Brexit isn’t Europe’s biggest challenge, but economic inequality between east and west

2018 will be a crucial year for Brexit, but there’s something else going on in Europe that could be even more important – and that is the growing tension between ‘core Europe’ (especially Germany) and the poorer countries to the east.

The flag of the European Union features a circle of identical stars. Symbolically, it speaks of nations coming together as equals. In reality, the power relationships between the different member states are hugely unequal.

A more representative flag would have 28 stars not 12, and they would be of massively different sizes. Their colours would be different too, from the 24 carat gold of Luxembourg to the rusty iron of the poorest members.

The gaping income inequalities across the EU drive mass migration from south to north and east to west. What is less visible, however, is the extent to which some EU members literally own the economies of poorer EU members.

It was a point made last year in an article by Leonid Bershidsky for Bloomberg:

“In a recent paper, Filip Novokmet, Thomas Piketty and Gabriel Zucman bluntly call Eastern European nations ‘foreign-owned countries’… 

“‘The owners tend to come from EU countries (in particular from Germany),’ they write. ‘So in some sense it is not entirely different from the situation of peripheral regions that are being owned by more prosperous central regions in a large federal country.’ To Piketty and collaborators, this is a nuisance because it distorts inequality measurements: Much of a country’s wealth and income accrues to foreign shareholders who do not belong to the local top one percent, so the country looks more egalitarian than it actually is.”

Germany has an economically dominant position in eastern Europe because of massive inward investment. However, this isn’t nearly so welcome as it used to be. Writing for the European Council on Foreign Relations, Sebastian Dullien explores the issue from a Czech perspective:

“…there is deep anxiety about the fact that Czech wages are no longer showing much sign of catching up with the German [wage] level. While the 1990s and early 2000s saw a steady convergence, there has been no progress since 2007.

“The blame for this aborted convergence is laid squarely at the foot of foreign investors…”

When the most important private-sector employers are foreign-owned, it’s not surprising that foreigners are blamed for stagnant wages:

“The source of discontent is that by now, basically all of the financial sector and half of the manufacturing sector is foreign-owned. The multinationals set the prices for the intermediary products that Czech factories produce, and by setting these prices low, they suppress wages in Czech Republic while boosting their margins.

“One story which seems to be endlessly retold is that workers at the assembly lines at Volkswagen plants in the Czech Republic only earn a third of the wage of VW workers in Germany, even though the assembly lines run at the same speed at the ones in Wolfsburg.” 

To compound the resentment, there’s the sense that Germany is using its huge economic influence over its eastern neighbours to force them into political concessions. Here’s Leonid Bershidsky, again: 

“The Hungarian, Polish and Czech governments can resist European directives on refugee resettlement and posture defiantly when their efforts to take over the courts are challenged: ‘We will not be a colony,’ Orban and Polish ruling party leader Jaroslaw Kaczynski have told EU officials on separate occasions. That, however, won’t change their de facto status as economic colonies of the wealthier West, unless the populist governments move to expropriate the foreign companies – an unthinkable development.”

British Eurosceptics have long complained about the size of the UK’s net contribution to the EU budget. The counter-argument was that Germany makes an even bigger net contribution, and you don’t hear the Germans complain about having to help the much poorer nations of eastern Europe.

However, Germany has a vested interest in channeling EU funds to their economic dependencies. Not only do German exports to eastern Europe exceed those of the United Kingdom by a huge margin; German (and other continental) firms also own the ‘commanding heights’ of those economies.

Progressives are usually very interested in unequal economic relationships – whether between different classes, different ethnic groups, men and women, or between the developed and developing world. Yet when it comes to the European Union, the profoundly unequal relationship between west and east barely seems to register.

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Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.

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