A Project of the American Enterprise Institute and the Federalist Society

For Eastern Europe, the EU Honeymoon Is Over

Wall Street Journal


(See Corrections & Amplifications item below.)

PRAGUE -- Three years after the European Union expanded to take in 10 new members, mostly from the ex-communist bloc, East Europeans are complaining about being treated like second-class citizens while longstanding EU members grumble about the newcomers' nationalistic politics and fiscal indiscipline.

Gone is the wide-eyed enthusiasm and ambitious talk of reuniting a divided Europe. In some ways, however, the EU's new members are simply becoming more like its "old" ones: they are almost as lukewarm about the EU, their politics can be fractious and their governments often chafe at EU strictures.

In the run-up to joining the EU, the former communist states pushed through tough economic changes, ranging from slashing aid to loss-making state companies to closing polluting plants. If they didn't, the EU could threaten to keep them out of the club. But now that they are inside, diplomats say the EU's executive arm in Brussels lacks the same leverage and old patterns of behavior are reappearing. If not held in check, the shift could ignite inflation, slow growth and scare off investors.

"After you achieve a great goal, a certain relaxation sets in -- it's normal," said Maros Sefcovic, the Slovak ambassador to the EU. "Before joining, we had to work hard to prove our credentials."

Now, East European politics are turning volatile. The Czech election last year produced a deadlock that resulted in eight months of bickering before a coalition government with a fragile majority was formed this month. Hungary's socialist government faced violent street protests this past autumn after acknowledging it lied about the dire state of the country's finances.

Despite these difficulties, Eastern Europe continues to prosper. Foreign investment is buoyant, rising to ?38.4 billion ($49.6 million) in the 10 new member states in 2006, from ?28.5 billion in 2004, according to the United Nations Conference on Trade and Development. Economic growth reached an average 5.3% in 2006, up from 4.7% the year before, according to the European Bank for Reconstruction and Development.

Yet some worrying signs are emerging. Economic growth in the 10 new EU members is likely to moderate this year, as strong wage and credit growth plus tax increases lead to "overheating and significant inflationary pressures," says a World Bank report published last week.

Their budget deficits are deepening and the adoption of the euro is being delayed. Hungary is the worst case -- its budget deficit last year widened sharply to about 10% of gross domestic product. Budapest has been fighting for the past year with Brussels about how much to cut spending.

Not only is the EU unable to impose fiscal order, East Europeans complain about unfair treatment. Frightened by low East European taxes and wages, West Europeans have maintained strict limits on East European workers. Mr. Sefcovic says it is crucial to allow the new members this year to join the Schengen passport-free travel zone, which already includes most of Western Europe. That change is currently planned for June.

Some frustrated new members have done battle with Brussels and their West European neighbors. The Czech Republic last year sabotaged an EU deal on minimum rates of excise duty on alcoholic beverages, demanding that its beer be treated the same as France's wine. The Czechs also are furious about French lobbying to keep them from hosting the head office for the EU's Galileo satellite-navigation project.

The squabbles also reflect a geopolitical split. The newcomers are much more positive about the U.S., which they believed supported them during the Cold War. They are pushing for strong ties between the U.S.-led North Atlantic Treaty Organization and the EU.

The newcomers have insisted on a hard line toward their former communist master, Russia. Poland has blocked the EU from starting negotiations on a new framework agreement with Russia covering trade, energy and visa policies until Moscow ends its ban on Polish meat imports. Russia claims Warsaw's certification system is unreliable and corrupt. This comes as Poland and other East Europeans worry about Russia building a new gas pipeline across the Baltic Sea to Germany that avoids their territory.

Despite their frustrations, limits exist on how far governments can deviate from EU-wide norms. When Slovakia wanted last year to avoid decommissioning a Soviet-built nuclear plant, it considered defying EU laws, but decided that it risked a condemnation at the European Court of Justice -- and the loss of crucial EU development funds.

Some leading East Europeans acknowledge they need support from Brussels. "We may like to joke that no one is responsible for the country these days and it doesn't matter because everyone is still getting rich," says Jiri Dienstbier, Czechoslovakia's former foreign minister. "In the long run, you need a government with policies to prosper."

Write to William Echikson at william.echikson@dowjones.com1

Corrections & Amplifications:

Foreign investment in 10 new European Union member states totaled ?38.4 billion, or $49.6 billion, in 2006, according to the United Nations Conference on Trade and Development. This article incorrectly says such investment totaled the equivalent of $49.6 million.

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