Economic Relations between Eastern, Central and Western Europe

An Historical Perspective

-Introduction1

The thrust of this essay is that developments during the past 500 years have created three distinct regions in Europe, defined partly by geography and partly by history, that must be taken into account when considering prospects for economic cooperation between the transition economies of Central and Eastern Europe and the already eco- nomically integrated countries o f Western Europe. Europe’s three main regions are:

( 1 ) Developed and democratic Western Europe, whose long-term political future is not being seriously threatened. Western Europe encompasses the lands west o f the eastern borders o f today’s Scandinavian countries, Germany, Switzerland, Austria and Italy; it also includes Greece.

(2) Precariously democratic and economically lagging Central Europe, made up o f countries whose prospects of remaining democratic and becoming viable mar et economies are quite good, and where Western policies can make a difference for the success of those endeavors. Central Europe is situated between the Scandinavian- German-Italian speaking lands and the Russian-Ukrainian world’s eastern and southern borders; it excludes the Balkans. Central Europe has been aptly called The Lands Between: it encompasses the Baltic states, Poland, the former Czechoslovakia, Austria, Hungary, Slovenia and Croatia.

(3) Eastern Europe is made up of the rest o f the countries, whose prospects of remaining or becoming democratic and well-functioning market economies are less clear and where Western policies are likely to make a more modest difference. Eastern Europe is comprised o f all the lands to the East and South o f Central Europe, and includes the Balkans.

This division o f Europe is somewhat arbitrary and simplified. The progression from more developed West to the less developed East is not a straight line. For exam- pie, Greece is included here as part of the West even though during for much of the last 500 years its development was closer to East Europe’s than to West Europe’s. The same can be said also of Spain, Portugal, and Sicily. In fact, the Mediterranean region has certain features that set it apart from each o f the three regions o f Europe.

Notwithstanding these and other caveats, Europe’s three regions are sufficiently distinctive, and the differences between them have sufficient current policy relevance, to warrant emphasizing them in this essay.

1 The author would like to thank Professors R ohen Byrnes, Charles Jelavich, John Kulczycki and Toivo Raun, as well as daughter Eva Marer, fo r valuable comments on an earlier version. This acknowledge- ment does not imply that the individuals thanked concur with the author's statements and interpretations.

Part I sketches, in the briefest possible way, the 500-year history o f Europe, men- tioning some of the forces that have caused the three regions to develop differently.

Part II examines the nature o f economic integration in postwar Western Europe. Part III discusses the prospects o f economic cooperation between the economies of Central and Eastern Europe and those of Western Europe. Part IV notes the policy implications o f the analysis.

/. Economic Development o f Europe: an Historical Perspective

The central feature of world history between 1500 and 1815 (Napoleon’s defeat and the Congress of Vienna) was the expansion of Europe and the spread o f European civilization-with its positive as well as negative aspects-throughout the globe. Until around 1500 the world had, on the whole, pressed in on Europe; after 1500 Europeans pressed across the planet.

Uneven economic development was behind the shift in power. In 1500, more than three-quarters of the world’s surface was inhabited by food gatherers, hand-cultiva- tors and herdsmen. The rest - mostly in England and the Western and Northern parts of Continental Europe - were plough cultivators, who were more productive. This enabled them to multiply and to accumulate the resources to finance economic deve- lopment, once the other conditions for it were met.

In Europe itself, the division between Western and Central Europe on the one hand and Eastern Europe on the other coincides roughly with the dividing line between Western and Eastern Christianity and the different value systems and world views that they represented. The fundamental values o f religion were transmitted to the people because o f the strong involvement o f the church in education and because religion accompanied and gave meaning to every significant event in the lives of individuals and communities.

The areas where Roman Catholicism and later Protestantism flourished became more fertile grounds for the development of capitalism than the areas where the Eastern Orthodox Church remained predominant. The former is associated with rational ascetism and a strong work ethic. For example, the motto o f the Catholic Benedictine order was ora et labora!, meaning “pray and work!” And the association between Protestantism and capitalist development (“help yourself and God will help you too”) has been emphasized ever since the writings o f Max Weber.

The Orthodox Church kept itself more aloof from worldly developments, remained subordinated to the state and tended to support the preservation o f the state and the status quo generally, including feudalism, inherited privileges, and serfdom.

Around 1500, Roman Catholicism dominated in the west and Greek Orthodoxy (with Muslim overlays) in the east. The dividing line ran through Poland and Lit- huania in the north, down to Dubrovnik, to the Adriatic Sea.“

What, then, defines “Central” Europe? Briefly - and thus much oversimplified - Central Europe is that region to which Western political and economic developments

2 The Times Allas o f World History, Hammond. Maplewood, New Jersey, 1978, p. 182.

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Economic Relations between Eastern, Central and Western Europe 87 came later and were disseminated more slowly than in Western Europe, but never- theless arrived earlier and spread faster than in Eastern Europe. Hence the apt charac- terization of Central Europe as “ The Lands Between.” 3

The agrarian revolution that began in the 16th century in north-west Europe - Britain, Belgium and Holland - had produced an efficient, commercialized farming system by 1800. That in turn made possible the industrial revolution. In less than a century, Great Britain became the workshop o f the world. And England and Holland became not only the greatest textile producers, but also the largest manufacturers and owners o f merchant fleets.

England was the first, early in the 18th century, to create a unified common market at home. On the Continent, economic development was hampered well into the 19th century by stiff tariff and non-tariff barriers between the states and the principalities within them. The economic development o f western and central Europe was promo- ted wherever tariffs and other barriers to trade and the free movement o f people were reduced or abolished. France abolished internal tariffs in 1790. In Germany, a customs union (Zollverein) was established in 1834, gradually extending the link to indepen- dent states, preceding the political unification of Germany in 1871 under Bismarck. In Switzerland, tariff barriers between the cantons were removed between 1848 and 1874, while Italy achieved economic and political unity in the 1860s. Moldavia and Wallachia (most o f their territories in present-day Romania) entered into a customs union in 1847. In the Habsburg dominions the customs frontier between Austria and Hungary was abolished in 1850; in Russia, the customs frontier with Congress Poland was abolished in the following year.4

However, the tariff-free area o f the Habsburg Empire included only Austria, Hungary and Bohemia. Much o f the rest o f Central and Eastern Europe was too backward to have much trade in manufactures and thus to participate in the division o f labor.

A strong central state had an important role in creating a customs union and other conditions of capitalist development in Western Europe and in pockets in Central and Eastern Europe. But the extent to which the state was needed to financially support the entrepreneurs, or to try itself to be the entrepreneur, differed greatly. In England and in the Low Countries, capitalist entrepreneurs arose more or less spontaneously because society itself created the conditions under which new ideas, inventions, and capitalist accumulation could take place. In Germany, capitalism was created jointly by indigenous resources, by state support for banks (that in turn helped finance new ventures), and by foreign investors. In Central and Eastern Europe, capitalist deve- lopment was brought about, with a delay and in much more dampened form, mainly by the state, with the assistance o f foreign capital.5 In Eastern Europe, the state played an even more important role, although the role was not, as a rule, efficiently per- formed.

The modern nation state - defined by John Stuart Mill as a group o f individuals inhabiting a given territory and sharing certain historical, cultural or other traits, who

3 A. Palmer. The Lands Between, New York. 1970.

4 The Times Allas, op. cit., pp. 210-211.

5 /. Berend and Gy. Ranki, The European Periphery and Industrialization, Akademia, Budapest, 1977.

are willingly governed together - arose in the 18th and 19th centuries. A key factor was the desire of the emerging classes o f capitalists, entrepreneurs and the bourgeoi- sie for more freedom and rights, but also greater legal and economic support (such as enlarged markets, the enforcement of contracts, and law and order) than the conser- vative “ancien regimes” could provide.

Over the centuries, powerful central governments emerged, enabling their rulers to create a modem nation state by achieving a high degree o f economic and political integration within their borders, defending those borders against foreign foes. Modern nations are thus rooted in “civic-territorial" nationalism, as exemplified by Britain, France and the United States.6

There is also another type, "ethnic-cultural ” nationalism, which became a perma- nently strong force in societies where alien rule or severe (perceived) injustice was imposed by foreign powers. At various times in the last century - and in some cases down to the present - these include(d): in Ireland, against England; in Belgium, against Holland; in Norway, against Sweden; in Greece, against Turkey; in Italy, against Austria; the Czechs and the Magyars against the Habsburgs; the people under M agyar domination against Hungary; in Poland, against Russia; and so on.

The peoples of Central and Eastern Europe, being on the periphery o f development and lacking the independent national states that most peoples in Western Europe were eventually able to create, assigned a special role to national cultural identity: preser- ving the “purity” o f the native language, folklore and each group’s own version of its history. These images became a substitute integrating force, a basis for national iden- tity. Groups emphasized the uniqueness of their own language, history and culture, as a counterbalancing factor to the dependence of their nation and people.7 This “culture as the nation” concept involved a nationalism that, in certain cases, was so defensive as to be offensive, with hostility directed not only against the dominating foreign powers but also against each other. The turbulent histories and mixed populations in many parts o f Central and Eastern Europe gave each group of people the sense that it had to fight against other groups to strengthen its national position - and territorial claims - in the area in which it lived. To be sure, civic-territorial nationalism has also shown itself capable of being aggressive, but perhaps less frequently than ethnic- cultural nationalism.

In the reshaping o f Europe that followed the defeat o f Napoleon in 1815, the Habs- burg Empire can be considered the embodiment of Central Europe: it controlled all or parts o f six o f (what later became) the nine states in this group, the Baltic states being the exceptions. Was the Habsburg Empire a constitutional state (Rechtsstaat), which means a state based on the rule of law, or did it remain “the prison o f the people” in a pseudo-constitutional form? While at the time o f the Congress of Vienna and until the middle o f the 19th century it probably was close to an absolute monarchy, the Empire did evolve in the direction o f a constitutional monarchy (especially after the Compro- mise o f 1867 with the Hungarians), but with remnants o f absolutism, although with a

6 A. D. Smith, National Identity University of Nevada Press, Reno, 1991.

7 Berend. /., “The Role o f Cultural Identity in Eastern Europe. ” In Eastern Europe: A Question o f Iden- tity. Occasional Paper of the East Europe Program o f The Wilson Center, Washington D.C., 1986, p. 13.

8 Ibid.

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Economic Relations between Eastern, Central and Western Europe 89 comparatively wide range of liberal civic rights. Thus, the Habsburg Monarchy even- tually became the eastern border o f European liberalism, “ the lands between.” 9

World War I led to the destruction o f the Habsburg, German and Russian empires and ushered in communism in Russia. At Versailles, the victorious allies - the United States, Britain and France - created or sanctified new states and boundaries. Although the truncation of some and the creation o f other independent states was, in some cases, an improvement over the prewar situation, the borders were not drawn well, as a rule.

Large ethnic minorities were left with or attached to states dominated by other ethnic groups. For example, Czechoslovakia and Poland contained large German minorities, the redemption of which became one of the objectives o f Germany’s inter-war policy.

The financial exigencies facing the economically weak successor states in Central and Southern Europe led them to impose stiff tariff and non-tariff barriers on goods origi- nating in the neighboring countries that impeded intra-regional trade. And whatever trade flourished despite the protectionist environment was decimated by the effects of the Great Depression, which hit the countries o f Central and Eastern Europe even more severely than it hurt the nations of Western Europe.

Given the withdrawal of the United States into isolation and the shortsighted poli- cies of Britain and France also, Germany could become the dominant - and domina- ting - economic and military power in Central and Southern Europe. In terms o f po- pulation and industrial strength, Germany’s economic and military potential - which it soon realized - was now without any counterbalance in Central Europe. Germany was eager and soon successful in placing the countries o f Central and Eastern Europe under its economic and later political and military umbrella.

World War II left Europe not only politically disorganized but also in a state o f eco- nomie prostration. The main countries o f Western Europe and their protector state, the United States, had able postwar leaders who made several intelligent policy moves.

Learning from the mistakes the Allies made after World War I, the United States treated fairly the defeated countries and gave significant economic assistance, the Marshall Plan, to Western Europe. By contrast, the Soviet Union under Stalin extrac- ted from Central and Eastern Europe unrequited resources of approximately the same order of magnitude as America poured into Western Europe via the Marshall Plan, with East Germany carrying the brunt o f the burden.10

The economies o f Central and Eastern Europe also grew rapidly after the War, until the early 1980s. But the imposition on them o f communism and central planning caused their economies to become seriously “misdeveloped.” That, in turn, helped preserve these regions’ economic periphery status vis-a-vis Western Europe.

One manifestation of Central and East Europe’s misdevelopment was the distorted geographic and commodity composition of their trade, on which the small size o f their economies makes them, inevitably, to depend. Vis-a-vis the Soviet Union, the Central and East European countries became net exporters o f energy- and raw

material-inten-9 Hanak, P., “Between East and West: Is There a Central European Identity?" Occasional Paper o f the East Europe Program o f The Wilson Center, Washington D.C., 1986.

10 P. Marer, “Soviet Economic Policy in Eastern Europe. " In Joint Economic Committee, U.S. Congress, Reorientation and Commercial Relations o f the Economies o f Eastern Europe. U.S. Government Prin- ting Office, Washington D.C., 1974.

sive manufactures, initially geared to meet Soviet needs, and net importers of energy, raw materials and intermediate products. Thus, the patterns of industrialization and intra-bloc trade continued to proceed along what might be called a “pre-World War I track”, not along a more modem “post-World War II track, wih would have meant ever higher values being added to a relatively stagnating or shrinking material input base, with infrastructure and services being continuously upgraded. The excessively material-incentive structure o f production and trade and the neglect of infrastructure and services are two o f Central and East Europe’s many unwelcome legacies from the communist era. The policies behind these developments helped maintain the rela- tively backward status of their economies vis-a-vis more developed Western Europe.

2. Postwar Economic Integration in Western Europe

Economic integration can take various forms and proceed through several stages. The simplest form is creating a fre e trade area, in which tariffs are abolished among the members but each member maintains its own external economic barriers against non- members. The next stage is the formation of a customs union, in which a common external tariff system is erected. A common market abolishes restrictions on the mobility of goods and services as well as on capital and people (factors of production) - the “four freedoms,” as it is called. This requires the removal of three types of barriers - physical, technical, and fiscal. The elimination o f physical barriers gets rid of obstacles such as passport controls and checks at the internal frontiers. The removal of technical barriers eliminates differences in standards, such as for electrical appli- ances and fittings. The removal of fisca l barriers harmonizes the types of taxes being collected and the rates on those taxes. Full economic integration presupposes the unification o f monetary, fiscal, and social policies and requires the setting up of a supranational authority whose decisions are binding for the member states.

The extent and the distribution of the benefits and costs o f integration depend on the type o f economies that are being integrated. In just about any conceivable case, benefits tend to exceed costs by substantial margins, especially in the long run. Most of the gains come as a result o f eliminating (large) barriers to trade among the mem- bers, which make it possible for producers to exploit economies of scale and scope.

More importantly, increased competition forces producers to become more efficient, which accelerates economic progress. Further substantial gains arise when countries establish a common market, when barriers to the free movement of factors of produc- tion are eliminated. The gains that can be obtained by moving beyond the common market stage, toward full economic union, are largely political.

Integration is thus not an all or nothing proposition. In addition to the stages just mentioned, integration has several further dimensions: economic, monetary, and poli- tical. One - perhaps utopian - vision of European integration advocates full economic, full monetary and substantial political integration among the member states. Economic integration is desired for the large economic gains that the free movement of goods, services, factors of production and people entails. Monetary integration, which at the end stage means a single currency, is desired because it supports the deepening of eco- nomie integration by reducing the cost of economic transactions and mitigates the

currency risks of investing across borders. (However, relative to the size of the gains that countries can obtain through economic integration through the common market stage, the estimated gains of monetary integration are modest.) Political integration- which means having centralized, or at least a highly coordinated set o f domestic and foreign policies, is desired for two sets of reasons. Unified or coordinated domestic policies are supposed to give individuals and organizations a “ level playing field” in

Im Dokument Übergang zur Marktwirtschaft am Ende des 20. Jahrhunderts (Seite 85-101)