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2 February 2018

The state of convergence in the European Union 14 years after enlargement

Martin Myant

The ETUI marked the retirement of its Chief Economist for the past five years, Martin Myant, with a well-attended conference focusing on wage convergence in the central and eastern European (CEE) countries, which took place on 25 January at the European Economic and Social Committee in Brussels. Maria Jepsen, Director of the Research Department at the ETUI, praised Martin in her opening speech for his long-standing work on convergence and transition that widened and deepened the research agenda of the ETUI in this area, but also for the work he carried out on broader issues such as trade agreements, employment protection legislation, and the labour market in general.

Contrary to popular belief that enlargement has brought about convergence in economies and wages, ETUI research has shown that the evidence is not all that straightforward. Martin Myant explained this by presenting his recently published working paper, ‘Why are wages still lower in eastern and central Europe?’. According to him, nominal wages in this part of Europe are lower than the productivity level due to the business strategy of the multinationals (MNCs) operating in the region. Raising wages may cause MNCs to displace their activities to other countries with lower wages. In his view, it is crucial for CEE countries to focus more on research and development, innovation, and trying to attract a more qualified workforce. Only with a combination of different policies will convergence possibly start to happen.

Jan Drahokoupil, Senior Researcher at the ETUI, supported the first presentation with his findings from a working paper that he and Agnieszka Piasna published in 2017. According to these findings, wage gaps between high-wage and low-wage countries become bigger once one takes into account worker, work and workplace differences such as lower costs of living, skills and productivity. Magdolna Sass from the Hungarian Academy of Sciences emphasised that the ETUI is doing very important, even ‘avant-garde’, research that highlights the issues which contribute to the gaps between East and West. She added that some new developments, such as increased economic nationalism and new technological developments, could also have a negative impact on the position of CEE countries.

In the roundtable discussion that followed, Josef Středula, President of the Czech-Moravian Confederation of Trade Unions, said that trade unions in central and eastern Europe are in a very dangerous situation because of the huge popular discontent with the socio-economic situation 14 years after enlargement. While the productivity level is at around 70% of the EU average, wages are only 30% of the average EU wage. This has led to various conflicts, a recent one being on the Posted Workers Directive. “Social dumping is dangerous, but not the fault of eastern Europe,” Středula said. “It is not eastern Europe that wants lower wages.”  

Katja Lehto-Komulainen, ETUC Deputy General Secretary, talked about the efforts of the ETUC to tackle the problems mentioned in the preceding presentations. She said that the ETUC is actively involved on different fronts, such as the ‘Pay Rise’ campaign, the European Semester, the European Pillar of Social Rights, and in the fight against social dumping.

Jens Holscher from Bournemouth University argued that the example of East and West Germany is very telling. Even though billions have been invested in East Germany, convergence has been very disappointing. Informal and formal institutions and migration are important factors which have been underestimated, but must now be taken into account. He also reminded the audience that progressive economists and trade unions have argued for an increase in wages in Germany, in order to counterbalance the export surplus the country has. The problem is that, although sound from a macroeconomic perspective, such an increase would result in an even wider wage gap.

Jože Mencinger, a former Slovenian government minister and currently Professor Emeritus at the University of Ljubljana, expressed his pessimism about the future, declaring that some “countries were condemned to be left behind, at least for the coming years”. He said that the price for convergence has been very high, especially for the neo-capitalist countries such as Bulgaria, Romania and the Baltic states: they have lost a huge portion of their population (particularly highly skilled people), foreign capital owns a great proportion of the national wealth, and there is very high inequality. According to him, one of the biggest problems is the lack of research activity and innovation in the CEE countries, with the exception of Slovenia.  

By means of conclusion, Bernard Chavance, Professor Emeritus at Paris Diderot University, reminded the audience that the very concept of “convergence” comes from the mainstream economics relying on GDP as the main measure of growth which, as we already know, has many shortcomings. Concerning foreign investment, he recalled the words of the British economist Joan Robinson who said that "the only thing worse than being exploited is not being exploited." There are possibilities to break with the kind of situation the CEE countries find themselves in, China being a leading example. Although it has also been overwhelmed by foreign direct investment, China has managed to transition from a very low-wage economy to a growth model based on innovation.

You can download the presentations from the event here

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