But this is not where the story should end. Brittle democracy in the East has roots in the region’s economic transition. This has resulted in a minimal state whose public sector cannot effectively uphold the rule of law and whose impoverished population finds it difficult to organize as a proper civil society. In the meantime, politics are dominated by cliques that vie to act as gatekeepers for inward investment and financial aid, mostly EU structural aid. Since these flows are designed to be the only real engines of growth for these lean export-oriented economies, the struggle is correspondingly intense and low blows are hardly surprising.
If the West is worried about Eastern democracy, it should put some pressure on the new member states to adjust their economic model. This is now not impossible, as many processes of deepening integration that have been started as a reaction to the eurozone crisis create a welcome window of opportunity and offer the proper decision-making framework.
Romania and Hungary are at the forefront…
The reason that the European Commission and the wider Brussels establishment got so nervous so quickly over Romania’s government’s steps was that they are afraid of, as pundits put it, “contagion”. Next door, the Hungarian prime minister Viktor Orbán has often crossed swords with the international community and the EU structures in particular during his 2-year rule. Among other things, he stripped the central bank and the constitutional court of much of their autonomy. Orbán managed to fend off the ultimate sanction, the suspension of voting rights in the Council, the body that approves EU legislation. This is now wielded against Romania too. Orbán had to make concessions, but he is clearly unrepentant. The Romanian prime minister Victor Ponta, in the meantime, swiftly made amends on some of the more egregious legal stumbles, but concerns remain.
However, Romania and Hungary are not the only countries in the region with democratic governance problems.
…but democracy is brittle across the region
The eurozone crisis has brought some welcome respite to the ten post-communist member states that joined the EU in 2004 and 2007. The “old EU” has guarded against the citizens of the New Member States by opening up the labour market only gradually. The Easterners also remember the times when they had been almost universally branded shoplifters. Now, Europe is gazing at all those islands and pensinsulas on its Western and Southern fringe and for once, Eastern Europeans are not the negative news. In fact, newspapers in the new member states revel in smug stories about lazy Greeks on social benefits. The Czech president Vaclav Klaus has even dropped the remark about Greeks being at most fit to drink ouzo in the shade.
However, the average Czech feels the country has nothing to be smug about. Under the spires and gargoyles of Prague, politics is very murky. The city itself has become a local byword for corruption, with money from city’s enterprises such as public transportation being siphoned-off through a maze of tax haven-registered companies. At the same time the city government has bought Hummer cars, Segways and other expensive toys for the municipal police. This is replicated at the national level. For example, over the past 10 years the government has wasted the equivalent of €80 million on an online patient information system that practically nobody used. The supplier had anonymous owners.
Czechs have partly taken this in their typical humorous stride. One businessman has started a company called Corrupt Tours, which gives tourists a ride around the spots such as the villas of some of the more notorious politically-connected businessmen.
Jokes aside, Czechs are very angry, and often point out despairingly that no really important politician or businessman has ever been sentenced for corruption or fraud. In Bulgaria, just this month a popular judge, the leader of a reformist judges’ union, was suspended, prompting her colleagues to protest in the streets. The police also re-started investigation of the co-owner of the most popular paper, “24 hours”. Critics say in both cases the government, mired in corruption scandals, is simply trying to silence dissent. In Latvia every election since 1990 brings a completely newly formed party into power. At the end of every electoral cycle, Latvians hope a saviour well emerge to clean up the act.
For now, these developments are being discussed as a form of epidemic spreading across the region. ‘Ponta learns bad ways from Orbán’. But rather than being a simple contagion, the problems in the East are simply caused by the same structural factors.
All of these countries started their economic transformation in early 1990s by efforts to build “domestic capitalism”. This was to happen either via sales of assets to local managers or by ‘voucher privatisation’ where citizens could en masse apply for shareholdings in companies. These efforts mostly ended in failure. Partly this was due to policy-makers’ naiveté, when they wanted to steam ahead establishing capitalism without having developed a proper legal framework first. Partly due to the fact that there were many unscrupulous people involved. The travails of one Viktor Koený, who set up a fund to invest people’s vouchers on their behalf in the Czech Republic are the stuff of legends. He managed to gain control over a huge chunk of Czech industry, only to strip companies of assets and get a fortune out of the country before he could be caught. He later bought an island in the Bahamas and would have lived a happy life had he not got caught up in a bigger deal later, where he defrauded rich American investors, including the odd senator, in a scheme to gain oil concessions in Azerbaijan. The scheme backfired when Koený failed to secure concessions, but managed to spend his clients’ money. He now fights extradition to the US.
Additionally, there simply wasn’t enough managerial expertise in the region to turn ailing companies around and adjust them for exports to capitalist markets. Slovenia is the only outlier. Having had plenty of experience exporting to the West in pre-1989 times and a strong base in producing consumer goods needed in the West, local managers did not experience dramatic difficulty in adjusting to new conditions.
So, after the failures of earlier transition, countries in the region switched emphasis from domestic entrepreneurialism to attracting foreign direct investment in a drive to achieve quick, export-driven growth. These efforts were accompanied by widespread enthusiasm for policies aimed at rolling back the state.
And they did roll it back. Or, rather, shrink the public sector by cutting its funding. Bulgaria, Slovakia, Romania and Lithuania are absolute bottom of European ranking on tax revenue. The others are only a little above.
…and a “minimal state”…
This would be great news if the system was equitable and benefited innovative talent. But it does not. Arbitrary tax cuts are given to foreign investors. Further loss of revenue is due to poor collection. OECD figures for tax gaps in the region are pretty staggering. Also, there is a real problem in taxing the rich. Wealth taxes are practically non-existent. But it is precisely the appreciation of assets, rather than labour income that has made rich those that were lucky enough to own a flat, land or buildings. In addition, the rich have it extremely easy to avoid taxes. Yes, this is something that taxpayers in the west complain about too. But this is the east. If you declare yourself the tax resident of one of those small exotic states in Europe or the Carribbean, nobody is officially going to check whether you are really away from your home country for the customary half-year to qualify for tax residency change.
Part of the Western press keep portraying the east as the lean and mean players with exactly the right policies for today’s global market place.
This is, first of all, ironic. These countries crucially depend on Germany as their main export market. Especially the Czech Republic and Slovakia have more trade with Germany than some out-lying German regions themselves. If the highly regulated German engine stops running, the lean and mean Eastern Europeans are finished.
The small state model also means the public sector is in shambles. This, first of all, stifles innovation and investment into the future. Seven of these countries spend less than one percent of their GDP on research and development. Slovenia, the Czech Republic and Estonia are doing better, at 1.5-2.0 % averages over the past five years, but this is still just licking the EU average and well below the Lisbon figure of 3 %.
The model also breeds corruption. Local “reformist” politicians and NGOs try to fight corruption by churning out transparency indicators and anti-corruption reports. But at the end they are baffled by the fact that in many of these countries the public now states they are more willing to give bribes than ten or twenty years ago.
They should not be surprised. If professional classes, doctors or university teachers, get the income that does not allow them to eat and pay rent, they either have to exit the profession or resort to some form of corruption.
The lean and mean model also kills civil society. Civil society should not mean a few Western-funded NGOs, but groups of citizens who have enough spare time and trust in each other to undertake common action.
Of course, not all is doom and gloom. The “new Eastern core” of Poland, the Czech Republic and Slovakia is doing quite well, as is Slovenia and, up to a degree, Estonia.
Yet a Czech still works for a quarter of the average German’s wage, a Slovak for a fifth and a Bulgarian for a tenth.
…plus social misery and ethnic tensions
And beyond the above five countries which are doing fine at least in macroeconomic terms, the crisis actually did hit the region hard. In the most dramatic example, Latvia lost 24 percent of its GDP over its worst period of crisis, from 2007 to 2009. And it continues to bleed as especially the young and the more educated liquidate assets, close their bank accounts and close the door on the motherland in which they see no future. Or, if one needs a really dramatic example of real estate speculation in Europe, it wouldn’t be Spain: Bulgaria’s coast and its mountain resorts are dotted with mammoth developments such as hotels or apartment houses that simply don’t have clients. All major cities have shopping malls that are either eerily empty (as much as half of shopping space unsold and a few lone customers wondering around the opened places) or simply never opened.
Social tensions increasingly mix with ethnic ones. In June his year, a Slovak policeman shot dead three Roma. “Could not stand those troublemakers anymore”, he said. Two years ago in the same country a gun-club member entered the flat of his Roma neighbours and killed seven of them. In the neighbouring Hungary, a spate of attacks targeting Roma with Molotov cocktails and guns left 6 of them dead. In the Czech Republic, anti-Roma marches are now practically commonplace. Anti-Roma parties proliferate across the region. The best-known example is Bulgaria’s “Ataka”, a parliamentary group.
The region has plenty of talent. A case in point is the IT sector: three of the world’s top five producers of anti-virus software come from two countries the Czech Republic (AVG, avast!) and Slovakia (Eset). Skype was developed in Estonia.
Yet in order to capitalize on its talent and potential, the region needs are sweeping public sector reforms that would finally restore some degree of “normality” to the society.
How to stop it?
If you talk to the citizens of the new member states, one thing that they mentioning is how they crave a “return to normality”. They are tired of years of economic reforms which result in key laws being changed with every electoral cycle. They want rule of law and social and political stability.
These sentiments are now often exploited by the political class. In fact, the two most successful politicians in the region, Hungary’s Orbán as well as Robert Fico in Slovakia – both completely dominate their parliaments – are so dominant precisely because of their “anti-reform” rhetoric. And so are, to a lesser extent, Romania’s Ponta and Bulgaria’s Boiko Borissov.
At the same time, not much is done to really restore the stability of the public sector or to make social and political life fairer.
However, efforts to deepen EU integration can help. What is needed now is an intellectual movement across the new member states that will support the type of integration that will lead to certain tighter standards in taxation and social policy. This movement should steer discussion in these member states towards accepting a new standard of harmonization via ongoing integration efforts. Which are these?
First, the Euro Plus Pact specifically calls for some tax and social policy harmonization and this opportunity should be seized. Harmonized standards can be extended by intergovernmental treaty, which would be needed anyway to create binding rules, beyond the eurozone countries.
Germany should lead the way. Of course, it will be opposed and misunderstood. When Germans proposed the harmonization of pension systems last year, the then Slovak prime minister Iveta Radi?ová naively protested that she cannot require Slovaks, with their relatively low life expectancy, to retire as late as Germans. Of course, this is not what German officials meant by harmonization (it was more along the lines of making sure years spent in retirement are the same). Radi?ová simply reacted to misleading Slovak press reports rather than discuss things with Germans. The reason why Eastern European politicians are able to get away with blatant misrepresentation of EU discourses is because they have no pro-integration intellectual opposition that would correct them.
Secondly, more use must be made of the Open Method of Coordination, the tool of Europe2020, to include and properly steer labour market policies as well as education policies.
Thirdly, the European Commission should make proper use of its competition powers to crack down on tax cuts as part of state aid. This should end the vicious cycle of offering more and more cuts. Some of the new member states see hardly any other benefit from foreign investment than improvement in employment. They are locked in beggar thy-neighbour policies and need some common standards to resolve this collective dilemma.
Fourth, the member states and the EU institutions should revise the use of structural aid. In many instances, EU aid is very helpful and leads to useful projects. However, in general in the new member states it has become a byword for corruption.
Finally, the needs of the new member states need to be properly reflected in any new growth strategy that the EU might adopt.
The crisis is already leading to some unravelling of the policies that were seen as the cornerstones of the Eastern “lean and mean” state. The need to consolidate public finances has meant that privatisation of pension provision has been rolled back. The Baltic states halted mandatory contributions to private pension funds in 2009. Poland has drastically cut them, and Slovakia will soon follow. Hungary went for outright renationalization of its private pension pillar.
Similarly, that large symbol of Eastern reforms, the flat tax, is now falling apart. Governments, needing to shore up their revenue to stem rising debts, are re-introducing progressive taxation. This is the case of the Czech Republic as well as Slovakia, which had one of the most radical ‘flat tax’ arrangements. So far the tax reforms are rather symbolic, but more harmonization at the EU level can help to carry the momentum.
Harmonization efforts at the EU level will not in themselves help these countries overcome their deep structural problems. But they can significantly help to put these countries on the path of, finally, becoming part of proper, prosperous democratic Europe. The EU has always been conceived of as a social market economy. The new member states should now be properly integrated into this model.