By Erik Sass
The alarm bells are ringing, but will EU officials in Brussels wake up before it’s too late? Alas, probably not. A rising tide of discontent in Eastern Europe over protectionism, income inequality, unchecked immigration and overregulation threaten to undermine the region’s adhesion to the European Union, jeopardizing the entire European project, a panel of experts warned the audience at the Free Market Road Show conference at the University of Warsaw on April 3, 2019.
In conversations whose tone frankly cannot be described as optimistic, panelists laid out the systemic shortcomings of the policies adopted by the EU’s wealthier members over the last decade. Assailing new limits on trade in goods and services in the west, Marcin Nowacki, vice-president of Poland’s Union of Entrepreneurs and Employers, representing small and medium-sized enterprises (SMEs), warned that rich westerners increasingly appear to be hypocrites: “In European markets we are seeing more and more protectionism. It is hard to explain to small businesses, traveling across Poland, why it is happening. They remember how freedom of capital has worked well for the benefit of other countries for many years.”
Unfortunately free movement of capital is no longer matched in goods and services, categories where Eastern European economies are strongest. Nowacki noted that “once we [in Poland] were very successful in food production and food export. Now we see that roughly 30% of exports are somehow discriminated against in markets in developed countries,” often due to meaningless technical requirements.
Another area where protectionism threatens EU cohesion is services, including transportation, a sector where Poland should be a natural champion due to its central geographic position and relatively good infrastructure. “The case is really massive for Poles and Polish businesses,” according to Nowacki: “We were lucky with open markets to have built the largest transport sector in the European Union. We have the largest market share [in Europe] in truck transportation today, and it’s fully based on SMEs,” with over 30,000 SMEs representing this sector. However “the other markets, mostly French and German, have started to protect their own truck transportation,” as reflected in recent regulatory and legislative defeats at the European level.
Entrepreneurs and small businesses are intensely aware of the impacts these measures have on their livelihoods: “If you try to explain that somehow the market still works for us, and they see how the market has been closing in France for many years now, and they see how politicians in France are revising the earlier directives because of political reasons, then it’s hard to make them [rally] behind you as a supporter and friend of freedom in Europe.” Ominously, Nowacki added, “Speaking to these people, they are losing their faith that the EU is still about freedom and hope.” Indeed, it is only a matter of time before they begin demanding protectionist measures at home too, Nowacki predicted.
The erosion of the EU’s core freedoms is working in tandem with an array of other threats, including uncontrolled immigration and income inequality, according to Ivan Miklos, former Slovakian finance minister. On the first subject Miklos declared point blank: “Europe doesn’t have enough protection of its external borders,” while at the same time, “Too generous social policy in Europe is increasing motivation of those immigrants to come to Europe.”
Turning to social tension, Miklos noted that “quantitative easing is one of the biggest reasons for increasing economic inequality, because pumping a lot of cheap money does not have as a result real growth of the economy, but increasing the value of assets” – the vast majority owned by people who are already wealthy. While conceding that “QE was good medicine right after the [financial crisis of 2008],” Miklos explained it is now keeping zombie companies alive: “The problem that this short term medicine is being used in the long term, and it is not only increasing inequalities, it is softening support for reform… Without cleaning of the market we are just delaying the crisis, and I am afraid this next crisis will be even bigger.”
Richard Zundritsch, a veteran banker, independent financial consultant and board member for the Austrian Economics Center, also pointed to prolonged low interest rates and QE as one of the most serious long-term threats to European growth and stability. Like Miklos he agreed that “the first chunk was necessary. The medicine was exactly right, but now we’ve gotten to the drug. We’ve become addicted [and] the financial shocks we saw before Christmas were quite typical withdrawal symptoms.”
The negative impacts of unusually low interest rates and QE on ordinary people are very real, Zundritsch continued: “Anyone trying to save, save in regular life or save for a pension, plan for the future – with easy money, 0% interest rates, negative interest rates, forget about saving.” At the level of business, Zundritsch observed, “We haven’t had a natural interest rate for probably 10 years, and anyone who studies economics [knows this] leads to malinvestment. If money doesn’t cost anything you can just throw it at stuff… We’re not living in a real estate bubble, or a stock exchange bubble, we’re living in an everything bubble.”
The (supposedly) imminent departure from the EU of Britain, the world’s fifth largest economy and long a reliable supporter of fiscal probity, is hardly grounds for optimism either, added Karol Zdybel, an associate at the Mises Institute of Economic Education in Poland: “One of the most historically speaking liberal countries in the world is leaving our union and that’s something we should really be concerned about.” Zdybel also echoed Miklos’ concerns about the growing distance between Brussels and EU citizens, providing fuel to the populist convulsion now shaking the continent: “People are losing the sense of connection between their everyday lives and the European Union bureaucracy. People have a sense of the intransparency of EU structures… and that’s [something] populist movements can free ride on.”
While it would be pleasant to conclude on a hopeful note, the panelists agreed that current trends simply aren’t pointing that direction. Looking to the future Macrin cited a lack of vision in the EU and national political classes: “I’m afraid because of our political leaders we will go on with the status quo.” Miklos urged a return to fiscal discipline at the national level, robustly enforced by the EU, paired with a dire prediction: “If we don’t have serious rules, then the crisis will come… [and] then we can expect it will have serious, serious negative consequences.” Zdybel reinforced Miklos’ warning: “In case of any major crisis we can see a rapid collapse of our European consensus. When the next Greece scenario happens in Italy or even France, we will be totally unprepared.” Zundritsch came closest to cautious optimism, but nobody should be cracking open the champagne: “We need monetary and fiscal policy to counter [the effects of recent monetary policy] and maybe, maybe we have a chance to slowly let the air out of the bubble.”