The EU’s newest members are yapping at the heels of their bigger neighbours. In their competition to offer the most attractive business climate for investors, countries like Slovakia, Estonia, Lithuania and Latvia are charging ahead with economic reforms. In the process, they are exerting growing pressure on reform laggards like Germany and France to keep pace, which otherwise risk losing new investment and existing jobs to the more competitive accession countries.
So far there is little sign of a let-up in resistance to reform in “old” Europe. Germany is mulling over plans for a minimum wage. The plan may be abandoned or set at a competitively low rate – Germany is rare among industrialised countries in not having a minimum wage – but its mere appearance on the agenda is symptomatic of the government’s great difficulty in winning any kind of support for labour market reform. Given its immediate proximity to the more business-friendly Poland and Czech Republic, it is in some ways astonishing that the debate is even being held.
With political demands to maintain all the benefits of “old” Europe’s generous welfare systems and pressure to stimulate vigorous growth in the accession countries – outcomes that are straining policy unity across the EU – something will have to give.
Amid relentless globalisation, it is not unreasonable to foretell the influence of Adam Smith’s invisible hand: factors of production – capital, labour and entrepreneurship – will locate where profits can be maximised; away from “old” Europe for as long as it rejects reform.
If Germany, France, Italy and others succeed in stalling moves by the accession countries to improve the competitiveness of their economies, it will be Pyrrhic victory: capital, and particularly new investment, will simply look beyond the borders of the EU.
