The political and economic transformations, which the European continent is currently undergoing, are of great importance for the security, stability and prosperity of the region. One process that links these developments is the eastward expansion of the European Union (EU). The decision to invite 8 Central and Eastern European countries (plus the Mediterranean countries of Malta and Cyprus) to join the EU in 2004 is unprecedented in its significance for both the Union itself and the continent. The process leading to EU membership is long and consists of several distinct phases. Once a country expresses a desire to join the Union, it must be approved as candidate. Then, it enters the long phase of accession negotiations. Upon their completion, membership has to be approved both by the EU and the candidate country. Foreign assistance to the accession countries plays a major role in the enlargement process, helping along lagging members. From the theoretical literature on foreign aid, I draw two competing sets of explanations for the distribution of EU aid to the postcommunist countries. One is that amount of aid is determined by the need of the recipient country. Countries with greater needs are expected to receive more aid. Traditionally, wealth and economic growth are used to determine need. In addition, the future EU members have another set of ‘need’ factors, the ability to meet accession criteria. On the demand side, I use measures capturing levels of political and economic reform in each country. The other group of expansions focuses on the interests of the donating country as determining the amount of aid distributed. Countries, which are strategically and economically important partners, are expected to receive more aid, along with countries sharing similar cultural, religious, and historical characteristics. In this paper I use trade with the EU (exports and imports separately) to capture economic importance, and religion and proximity to EU to measure cultural similarities. Using annual per capita data for 12 countries for the 1990-2001 time period, I find support for both sets of arguments. Countries, which are lagging behind in democratic and economic performance receive slightly more Phare aid than the rest of the recipients. However, I find stronger support for the claim that EU aid serves the interests of the donor states more than the needs of the recipient economies. Consistently, in my analysis, I find that countries which import more goods from the EU receive more financial aid than countries which import less. Thus, indirectly, Phare aid ends up supporting the economies of the donor countries. [ABSTRACT FROM AUTHOR]