The shoelace handicap

Jul 20th 2006 | WARSAWFrom The Economist print edition
Central Europe risks becoming a bad advertisement for the further expansion of the European Union
TIME was when “new Europe” felt superior to “old Europe”. Before joining the European Union in May 2004, the eight ex-communist candidates transformed their economies and political systems, changing everything from competition policy to food-hygiene rules. They dumped bad communist habits and odd post-communist ones alike. Governments of left and right showed impressive determination to qualify for the club. Those that the European Commission found lagging, such as Lithuania and Slovakia, made strenuous efforts to catch up. Abroad, new Europe proved an eager ally, deploying armed forces for peacekeeping in the Balkans and for American-led interventions in Afghanistan in 2001 and Iraq in 2003.

Some of the headiness of that era still lingers. The newcomers' economies continue to grow strongly (see chart). At this rate, living standards will catch up with the European average within a generation. But in many other respects, the region is stagnant or going backwards. The reform momentum has petered out. These days the only ex-communist country with a strong reformist government is Romania. It, along with somewhat less reformist Bulgaria, is outside the EU. Both expect to join in 2007.
For their counterparts inside the EU, political weakness seems now to be the rule. The Czech Republic, after a tie in last month's election, has no government at all. Estonia, Latvia and Slovenia all have cautious coalitions, preoccupied with sharing the fruits of power rather than pursuing further reform. In Slovakia and Poland the coalitions have an added ingredient: extremist populist parties of left and right. Lithuania has a weak minority government. Only Hungary has a solid government made up of mainstream parties—and it is probably in the most alarming economic situation. Public debt is ballooning, and both the currency and bond markets look wobbly.
The effect is like that of a bunch of runners going briskly but with their shoelaces undone. Accidents are waiting to happen across the region. In Estonia and Latvia, the fear is of runaway growth—a nice problem, perhaps, but one that risks a crash. One possible cooling mechanism would be for the two to open their labour markets to migrants, but neither government has the vision or grit to push that through.
Lithuania and the Czech Republic suffer from fractured political systems unable to produce any plausible government. In contrast, Poland and Slovakia suffer from too much government, not too little. After nine months of bickering, Poland's new prime minister, Jaroslaw Kaczynski, won a vote of confidence this week. But his priorities are moral—eg, purging ex-communists—not economic. He has few convincing plans to trim the state and create the sort of modern economy that might tempt back the 1m-plus Poles working abroad.
Foreign policy is flagging too. Enthusiasm for American-led coalitions has cooled, but with no alternative in sight. There is no coherent strategy from the eight central European countries on such crucial issues as relations with Russia or energy security. Poland, for example, is trying to diversify its gas supplies, whereas Hungary is co-operating with Russian efforts to prevent this.
To be fair, cynicism and timidity over reform are not unique to the post-communist bit of Europe. Nor are extremist or populist parties. Italy's post-fascist party, Flemish nationalists, Jean-Marie Le Pen in France, and Austria's Jörg Haider have all pushed the boundaries of tolerance farther than their counterparts to the east.

Nor is it clear that the region is suffering now from bad (or no) governments. One common worry is that it may damage their chances of joining either the Schengen passport-free area, or the euro, or both. Yet, given today's fears in western Europe over legal and illegal migration, the expansion of Schengen is some way off. As for the euro, joining the single currency looks a risky step, particularly for the larger ex-communist countries—so a slippage in the timetable may be no bad thing.
The real dangers are different. One is that the central Europeans need deeper reforms if they are to stay ahead as their labour costs rise. Being cheap has served them well, but they now face competition from countries that are cheaper still: Romania and Bulgaria close to home, China and India farther afield. That puts the emphasis on quality, flexibility and innovation—none of which is a strong point. Universities are mediocre and overcrowded, even by the dire standards of continental Europe. Spending on research is feeble.
Worst of all, unstable and populist governments in the new democracies offer a poor advertisement for continued EU expansion. Arguably, the prospect of EU membership for the western Balkans is all that prevents a return to violence there. In the longer run, the lure of joining the EU is also the best way to keep Turkey, or ex-Soviet countries such as Ukraine and Georgia, on the right track.
But are politicians in western Europe ready to tell their voters that the EU needs more countries like those that joined in 2004? Support in old Europe for further expansion is sliding: in the 15 old members, only 41% are now in favour, compared with 47% in 2003 (and 66% in the new members). Nutty politicians in Poland and Slovakia, baffling stalemates in the Czech Republic and Lithuania and a belief that a chunk of the continent will stay backward may lead voters farther west to feel disappointed by past enlargements—and to be hostile to any future one.