($14.4 billion in the first half of 1991). The greatest reason for this widening trade imbalance is the major changes in the trade structure of Germany due to the German unification. Germany has increased its fiscal expenditure since the unification and domestic demand expanded due to the large growth in domestic consumption, which boosted imports and eroded export capacity. Consequently, Japanese exports to Germany grew, although not as much as exports of other EC countries or the United States, while German exports to Japan stagnated, widening the trade imbalance.
On the investment side, resulting from active invitations by the EC countries, Japanese direct investment in the EC has grown steadily in the past few years (Note). In fiscal 1990, while Japanese direct investment to the rest of the world largely declined (a 15.7 percent drop against the previous year), it stayed relatively firm toward the EC (totaling $13.3 billion while dropping 5.2 percent). Major factors contributing to this would be the strong interest of Japanese corporations in the EC integration, as well as the activated EC economy due to market integration and German unification. Direct investment by Japanese corporations in the EC is contributing to the revitalization of the European economy through technology transfer and job creation, and is favorably greeted in general by the EC host countries.
The EC countries' direct investment in Japan is increasing steadily every year, and doubled in fiscal 1990 from the previous year's level to about $1.1 billion. However, this figure is still trivial in comparison with the Japanese investment in the EC and it is hoped that European corporations will take a greater interest in the Japanese market in the future and increase their direct investment promoted by their entrepreneurial spirit.
(b) Japan-EC Trade Imbalances and EC Interest in Japan
Although Japan-EC economic relations are on an expanding trend in terms of both trade and investment figures, some unsettled issues still remain between the two parties. In particular, against the background of trade imbalances, the EC has been strongly demanding improved access to the Japanese market for such goods as processed agricultural products, fishery products, leather and leather shoes. However, the major reason behind the existing trade imbalances is not the lack of openness of the Japanese market, but rather the paucity of interest from the EC side despite the dynamism of the Japanese market, as well as its neglect to appropriately judge the Japanese market. Still, Japan must carefully listen to EC's requests and deal with them in good faith. In order to do so, a detailed exchange of views on specific trade issues between the EC and Japan were made through the working group on trade that met twice in July and October after the agreement reached in the Japan-EC Ministerial Meeting of May 1990. Nevertheless, a number of EC demands are covered by various consultations including those within the framework of the current negotiations in the Uruguay Round. How those demands are dealt with largely depends on the progress of the Uruguay Round negotiations. Therefore, the success of the Round is important for improving Japan-EC economic relations, and it is essential that both parties make continuous efforts toward the early conclusion of the Round.
On the other hand, as mentioned before, interest in Japan from the EC until today has been very limited both in the public and private sectors. It cannot be denied that the EC was lacking the disposition to properly evaluate the Japanese market, unilaterally criticizing the alleged closed nature of the Japanese market, and having insufficient will to construct a serious cooperative relationship with Japan as an equal partner. However, the emergenence in the EC to properly judge the Japanese market in recent years is welcomed. Its representative example is the Opportunity Japan Campaign (Note) in the United Kingdom, which started in April 1988. Furthermore, other EC countries, including Italy, revised their opinion on the Japanese market and are becoming enthusiastic to invite Japanese corporations to reactivate their domestic economies. In France also, while there are still some critical statements made not necessarily reflecting reality, such as comments made by Prime Minister Edith Cresson, there are voices in the business and political circles arguing for the necessity to cooperate with Japan in the technological and industrial fields. They have objectively recognized Japan as an equal partner for Europe. On the other hand, Germany was seen as a powerful partner in advocating free trade against protectionist pressures on the international economic scene. But as the country is now in a post-unification transitional period and the German trade balance has turned into a deficit since April 1990, coupled with certain apprehensions in the field of advanced technology among some of the German intellectuals, the possibility of a protectionistic attitude in Germany in the future cannot be excluded.
Amid such a situation, in order to aim at a further development of Japan-EC economic relations, it is essential that Japan endeavors to promote bilateral dialogue and enhance cooperative relations with Germany and other EC member states.
(c) EC Market Integration and Japan-EC Economic Relations
Japan basically welcomes the EC market integration, as it contributes to vitalizing the European economy and also to the development of the world economy through healthy competition for mutual benefit among Japan, the United States and Europe. The overall premise is that the integrated market be open to the outside. From this viewpoint, Japan has been vehemently arguing that by the end of 1992, at the latest, the EC countries should remove all import restriction measures on Japanese automobiles and discriminatory quantitative restrictions (QRs) against Japan that the EC countries have maintained. Among these issues, the Japan-EC automobile problem was settled in the following manner. In July 1991, the EC decided to remove all import restrictions on Japanese automobiles by its member countries by the time of the market integration, and upon the EC's request, Japan promised to monitor automobile exports to the EC and to specific individual country for seven years after January 1993. As far as the discriminatory QRs against Japan are concerned, informal consultations are under way between Japan and the EC Commission, aiming to remove all of them by the end of 1992.
Among the specific measures related to the market integration, the margin for unfair discrimination against extra-regional countries cannot be totally discarded in such areas as finance, government procurement, mergers and acquisitions. Japan has repeatedly requested the EC to ensure appropriate management so that the integrated market is truly open to the outside.
(d) Toward the Reinforcement of Japan-EC Economic Relations
Considering the importance of the EC in constructing a new international order, Japan takes a view that building the economic relationship of coexistence and co-prosperity is indispensable in the medium- and long-term. Such a relationship should be built with such considerations that Japanese corporations do not directly carry abroad their overheated domestic market-share competitions and that they establish a relationship of coexistance and co-prosperity.
These points are important in establishing the Japan-EC relations along the lines of the Japan-EC Joint Declaration.
2-1. Changes in the European Security
The security environment in Europe underwent dramatic changes, such as the democratization process in the Central and Eastern European countries, German unification, dissolution of the Warsaw Pact and political changes in the Soviet Union. Accompanying these changes, the functions of existing organizations and frameworks, such as the North Atlantic Treaty Organization (NATO) and the Conference on Security and Cooperation in Europe (CSCE), are also changing. Major progress has been seen in the field of arms control and disarmament negotiations with the signing of the Treaty on Conventional Forces in Europe (CFE), the total abolition of the Intermediate Nuclear Forces (INF) and the signing of the Strategic Arms Reduction Treaty (START).
The NATO Summit held in July 1990 in London articulated the defensive feature of the organization in the Declaration, came up with the decision to strengthen its political role, and announced that its strategy will be reviewed based on the new situation. Moreover, in the North Atlantic Council (NAC) Ministerial meeting held in December 1990, recognition of the end of the Cold War was announced. A review of NATO strategy was delayed due to the problem of the Soviet aversion to the CFE Treaty and in relation to the discussion on defense matters in the political integration of the European Community (EC). In the NAC Ministerial meeting of June 1991, a schedule was indicated to adopt the new strategic concept in the November summit in Rome, since the prospect of overcoming the Soviet aversion to the CFE Treaty had become strong. The new strategic concept is to revise the past basic strategy of the forward defense strategy and the flexible response strategy and to attach importance on crisis management to respond to risks. The revision is founded on the basic perception that while the possibility of East-West conflict has significantly weakened and the threat coming from the East to NATO has disappeared, the risks that can affect the security of NATO countries still exist. Furthermore, a statement was issued concerning the core security function of NATO in Europe, stressing the role of NATO as a stabilizing factor in Europe.
Against the background of dramatic changes taking place in the European identity, there are moves to enhance the European identity on security, while recognizing the need to also secure the commitment of the United States and Canada on the security of Europe. Although a specific modus operandi for that is being discussed, centering on the strengthened role of the Western Europe Union (WEU), views differ among the countries on the relationship between the EC after the political integration and the WEU. Germany, France, Italy and Belgium take the position of placing the WEU under the European Council in the process of the EC integration. On the other hand, the United Kingdom and the Netherlands take the position that for Europe to ensure maximum security, policy should be pursued within the framework of NATO, although the role of the WEU should be expanded to bridge the EC and NATO.
Given these moves by the European countries, NATO announced at the NAC Ministerial meeting of December 1990 that while emphasizing the importance of safeguarding complementarity and transparency between the two processes of the adaptation of NATO and of the development of European Security cooperation, it would support the efforts to strengthen the security dimension in the process of the EC political integration. In the June 1991 NAC Ministerial meeting, the need to establish appropriate links and consultation procedures between EC, WEU and NATO was mentioned.
The military organization in the Warsaw Pact was dismantled in April 1991, which virtually stopped the Pact from functioning. In the July political advisory committee meeting held in Prague, a protocol setting the dissolution of the Warsaw Pact was signed. Consequently, when this protocol was ratified in the parliament of the member countries, the Warsaw Pact officially became extinct. The Central and Eastern European countries are trying to ensure their own security on the basis of bilateral and multilateral security co-operation and by strengthening the framework of the CSCE.
Responding to the change in Europe from confrontation to cooperation in the East-West context, the CSCE is increasing its importance as a consultation forum to pursue the common interest of Europe as a whole. Based on these situational changes, a summit meeting was held in Paris in November 1990, at which an end to the East-West confrontation in Europe was declared and the Charter of Paris for a new Europe was adopted, which should start a new CSCE process toward the construction of a new order in Europe. The Charter of Paris aims to institutionalize the CSCE, stipulating the implementation of regular consultations by the heads of States and Governments and Foreign Ministers, the establishment of a permanent secretariat, the Conflict Prevention Center (CPC) and the office for free elections. Work in these institutional aspects is currently proceeding. In the first Foreign Ministerial Council held in June 1991 in Berlin, the establishment of the mechanism for consultations and cooperation with regard to emergency situations, as well as the mechanism for the peaceful settlement of disputes, was decided. The CSCE is expected much more than in the past to contribute to the stability of all of Europe and its role is expanding. In fact, the mechanism for consultations and cooperation with regard to emergency situations was applied to the Yugoslavian strife that occurred immediately after the Foreign Ministerial Council. It was also decided to dispatch an observer mission to monitor the cease-fire.
The Charter of Paris calls for negotiations on arms control and disarmament by all of the CSCE participating countries to begin after the summit meeting scheduled to be held in Helsinki in June 1992 and provides for a framework for the new arms control and disarmament negotiations for post-Cold War Europe as a whole.
2-2. Reforms in and Assistance to Central and Eastern Europe
(1) Central and Eastern European Reforms
(a) Progress in Reforms
The reforms in Central and Eastern Europe that started in 1989 were a historical event. Through these reforms, East-West relations are changing and a new world order is about to be constructed. The new international order shares common values based on freedom and democracy and is to be built upon efforts to eradicate East-West confrontations. Efforts toward that goal continue.
Looking back on the past year, these efforts are attaining results. In all of the Central and Eastern European countries, free elections were held and governance based on the will of the people is beginning to be practiced. And basic human rights are beginning to be guaranteed. In Poland, Lech Walesa, the leader of Solidarity, was elected President in December 1990 in the first direct election since World War II. Democratization is also proceeding steadily in Hungary and the Czech and Slovak Federal Republic (CSFR). Progress in democratization is also seen in the Balkan countries. In Bulgaria, a coalition government was established in December 1990 as a result of the collapse of the Socialist (former Communist) government and a new Constitution was adopted in July 1991. In Romania, although the oppression of anti-government demonstrators in June 1990 invited criticism from the Western countries, the country is now well along the path of democratization. Moreover, in Albania, which had stubbornly continued the Communist dictator-ship and the closed-nation policy, frequent anti-government demonstrations and massive outflow of refugees occurred against the background of economic difficulties. Responding to these circumstances, the first free election was held in March 1991. As a result, while the Workers' Party (Communist) won a majority, its power base was weakened, as seen in the defeat of the Party Leader Ramiz Alia in the election. Since the anti-government moves of the public did not subside, a coalition government was established in June. Welcoming these movements toward democratization, the CSCE Foreign Ministerial Meeting approved Albania's membership in the CSCE on June 19.
In Central and Eastern Europe, economic reforms to accomplish the transformation to a market economy also progressed in parallel with political democratization. Macroeconomic stabilization policies to bring about currency stability and inflation control through an austerity policy and by introducing the liberalization of prices and the convertibility of currencies are becoming a general trend. In addition, structural reforms to privatize enterprises and to introduce various systems of the market economy, such as banking reforms, have begun.
(b) Difficulties in the Reform Process
However, these changes are amplifying instability at the same time. In the security area, the dissolution of the Warsaw Pact was agreed upon, and the withdrawal of Soviet forces has been completed in Hungary and the CSFR and has begun in Poland. Disarmament is also progressing. On the other hand, a collective security system for the Central and Eastern European countries appropriate to the new situation has not been constructed, and the security system encompassing all of Europe is still in the process of being formed. In terms of the economy, the Council for Mutual Economic Assistance (COMECON) (Note) shifted on January 1, 1991 its payment settlement method to convertible currencies for trade among the member countries. Its dissolution was agreed upon in June. The Central and Eastern European countries are thus losing their traditional market. Moreover, the reduction of the crude oil supply by the Soviet Union to the Central and Eastern European countries and the Gulf Crisis aggravated economic difficulties of these countries. Transformation from a centrally-planned economy to a market economy requires severely stringent policies and fundamental structural reforms. While it may have been fully anticipated that difficulties and pains are inevitable, there is a sufficient possibility that the general public in the Central and Eastern European countries might not bear the reality of unemployment and bankruptcies and might increase their dissatisfaction against the government. For instance, in the Presidential election of Poland, former Prime Minister Tadeusz Mazowiecki, who was a proponent of the retrenchment policy, was defeated and an unknown businessman residing in Canada made a good showing, both epitomizing the dissatisfaction of the public against the government. Likewise in Hungary, an announcement that gasoline prices would be raised in October 1990 instigated a nationwide transportation strike, forcing the government to compromise.
Furthermore, it can be pointed out that the freedom brought on by the reforms awoke ethnic consciousness and ethnic problems are surfacing in Central and Eastern Europe. For instance, the relation between the Czechs and Slovaks in CSFR, the problem of the Hungarians in Romania, and the problem of the Turks in Bulgaria can be mentioned, although these ethnic problems have not become too serious at this juncture. On the other hand, in Yugoslavia, confrontations among various ethnic groups and Republics are critical.
(2) Assistance to Central and Eastern Europe
(a) Response of the Group of 24 for Economic Assistance to Central and Eastern Europe (G-24)
Each Central and Eastern European country is earnestly coping with various difficulties in the reform process. Whether the reforms will succeed is primarily the responsibility of the Central and Eastern European countries. At the same time, their work needed to accomplish the historical change requires the support of the industrialized democracies.
At the Arche Summit in July 1989, the member countries, realizing that the reforms would not be completed without economic stability, launched assistance to Central and Eastern Europe by establishing the Group of 24 for Economic Assistance to Central and Eastern Europe. Bilateral assistance by the G-24 countries alone reached, on the commitment basis, $31 billion as of June 1991. In April 1991 the European Bank for Reconstruction and Development (EBRD) was formally established. Furthermore, in the London Summit in July, the member countries promised their full support for the reforms in Central and Eastern Europe. In light of the progress made in the Central and Eastern European reforms as well as the past assistance given to Central and Eastern Europe, the West is now at the stage of studying what kind of assistance is most useful.
Assistance to Central and Eastern Europe has centered on six fields: agriculture, vocational training, environment, investment, energy and market access through both financial and technical cooperation. Since the mid-1990s, the G-24 has discussed how to meet the need for external financing of the Central and Eastern European countries ($15 billion in 1991 according to the Commission of the EC which chairs the G-24). This is based on the extremely deteriorated international balance of payments of the Central and Eastern European countries due to such factors as the Gulf Crisis, the reduction in oil supply from the Soviet Union, the drastic cut in exports to the Soviet Union and the former East Germany, as well as in consideration of their need of foreign currency reserves to introduce currency convertibility. Consequently, it was agreed that international financial institutions, like the IMF and the World Bank, should shoulder the primary responsibility. However, since it was judged that loans by international institutions alone will be insufficient, additional support totaling about $2.9 billion was given as of July 1991 through the bilateral financial cooperation of the G-24 countries.
The EBRD, which was established through the cooperation of the G-24, is to assist with the privatization and consolidation of economic infrastructures. Furthermore, the Organization for Economic Cooperation and Development (OECD) has begun technical cooperation on mechanisms of a market economy.
(b) Response of Japan
Japan has given active assistance based on the recognition that the reforms in Central and Eastern Europe are historical in providing an opportunity to transform the order of the world as a whole, rather than a mere European change, and thus they constitute an appropriate case for Japan to fulfill its international responsibilities. In providing assistance, Japan attaches importance to enhancing the effectiveness of assistance through cooperation with other industrialized countries and relevant international institutions with the G-24 as the major framework of assistance. For example, to assist in solving the fund shortage problems in the Central and Eastern European countries, Japan announced a provision of untied loans from the Export-Import Bank of Japan totaling $550 million to Hungary, CSFR, Bulgaria and Romania, which amount to about 20 percent of the total committed by the G-24 ($2.9 billion). As for the food crisis in Bulgaria and Romania that became evident from 1990 to 1991, Japan provided emergency food aid of $1.5 million to each country in cooperation with the G-24 countries. Japan is also implementing a five-year technical cooperation program for all the Central and Eastern European countries equivalent to $50 million with priority on management control, production control, environment and agriculture. Japan has completed the procedure for membership as the second largest capital subscriber, along with major European countries, of the EBRD, and plans to cooperate with the new institution actively.
Responding to such a positive stance of Japan to assist Central and Eastern Europe, the expectation by the Central and Eastern European countries of Japan is mounting, which is clearly indicated by the active visits to Japan of important persons from these countries. Most of the Central and Eastern European countries sent their Heads of States to the Enthronement Ceremony of the Emperor. Other leading figures also visited Japan, including CSFR's Foreign Minister Jiri Dienstbier in October 1990, Deputy Chairman of the Council of Ministers and Foreign Minister of Bulgaria Victor Valkov in May 1991, Chairman of the Hungarian National Assembly Gyorgy Zabad in May, Polish Prime Minister Krysztof Bielecki in June, Chairman of the Federal Assembly of CSFR Alexander Dubcek in July, Romanian Foreign Minister Adrian Nastase in August and Hungarian Prime Minister Joseph Antall in September. Japan views contacts with these leaders as a good opportunity to strengthen bilateral relations with these countries, which have entered a new era with the reforms under way in these countries, and has expressed solid support for and assistance to their reforms.
Moreover, assisting Central and Eastern Europe is evaluated highly by the United States and Western European countries as a successful case of cooperation among the tripolar regions of Japan, the United States and Europe.
(c) Future Tasks
As stated above, the system to assist Central and Eastern Europe is almost well in order and Japan has accumulated experience in making specific forms of assistance. The future task is to clarify what kind of assistance is required based on what kind of principles.
(i) Criteria for Assistance
The first principle is to support the transformation to democracy and a market economy. Inherent to this principle is an important point that no assistance is provided if a set-back is seen in the reform efforts.
The G-24 postponed the expansion of assistance to Romania in the Ministerial Meeting of July 1990. This was due to the judgment that the oppression of anti-government demonstrations in June 1990 proved that efforts toward democratization are not well-rooted in the country. But since Romania proceeded with democratization, it was formally decided at the high-level official meeting of the G-24 held in January 1991 to expand assistance to the country. This first criterion of assistance is still effective. While expanding assistance to Albania is discussed by the G-24, the decision will be made in light of the progress made in the country's reforms.
The second principle is to acknowledge that establishing a market economy and integration into the world economy are accompanied by great pain.
The transformation of the Central and Eastern European economies to market economy requires, at least in the short-term, stringent monetary and fiscal policies. As a result, unemployment and bankruptcies are increasing, creating tremendous social and political costs. But to delay the reforms from the fear of these pains entails a danger of not only delaying the fruit of the reforms, but also leading the reform itself to failure. Assistance by the IMF and the World Bank impose a certain conditionality on monetary and fiscal policies, which should be maintained as a prerequisite of assistance. On the other hand, stringent policies alone cannot bring about a market economy. Competitive economic entities must be nurtured at the same time. Toward that goal, it will be essential to put on the right path within a year or two the structural reforms indispensable to the transformation to a market economy, such as the establishment of the private ownership system, privatization, consolidation of financial systems and tax reforms. That is also necessary to improve the business environment to induce foreign direct investment.
There is little domestic accumulation of capital in Central and Eastern Europe. And the outstanding amount of lending by Western private banks is declining due to their debt problem. Large-scale private direct investment to the manufacturing and other sectors is also stagnant. Improving the industrial infrastructure and nurturing competitive enterprises require a massive amount of capital. That is why great expectations are placed on foreign direct investment to make up for a major part of the capital shortage. But without progress in the structural reform of the Central and Eastern European countries, investment is unlikely to become active.
(ii) Importance of Market Opening
Assistance to Central and Eastern Europe has so far been made centering on financial and technical cooperation provided through the international framework of coordination by the industrialized democracies and international institutions. In addition, it is increasingly gaining importance as an effective assistance measure for industrialized countries to open up their markets. In the background lies the fact that Central and Eastern Europe has lost the former COMECON market, particularly of the Soviet Union, and the recognition that the Western market opening is indispensable for sales of goods produced as a result of investment if private direct investment from the Western countries is to be encouraged. Moreover, it is necessary that the market opening should be made in such sectors as agriculture, textiles and steel, for which Central and Eastern European countries have a comparative competitiveness but in which the Western countries have political problems. This point was confirmed in the London Summit. The United States is taking various market opening measures under the "Trade Enhancement Initiative" advocated by President George Bush. The EC also is pursuing the conclusion of an association agreement aiming to form a free trade area with some Central and Eastern European countries. Japan is implementing market opening measures comparable to those practiced by the United States and Western Europe in applying the General System of Preferences and maintaining Japan's markets in textiles and steel. But efforts to further open up the market will be necessary in view of the widening trade surplus Japan has with the Central and Eastern European countries.
While it is important for the Central and Eastern European countries to secure exports to the traditional Soviet market, it would not be appropriate for the Western countries to give assistance that would lead to maintaining inefficient trade relations under the old COMECON system. On the other hand, the Western countries should avoid a situation whereby their tied aid credits and export subsidies would chase out Central and Eastern European products from the Soviet market.
(iii) Role of Official Financial Cooperation
The expansion of private direct investment to Central and Eastern Europe is extremely important, but this fundamentally is up to the decision of the private sector. The Government of Japan, for its part, has made adequate efforts to improve the environment that is conducive to enlarge investment, by such means as negotiating with Poland, Hungary and the CSFR toward the conclusion of an investment protection agreement. However, no sign can be found now that private direct investment to Central and Eastern Europe will expand. Lending by private banks is diminishing, accompanying the increased external debts of the Eastern European countries.
For this reason, the role of official funds to meet the capital demand of the Central and Eastern European countries is still very important. A reduction of official debts that has been agreed for Poland as an exceptional measure is likely to make the provision of new financial assistance difficult. It is to be welcomed that other Central and Eastern European countries have made it clear they would not request official debt reduction measures. Provision of these official funds is necessary to stabilize the macroeconomy, to improve the extremely underdeveloped transportation and communication infrastructure and to preserve the environment. Moreover, official export credits and the provision of insurance are becoming important for the debtor countries to expand their trade and investment. Japan has already extended considerable cooperation in these areas, but continued maximum efforts will prove important.
2-3. Ethnic Problems in Yugoslavia
Conflicts among different ethnic groups and Republics are making the situation in Yugoslavia critical. As a result of the free elections held in all of the six Republics from April to December 1990, strongly nationalistic governments were established in the four Republics of Slovenia, Croatia, Bosnia-Herzegovina and Macedonia, and the former Communist Party won the election in the two Republics of Serbia and Montenegro. But the governments of these two Republics have also gradually strengthened nationalistic features. Slovenia and Croatia, which are economically advanced regions within Yugoslavia, are pursuing their own reforms and stressing the sovereignty of the respective Republics to overcome the constraints imposed by economically less developed Republics. They deepened their confrontation with the Serbian and Montenegran governments of the former Communist Party, which argue for the maintenance and reinforcement of the Federal System. To solve these antagonisms and to determine the future framework of Yugoslavia, the so-called "Yugo Summit," which brought about dialogue among the heads of the six Republics, had taken place intermittently since the beginning of 1991. Because no specific proposal had emerged, Slovenia and Croatia unilaterally declared independence from the Federation on June 25, 1991.
In Slovenia, immediately after the declaration, armed clashes occurred between the Federal Army and the Slovenian territorial defense forces. But through the mediation efforts made by the EC, a cease-fire agreement was recorded on July 8 between the Federal Government and Slovenia, leading to the decision of the Federal Government to withdraw its army from Slovenia. After the armed clash, Slovenia made clear its desire for complete independence, and moves toward independence of the Republic are likely to accelerate.
On the other hand, unlike Slovenia, Croatia has a large Serbian population and the situation is more complicated. Since the summer of 1990, armed clashes between the Serbian population and the Croatian authorities have occurred in many places. These conflicts have intensified since the declaration of independence by Croatia in June 1991, and the Federal army that has intervened as a buffer of the two is now fighting directly with the Croatian army. While cease-fire agreements were reached in August, the agreements have not been adhered to and the situation continues to be tense. Moreover, in case the fighting among ethnic groups over the Croatian issue expands to a larger extent, it is feared that the conflict could spread to Bosnia-Herzegovina which comprises several ethnic groups such as Croatians and Serbians, or to Kosovo where Albanians and Serbians continue their mutual antagonism.
The Yugoslav problem shows the difficulty of harmonizing the principle of the right of peoples to self-determination, with the principle of the territorial integrity of states (the maintenance of the unity of Yugoslavia), both of which are stipulated in the CSCE documents. It is becoming a touchstone in constructing a new European order not only for the parties fighting in Yugoslavia but also for other European countries. Since both Republics of Slovenia and Croatia declared their independence and fighting broke out, the European countries made efforts to have the Yugoslavians themselves solve the problem peacefully based on the principle that "It is for the peoples of Yugoslavia themselves to decide upon their future." The European efforts took such forms as mediation by the EC and dispatching the EC observers mission to monitor the cease-fire within the framework of the CSCE. Japan also appeals to the parties concerned within Yugoslavia to reach a peaceful solution of the problem and expresses support for the efforts made by the European countries in such fora as the G-7 Summit.
3-1. The United Kingdom
Mrs. Margaret Thatcher had served as Prime Minister since 1979. Against the background of the sluggish economic activity since 1989 and mounting domestic dissatisfaction over the introduction of the community charge introduced in 1990, public opinion polls showed lower support for the Conservative Party than for the Labor Party. This created a question within the Conservative Party of whether the Party could win the next general election under the leadership of Prime Minister Thatcher. In the election for the leadership of the Conservative Party held in November 1990, Prime Minister Thatcher was obliged to resign as she could not win the quorum required to be elected on the first ballot. As a result, Mr. John Major formed a new cabinet. His government basically follows the policies of the former government. But Prime Minister Major is gradually showing his own colors by announcing in March 1991 the gradual abolition of the community charge in two years and by taking a more cooperative approach to the question of the EC integration. The next general election is to be held by June 1992, and is the focal point of British politics.
In the field of foreign relations, amid the turbulent international situation, including the Gulf Crisis and the changes in the Soviet Union, the United Kingdom played a significant role, closely collaborating with the United States, in policy coordination among the major countries. Prime Minister Major enhanced his international standing by hosting the London Summit meeting in July 1991 and by visiting the United States and the Soviet Union immediately after the failed coup in the Soviet Union.
The Japan-U.K. relations greatly advanced under the third Thatcher Government (1987-1990), when Japan's investment in the United Kingdom expanded consistently and pending bilateral issues, such as the liquor tax and membership in the Tokyo Stock Exchange, were solved. The bilateral relations have developed into a new stage of mutual consultation and cooperation in coping with a wide range of international issues. In the Japan-U.K. Foreign Ministerial Consultations held on the occasion of the visit of Foreign Secretary Douglas Hurd to Japan in September 1990, both sides agreed to cooperate on assistance to the Central and Eastern European countries and on environmental questions in the spirit of establishing good bilateral relations. In addition, a joint press announcement was issued on the Gulf situation and the Uruguay Round. The two Prime Ministers agreed in their meeting held on the occasion of the London Summit in July 1991 that further development should be made in the bilateral relationship.
While it is expected that the influence of Europe in the world will increase with the progress in the EC integration process, the United Kingdom is particularly positive in strengthening relations with Japan. The United Kingdom also maintains close relations with the United States. Thus, it will be extremely important for Japan to further strengthen its relations with the United Kingdom.
3-2. Germany
After the unification of the two Germanies on October 3, 1990, which was a goal of German nationals in the postwar period, the first post-unification election of the Bundeshaus was held in December. The CDU-CSU and FDP coalition government which achieved the unification won a majority, and the fourth Kohl Cabinet was formed, in which the coalition was maintained. The Germany that was united under Chancellor Helmut Kohl and Foreign Minister Hans-Dietrich Genscher is making increasingly clear its stance to make positive contributions to Europe and to the international community. On the other hand, it has gradually become evident that the economic reconstruction of former East Germany is not easy. Coupled with the increased fiscal spending especially for the financial contribution to the multinational forces during the Gulf Crisis, there emerged the problem of an inevitable tax increase even if it violated the campaign pledge made during the general election in 1990. Furthermore, the Government is facing many tasks in foreign relations, such as the amendment of the Basic Law to enable deployment of the Federal Defense Force outside the NATO region and assistance to the Soviet Union.
The unified Germany is further strengthening the positive stance and cooperation concerning international affairs, based on the awareness of the expectations placed on Germany by the international community as well as of its own responsibility. Japan similarly endeavors to realize many policies with the same sense of responsibility. Given these efforts of both countries, fortification of cooperation between Japan and Germany is of urgent necessity. From such a perspective, Japan attaches importance to political dialogue with Germany, and consultations between the Governments are becoming more intensive recently, in such cases as the Gulf Crisis and the policy toward the Soviet Union.
3-3. France
The Rocard Cabinet that had enjoyed a high support rate from the public until the end of 1990 faced various difficulties, such as decelerating economic growth, the rising unemployment rate, the payoff suspicion of election funds to President Francois Mitterand during the 1988 Presidential election and the riot on Reunion Island. In May 1991, it was taken over by the Edith Cresson Cabinet.
One of the main objectives of the newly born Cresson Cabinet was to reconstruct a strong French economy in line with the forthcoming EC market integration by the end of 1992. As for France's stance toward Japan, the Prime Minister is known to be a hardliner in relation to Japan and future development is carefully watched.
France actively promotes the European integration and plays a central role in Europe such as hosting the CSCE Summit in Paris in November 1990. Strengthening political dialogue with France is indispensable for reinforcing the Japan-European relations. Since the visit of Prime Minister Michel Rocard to Japan in 1990, exchanges of leading officials between Japan and France have become more active. Consultations are also activated, as represented by the meeting of Prime Minister Rocard and Foreign Minister Taro Nakayama in New Zealand in April 1991 and the Japan-France Foreign Ministerial Meeting held in Paris in June 1991. It is hoped that, under the Cresson Cabinet, the bilateral relations will be further developed toward a favorable direction as ever and that political dialogues are reinforced.
3-4. Italy
The sixth Andreotti Cabinet established in July 1989 began to show difficulties among the coalition government parties around mid-1990. The Cabinet resigned in March 1991 due to the confrontation between the ruling and opposition parties on the issue of the political reform, such as the introduction of the direct election system of the President. Giulio Andreotti, who was redesignated for the leadership, formed a Cabinet in April. The political reform is expected to be discussed in all fields as the greatest domestic political issue. The Italian Communist Party, which is the largest in Western Europe, dissolved itself and evolved into the "Party of Democratic Left" in February 1991.
Faced with the EC market integration, the greatest economic task for the Italian Government is to reduce the high level of fiscal deficit, which is more than 10 percent of GDP, and to overcome high inflation. The present Cabinet has made it clear that it will cope with these problems positively, as the previous Cabinet did.
During the latter half of 1990, Italy energetically dealt with promotion of the EC integration as the Presidency of the EC. It also responded positively at the time of the Gulf Crisis and endeavored to raise the position of Italy in the international arena.
Italy and Japan traditionally have had a close relationship. In particular, the government leaders of Italy are recognizing Japan as an indispensable partner as a member of the G-7 and stressing the need to strengthen relations with Japan. In May 1991 Foreign Minister De Michelis visited Japan for the Japan-Italy Foreign Ministerial consultations, and in July the Japan-Italy Prime Ministerial meeting was held in London.