Central Europe. Reaping the European Union harvest

How the new central European members learnt to stop worrying and love the European Union

AFTER grumbling furiously about dangers to their sovereignty and their social values when they joined the European Union in May, Poles are discovering themselves now to be among the Union's most loyal citizens. Some three-quarters say they are happy with EU membership - and no wonder. In its first eight months of membership Poland got some €2.5 billion ($3.4 billion) from the EU budget, or roughly twice what it paid in, according to the newspaper Rzeczpospolita. Rural incomes have risen by one-third for small farmers and two-thirds for big ones, reversing eight years of stagnation and decline, thanks to munificent EU subsidies and an influx of foreign buyers offering high prices for Polish meat and fruit.

Poland's total exports rose by more than 30% in the first nine months of 2004, helped by the abolition of customs formalities. EU rules have opened the skies to budget airlines, boosting tourist numbers by 20% last year. Higher-than-expected tax revenues have meant lower-than-expected budget deficits, not only in Poland but also in the Czech Republic and Hungary - although the EU says that Hungary is still doing too little to balance its books.

The Polish economy was particularly strong in 2004, because it was recovering from a recession exacerbated by bad government policies. But almost everywhere in central Europe, the first eight months of EU membership have been good for business. In Poland, the Czech Republic, Hungary, Slovakia and Slovenia, growth averaged 4.6% in 2004, up from 3.5% in 2003, according to the Economist Intelligence Unit, a sister company of The Economist. The three Baltic countries, Estonia, Latvia and Lithuania, with their less regulated economies, grew even faster, at 6.7% in 2004, though this was still slower than in 2003.

For all of the new EU member countries, the key to growth has been their labour costs, which are far below those of their main export markets in the 15 existing members, especially Germany. Export growth declined during the year, but economies in the “new Europe” still did almost embarrassingly better than those in the old. The euro-area economies grew by 1.8% year-on-year in the third quarter of 2004, but the worst-performing economy in central Europe - the Czech Republic's - grew almost twice as fast.

Nor is it economic gains alone that have made the new members of the EU feel happier. Poland's president, Aleksander Kwasniewski, and his Lithuanian counterpart, Valdas Adamkus, wielded far more clout as leaders of full EU member countries when they waded into the chaos of Ukraine's disputed presidential election between October and December, urging the government to overturn a first rigged result in favour of a pro-Russian candidate, Victor Yanukovich, and to allow the re-run that was won by a pro-western candidate, Victor Yushchenko. After the Ukraine showdown, the central Europeans may also find it easier to push the EU's foreign policy in two directions which have long preoccupied them. They want to raise the possibility of future EU membership for Ukraine, Moldova and - if it can somehow ditch its dictator, Alexander Lukashenka - even for Belarus. And they want to see the EU treat Russia with maximum caution.

Now that they have tasted the EU's attractions, central Europeans are much less likely than once seemed possible to revolt against the draft EU constitution. Their earlier worry, that the EU was moving the goalposts before they had even got on to the playing-field, is dissipating. Lithuania and Hungary have already ratified the constitution, becoming the first EU countries to do so, by parliamentary votes. Poland still has a referendum pencilled in for this autumn, or even next year, but a yes vote looks increasingly likely.

The trickiest case may be that of the Czech Republic, where the two main opposition parties, the Civic Democrats and the Communists, both have strong Eurosceptic factions. Vaclav Havel, the Czech Republic's first post-communist president, argued this week for ratifying the constitution by parliamentary vote, on the grounds that the public had already made an open-ended commitment in 2003 when they voted to join. But the Czech prime minister, Stanislav Gross, is said to prefer a referendum at the same time as the general election, which is due to take place in June 2006, although his fragile coalition government may fall sooner.

All that said, the increasing EU-friendliness of the new members does not necessarily mean that their relations with the more defensive older members, such as France and Germany, will improve greatly. Indeed, they may get worse, especially if the new members go further in cutting their taxes to stimulate growth. France and Germany were already complaining loudly last year that excessively low taxes in central Europe were sucking investment and jobs out of western Europe. They, and Belgium, have questioned why the EU should give regional assistance to countries that seemingly choose to collect very little in taxes.

That last argument will now be easier to puncture. Slovakia set the regional benchmark last year with a 19% flat rate for income tax, corporate tax and VAT. But it has turned out to be a good way of raising money, as well as a brilliant advertisement for Slovakia's business climate. The government had braced itself for a fall in overall tax revenues in 2004, but it reported happily this week that that they had in fact shown a modest rise.

An outcome like this can only encourage Civic Platform, a conservative party that looks likely to win power after Poland's elections this year and has been toying with proposing a 15% flat rate for the same three main taxes. The Czech Republic's ruling socialists are also looking for ways to cut payroll taxes and so reduce labour costs. Old Europe is being forced to respond: Austria, which borders Slovakia, has cut its corporate-tax rate to 25% in 2005 from 34% in 2004.

The competition can only get tougher. Romania, which is due to join the EU in 2007, has just introduced a 16% flat rate for income and corporate taxes, and its labour costs are far lower even than Slovakia's or Poland's. Looming further down the road is Turkey, which could carpet all Europe with low-paid workers from Anatolia. For all the countries of Europe, in short, enlargement is proving to be less a sudden shock than a long and salutary squeeze that should help to force them to become more competitive.

Feature shows that the new Member States of the EU from Eastern and Central Europe are quickly seeing economic benefits from EU membership - which may also force the entire EU to become more competitive.

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