Mon, May 28, 2012 - Page 9 News List

It is not all milk and honey when east meets west

As the economic meltdown of the eurozone continues, many east Europeans are beginning to question the benefits of joining the EU

By Michael Winfrey and Luiza Ilie  /  Reuters, PETRACHIOAIA, ROMANIA

While the rest of the EU expanded at 2 percent a year from 2000 to 2008, the new eastern states easily grew at double that rate, with Latvia peaking at 11.2 percent in 2006.

Convergence looked a sure thing. Bulgaria’s GDP per person reached 44 percent of the EU average in 2008, from just 28 percent at the start of the decade. Romania’s rose two-thirds to 47 percent.

The crisis ended the boom and slowed convergence.

Every country in the region save Poland has had a recession in the past four years. Latvia shrank by more than a fifth from 2008 to 2010 and a two-year contraction in Romania wiped more than 8 percent off its annual output.

Many western European members also suffered recessions. The worst-off — debt-choked Greece — is in its fifth year of what looks set to be a 20 percent contraction.

However, it started from a much higher pre-crisis base and its living standards are still roughly 80 percent of the EU average, neck-and-neck with the richest new EU state, Slovenia, and well ahead of the poorest. Ireland too has dropped from its peak, but is still roughly at Germany’s level.

Since the crisis, eastern Europe’s governments have imposed austerity measures including layoffs and wage cuts for state workers, in what they claim is a drive to tackle inefficiencies.

Foreign banks have shut off credit. Loans are harder to get. Romania has just re-entered recession.

“When we joined the EU people believed their world will change,” said Decebal Floroaica, a 38-year-old priest who has just opened the first soup kitchen in Pitesti, a southern Romanian town of around 180,000. “Our euphoria was at a maximum and they thought everybody would find jobs abroad. Now we’re realizing maybe the EU is not the land of milk and honey.”

Economists now expect growth to remain below potential for several years, squeezing the ability of countries to gain ground on their richer neighbors.

“Citizens of new member states must have expected fast convergence. As a result they have been disappointed,” Hungarian experts on transition economics Peter Halmai and Viktoria Vasary said in an e-mail. “The convergence machine continues to work, but at a lower level than expected earlier ... In certain countries convergence has stopped or slowed down to a great extent.”

In forecasts updated from a 2010 paper published in The European Journal of Comparative Economics, Halmai and Vasary see growth in the new member states outpacing that of the EU’s original 15 member states, with a peak in 2030 or 2040.

That is when a demographic crisis is expected to hit eastern Europe, as a steep decline in the birth rate after the end of communism in 1989 brings a large fall in the workforce as generations born before then retire.

“The real convergence will stop from 2030 onwards and even a moderate divergence from the EU-15 might occur,” Halmai and Vasary wrote.

Though they concede that their long range forecasts are uncertain, the economists believe that in most advanced states — Slovakia, Slovenia and the Czech Republic — the eventual convergence ceiling will peak just around the EU norm before falling back to below that level.

Poland would top out at 76 percent of the EU average in 2060, they said, far short of last year’s boast by former Polish finance minister Leszek Balcerowicz that Poland could catch Germany in 20 years and behind even countries such as troubled eurozone member Portugal.

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