Report Card on Unity; the New European Union Celebrates the First Anniversary of Enlargement. How's It Doing?

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Byline: William Underhill (With Eric Pape in Paris and Wojciech Rogacin in Warsaw)

Teresa Wawer is happy as a pig in warm... well, let's just say she's that rare creature--a happy farmer. The market for her pork is booming. During the past year she's plunged almost 90,000 euros into new equipment for her 130-hectare farm in eastern Poland. "The European Union has made our dreams come true," she says. Not only is Brussels paying for much of her new farm gear, but it's also removed trade barriers to Poland's richer Western neighbors. Exports have surged by 30 percent or more, subsidies are flowing in and farm incomes are rising fast--up 70 percent, in some cases, over the past year. At the same time, EU funds are financing new highways to carry thousands of newly imported cars from the West. The only loser: the nationalist Self-Defense Party, a diehard enemy of the EU, has seen its support in the countryside plummet as prosperity climbs.

So what went right? When the EU took in eight new members from Central and Eastern Europe in May 2004, populist pols in Poland and elsewhere lined up to warn of impending catastrophe. Produce from the West would swamp local markets. Prices would skyrocket. Powerful neighbors would twist the newcomers' arms in Brussels. None of that happened. Says Vladimir Bilcik of the Slovak Foreign Policy Association in Bratislava: "We have seen none of the big scary negatives that people were talking about on the eve of membership." Instead, many of Eastern Europe's farmers and manufacturers are experiencing an unforeseen prosperity. Tourists and foreign investors are flocking to the region. The World Bank forecasts growth of 4.5 percent, outpacing most Western members'. If not all voters are enthralled by the Brussels club (remember the dismal turnout at last summer's European Parliament elections), neither are they disappointed.

If only Old Europe were as happy. The year's real surprises have come west of the Polish frontier. As millions prepare to vote on the EU's proposed constitution, the fallout of enlargement is changing attitudes toward the entire European project. Contrary to expectations, it's forcing sclerotic Old Europe to adapt, not the newcomers. Westerners increasingly fear an influx of low-wage, energetic workers from the East. More positively, they see Eastern Europe's fast-growing economies and realize they will need to undertake potentially painful reforms in order to compete. As with Slovakia, those measures typically include tax cuts, tighter welfare budgets and more relaxed labor-market regulations. Thus the old teacher-pupil roles are reversed, says Simeon Djankov at the World Bank in Washington, D.C. "Enlargement has helped reform in the old East bloc, but what's really important is the movement it has started in the big countries of the West."

To be sure, the French and Germans are proving reluctant students. Their first reaction to the threat from the East was bluster. Berlin and Paris spoke darkly of punishing the Easterners for luring away investors with generous tax regimes and easier labor laws. But a new sense of reality has kicked in. In the past year, Austria and Germany have trimmed corporate tax rates to help keep business at home. Germany has made stop-start progress toward overhauling its labor laws, and France has eased its rules on the 35-hour workweek.

All this represents a victory for one view of Europe's future, championed in particular by the British. Denis MacShane, Britain's minister for Europe, suggests that the EU's new members "have learned the lesson of European success" while avoiding its failures: excessive regulation, high taxation and protectionism. …