BUDAPEST — Forget the politics for a moment — check out the economics.
Central and Eastern EU members are in Brussels’ bad books over democratic and legal standards but their economies have become some of the bloc’s star performers.
Romania was the fastest growing economy in the EU last year, with an estimated GDP growth rate of 6.4 percent. Poland, the Czech Republic and Hungary are also growing more quickly than major economies in Western Europe and boast low unemployment. Of the 12 EU members forecast to grow by 3 percent or more this year, nine are former communist countries in the east of the Continent, according to the European Commission.
A visitor returning to these countries after a few years away will find new highways, modernized buildings, and a plethora of foreign investment. At the same time, low unemployment is boosting consumer confidence and domestic demand, while the continued flow of EU cohesion funds means money is still pouring into the region.
In some countries, unemployment is so low that it’s a problem. In Hungary, high demand for staff and an exodus of workers to Western Europe is making recruitment hard for some companies. Locals complain of having to wait six months just to have an apartment painted. Poland, the region’s largest economy, has thus far avoided a shortage of workers by importing labor, primarily from Ukraine.
Such strong economic performance is prompting political leaders in Central and Eastern Europe to demand a greater say in the future of the EU.
“Our country witnessed, at the end of 2017, its seventh consecutive year of growth,” Teodor Meleșcanu, Romania’s foreign minister, wrote in a note to POLITICO. “The first decade after the EU accession was one of growth and development, and we are confident that this next one will be one of consolidation, as we are increasingly active in all EU debates on the main themes concerning its future.”
Hungarian Prime Minister Viktor Orbán said this month the region was “making more of a contribution to the strength of the European Union than anyone would have thought back in 2004,” when eight Central and Eastern European countries joined the bloc.
“This is the European Union’s fastest-growing region, without which we couldn’t speak about any meaningful European growth today,” he declared at a press conference, adding that “in debates on the future of Europe, we would like our input to be consistent with this role.”
That may be a stretch, as Central and Eastern European economies still represent a small share of the EU’s overall GDP. But, in Warsaw, policymakers believe the economy’s strength has already had an impact on the country’s role.
“Poland’s standing in the EU has been clearly influenced by its economic success,” said Konrad Szymański, Poland’s deputy foreign minister for European affairs.
Poland’s standing in the EU is viewed differently at the European Commission in Brussels, which has launched its most serious censure procedure for member countries over the government’s increasing control of the judiciary. That process can ultimately lead to the suspension of a member country’s EU voting rights.
The European Parliament is considering triggering the same so-called Article 7 procedure against Hungary over concerns it is curbing the rule of law, academic freedom and the rights of asylum seekers.
West boosts East
Paris and Berlin have also criticized Warsaw and Budapest. But the irony is that much of the boom that keeps those governments popular has come on the back of a recovery inside the eurozone, particularly Germany. That recovery has boosted demand for exports from Central and Eastern Europe and created new jobs in the region, where many major Western European companies have factories because the cost of labor is lower.
“These economies are more competitive, there is much larger room and potential for an increase in labor productivity,” said Piotr Bujak, chief economist at PKO Bank Polski, Poland’s largest private bank. “With the eurozone booming and Germany booming, also the Central and Eastern European region is booming.”
With higher employment, consumers in the region began spending more, a phenomenon also supported by domestic government spending.
“In recent years the main driver of economic growth was private consumption resulting from a constant increase in wages, high consumer trust and employment,” Jerzy Kwieciński, Poland’s new minister for investment and economic development, said in an email to POLITICO.
“In addition to economic stability, foreign investors also appreciate in Poland the skills of the local labor force, the potential for productivity growth and relatively low labor costs,” he said.
But some analysts and policymakers worry that the region’s economic boom could hit trouble.
“In the short term, the GDP growth is very large and everyone should be happy, but I think at the same time we should be concerned about the sustainability of that growth,” said Ionut Dumitru, president of Romania’s Fiscal Council, an independent government body that assesses the impact of economic policies. “Investments are missing, especially public investments.”
Governments from Warsaw to Budapest and Bucharest are spending big on programs that are highly popular with their voters but that may ultimately put pressure on budgets.
Poland’s conservative Law and Justice party introduced new family benefits and cut the retirement age. Hungary’s government, run by Orbán’s Fidesz party, sent cash voucher gifts to pensioners, increased child benefits, and began providing grants to help families buy homes. Romania, meanwhile, introduced a double-digit wage hike for public sector employees last year.
In the meantime, infrastructure and development projects continue to rely heavily on EU cohesion funding.
In Poland, over half of national public investment between 2014 and 2017 came from EU funds, while in Romania EU funding accounts for over 60 percent of public investment spending.
Contributions to the EU are greatly outpaced by funds received from the bloc.
While the average Hungarian spends €0.31 a day on the EU, European structural and investment funds spent in Hungary amount to an average of €0.99 per Hungarian per day.
Future funding
But, in keeping with the region’s economic bullishness, some officials are playing down the importance of EU funds for future growth. They argue that the changing nature of EU cohesion programs means they will become less crucial.
“In the past, the cohesion funds were more focused on economic growth and catching up in GDP per capita terms, and member states and regions had much more leeway in how they want to spend them,” said Polish Deputy Foreign Minister Szymański.
“Today, they are constrained by a set of specific thematic targets, mostly related to environment, climate and social protection,” he said, adding that “if EU funding would suddenly stop or would be significantly lowered then it would rather not have that much detrimental impact on economic growth, but would rather hit harder the other pillars of sustainable development.”
“In 2030, the European Union will in the most part be financed by Germany and the countries of the V4” — Viktor Orbán
The Hungarian government also insists much of the country’s economic success lies with its own policies of lower taxes on labor, higher wages and a reduction in corporate taxes.
“In the last six years, the constant economic growth has not been jeopardized by the very different annual levels of absorbed Union funds,” said a Hungarian government official, who spoke on condition of anonymity.
Hungarian leader Orbán boldly predicted that the Visegrad group of Central and Eastern European nations — Hungary, Poland, Slovakia and the Czech Republic — would become leading contributors to the EU budget.
“In 2030, the European Union will in the most part be financed by Germany and the countries of the V4,” he declared earlier this month.
But he also made clear he expected the EU to continue to pour money into the region — and countries would look elsewhere if it did not.
“Central Europe must make progress with relation to significant handicaps within the field of infrastructure,” he said. “If the European Union cannot provide funding, we will turn to China.”
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