e-Estonia and the new Europe

Remarks by Mr Toomas Hendrik Ilves, Minister of Foreign Affairs of Estonia at the London School of Economics, 25 October 2000, London


I purposefully chose this somewhat odd title for my talk not because I wanted to talk up the latest Nordic start-up, which does indeed happen to be Estonia. Rather it was to take a somewhat iconoclastic approach to the issues facing one, but indeed also many countries of the post-communist space currently trying to integrate into the Europe that fifty years of foreign domination kept them out of. Today, the United States is the indisputable leader in the new economy. Because of this, the EU this year launched the E-Europe programme, for it was widely recognised that Europe was indeed falling behind. But Europe – in or outside the EU – is not that unsuccessful, certain countries do compete.

If we look at internet penetration then Estonia is among the leading countries in Europe. In order, are the Nordic countries, Netherlands, Austria, Switzerland, Belgium, Ireland, and the U.K. Neck and neck with the U.K. is… Estonia, a country still called pejoratively a “former soviet republic”, where 35 percent of the population is online, 20 percent own PC-s, where a quarter of the population banks on the internet and where 85% of bank transactions are carried out on the internet. I am not going to bore you with statistics, or will just a little bit. But the thrust of my talk is that with the emergence of new technologies and the new economy, the iconic vision of a backward, corrupt Eastern Europe, dismal and grey requires iconoclasm.

Rather than simply focus on one’s own country – what else do you expect from a foreign minister – I think it useful to instead look at my country, Estonia, more as an example of a larger issue facing what once was called and today still remains “Western Europe”. I chose e-Estonia as a title simply because in the most dynamic area of economic growth, Estonia far out-strips Western Europe. At the same time, preconceptions about Eastern Europe remain, to the detriment of both. An executive summary of what I plan to talk about today would read as follows:

A number of countries of the "post-communist space", very much like some of the post-WWII countries of Western Europe, have pursued far more dynamic reform and transformation policies than is generally realised. Past pre-conceptions that form views of present day “Eastern Europe” will in the future put those who fail to understand this at the same political disadvantage as companies that already today have voluntarily opted for competitive disadvantage by ignoring what is actually taking place.

That’s the summary, here’s the talk:

1989-1997

I have long maintained that Eastern and Western Europe operate on different clocks, a difference that comes out of our diametrically different experiences with change and decisive political actions. The post WWII experience of Western Europe can be characterised by unprecedented political and economic success that derives from slow, incremental change. Indeed, it has become almost axiomatic that by discussing everything one can avoid the unpredictability and chaos of the 20s, 30s and 40s.

A corollary implicit in Western European approaches to change is that instability and rapid changes must be avoided at all costs. This approach has indeed been successful, especially if we look at how, out of the ruins of the Second World War, Western Europe has turned into the economic and political powerhouse it is today.

In the Post-Communist World, however, the experience with time is the opposite. Slow, incremental change has always been equated with stagnation.

What liberated the Czechs, Hungarians, East Germans, not to mention Estonians, were rapid, decisive actions. This in turn, at least in the Estonian case, created the mind-set for the ensuing reform or transition period of post-liberation. Spurred by success in re-establishing independence, Estonia’s post-communist governments stepped eyes wide shut into radical and resolute reforms. A case in point is currency reform. The IMF warned us in 1992 not to step out of the ruble-zone, not to attempt a currency board.

Within half a year of Estonia’s astoundingly successful currency reform the IMF was advising everyone to adopt a currency board: so far Latvia, Lithuania and most recently Bulgaria have copied the Estonian example, with considerable success. So too with privatisation. Estonia opted for the less popular but far more radical route of straightforward privatisation rather than the politically easier voucher privatisation. Today, Estonia has one of the few successful privatization histories in the post-communist space. Estonia eliminated all tariffs, constitutionally mandated a balanced budget, established the first flat-rate income tax in Europe and eliminated the corporate income tax. This year we will have a minimum of 7.5 percent growth. The lesson to be learned is the following: countries that chose the tougher path are doing well, countries that chose a less dramatic reform course are the ones who did not get invited to the first round of EU negotiations.

That was then but where are we now?

Just yesterday I was visited by a senior Western diplomat who eight years ago served briefly as charge d’affaires in Estonia.

Having heard that Estonia now ranks as number six in all of Europe in Internet penetration, he chuckled that people still ask him if he packs a sleeping bag when he comes to Tallinn. 35% of Estonians regularly use the internet today. In a survey of government use of the internet, Estonia ranked number one in the world. 90% of public sector employees use personal computers in their daily work and 20 % of the population owns a personal computer (this in what Western Europeans consider a poor East European country). All Estonian schools are online. We have the highest percentage among candidate countries in percentage of the budget devoted to education.

What do these numbers mean? In the European context, Estonia is at the same level as the U.K. Along with the UK, Estonia is a in the top five or six European countries in for example mobile phone and computer use. Among other indicators in the transparency international corruption index, Estonia has consistently, from year to year, ranked as the least corrupt country in Eastern Europe. No mean feat. But, more importantly, as a country less corrupt than a number of EU member states.

All of this should give pause to West Europeans still living in the decade old, comfortably smug but misguided notion of Eastern Europeans as some kind of Cafavy-ian Barbarians at the gate. We may be poorer, but in those areas that currently rank as measures of advancement, Estonia has outpaced two thirds of the EU.

What does this mean in terms of investment and the business climate? This year Estonia overtook Hungary as the country with the largest per capital FDI in Eastern Europe. Estonia ranks no 4 in the world in the Emerging Markets Access Index, after Singapore, Chile and Hong Kong, in openness to investors. The Finns and Swedes have certainly understood this, as have, I am pleased to say, U.K. investors. Our largest exports today are Ericsson and Nokia mobile phones.

At the same time, I am proud to say, Estonia has, under the current government adopted a fully Scandinavian social welfare programme. The structure of our social welfare system as well as its funding, closely follows the pattern set by Finland, Sweden and Norway.

In this regard, I can allow myself as a social democrat to say we have implemented the New Labour programme in Eastern Europe having created a proven business and investor-friendly environment concomitantly with a strong social-welfare component.

So we are faced with a paradox: clearly one of the most rapidly developing countries in the world, a country obviously at the forefront of innovative change, remains, like its fellow leaders Hungary and Slovenia, in the eyes much of the EU merely another Eastern European country threatening to drain the EU of its resources.

Ladies and Gentlemen:

Now when I talked about the differences between Eastern and Western chronometries, I spoke of the rapidity of change and decisive actions in countries such as Estonia. But where is Western Europe? Where are we in the process designed to overcome the old barriers, including the barrier of a static vision of the grey and woolly East?

On the surface, everything seems to be proceeding according to plan. Sufficient political support also seems to exist. No matter whom I speak to about enlargement, the rhetoric is always positive: EU enlargement is a priority, rapid enlargement is necessary, and so on. All of these political statements in support of enlargement are most welcome.

Yet the credibility of the enlargement process cannot be sustained on positive political rhetoric for very much longer. In recent months, an increasing number of signals have appeared suggesting that a slowdown in the enlargement process is imminent. The increase in mixed and confusing signals is in direct correlation with the developments in the accession process. The closer we get to discussions on serious issues such as transition periods, the more we are met with opposition to rapid enlargement.

While all member states have accepted that enlargement is inevitable, it seems that there are still a number who hope to postpone it for as long as possible. The date of accession depends mostly on the candidate countries. It depends on our ability to take on board the acquis. More importantly, it depends on our ability to implement it. Yet enlargement is not entirely in our hands.

We can delay our accession to the EU by failing to meet the objective criteria for membership. Enlargement can, however, also be delayed through subjective means. The so-called ‘big bang’ approach to enlargement - one of the many enlargement scenarios being thrown around – is one of the ways that those who are not keen on enlargement hope to preserve the status quo for as long as possible.

Clearly some new impetus is needed. As Prime Minister Tony Blair aptly stated in Warsaw at the beginning of this month: ‘supporting enlargement in principle but delaying in practice is no longer good enough.’ We couldn’t agree more. We need to move on.

I am pleased that policy makers in Great Britain have understood this and have moved rapidly to place the UK on the vanguard of the movement to integrate Central and Eastern Europe into the new Europe. This is not the first time that the UK has acted decisively. In 1998, as the EU presidency, the UK demonstrated its commitment to enlargement by launching the accession negotiations. In recent months, London has sent strong, clear and positive messages on enlargement placing itself yet again in the vanguard of enlargement.

More importantly, the UK is following up its strong political rhetoric with practical policies and initiatives that aim to bring forward the accession negotiations and enlargement.

But that is the UK. If you follow the broader discussion in the EU, read between the lines of what some European politicians say (East Europeans for understandable reasons have a hypertrophied literary scholars ability to read between the lines), a different picture emerges. In many places, enlargement is not at all popular.

Enlargement is endangered by a series of arguments and attitudes towards the future members, of which the more prominent are:

1. We will be inundated by cheap foreign labour,

2. CAP will fail,

3. and related to this the general argument about the costs of enlargement,

4. We have to first reform ourselves, and only then take in new members,

5. Enlargement based on national interests of particular member states, not on the performance of candidates,

6. Simple prejudice.

Let us review these arguments.

Cheap labour. Europe is entering a labour-shortage crisis. Germany wants 20,000 hi-tech immigrants from Eastern Europe. Denmark wants 4000 from the Baltic countries. One cannot compete in the new economy without more trained specialists, so the best way to do it, is to have taxpayers in countries like Estonia pay for the education of IT specialists for the benefit of the EU countries. But the rest of those wogs, god forbid, that they might come and work here.

CAP. Here we have an interesting argument: CAP must be preserved in its current form to maintain rural life in the Union. It is too expensive to spend such money, however, on new members. What do we deduce from this? Rural life in the EU is worth preserving, in the case of Eastern Europe, it is not.

Costs of enlargement. This argument is especially fun because my response will immediately raise all sorts of anti-American hackles. Right now the EU spends on the candidate countries 1 percent of its budget.

That is 1 percent of the 1.27 percent of GDP that forms the EU budget, in other words about 1% of 1%, or .01 % of EU GDP. This is a formidable sum. But let us compare it to the amount paid by the U.S. in the Marshall Plan, that allowed the original members to get their feet on the ground and pen in hand in order to sign the Treaty of Rome. The U.S. opted to send to the countries of Western Europe 2 % of U.S. GDP and opened up access to US markets for 10 years. Compare that with .01% and restricted access to EU markets for candidates. One need not mention, that the U.S. did not view Europe as candidates for statehood in the U.S.

Actually, the U.S. did not put that much money on the erstwhile basketcase economies of Western Europe out of the simple goodness of its heart. The U.S. created for itself what to this day is its largest foreign market. A high purchasing-power populace with an appetite for U.S. goods. Clearly, after the Seward purchase of Alaska, the Marshall Plan was one of the best investments the U.S. made. But in Western Europe, a similar self-interested awareness in the trade potential in its own backyard is absent (with certain exceptions such as Finland and Sweden, who have experienced very large growth in exports to countries like my own).

We must reform ourselves before we enlarge. Allow me to set aside the somewhat prejudicial implications of this, à la, let’s make the Union to our liking before the barbarians are let in. The major intellectual flaw here is that the EU is trying to set up a system without new member participation for a structure that will include those same new members. By doing that, what does EU think of the capability of its future members to make reasoned decisions? One does wonder. As a synecdoche I would bring the example of German re-unification. Could we for example imagine the Kohl government saying, “yes, of course we must bring East Germany in, but first we have to revise the German constitution to ensure Germany is capable of handling decision-making when we have the new Länder as part of Germany?” Clearly some reforms are needed before enlargement but to set everything in stone before new members have a say does not seem to be rational.

Enlargement based on national interests of particular member states, not on the performance of candidates. Here the arguments are advanced by specific countries. Country X demands waiting until candidate Z is ready, member-state Q will not allow enlargement to proceed until country Y is admitted. Publicly, enlargement is based on performance, in reality, however, enlargement is a matter of EU interests.

But if enlargement is held hostage to the national interests of individual member-states and is delayed for this reason, or standards are artificially lowered for some, or for purely political reasons, raised for others, the EU will be programming in new problems. In the candidate countries best prepared to join, those governments courageous and bold enough to push through the most decisive and frequently most unpopular reforms will be penalised for their decisiveness. At the same time politically motivated rather than performance based enlargement will reward those governments that have been most recalcitrant in undertaking the understandably difficult choices entailed by EU membership. I don’t think the Union will be better off by rewarding slowness and punishing reform. Within the Union, as we can see from the Single Market Action Plan, this principle is well understood. The same principle should apply to the candidates.

Simple prejudice. Here I don’t even want to complain. Let me simply cite a leading European politician, a former President of the European Parliament and incidentally, like me, a Social Democrat.

The forthcoming enlargement is not comparable to any previous one. This is true not only – and not primarily – because of the immense gulf between the West and the potential East of the Union in terms of the standard of living. More important is that the citizens and the politicians of the Central and Eastern European countries differ fundamentally from those in the present EU Member States as regards their national emotional traditions, experiences, interests and value judgements. What needs to be overcome here is not only the legacy of 50 years of separate development but also far older and more fundamental differences rooted in European history.

Differ fundamentally from those in the present EU Member States as regards their national emotional traditions, experiences, interests and value judgments??? Now frankly, and I am sure most historians of Europe would agree, the fundamental democratic values of the Anglo-Franco Enlightenment that form the basis of the EU didn’t really extend before 1945 East of the Rhine.

Though one should also add that it was the most recent member of the EU - Finland -, that first established women’s suffrage in Europe.

As far as prejudice goes, I should also mention this idea of Social Dumping: for years Eastern Europe heard the concerns of the West, that the East couldn’t compete. Interestingly, however, as soon as a country becomes successful in competing in the internal market, i.e. capable of producing quality goods at a reasonable price, it becomes social dumping.

There is a larger problem here: if people do not believe that they are to treated as equals in the EU, then they will not wish to join it. If we do not overcome the kinds of prejudices I have described here today, the people of Eastern Europe will not support joining.

Ladies and Gentlemen:

Finally, allow me to project a decade or so, into the future.

I believe there are two general directions the European project can take: one is to be bold, to move quickly to bring in those candidate countries who are, by objective evaluation, qualified. This means, inter alia, that the goalposts should remain in place and that they should be the same for everyone. By doing this Europe would ensure that enlargement will bring the greatest benefits to all: qualified candidates would be rewarded for their hard work; those less qualified will see that hard work is indeed rewarded, that there is a light at the end of the tunnel and it isn’t a train speeding toward you. Just as important, however, is that there be larger strategy. Those candidates who have not been able to meet the standards must understand that enlargement will proceed, that the first enlargement will not be followed by a long hiatus.

The other way to go, of course, is to find reasons to postpone enlargement. To quote a beer ad from my country “You can always find a reason”. Or to quote my dear friend and colleague, the Foreign Minister of Hungary, Janos Martonyi, “ever since 1995 we have been told we will join the EU in five years”. Putting off enlargement will indeed send a message to candidate countries that the ones who did the hard work were fools and the ones to delay reforms were on the right track. Certainly that is the message of the “Big Bang”. That is the message in delaying enlargement.

Purely from a point of self-interest and elementary skinnerian psychology, the message that effort doesn’t pay will not result in new members eager to play a constructive role in the Union.

Before I end, just a few words on the "future of Europe", a question much asked in the past year, occasionally even from us. For one, a debate on how a future Europe should be structured without the participation of candidate countries I believe to be doomed. And this should be clear to everyone. I do think that there are fundamental questions that need to be addressed by both current and future members if we are to achieve the goal of genuine legitimacy of political decision making at the EU level.

In conclusion, I hope I have managed to convey some sense of how dramatically candidate countries such as Estonia have changed and that a static or recalcitrant view of Europe will only harm our economic prospects and our common competitiveness. The view of Eastern Europe as a burden only burdens us all. An integrated Europe, whole, free and prosperous, is within our grasp, it is ours to do, Carpe Diem!