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The New Europe: introduction

By Marcus  Warren

People cutting the border fence

Who saw it coming? Where, hidden beneath the glum exterior of the Cold War, planned economies, ‘goulash communism’, the Comecon and the promise of ‘glasnost’ and ‘perestroika’ among other signs of the time, were the hints as to what would happen next?

Change was in the air in Europe at the start of 1989, in some corners of it, at least. But it would have required the clairvoyant powers of a supernatural seer to have spotted the momentous events which unfolded only months later.

And the world only a few, let alone 25, years further on? Europe was – and is – a continent transformed. It is, in its own way, one continent, enjoying peace and prosperity unheard of in its history. East has met West, and – likewise – West has met East. A process has been set in motion, a development has begun, which is far from over.

Europe even has its own AAA-rated development bank, the EBRD, specifically founded to help the countries of its centre and East make the transition to market economies and democracies and integrate with western Europe and the global economy beyond. Founded in 1991, the EBRD became a pioneer in promoting private enterprise by initiating foreign investment and unleashing the region’s entrepreneurial spirit, suppressed under communism.

For eight of the nations which emerged from decades of communism, and in some cases had ceased to exist except as parts of socialist federations, 2014 marks a double anniversary. For a decade ago the Czech and Slovak Republics, Estonia, Hungary, Latvia, Lithuania, Poland and Slovenia joined the European Union as fully fledged members on a par with its founders.

Indeed, so locked into the European economy are Estonia, Latvia, Slovakia and Slovenia today that they have all now adopted the euro. And the Czech Republic is the only country so far to have ‘graduated’ from the EBRD; it no longer receives investments from the Bank.

The history and destiny of the region have been changed, perhaps irreversibly, in less than half a lifetime. And, to borrow an image coined by a British prime minister in a different context, the bankers at the newly-established EBRD at the beginning of the 1990s could most definitely feel ‘the hand of history’ on their shoulders.

The first meeting of the banking department of what would eventually become a €9bn-a-year business took place with five people and a map on the table. Its early executives found themselves having to explain to their new business partners not only how interest rates worked but what they in fact were. One mayor, newly elected in an early free election, wanted to know what, in the West, mayors actually did.

Back then, alongside the sheer excitement of discovering this new world, policy-makers argued over the merits of shock therapy versus gradualism, privatisation versus restructuring. Euphoria and wishful thinking soon gave way to the realisation that much hard work lay ahead.

It is a measure of how far central and eastern Europe have travelled since then that some of the hot button arguments raging over the region today concern on the one hand, fears in some quarters that it has integrated with the western half of the continent too hastily; and on the other, that its chance to converge with more advanced economies may be in danger of passing and that it is ‘stuck in transition’.

Thus, for some politicians in the West, the barriers to freedom of movement within the new Europe were torn down too soon, allowing ‘Polish plumbers’ and other workers to flood across the borders and supposedly ‘steal’ jobs in the ‘old’ Europe. At the same time, here at the EBRD, we worry that, overall, there is still more work to do, that reforms have stalled or, in some cases, gone into reverse.

We wonder how the transition economies can get back into gear and rediscover the momentum that followed the end of communism and their reintegration into the world economy. We ask whether the greatest spur to change was membership of the EU and whether, once that was achieved, certain countries decided that all their hard work to date would be enough in itself to catch up with more ‘advanced’ economies.

The quarter of a century since the breaching of the Iron Curtain (see the picture of Hungarian soldiers cutting through its barbed wire above), the fall of the Berlin Wall and the annus mirabilis of 1989 has also seen the passing of the notion that the ‘other’ Europe is: one, monolithic; two, necessarily more backward than the West, peopled predominantly by peasants, its factories a doomed rust belt.

Where now does the West end and the East begin and where exactly is the centre? Some of the fastest-growing economies on the continent since the 2008-09 crisis have been in the East, the laggards in the West. Estonia has the lowest ratio of public debt to GDP in the EU, by a large margin.

And the new Europe is an optimistic place, relative to the western half of the continent, certainly. The last time the EBRD took the temperature of those who have lived through the transition of the last two decades, the people of the EU8 nations were far more hopeful about the future of their younger generations than those quizzed in western Europe. (The sole exception to this rule was Slovenia.)

This May the EBRD will hold its Annual Meeting and Business Forum in Warsaw, the capital of Poland, the largest of the EU8 countries and arguably the one which, with its proud sense of national identity and its Pope, did more than any other to undermine the region’s pre-1989 world.

Between now and the middle of May, week by week, we will be taking a more detailed look at financial institutions, the real economy, agribusiness, cross-border trade, power and energy, telecommunications, municipal infrastructure, transport, small businesses, crisis response, legal reform and the future in the EU8 countries and how the EBRD has helped them in each sector.

We now know what happened after 1989. And we also know that four years after the EU8 joined the EU the continent’s economies suffered their worst slump in decades. But, whatever the future holds, the New Europe looks unrecognisable when compared with the world of not so long ago.

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