As the EU's borders expand, Gerhard Gnauck ponders the economic consequences for the countries of 'New Europe' on the poorer side of a division that has persisted for centuries and shows few signs of softening even as enlargement proceeds.
Why is it that the future members of the EU to the east are importing not only dishwashers and Mercedes limousines from the West, but even nails, paper and grain? When the radical Polish peasant leader Andrzej Lepper recently chucked out of the railway wagons German wheat that had just crossed the border, the Polish miller waiting for the delivery argued that it was cheaper for him to process wheat from West Germany than Polish wheat. Of course, the reason for this might be in the economies of scale, which gives large German farms an advantage against small Polish ones. Facing the protests in a case such as this, a liberal economist might argue that economic life is a bargaining process and economics is a mathematical science from which “moral values are obviously extruded.”
Another reason for the success of German wheat, certainly, is the subventions to EU farmers. EU agricultural policy and subsidies, as we know, have little in common with free market prices. But this is not the only point where a closer look at the developments between the two halves of Europe unveils economic absurdities and riddles we used to associate with the years prior to 1989. Each of them, presumably, has an (economic or quasi economic) explanation of its own. This leads me to a new, broader question: who has been and who will be the beneficiary of cross-border economic cooperation, and what impact will EU enlargement have on the new member states?
On the one hand, many politicians across Europe believe (or pretend to believe) that EU enlargement is a “win-win game” and that all participants understand this. None within the establishment likes to argue when the European hymn (“all men become brethren”) is sung The glass palaces of Brussels appear to be the European equivalent of the Statue of Liberty, where inscribed on the pedestal are these words from Emma Lazarus’ poem “The New Colossus”:
“Give me your tired, your poor, your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore.
Send these, the homeless, tempest-tost to me,
I lift my lamp beside the golden door!”
The overall calculation saying that the enlargement will require an expenditure of roughly 40 billion Euros on behalf of the new member countries (for the period 2004-2006; minus 15 billion for their EU membership fees) seems to confirm that the new members will be the winners in this process. Provided their administrations are able to absorb and, what is in many cases is a conditio sine qua non, “co-finance” the payments from Brussels. He who has 1,000 Euro shall be given another 2,000 Euro.
On the other hand, the intellectuals of East Central Europe have argued that never before when new states have entered the EU has there been such a huge gap between the needs of the new and the (insufficient) solidarity of the old. The writer Andrzej Stasiuk seems to share the skepticism he observed among the inhabitants of Poland’s South-Eastern borderlands:
“Open borders don’t impress him who knows that traveling is a thing for the rich and for himself means, at best, a humiliating work force migration. These simple people feel instinctively that the promised world of affluence and freedom will be a world only for the chosen. There is never enough wealth for all, and those who come last, most often don’t get anything. Every half-way literate peasant in my region understands this truth.”
The West European leaders’ policy of telling their voters that “nobody is losing a single cent” due to the enlargement seems to confirm the Polish peasants’ fear. Nevertheless, the enlargement arrangements provide for equal treatment in 2013, when agricultural subsidies for the East will reach the Western level. The numerically strong representation of the new members in the European institutions, as agreed upon at the Nice summit, gives a chance to fight for this or that additional benefit, as long as the voting system is not altered.
But money, especially in the form of subsidies, is not everything. From until 2013, and perhaps beyond, the broader question remains unanswered. Will the treatment of East Central Europe live up to the principles of justice and fair play, and will the region and its citizens get equal opportunities, do they have a chance for sustainable development?
These questions are difficult to answer, but they are far from being rhetorical. My fears concerning the well being of the future EU members are the following: Firstly, their region will be primarily a consumer market for Western companies and, secondly, will become their extended workbench. Next, Western Europe will by all means – and it has the means to do so – attract the lion’s share of strategic investment available in Europe. This means technological progress, skilled jobs and social stability for Western Europe, whereas the negative effects of globalization will hit East Central Europe more severely than the other regions of the continent and might outweigh the positive effects.
To be somewhat more specific: Once the new members enter the community, a sweeping success of Western products might lead to a bankruptcy of tens of thousands of domestic companies – compare the development in former East Germany (although in our case it would be extended over time and somewhat mitigated by the currency barrier). Goods and services from the West, superior in marketing and distribution (and quality?), superior by virtue of the experience and capital basis of their producers, soon will outrank most of their fledgling competitors, as the “Trodat” example has shown. Soon, the rubber stamps and the influenza vaccine, the bathroom tiles and the ceiling lighting will come from abroad. This process is well underway, as I observe in Polish shops daily. In many cases, this may serve the interests of the consumers (especially of those who are more affluent); the impact on the labor market, though, could be disastrous. I believe that the “old” Europe, unlike West Germany in the years following 1990, is not ready to pay the social costs of this “win-win” development. Social policy is still the domain of individual countries.
Secondly, the takeovers of East Central European companies will make these countries the extended workbench of the West. This certainly means, to some extent, the creation of (rather unskilled) jobs, although no miracle should be expected. But increasingly jobs and wages in East Central Europe will be decided upon abroad. In the case of the banking system, this is even true of the citizens’ savings. The new EU members will hardly be able to enlarge their own large companies or even to defend existing ones (as Germany, through the lex Volkswagen defending the company from hostile takeover since 1960 and struggling against Brussels’ regulations, has been doing until now).
Again, one might argue that the West-Eastern company takeovers are “economically inevitable” and “in the interest of the consumer”. The circumstances and consequences of some takeovers, though, remain controversial. The takeovers in the Czech banking sector, which Prime Minister Vaclav Klaus tried to avoid until a crisis struck the economy in 1997, are good examples. Let us keep in mind that the takeover of Ceska Sporitelna by Austria’s Erste Bank, as with many others, happened only after the Czech government agreed to forgive bad loans, to be paid for by the Czech tax payer. Another effect of the takeover was the closure of 300 out of the 1000 branches (branch offices) of Ceska Sporitelna. This reminds me of the ironic saying “Nationalize the losses, privatize the gains”. The gains accrue to Austria, the losses remain Czech. “We enjoy a good living at the cost of those whom we actually ought to help”, comments former Austrian vice-chancellor Erhard Busek.
The overall result of this and other takeovers is that Erste Bank and other large Austrian banks are in a good economic shape – thanks mainly to gains earned in neighboring countries. When I asked an expert at the consulting company PriceWaterhouseCoopers, who specializes in this region, what could happen if Western banks continue to have poor earnings in their “motherlands”, he answered: “If the bank enters a crisis, it will knock at the door of its subsidiary company and ask it for, say, half of its capital reserves. The supervising authorities would hardly take notice. But since these reserves will not save the company anyway, both banks will collapse altogether.”
Thirdly, I am afraid that the distribution of strategic investment (and with it: technology, know-how and skilled, well-paid jobs) across Europe after 2004 will hardly differ from the distribution before. The gap in development will remain for decades, and the scheme called “St. Matthew’s principle” will continue to operate: “To every one that hath shall be given, and he shall abound.” Hopefully, without the continuation: “But he that hath not, even that which he hath shall be taken from him.”
While the new members are preparing to receive EU subsidies, the old member states are cultivating their national subsidy practices. The most impressive example, perhaps, is the East German Länder that used their own as well as federal subsidies to attract large investors. They can more or less continue to do so, whereas the new EU members, thanks to Brussels and its enlargement negotiators, will lose their main bargaining chip, which was the granting of tax holidays in 2004. Equal opportunities?
Take the automobile industry, so vital to the economy as a whole. It has indeed placed investments in East Central Europe, which were milestones in the development of the region. Skoda, in majority owned by Volkswagen, even some years ago made up more than 9 percent of the Czech Republic’s exports, and in Slovakia, cars amount to an even higher 17 percent. Poland produces Opel, VW, Fiat and formerly produced Daewoo, Hungary Opel and Audi. According to a decision made in 2002, the Peugeot-Citroen group will invest 1.5 bln Euro in a car plant in the Czech Republic, and this year Peugeot/Citroen decided to produce cars in Trnava, Western Slovakia (investing 700 mln Euro). For the lucky latecomer in the region this is the “investment of the decade”, and soon little Slovakia will belong to the 15 largest car manufacturers in the world.
Equal opportunities? East Germany attracted a similar investment sum, more than 1.7 bln, during the past two years, not however, because the German workforce is cheaper. Obviously, it is not. East Germany was successful because the Germans paid the investors subsidies of up to 35 percent of the total investment: they paid 400 mln Euro to BMW in Leipzig, 70 mln to VW in Dresden, 57 mln to DaimlerChrysler/Mitsubishi in Kölleda. France was also successful in attracting a Toyota plant due to a huge subsidy.
These public funds were – according to the statements of the automobile firms – crucial to their decisions not to go to Poland, to the Czech Republic or Hungary as they threatened to do, but rather to Germany and France. Their argument sounds ludicrous: conditions there are so bad for investment that you have to bribe me if you want me to come. I must admit that the answer the government of Saxony gave me when I asked about this is quite cynical: “Poland, not being an EU member, can subsidize investments with any sum it wants. We can only give 35 percent, due to EU regulations.” The whole truth is that Poland theoretically could by law, but it simply doesn’t have “any sum it wants”. Germany had 400 mln Euro to give to BMW to lure them to Leipzig – and that’s what happened. These national subventions will not cease to exist after 2004.
So, when will East Central Europe in terms of economy and industry emerge from the periphery? Will these countries be able to catch up to or perhaps even overtake the West? Can the hope of Poland’s former prime minister Jerzy Buzek materialize that “our countries (i.e. the Visegrad countries) cannot be the best everywhere, but in the field of the most modern technologies we want to be among the top European countries by 2010″? There are signs of hope. The mobile phone net in Hungary was established a few months earlier than in sluggish Austria. The Czech Republic is supposedly the world record holder in the number of sms messages per capita. But I can hardly believe that this specific sort of technical progress alone can bring about wealth and sustainable growth.
The Western public tends not to see the burdens the candidate countries are carrying, with their citizens working harder, but still earning Eastern wages and quite often paying Western prices (and sometimes even more!). There are many negative phenomena that are being ignored: Foreign observers are concentrating on the sums of new foreign investments in the region, but there are no statistics on investors who have pulled out. It took a long time for even the European Commission to understand that the required co-financing from the national budgets for structural projects supported by EU would become an enormous problem for the candidate countries. And, of course, even if the national statistics say that Hungary or Poland are doing relatively well, we hardly know what is going on to the East of the Danube or in the Mazury region or in poor Pomerania. The regional differences and social inequalities within the countries which communism had equalized to some extent are becoming more pronounced.
So, we will have to mitigate our expectations as to the future of this region. Will the enlarged EU within the next 30 years see an equal distribution of civil rights and freedoms? Certainly yes. Will the EU see an equal distribution of opportunities, of wealth, of the standard of living, of sustainable development, of social security? Certainly not. The border dividing Europe is 10 times and in some respects even 30 times older than the short life span of the communist regimes, and it is difficult to believe that a few years of subsidies or foreign investment can do away with this heritage.
Two great historians of the 20th century, the Pole Oskar Halecki and the Hungarian Jenö Szücs, drew attention to this border, which more or less follows the eastern frontier of Charlemagne’s empire. It runs along the rivers Elbe and Saale, thus dividing what now is Germany, then along the mountain ridge between Bavaria and the Czech lands, and continues somewhere to the East of Vienna, near the river Leitha. In his book “The three historical regions of Europe” Szücs writes:
“The sharp line of demarcation in economic and social structures which divided Europe from the year 1500 on (…) was reproduced with surprising accuracy along the border at the Elbe and Leitha from the year 800. And even more: Half a millennium later Europe is divided nearly exactly along this line (with one deviation in Thuringia) more radically than ever into two “camps”. It was as if Stalin, Churchill and Roosevelt had studied accurately the status quo of Charlemagne’s epoque, 1130 years after the death of the emperor.”
So, will East Central Europe be doomed to continue along “from periphery to periphery”, as the Hungarian-American historian Ivan Berend put it? Certainly, the region will have to live with what the Polish sociologist Jadwiga Staniszkis calls “incomplete capitalism”. To some extent, this will be a “capitalism from the outside”. The region will have a “dual economy” with a booming sector dominated by foreign companies and their subsidies, concentrated on some islands of growth and development, and a domestic sector which will be struggling very hard to survive. The region will import from “the West” rubber stamps and influenza vaccine, bathroom tiles and a large number of food products, and with it a lot of unemployment, while being barred from the labor market for (at the worst) seven hard years. Altogether, the region will remain on the periphery. Perhaps a privileged one, if one compares it to other peripheries in the world. Perhaps as a region which is under the political umbrella of the United States, but doesn’t share its wealth.
I am still waiting for someone to convince me that the longue durée of backwardness in East Central Europe will come to an end. For the time being, the diagnosis Zysman and Schwartz put forward in their book on the industrial integration of Europe seems most realistic: The chance these countries are facing is to grasp as high-ranking a place as possible in the international division of labor. While starting from the position of the economic underdog, they can only hope that even in times of globalization there are different ways to catch up and develop a national economy, as Great Britain and later on Germany have shown in the 19th century.
Why join the European Union? Does membership pay in economic terms? The answer is – it does only if we accept that it is better to be the poor cousin in a rich family than vice versa. Then we can subscribe to the words of Andrzej Stasiuk: “It is some sort of way out.” Not more than that.
Copyright © 2003 by the author & Tr@nsit online.
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Gerhard Gnauck ist Korrespondent der WELT in Warschau und war 2003 Milena Jesenská Visiting Fellow am IWM
Notes:
In 2000, e.g., Poland imported nails and screws for $ 145 million, paper and cardboard for $ 1,4 billion, milk and cream for $ 57 million and fresh eggs for $ 5,7 million. See Gazeta Prawna, 4.-6.7. 2003, for the figures and the commentary of economist Prof. Mieczyslaw Kabaj.
John K. Galbraith, A History of Economics, London 1987, p. 125. This, according to the author, applies especially to price fixing.
Andrzej Stasiuk: Europa – Nein Danke. In: DIE WELT, 17.02. 2001. Stasiuk does not oppose EU membership but feels unable to greet it with euphoria or even “simple joy”. He agrees with his Hungarian colleague Adam Bodor in saying that membership is “some sort of way out”, furthermore, a “marriage of convenience, a way (for the tired West) to uphold its fading strength”.
Ewa Freyberg, undersecretary of state in Poland’s Ministry of Economy, proudly presented a study saying that even if, theoretically, Poland fully absorbed the EU means offered from 2004 through 2006, unemployment would drop by 0,69 percentage points in 2004, by 1,44 p.p. in 2005, and by 2,14 p.p. in 2006 (currently it amounts to 18 percent). Freyberg noted that absorption may vary from 30 to 70 percent. Meeting with Ewa Freyberg at Warsaw University, Nov. 26th, 2002
Public debate with Dr. Erhard Busek in Vienna, January 10th, 2003. On the significance of the “Eastern business” for the well-being of Austria’s banks, compare Michaela Seiser: Österreichs Banken spüren eine kräftige Ertragsdelle. Starke Verankerung in Osteuropa stützt die Ergebnisse aber deutlich. In: F.A.Z., 11.3. 2003.
Reinhard Engel: Der harte Weg nach Europa. Wien 1999, p. 183. Mr. Engel was one of my valuable conversation partners. I would like to thank him and all the others in Austria, the Czech Republic, Hungary, Poland and Slovakia I have not mentioned here.
Hungary, earlier the shooting star among the new economies, has recently seen the closure of a couple of foreign-owned plants, the largest being IBM at Szekesfehervar with 5,000 employees.
Jenö Szücs, Die drei historischen Regionen Europas, S. 15 (my translation). Szücs wrote his book in 1983; he died in 1988. See also Oskar Halecki: The limits and divisions of European History, 1950.
Ivan T. Berend, Central and Eastern Europe 1944-1993. Detour from the periphery to the periphery. Cambridge 1996.
Jadwiga Staniszkis, Postkomunizm. Proba opisu. Gdansk 2001, passim.
Interview with the Hungarian-American sociologist Ivan Szelenyi, Budapest, Feb. 5th, 2003. Szelenyi spoke about China’s step-by-step “capitalism from below”, strongly resembling European capitalism, Russia’s “capitalism from above”, made by the former Nomenklatura, and the “capitalism from outside” through foreign direct investment, which, according to Szelenyi, hampered the creation of a bourgeoisie especially in Hungary.
John Zysman and Andrew Schwartz, ed., Enlarging Europe: The Industrial Foundations of a New Political Reality. Berkeley 1998, p.2: „…in many cases the critical issues will be how Eastern Europeans will participate in value chains of the main companies of the advanced countries.”
Alexander Gerschenkron, Economic Backwardness in Historical Perspective. In Bert F. Hoselitz (ed.), The Progress of Underdeveloped Areas. Chicago 1952.
