Accession states defy pessimists

Former communist countries that joined the EU last May are booming, with farm incomes up 50 per cent and inward investment racing ahead, writes Daniel McLaughlinin Warsaw

Their best workers are not fleeing west, their economies are growing steadily and even "old Europe" is sniffing around for tips on economic reform: it has been a good year for the former communist states that joined the European Union last May.

A recent United Nations report predicted that the gross domestic product of western Europe was likely grow by just over 2 per cent this year, while the economies of the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, the Slovak Republic (Slovakia) and Slovenia are set to expand by an average of 4.5 per cent.

Warnings that high-quality Western imports would flood eastern markets and crush local producers have proved unfounded: in fact, exports from the new members have risen 20 per cent, boosted by the end of pre-accession controls on farm trade.

It is the region's farmers who seem to have undergone the most spectacular EU epiphany.

Most of their pessimism about the benefits of membership, especially in Poland, has evaporated as EU farm subsidies have been distributed with far less hassle than expected.

In Poland alone, 1.4 million farmers have filled in the paperwork to receive direct aid from Brussels, and have enjoyed a surge in foreign demand for their goods. The upshot, according to EU estimates, is a rise in earnings among east European farmers of some 50 per cent.

Predictions of an exodus of jobseekers to the west have also been disproved over the last 12 months. Tens of thousands have left home, but their new "host" countries have absorbed them, and talented young people see less reason to look abroad now that many major foreign firms are moving east.

In Poland, for example, where unemployment is still high, foreign direct investment rose to $7 billion (€5.4 billion) in 2004 from $4 billion the year before, and is expected to hit $10 billion over the course of 2005.

Neighbouring Slovakia has also seen an influx of foreign cash, and is now close to winning a €500 million investment from South Korean tyre-maker Hankook to build its first European plant in the Levice region, where some 1,600 jobs could be created.

Hungary and Poland are also competing for the project, but Slovakia already has a history of winning such battles: Volkswagen, Peugeot-Citroen and Hyundai- Kia already build cars there, a trend that is set to make Slovakia the largest per capita car manufacturer in the world by 2007.

Slovakia benefited from beating its closest neighbours to the adoption of a flat tax rate for personal and corporate income and VAT.

The simplicity of the system, and Slovakia's low land and labour costs and well-educated workforce, drew such a surge of foreign investment that the country was dubbed the "Tatra Tiger", after one of its mountain ranges.

Poland's government plans to introduce an 18 per cent flat rate by 2008, and Hungary's main opposition party also advocates such a move.

Romania, which wants to join the EU in 2007, already has one, set at 16 per cent compared to Slovakia's 19 per cent.

Even long-term EU aspirants like Serbia and Ukraine have gone over to the system, and Russia experienced an influx of previously unpaid taxes when it simplified its tax code and introduced a 13 per cent flat rate in 2001.

"The flat tax, in countries I looked at, led to an increase in revenues, so it is good for the budget," said Katinka Barysch of the Centre for European Reform in London.

"You see a decrease in tax evasion, administrative costs go down and it will put pressure on the west European countries to make their systems easier."

The flat tax revolution began in the Baltic states where, between 1994 and 1995, Estonia, Latvia and Lithuania rolled out the system. Their economies have been among the continent's fastest growing for most of a decade now.

The Baltic nations also received praise, along with the other new members, for the speed at which they have adopted more than 1,500 directives relating to the single market. Lithuania was top of the class, having implemented all but 1 per cent of EU laws.

Not everything is rosy, of course: Poland's 19 per cent unemployment is proving hard to budge and the country's government is weak, like that of the Czech Republic, after battling relentless sleaze allegations.

In the Baltic states, governments fall so frequently and usually with so little trauma that people have almost stopped noticing.

But as France stares into the abyss of a "Non" to the European constitution, and Germany agonises over its economy, life seems to be looking up in "new Europe".

"There were numerous fears before enlargement took place, that the union would go bankrupt, decision-making would end up in paralysis and there would be a massive inflow of workers," an upbeat EU enlargement commissioner Olli Rehn said this week.

"In fact... after the first year, none of these fears has materialised and instead the fifth round of enlargement has been an overall success. It has extended the zone of peace, stability, democracy and prosperity."