The eastern flank of the EU has proven not only capable of social and political transformation but also economically resilient. There are significant differences, however, between the European core and its peripheries.
The twentieth century proved cruel for Central and Eastern Europe (CEE), not only as a scene of brutal war conflicts but also letting it fall prey to totalitarian regimes. In fact, only recently has a sense of historical justice been brought to these lands thanks to joining the European Union (EU). Those who assumed, however, that this would be the end of history were wrong. The last decade indicates that the EU is an incomplete project, still more of a forming process than a final product. Doubts inflicted by the Euro debt crisis were augmented by mismanaged migration inflows to the EU. Voices of mistrust have arisen, bringing Eurosceptics popularity.
In fact, the issue of the East-West gap popped out during EP campaigns in the region and problems of inequalities tearing Europe apart, most recently also along the North-South axis, persist.
Worrisome tendencies are visible all over the continent—not only in Poland or Hungary but also in France, Italy, Germany or Sweden, not to mention the chaos inflicted by the Brexit referendum. A new vision for Europe is definitely needed. With the newly elected European Parliament, a new Commission to be chosen and the next EU budget on the horizon, Europe can now gain momentum to realize it. How could it optimally benefit the CEE?
The Persisting East-West Divide
Despite more than a decade in the EU, its eastern flank still tends to be called New Member States (NMS), which indicates an assumed quality difference with this pocket of Europe. In fact, the issue of the East-West gap popped out during EP campaigns in the region and problems of inequalities tearing Europe apart, most recently also along the North-South axis, persist. Shouldn’t a new model of socio-economic cohesion, therefore, be the most important issue for the entire EU?
Although the debates on convergence have been going on for a long time, the most tangible and determined action came from Europe’s still fresh and therefore energetic leader, Emmanuel Macron. Instead of focusing on abstract constructs, he kicked off with a very particular manifestation of the East-West divide: the costs of labor and services. In his speech at the Sorbonne in September 2017, Macron explained his policy on reforming the Posting of Workers Directive as a crusade against social dumping and a fight for social justice in Europe.
What Emmanuel Macron seems to overlook, in his protectionist and pro-regulation stance, is that the unequal standards within the EU have proven profitable for other business sectors, especially in Central and Eastern Europe.
He expressed the urgency of developing “true social convergence” and gradually bringing “our social models closer together” through defining “common minimum European social standards”.¹ It is difficult not to support this bold call. The choice of this particular issue is also understandable as it aims to protect the competitive potential of Western companies suddenly faced with cheaper but just as good services from the East. What Emmanuel Macron seems to overlook, in his protectionist and pro-regulation stance, is that the unequal standards within the EU have proven profitable for other business sectors, especially in Central and Eastern Europe.
For example, in Romania, one of the poorest societies in the European Union, the largest foreign investors are French companies, ranging from the automotive industry through retails, energy, banking to the food and pharmaceutical industry.² Similarly, German industry branches have integrated the Czech Republic, Hungary, Poland and Slovakia into their production chains. Yet, lining up the standards has not followed. For example, “the highest wages at Volkswagen Slovakia do not approach the lowest pay at Germany, even though productivity in both countries is comparable. The average salary at the plant is 1,800 euros (…), according to the company. Slovakia’s average salary is 980 euros per month”.3 In fact, the minimum wage in Germany is three times higher than in any of the Visegrad countries,4 with this disparity applying not only to Germany.
Annual net earnings and median net income in the Visegrad Group are 2.5-3 times lower than the European average, not to mention the harsh Romanian and Bulgarian reality.
Annual net earnings and median net income in the Visegrad Group are 2.5–3 times lower than the European average, not to mention the harsh Romanian and Bulgarian reality.5 Many western investors have benefited exactly from this very favorable ratio of the skilled labor force and available infrastructure to low labor costs and very often—tax exemptions, for example in the Special Economic Zones. What a paradox: what poses a threat for businesses in the West, proves to be profitable if moving operations to the East. Taking the principle of “equal work, equal pay” serious should, therefore, embrace far more than the mere Posting of Workers Directive and focus on striving for more convergence and progressing cohesion in the EU as a whole.
Out of the Middle-Income Trap
Unquestionably, competing with low costs of labor and favorable taxation brought jobs and investments to the eastern flank of the EU. Indisputably, the inflow of foreign capital not only improved the living conditions of the local populations but also, in all probability, prevented ever-greater emigration from the region. Nevertheless, as much as this strategy of attracting investors might have made sense in difficult times of transformation, its persistence pushes the CEE countries into a trap of low/middle wages and hardly any genuine investments in innovations.
The eastern countries of the EU are currently boosting the European economy. It is a success story, on the one hand, of European structural funds. On the other hand, it is also the effect of the Eurozone crisis, which completely reshuffled the European map of economic performance. As a result, the eastern flank of the EU has proven not only capable of social and political transformation but also economically resilient. There are, however, significant differences between the European core and its peripheries when it comes to technological innovations, innovation ecosystems, living standards wages, access to social services and public infrastructure.
These problems have been gradually tackled over the last decade, but still, persist. As a matter of fact, quality of life is the main reason keeping CEE migrants abroad—as opposed to the years straight after joining the EU when their motivations were of a purely financial character. The argument, popular in the 1990s, that working one’s way up means accepting austerity, inequality and sacrifices is no longer convincing. The CEE can and should take a step further, also overcoming a mental constraint on daring more generous, European standards—looking at the social policy as an investment, not an expense. It is also crucial to shift to an innovation-driven growth model. Therefore, it is in the very interest of the “New Member States” to seek a new direction of EU’s development that will contribute to closing the gaps but at the same time give Europe an impetus to compete globally. In this sense, Macron’s initiative is just the tip of the iceberg and treating the symptoms instead of the disease.
Europe Needs to Dare More
As for the future, the Multiannual Financial Framework (MFF) for 2021-20276 is being negotiated right now. It will definitely be much different from the previous EU budget, offering new priorities, new tools and different allocation of funds. It will not in all probability continue to favor the eastern flank of the EU, rehabilitating the societies raided by the debt crisis and austerity instead. It will also shift priorities, in recognition of the global challenges that Europe is facing: digital revolution, climate change, security threats and instability in the European Neighborhood.
The eastern countries of the EU are currently boosting the European economy. It is a success story, on the one hand, of European structural funds. On the other hand, it is also the effect of the Eurozone crisis.
It will cut down on cohesion and agricultural policies in favor of investing more in R&D and improving the EU’s position as a global player due to a common foreign and defense policy.
While there is broad agreement on the need to update and readjust the European development strategy, the issue of final funds redistribution raises anxiety in the eastern flank of the EU. Extra stress factors include Brexit, which can shrink the EU budget as well as the hesitation of some “old” European Member States to chip in more to cover the gap. At the same time, all seven MFF priorities are prime concerns to Europe. Additionally, the conditionality of EU payments is being discussed, opening up the possibility of tying EU funds to member states’ records on upholding rule of law. The final funds allocation will therefore involve trade-offs and will perhaps leave some hungry for more.
This setup of MFF headings and geographic allocation of common funds may help, however, overcome the clichés of the poor eastern neighbors entering the rich club. Although the convergence has not yet occurred, the socio-economic map of Europe does not resemble that of 2004 or 2007. Perhaps it is a good moment for the CEE to use this impetus to embark on more ambitious projects, not only regarding domestic policies but also embracing the European strategy. On the one hand, it is giving up competing through a cheap labor force and abandoning the status of “a European assembly line”, focusing on innovations and striving for academic excellence. On the other hand, current economic growth should serve to close the gaps between the Member states. Investments in social policy are still needed in the CEE region to build European standards in access to services such as health-care or childcare, which are fundamental for the wellbeing of societies. Moreover, recent developments in Hungary, Poland, but also Romania demonstrated that the EU needs to develop mechanisms that effectively protect the integrity and the principle of government by law within the community. The controversial idea of budget conditionality is still a journey to the unknown.
The CEE can and should take a step further, also overcoming a mental constraint on daring more generous, European standards—looking at the social policy as an investment, not an expense.
In any case, the race to the bottom is not the way to compete with booming Chinese capitalism or transatlantic competition. Widening socio-economic inequalities and uncertainty have become a low hanging fruit for the populist Euro-sceptic agenda that has been trying to take over the mainstream in many places in Europe. It is therefore in the interest of the European Union—and in particular its Eastern flank—to subscribe to projects promoting investments in innovation and technological advancement. At the same time, the cohesion component of a united Europe must not be neglected or abandoned. This can not only stop the brain drain that the East and the South have been experiencing in the recent decade but also close the gaps between and within (!) societies.
Recent developments in Hungary, Poland, but also Romania demonstrated that the EU needs to develop mechanisms that effectively protect the integrity and the principle of government by law within the community.
A more stable and sustainable Europe, with less social disparities and with chances for social mobility, will not be such an easy target for populists, or for the illiberal ones already in government in a few member states. In order to achieve this, a broad consensus of European countries is needed: an understanding of different development stages on the path to one common goal. Otherwise, the existing divisions will implode Europe by feeding its enemies. And if the EU sinks, all of Central and Eastern Europe will sink as well.
This text was originally published by the Aspen Review: https://www.aspen.review/article/2019/new-mff-horizon-hope-central-eastern-europe/