From The Times / October 26, 2006
What has four letters, begins with E and is slowly killing half of Europe? Anatole Kaletsky

WHILE MOST of the world’s attention has naturally focused on the catastrophe of Iraq, the nuclear showdown in North Korea and the electoral nemesis approaching for George W. Bush on November 7, it has also been an interesting week in Europe.

Hungarians marked the brutal suppression of their democracy by Soviet tanks 50 years ago by rioting against their elected Government. In Italy, the Government’s credit rating was reduced to the same level as Botswana’s, and Romano Prodi seemed on the verge of losing a vote of confidence, just six months after sweeping his reviled and derided predecessor, Silvio Berlusconi, from power. The British Home Secretary welcomed Bulgarians and Romanians into the European Union by restricting their ability to seek jobs.

The Iraq invasion, disastrous though it has been, may not go down in history as the greatest political blunder of the past decade. That dubious honour will probably belong to an event most people still regard as a triumph: the creation of the euro. What we see today, not only in Italy and Hungary, but also in the other relatively weak economies on the southern and eastern fringes of the EU, is the beginning of the end of the European project. And if the euro project does turn out to be the high-water mark of European unification, then history will judge it a far more important event that anything happening in the Middle East.

But what does the euro have to do with the political troubles in Hungary and Italy? And how can I compare the technocratic financial problems connected with the euro to a moral and humanitarian disaster such as Iraq? These two questions have a very clear answer: democratic self-government — or, more precisely, its denial.

What we see in Eastern and Southern Europe today are the consequences of the EU’s transformation from a union of democratic countries into a sort of supra-national financial empire in which the most important decisions affecting EU citizens are no longer subject to democratic control.

In Italy the Government is on the brink of collapse because of Signor Prodi’s insistence on implementing tax increases and budget cuts demanded by Joaquín Almunia, the EU Economic Commissioner, under the terms of the Maastricht Treaty. In Hungary, the riots began a month ago because the Prime Minister showed his contempt for democracy by publicly admitting that he had “lied, morning, noon and night” about the tax increases and public spending cuts that he had promised Señor Almunia before a recent election — and after the election was over, he naturally felt that his promises to Brussels were far more important than the ones he had made to Hungarian voters.

The resulting budget cuts of 7 per cent of GDP over two years would be roughly equivalent in Britain to closing down the entire NHS. And Hungary, remember, is being forced to do this to comply with the Maastricht treaty, without even being admitted to the eurozone.

There is now almost no chance of Hungary, or any other new European country, being admitted to the euro-zone in the foreseeable future. This was demonstrated over the summer when Lithuania and Estonia was refused permission to join the euro on the flimsiest of grounds. This EU decision attracted little attention in Britain but was hugely controversial in Eastern Europe. It effectively meant that the accession countries would continue to have their economic policies set in Brussels and Frankfurt without even being able to enjoy the modest benefits of using the single currency.

The political consequence of this asymmetry of power is growing disillusionment in the East, not only with the EU but even with the concept of parliamentary democracy. The economic effect of forcing Central Europe to abide by deflationary policies designed for the mature economies of the eurozone is the weak demand growth and mass unemployment experienced by the accession countries. This unemployment has been the main driving force behind the huge flow of labour out of Central Europe. And that flood of workers, in turn, has provoked the hostile and ultimately self-defeating rhetoric of the British Government against Bulgarian and Romanian immigrants.

The Maastricht treaty has turned the Eastern Europeans into second-class citizens. The belated recognition of this fact is starting to have the predictably ugly impact on the politics of Europe’s eastern periphery. But before getting too indignant about the injustices to Eastern Europe, let us spare a thought for the citizens of old Europe who are privileged to “enjoy” full membership of the eurozone. The latest budgetary crisis in Italy may well be averted and the Prodi Government will probably survive for a few more months. But as Signor Prodi’s huge tax increases begin to bite, the Italian economy is almost certain to sink back into recession. Moreover, there will be no chance of Italy tackling any of its real economic problems once unemployment starts rising next year.

What Italy needs today is competition, privatisation of grossly inefficient state-sponsored utilities, deregulation of the financial system and changes in labour laws. Such reforms can be hard to implement even in a booming economy. In a stagnant or declining one, they will become impossible.

To make matters worse, Italy will be tightening its budget at the same time as Germany implements the biggest tax increases in its modern history — also in deference to the Maastricht Treaty, if not under quite such direct compulsion from the EU. These simultaneous fiscal blunders in Italy, Germany and Eastern Europe will almost mean another “lost year” for the euro zone, with economic performance falling far behind America, Britain and Japan. But the long-term consequences could be more far-reaching.

At some point the people of Europe will realise that there is something rotten in a political system that leaves them forever in the world economy’s slow lane — and which cannot be changed by any democratic process, regardless of how people vote.