I was reading the other day on the blog of excellent Bucharest-based economist Radu Craciun his latest article: “Is Eastern Europe the EU’s scapegoat?” When I read the headline, I thought the article was about Brexit; but in fact, Radu writes about how some experts in the EU claim that the single currency was created as a way to maintain the unity of the Union after it expanded “too rapidly” to the East.
Well, that’s new. I didn’t realise that, besides causing English people to behave irrationally against their own interests and vote to leave the world’s biggest trading bloc, Eastern Europeans are also guilty of inspiring what could turn out to be the world’s least successful currency union.
Radu points out, rightly, that the euro was created before the first wave of Eastern expansion took place in 2004, not to mention that the concept of the single currency had been mooted a long time before — at least a decade, if not longer. “Are European elites trying to eschew responsibility for their mistakes by blaming the EU’s eastward expansion?” he asks.
Sadly, it looks like they are. Recently, at a meeting about the causes and consequences of Brexit, one such member of the British elite told me that he believed the EU’s expansion to take in Eastern Europe was the bloc’s biggest mistake, and that it was the main reason for the UK people’s vote to leave the union.
I can see why it is so easy for people in Western Europe, even for the educated ones, to fall for this narrative: after all, very few people in the West nowadays know how, after the war, Eastern Europe was thrown under the brutal regime of Stalin, without having any say in the matter.
What followed — the mass killings, the deportations, forced nationalisations, and the forced “construction of socialism” — does not even get mentioned nowadays. Even fewer people in the West know about what happened after communism was overthrown.
After the fall of the Berlin wall, many Eastern Europeans were elated at the prospect of joining, or rather re-joining, the free part of Europe, the West. However, it quickly became clear that the other side wasn’t so keen: Western European countries resisted the invasion.
They imposed restrictions on travel and work for citizens in the much poorer East, at the same time insisting that these countries open their markets to Western products in exchange for greater acceptance of their citizens by the West and investment by Western companies in the East.
This was done in the name of economic and social progress. The centralised, communist system under which Eastern Europeans lived before 1989 had created a closed, centrally-planned economy in which people had secure jobs and accommodation but no freedom of speech; shortages of essential goods were common and some food was rationed.
There were frequent power cuts in some countries, infrastructure was bad and the products that the communist factories churned out were inferior in quality to those made by Western factories.
When communism fell, the common market that the socialist countries had created (few people today remember that the USSR and its satellites were a trading bloc as much as a collection of political dictatorships) collapsed and Western countries stepped in.
One by one, factories in Eastern Europe closed and millions of people lost their jobs. Even today, those countries are strewn with the ruins of the once-gleaming factories and you can often meet older people who reminisce about the good, old days when everybody had a job, a home and could afford at least a seaside holiday every year.
Yes, the cars were bad quality and broke down often. Yes, the clothes were not as nice as those made in the West. Yes, make-up, fragrances, etc., weren’t as sophisticated — but “they were ours,” runs the complaint.
Boom and bust
So, the Eastern factories closed down and those markets surrendered to Western companies’ products. Eastern Europeans initially became poorer, but quickly learned to survive and later even thrive in economies that were adapting to a new, much more competitive, environment.
For a while, this was great for Western Europeans: they were getting richer. The EU imposed total liberalization of Eastern markets to Western products and services as a condition of these countries joining the tariff-free trading bloc, so their products and services had little competition.
The Eastern Europeans were eager to join the EU, because of its democratic traditions and because it offered yet another guarantee (besides that of being NATO members) that Russia will never again be able to invade their countries (the example of what happened in Ukraine is a tragic reminder that that is still a very clear possibility).
Their accession process became a one-way bet for richer Western Europeans: as these countries’ date of joining approached, savvy and much richer Western investors snapped up property in Eastern Europe, pushing real estate prices way beyond the reach of local people on local wages.
Still, many Eastern Europeans borrowed (usually from Western banks that had expanded to the “fast growing” economies) huge amounts to be able to afford a home.
In fact, a recent study by Erste Bank throws a fascinating light on the magnitude of this phenomenon: for the real estate sector in Romania, the ratio of price to income was 30 in 2009, the year when the housing market crashed; it is more like 10 now. The second-worst country for house prices before the bubble burst was Poland, with a price-to-income ratio of almost 25 in 2009 (it is also down to 10 currently).
The 2009 property crash was a rude awakening: in Romania, house prices lost 70%; they fell sharply virtually everywhere in Eastern Europe. Foreign investors rushed to the exits; some even managed to squeeze through, leaving the locals to pay for overpriced mortgages out of greatly diminished wages.
And so the Eastern European migration to the West, which started in the mid-2000s with a trickle of people looking for better jobs and adventure, turned into a flood of people looking for a way to pay their mortgages or the mortgages of those left at home as the financial crisis hit the region in 2009.
Of course, I am over-simplifying. Not every Eastern European who lives in Western Europe has a crippling mortgage back home that needs paying off. But a lot of people went looking for jobs abroad as those in their own countries disappeared and they found themselves deep in debt, partly because of the market liberalisation requested by the EU.
Still, at the end of the day, this is nothing else than what was supposed to happen. The EU wants to emulate the success of the United States, with its flexible, open economy where people move from state to state looking for jobs. The Eastern Europeans moving to the West are doing exactly that. It is not something they should be criticised for; at the end of the day, they show that the EU works like it was supposed to.