Growth and Its Discontents

Central Europe has experienced a soaring economy in the last two decades. Yet the disaffection of many shows the limits of what economic growth alone can achieve.

Central Europe is thriving as never before in history. Any macroeconomic indicator will tell you that. While the measures are imperfect, the Prague and Bratislava regions appear among the top ten richest in the EU by purchasing power per capita. While the eurozone struggles to reach growth over 1% per annum, in Central Europe 3% has become the norm.

But people are not happy. This discontent is transformed into growing number of votes going to populist, nationalist and extremist parties, which sometimes even play with the idea of leaving the EU altogether – gambling with the foundations of growth of the region.

It’s a paradox – which we must nonetheless try our best to explain.

The answer lies in a couple of layers hidden under the statistics. As always, the devil is in the details.

First, seeming prosperity is not shared by all, and in most cases not even by a majority of the people. And second, the easy comparison with the neighbors just across the (now open) border can breed discontent. Older people remember 30-year old promises that they would catch up quickly with the West in economic terms. For them, that means mostly Germany and, to a lesser extent, Austria.

When they go shopping in German supermarkets across the border, they find the same or similar products as in their countries, but cheaper and of better quality in the larger, more experienced consumer markets in the West. Many work there too, so they see salaries that are still the multiples of what they can earn at home. And they see the lower quality of public services and often education back home. So, the simple everyday comparison acts as a powerful anger generator, creating a feeling of second-class EU citizenship.

In the 1990s, countries like Poland, Czechia and Slovakia became the source countries of cheap labor for German and Austrian companies. In the early years of transformation, that was probably the only way to move forward in the transition from planned economies to a free market model.

But now, 30 years on, with a new generation who grew up in freedom and relative prosperity, not only older people but also many of the young see themselves stuck in a kind of vicious circle without the long-term prospects they now expect: They are the best-educated generation ever, but they cannot get salaried employment, save money or get a mortgage to buy a house.

All this played a crucial role in Poland in 2015, when conservative nationalists from the Law and Justice party (PiS) attracted more young voters than any other, skillfully exploiting these grievances on the social networks where they live and where other – liberal and pro-European – parties failed.

People simply feel that they do not have a share in the success that politicians praise on television.

Bailiffs at the door

Then there are also idiosyncratic reasons country to country, like the foreclosure phenomenon in the Czech Republic. Here, a bad law, the greed of special interests and the inability of justice to respond, there are an estimated 800,000 to 900,000 people – a tenth of the population of 10 million – who are buried in debt and live under threat of the bailiffs coming to repossess property in default. In Czechia, people can easily fall in this trap by borrowing from nonbanking lenders luring them with exotic holidays or pretty presents for Christmas, or paying off the fine for fare-dodging on public transport.

Financial illiteracy combined with the prevailing official narrative of success has created a mass of indebted people who live on the edge without any hope for change. In the last round of elections, the greatest gains for nationalists and populists were in regions with the highest number of people living in fear of the bailiffs.

So, economic growth is one thing, but the lack of functioning judiciary (to enforce contracts) and regulatory institutions that work, combined with low salaries and few prospects for improvement is something else. So far, these are issues politicians have been unable to address. Instead, they offer the politics of identity, praising a “glorious past” instead of building toward a prosperous future.

Central Europe, then, stepped into the trap of old-fashioned liberalism, i.e. the idea that economic growth alone will automatically improve every aspect of life, including democratic standards, and that prosperity will be shared easily by all. That dream has vanished with the crisis of 2008-2009, when institutions and politicians failed to address the real causes of the crisis and left people alone to fend for themselves.

Growth itself cannot bring prosperity and a functioning liberal democracy, that is the lesson of Central Europe of the last 30 years. Unfortunately.

Martin Ehl
Chief International Editor of the Czech economic daily Hospodářské noviny and a syndicated columnist writing on Central European issues.

 

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