They did it the hard way, and now May Day heralds a fresh start for Europe's new boys

Click to follow

It is a week to go before the largest expansion of the European Union in terms of population - ever. So May Day this year should be less a celebration of Socialist worker solidarity and more one of welcoming the nations that have thrown off the Communist yoke and joined the rest of Europe's club.

The trouble is that the welcome has not been quite as the new members have had a right to expect. With the partial exception of the UK, no large EU member is extending the usual freedom of other EU citizens to seek a job in another EU country. Most countries have shut their labour markets to the new member states, but here we will supposedly allow reasonable access, though not the complete freedom promised until a few months ago.

You can see why. With unemployment above or close to 10 per cent in the four largest eurozone members, it is hard to argue that there is a pressing need for new migrant labour. In the UK there clearly is such a need, for in parts of the South-east, unemployment is below 1 per cent - in effect, it is non-existent. With continued sensitive handling of the work permit system, one of the unsung triumphs of this government, we should be able to continue getting the workers the economy needs.

But to see enlargement through the prism of the European labour market is to take a worm's-eye view of what may well become the most important expansion of the EU. It is not just the little matter of another 75 million people, the largest-ever addition to the EU club, but that the majority of the new members bring a very different set of experiences to the union. There is the experience of living under a planned economy and the sometimes traumatic transition to a market one. But there is also the experience of a decade of decent growth and, most recently, great economic success. You can see the visible evidence of this in cities such as Prague and Budapest, with their streets full of well-dressed, stylish people, and shops full of consumer goods. As the low-cost airlines expand their networks we can all catch the feel of the boom for a weekend. And you can see it in the growth figures. The graph above shows what has been happening to growth in the run-up to accession in the three biggest new members - Poland, Hungary and the Czech Republic - and some projection for this year and next. For comparison I have also included the performance of Russia, plus that of Germany and Britain.

As you can see, the star performer has been Russia, and the duffer Germany. But Russia starts from a very low base and in any case its growth has been flattered by the strong oil price. Some two-thirds of its exports come from oil and gas. The big three new EU members, Poland, Hungary and the Czech Republic, are all growing solidly, again from a low base, but they will gradually catch up with the West.

So the real significance of the expansion of membership is not the flow of labour to the West, which I expect will be quite limited. Rather it is that the fastest growth in Europe is to the east. Much of this is propelled by EU investment. Why invest in a plant in China, with all the uncertainties that this involves, when you can achieve real cost savings in an EU member state? There was a burst of such investment in the 1990s but it shows no sign of petering out now. New ideas about investment are being exported: the venture capital funds are scouring the region for places to plant their seed money.

This is not charity. True, some of the weaker nations that have no immediate prospect of joining the EU are still relying on flows of aid rather than investment flows: countries such as Bosnia, Serbia and Albania. The European Bank for Reconstruction and Development noted that as one of the things on the "need to do" list in its report on the transition economies last week. It also noted that the big three new members have to tackle their fiscal deficits, and that Romania and Bulgaria need to cut current account deficits. That latter pair will be in the next group of countries to join the EU.

But, of course, there are economic difficulties. It would be astounding if there were not. If you stand back from the process, though, surely the most impressive thing is the way a tide of prosperity has been rolling across the whole of central and Eastern Europe. Indeed, the main place that has been disappointing from the economic point of view has been the former East Germany, which still has unemployment in the high teens while relying on a huge annual subsidy from the western provinces.

Some lessons can be drawn from the very different performances of those new members that have had to pull themselves up by their own bootstraps and the one former Communist state that was taken over by a Western country.

One is that you have to get the exchange rate right. The killer for East Germany was an overvalued currency, inevitable when the Ostmark was converted, for political reasons, one-for-one with the Deutschmark. The new EU members, by contrast, have had undervalued currencies, enhancing their considerable cost advantage.

A second is that subsidies can be destructive while market-led investment is hugely constructive. There are arguments for subsidies in funding infrastructural projects, and the infrastructure in the whole of Eastern Europe had lagged behind. But East Germany now has a wonderful infrastructure, in some ways better than the West. That has not led to much inward investment, aside from that done by a few West German companies, partly for social reasons. By contrast, much investment in the new EU members has been market-led, and that transfers know-how and money.

And a third, perhaps, is that control of one's own destiny matters. It is nearly 15 years since the Berlin Wall came down. Anyone who visited these countries regularly over the period will have seen their bewilderment at the scale of the market economy, the early hardships, and now - for most of the population - the burst of prosperity that has followed. They did it themselves - and I for one am thrilled they are now joining the EU club.

Who are the G7 to pass comment on China?

The Group of Seven finance ministers and central bank governors are in Washington this weekend as part of the twice-a-year committee meeting at the International Monetary Fund.

The markets always note with some concern what they say in their communiqué afterwards, though they don't necessarily believe what they are told. This time the most interesting thing will be what will not be said, for in recent meetings the prime concern has been the dangers of turbulence on the currency markets. The big imbalances remain between the fast-growing (but with a huge current account deficit) US, and the slow-growing (but in the black) eurozone. The growth differential remains, too. But the fall of the dollar last autumn and its subsequent partial climb back seems to have been weathered. It would be wrong to say the danger is passed, but everyone seems more relaxed.

Other tensions also seem to have eased. This year will be a good year for world growth. The hares - in particular the US and UK - are still racing ahead, and the main tortoise - the eurozone - is still lagging. But Japan is now growing decently and the East Asian region as a whole is, in economic terms at least, the most vibrant part of the planet.

So if, as it should be, the tone of the meeting is relatively upbeat, there will be two issues where the G7 briefings will be carefully noted. One is that stronger growth usually means higher interest rates. Alan Greenspan, the US Federal Reserve chairman, hinted last week that US policy might have to be tightened. But how far, how fast and what it means for the rest of us is wide open. As of now, expect a gradual increase in rates here through the summer and autumn, but nothing too dramatic.

The second issue is what happens in China and to a lesser extent in India. The idea of the G7 becomes more and more outdated each year: China supplies much more of the world's annual growth than the entire eurozone, but it is not at the G7.

There are great tensions in China, alongside its great growth. Anyone interested in the world economy will want to know what the G7 thinks about China, but I would also like to know what China thinks about the G7.

Comments