The EU’s Marshall Plan for the East

From the 1970s on, the European Community worked toward reducing regional imbalance. Regional policy gained further relevance when the EC enlarged southward in the eighties. Portugal, Greece, and parts of Spain were as economically underdeveloped, in comparison to the Benelux countries and Germany, as the new EU member states twenty years later. Thus the EC followed a two-track policy of investment in the peripheral regions of the South, providing its increasingly controversial agricultural subsidies on the one hand, and direct funding for infrastructure projects on the other. With a decades-long tradition of combating economic disparity, then, it is not surprising that Brussels was attuned to the problem of urban-rural divergence in Eastern Europe from an early stage. Eurostat, the Brussels statistical agency, began collating data on the regional development of postcommunist states associated with the European Union in 1995. They highlighted the growing divides within these countries, which the European Union consequently set out to target.

The first major aid program for Eastern Europe, PHARE (Poland and Hungary Aid for Economic Restructuring) was launched in 1989 and later extended to include Czechoslovakia and all other EU membership aspirants. At first, the program was primarily aimed at supporting administrative reforms and establishing the rule of law—much in this field still remains to be done in the former Soviet Union. PHARE was initially allocated an extremely modest budget of 8.9 billion euros for ten countries over a period of eight years (1990–98). In any event, not quite two-thirds of the funds were actually transferred. The frequent discrepancy between the amount approved and the amount actually spent continues to be a problem of EU funding, caused in part by the many bureaucratic obstacles imposed by Brussels.52 In terms of volume, the aid program was far removed from a second Marshall Plan, contrary to claims to this effect by George Soros in 1989 and Jeffrey Sachs in 1992, perhaps in a bid to refute the theory that neoliberals were heartless. (For more than ten years since then, Sachs has turned his attention to fighting poverty around the globe.) A program of such dimensions would have cost some ten to fifteen billion dollars per year.

But after 1998, the European Union successively stepped up its aid. Brussels initiated a number of special programs: for rural development, transportation and infrastructure projects, adult education, and corporate loans. The stickers that appeared all over Poland bearing the motto “Finansowana przez Unię Europejską” (“financed by the European Union”), and twelve little stars against a blue background, inspired jokes about echoes of another gift-giving union, lost in 1991. But they were signs of Brussels’ commitment, which in turn encouraged international corporations to allocate foreign direct investments.

Thrifty at first, the European Union spent abundantly later. Its budget for the first three years after enlargement (2004–6) included structural funds of 15.5 billion euros for the new member countries; more than half that amount was allocated to Poland, the largest and most populous new member. In addition, the European Union introduced subsidies for agriculture. Although only a quarter of the level in the old EU countries (more on this unequal treatment in chapter 10), they made a considerable difference in “Polska B” and comparable regions. Even higher transfer payments were paid out in the seven-year budget for the period 2007–13. Poland was allocated an additional 67 billion euros; by 2013 it had also received around 90 percent of the previously agreed funding.53

In concrete terms, Brussels spent at least €40 billion on Poland alone. Meanwhile, the influx of private capital amounted to about fifty billion euros between 2007 and 2013. But FDIs can be purely nominal values in a company’s accounts, and not necessarily flow into the local economy at all.54Hence the EU’s transfer payments appear all the more impressive, especially in relation to local prices and incomes. Divided by the population number, they totaled 1,000 euros per resident. Much can be achieved, especially in rural areas, with such amounts.

In contrast to the FDIs, a large proportion of the EU funding—two-thirds of which is earmarked for improving infrastructure and agriculture—flowed into less prosperous regions. The roads to eastern Poland have been improved (although, unfortunately, a large number of trees lining the avenues were felled collaterally); the market squares of most small towns have been renovated. Obvious signs of poverty have disappeared. The upturn in the rural regions has had a ripple effect on the entire economy. The EU commission estimates that “cohesion policies” boosted growth in Poland by 5.5 percent in the period 2007–13, and by as much as 8.5 percent in the Czech Republic and the Baltic states.55

In the meantime, the transfer payments made since EU enlargement have exceeded the volume of the Marshall Plan, by absolute numbers and in relation to the gross domestic product of the recipient countries. Overall, European integration and its attendant programs were a tremendous success. This is true even from the perspective of net contributors such as Germany, which was able to export more to the new member countries than it imports from them.56 Despite the neoliberal rhetoric that characterized the acquis communautaire (the conditions fixed in 1993 for accession to the EU) and the Lisbon Agenda of the year 2000, the European Union served as an equalizing factor. Regions that achieve less than 75 percent of the EU average qualify for funding. Compared to the yardsticks applied for social benefits in Western welfare states, or official poverty thresholds, this seems quite egalitarian. The OECD defines individual poverty as an income of less than 50 percent of the average per capita income; most national statistics set the threshold at 60 percent. Since about 2005, EU investments in deprived regions have helped close the gulf between growth centers and regions such as “Polska B.”

The upsurge in the eastern regions of the European Union is even more striking in comparison to the situation in Russia or Ukraine. Here, the villages still resemble those in the early nineties in Poland. Most are hard to reach because of the terrible state of the roads; there are no businesses where local products can be processed. Career prospects for young people are meager. The greater the contrast with Belarus, western Ukraine, and Russia, the more the residents of EU member countries feel they are living on the right side of the border. Many of the native nurses, chambermaids, and mechanics who left eastern Poland, Slovakia, or Hungary to work in the West have been replaced by workers from the neighboring non-EU countries. Funding from Brussels for agriculture and road improvement, as well as various smaller cultural projects (including heritage conservation and European cities of culture programs), helped the eastern regions of the new EU member states keep pace. The post-Soviet states, by contrast, seem to be out of bounds for the European Union (although that might change in Ukraine). Here, the difference between the cities and the rural areas remains striking.

The only postcommunist countries without stark urban-rural and east-west divides, even before the European Union started channeling aid into the region, were the Czech Republic and Slovenia. Some parts of the former have structural problems, such as the industrial regions in northern Bohemia and northern Moravia. Nevertheless, by the Gini coefficient (used to measure international income disparity by calculating the difference between various strata of society—that is, the rich and poor), the Czech Republic and Slovenia are as equitable as Sweden. The reason lies in privatization strategies as well as historical structures. In the nineties, the Czech Republic hesitated to sell its major enterprises to international investors, opting to distribute vouchers, or company share certificates, among the population first. Most of these were subsequently bought up by local banks and investment funds. Slovenia went one step further, allotting company shares to staff members, pension funds, and bankruptcy compensation funds in addition to distributing vouchers. This regionally and socially balanced approach was made possible by the fact that domestic investors financed economic restructuring. Economic growth or intense modernization, then, does not necessarily go hand in hand with increased social inequality. True, this occurred during industrialization in the nineteenth century and, as discussed above, in most postcommunist countries. But the outcome hinges on where the capital comes from and how it is channeled. Trade unions, which remained strong in both Slovenia and the Czech Republic, are also important for maintaining egalitarian societies.

One drawback of these national privatization and investment strategies was their susceptibility to insider deals and corruption. In the Czech Republic, an accumulation of nonperforming loans to large enterprises, often given as personal favors, caused the banking crisis of 1996. The government ultimately solved the problem by selling the banks, giving indemnity for their losses, and devaluing the Czech crown. Slovenia’s problems after the crisis of 2008–9 are comparable. After independence, the government followed a predominantly national privatization strategy, prioritizing Slovenian investors. But the strategy was financed largely by cheap loans, and by the government giving bank guarantees in excess of its financial resources. As a result, many of these loans went bad, precipitating a severe banking and budgetary crisis. In contrast to the Czech Republic in the nineties, Slovenia, a member of the eurozone, was not able to devalue its currency, which prolonged the crisis. Besides these homemade difficulties arising from national privatization strategies, problems were caused by unfulfilled expectations and the herd instinct that continues to drive the world of international finance. Having been vaunted for years as a model transformation country, the flow of foreign capital to Slovenia virtually stopped after the crisis of 2008–9.

The geographical cluster of countries with more egalitarian societies (see fig. 5.4b)—the Czech Republic, Slovakia, Hungary, Slovenia, and neighboring Austria—points to a longue durée explanation rooted in the history of the region. The Austro-Hungarian Empire built a dense infrastructure of good roads and railways, public schools, and hospitals, and established a progressive social security system.57 Thus the preconditions for development were better than in most of Poland (the former Russian partition) and Romania (with the exception of Transylvania). It is difficult to gauge the extent to which generations of welfare security have shaped contemporary attitudes, but the kind of deep social inequality that prevails in Russia and Ukraine would certainly be alien to Slovenian and Czech society. The same is true of Hungary and Slovakia, though these two countries are only equitable by the Gini coefficient, not in terms of regional wealth dispersion.

The above considerations negate one of the initial hypotheses on which this book was based—that the egalitarian social order in post-Habsburg Europe might be due to the relatively small size of these countries, especially compared to Poland. Looking at the Baltic states, however, it emerges that social equality is not a problem of scale: Estonia, Latvia, and Lithuania are characterized by even higher regional and social inequality than Poland (see fig. 5.4a).58

EU enlargement clamped the growing social and regional gaps. Until 2005, the Gini coefficient rose in all new EU states as a consequence of reform policies. Neoliberal reform packages such as Russia’s in 1992–93, the Slovak flat tax rate, or the German labor market reforms during the second wave of neoliberalism, led to growing social inequality. In Russia, the Gini coefficient climbed from 23.8 in 1988 (approximately equivalent to Sweden’s) to 37.1 in 1992, 46.2 in 1993, and 48.3 in 1998 (approaching the situation in Argentina).59 A deep social divide also emerged in the Baltic states (almost on a par with the United States); Poland followed with a Gini coefficient of 35.6 in 2005. In Germany, too, social inequality increased: here, the Gini coefficient rose from 25 in 2001 to 30.4 in 2007. Although such changes are never monocausal, there is a clear connection with the Hartz social and labor market reforms (named after the Social Democrat and Volkswagen manager Peter Hartz) of the same period.

Fig. 5.4a.  Social inequality in the transformation states, 1987–2013. Source: In the absence of a continuous database for the entire period, this diagram is a composite of two sources, the World Bank Data Catalog (until 2004) and Eurostat data (from 2004).

The case of Ukraine, however, shows that the Gini coefficient must be viewed with caution. In international statistics, Ukraine ranks as a relatively equitable country. But in fact, the wealthy elite is so small and the broad mass of the population so poor that the social divide is simply not captured by the quintile measurement commonly used for the Gini coefficient, which calculates an average by certain threshold values and progresses in stages of 20 percent.

Fig. 5.4b.  Social inequality in the transformation states, 2009. Source: United Nations Human Development Report 2009 (pp. 195–96).

Without setting too great store by the Gini coefficient, then, it is useful for discerning broad trends. It highlights the stagnation of, or decrease in, social inequality in all countries about two or three years after European Union accession.60 The crisis of 2008–9 temporarily interrupted this trend in some of these countries. Nevertheless, the EU transfer payments acted as a corrective antidote to the second wave of neoliberalism.

In the successor states of the Soviet Union, transformation had diametrically opposed results. The post-Soviet societies (with the exception of Belarus) are deeply divided. Largely impoverished populations face small elites of oligarchs, and in Russia, the so-called “new Russians” (новые русские). Long-term historical path dependencies are perhaps partly to blame. There were small upper classes and impoverished masses in today’s Ukraine and Russia under the Tsarist Empire. But the main cause lay in the sequence of reforms. Under the influence of Western advisors, Russia began privatization before an institutional and constitutional framework was in place. As a result, the state was plundered, and a small class of oligarchs formed. Deindustrialization, wiping out countless workplaces, also had disastrous effects. Due to the lack of legal security and opportunity for export to the EU market, there was hardly any inflow of foreign capital other than the oligarchs’ laundered money. As in the late nineteenth century, a small middle class formed in the big cities only; in rural areas, grinding poverty and, in some places, abject misery still prevails today.

The social divide is reflected in life expectancies. In the five-year period 1989–94, the average lifespan dropped in Russia by three years and remained low even after the country’s economic recovery at the start of the new millennium. It increased slowly to reach an average of sixty-seven (almost twelve years less than in Germany and the United States) in 2006—the same level as in the late Soviet Union. Life expectancy in Russia is lower than that in Latin America and North Africa, and higher only than in South Asia and sub-Saharan Africa. It is no exaggeration, then, to say that the Russian and Ukrainian rural populations live in conditions akin to developing countries. Life expectancy in Poland, the Czech Republic, Hungary, and Estonia, by contrast, rose in the period 1989–2009 by five years or more; in Slovakia, by four, in Latvia, by three, and in Lithuania, by two (see fig. 5.5).61 Because life expectancy reflects the quality of health systems from obstetrics to geriatrics, and of education from preschool to university, as well as labor market prospects, levels of social cohesion, and environmental factors, it is a broadly encompassing indicator.

Life expectancy in Ukraine did not nosedive in the nineties in the same way as in Russia. But here, too, the welfare state exists only on paper. Kyiv set up pension and unemployment insurance systems following the European model. (Neither of these existed in the Soviet Union or other communist countries, where the state was supposed to take care of the sick and elderly; the lack of a universal social insurance system poses a major challenge to the Chinese government today.) However, the benefits they afford are just sufficient for the bare necessities—bread, potatoes, onions, and dairy products. Public hospitals still exist, but patients have to supply their own medication and syringes, and pay several hundred dollars for more complex treatments and surgery. Patients who cannot produce the money are only treated in emergencies. They depend entirely on the good natures of the doctors and the hopelessly underpaid nurses. While the poor in Ukraine are barely able to fend for themselves, eight Ukrainian oligarchs appeared on the Forbes World’s Billionaires list in 2012.

Fig. 5.5.  Life expectancy in the transformation states, 1984–2009. Source: World Bank, Data Catalog (“Life Expectancy at Birth”).

How did they become so wealthy? Consider the example of one of Ukraine’s most infamous oligarchs, Dmytro Firtash. He made his fortune, estimated in 2008 at five billion dollars,62 with a strikingly simple business model: he positioned his company RosUkrEnergo as an intermediary between Russia’s Gazprom and the Ukrainian gas monopolist Naftogaz, selling cut-price, state-subsidized Russian gas, directly or via subsidiaries, to industry and households in Ukraine. Firtash’s business thrived—at the expense of the Ukrainian taxpayers. As in the case of prominent Russian oligarchs’ dealings, the West became a party to these business practices: the company office was registered in Switzerland; the opulent headquarters of Firtash’s holding company, DF Group, are in Vienna, Austria. No lesser institution than Cambridge University gratefully accepted the oligarch’s support to launch a Ukrainian Studies program, complete with film festival and exhibitions. In Ukraine, Firtash channeled millions into cultural institutions (including the newly restored theaters in Chernivtsi and Kherson) and many festivals. As a result, he could be sure of being received in the West as a philanthropist rather than a tycoon of questionable repute—a biznesmen. In 2014, however, his fortunes suddenly turned. He was arrested by Austrian police at the request of the FBI on suspicion of bribery and leading a criminal organization. But so far he has seemed untouchable. The American extradition warrant was turned down by a Viennese court, and Firtash is still a political power broker in Kyiv.

How could transformation in the former Soviet Union and Ukraine lead to outcomes of this kind? From a neoliberal viewpoint, it was due to the lack of functioning markets, and could be remedied by pursuing deregulation and liberalization. The actual problem, however, was the weak state, which was and still is abused on all administrative levels. Top-level corruption has been mentioned above; consider the following example from the picturesque Carpathians (which look a lot like the Blue Ridge Mountains) in the southwest Ukraine. In the best hotel in the village of Slavs’ke, once among the Soviet Union’s most prestigious ski resorts, a Ukrainian colleague of mine held international summer schools for historians from the post-Soviet states in the years 2011–13. Armed security guards, wearing the uniform of a Ministry of the Interior special unit, patrolled in front of the hotel. They checked every guest and visitor, presumably to prevent thefts from the hotel rooms or the fleet of SUVs, and to convey a sense of security to the hotel guests (mostly the oligarchs’ senior staff members; the oligarchs themselves prefer to vacation along the Mediterranean). It was unclear whether the guards were still paid by the Ministry of the Interior or by the privatized hotel (which changed hands via a manager buyout). In either case, something was wrong.

Or take another example from the resort Slavs’ke: Prior to the 2012 European Soccer Championship, cohosted by Poland and Ukraine, a new soccer field was built on public land in the middle of the village in hopes that one of the national teams participating in the tournament would use it as a training base. The owners privatized the field and enclosed it with a fence. In keeping with the principles of “real existing capitalism,” they charge to play on the well-kept pitch. As a result, it is usually abandoned, and has to be protected by “private” security guards. In this and the previous case, the root of the problem lies in the entanglement of state and private structures, and privatization at the public’s expense. Despite obvious injustices such as these, there has been little public discussion of the economic reforms and privatization in Ukraine. A neoliberal order became established with minimal public debate about the course of the transformation.

The shock therapies in East Central Europe, in contrast, shook the public, provoked debate, and shaped election campaigns. Democratization led to gradualist modifications. Thanks to the consensus about maintaining at least a minimum of state welfare, social security systems were set up following the example of the old EU states, despite the second wave of neoliberalism after the turn of the new millennium, and despite the free-market speech acts by politicians such as Václav Klaus. Although welfare spending in East Central European countries is well below the average in the old EU states—in 2006, social security payments here made up 25.9 percent of the GDP; in the new member states, it was only 16.2 percent63—they at least afford some basic provisions and benefits. East Central Europe’s social security systems would not have been set up without democratic mechanisms of control and correction. The successor states of the Soviet Union did not have these. Russia gained economic scope after the turn of the millennium thanks to higher oil and gas prices. But it was primarily the elites and the large cities that profited, whereas the rural population and the truly needy continue to live on the breadline. The lack of political participation is partly to blame. Since 2003, Putin has either brought Russia’s oligarchs under state control or disempowered them. Mikhail Khodorkovsky’s arrest marked a crucial turning point—he had been on the verge of floating his oil corporation Yukos on the New York Stock Exchange when the Russian government immobilized him. However, this partial retreat from neoliberal practices has done nothing to reduce either regional or social inequality. According to data collated in 2009, the Russian Gini coefficient remains over 40, primarily because of the huge gulf between the oligarchs and the new middle class in the big cities and the economic lowest fifth of society, especially the rural population.64

The oligarchic order is consistent with the neoliberal ideal insofar as it shapes the economy and the political system. But it conflicts with it by allowing politics to strongly influence the economy. Putin, moreover, halted deregulation and liberalization. But the privatization launched in the nineties was extended rather than reversed. The Russian blend of state capitalism, then, is a hybrid variant of neoliberalism within the framework of an authoritarian system.

Comparing transformation in East Central Europe and the post-Soviet states sheds light on the role of external agents. The successor states of the Soviet Union struggled to find their feet without any aid from Brussels, whereas the reforms in East Central Europe were supported by the EU’s cooperation program. The prospect of accession stimulated domestic efforts to establish the rule of law as well as foreign investments; both tendencies increased from 2004. While FDIs created and compounded social and spatial disparity, the European Union helped compensate for social inequality in its new member countries. The question remains why Brussels did not pursue the same policy in crisis-torn Southern Europe after 2008.

Whatever the role of the EU, or the repercussions of the FDIs, the political elites retained their pre-1989 goal of catch-up modernization. Nevertheless, the continuities should not be overstressed. Stalinist modernization was based on the principle of autarchy and endogenous resources. After 1989, the IMF, the World Bank, and foreign corporations and the European Union stepped in. In Poland and Hungary, the transition from endogenous to exogenous modernization dated back to the period of détente, when they first opened to Western capital and technologies. The most problematic aspect of endogenous modernization is that it can lead societies’ internal resources to become badly overstretched in pursuit of vague promises of future prosperity. The drawback of exogenous modernization is the economic dependency it creates. It can also activate cultural defense mechanisms, which can be articulated in quite harmless ways, such as revivals of traditional music (“Disco Polo,” a blend of folksy songs, pounding rhythms, and Western disco music was one manifestation in Poland), or in more aggressive ways.65

There have also been strong political counterreactions. An amalgam of social inequality, badly paid and insecure jobs, the socialist heritage of collectivist thinking, and revamped nationalism creates a breeding ground for authoritarian right-wing parties. Viktor Orbán, Hungarian prime minister and Fidesz president, and Jarosław Kaczyński, Polish Law and Justice Party chairman and former prime minister (whose twin brother, then-President Lech Kaczyński, died in an airplane crash on his way to visiting the site of the Katyn massacres in 2010), each operate on a political platform that combines social and nationalist populism with anti-European propaganda. Their parties’ programs resemble a combination of right-wing US Republicanism and the collectivist heritage of state socialism. In the United States this strange blend would probably not threaten democracy, but in Eastern Europe it does. Both Orbán and Kaczyński have shown strong authoritarian tendencies and have cracked down on critical journalists and media. They have also made inroads into the independent judiciary. Such developments can also occur in established democracies—Silvio Berlusconi’s monopolization of electronic media in Italy is one example. But the checks and balances of established democracy, and eventually electoral defeat, forced him to step down. It is uncertain whether political leaders such as Viktor Orbán or Jarosław Kaczyński would renounce power because of a negative ballot. Both did so after their first terms in office, but then turned out to be bad losers. Unable to admit to mistakes or accept democracy’s right to change governments, they wove a fabric of conspiracy theories, criticized the West (often echoing Vladimir Putin), and attacked their adversaries in every possible way.

Since reelection, Orbán and Kaczyński have turned out to be even worse winners than losers. In recent years, Orbán has subordinated the constitutional court, infringed on the freedom of the press, and openly argued for an “illiberal” democracy. His government still suffers from rampant corruption, which the European Union and the United States have tried to counteract. But Orbán only responds to criticism from outside with even more nationalist propaganda. It is tragic indeed that Hungary, the country that opened the Iron Curtain, has evolved in this direction. In Poland, Kaczyński’s PiS party has openly expressed admiration for Orbán, and tried to emulate his policies since its double election victory in 2015. The crisis of 2008–9 left a question mark behind the transformation economies; recent political tendencies have shown the 1989-created democracies to be precarious, too.

In view of this highly ambivalent picture more than twenty-five years after the revolutions of 1989, can a bottom line be drawn under the transformation period as a whole? As discussed above, it would be difficult to do so for East Central Europe alone, not to mention the rest of Eastern Europe. There are not only problems of scale to consider; that is, the nations’ varying sizes. The inclusion in transformation surveys and emerging markets indices of small states such as Slovenia and Estonia alongside the two largest European territorial states, Russia and Ukraine, is due more to the legacy of the Cold War than to structural commonalities. Each of these countries had distinctive historical traditions before the communists seized power, and evolved along different paths under state socialism. In view of history, then, it is not surprising that the outcomes of transformation have been highly divergent.66 In retrospect, the more pressing question seems to be why the West expected all of these countries to become market economies and democracies.

Within the former Eastern Bloc, the contrast between the Visegrad countries and the successor states of the Soviet Union is most striking. A comparison of these two macroregions shows that the countries that cushioned society against the hardships of transformation rapidly returned to their 1989 levels of economic strength and prosperity. As early as 2001, the economists Michael Keane and Edward Prasad concluded from the example of Poland that an efficient (but not too costly) welfare state facilitated structural changes in the business sector and other market-oriented reforms.67 Wherever a deep social divide emerged, it tended to hamper the economy. The reason is that a growing middle class propels the economy more significantly than do the small elites that exist in post-Soviet countries (oligarchs plus a small middle class dependent on them and the state apparatus). The Russian path also refutes the neoliberal trickle-down myth, which played a central role in legitimizing Reaganomics. In fact, the new wealth created by the Russian tycoons of capitalism trickled away, as did the wellsprings of economic recovery.

The history of the transformation period also disproves one of the central neoliberal theories: that higher social security spending curbs economic development. Although in comparison to the Baltic states, Southeastern Europe, and the former Soviet Union, the East Central European states and Slovenia expended relatively large sums on pensioners, the unemployed, and other people in need—according to Dieter Segert, the proportion of welfare spending in the 2006 GDPs of East Central Europe was between 18.1 percent (Poland) and 22.3 percent (Hungary)—they achieved high growth and greater prosperity in the twenty years following 1989.68

Until 2009, the Baltic states were often cited as evidence that an unfettered market economy generates even higher growth. (The proportion of social security spending in the GDP here was between 11 and 14.3 percent in 2006.) It should be noted, however, that the original motive for reducing the welfare state was political rather than financial—these governments did not want to support the déclassé resident Russians. This would explain why Lithuania, with its far smaller Russian minority, did not take as strictly neoliberal a course as Estonia and Latvia. Second, the payoff was high emigration and demographic decline, which will be discussed in more detail in chapter 7. Third, the deceptively high growth rates after the turn of the millennium were largely based on venture capital, which disappeared in a flash in 2008–9.

At first glance, the example of Slovakia appears to better support the theory that less welfare (state) stimulates growth. But developments here since the 2006 election victory of the Left seem to point in another direction. The Slovak Social Democrats reversed some previous reforms (such as the comprehensive privatization of the healthcare and pension systems and part of the flat tax system) and moderated others. Like the postcommunist turnaround in Poland in the mid-nineties, these readjustments did not have any serious economic consequences. Slovakia’s main problem is that its automotive industry is virtually a monoculture, and production continues to hinge on low wages. Yet Keane and Prasad’s indirect warning should not be ignored: if social security spending becomes too costly, it can knock a country’s budget and entire economy off balance, as the case of Hungary shows.

Societies can only be cushioned against the harsher effects of reforms and engender socially mobile middle classes where there is a functioning (constitutional) government. The European Union played a crucial role in establishing the rule of law in former Eastern Bloc countries. In the mid-nineties, it became the most important external transformative actor. Following EU enlargement, Brussels contributed significantly to preventing the social and regional divides in the new member states from widening further. One of the EU’s often-cited founding principles was to promote peace after the devastation of two world wars. This mission was acknowledged with the Nobel Peace Prize in 2014. In the new member states, the European Union also carried out a prosperity mission to remedy some of the negative effects of neoliberalism. It would be wrong, however, to attribute the new member states’ upsurge exclusively to external factors. As shown in this book’s section on human capital, the crucial ingredients were social resources and “transformation from below.” They are further investigated in the next chapter on metropolitan comparisons.

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