Constantin Gurdgiev is head of research with St. Columbanus IA and lecturer in finance at Trinity College, Dublin
At the recent Krynica Eonomic Forum, I chaired a panel on the future of central and eastern European economic development. The experience highlighted the fact that since at least the late 1990s, the European Union’s economy has all but split along the lines of the “old” EU obsessed with preserving the status quo of wealth and privileges distribution and the “new” EU concerned with competitiveness and economic mobility.
The latest crisis has added another dimension -- the collapse of peripheral member states -- resulting in a trifurcation of Europe. This development is not a trivial one. Roughly a quarter of Europe’s economic resources are now firmly under water, battered by a wholesale collapse of debt-fuelled public sector spending and “investment” schemes.
Speaking at the panel discussion, Hungary’s economy minister, Zoltan Csafalvay, stressed the competitiveness gap between the northern and southern parts of Europe -- expressed in lagging “productivity, flexibility, innovation and even economic freedom.” Hungary has used its fiscal consolidation since 2009 to introduce “a very strong pro-business agenda, including cutting taxes, introducing a flat tax, reducing red tape, increasing the flexibility of the labour market and reforming the public sector,” the minister said. Thanks to such measures, the same gap is now opening up between some central and eastern European states (CEE) and the “old” EU.
Ivan Miklos, Slovakia’s deputy Prime Minister and Finance Minister, echoed the same theme, saying that “the EU states need … deep structural reforms” as the key pre-conditions for increasing competitiveness.
Two approaches for dealing with the current debt and competitive crises are currently on the table. One is via a political and fiscal union leading to stronger and stronger centralization. The other is to have “more strict and enforced rules, based on competition.” Leaving no doubt as to where CEE leaders think the right solution lies, Mr. Miklos said that “in current conditions, a political union will be politically unsustainable. Economically, this kind of policy is not creating a good environment for necessary fiscal consolidation and structural reforms.” Instead, Europe needs more competition and more comprehensive structural reforms.
Mr. Csefalvay also stressed the need to increase competitiveness. The main challenge is “to increase the competitiveness of Europe's single market, [develop]energy, transport and [an]R&D focus. ... But if we want Europe to be competitive on the global stage, we should maintain tax competition between member states, competition between different social and economic models, between what different business environments can offer.”
Spot the difference with the rhetoric coming from Brussels. In those plush quarters today, as 20 years ago, favourite policies remain the tax-and-spend kind, with an increasing degree of co-ordination, harmonization and cohesion acting as a deus ex machina for more of the same.
It’s not working. According to the Fraser Institute’s latest Economic Freedom of the World rankings, based on 2009 data, CEE states have now surpassed both the PIIGS and “old” Europe in terms of international institutional competitiveness.
Adjusting for the fact that parts of the CEE region suffered significant economic disruptions during the global recession, exacerbated by the spillover of the credit crunch from the euro zone, the CEE performance (average rank for the region of 36) now drives global rankings for the EU as a whole, with the euro-area states starting to fall behind and the peripheral euro countries sinking.
Beneath the immediate acute crises in banking and sovereign finances, “old” Europe’s core is now strained by decades of competitiveness losses and institutional sclerosis. The “periphery” is just a proverbial canary in the mine.