this week's europe.view

Europe.view

Two speeds, too scary

Feb 22nd 2007
From Economist.com

Beware a split between the EU's old and new democracies

DEPENDING on where you are standing, the phrase “two-speed Europe” can be tempting or terrifying. For the people who run many of the continent’s old democracies, it must be very tempting—a device for marginalising all the prickly Poles, hapless Hungarians, sleazy Slovaks, chattering Czechs and baffling Balts who have made the European Union so much more diverse a place in the past couple of years.

If the EU were to fracture, the natural fault-line would be the edge of the euro zone, as Toomas Hendrik Ilves, Estonia’s thoughtful president, has observed (see map, below).

The common currency includes most of old Europe, but excludes most of the new democracies (including his). What would happen to the outsiders?

It would be nice to think, as a worst-case scenario, that the single market would hang together, and that the baker's dozen of countries outside the euro zone would at least remain part of this thriving free-trade area.

They would find themselves in much the same position as Norway and Switzerland do today―bound by the EU's rules and standards for trade and industry, in exchange for free-trade arrangements, but with few of the other main burdens and privileges of EU membership.

Probably, however, the unravelling would go further. The EU already finds it a huge effort to make the Poles, for example, abide by European competition law. Without a seat at the top table in Brussels, no Polish government would allow foreigners to claim full national treatment, especially when it came to buying the country’s big companies. With that, the single market would unravel too.

The already withered carrot of enlargement would look much less appealing. Today the EU can hope to make the politicians of the western Balkans raise their game by talking up the distant prospect of full membership. But who is going to lift a finger to join a two-speed Europe in the slow lane to nowhere?

Another big casualty of a two-speed Europe would be any hope of a tough and coherent policy towards Russia.

A resurgent old Europe would probably be dominated by France, Germany and Italy (assuming Britain, as usual, dithered). These countries tend to see rows with the Kremlin as costly distractions. They view the warnings and grumblings of the Poles and the Balts as mere revanchism.

Given the chance, they would happily strike bargains with Russia on energy and anything else, over the heads of the countries in between. A Russian-German gas pipeline being built on the Baltic seabed is a foretaste of what Poland and the Baltics can expect if a two-speed Europe takes shape.

The ex-communist states’ wobbly finances are propped up in part by the financial markets’ confidence that they will join the euro eventually. If that belief erodes, the halo effect of proximity to rich stable Europe evaporates

This should be a terrifying scenario for the new democracies. You might expect them to react furiously by hastening to adopt the euro, by restoring their reputation as reformers, and by pushing for adoption of the EU's constitutional treaty.

But they aren’t, mostly. And the euro is slipping away from them as the EU’s monetary bosses cook up ever more slippery criteria to limit membership. Slovakia, the new EU member with the best claim to join soon, is likely to be told that its low inflation is “unsustainable”, because it relies on a currency appreciation which will end when Slovakia joins the common currency.

The dangers here can scarcely be exaggerated. The ex-communist states’ wobbly finances are propped up in part by the financial markets’ confidence that they will join the euro eventually. If that belief erodes, the halo effect of proximity to rich stable Europe evaporates. Slow-lane Europe’s bad government, backwardness and weakness will stand starkly revealed. And who will pay then?