The EU’s other Periphery

Frank Lee

We’ll start with the 10 per capita poorest countries in the whole of Europe. In rank order:

1. Moldova – GDP US$2560
2. Ukraine – GDP US$3560
3. Kosovo – GDP US$3990
4. Albania – US$4450
5. Bosnia and Herzegovina – GDP US$4769
6. Republic of Macedonia – GDP US$5150
7. Serbia – GDP US$5820
8. Montenegro – GDP US$7320
9. Bulgaria – GDP US$7620
10. Romania – GDP US$9420

Average per capita income in Europe as a whole is US$37,317 (2018 figures).

What is noticeable is that most of these states are situated in either the Balkans or South-Eastern Europe. But that is not the end of the story.

Portugal, the poorest country in western Europe with GDP standing at US$238billion, is just pipped by the Czech Republic (now Czechia which is actually in the centre of Europe) as the star performer of the East whose national income stands at US$ 240,105.million.

Thus, in terms of per capita income the Czech Republic is the sole representative of the ex-Soviet states in Europe. This geopolitical and economic cleavage could hardly be starker. These two Euro-zones replicate the division of North and South between the US/Canada and central and Latin America.

Much of the attention to European development – or the lack of it – has been preoccupied with the gap between the West and South of Europe. This present schism is attributable to tried, tested, and failed economic strategies promulgated by the various institutions of globalization: the IMF, WB, WTO and so forth.

The single currency, the euro, became legal tender on 1 January 1999 and was adopted by most of the countries in the Euro area. But this proved to be the undoing of the political economy of the South.

When different sovereign states are responsible for their own economic policies and are able to print and issue their own currencies on world markets, any distortions and maladjustments which occur in trade balances is alleviated by changes in exchange rate values – in short, devaluation. This will hopefully restore such imbalances and return to a trade equilibrium.

However, this policy is, now, no longer available to the Southern European states since they no longer have their own currencies and, in addition, are under the tutelage the European Central Bank (ECB). The Southern periphery are now are using the same currency as the Northern European bloc, the euro, and required by the ECB to take on a one-size fits all monetary policy.

Devaluations are therefore ruled out.

Given the higher productivity levels and lower costs of Germany, Holland, Sweden, France and so forth, the Southern peripheral states have begun to run chronic balance of payments deficits. The only avenue left open to them is what is termed ‘internal devaluation’ – i.e., austerity.

This results in low growth, high unemployment, high migration, depopulation, cuts in public spending and the rest of the IMF’s Structural Adjustment Policies – policies which have failed just about everywhere. So much for the southern periphery.

Focus on Eastern Europe sheds light on a different set of problems. Most Eastern European countries, Bulgaria, Croatia, Czech Republic, Hungary, and Poland kept their own currencies; apart that is from basket cases like Latvia whose government, unlike the people, went where angels feared to tread – into the Eurozone and the euro.

(N.B. Some Western European countries, e.g., the UK, Denmark, Switzerland and Norway did – wisely – keep their own currencies.)

Excluding Russia, of course, these Eastern European states – termed ‘transitional economies’ – have become stalled in economic stagnation which so far has been difficult if not impossible to overcome. These obstacles have been specific to the Eastern periphery.

The European Union now consists of 28 states. No fewer than 10 of these are former states of the Eastern Bloc, and this proportion is set to grow with the impending accession with some minor Balkan nations. Although Georgia and Ukraine are in line for membership of the EU, they are also expected to join NATO as has become customary for aspirant EU states.

Whether they obtain either is a matter of conjecture, however, as this would be almost certain to cross Russia’s red lines and result in a major geopolitical flareup. Europe’s centre of gravity is shifting. And while the process of joining the European Union is driving change within these countries, it is also changing the nature of Europe itself.

Where’s my Porsche?

Those Eastern European states which emerged from the break-up of the Soviet Union had been led to believe that a bright new world of West European living standards, enhanced pay levels, high rates of social mobility and consumption were on offer.

Unfortunately, they were sold an illusion: the result of the transition so far seems to have been the creation of a low-wage hinterland, a border economy on the fringes of the highly developed European core; a Euro version of NAFTA and the maquiladora, i.e., low tech, low wage, low skills production units on the Mexican side of the US’s southern borders.

This has had wider political and social ramifications for the entire European project. The Brave New World envisaged did not have any basic guiding principles or planning other than the usual neoliberal prescriptions of privatisation-deregulation-liberalisation, the well-thumbed policy triad of the neoliberal playbook.

Central to this policy implementation was a controversial prescription called ‘shock-therapy’. The fact that this policy had already been tried in Russia and failed spectacularly, didn’t seem to worry the PTB. Such is always the case with religious beliefs.

The doctrine itself had become popular among the ingenues and opportunists of the old ‘workers states’. Shock-therapy was designed to wipe-away all the old fuddy-duddy notions about state interventionism, welfarism, social and national protection; measures included the sudden removal of subsidies, fire sales of state assets (privatisation), and the abrupt removal of the controls and subsidies that had formerly applied to wages and prices.

But the neoliberal militants insisted upon a policy of ‘freeing up’ the markets which, according to them, would maximise growth and development. Predictably of course, these policies also opened these countries to maximum – and often predatory – western penetration and influence.

The shock was timed to occur before the establishment of financial markets within the region and, in the absence of investment capital, restructuring efforts became focused on labour – on reducing the unit cost of labour in order to become “competitive”. It should be understood that in neo-liberal, supply-side, economics the road to wealth and prosperity entailed policies that actually make their populations poorer. There seems to be a slightly Orwellian flavour here. ‘Poverty is Wealth.’

The wave of mass unemployment that this generated in the early 1990s goes well beyond the experiences of British recessions of the 1980s, with unemployment in some regions reaching 80 per cent. Shock therapy deliberately engineered a slump in the economies of the region, by shattering the region’s economic links, and then creating a massive domestic recession.

Shock-Therapy – All Shock no Therapy

Regardless, the show must go on. The neoliberal religion taken up in many of these states, often by former members of the Communist nomenklatura, which resulted in high levels of structural unemployment were actually meant to do that, at least in the short-term. Painful as it was bound to be, this was the necessary shakeout of an inefficient and cosseted workforce and therefore the absolute precondition which would catapult these formerly backward economies into lean and mean competitors on Europe’s markets and the prelude of an entry into the developed economies on the Western European and US model. Yeah, right.

In the real-world Michael Hudson[1] analysed just how this process panned out in Latvia.

Like other post-Soviet economies, Latvians wanted to achieve the prosperity they saw in Western Europe. If Latvia had followed the policies that built up the industrial nations, the state would have taxed wealth and income progressively to invest in public infrastructure.

Instead, Latvia’s Baltic miracle assumed largely predatory forms of rent-seeking and insider privatisation. Accepting the US and Swedish advice to accept the world’s most lopsided set of neoliberal tax and financial policies. Latvia levied the heaviest taxes on labour. Employers had to pay a 25% tax on wages plus a 24% of social service tax, whilst wage-earners pay another 11% tax. These three taxes making up to a 60% flat tax before personal deductions.

Additionally, in order to make labour high-cost and uncompetitive, consumers must pay a high value-added sales tax of 21% (raised sharply from 7%) after the 2008 blowout. No Western economy taxes wages and consumption at that level.

Latvia’s heavy taxation of labour finds its counterpart in a mere 10% on dividends, interest and other returns to wealth and the lowest property tax rate of any other economy. Thus, Latvian fiscal policy retarded growth and employment whilst concurrently subsidising a real estate bubble that is the chief feature of Latvia’s “Baltic Miracle”.

Now Latvia was to open up its economy to foreign capital inflows – hot money – from foreign bank affiliates, mainly Scandinavian, whose chief interest was to finance the property boom. Of course, these cash inflows needed to be serviced and in doing so became a financial tax on the nation’s labour and industry. Other sources in overseas monies came in the form of privatisation of Latvia’s public sector stock. Sweden became a major source of these rent-seeking inflows.

Yet with all of this money flowing into Latvia absolutely no effort was made to restructure industry and agriculture to generate foreign exchange to import capital and consumer goods not produced at home. Having lost export potentialities during the COMECON period the existing production linkages were uprooted, industrial plants were dismantled for their land value scrapped or transformed into real estate gentrification.

The Baltic miracle had been nothing more than a property debt-bubble financed by foreign capital inflows. When the flows reversed the extent of debt deflation, deindustrialisation and depopulation (see below) became apparent.

The Austerity programme … Latvia was suffering was the world’s steepest one-year plunge in house prices which had peaked in 2007. Despite having emerged debt-free in 1991, Latvia had become Europe’s most debt-strapped country, without using some of its borrowed credit to modernize its industry or agriculture.[2]”

What was true of Latvia was also generally the case in the rest of Eastern Europe’ Thus by 2008 it had become apparent that the post-Soviet economies had not really grown as much as they had been financialized and indebted.

Forbes economist Adomanis calculated in 2014 that convergence of these economies with those of the West…

…continues at its 2008-13 pace (about 0.37% per annum) it would take the new EU members over 100 years to match up to the core countries average level of income …to the extent that Central Europe’s most rapid and sustained burst of convergence coincided with a credit bubble that is highly unlikely to be repeated, it seems more likely than not that the regions convergence will be slower in the future than it was in the past.”[3]

Buddy can you spare a euro

With the decimation of indigenous industry, the role of financialization and debt became crucial, as the new capitalist economies required a financial services industry that could support the growing tendencies towards property speculation and asset manipulation.

Different vulnerabilities arose from the actions of different institutions, but the overall effect was to create state dependency upon foreign direct investment (FDI), and support from the World Bank, IMF and the specially created European Bank for Reconstruction and Development (EBRD).

The general financialization of the region led to huge increases in debt, both personal and institutional. Western banks in a number of smaller states, most notably Austria and Sweden, sought to boost their profits through increasing their market share in the Central and Eastern Europe (CEE) region, by aggressive lending to households.

Drawing on the general expectation of CEE countries’ membership of the EU to borrow on the wholesale money markets and taking advantage of financial deregulation and poor consumer protection standards in the region, they lent money denominated in Euros, Swiss Francs and Japanese Yen. This allowed them to offer consumers lower interest rates than those available for borrowing in domestic currencies. And this borrowing has driven eye-watering increases in levels of personal household debt – especially in Hungary, Romania, Bulgaria and the Baltic States.

Another consequence of shock-therapy was the pressure that it would generate on the European Union to open up western European markets to the CEE countries. The model that peripheral states adopted – of being low-wage export-based economies – depended on access to EU markets.

However, in order to sell on EU markets, it is necessary to have something to export. But these states simply did not and do not have the industrial and/or financial capacity to compete with Western European states and are not likely to have in the foreseeable future. Being subordinated to a set of rules empowered by global institutions, the IMF, WB, WTO – neoliberalism – makes such development impossible.

Of course, there has been some Western investment in CEE but without wishing to be cynical – moi? Never! – not all of this investment has been for CEEs benefit, most of it was purely predatory.

For example, the US Transnational Conglomerate, General Electric, after sniffing out worthwhile opportunities for a quick buck decided upon buying a lighting company, Tungsram, in Hungary. They swiftly closed profitable product lines and were thus able to remove a source of domestic competition from the market.

Similarly, the Hungarian cement industry was bought by foreign owners, who then prevented their Hungarian affiliates from exporting; and an Austrian steel producer bought a major Hungarian steel plant only in order to close it down and capture its ex-Soviet market for the Austrian parent company. For a voracious appetite try Volkswagen.

VW acquired a controlling stake in SEAT in 1986, making it the first non-German marque of the company, and acquired control of Škoda (see below) in 1994, of Bentley, Lamborghini and Bugatti in 1998, Scania in 2008 and of Ducati, MAN and Porsche in 2012.

But VW’s cherry-picking didn’t stop there.

These are examples of the ways in which the “peripheral economy” status of the CEE region was imposed. An exploitative relationship between East and West. The Skoda experience of the negative outcome from opening up of the leading sectors of a target’s country’s (the Czech Republic) production apparatus into the global strategy of a Western TNC is not unique and is a common feature of FDI flows.

After only a couple of years of “shock-therapy”, much of the core industrial infrastructure of the peripheral states had fallen into the hands of multinational companies – from chains of shops, to power generating plant and steelworks. Two political/social phenomena resulted from the asset-stripping (whoops, I mean productive investment).

Political

Since the advent of the shock therapy, it would have been expected that East European voters would have voted en masse for parties of the left for the usual reasons. Namely to mitigate the worst social and economic effects of the capitalist transition.

But these parties themselves had become Blairised, i.e., heavily committed to the pseudo-reformist ‘third-way’ along with the orthodoxies of neoliberal economics, as this was seen as part of their commitment to European accession. Into the ideological vacuum and emerging across the region came populist and right-wing movements, in Poland and Hungary in particular as well the semi-fascist Baltics where they have always had a presence.

These groups have attempted to harness people’s discontent. Political forces that flourished in the time of the Austro-Hungarian empire have re-emerged – such as anti-Semitic “Christian socialism” and patriotic “national liberalism”. and perhaps more important came mass migration and depopulation in the whole area…

Depopulation

Depopulation of Eastern Europe is connected not only with the outflow of labour resources: after 1989, the era of wild capitalism began in the former “socialist countries”, accompanied by the collapse of social and medical systems, a sharp increase in mortality, especially among men, with a simultaneous fall in the birth rate…”

The French newspaper Le Monde diplomatique wrote about the unprecedented demographic catastrophe that hit the countries of Eastern Europe after the collapse of the communist system in its June issue.

The process began in late 1989, immediately after the fall of the Berlin Wall. There followed a massive exodus of the population from East Germany, Poland, and Hungary to the countries of Western Europe in search of higher earnings, which continues to this day, covering practically all former countries of the socialist camp.

As a result of the new “resettlement of peoples”, the human losses of Eastern Europe were much greater than those of both world wars. Over the past 30 years, Romania lost 14% of the population, Moldova – 16.9%, Ukraine – 18%, Bosnia – 19.9%, Bulgaria and Lithuania – 20.8%, Latvia – 25.3% of the population. Depopulation also affected the parts of Germany (the former DDR), which in the literal sense of the word were emptied.

A kind of exception was made by the Czech Republic, where it was possible to preserve the main “gains of socialism” in the form of social support for the population, a free medical system, assistance.

Depopulation of Eastern Europe is connected not only to the outflow of labour resources: after 1989, the era of wild capitalism began in the former “socialist countries”, accompanied by the collapse of social and medical systems, a sharp increase in mortality, especially among men, with a simultaneous fall in the birth rate.

However, the main blow to demography caused the outcome of the population, especially the youngest, active, qualified group. In the historical homeland remained children, pensioners and persons incapable of actively seeking work abroad. And this despite the fact that for 40 post-war years in the countries of Eastern Europe there was a slow but steady growth of the population.

According to the UN, all ten of the world’s most “endangered” countries are in Eastern Europe: Bulgaria, Romania, Poland, Hungary, the Baltic republics and the former Yugoslavia, as well as Moldova and Ukraine. According to the forecasts of demographers, by 2050 the population of these countries will decrease by another 15-23%.

This means, in particular, that the population of Bulgaria will drop from 7 to 5 million people, Latvia – from 2 to 1.5 million. According to experts of the Wittgenstein International Demographic Centre in Vienna, “it is unprecedented for peacetime depopulation.”

Among the main reasons called the killer combination of three factors – low birth rate, high mortality and mass emigration. But if in the countries of Western Europe, the fall in the birth rate is compensated by the new migration waves, the countries of Eastern Europe categorically refuse to accept the “fresh blood” in the person of migrants, and this issue has acquired an extraordinary political poignancy.

At the height of the migration crisis of 2015, Slovakia and the Czech Republic took 16 and 12 refugees respectively, Hungary and Poland did not accept anyone.

Meanwhile, Eastern Europe continues to lose its “golden cadres” – the best specialists and young people. In Hungary alone, since joining the EU in 2004, 5,000 doctors have left the country, mostly under the age of 40. There is a shortage of technicians and mechanics who also left for Austria, Germany and other countries of Western Europe.

This is perfectly understandable since in Hungary they receive 500 euros a month for heavy manual work, and in Austria for the same work – 1 thousand euros per week.

In other countries, the outflow of specialists of medium qualification is felt even more: hundreds of thousands of nurses, carpenters, locksmiths and skilled workers moved from Poland, Romania, Serbia, and Slovakia to the West. In Romania, the outcome of the population is called a “national catastrophe”. The population of this country declined for the post-communist period from 23 to 20 million people.

The transfer of labour from the East was not only spontaneous but also systematically predatory. Numerous German and British firms of “head-hunters” in large numbers began to entice Eastern specialists immediately after the accession of Eastern European countries to the EU. As the German Die Welt writes, qualification, youth and money flow from Eastern European countries, while the old people and children remain deeply disappointed in “freedom” and “democracy.”

Since the early 1990s, Bosnia lost 150 thousand people, Serbia – about half a million. However, the most significant outflow was observed in Lithuania: over 300,000 people out of 3 million left the country.

But the most tragic consequences of the “post-communist breakdown” have been experienced by Ukraine – once one of the most developed republics of the USSR. If in the early 1990s there were 52 million people in the republic, now the population does not exceed 42 million. According to the forecasts of the Kiev Institute of Demography, by 2050 the population of the republic will be 32 million.

This means that Ukraine is the fastest dying state in Europe, and possibly, in the world. According to Ukrainian sources, the country was abandoned by 8 million people (experts believe that number is from 2 to 4 million people – ed.), who went to work in the countries of the European Union and neighbouring Russia. According to recent polls, 35% of Ukrainians declared their readiness to emigrate. The process accelerated after Ukraine received a visa-free regime with the EU: about 100,000 people leave the country every month

It was in Ukraine in the most extreme form three factors coincided: a fall in the birth rate, an increase in mortality (the death rate was twice the birth rate) and mass emigration of the population. Compare the corresponding dynamics in France and Ukraine. If before 1989 the growth rates of the population in these two countries were comparable, then in the subsequent period the population of France increased by 9 million people, and Ukraine lost the same number of people.

Experts believe that the demographic crisis in Eastern Europe cannot continue indefinitely. The systems of social support and healthcare cannot physically work in conditions when the majority of the population is pensioners and children, at some point, inevitably there will be a collapse of statehood.

But you should not flatter yourself about Western Europe, where the birth rate is also extremely low. While the developed part of the continent temporarily benefited from human resources from Eastern Europe, a much more rapid influx of migrants from the Middle East and Africa will inevitably change the sociocultural image of Western European countries, where religious and ethnic conflicts already arise.

If the fertility rate for native French women is 1.6 children per woman, then for adults from the countries of the Middle East and Africa this figure is 3.4 children or more. Today’s kindergartens in France are already three-quarters composed of representatives of ethnic minorities, and in the future, great socio-cultural changes await the country. This has already been written in his best-selling Soumission by the French writer Michelle Houellebecq.

Is there a solution? Is it possible to stimulate the birth rate mechanism among Europeans? Demographers believe that this is impossible either in Western or Eastern Europe. In the west of the continent, the consumption standard is so high that the appearance of a new child will automatically mean a decrease in the standard of living. In Eastern Europe, another mechanism operates: poverty, lack of prospects and the breakdown of family relations make the birth of children undesirable. Meanwhile, the proportion of Europeans in the world’s total population is decreasing. If in 1900 Europe accounted for 25% of the world’s inhabitants, now it is about 10% [5]

Conclusions

As with other earlier examples of catch-up modernization the development policies, Eastern Europe presents a textbook example of the development of under-development.

The general liberal theory of gradual evolution was penned by W.W.Rostow, an American economist, professor and political theorist who served as Special Assistant for National Security Affairs to US President Lyndon B. Johnson from 1966 to 1969.

His theory of 5 Stages of Growth held that all societies progress through similar stages of development, and that today’s underdeveloped areas are thus in a similar situation to that of today’s developed areas at some time in the past, and that therefore the task in helping the underdeveloped areas out of poverty is to accelerate them along this supposed common path of development, by various means such as investment, technology transfers, and closer integration into the world market.

This view, however, was a source of a major counter-critique. Dependency theory (see Immanuel Wallerstein, Andre Gunder-Frank, Samir Amin and Paul Baran) is essentially a body of social science theories predicated on the notion that resources flow from a “periphery” of poor and underdeveloped states to a “core” of wealthy states, enriching the latter at the expense of the former.

It is a central contention of dependency theory that poor states are impoverished, and rich ones enriched by the way poor states are integrated into the “world system”. Dependency theorists, argued that underdeveloped countries are not merely primitive versions of developed countries, but have unique features and structures of their own; and, importantly, are in the situation of being the weaker members in a world market economy, whereas the developed nations were never in an analogous position; they never had to exist in relation to a bloc of more powerful countries than themselves.

In opposition to free-market economists (vide supra) the dependency school argued that underdeveloped countries needed to reduce their connectedness with the world market so that they could pursue a path more in keeping with their own needs, less dictated by external pressures.

About right.

Peripheral and semi-peripheral states being integrated into the world system are ‘ruled’ if that is the right word, by comprador elites who are part of a cosmopolitan overclass in a global financialised world system. Capital leakages and flight from periphery to core – a common feature of the world system, as are raw material and other energy products from the ‘developing’ world. Eastern Europe and its elites fit entirely into this comprador category supplying raw materials, labour and tourism as well as East to West capital flows/flight.

As we have seen the notion that FDI brings about growth and development is the wrong way around. No developed economy got that way by opening up its economy to competition and inward (invariably predatory) investment from more highly developed countries and economies. Policies of State-capitalist mercantilism and nation-building have always been the road to development. The UK being the first, followed in short order by the United States and Germany, in the 19th century, and in the 20th century by a number of East Asian states in historical order, Japan, South Korea and China, and a number of others.

In the case of Russia, this state has a semi-peripheral global position, in both political and economic terms. Too big and to small in economic terms with a small GDP, although very low debt-to-GDP ratio (15%). It is both semi-sovereign and semi-peripheral and a somewhat less than submerged struggle is going on between the Eurasian sovereigntists and the Atlantic integrationists with Putin balanced between the two factions.

[Russia] is not exactly classical peripheral capitalism but rather a semi-periphery.

Its phenomenon is characterised, on the one hand, by its dependency on the core, but on the other hand by its ability to challenge the domination of the latter in some particular areas. This semi-dependent position of Russia is conditioned by its shift to capitalism, whilst its semi-independent position is due to the Soviet legacy.

In particular, this legacy found its manifestation in a significant nuclear arsenal still comparable with that of the United States. If it had not existed, Russia would have been subjugated to Western interests a long time ago, just as Ukraine was.” [6]

Russia and the world’s future are yet to be played out.

As for Eastern Europe, it would not be stretching credulity too far to say that it has been had, falling straight into the trap of under-development where it will probably remain for the foreseeable future.