Surveys, News, Events

Russia is on Pace to Outgrow Every European Union Economy in 2012


By Mark Adomanis

That’s probably not what The Economist intended to say in a rather boring and predictable story touting Poland’s economic performance (has The Economist ever refrained from calling Poland a “star performer?”) but it’s what they said nonetheless:

    In economics, Poles and Germans get along as never before. Germany benefits from low production costs on its doorstep. Poland gains from German demand and investment. It boasts the fastest growth in the EU: this year, GDP should rise by at least 2.7%.

    Yet even in Poland growth is slowing. The euro crisis has hit exports, two-thirds of which go to the euro zone. A weakening euro does not help. Poland’s unemployment is about 13%, around a five-year high. In April the purchasing managers’ index fell. Yet Poles continue to spend freely. Inflation was 4% in April, above the central bank upper limit of 3.5%. In response, the central bank has raised its benchmark interest rate to 4.75%, having held it at 4.5% for ten months. Foreign investors remain keen. Poland (like the Czech Republic) pays less for ten-year government bonds than Italy and Spain (see chart). Jacek Rostowski, the finance minister, hopes to cut the budget deficit to 2.9% of GDP this year; the public debt may fall to 55% of GDP.

In contrast to the EU’s “star performer,” Russia is on pace to grow faster (3.4% according to the finance ministry, 4% according to the IMF), with a much lower unemployment rate (6.6% for 2011 as a whole and 6.5% for the 1st quarter of 2012), a much smaller budget deficit (as little as 0.1%, as much as 1.5%), and a much smaller overall level of public indebtedness (around 7-8%). To be sure there are numerous areas where Poland outperforms Russia, notably in inflation, and it is arguable that, with a much more balanced economic model, Poland will more ably weather the shockwaves from the slow-motion debt crisis that is currently eating at the EU’s very foundation, and that Russia’s over-dependence on natural resources will once again send it into a tailspin as happened in 2008-09.

However, as the Economist itself noted, Poland is currently the European Union’s fastest growing economy, it’s best performer. To even be having an argument over whether Russia is outperforming every single EU country is remarkable. If, a decade ago, I stood up and said “ten years from now Russia will not only be significantly less democratic than it is today, it will also be growing faster than every single country in the European Union” I’d have been dragged off to a mad-house. Putin’s cruel autocracy would have run out of steam by then, people would say, and the countries of “new Europe” would be confidently marching into the economic future. Oops.

The recent divergence in economic trajectories is not, I repeat not, a testament to the Kremlin’s stellar economic management. As I think I’ve been very consistent in noting Russia remains poor and underdeveloped enough that it ought to be able to easily grow in the 5-6% range for many years if the appropriate policies are implemented. No, the difference in performance is due almost entirely to the unbelievably, epically awful performance of the EU, particularly those post-Communist countries to which Russia is most comparable. The Czech Republic, Romania, and Hungary are all once again in recession, while Bulgaria stagnated in the first quarter of 2012 and only grew by 0.5% year over year. Expectations are that things will only worsen as the contraction in the region started before the most recent iteration of the Euro crisis started to have much of an effect: forecasts for the next few years are either for stagnation or growth in the 1-2% range. For post-Communist EU countries, then, the forecast is slow growth, austerity, and economic misery as far as the eye can see.

As should be clear from the brief outline I’ve given above, this is an extraordinarily dangerous cocktail. Periods of prolonged economic crisis and elevated unemployment have a way of bringing out the worst in people and political systems, and there has already been a noteworthy surge of support for extremist political parties across the region and a rapid erosion of political liberalism in Hungary. Continued economic crisis (i.e. the consensus forecast) will only further empower political radicals who have a ready-made narrative than can explain their country’s problems, something that sets them apart from the “serious” politicians who ramble on about the need for “cooperation” and “solidarity” with the EU. Indeed to the extent that political establishments in the region continue to support economic policies that produce widespread misery, they will become increasingly discredited. This, thankfully, won’t happen as rapidly as it did in Greece, since Central Europe is thankfully not in a full-on economic and social collapse, but it will continue to happen until there is a renewal of broad-based economic growth.

But from a very strategic level, the EU’s continued economic paralysis could give rise to something far more dangerous than simple political radicalization: the de-legitimization of the Western model as a whole. For countries like Hungary, Bulgaria, and Romania, joining the EU was not supposed to be like joining a monastery, an impoverished, austere, and sober existence whose benefits were purely moral in nature. Joining the EU was supposed to have a very concrete, and very positive, impact on a country’s economic fundamentals. Adopting the Western playbook was not simply the right thing to do, it was a way of ensuring a country’s stable, long term economic development: becoming more like Germany, France, the Netherlands, and Italy politically was supposed to eventually make you more like them economically. That model has totally broken down. Germany has been consistently outperforming most of the post-Communist countries despite already being dramatically wealthier than them. Rather than “converging” with the developed core, there is a real danger that several post-Communist countries will lapse into a kind of permanent economic backwardness (indeed even Russia is pulling further and further ahead of countries like Bulgaria and Romania, countries that were wealthier than it as recently as 1998).

The EU’s economic failure could potentially be an even more dangerous lesson for aspiring member countries like Ukraine, Moldova, and Serbia, and even a country like Russia who should at least aspire to some sort of membership in or partnership with the EU. In the very recent past, one could very easily and straightforwardly make the case that joining the EU was a no-brainer. There was no real downside: when your country joined the EU, you gained freedom of movement throughout Europe, you solidified your country’s democratic and liberal credentials, you got a big pot of “structural adjustment” funds to play around with, and your economy got a sharp boost to boot. Yes you had to bother with that meddlesome acquis communautaire, but this was worth doing for all the benefits that it produced.

One can still make the case that joining the EU is beneficial  but it’s obviously not open-and-shut. Most troublingly of all, the aura of competence which used to surround European institutions has been shattered, perhaps irrevocably.

Source: Forbes

Post-Crisis World Institute