They may account for only 5% of the EU’s GDP but the new central and eastern European members, particularly Slovakia and the Baltic states, are setting the pace on economic reform. While they must keep deregulating aggressively to maintain their competitive edge, they are helping to give the EU the liberalising shake-up it sorely needs.
The Brussels summit on March 22-23 marked the halfway point in the EU’s strategy – unveiled with great fanfare in Lisbon in March 2000 – to turn the bloc into the world’s most competitive, knowledge-based economy by 2010. Yet the ostensibly resolute communiqué presented at the end of the summit, calling for a relaunch of the faltering Lisbon agenda and a renewed focus on jobs and growth, belied the EU’s unenthusiastic and, at times, hostile approach to economic reform.
The main culprits are France and Germany (with Italy proving equally reluctant to liberalise). Whether it is their successful campaign to make it easier for member states to exceed the stability and growth pact’s budget deficit ceiling of 3% of GDP or its staunch opposition to the European Commission’s plan to liberalise cross-border trade in the services sector, the eurozone’s two biggest economies are resisting reform on political grounds.
As the latest Lisbon agenda scorecard from the London-based Centre for European Reform notes: “Neither [the French nor the German] government has persuaded voters of the urgent need for change. As a result, Germany’s package of Agenda 2010 labour market reforms and the French government’s plans to cap generous state sector pensions met with strikes and voter hostility. Such domestic political opposition [limits] the pace at which governments can proceed.”
If real reform is to be made, it will not be inspired by pleas from the European Commission. Instead, it will be the chill wind of greater foreign competition that creates the pressure for change. One of the main catalysts for restructuring is the accession last May of eight central and east European countries to the EU. Although the combined size of their economies is equivalent to the GDP of the Netherlands, they are punching above their weight because of their brisk economic growth rates, low labour costs, attractive corporate tax regimes and, crucially, their readiness to embrace radical reform.
Unexpected turnaround
A recent report from Merrill Lynch said: “The mistake has been to think in terms of how west Europe was going to transform the east, rather than how east Europe was going to transform the west. Five years from now, investors may look back and see [EU] enlargement as Europe’s ‘disruptive technology’ … a major force for change, particularly in Germany.”
Simeon Djankov, manager of the World Bank’s monitoring, analysis and policy unit, which assesses business climates in 145 countries, says that the central and eastern Europeans “started from a position where it was crystal clear what needed to be changed”.
The facts speak for themselves. While the old EU grew by 2.2% in 2004, the post-communist newcomers achieved growth of nearly 5% (with Bulgaria and Romania, which are expected to join the EU in 2007, growing by 5.6% and 8.3% respectively), according to figures from Bank Austria Creditanstalt. Much of the growth was fuelled by investments that nearly outstripped the 9% growth rate in the US. The new members have attracted the bulk of the $220.6bn in foreign direct investment (FDI) that poured into the former Soviet bloc between 1989 and 2003, with Poland receiving nearly one-fifth of the inflows and the Czech Republic boasting the highest share per head.
Reform plaudits
Many of the newcomers, in particular Slovakia and the Baltic states, have won plaudits for implementing far-reaching structural and regulatory reforms to improve their business environments. According to the 2005 Index of Economic Freedom – a scorecard published by the Washington-based Heritage Foundation and The Wall Street Journal that assesses the openness of economies – tiny Estonia ranked fourth, leapfrogging the US, the UK and Switzerland.
Stefan Ermisch, chief financial officer of Bank Austria Creditanstalt, which has one of the largest networks in the region (it was the first Western lender to receive a banking licence in a former Soviet bloc country when it opened a representative office in Budapest in 1975), says that the newcomers are “enriching” Europe by embracing radical reform. “These are not emerging markets like Latin America or Asia. This is old Europe waking up. The mentality is completely different to west European thinking. They are very open and hungry for success. They know they have to be attractive to investors,” he says.
“These countries are accustomed to implementing reforms,” adds Alessandro Profumo, CEO of Italy’s UniCredit, another large bank in the region.
