Shout welcome from the rooftops

Instead of celebrating the fact that at last the Iron Curtain has been torn down, we are worrying and griping
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The Independent Online

Bigger will truly be better. We are just three days off the greatest expansion of the European Union ever, with another 75 million people, mostly in eastern and central Europe, joining the club

Bigger will truly be better. We are just three days off the greatest expansion of the European Union ever, with another 75 million people, mostly in eastern and central Europe, joining the club. Yet instead of celebrating the fact that at last the Iron Curtain has finally been torn down, we are worrying and griping.

Here in Britain there are warnings of floods of new immigrants waiting to take our jobs, or worse, scrounge on our welfare state - hence the new rules on benefits foreshadowed by the Prime Minister in his CBI speech yesterday. But at least we are prepared immediately, on 1 May, to let them come here to work provided they register. On the Continent they have erected barriers to stop people from the accession countries getting jobs at all. And throughout the present membership there are worries that these new nations will be a drag on Europe's already lacklustre economic performance.

It is easy to understand these concerns. East Germany, the only former member of the USSR's eastern European empire to join the EU so far, has been an economic catastrophe. Despite huge and continuing subsidies, it still has unemployment in the high teens. There is no realistic possibility of its being self-supporting for another decade, maybe longer. And the burden of support has been one of the factors, though not the only one, that has pushed Germany to the bottom of the European growth league.

Certainly the expansion comes at a time when almost the entire eurozone economy is struggling. The European Commission admitted earlier this year that the EU was falling further behind the US and there was little hope of it attaining the Lisbon summit goals of becoming "the most competitive and dynamic knowledge-based economy in the world by 2010". Just yesterday the poor progress was confirmed in a World Economic Forum survey. This acknowledged that while Scandinavia and the UK were broadly competitive with the US, most of the rest of Europe scored badly. It also warned that the largest of the new members, Poland, scored particularly badly on all counts.

But if the concerns are understandable, they are also wrong. Ten years from now we will, I suggest, see this expansion of the EU as a huge positive boost to its economy. It won't make the continental European economy as dynamic as that of the US: given demographic realities that is too much to ask. But it will give the entire continent a boost, and a most welcome one at that. Here's why.

First, dismiss the negative experience of East Germany. The process of reunification, at an economic level, has been scarred by two huge mistakes.

One was merging the two German marks at the wrong rate - a one-for-one exchange. Politically that may have been necessary, but it meant that East Germany could never compete with West Germany, or indeed any other EU member. Wage levels were too high relative to productivity, so there was virtually no inward commercial investment apart from some politically-driven projects from West German companies.

The other was to impose the West German system - legislation, standards, business practices - on what had become a foreign country. There was no incentive for East German society to create its own new, flexible economy. It was not in charge of itself.

The position of the new members is utterly different. They have competitive exchange rates. As a result there has been a flood of investment. You can see the results on our streets: Volkswagen's takeover of Skoda has ended all those Skoda jokes, turning the company into one of the most admired manufacturers in Europe. Right now Toyota and Peugeot are planning to invest $1.8bn in a new car assembly plant.

The new members also have charge of their own destiny. Having had to live with Soviet-imposed economic planning and seen what it does, they have been very clear not to make that sort of mistake again. So they have in general established flexible regulatory systems, given sensible rather than over-lavish investment incentives, and allowed market signals to dictate how their economies should develop. And they have not had the subsidies that East Germany received. They had to pull themselves up by their own bootstraps, with the result that they now have a much more market-oriented economy than most of the eurozone.

As a result of broadly sensible economic policies, the region is consistently growing at around 4 per cent a year, more than double that of the eurozone.

That will continue for two reasons. One is that the wall of investment funds flooding into the region will continue for another decade at least. That will bring expertise and deliver exports: the know-how of building and running a car plant as well as the distribution network across Europe for selling the cars.

The other is proximity to Russia. We have been so attuned to thinking of Russia as an economic basket case that we forget that it is growing even faster than its former empire. Its success at present rests on the narrow economic base of energy exports, but on any rational view of world economic development over the next decade, energy and other natural resources are the key sectors to be in.

Here in Britain we catch a glimpse of Russian wealth as buyers of football clubs and expensive houses in Kensington. In the countries between western Europe and Russia the impact will be much more widespread. As the EU grows to include Bulgaria and Romania, expect the trade relationship with Russia to help the EU even more.

Finally, new members bring new ideas. Look how the advent of Scandinavia has helped Europe to compete more effectively against the US and East Asia in telecommunications.

In the case of the new central and eastern European countries, the EU gets the experience of conversion from a planned economy to a market one. These countries have had to learn the hard way how to restructure declining industries, how to create flexible labour markets, how to get the right mix of top-down and bottom-up economic management. It has not been easy. But as a result these countries know what does not work as well as what does.

And there they can be hugely helpful to the core of the eurozone. Everyone accepts that there have to be big structural reforms in the big three, Germany, France and Italy. The scale of those reforms is modest compared with what the other big three - Poland, Hungary and the Czech Republic - have had to go though. Now, within the EU, there are countries that are committed to structural reforms. They know the benefits as well as the costs.

And that may be their greatest gift to Europe. The fact that on paper they may be poorer and may not tick all the EU boxes on standards does not matter. That is to take a static view of their condition, not a dynamic one. They are eager. They are growing. They bring vigour. We need that. Much of Europe is stuck with economic stagnation and political paralysis. It has to make difficult reforms if it is to break out. Now it has new members which have taken far tougher decisions than the EU establishment has had to face.

So we should stop carping, stop being patronising, above all stop being fearful. So shout "welcome" from the rooftops and let fireworks light the sky.

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