What New Europe?

It's surprising that a man so widely despised there could have done so much to frame the way the world thinks about Europe. In Germany last week, U.S. Secretary of Defense Donald Rumsfeld repeated his now famous juxtaposition of the "Old Europe," which balked at war in Iraq, versus the "New Europe," which backed the good fight against Saddam, terror and all that. Since Rumsfeld first drew this distinction back in January, the terms Old and New have been widely adopted to distinguish the founding Western states of the European Union, particularly Germany and France, from the 10 members now entering from the East, led by Poland, Hungary and the Czech Republic. More than a label, the "Old" and "New" symbolize a widespread sense that the newcomers are post-communist converts to American ideals, and will establish a 51st state in the heart of the Continent. One German wag warned, on the eve of Poland's vote last week to join the EU, that it would enter as America's "Trojan donkey."

The truth is that the Old Europe need not worry, because the New Europe doesn't really exist. True, at least seven of the incoming member governments publicly supported Washington's tough stand before the war, but only Poland sent troops, and in none of these states did the public support the war. The draft constitution to be discussed at the Eurosummit in Greece this week appears unlikely to produce a powerful European head of state, foreign minister or commander in chief, which means that the essence of Europe will remain its economic union: a vibrant free-trade zone and a common currency. And if there ever was a danger that the incoming members would push, perhaps in concert with Washington's allies in Britain, Spain and Italy, to somehow Anglicize or Americanize the economy of Europe, recent trends suggest the likelihood is small and fading. On the critical economic front, New Europe looks either increasingly like Old Europe, or uninspired to press change on the founders.

Far from being a one-dimensional band of pro-America free marketers, the accession countries are a diverse bunch with differing agendas. On key transatlantic trade disputes, like American tax subsidies for its exporters, or European hostility to genetically modified foods, they are as likely to vote with Old Europe as not. The Estonians are aggressive free traders, the Poles and Slovaks are protectionists. The Poles are likely to form a Weimar Triangle with France and Germany to maintain Europe's system of agricultural subsidies. Euro-skeptics like Czech President Vaclav Klaus are the exception rather than the rule. Most incoming members have overblown welfare programs, soaring budget deficits and aging populations (along with the resulting pension crises), just like Old Europe.

For a time, it did indeed look as if the New and Old were on course to collide over the future of European capitalism. Around the mid-1990s, the economies of the former Soviet satellite nations began growing fast, buoyed by Westerners who invested more than 100 billion euros in production facilities, mainly to take advantage of the cheap but well-educated labor pool. As Heather Grabbe, research director of the Centre for European Reform in London, points out in a recent paper, workers in Bratislava now assemble German cars and Hungarian researchers develop software for Finnish mobile-phone companies. Since fast- and slow-growing economies typically pursue opposite fiscal and monetary policies, the East seemed destined to clash with the West.

The most likely flash point was reform. In liberalizing key industries like telecom, energy and financial services, accession countries got way ahead of the EU on market reform, particularly in the sale of state companies to private owners. While the French still jealously protect their utilities, some Polish and Hungarian power companies are private. In Hungary and the Czech --Republic, foreigners own the majority of the banking sector, while Germans still refuse to privatize some regional banks. Countries like Slovakia have highly competitive corporate-tax rates. While many West European countries still promise pensioners a payout they can't possibly pay for, Poland has become a model for pension reform. In a recent scorecard of progress toward Europe's goal of creating the most competitive economy in the world, the Centre for European Reform ranked new entrants like Poland as "heroes" in many areas of reform, while France and Germany often fell in the "villain" column.

But as they enter Europe, many supposedly New Europeans are losing the impulse to change. For one, growth is slowing, due in large part to the stagnation of export markets in the West, particularly Germany, and is now running at just 1.2 percent in Poland, 2 percent in the Czech Republic and 3.1 percent in Hungary. And Eastern politicians, who often sold painful reform by saying it was a must for acceptance in the West, no longer have that stick. In Poland, for example, there's been no major structural reform in a decade. "The reason that Poland was able to make progress on the pension issue was that the government had no idea how unpopular it would be," says Janusz Reiter, head of the Warsaw-based Center for International Relations, and a former Polish ambassador to Germany. "Those sorts of changes couldn't have been made in the last two years."

Increasingly, the East mirrors the Western approach to reform: first, cause no pain. Public spending as a percentage of GDP remains high, averaging 42 percent for Central Europe and the Baltic states, similar to the levels in France and Germany and more than twice as high as in the United States. "Many accession countries are trying to support a Western European-style welfare state on an Eastern European budget," says Willem Buiter, chief economist at the European Bank for Reconstruction and Development.

Those New European politicians who do still dare to push change now pay for it. On Saturday the Czechs voted overwhelmingly in a referendum to join the EU, and they should feel right at home: job cuts have Czech unions calling for street protests, much like those that raged recently in Paris. In both the Czech Republic and Slovakia, students and teachers are complaining about cuts in state funding of universities. "The proposed creation of university fees is just as unpopular here as it is in the rest of Europe," says J. R. Centerfield, deputy head of the U.K. Mission to Slovakia.

The new members will increase Europe's --population by 20 percent and its total GNP by just 5 percent, and are scrambling to change themselves to fit into Europe, not the other way around. Newcomers must adopt EU rules in areas like taxes and competition, which makes it harder for them to offer special perks to multinationals. Now that wages are starting to rise, foreign investors are moving on to other regions. Philips recently announced it was shifting a production facility outside Budapest to China. Earlier, German conglomerate Mannesmann had done the same, putting 1,100 Hungarians out of work at a time of high unemployment throughout the region. In Poland, official unemployment stands at 18 percent, which won't make reform easier. "The accession countries have liberalized," says Grabbe. "But they still cling to social-democratic ideals."

If anything, Old and New Europe now seem to be encouraging one another's least productive tendencies. Already, the European Union is asking incoming members to digest its official 80,000-page book of regulations. If that doesn't sap their remaining will to reform, nothing will. In fact, many newcomers now seem interested mainly in getting their share of Europe's most wasteful practice, which devotes half the EU budget to support mostly unproductive farmers. "I suppose Polish farmers would like to take advantage of the system for a while," admits Pioter Kozerski, the minister for Economic Affairs at the Polish Embassy in London.

The incoming EU members are already split in as many ways as the old, between rich (Slovenia) and poor (Latvia), large (Poland) and small (Estonia). Their history of intramural conflict, and general lack of confidence on the global stage, make it unlikely that they will follow each other's lead. Even though new members will have enough votes in the EU Council of Ministers to stop any policy pushed by the coalitions of Old Europe, they can't be counted on to vote as a unified bloc. Estonians will fight agricultural subsidies against the wishes of the Poles, who will stand with the French on farms but the Brits on tax harmonization, and so on. "We'll be reform-minded, but not on all issues," says Kozerski. "We're a poorer country, and we need time to adjust." They'll be low profile but nobody's Trojan donkey, and no part of a pro-American "New Europe" that exists mainly in the minds of the pundits.