gloom

Central and eastern Europe

Shadows at Europe's heart

Oct 12th 2006 | BRATISLAVA, BUDAPEST, PRAGUE AND WARSAW
From The Economist print edition


The ex-communist countries have been an economic success—but risk becoming political failures





MANY countries would love to have the problems of the EU-8, the eight once-captive nations that joined the European Union in 2004. Sheltered by NATO and locked into the legal architecture of civilised Europe, they are flourishing in a way that seemed hardly possible when they leapt to freedom in 1989. Their economic growth is enviable: Estonia's is a breakneck 12%.

But a more disturbing picture, of livid discontent, declining competitiveness, sleaze and subversion, is lately more prominent. That overshadows not just the fate of the 73m-odd people in the EU-8, and the 30m in Romania and Bulgaria who will join the EU at the year's end. It could dash, disastrously, the EU's already flagging enthusiasm for expansion.


It is tempting to ignore post-communist politics. The countries are mostly small, the names of the politicians as unfamiliar to the outside eye as the differences between their parties. Sides switch, and coats are turned, with bewildering rapidity. Is the ruling People's Party, re-elected in October 8th's election in Latvia, rightwing or leftwing compared with the New Era, which may join it in coalition? Why is the party led by King Simeon of Bulgaria in coalition with the (not very) ex-communists, whose forebears exiled him and murdered his followers? Which Kaczynski twin is president of Poland? Is it the less batty one who is prime minister? Without a patient guide and a large glass of plum brandy, it all seems too intricate and unimportant.

So here is one striking fact. Not a single country of the EU-8 has a strong reformist government. Minority or caretaker governments run the Czech Republic, Poland and Lithuania. Estonia and Slovenia have administrations that are stable but do little. In Slovakia, a new coalition government unites the sleaziest and nastiest parties in the country. Hungary's government is wobbling after the prime minister admitted systematic lying.

In the past three months, the politics of central Europe have turned turbulent. The biggest failure has been in Poland, the most important ex-communist country in the EU. The main governing party, Law and Justice, has ruled for 11 months in a series of shaky coalitions.

It is quarrelsome at home and abroad. Its two leading figures, the twins Lech and Jaroslaw Kaczynski, are respectively president and prime minister. They have repeatedly insulted Germany—which did more than any other country to get the EU to overlook Poland's manifest political and economic weaknesses in the run-up to membership. Now phone calls are not returned, meetings cancelled, cheap historical jibes commonplace. On the flimsiest evidence, Poland's rulers seem determined to believe that Germany is revanchist and hostile.

Sticking up for national self-interest is no crime. Like any other member state, Poland has every right to haggle with the EU. But the tone is amateurish and counterproductive. The former president, the ex-communist Alexander Kwasniewski, made Poland a trusted Western ally and sounding board, notably in Ukraine. The Kaczynskis sneered, with some justice, at his communist past, glitzy lifestyle and chummy ties with businessmen of all descriptions. But they have turned the diplomatic powerhouse they inherited into a laughing-stock.

There have been unnecessary fights at home too, chiefly with the central bank. Its governor, the peppery Leszek Balcerowicz, may be no loss to diplomacy, but he epitomises the radical economic reform and financial stringency that lies behind Poland's hearty economic growth. Law and Justice is also mystifyingly estranged from its potential coalition allies, the liberal-conservative Civic Platform. No political differences divide them, only a series of petty feuds that should have long ago been buried in pursuit of power.

Unsurprisingly, the government's record is rather thin. It has set up a large and perhaps overmighty anti-corruption unit. Much energy has gone on reform of the military-intelligence service, the WSI, which was certainly a rum outfit. But for many Poles, the issue pales in contrast to other problems. Signally, the government has failed in the fiddly but vital task of applying for and administering the €60 billion ($75 billion) that Poland is due to receive from the EU from 2007 to 2013.

That money—contrary to what some Polish politicians seem to think—does not come free. It is doled out only to properly drawn-up projects, where the home country is sharing at least a bit of the cost, and with audited results. Money misspent one year is clawed back the next. So far only the smallest and best-run countries, Estonia and Slovenia, have learned what to do.

The Kaczynskis' one real advantage was a reputation for integrity. Like many ex-dissidents in power, they made up in honesty and patriotism what they lacked in political savvy or experience. But a new scandal has dented that. Covertly recorded videos showed their party's representatives trying to win over a deputy from the Self-Defence party. “You want a senior position? We've got lots,” says a prime ministerial envoy. He also offers to “sort out” the deputy's legal problems.

Jaroslaw Kaczynski is again trying to put a new coalition together. Early elections are still possible. It is hard to see any strong and sensible government emerging.



The wages of lies
In Hungary, the government has also seen its credibility collapsing—though it arguably had less to start with. Whereas Poland's politics are buffered by strong growth and fairly sound finances, Hungary's are aggravated by the consequences of five years of spendthrift rule.

The prime minister, Ferenc Gyurcsany, was caught on tape telling party colleagues that his government, re-elected in June this year, had lied, screwed up and done nothing. That led to an eruption of public anger, and big losses in local elections this month. Mr Gyurcsany hung on—but this weekend another tape leaked, on which his local government minister, Monika Lamperth, can be heard assuring party chieftains that planned spending cuts will spare Socialist-controlled regions.

The opposition, led by the mercurial and opportunistic Viktor Orban, is little better. Its election campaign was as nonsensical and populist as the slippery ex-communists it affects to despise. Mr Orban and his colleagues seem to have a worryingly soft spot for the racists and ultra-nationalists who took part, sometimes violently, in last month's demonstrations.

Yet Hungary is crying out for good government. Once the reform star of the post-communist world, it is awash with debt, with a government deficit now revealed to be over 10% of GDP—by far the highest in Europe, and more than twice what the government was admitting at the time of the election. Amid the smell of cooked books, foreign investors' confidence has shrivelled. A run on the Hungarian currency, the forint, would mean default and devaluation: a national humiliation, and a disaster for the millions of Hungarians who have borrowed euros and Swiss francs to pay for houses and consumer durables.

The story is little better in the Czech Republic, where an election in June produced a result tied between a conservative-green coalition and the leftist opposition. That has brought four months of political deadlock. A right-of-centre caretaker government failed to gain a confidence vote last week, starting a new round of bickering and arm-twisting. Tomas Lebeda, a political scientist in Prague, says this may go on for a year. Meanwhile no one is even thinking about reforms to the country's creaking pension system. Next year's budget may not be passed on time.

The squabbling takes place against a background of worrying misuse of the security and intelligence services for political advantage. Just days before the general election in June, Colonel Jan Kubice, a senior crime-fighter, presented to a (supposedly) closed session of parliament a report claiming that members of the governing Social Democrat party had been interfering in investigations of organised crime. It also contained gossipy accounts of alleged sexual misdeeds. This leaked to the press, apparently thanks to conservative deputies. Wiretaps in a subsequent leak investigation have prompted even fiercer rows.

All that seems benign compared with next-door Slovakia, where a majority government of racists, populists and authoritarians is beginning to undo the work of the past eight years. Under the rule of the authoritarian populist, Vladimir Meciar, Slovakia had become a playground for crooks and spooks. The government that ousted him in 1998 flattened tax rates, liberalised the labour market, and won billions of dollars of foreign investment.

Elections in June produced an ambiguous result. A reformist coalition was possible, but instead the largest party, Smer, a populist outfit calling itself social democrat, teamed up with Mr Meciar's party and the outright racists of the Slovak National Party. On paper, the government seems committed to free-market policies. In practice, it sounds muddled—and clumsy. At a foreign investors' conference there last month, a senior government figure, Peter Ziga, addressed a roomful of bewildered foreign executives in Slovak, without translation. Worse, public institutions are again being politicised.

There are some slivers of good news. Lithuania's minority government is proving tough-minded and competent. In the presidential election in Estonia, the electoral college, by a perilous single vote, chose Toomas Hendrik Ilves, a brainy and eloquent American-educated émigré, over a candidate backed by an unscrupulous populist party closely tied to Russia.



Voting with their feet
If post-communist countries cannot raise living standards to western levels, and improve radically the quality of their public services, more people will vote with their feet. Since barriers to movement within Europe were largely lifted in 2004, more than 2m have headed west. Most don't want to emigrate permanently. But almost all complain that as workers and as citizens, they feel poorly treated at home, ill-paid, and frustrated by economies where connections matter more than talent.

For all the strides made in past years, the sad truth is that no ex-communist country has fully reformed its public administration. Voters may be richer, but they also feel cheated and put upon by bossy bureaucrats and snooty politicians. The optimism of 1989 seems sadly distant.

The danger now is that even the bravura economic performance of the past few years may fizzle. Russia and Ukraine offer great supplies of cheap labour, not much farther away. Romania and Bulgaria make the EU-8 look expensive. Emigration tightens the labour market still more.

So brainpower in the service industries, rather than cheap, nimble fingers in manufacturing, should be the new wellspring of wealth-creation. But education systems are rigid and rife with cheating. Most universities are disgracefully old-fashioned and introverted, run by self-interested bureaucracies, mediocre to their roots. Research and development spending is under 1% of GDP—worse even than the puny 2% average of western Europe.

If competitiveness is one worry, financial stability is another. The World Bank said recently that fragmented and populist governments were not only hampering reform but “complicating fiscal and macroeconomic stabilisation”. Bloated public administration makes most ex-communist governments chronically spendthrift. So far, booming tax revenues disguise the problem; that could change all too quickly.

None of the seven ex-communist states outside the euro (Slovenia squeaked in and will adopt it on January 1st) is likely to join this decade. Yet small open economies cannot have an independent monetary policy (indeed, several have currency boards) and are vulnerable to external shocks and speculative attacks.

Discontent and populism may now form a vicious circle, both causing economic failure and worsening it. Ivan Krastev, a Sofia-based political scientist, believes that a political model based on clear ideological differences, mass memberships and strong party loyalties may have once worked well in “old Europe” but has signally failed to transplant to “new Europe”. The gulf between the political elites and the people is growing, and it is hard to see what will bridge it.

If global financial markets tighten, the extraordinary willingness of foreign savers to finance the consumers and bureaucrats of post-communist Europe could shrivel almost overnight. That vulnerability is now matched, dangerously, by unlovability. Western countries might be prepared to bail out their eastern neighbours, financially or politically, when they are seen as valiant, fast-reforming success stories. When run by incompetent and prickly populists, it may prove to be another story altogether.