Thursday, February 22, 2007

this week's europe.view


Two speeds, too scary

Feb 22nd 2007

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?


Pawel Dobrowolski said...
This comment has been removed by the author.
Pawel Dobrowolski said...

I am not sure that a two speed Europe need be such a bad thing.

It is true that if the financial markets decide that new europe is not joining the eurozone and economic convergence won't happen than the confidence of foreign investors will be dented and their money will leave the region. This is an important short term risk.

But if one takes a mid to long term approach and looks at the fiscal projections for the rapidly againg economies of France, German and Italy one will notice the potential for tremendous debt growth. This will lead to pressure for dealing with the pensions obligations and debt via inflation.

UK and Poland which may have a slightly better long term fiscal stance than France, Germany and Italy may rightly be wary of joining a currency that will come under significant political pressure to inflate in the not so distant future.

oulematu said...

I disagree with Pawel. Europe's citizens and businesses need a Europe that is big, strong and has simple and compatible rules. A two-speed or three-speed or variable-speed Europe would be a nightmare. Such Europe would not be a prosperous area with free movement of goods, services, people and capital which fosters the protection of human rights and of the environment, acts as a strong but reasonable voice in foreign politics and is admired by other peoples for its intellectual magnetism. Instead, it would be a nonentity with millions of well-fed beaurocrats and the member states of this nonentity would be poor miserable places scraping to compete against China, India and Latin America, dependent on Russia for its oil addiction and suffocating from its poisonous emissions. In my view, not even Poland's allegedly so sound fiscal outlook could change the picture!

The decision has to be made at some point. Either the EU is a federal state with its currency and national attributes or it is not. But in the latter case we do not need the armies of EU beaurocrats and the piles of laws and regulations that even our legislators do not understand - in such case the EU as we know it simply constitutes collosal waste and should be dismantled.

Pawel Dobrowolski said...


I am just making the simple observation that Poland's (and UK's) long term fiscal stance is relatively better than that of many EU countries.

Joining a currency whose value may be inflated away in order to deal with the long term fiscal problems of France, German, Italy may not be such a good deal for Poland and UK.


oulematu said...

Pawel - I understand your point. My point is that if each EU member state starts cherry picking EU rules based on its own perceived (sometimes mistakenly) self-interest, the EU as a whole will not function and ultimately will have to be discarded.