Flickr/Thierry Ehrmann (some rights reserved)
Greek voters have decisively repudiated the economics of austerity by handing an overwhelming victory to the left-wing party Syriza in their recent parliamentary elections. This was not a big surprise. Greece has been suffering from high levels of unemployment, including a rate higher than 50 percent for young people. The standard of living for much of the population has dropped precipitously over recent years, as a direct result of the cuts in government programmes mandated by the European Union and the International Monetary Fund.
But the EU should have predicted this result even before it insisted on austerity as a solution to the Greek debt crisis. After all, this was the great unlearned lesson from the experience of east-central Europe over the last 25 years.
Twenty-five years ago this year, the people of east-central Europe braced for the cold shower of economic reforms that reduced government spending and threw millions out of work, East Europeans took solace in their expectations that they would live at the same standard of living as their western counterparts within a decade. Instead, 25 years later, the region has made very little relative progress.
Consider Hungary and Austria, two neighbouring countries that were once part of the same cognate empire. In 1991, according to the World Bank’s figures, Hungary’s per capita GDP was $8,240 while Austria’s was $20,610. By 2013, Hungary’s level had risen to $23,482, but Austria’s now stood at $45,493. Other countries have remained as far or even further behind this halfway mark: Poland ($23,649), Romania ($18,991), Bulgaria ($15,732).
Perhaps these glass-half-empty results reflect decades of communist mismanagement. Surely it was unrealistic to expect to close this gap so easily. But for all of its defects, the communist era left behind a well-educated population, some decent infrastructure, an organised if inefficient agricultural sector, and an industrial base considerably more advanced than China’s on the eve of its economic expansion.
In fact, the people of the region had every reason to believe that they could catch up with the west. Compare eastern Europe in 1990 to west Germany in 1946. The latter had been broken by the war, most of its factories and building stock reduced to rubble, a large section of its able-bodied population dead. But two decades later, West Germany had not merely caught up with the rest of Europe – it was the continent’s most powerful economy.
The expectations of eastern Europeans were fed not only by west Germany’s wirtschaftswunder. Earlier expansions of the European Union had come with a promise that the new members would eventually rise to the level of their peers. Ireland was at the bottom of the heap when it joined the European Community in 1973. Twenty-five years later, and after billions of dollars in Euro-assistance, the Celtic Tiger’s economy had surpassed that of its fellow clubmates. Although the bubble later burst, Ireland’s GDP today remains comparable to Austria’s.
The failure of eastern Europe to replicate the German and Irish experiences has produced all manner of reactions in the region, from extreme nationalism and nostalgia for the communist past to Hungary’s embrace of a more authoritarian approach to governance. Millions of people have fled the region in search of better prospects, Bulgaria for example suffering the largest demographic drop of any modern country not seized by war or famine.
There are many complicated reasons for eastern Europe’s failure to close the gap. The economic reforms of 1990 largely achieved their primary goal of macroeconomic stability. But these reforms failed to address high levels of long-term unemployment, establish law-based states strong and transparent enough to guide economic renewal, or provide Keynesian stimuli to restart stalled growth. Meanwhile, the EU was more concerned with restricting the budgetary policies of its newest members than helping close the gap with the rest of Europe.
These problems may sound familiar. Greece currently faces the same problems endemic in eastern Europe in 1990. And the EU has offered the same solution: budget-cutting austerity. By rejecting this solution, Greek voters have set up a major confrontation with Brussels.
The issue, ultimately, is not whether Greeks or Poles or Spaniards need to make sacrifices. Economics is all about making hard choices with limited resources. The issue is what people get for their sacrifices. Given the economic difficulties that eastern Europe still faces after 25 years, including the failure to catch up to the west, the people of Greece have concluded that if that’s what they get for following the EU rules, they’d rather have Plan B.