#10 - JRL 7020
Financial Times (UK)
January 16, 2003
Glimmers of light in the east: Eastern Europe needs more economic liberalisation
Despite the general economic gloomin Europe, there is some good news about - and much of is coming fromthe former communist states in the east. PSA Peugeot Citroen, the Frenchcarmaker, yesterday published plans for a Euros 700m (Dollars 740m)plant in Slovakia, while the European Bank for Reconstruction and Development announced a record flow of new investments for eastern Europe and the former Soviet Union.
The impact on the region of the global economic downturn is being offset by three forces. In central Europe, the drive to join the European Union next year is boosting business confidence. In the Balkans, the slow recovery from the Yugoslav wars is promoting investment. In Russia, continuing high oil prices, combined with the stability created by President Vladimir Putin, are encouraging growth. However, the region's governments must do more to take advantage of these conditions. In central Europe, restructuring public finances should head the agenda. The Czech Republic and Hungary have high deficits, with Poland not far behind. All three promise to cut borrowing. But none has shown it is serious about the basic challenge - reducing over-generous and widely abused social benefits. Ministers cannot ignore poverty. But they must tackle it with more narrowly focused support for the really poor.
Central European states must also liberalise their economies further, especially labour markets. There is a lot of loose talk about adopting "continental" rather than "Anglo-Saxon" employment conditions. But if that means restrictive labour laws, central European states should say No. Poland, in particular, cannot afford to complicate job creation, with unemployment already at 18 per cent. Ministers understand the problems. But they lack the will to adopt the right solutions.
In the Balkans, the priority is political stability. Bulgaria and Romania have made good progress in recent years, resulting in useful increases in inward investment. Now the pressure is on Serbia to deal with the complex legacies of war, for example by sorting out property rights. The EU must do more to help. Aid is welcome, as is the promise of eventual EU membership. But better access to EU markets is also urgently needed, not least in restricted sectors such as agriculture.
In Russia, Mr Putin has wisely used oil tax revenues to bolster public finances. But he must make more use of the current favourable economic climate to promote serious restructuring, particularly in banking, energy and electricity. The inefficiency of these crucial sectors holds back economic growth. Also, unless commercial laws are fairly enforced, the influence of politically connected business oligarchs will continue to increase at the expense of other businesses. The recent un- transparent Slavneft privatisation was a disgrace.
Ex-communist Europe has made great progress with economic reform in the past decade - far more than the EU. But today's political leaders need to finish the job.