New EU States Shake Things Up

TO SOME IT seemed like an act of charity. The European Union experienced its biggest expansion ever in May, adding 10 new countries to bring the total number to 25. The newcomers were a motley lot - smallish, poorish countries like Slovakia, the Czech Republic, Lithuania and Cyprus.

New EU States Shake Things Up

TO SOME IT seemed like an act of charity. The European Union experienced its biggest expansion ever in May, adding 10 new countries to bring the total number to 25. The newcomers were a motley lot - smallish, poorish countries like Slovakia, the Czech Republic, Lithuania and Cyprus. Their average GDP per capita was only 40 per cent as great as the average wealth of the EU's 15 longstanding member states. Most were still recovering from half a century of bending under the yoke of Communist oppression. "It is a noble venture, to bring into the European prosperity club the orphans of Stalin's wretched Soviet empire," one commentator wrote some months before the enlargement.

But if Europe's new partner nations are supposed to be acting like charity cases, Robert Smolen didn't get the memo.

Smolen is the chairman of the European Union Affairs Committee in Poland's parliament. In his smashing navy business suit, carrying the shiny digital gadget he used to intercept phone calls and emails while we chatted in his Warsaw office, he didn't look like anybody's wretched orphan. And in soft-spoken but insistent tones, Smolen was soon arguing that it's the founding members of the European Union - not the newcomers - who need to catch up with the times. "If a business in France decides it's better to locate here, who should hinder them?" he asked with a thin smile.

Nicolas Sarkozy, France's finance minister and an early favourite in that country's 2007 presidential election, has been complaining bitterly that the newly arrived member states charge business taxes so low that France can't compete. He has a point: France's corporate tax rate is 34 per cent; Poland's is 19 per cent. You can hardly pick up a French newspaper these days without finding new dismay about "délocalisations" - factories closing in the West and moving eastward to profit from cheap labour and low taxes.

Too bad, Smolen said. "If they say we should raise our taxes, that's an absurd position. If they want to harmonize - as long as it means they cut their taxes - we won't protest."

Perhaps I should pause here to point out that Smolen is not some Thatcherite freak from Poland's extreme right wing. The party he represents in the Sejm, Poland's equivalent of our House of Commons, is the nominally centre-left Democratic Left Alliance. (Down the hall from Smolen I met a member of the main opposition party, the conservative Civic Platform, who cheerfully told me: "We need a complex tax reform. It will make the French and Germans even angrier - because we will cut taxes even more.")

For decades, one of the most persistent debates in the EU has pitted fans of the état-providence, the European welfare-state model of generous social benefits and ironclad job security financed by high taxes, against advocates of a more entrepreneurial and risk-prone business culture in which taxes are kept low, social programs offer less protection, and employers are likelier to hire workers because they are freer to fire them.

The big-government model's greatest admirers were in France and Germany. They tended to dismiss advocates of limited government as "liberal" - a word whose European meaning is almost the opposite of its North American meaning - or, worse yet, "Anglo-Saxon," a blanket term of derision aimed at the Brits, the Americans and anyone else with an unseemly fixation on profit.

For the longest time the social-democratic model reigned with little trouble. But lately it has come under severe challenge - and not just from the EU's poor but ambitious new eastern members. Thanks to changing demographics, sluggish economies and a highly competitive international environment, social-democratic Europe is facing criticism and reform from within.

That's why it's a bit passé to draw any geographic distinction between "Old Europe" and "New Europe," as Donald Rumsfeld, the U.S. defence secretary, did in 2003 before the U.S.-led invasion of Iraq, which France and Germany opposed but Poland and the Czech Republic supported. For one thing, even in Warsaw, many supporters of the Iraq war are starting to doubt the wisdom of that choice.

For another, skeptics of Europe's economic model are hardly limited to the East. Sarkozy's suggestion that EU member states be penalized if they set taxes too low was roundly derided - even in France. "We are not isolated," Smolen said. "Countries like the Netherlands, the U.K., Italy - they are strongly against such tax harmonization."

Advocates of a more business-friendly, competitive Europe - the new New Europe, if you will - are everywhere. Consider:

• In Germany, social-democratic Chancellor Gerhard Schröder has pushed through a set of economic reforms, called Agenda 2010. Schröder's minister of labour, Wolfgang Clement, says the reforms are designed to "lower subsidiary wage costs" - Germany's job-killing taxes on salaries - to "keep Germany attractive as a location for investment and at the same time reduce the depressingly high level of unemployment."

Successive waves of reform, designed to push back the age of retirement, implement user fees in hospitals and cut benefits for the long-term unemployed, sparked a summer-long series of Monday-night demonstrations in east Germany. But the demonstrations never really caught on in the country's more prosperous west and have begun to fizzle in the east - suggesting that voters buy the Schröder government's explanations and understand that, at any rate, Germany's centre-right opposition parties would probably implement the same policies.

• In Brussels, the incoming president of the European Commission, Portugal's Jose Manuel Barroso, is stacking the EU's executive branch with free-market liberals. The new trade commissioner will be Peter Mandelson, an architect of Tony Blair's "new Labour" revolution in Great Britain. The taxation and customs file goes to a woman from the low-tax nation of Latvia. Charlie McGreevy, the finance minister during Ireland's economic boom, will be in charge of the EU's immense internal market.

• For the longest time, Euroskepticism - the belief that the EU was a bureaucratic assault on national sovereignty - was a belief held almost uniquely by economic conservatives, led by the editorialists at Conrad Black's Daily Telegraph in London. But not surprisingly, given the small-government winds blowing across Europe, the new Euroskeptics are on the left.

In France, the No. 2 man in the Socialist party, former prime minister Laurent Fabius, has split the party into warring factions by announcing he will campaign for the No side in a referendum on the new EU constitution. Fabius says the constitution entrenches small-government philosophy and makes it impossible for France to protect against job raids by its poorer neighbours.

In Britain, Tony Blair's hopes of winning his own referendum on the EU constitution were rattled last month when the Trades Union Congress refused to endorse the constitution. Transport union boss Bob Crow echoed Fabius's argument, saying the new constitution would "institutionalize privatization and the neo-liberal economics that have helped wreck industries in Britain."

In some ways, what's most striking about the debate over the new New Europe is that some of the most caustic critiques of the old way have come from within. Shortly after Sarkozy and Fabius started complaining, from opposite ends of France's political spectrum, that France's "social model" was at risk, they were given a stern lecture in the pages of Le Monde by that august and rigorously non-partisan newspaper's economics editor, Eric Le Boucher.

"If the 'French social model' commands a consensus within our borders," Le Boucher wrote, "beyond them it meets with unanimous criticism, even sarcasm. 'Social' France is 10 per cent unemployment, especially among youth; a by-now-explosive inability to integrate immigrant populations; an obese and nearly impotent state living off record tax rates. There is hardly anyone but the French, prideful and none too lucid, who see a model that could tempt others in all of that."

In Warsaw, Piotr Nowina-Konopka has been watching the hubbub to the west with keen curiosity and no small measure of amusement. Nowina-Konopka spent most of the 1980s as an assistant to and spokesman for Solidarity leader Lech Walesa. In 1991 he helped found the Polish Robert Schuman Foundation, a pro-EU group named after the French bureaucrat who helped conceive the idea of European integration in the 1940s. He's as Europhilic as they come, but he can't hold back a chuckle at his neighbours' discomfiture. "What I would reproach the EU for was an excess of happiness due to long-lasting stabilization," he said. "It's never healthy to be too happy. And in this sense we" - the countries that joined the EU this year - "produced a sort of nervosity. Good for all of us."

It would be a serious mistake to overstate the influence the 10 new countries have had on European politics. After all, they really do have a long way to go before they match Western levels of affluence. Together the 10 new countries account for less than five per cent of European GDP.

During visits to Brussels and Berlin, European and German officials spoke to me about Poland mostly in tones of exasperation. The Poles bucked the EU line on the Iraq war. They bought American-built F-16 fighter planes instead of good European jets. With Spain, Poland blocked negotiations on the voting system in the new European constitution for months on end, unwilling to give up the extra voting power it would lose under a new system. One member of Germany's governing party privately expressed the hope that after spending a few years in Brussels, the Poles would become more "sophisticated" in their thinking.

Nowina-Konopka rather suspects that if anyone is going to be influencing anyone else, it will work in the opposite direction. As vice-rector of the College of Europe's Polish campus in Natolin, he has watched students from all over Europe study together. "I was watching how youngsters from Italy, the U.K., France started to be somehow ... contaminated ... by those from Poland, the Czech Republic, Lithuania, Bulgaria - who are like horses before the race! Just waiting for the starting signal! Of course, those youngsters from the Czech Republic, or from Moldova or from Romania, their parents are poor like hell. They inherit nothing. The only thing they have is their own brains, their own dynamic, their own will to win the world."

He paused. "Without drawing up any extravagant thesis, I think this will be the result of this enlargement. Sooner or later, it's like bringing a new firm that is much poorer into the consortium. Why do it? Either just close it, to kill off some competition - or you believe it will put some new yeast into an old company that is dying from happiness and from doing nothing."

If the most important date so far for the new New Europe was the adhesion of the 10 new member states in May, two other vital moments are already on the horizon. One is the ratification of the new European constitution, a brand new set of rules for governing this ungainly 25-member beast. Every one of the 25 member states must ratify the constitution. Several, including France, Poland and the U.K., have indicated they'll hold referendums so their populations, not their parliaments, can decide whether to ratify. In theory, a No vote in even one member state would kill the new constitution and provide the most serious setback yet to the EU's growth.

The other rendezvous is even more technical but may prove to be a sleeper. In 2000, ministers from the EU member states met in Lisbon and developed a strategy to make the EU the world's most dynamic and competitive economy by 2010. It will come as little surprise to readers of the business pages that Europe almost immediately began missing targets set by this "Lisbon strategy."

But some of the new New Europeans, including most of the Polish politicians I talked to, still see Lisbon as their best chance to push for reforms that will export the small-government model to the rest of Europe. Wlodzimierz Cimoszewicz, Poland's foreign minister, told me the mid-term report of the Lisbon strategy, due next spring, will be a harshly critical call for still more reform. "We have to think very seriously about the conditions we have to meet if we really want to transform our economy," he said.

It will be a fascinating spectacle: the Zegna-clad orphans of Stalin's wretched empire, PDAs in hand, PowerPoint presentations at the ready, challenging the sleepy members of the European prosperity club to share that prosperity by expanding it and giving it a hearty free-market push. "We come as young, hungry wolves that upset the harmony of the whole stable," Piotr Nowina-Konopka told me. He was smiling as he said it.

How They Stack up

There are large differences between the 15 older members and the 10 countries that joined the European Union earlier this year.

Old 15 New 10

Population (millions) 380 74

Life expectancy (years)

Women 82 78

Men 76 70

GDP ($billions) 13,600 660

GDP per capita ($) 36,000 8,900

SOURCE: EUROSTAT

Talking Turkey at the EU: Many still see the secular Islamic country as too foreign

IT'S NOT AS THOUGH the European Union hasn't added new members before - it started with six member states signing the Treaty of Rome in 1957 and has grown to 25, with Romania and Bulgaria set to join in 2007. In fact, there's a school of thought that says whenever the EU doesn't know what to do next, it gets bigger. But another candidate for membership is causing unprecedented controversy: Turkey. Only the Turkish issue gets to the heart of a question whose answer has now become delicate and divisive: what, precisely, is "Europe" for?

"Do we want the river of Islam to enter the riverbed of secularism?" Jean-Pierre Raffarin, the prime minister of France, said with uncharacteristic bluntness in an interview with the Wall Street Journal. Many in Europe see Turkey as irreconcilably foreign thanks to geography, religion, culture - and the fact that, with a population of nearly 70 million, more than France's, Turkey would simply be too big to assimilate.

It's a delicate question, which means it's divided Europe in unpredictable ways. Raffarin sounds skeptical, but his boss Jacques Chirac isn't: he favours Turkish membership, and has asked for a national referendum on the issue. A former French president, Valéry Giscard d'Estaing - whose opinion carries clout because he was in charge of producing the new European constitution - has said that Turkish membership would be "the end of the EU." Giscard has also warned darkly that Turkey's supporters are "the adversaries of the European Union."

Turkey's prime minister, Recep Tayyip Erdogan, can do little more than watch the debate and try to remove irritants in the way of his country's candidacy. Erdogan's party has Islamist roots, but he has bent over backwards to demonstrate that Turkey can fit into a secular Europe with Christian roots. One example of his - and Europe's - sensitivity came in September, when Turkey's parliament began considering penal-code reforms demanded by the EU. When Erdogan's party wanted to add a provision that would have outlawed adultery, the European Commission, the EU's executive branch, told Turkey such a ban would hurt the country's candidacy. The timing could not have been worse: the commission is to report on Oct. 6 on whether EU leaders should begin formal membership talks. Soon after European papers first reported the controversy, Erdogan was in Brussels asking for a chance to make things right. Turkey then passed the reforms - without the adultery ban.

Membership, if it ever comes, is still a decade away. But the debate between those who see Turkey's Islamic society as an obstacle, and those who see the country as a valuable bridge between Europe and the Middle East, is already heating up.

Saying "Ja" to User Fees: What Germany can teach us about sustainable health care

OVER DINNER in Ottawa a few months ago, a cabinet minister said it was like pulling teeth to get anything out of his department's bureaucrats about the way other countries are governed, unless the countries in question are the United States or Great Britain. It's a shame - although it will come as no surprise to anyone who's heard a debate about health care in Canada that assumes the only alternative is the U.S. system.

But a Canadian reporter travelling in Europe is often struck by the lessons we could learn if we paid attention. Germany's health care reform is a handy example. Here, it's useful to compare public pensions and health care. Germany could stand to learn from the way Canada runs its pension system. But we could learn a lot from the Germans about keeping health care sustainable.

Germany is going through a painful and politically unpopular pension reform caused by a simple problem: Germans depend too heavily on the government to provide for their retirement. This was not a big problem until Germany's population started aging and its unemployment rates went up.

Suddenly the public pension-insurance scheme was paying more benefits, but a smaller active population was paying into the system to fund it. This was driving premiums up. But since pension premiums are a hefty tax on salaries - 19.5 per cent in Germany, compared to only 9.9 per cent for Canada Pension Plan premium - hiking premiums would have made it even more expensive to hire employees, resulting in even worse unemployment.

So part of Germany's Agenda 2010 reform reduces pension benefits and starts paying them later, by raising the retirement age for some recipients. But this doesn't mean Germany's government is trying to cast elderly Germans into the street or work them until they drop. Instead, Germans are being encouraged to save more of their own money for retirement - and to rely more heavily on pension funds run by their employers as well as the state pension scheme.

Well. Any Canadian (or at least any Canadian accountant) would recognize the German "reform" as a version of the three-pillar pension scheme - a blend of public pensions, employer pensions and private savings - that has characterized the Canadian system for decades.

Now here's the neat part. If the cost of Canada's health-care system is hard for governments to sustain, it's because we treat health care the way the Germans used to treat pensions: as something only the government should be providing. Germans use a complex mix of public and private for-profit health insurance. You could call it "American-style two-tier health care," but Germans would just stare at you blankly because they see nothing American-style about it.

Still, the cost of health care goes up no matter who pays for it. So the latest round of German health-care reform attacked that problem directly by working to reduce demand. How? By reminding Germans that health care is never free, even if you're not the one paying for it.

Now, Germans over 18 have to pay 10 euros the first time they visit a doctor in any three-month period. The second visit is free. Visits to other doctors, as long as the patient is referred by the first doctor, are free - although if a patient simply goes doctor-shopping to compare opinions, he has to pay 10 euros for each visit. And finally, patients must pay 10 per cent of the cost of prescription medication, up to a very modest ceiling of 10 euros.

These user fees caused doctors' visits to drop 10 per cent in the first quarter of 2004. The public health insurance system should be able to cut premiums and reduce debt, making the system healthier for patients who really do need to visit the doctor.

Of course, a Canadian government that introduces user fees for health care will be harshly punished by voters. Which means none will dare try it - until the cost of our health-care system keeps ballooning for another few years. By then, the German example will start looking very attractive to Canadian governments.

Maclean's October 11, 2004