Commentary

The European Rift Goes Beyond Politics

The European enlargement is turning into a nightmare for the cozy Franco-German alliance that historically dominated the foreign policy of the European Union. The irrefutable sign that the gravity of power is shifting came when three new members of the EU - Hungary, Poland and the Czech Republic - joined Great Britain and Spain in expressing their support for the U.S. policy toward Iraq. Within days, other new members, Slovakia, Latvia, Estonia and Lithuania, joined them. Even aspiring EU members, such as Romania, Bulgaria, Croatia, Macedonia and Albania signed up.

The reaction of Paris was one of shock as the perpetually servile Central and East European states entered the stage of European politics with a bang-and in opposition to La France. Imagine that.

The “new” Europeans, as Donald Rumsfeld called them, clearly do not think that European foreign policy should be shaped by French anti-Americanism. The new members are rather fond of the Americans — not least because they see the United States as having done much more to defeat communism than all the other European countries put together.

But the divisions between “old” and “new” Europe go much deeper than that. The accession of the new EU members threatens the post-war consensus regarding the social-democratic nature of the European economy. The type of economic arrangements that the Central and East European countries wish to follow seems unambiguous.

While the French and the Germans agonize about the preservation of their pay-as-you-go public pension systems in the face of growing expenditures and declining ratios between workers and retirees, the Poles and Hungarians have partially privatized their systems. While the governments in “old” Europe prepare for battle with powerful labor unions, the “new” Europeans continue to liberalize their labour markets and attract a growing share of foreign investment. While Brussels seethes over the “social dumping” and “unfair competition” of the new members, the Central and East Europeans see that the only way to escape the communist legacy of poverty is a vibrant free market.

Estonia, which had to accept a mind-numbing number of EU laws and regulations to qualify for EU membership, remains the freest economy in the former Soviet bloc. The country has introduced a flat income tax and effectively eliminated her corporate taxes. Slovakia is quickly turning into a poster child of economic reform. The biding war has already started for licenses that the Slovak government wants to award to private pension management funds. In fact, Slovaks decided to go further than their neighbors and plan to privatize Slovakia’s pension system in its entirety.

There are plans for school vouchers and tuition fees for university students. A flat tax of 20 percent is expected to kick in beginning January 2004. In the Czech Republic, the government made the difficult but necessary decision to gradually eliminate rent controls last month.

Even slow-moving Russia has begun to liberalize and introduced a flat tax of 13 percent in 2001. At that time, the move was seen as risky. But the flat tax has contributed to the 40 percent increase in revenue in 2001 and another 40 percent increase in 2002. In fact, Russia experienced a budget surplus of 1.4 percent of the GDP last year and this year the surplus is expected to reach 0.6 percent of the GDP. Russia is considering other reforms, including energy privatization and membership in the World Trade Organization.

To be sure, Russia will never become a part of the EU, but reforms in this former communist behemoth are symptomatic of a liberalizing wind sweeping through post-communist Europe. As her economy grows, so will Russian prosperity and influence.

In the short- to medium-term, however, it will be the British who will play a pivotal role in the whole European saga. The accession of the Central and East European Countries will strengthen the British role in the EU and turn the United Kingdom into the undisputed leader of its reformist faction. Hopefully, this new bloc will check the power of the Franco-German alliance and succeed in reforming the fossilized edifice of the European economy — a necessary venture, which will in time release the creative potential of all European peoples.

Marian L. Tupy is assistant director of the Project on Global Economic Liberty at the Cato Institute.