Friday, July 21, 2006

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.


mihkel said...

In this and other articles you have suggested immigration as a possible solution to Estonia's problems. As a local in Estonia and informed about events and developments in other countries, especially in Western Europe, I'm curious as to how we could succeed where others have (seemingly) failed? I think this is an important question that deserves some debate.

I personally can't help thinking that the lack of workforce is some time a good thing since many people get more paid than they otherwise would. And since when is a low pay and accompanying bad working conditions "a good competitive advantage", as quoted in some Estonian newspapers. Central Europe's main attraction should definitely not be cheap workforce. It's a pity and although an unhappy past has made us walk this path so far, things could have been managed better, as always.

Although one might be rushing too much ahead of time with this, but in the long term even the poorest countries lose the advantage of a low cost labour, just like Central/Eastern Europe is slowly losing it now. What further complicates the matter regarding immigration is that under the terms workforce and economics lie people and cultures - it would definitely be difficult and perhaps inhumane or occurate in some cases to ask aliens, immigrants to leave after they have established homes in their new countries the Baltic states under some Gastarbeiter program.

Maybe this would be drawing just an interesting, nevertheless untruthful parallel with Germany, as I hope some, if not the more important mistakes (namely immigration) are surely to be avoided by the possible decisionmakers on this area?!

As might have expected, Estonia has to a large extent failed in integrating her 30% minority or Russians, who came here looking for better lives after the end of 2nd World War and during forceful industrialization of this country to play a part in an inherently terribly managed economic system we call communism.

One has to calculate the risks and gains of immigration further, since this is no easy matter, when economics is tied to such things as different cultures and their understanding of each other.

It might be of interest, as this perhaps concerns the overall economic conditions here, that I worked as a student temporarily this summer for a mere 236 euros a month, and with this sum I had yet to see the benefits of the economic boom they talk about in Estonia.

Tartu is generally considered a town which boasts itself for the so called spirit of Tartu, which should somehow demonstrate its mental superiority over Tallinn, tha capital.

The university guard can be seen at the information desk from 16:00PM every workday.


Edward Lucas said...

In response to Mikhel's very fair point, I would say that I don't think mass migration is necessarily good in itself and Estonia has every reason to be cautious about this because of its history. However it does seem to me that there are clear signs of labour market over-heating now, at least in Tallinn, and bringing in some building workers or waitresses from eg Ukraine would be no bad thing.

On a separate but related issue, Estonia urgently needs to liberalise its rules for skilled migrants from India and China. This threatens the competitiveness of the IT industry.

With regard to Oulematu, I would point out that I do criticise the old EU in the article, and the Economist does so with great regularity elsewhere. Yes the CEE countries are doing well at the moment, but I worry that there is a danger of complacency.

Sean Hanley said...

Your don't really respond very clearly to the point made by Mihkel - perhaps beause the article's point of departure is economic and doesn't really consider the politics of economic reform very coherently (You essentially present CEE political systems as based on politicians' self-interest, baffling or pathologically populist, rather than responsive to voters). If Western Europe's experience shows that in issues such as open labour markets and migration there can be a powerful trade-off between economics and politics, long-term and short-term interests. I guess the implicit question of your post is how - now EU leverage is gone - democratic processes in CEE can be bypassed or contained so further liberal reforms can be implemented. (I presume you have written off the prospect of any domestic impetus for reform in the region). It is a good question, but there seems to be an odd disconnect between economics and politics in the way your write...

Sean Hanley said...

Personally, I would endorse your liberal values as regards both economics and culture, but the question would seem to be "Where's the politics"? Or rather what is the politics of this? As all good liberals should appreciate the benefits (utility) of any particualr "public good" (such a more culturally diverse society) may not only be unevenly distibuted but are defined by individual voters, who many not share your view of what is beneficial to them... West European electorates have been "confronted with other cultures" through since at the least 1960s and it has always generated issues that need negotiating politically. What discussion I am aware - outside political extremes - has often been negative. Witness Czech President Klaus's claims that the West European experience of multi-culturalism is a warning CEE should avoid without a word about economic imperatives that as neo-liberal he should be well attuned to.

Sean Hanley said...

Czechs are certainly more liberal on social issues than other societies in the region, where these questions are more politicised, although he "rise" of the Greens is essentially just a shifting about of a liberal centrist vote rather than a real harbinger of social change. However -as recent Dutch experience shows - one can be liberal on say same sex relationships but illiberal on the status of ethnic minorities (as many Czechs are about Roma - a long established minority). Klaus's views are not significant because of his current influence but as marker of debates to follow in years to come and as an indication of how liberal nationalism can quickly become national liberalism. After all wasn't Viktor Orban once a liberal?