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Wednesday, May 05, 2004

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Opinion - Leader Page Articles

Paying for the party

By Vaiju Naravane

Fears over what enlargement will bring are not limited to the richer, older members of the European Union. Polls in several former Soviet bloc countries indicate a certain disillusionment.

THE PARTY'S over, the champagne's gone flat. Euphoria has given way to doubt. It is now time to take a cold hard look at the real issues that face an enlarged Europe. A Europe that on May Day, amid great pomp and ceremony, jumped from a membership of 15 to 25.

With 10 new entrants and a population that has suddenly increased to 450 million, Europe has become the world's largest and most prosperous trading bloc. The prosperity however is not evenly distributed, and in a deeply morose economic climate, people across the continent, but especially in "Old Europe" to use the United States Defence Secretary, Donald Rumsfeld's infamous phrase, are looking to the future with a mixture of fear, resentment and trepidation.

Has Old Europe run out of steam? Has it exhausted its vein of dynamism, innovation, agility and inventiveness to become resentful of the energy and eagerness that characterise the new arrivals?

The enlargement has come at a particularly unpropitious moment for old-timers such as France, Germany and Italy. With low birth rates and a rapidly ageing population, these countries, among the largest in Europe, are unable to control spiralling health care costs or support the burden of generous pension schemes. Persistently low growth rates — 1.6 per cent — very high unemployment — between 10 and 11 per cent, and an almost irrational fear of migration — hordes of East Europeans pouring in to snatch their jobs — have created an atmosphere of hostility bordering on paranoia.

This resentment has also been expressed through the ballot box: the Governments in France and Germany have taken a drubbing in local polls. The leaders of Britain and Italy appear increasingly shaky while the Greeks and the Spaniards replaced their old rulers.

The feeling of insecurity within Old Europe has been exacerbated by the sudden entry of the 10 new members. "I'm worried about two things. That all their unemployed people will come here to take advantage of our welfare system and that they'll offer to work for nothing and bring the wages down. They are getting in for free and we are going to have to pay. They will get the investment while we will have to cough up the money to bring their living standards [on a] par with ours. That's just not fair," a retired shop owner moaned.

There is certainly a generalised fear that wages will come down across the old economies of western Europe as skilled workers from the east willing to work for next to nothing flood the market. This resentment is reflected in the restrictions that have been placed on the new members by the old. Free flow of labour will not take place for another seven years and already there is carping about budget increases with France and Germany leading the pack.

Although this is not the E.U.'s biggest enlargement either in terms of territory or population, it is certainly its most significant yet, one fraught with an astounding number of opportunities and challenges. What began in 1951 as the European Coal and Steel Community with a total of six members now looks like a vast empire stretching from Portugal to Poland. What singles out this wave of new arrivals is their economic and political history. Many of them were communist states, part of the former Soviet bloc and are neophytes at both democracy and market capitalism. While they appear to have taken to laissez faire policies like ducks to water, their march towards a market economy has created huge social imbalances, giving rise to massive unemployment, poverty and social resentment. Most of the former Communist countries are very poor compared to the countries of the Old Europe with prosperity reaching only a section of the urban middle classes.

Average GDP per head in the 10 new member-countries, for instance, is only about 40 per cent of the average in the 15-member E.U. With 75 million inhabitants, half of whom live in Poland, the new members make up 20 per cent of the E.U.'s population. Their combined GDP however is equivalent to that of Belgium or The Netherlands — 5 per cent that of Europe. Since production costs are lower in these countries, investors are likely to see them as potential markets. At the same time, workers from these areas are already eyeing the higher wages in the west. Preventing this inverse east-west flight of capital and labour will be a major challenge for the E.U.

Fears over what enlargement will bring are not limited to the richer, older members of the club. Polls in several former Soviet bloc countries indicate a certain disillusionment. Meeting the admission criteria has meant the dismantling of several costly welfare programmes giving rise to certain nostalgia for the "good old days" where a not-so-benevolent state withheld freedoms but gave free health care and education. Several of these states have experienced political instability, with a series of coalition governments and an upsurge in populist and nationalist parties. "They behave as if we are being admitted on sufferance. No one in the west recognises the hardships we have had to undergo to meet their precious four criteria (democracy, free markets, an army subservient to civilian rule and the respect of human rights). Even when they let us in they continue to be suspicious of us and humiliate us. What will the E.U. bring us except increased prices," fumed a Polish construction worker.

Many serious battles lie ahead. There is enormous uncertainty over the future of the E.U.'s Common Agriculture Policy. France, one of the top farming countries in the E.U., is suspicious of countries such as Poland whose strong farm sector is seen as a threat. The new members will receive an estimated 14 billion euros annually to help them catch up with the wealthier states, mainly through agricultural subsidies and regional development grants. However, while foreign investment and E.U. aid will help, economic development will depend largely on the efforts of governments and local entrepreneurs. New members continue to face formidable challenges in this regard. Poland, Hungary, Slovakia and the Czech Republic are all vainly attempting to overcome huge fiscal deficits.

Despite the defeat of Spain's Jose Maria Aznar and the departure of Poland's Leszek Miller — responsible for blocking the adoption of a new E.U. constitution — the institutional challenge remains as big as ever. The enlarged club is scheduled to adopt the Constitution in mid-June; but even if that is achieved, there is no certainty that all national parliaments will ratify it, to say nothing of Tony Blair's plans to ask the British to vote in a referendum — a negative vote would seriously cripple the E.U. and might jeopardise Britain's membership.

In addition, there is enormous resentment at attempts by the Franco-German duo to drive E.U. policy and cast the Union in their mould. This includes ambitious plans for an E.U. with an independent foreign and defence policy. Last year's split over Iraq that pitted Old Europe against the New could resurface over the E.U.'s political future. But the resentment on both sides notwithstanding, this enlargement also offers opportunities that should not be squandered. If Old Europe is tired and out of breath, New Europe is hungry, greedy and raring to go. The new states are growing at a much faster rate than the current E.U. Their GDP rose by about 3.5 per cent last year and is forecast to increase by more than 4 per cent in 2004. This growth creates opportunities for local and international companies alike. Incomes per head are half those of the current E.U. on the basis of purchasing power parity. While this comparison is a grim reminder of the east's relative poverty, for entrepreneurs it is an indicator of market potential.

The new members also bring to the E.U. a large number of reasonably well-educated, low-cost workers. Labour productivity is only about a third of E.U. levels, but hourly wage costs are about one-fifth — creating big opportunities for investors in heavy industry such as automobiles or machine tools that have created large areas of new economic activity in central Europe. The competition from these new plants might be creating angst in the west, but it is also forcing the westerners to increase productivity. The message is stark — shape up or lose out. Although painful, these changes could help raise European competitiveness as a whole and allow it to meet the challenges from other fast growing regions in the world, particularly China and India.

At this point in time, one of the most pressing challenges faced by the E.U. is that of a leadership crisis. The present Commission's term runs out in October. Member-States are casting about for a good replacement to Italy's Romano Prodi, the present Commission President, who is seen as weak, lacking in coherence and authority. For the moment a few names, including that of Britain's Neil Kinnock and Chris Patten are doing the rounds. Showing the wisdom to choose the right candidate who will not be seen to be furthering the interests of this or that bloc will be the E.U.'s first immediate test.

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