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All About the Money

The weariness toward the EU and the turn to populism among Visegrad countries might be grounded in plausible economic arguments. by Martin Ehl 13 February 2018

A chicken and egg situation is looming in the background of the tense relationship between the European Commission and the populist governments in Central Europe, and that is the ongoing debate about the region’s right to EU subsidies. To sum it up, the question is whether the West, with its neocolonial policy toward Central European post-communist states, has created a breeding ground for the recent wave of populism and nationalism – or if the people behind these currents are only capitalizing on lower wages and popular discontent, during a difficult time of transition, to gain political clout while Western investors continue to bring jobs, money, and efficiency to the region.


The former take was detailed in a blog post written by famous French economist Thomas Piketty, whose research shows a low inflow of EU funds to the Visegrad countries, compounded by a high outflow of profits and dividends from investments between 2010 and 2016. That, in his interpretation, has contributed to regional discontent, keeping wages low for the benefit of Western investors, and stoking the frustration of voters. In other words, he has confirmed Hungarian Prime Minister Viktor Orban’s claim that EU funds should be paid to Central Europe regardless of whether the region’s countries agree to immigration quotas or not – simply as a kind of fee for opening up their markets to the West.


A few weeks later, Zsolt Darvas, an economist from the Bruegel think tank in Brussels, penned a clever response, representing more than just a second opinion on Piketty’s conclusions. He suggested that Piketty was mixing oranges and apples and that EU funds are a fundamentally different kind of money than foreign investment – one public supporting overall development, the other private from which investors expect profit (meaning less of the first could actually be more valuable than more of the second when it comes to contributing to the public good).


And thirdly, Bloomberg columnist Leonid Bershidsky summed up both opinions, and concluded that the current situation reflects the tax policies of Visegrad governments. In their desire to attract as much investment of any kind as possible, these states neglected their efforts to lure in funds specifically for improving local infrastructure and social services. And as Bershidsky mentions, there is something to “the economic colonization of Eastern European countries.” This is a tax gap between Western and Eastern EU countries, which lured investments from Western companies but then saw them export much of their earnings. EU funds only fill part of the gulf still needed to cover the costs of upgrading public infrastructure. It is then only natural that some governments, like those in Hungary and Poland, want to recoup some extra money back through special taxes and other means.


To these economic considerations, I would add a political angle that has so far been missing in this despite being hugely important because it touches the core issue of the European Union’s relationship to Central Europe, which has been getting weaker by the month.


First, the role of the state has been substantially weakened in the post-1989 transformation, and after the 2008 financial crisis, in particular, we have seen that public institutions have not been able to react properly. Institutions failed to a great extent to regulate markets swept by the neoliberal wave. Justice systems look weak and inefficient, while regulators seem more helpful to big companies than taxpayers. Voters have started to look around for stronger hands to counter such realities than those of the neoliberal elites, who have promised a lot, but delivered much less during the deepening crisis of globalization and wild capitalism. In the end, it was naive to expect changes in tax policies and a tougher hand on foreign investors who were greeted with so much hope after 1989, with their offers of more jobs and Western know-how.


Into that atmosphere stepped a wide range of politicians promoting what they claimed was the only reasonable solution after years of a transition that had alienated large segments of society, and led to the downfall of traditional political parties. Orban, Polish ruling party leader Jaroslaw Kaczynski, Slovak Prime Minister Robert Fico, and Czech Prime Minister Andrej Babis all represent different faces of the same phenomenon: a stronger and less liberal state, coupled with promises of social dignity, national pride, and a more equitable redistribution of income.


Secondly, if these governments want to keep more money in their respective countries – like Orban did or like the conservative Polish government wants to do through less drastic means than the Hungarians – these steps are automatically considered anti-EU, especially by local pro-European forces.


But the EU does not offer any solution to this “income dilemma.” EU institutions are not directly accountable to voters in member states, and multinational companies are not taxed where they make profits, but often in EU tax heavens that are in Western Europe. So EU policy has not adapted to a situation partially caused by shifts through globalization and changes within the capitalist system – and not controlled by the EU as such. That leaves Central European states to fend for themselves.


And that’s just what they have done. An article published last week in the Handelsblatt business daily describes how Orban has made a deal with German businesses, which are totally satisfied with the Hungarian government’s policies – unlike the European Commission and some Western politicians.


Here in the Czech Republic, there is a vivid and ever-growing discussion about EU membership and a potential Czexit. But to call a referendum on EU membership is not so easy, so for now the debate revolves around the positives and negatives of membership. After the emotional arguments about immigration calm down a bit more, there will be increased talk about real money: wages, funds, investment, and taxes. And here's the main worry: the case against the economic policy of the Visegrad nationalists and populists is not so strong based on the arguments used so far in the debate.

Martin Ehl 
is the foreign editor of the Czech daily Hospodarske noviny. He tweets at @MartinCZV4EU.
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