We are at an historic moment for central and eastern Europe (CEE[1]): never before have living standards been higher in both material terms as well as in terms of personal freedom and opportunities for the population. It is no surprise that investors call these countries “the developed markets of emerging markets”. While the CEE countries deserve praise for their achievements, the region’s leaders need to recognise the EU’s role in this success story. First, European integration gave new EU members a blueprint for a Western-type democracy based on free elections and a clear division of power. As a result, the region ranks ahead of other developing countries in quality of democracy, rule of law and personal freedom.
Second, the new EU members received large foreign investment that helped transform command economies into efficient, export-oriented market economies. And when foreign direct investment dried up in the aftermath of the global financial crisis, CEE took advantage of generous EU financing. By 2020, EU funds ploughed into CEE will be more than twice the size of the Marshall Plan (in comparable prices). EU funds helped improve transport and IT infrastructure, transform subsistence agriculture into modern farming, support entrepreneurship, arts and crafts, develop workers’ skills, and much more. While some countries like the Baltics, Hungary and Poland proved better than others at absorbing EU funds, their positive impact can be felt throughout the region.
Third, the EU helped these countries go through needed, albeit painful adjustments after the global financial crisis. The initial impact of harsh austerity measures was disruptive: wages and pensions were cut, unemployment and bankruptcies surged and lower asset prices left the population much poorer than before. But after three painful years, these countries returned to rapid economic growth. Small budget deficits and debt allowed new EU members to keep low tax levels. Combined with a competitively priced labour force, this led to a second wave of foreign investment that further increased exports and external surpluses. Living standards increased at the fastest pace among emerging markets and reversed post-crisis losses on the back of stable currencies and rapidly-growing wages. Moreover, growth has been more inclusive than anywhere else, as shown by the lowest GINI coefficients of all emerging market regions.
Fourth, European integration brought freedom of movement, which has helped reduce social tensions at a time when living standards were affected by austerity measures. It also exposed more people from the region to European values, and opened the possibility of returning higher-skilled migration in the future. Not surprisingly, a majority of CEE economic emigrants who vote in their countries’ elections choose parties that support free markets and personal freedoms.
The blame game
Yet, despite the leap in living standards, personal freedom and unprecedented generosity from the EU, the CEE region is not immune to populism, nationalism and euroscepticism.
A growing number of CEE politicians blame European institutions and foreign companies for the region’s lower living standards compared to the eurozone’s (and for most other inconvenient issues), forgetting that convergence takes time, albeit less time than it took other emerging markets.
And at the extreme — and of significant concern — multinational companies (the largest investors, employers and tax payers in CEE) have been hit by sectoral taxes that targeted, among others, banks, retail chains and utility companies. Such targeted surtaxes threaten to undermine economic growth and thus the pace of convergence in living standards.
The overwhelming argument for businesses to invest in the CEE region has always been — and continues to be — the prospect of the countries’ continued integration with the rest of the EU and with that, the continued convergence in living standards. This is evident not only in the deepening economic integration, but also in the sharing of European institutions, ultimately anchored in shared liberal values — as indeed preferred by a majority of CEE citizens.
Importantly, were this vision of shared values and European integration to be questioned by the CEE population and its leaders, businesses would naturally have to apply a new and higher risk factor to our investments in the region, which would lead to a reduction in inward investment, if not even outflows.
CEE countries belong in the EU and their common interest is to help build a strong, functioning union that can help improve living standards for all its citizens.
Jean Pierre Mustier is chief executive, UniCredit Group
[1] CEE: Baltics, Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia.