In late August, a group of scholars, technocrats, and economists from around the world gathered in a castle outside Salzburg, Austria, to debate the future of the euro. Amid torrential rains that kept everyone hunkered down inside, the talk soon turned global. The Taiwanese, Koreans, Vietnamese, Chinese, and Latin Americans wondered if a euro-type currency could ever work for them. A Russian economist hoped her country would eventually adopt the euro to lock itself into Europe. The Czechs, Poles, Estonians, and Bulgarians saw the euro as their best selling point for getting voters to join the European Union. The magnetic attraction of the euro was clear.
Then came a surprising conclusion. The guests of the Salzburg Institute, a European think tank, agreed that changes like the euro and EU enlargement are seldom justified on economic grounds. They are really political moon shots cleverly marketed as economic breakthroughs to goad change, rather than build on it. Thus the euro was supposed to cap a new, streamlined European economy. Instead, it has become a potent symbol of Europe and what it could be. "All the economists were against it. If we had listened to them, the euro would never have happened," says Michel Petite, the European Commission's top lawyer, who wrote the euro rules.
Europe's enlargement plan is the same kind of political bet. At stake is whether Europe becomes a diverse, competitive, high-growth region or a much broader social welfare state with new petitioners banging on Brussels' door may not be known for years.
Europeans have some big choices ahead. One is to use the new states as a lever for change. That means scripting flexibility into economic policies so that new countries can carve out their own path. The nations of the East are young, high-growth economies that could become vibrant competitors. But it has been hell for them to manage their spending and currencies over the past decade. Poland has had nine governments since 1989, and most have fallen because farmers, unions, and other special interests demanded bigger subsidies. Even ardent reformers are throwing up their hands. "I want to join the euro because it is the only way I can control our runaway spending," says Polish central bank head Leszek Balcerowicz.
The new states will use Old Europe's stringent budget rules to beat their spenders into submission, just as Spain, Belgium, and Greece did a few years ago. The reward for less spending would be lower interest rates for those who take the pledge. But there's a big trade-off. They would also have to opt into western Europe's own expensive model of the welfare state--not long after slipping out of the Soviet economic noose. For Poland, a 6%-per-year growth tiger in the mid-1990s, this transition could be devastating.
On the other hand, if the new states persuade Frankfurt and Brussels to lighten up, they could be allowed to break deficit limits in the short term to get growth going. The EU already is allowing Old Europe countries to temporarily exceed budget deficit limits of 3% of gross national product and to stretch out the time they'll have to get budgets in balance. The European Central Bank seems poised to cut rates even though inflation remains above target.
Another outcome could be perpetual conflict between the new states and their rich neighbors. German unions want to help their counterparts in the East get their wages up to preserve German jobs. Greens want Eastern industries to abide by environmental controls every bit as strict as those in the West. Old Europe's farmers hope a new farm lobby from the East will help keep generous subsidies flowing. And who knows what Brussels would do if the new members cut taxes far below Western levels in order to draw investment.
For those watching this mélange from outside Europe, the best advice is to take a deep breath and wait. The Continent's politicians won't be derailed by lecturing. As Europe gets larger, it's likely to become increasingly absorbed with itself and tone deaf to outsiders. European Commission President Romano Prodi regrets in an interview that the U.S. isn't paying much attention to Europe. There's a reason for that. Until Europeans decide between socializing the East or competing head-on with these young economies, there isn't really much to say.
Dowling is managing editor of BusinessWeek International.
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