Has Central Europe lost its compass?

20-10-2006

The new EU member states of Central Europe are currently embroiled in either political or financial turmoil - or both. There have been violent anti-government protests in Hungary, allegations of sleaze and racism in Slovakia's government, the Czech's don't even have a government and Poland struggles from one weak coalition to another. At first glance, it looks as though Central European optimism has given way to populism and communism has given way to incompetence.

Photo: European CommissionPhoto: European Commission Kerry Skyring spoke to someone who knows the region well - Dr. Daniel Thornley, chief economist at the Economist Intelligence Unit in Vienna, and asked him is the simultaneous turmoil in Slovakia, Hungary, Poland and the Czech Republic, just a coincidence?

"Yes, it is mostly coincidence. You talk about the economic problems but the exception is Hungary. Generally, Central European economies and business environments are very good. Poland's, for example, is absolutely excellent. The Czechs' and Slovaks' are not bad to good. Slovakia is already in the ERM for the euro. I also think that you need to put this political issue into context and compare it with other parts of the world. In Southeast Asia, for example, there was a putsch in Thailand recently and it didn't cause much of a stir economically or politically and pressures in Latin America, Africa, the Middle East, are much worse than in Central Europe. The point about political risk in Central Europe in the last ten years has been very minor indeed and it only looks bad now in relative terms to how good it was in the past."

When you talk about political risk you mean the politics that we see at the moment, which is a tendency towards populism and perhaps right-wing populism. Is that a risk for economic growth and for reform that many economists would say is still necessary in these countries?

"I think what has also happened is that many of the populations got reform fatigue. Reform is very good for multi-national organisations, western businesses, but not if you're an unemployed person in eastern Hungary or southern Poland. Many of the population turned to radicals of one sort to another and to nationalists because they were tired and frightened of what was on offer from the reformists. I think this is important for Gyurcsany [Prime Minister Ferenc Gyurcsany] in Hungary who said 'we lied and lied and we lied' and the reason is that if they hadn't then the populace would have voted for even more populist and nationalist parties. So, things like flat tax and liberalisation may sound good to western reformists, the IMF, and western businesses but we tend to confuse sometimes that this is what the population want and think and since these are democracies, it seems they have a choice."

Well, the reformers are out and the populists are in. Are they going to stay in power and what are the consequences of that?

"I'm fairly blasé about the political risk, in the sense that the EU has transformed everything. If these countries were not in the European Union the risk of what we're talking about would be greatly heightened. They are gridlocked, embedded, and entrenched into EU structures - legal, tax, fiscal, and so forth. So, there is not much leeway for these governments to do anything radical or outstanding and they know that. I also think that there are some qualifications such as the coalition in Slovakia, for example. Fico [Slovak Prime Minister] is a businessman himself and he is surrounded by business supporters as well. So, they don't want to see the economy and business implode - far from it. I think, more likely, we could return to a mini-Meciar [former Slovak Prime Minister] situation in the sense that Slovak lobbies would look after themselves more and look after more Slovak businesses and that could alienate some western businesses in general. But the overall environment is not a dangerous one, in my opinion."

What about Poland. Leaving economic matters aside, you said that it is doing quite well. It has lost a great deal of credibility within Europe, it has a populist government, and it has managed to upset Germany on one side and Russia on the other. It seems to have lost its weight on the international stage. What's a worst case scenario there?

"Poland has had ten years of politics. It's been the most political of the countries and the good news for the business and the economy is that overall, the funny and the flurry of politics on the surface has not gone down too often into the substructure of the economy and into society. A few privatisation deals were fiddled around with in the past but nothing too fundamental.

"The problem with Poland and to some extent with the Czech Republic as well, is that they are politically gridlocked. In Poland you have the nationalist right and the centre-right having equal power within the electorate and there seems to be not much leverage there or opportunity for them to develop. The left, by the way, in Poland is emasculated for the time being. In the Czech Republic, you have the centre-left gridlocked against the centre-right - virtually neck and neck - which is causing a gridlock in politics. The interesting thing, though, in the Czech Republic as well as in Poland is that we've had all this politics now for six months but it has not really damaged the economies and society. In the Czech Republic they've not got a functioning government but things go on. Geopolitically, Poland was always going to play a difficult game within the European Union with the nationalists. But we're going to have Romania and Bulgaria joining soon, there will be a few more 'prima donnas', such as 'the terrible twins' in Poland. However, prima donnas are not exclusive to central and eastern Europe. We have quite a few of them in the west as well."

Picking up on something that is in your publication, that these countries may have chosen a model for business and government that is similar to Austria - a politicised civil service and close or 'cosy' links between government and business - when they may have been better off with the Nordic version which is a more free and open economy. What is your view on that?

Photo: European CommissionPhoto: European Commission "Following the Austrian model is no bad thing. If you look at Austria's records for the last 25-30 years, or the last 5-10 years, or the last 5-10 months, it's pretty damn good. And if you compare Austria with Germany, as many people are doing now, Austria has done astoundingly well in the last three or four years. Following the Nordic model, which I happen to think is the best economic model available at the moment in the world, is challenging and the Nordics have been doing it for 30-40 years. So, it's not so easy for Central European countries to say 'we've discovered the Nordic model and we'll introduce it next Saturday afternoon'.

"I also think the culture, society, and background is fundamentally different. It is very difficult for west European and developed economies to try and adapt the Nordic model, so for newcomers into the capitalist system it would be even more difficult for Central Europe. The point about the Nordic societies, especially in Denmark and Sweden and the others which are doing well is that you have to pay very high taxation for it, which I'm not against, actually. It gels into some of the things in Austria. Too often in societies, and perhaps in central Europe, we think we can get something for nothing. The Nordic model provides a good economy and good societies and you pay for them. The deal in North America, of course, is you get all of those things and you pay for nothing and they get nothing."

20-10-2006

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