The European Journal

Central Europe & the EU: Part IV. The economic failure of the European Union

When the Central Europeans joined the EU they hoped they were entering a rich man’s club that was dynamic and prospering and that they would benefit from this. Superficially at least, enhanced exports to the EC countries and reasonably rapid growth in Central Europe since accession seemed to have confirmed this.

But how secure is the economic future of the EC? Recent years have seen lower growth and persistent double-digit unemployment in the core countries of France, Germany, Italy. Within the Euro zone only Germany generates a substantial surplus through its exports. The others nearly all run deficits because their goods are uncompetitive. Their wages and costs are rising at home but they are trapped in the Euro and cannot devalue to become competitive on price with simple manufactured items from China or South-East Asia. If the Central European countries joined the Euro or if their tax and other fiscal policies were decided by the EU, they would suffer the same fate. Their advantage at present lies in low costs when calculated in Euros and their favourable investment conditions. The great threat to the nations Central Europe will come with forced harmonization, such as being made to join the Euro on unfavourable terms or the insistence on having uniform business taxes throughout the EU, to prevent competition between tax regimes. Would the Central European economies prosper if deprived of the right to attract foreign investment by having conditions more favourable to investors than those in the richer EU countries and of the possibility of keeping export prices low through control of the exchange rate? The EU is backward looking, fearful of the future, overanxious about risk and change. Its obsolete agricultural policy together with sporadic protectionism against basic manufactured goods from Asia is backward looking; an attempt to preserve for ever forms of production that are already not viable. The way out is to shift to more sophisticated, science-based industries but here the EU actually gets in the way.

The Lisbon strategy announced in 2000 aimed to make the EU “the most dynamic and competitive knowledge-based economy in the world” by 2010, through an emphasis on innovation,research and development. By 2004 at the time of the Kok report it was clear that there was no chance whatsoever of this target being met and the situation is no better today. Do I still hear someone in the EU boasting ‘ we shall catch up and overtake the USA’?

Indeed Europe is becoming less competitive over time. The EU’s use at Lisbon of targets such as total R & D expenditure, number of science and technology graduates, degree of consolidation as opposed to fragmentation and duplication both to measure and to promote progress in innovation is not only inappropriate but distracts attention away from the real problem. The real problem is the waning of European Unternehmergeist, the entrepreneurspirit, in a cautious, timid, precautionary European Union. Innovation occurs through a spontaneous economic process of creative destruction not as a result of EU exhortations and plans. In truth the European Union fears to be dynamic and competitive because this would disturb harmony and harmonization.. Europe’s continued failure to halt the steady onset of the ‘ European disease ‘ is shown by the far greater number of patents registered in the United States than in the EU and the far greater proportion of research and development (as well as the absolute quantity) carried out by private corporations in that country. Only three European companies are to be found among the top 10 investors in R & D, a list dominated by American corporations. Corporate investment in research is growing far faster outside the EU than within.

Behind this wilful backwardness lies the absurd ‘precautionary principle’, the idea that a new product or method of production has to be proven to be safe and that no risks, even small ones, should be taken; a corollary of this is that approval of a product can be withheld even if there is not much scientific evidence to justify any ban. Under the REACH (Research, Evaluation and Authorization of Chemicals) programme, the precautionary principle is now to be applied retrospectively to widely used chemicals and indeed even to herbal medicines and vitamin supplements. The costs of applying these regulations will be large, of the order of 5 billion Euros, and the gains small and uncertain, given that the chemicals and supplements have been available for a long time and epidemiological research has never indicated any serious problems. More to our present purposes new chemicals and materials are an advanced knowledge based sector within the EU countries which enable Europe to compete with the Asian countries in the future in a way that reliance on basic textiles, clothing, simple manufactures can not and never again will. Already the time taken to bring a new chemical to market is far greater in the EU than in the USA. Introducing ever more ‘precautions’ will lengthen this gap. It will also lead the EU’s chemical industries to move their operations elsewhere, will discourage foreign investors and will lead to major disputes in the World Trade Organization. It is all part of a general EU distrust and fear of new technologies, a certain recipe for economic decline.

One clear example of a technophobic European resistance to innovate has been the EU’s long lasting irrational opposition to and obstruction of the planting of GM (Genetically Modified) crops or even to the use of genetically modified organisms in industrial processes. Now the EU and some of the constituent countries are reluctantly relaxing their rules but it is too late; the Americans have a commanding lead in the biotech business, in medecine and manufacturing as well as agriculture, just as they long have had and continue to have in information technology. What is more, other countries such as Australia, Canada and China are seizing the opportunities that Europe missed. Even Romania took a more progressive view than the EU. What is the EU now going to do about agricultural produce from Romania?

When the leaders of the EU congratulate themselves on an ‘ever-closer’ union and speak of Europe as an ‘empire’ or a new ‘pole’ in world affairs, it is like twenty or more failing companies who proudly merge into one large company, which then goes bankrupt anyway. As I have indicated the EU has very little democratic political legitimacy, because it neither behaves in ways that acknowledge that all power is lent to rulers by the people, nor accepts the people’s verdicts in referenda, nor enjoys the kinds of solidarities that nations can. National politicians prop it up mainly because it gives them the opportunity to prance on a bigger stage, to be received at the imperial court. Such legitimacy as the EU enjoys among the people is that of a technocracy but such a legitimation depends utterly on a continued display of competence manifested in prosperity and innovation. This has now been called into doubt.

What should the peoples of Central Europe conclude?

There are two main morals to the story for Central Europeans. The first is that the hopes of the Central European countries that joining the EU would mean an escape from the lack of democracy, the absence of free markets and the prevalence of corruption of the socialist era are not going to be fully realised. The European Commission is a castle of apparatchiks whose ideal is not democracy but a bureaucratic ‘harmony’ controlled by them in collusion with a few privileged political leaders from the individual nations. The EU’s commitment to the free market and competition is faltering and we may well see it collapse. Because there is no enthusiasm for democracy or for markets, the essence of an open society, there is also no real concern to do much about corruption and no drive to innovate. The EU mind is closing.

Second, the twenty-first century has turned out to be for the core countries of the EU a time of economic stagnation.

If the Central European countries were to integrate their economies or their policies more closely with those of ‘old’ Europe, they too might stagnate. The future looks ever worse because of the failure to seize the technologies of tomorrow with sufficient speed and because of the serious demographic problems in such large countries as Germany, Italy and Spain which have very low birth rates indeed. The Central European countries have hitched their wagons to an EU train that they thought was going to progress at a good speed. But it is slowing down and may well come to a stop. The EU has yet to learn that neither boastful words, nor pulling down the blinds to avoid seeing problems will get the train going again.

Central Europe & the EU: Part III. Open democracy or hidden corruption?

Professor Christie Davies writes: One of the claims made for the benign and beneficial impact of the EU on the Central European countries in the pre-accession period is that it enabled them to reduce levels of corruption in their own countries, partly through exhortation and pressure, and partly through providing advice on administrative reform and indeed relevant training. This may well be true,1 though the main credit must, of course go to the local peoples who desired and nurtured reform. We can see a similar attempt being made today in relation to the next entrants Bulgaria and Romania who have been told they must meet crucial benchmarks on crime and corruption and that there will be continued post-accession monitoring to ensure that progress is made.

Can we therefore, assume that the EU itself and the older Member States are models of probity and exemplars of honesty that the Central and Eastern European nations and elites should seek to emulate? Are they in this respect a burning and a shining light to all these places after the gloom of the socialist era? Unfortunately not, as has recently been pointed out by the Bulgarian Minister of the Interior, Roumen Petkov; he has accused the EU of unfairness and double standards in insisting on the Bulgarians eliminating corruption in their country, while they allow it to flourish in ’old Mediterranean Europe, particularly in Greece and Southern Italy. It is notable in this context that there is no law in Spain against bribery in the private sector (or at least there was none in October 2006). Bribery in relation to corporations seems to have been an accepted practice in Spanish law. Civil laws relating to competition could in theory be used to annul contracts won via bribery, but in practice no case had ever been brought to court.

Members of the European Council signed the Criminal Law Convention on Bribery in 1999 but even by 2006 it had still not been ratified in France, Greece and Germany nor of course in Spain though Bulgaria and Romania have been forced to ratify. In June 2007 the European Commissioner for Justice, Freedom and Security Franco Frattini was still complaining that most EU members (all except two) had failed to implement a framework decision to combat corruption in the private sector, which in theory had to be done by 2005. It has not been done because corruption is not an EU priority and many of the other commissioners did and do not take it seriously at all. Corruption it would seem is something to be combated only in the new Member States; it is worth noting that no such probes about corruption were made and no conditions were attached when the Mediterranean countries, Spain, Portugal and Greece first joined the EU. The Bulgarians have a point when they complain that the EU has been selectively assiduous in its pursuit of corruption, though it is somewhat ironic that they should perceive having to clean up their own country as an unrewarding and oppressive requirement.

Very broadly the old countries of the EU can be divided into two groups when it comes to corruption. There are the honest majority and the corrupt Mediterranean countries, Greece, Spain, Italy and especially southern Italy and to an extent France that are thoroughly, perhaps incorrigibly, corrupt. In Greece it is part of everyday life. You do not need to sit the driving test, since you can easily buy a driving licence by giving a fakelo (bribe) to a corrupt official without having to demonstrate any competence behind the wheel whatsoever. It is hardly surprising that the incidence of a death through motor accidents per million people in Greece is three times as high as in the Netherlands. It makes complete nonsense of the attempt to harmonize first the nature of the driving test and now the training of the examiners of the driving test. A far better method would have been to have mutual recognition of a diversity of tests between countries where it is known that the local test works reasonably well as an instrument for the furtherance of road safety. To go beyond this is in two senses irrational and indeed these two forms of irrationality underlie the very concept and practice of harmonization and should lead us to reject it. First, if the same end, namely road safety is attained reasonably equally by different means, then why incur the extra costs of local reorganization in countries that are willing to have mutual recognition. Second, the attainment of equivalent formal legal-rational procedures does not guarantee real equivalence, since it does not allow for local cultural differences which are more important and which shape considerably the kind of procedures that are appropriate in a particular country. Harmonization is neither a necessary nor a sufficient means of attaining the desired mutual European goal of road safety. Indeed its attainment distracts our attention from other more important questions such as whether or not he driving test is fairly or corruptly administered or the ‘culture’ of driving attitudes. What is important is whether drivers habitually drive aggressively or with mutual consideration is what is important, not what is measured by a driving test. How can you harmonize cultural attitudes or indeed median national personalities?

Here is one basic reason why EC harmonization cannot work. The incidence of corruption and perceptions of corruption differ too much between countries. Regulations will never be enforced in the same way in honest Europe and in corrupt Mediterranean Europe, so what meaning can harmonization have? It is particularly a problem in relation to EU expenditures in the more corrupt countries. The accuracy of income support payments to farmers now has to be monitored by means of aerial photography. In the past money has disappeared to subsidise tobacco farms that did not even exist. Given the health hazards associated with tobacco it may well be that less harm was done than by paying the money to actual tobacco growers who despite decades of EU subsidies seem unable to adapt to growing other crops.

No doubt if I were to put these points to the EU Commissioners they would claim that all the blame lies with the Member States who are lax in investigating the corrupt use of EC funds and would argue that what is needed is even greater centralized powers, so that they can conduct their own anti-corruption investigations in individual countries at their own discretion.

I can only reply to these imperial sons of the Romans: Quis custodiet ipsos custodes? Who is to guard those who guard the EC’s finances? Every year perhaps 10 per cent of the budget goes missing, 5 billion euros per annum, five percent as fraud and five percent misappropriated. The auditors cannot say with any real degree of assurance where 90 per cent of the money went, which is why they inevitably refuse to sign off the accounts. Random checks reveal significant levels of fraud to which the EU tries to riposte that you cannot generalise from a small sample! The auditors refuse to pass the accounts year after year and accountants seconded by national governments to the auditors say that the accounts are badly kept; yet without a decent accounting system that tells you where the money is going, how is it possible to run any kind of effective administrative body?

It is not just that funds disappear at the southern peripheries of Europe. It is also that the southerners come to Brussels and bring their culture of corruption with them. It is no accident that the most recent charges of bribery and corruption over the construction of EC buildings in Albania, India have involved Italian nationals. There is corruption at the centre and there are even reports of systematic abuse and nepotism and of wrongdoing being ignored within the Court of Auditors itself.

What is profoundly shocking is the way in which irregularities are covered up, When honorable whistleblowers such as Paul van Buitenen or Marta Andreason, Dorte Schmidt-Brown or Robert McCoy provide revelations of corruption, then the Commission takes stern action not against the fraudsters but against the whistle-blowers, who are sacked, suspended without pay or on half pay or given compulsory sick leave and eventually tire and quit. They are even smeared; when Sir Paul van Buitenen the EU’s Dutch auditor wrote to a member of the European Parliament saying that his Christian principles required him to reveal the high levels of corruption that existed he was reviled as a religious fanatic. Despite all the concealment, scandals do get revealed, notably that of 1999, when Jacques Santer’s entire Commission resigned. Between a billion and two billion’s worth of taxpayers money had disappeared somewhere in the Mediterranean, the countries not the sea. Mme Cresson a Commissioner and former Prime Minister to the notoriously corrupt French President Mitterand, was found to have employed her dentist, who also lived in her house and was her astrologer, as a special adviser to the EC and to carry out a well-funded research project on AIDS. No doubt she had excellent teeth and a good horoscope, but was that a recommendation? All those who resigned or were dismissed for fraud at this time got substantial pay-offs. Cresson got 500,000 Euros. The penalties for being a whistle-blower are clearly far greater than for being found out in fraud, nepotism or mismanagement. What is most alarming is the inability and unwillingness of personally honest Commissioners to police such behaviour or to expose it. On the contrary they rush to scapegoat the persons who exposed the corruption and even to induce the Belgian police to arrest them; the said police held for questioning and seized the files of the journalist Hans-Martin Tillack of Der Stern investigating EU corruption, claiming that he possessed leaked documents from the Court of Auditors.

The pattern is a depressing one and must be familiar to those who experienced the socialist period in Eastern Europe. Loyalty to an institution, whether the Commission or the Party, the upholding of secrecy and avoiding scrutiny and scandal are more important to the insiders than any commitment to such democratic values as accountability, openness, transparency, honesty. The motives are the same, a mixture of ideology and a wish to retain great privilege. The ideology is Europeism and the privileges lie in the very high levels of lightly taxed pay and the very generous allowances, expenses, and pensions that EU officials enjoy, as indeed do MEPs. For the officials there is total job security and membership of a closed elite provided you do not question the questionable or deviate from the party line.

Democracy

The failure to tackle corruption is hardly surprising since the Commissioners are accountable to no one. There is no proper separation of powers and no definable limits to the Commissioners powers. Legislation that has been vetoed by a Member State can be brought in anyway by a decision of the European Court of Justice. The people are ensnared by EU regulations but the regulators are unregulated. At the top there are no certain rules, only creative accountancy and creative bending of the laws.

When the European Parliament was outraged at the corruption in the time of Jacques Santer, it was working on the basis of information leaked to its members by Buitenen, not as a result of its own scrutiny or that of a judiciary. It did not have the courage to vote for the censure and dismissal of the Santer Commissioners. Yet if a Parliament will not act in this way as the representative of its voters and taxpayers, how much democracy is there in Europe? Each time there is a scandal, there is a cosmetic change in the ineffective bodies for investigating fraud, which are then given new acronyms, and there is the rhetoric of reform. Some time later it happens all over again as with the Eurostat scandal. There are no checks and balances on the Commission, it has a culture of secrecy and attempts to scare off investigative journalists. Is this the democracy that the Central Europeans aspired to when they escaped from socialism?

Rather what we see is contempt for democracy. It is the other side of the unwillingness to accept the results of popular referenda, where the people of a country reject an EU treaty or most recently a Constitution on a high poll and after a strong debate, indeed one loaded towards acceptance because the EU and its supporters provide money and propaganda on a scale no opposition can match. Yet when the Danes and the Irish voted ‘No’ to ever closer union, they were told to hold the referendum all over again until they came up with an answer acceptable to the European leadership. When the proposed constitution was recently rejected in France and the Netherlands, it was not concluded that the people had spoken and that their will must prevail but rather that they were ‘wrong’ to do so or that their votes, despite the referendum question being entirely clear, did not mean what they said. The ‘treaties’ up for negotiation in 2007 are simply a dishonest way of smuggling in quietly the very constitution that was rejected, thus once again showing contempt for the voters.

What this indicates is a very wide gap between a European political class that exercises power and the national electorates. When the politicians from a particular country go to Europe to negotiate they forget the wishes of their own electorate, except for certain small powerful or vociferous sectional interests, and they seek to appease other European politicians and the EU apparatchiks with whom they have to deal regularly on a face-to-face basis. They are hopeful that at election time their fate will be decided by other local issues and they are reluctant to be the awkward ones who stall a European agreement. Thus a gap has opened up between a ‘them’, heads of governments and the European establishment working together and a ‘we’ the public, the voters, the taxpayers who are rarely consulted and indeed when they are, their clearly expressed views are disregarded. It is at this point that democracy ceases. The politicians and the people have to come to live in two different worlds, the very antithesis of democracy.

Central Europe and the EU: unfair accession and the imbalance of power

Christie Davies writes: When the Central European nations emerged from the long night of socialism they sought military security through NATO and a reinforcement of their drive towards a corruption-free democracy and a competitive and prosperous market based economy through joining the EU. They wanted the opposite of what they had known during the corrupt, undemocratic, state-planned period of Soviet domination During the latter part of the pre-accession period collaboration between the Central Europeans and the EU and its existing constituent countries may well have been effective in the achievement of these common ideals and objectives.

The actual accession was unfair and asymmetrical. The Central Europeans had to accept unfair terms imposed on weaker and vulnerable partners. Because of the size and proximity of the European Union’s market, they had very little choice but to join, whereas there was considerable opposition to their joining from ‘old’ members, who thought that an expansion taking in several poorer countries would disturb their existing pattern of comfortable privileges. The unfairness was to be expected given the ungenerous nature of the Association Agreements (Europe Agreements) concluded in 1991 and 1993 between the EEC and the core Central European countries and the conflicts to which they gave rise.

Now three years on it is necessary to ask whether further progress towards the fundamental goals of achieving prosperity and eliminating corruption, through the establishment of open democracy and competitive markets, can still be effectively pursued within the European Union. Alternatively, have the Central Europeans entered a fundamentally undemocratic European Union, where corruption is tolerated, and one where competition, innovation and economic progress are faltering? It is a question that, of course, should be asked in every member country but it is one that has a particular importance and even poignancy for the Central European countries whose past was bleaker and whose hopes correspondingly greater than for the ‘old’ members.

The Unfair Accession

The terms of accession were loaded against the Central European countries in three ways.

1. The acquis communautaire and the CAP had been designed and developed in the material interests of the earlier members and particularly of powerful producer lobbies and to satisfy the desires to control of a central bureaucratic elite. They were not negotiable. They do not necessarily suit the nations of Central Europe.

2. The free movement of labour is supposed to be a central principle of the EU but the existing members were allowed to bar the entry of Central European workers until 2011. The Central Europeans were not granted the free mobility of labour that the original Treaty of Rome 1957 had seen as, “ an essential element of European citizenship” and as “a fundamental right”, “the most important right under community law for individuals”. All Europeans have equal rights but until 2011 some have more than others. To add insult to injury some old members have permitted and even encouraged immigration from outside Europe. Since 2004 there has been more movement of labour into the EU from outside than between the constituent countries.

3. Central Europe ended up in 2004 without its fair share of the CAP and structural or regional funds that directly and indirectly subsidised and protected agriculturalists; payments will not become equal until 2013.

One supposed justification of the agricultural funds and the structural or regional funds is that they are there to assist groups who have low incomes by reason of where they live or the sector they work in. The Central European nations are far poorer than the established ones. Some of their regions to the east are the poorest of all and some parts of their agricultural sectors most in need of modernisation. If the principle of neediness applies, whether in relation to income or level of development, why was funding not diverted to them on their accession? That this did not happen shows that the principle is a sham, On 27 September 2006, at a time when the old member states took 90 per cent of the EU’s agricultural spending with over 20 per cent going to a very wealthy France, the European Commissioner Mariann Fischer Boel was still claiming in relation to the CAP that : “ the European model of agriculture embodies a core set of values”. Are unfairness and greed core EU “values”? When speaking of the EU Central Europeans would be well advised not to use the language of values but rather the language of power.

Initially the EU wanted the Central European farmers to get zero direct payments: One curious justification given for with-holding such funding was that it would halt or at least slow down the making of urgent and necessary structural changes in Central European agriculture. Yet this point applies with even greater force to agriculture in the EU’s Mediterranean countries, who are hopelessly addicted to EU subsidies. Surely by now those existing members who have been in receipt of EU aid over a long period of time should have developed to the point where they do not need it. If they have not so developed, should we not conclude that the money was wasted?

By 2013 the CAP, according to The Economist “the single most idiotic system of economic mismanagement that the rich Western countries have ever devised may well have to be scrapped due to cumulative pressures from other countries and trading blocs, who are also well aware that EU systems of income support and regional or structural funds are a form of disguised protectionism.

The Future Imbalance of Power

With accession in 2004 the situation of the Central European countries changed. Before entering the EU they had been supplicants forced to join on terms laid down by others, by a mixture of the arbitrary decisions of its bureaucracy and the material interests of its more powerful and querulous existing members. Now as full members they are entitled to press for the kind of Europe they want, which may well not be the one that had it been intended they should want nor the one that suits the earlier members.

The asymmetry in power remains. It is likely that in the future decisions will be made by simple majority voting in the EU, with the votes weighted according to population. In which case the core countries France, Germany and Italy will control 43 per cent of the votes as against only 5.6 per cent for the three peripheral Central European countries the Czech Republic, Hungary and Slovakia. The best predictor of whether more powerful nations will treat their smaller and weaker neighbours fairly is to ask ‘how did they behave in the past?’ The loaded politicking of the pre-accession period should lead Central Europeans to have doubts about the future, particularly in those countries proposing to enter a Eurozone in crisis and about to become politicised in the interests of the larger members.

Christie Davies is Professor of Sociology at the University of Reading.