And in with the pro-growth, pro-business new Europe

PAUL WELLS August 1 2005


And in with the pro-growth, pro-business new Europe

PAUL WELLS August 1 2005



And in with the pro-growth, pro-business new Europe


THE CENTRE OF BRATISLAVA is starting to look as impressive as any of Europe’s smaller capitals, a forest of shiny new steeland-glass office buildings around a vibrant medieval old town. But Slovakia’s democratic reformers inherited a bunch of rundown and ramshackle government buildings from

their Communist predecessors, and they’ve been reluctant to spend public money cleaning the old hulks up. When Pavol Rusko, Slovakia’s minister of the economy, comes in to work, his staff calls several minutes ahead so the decrepit elevators can make their way down to the ground floor to meet him.

Rusko doesn’t have time to wait for elevators, or much else. The 41-year-old minister is in charge of attracting investment to Slovakia. Given how much of a hotbed for investors the tiny, mountainous country has become, one of Rusko’s biggest challenges is simply managing his schedule. Our first

meeting lasted only long enough for Rusko to reschedule, apologize, and tell me he’d like to come hunt bear in Canada sometime. At the second meeting he laid out the aggressive pro-growth philosophy that has made Slovakia, a late bloomer among former Communist countries, a magnet for investment.

“The state is a bad owner and it doesn’t need to create business,” he said rapidly, sitting in a plush leather chair and staring at the floor as he concentrated on a familiar pitch. “The state should create conditions and not be a hindrance in the distribution of resources. So it should reallocate only as much as necessary. And it should collect from citizens the minimum necessary.”

Slovakia has followed that doctrine with zeal. In 2004 it introduced a flat 19-per-cent tax on just about everything: personal income, corporate income, and sales. That year, the state investment agency signed 47 investment deals worth US$2.26 billion, compared to 22 deals worth $1.44 billion a year earlier.

The countryside outside Bratislava is starting to look like one big car factory. By

2006, Slovakia will be home to more automobile manufacturing per capita than any other country on Earth. The European Commission projects a Slovak GDP growth of 4.9 per cent for 2005, more than triple the average rate of growth for the 12 countries that share the euro currency—and more than six times the projected growth rate for Germany.

To be sure, Slovakia has a lot of catching up to do. Prosperity is spreading too slowly outside the capital. Poverty and social adjustment seem almost insurmountable for the country’s Roma, or gypsy, population. The national unemployment rate is finally falling, but it is falling from a level over 17 per cent.

But if Slovakia’s story were only a tale of swift catch-up in a single country, it would be of limited interest outside Europe. It’s not. Slovakia is one of several countries pushing aggressive pro-growth economic policies and reaping substantial rewards. And it’s not only former Communist countries that

have put rapid growth at the top of their priority list. In fact, since the 2004 enlargement of the European Union that saw it grow from 15 members to 25, the pro-growth nations may now be in the majority. Which means that in the latest of the occasional debates over the future of Europe, the tables have been turned on Europe’s founding nations, especially France and Germany.

In today’s Europe, Thomas Friedman wrote recently in the New York Times, “all the innovation is happening on the periphery by those countries embracing globalization in their own ways—Ireland, Britain, Scandinavia and Eastern Europe—while those following the FrenchGerman social model are suffering high unemployment and low growth.” The “French-German model” is shorthand, of course, for the economic path lately followed by, well, France, Germany, and perhaps Italy and a few other countries. It’s not really a “model” so much as a series of bad habits, including unsustainable public

Car factories fill the countryside outside Slovakia’s capital, Bratislava (opposite)

Economics I >


-MARTIN BRUNCKO, adviser to Slovak Finance Minister Ivan Miklós

pensions and a system of social benefits so opulent and rigid that the cost of hiring discourages employers—and the difficulty in firing discourages them even more.

Add in an ample dose of protectionismworkers from the new member states are barred, during a transition period, from seeking most jobs in “old Europe”—and you have the snaiPs-pace economic growth that has fuelled so many stereotypes of Europe as yesterday’s club for yesterday’s economic policies.

But there is a new Europe, one that only partially overlaps the pro-U.S. “New Europe” that Donald Rumsfeld, the U.S. defence secretary, famously identified as the best friends of the George W. Bush White House in the

run-up to the 2003 Iraq war. This new, new Europe embraces both former Communist states and longstanding democracies. Its borders change depending on the moment or the issue. In fact, if Angela Merkel, a plainspoken pastor’s daughter who spent most of her life before 1989 in the former East Germany, wins a general election expected in Germany this autumn, the de facto capital of the new, new Europe may shift to Berlin.

But from now to the end of the year, the EU presidency falls to Britain, where Prime Minister Tony Blair has made reform of the EU’s decrepit institutions the centrepiece of his last major political battle before his expected retire-

ment. Which means that the rise of a new pro-growth, pro-business coalition around the periphery of Europe has become a central element of the continent’s politics.

Maclean’s recently visited three European countries whose economies are on track to grow much faster this year than the European average—and, not incidentally, faster than Canada’s: Sweden, Slovakia and Estonia. Political, academic and business leaders in each country displayed optimism twinned with impatience with the old ways.

“If you take every report on the European situation—whether it comes from the left, from the right, from liberals, conserva-

tives, socialists—it’s all the same,” Mart Laar, the former prime minister who hauled Estonia kicking and screaming into the modern era, said in an interview in a Tallinn café. “Every report says what is the problem of Europe. The list is exactly the same. Every politician who is working in Europe looks at this list and is scared absolutely, because they’re all sacred cows: agricultural subsidies, labour market, service market, taxation. All things which are either not to be touched or, when you touch it, there will be a lot of trouble.”

But the leaders of the new member states, who brought their countries back from Communism, have seen worse trouble. They survived and thrived, and they’re eager to share what they’ve learned. And in surprising corners, much older democracies are relearning lessons from their national histories that leave them far better-placed to face a harshly competitive world than some outsiders would ever have expected.

Take Sweden.

“Europe is losing market share,” Kai Hammerich, president of the Invest in Sweden Agency, said in an interview in Stockholm. “It’s losing competition. I mean, look at the Lisbon agenda”—the 2000 agreement by which European leaders pledged to make their continent the world’s most competitive knowledge-based economy by 2010. “C’est une rigolade. It’s a joke. Instead of narrowing the gap, the gap has become more important. And then, I mean, having an EU budget where 43 per cent of spending goes toward agricultural support? It’s old-fashioned.”

Hammerich, a courtly former journalist, added one more item, protectionism, to his articles of indictment. “We see, every day, more and more discussion down on the continent about, ‘How can we protect ourselves regarding competition from Asia? ’ for example. The old protectionist winds are slowly starting to blow.” The countries most tempted by that kind of defensive crouch, Hammerich added, are the ones having the hardest time controlling public deficits and maintaining economic growth: France, Germany, Italy. “We have got a completely different point of view,” he said. “It’s not that globalization is only positive, that’s not my point. But a country like Sweden has so much to benefit and gain from globalization. There are few countries as well-placed to benefit from globalization as Sweden.”

Why? Because of traditions of entrepreneur-


WHEN TONY BLAIR did a little on-the-slde diplomacy in the run-up to June’s failed European Union leaders’ summit, he flew to Berlin for a visit that began with a face-toface meeting with Angela Merkel. One of the most important appointments in Jacques Chirac’s July calendar was a meeting at the Elysée Palace with Merkel. Their July 19 têtea-tête lasted an hour and a half.

All of which is a little odd, because Merkel isn’t the chancellor of Germany. Not yet, anyway.

That honour won’t come until after elections currently expected for Sept. 18. Maybe not even thenMerkel’s embattled opponent, the Social Democrat Chancellor Gerhard Schroder, has won his way out of tight spots before.

Indeed, Schroder went to considerable trouble to push the general election forward a year, in a political system that isn’t really built to accommodate snap elections, precisely because he hoped to catch Merkel on the wrong foot.

But Merkel’s Christian Democratic Union and its parliamentary allies have been riding about 20 points higher than Schroder’s side in recent polls. And Merkel, a dour 51-year-old pastor’s daughter who was born in Hamburg but grew up in the former East Germany, offers the promise of such momentous change for her country and for Europe that Germany’s neighbours can’t afford to wait for her to win before they start trying to figure out what makes her tick.

In Paris, Merkel was careful to say nice things about the special relationship between France and Germany. But she emphasized that the two nations’ other European neighbours can never take a back seat. As for the “Paris-Berlin-Moscow axis” that has seen Schröder and Chirac take common strategic

ship and trading that are centuries old. But for the sake of argument, Hammerich picked a more recent starting point. After the Second World War, Sweden’s tiny internal market, less than a third the size of Canada’s, pushed its entrepreneurs out into the world decades earlier than the business commu-

stances with Russia’s Vladimir Putin on assorted issues, she was positively frosty: Germany can no longer “go over Poland’s head” when it pursues foreign policy. Any visitor to Poland could tell you that’s precisely the complaint Poland’s entire leadership class has levelled against Schröder. What’s novel is that a potential German leader shares the same set of priorities.

It’s in internal politics, though, that Merkel may bring the biggest changes. “What do I do in an economy where 1,000 full-time jobs disappear every day,” she asked the Financial Times, “and where, at the same time, my entire social security system-pension, unemployment, health and nursing insuranceare financed by this shrinking pool of full-time jobs?”

What she plans to do is look to Germany’s neighbours, not as threats but for examples. “If I look at Scandinavia, for instance, I see we still have a long way to go in decoupling our social security system from labour.

If I look at central and eastern European countries, I see we still have a long way to go in reforming my tax system. And when I look at the U.K., I see I still have much to do to make my labour market more flexible.”

While in Paris, Merkel also met Nicolas Sarkozy, the hot-headed French interior minister who will be the candidate to beat in the 2007 presidential election. (Le Figaro promptly dubbed the Merkel-Sarkozy summit “The Axis of Hopefuls.”) Sarkozy is less of a darling among European reformers than Merkel, but he too has taken to pronouncing the odd bit of amazing self-diagnosis for France’s ills. He recently called Britain “a leading light,” and wondered aloud whether it was “France that is wrong and the world that is right.” P.W.

nities in larger countries. “But if you are to compete abroad with products from a small country like Sweden, it must be state-ofthe-art,” Hammerich said. “Because in your own home country, people, for reasons of family almost, might buy your product. But if you are to compete with your product in

Economics | >

foreign markets, you have to have access to the latest technology. That’s why Sweden has always invested heavily—Swedish society and corporate Sweden—in R & D.”

Indeed. Swedish spending on R & D, as a fraction of the economy, is nearly the highest in the world, more than double the comparable Canadian figure. Private-sector research spending per capita is more than triple the Canadian rate, largely concentrated in a few big research-intensive firms such as Ericsson and Volvo. Taxes, meanwhile, are relatively low, at least for businesses. The business tax rate is 28 per cent, 6.5 points lower than in the Netherlands and fully 12 points lower than in Germany. Canada’s average corporate income tax rate, by comparison, is 32 per cent.

Sweden has also kept healthier budget books than most other European countries, running consecutive surpluses since 1998, unlike the rest of Europe—but like Canada. And Sweden started reforming its public pensions in 1999 to make them sustainable, unlike most of Europe—but like Canada. Still, Ingemar Hansson, the director general of Sweden’s National Institute of Economic Research, has had a hard time explaining his country’s “surprisingly” robust productivity growth. “It’s far above the European average and closer to, and sometimes in excess of, U.S. development,” he said. “Not only for single years, but over a 15year period.”

Hansson’s hunch is that this has something to do with investments in public education and with the disproportionate place of information-technology firms in Sweden’s economy. A wired, educated workforce is a better guarantor of steady growth than a worried, defensive workforce.

Nobody claims Sweden has built the perfect economy. Several Swedes mentioned an unflattering paradox: they’re the healthiest people in the world, but they called in sick to the tune of six million paid sick days a month last year. “There are signs the gatekeeping system isn’t strong enough” to pay for Sweden’s generous social benefits, Hansson said. Still, Sweden’s mix of ancient strengths and recent reforms has left it well-placed to lead European reform—and to look around for allies.

Earlier this year, a prominent Swede made a lot of waves by identifying two. In an article in the Financial Times, former prime minister Carl Bildt wrote that “the


How economic prospects in the 25nation EU compare with Canada’s

2005 Average

projected growth

GDP growth 1996-2000







Czech Republic Hungary Cyprus Luxembourg Slovenia Finland Sweden Greece Britain Spain Canada Denmark Belgium Austria France Malta Italy Portugal Netherlands Germany


6.4 6.0








3.7 3.3



2.8 2.7 23



5.5 9.8

3.7 5.1





4.3 4.7




3.9 4.1


forces of competition are probably increasing faster in Europe than anywhere else in the global economy.” The 2004 enlargement put longstanding EU members in direct competition with hungry new members. Bildt singled out two: Estonia, which introduced a flat tax on income in 1994 and has been cutting it ever since; and Slovakia, which has taken the idea a radical step farther with its 19-per-cent tax. Neighbouring governments “can grumble as much as they like, and to little effect,” Bildt wrote, “but for most it will be a question either of reforming their economy or starting to lose important parts of it.”

Bildt’s argument was put in blunter form in March 2004 by the head of Germany’s chamber of industry and commerce,

Ludwig Georg Braun, who said German firms shouldn’t “wait for better policies” in their own country but set up shop in Eastern Europe instead. Many German firms were way ahead of him. Which is why a nice German guy like Norbert Gabriel is living in Slovakia these days.

Gabriel is the director of the Brose factory in the sprawling Lozorno industrial park northwest of Bratislava. Brose makes door systems for high-end luxury vehicles like the Volkswagen Touareg. The Lozorno operation never makes a door until its customers are at precisely the right point in the manufacture of their cars. For the 25-minute trip to the nearby Volkswagen assembly plant, the doors are loaded onto trucks whose side panels carry the inscription, in English, “Just In Time for Volkswagen SK.” Similarly, Brose doesn’t order parts to make its doors until it’s ready to use them. Only two hours’ stock of some key parts is kept on-site.

So a large expanse of the Slovak countryside is a car-making supply chain of fearsome efficiency. Gabriel’s men are paid according to a scheme by which more than a third of their potential paycheque is delivered in bonuses and incentives. Last year they delivered only 150 faulty parts per million; so far this year it’s down to fewer than 10. No country in Europe can match this high-performance supply chain.

Which is pretty amazing when you consider that, until very recently, Slovak history was a succession of dreams deferred. The collapse of Communism at the end of 1989 gave way to squabbling between Slovaks and Czechs. A relatively amicable secession gave birth to the Slovak Republic in 1993. But Slovakia wasted five years under the authoritarian, pro-Russian regime of former prime minister Vladimir Meciar. In 1998, a year after Poland, Hungary and the Czech Republic were invited to join NATO—but Slovakia was snubbed—fed-up voters turfed Meciar and installed Mikulas Dzurinda’s reform coalition.

In many ways it was a rickety alliance. The most serious reforms had to wait until Dzurinda was re-elected, with a more stable government, in 2002. Slovakia has since made up for lost time, passing the low flat tax, overhauling pensions and dramatically cutting government spending. Now, evidence of the late start is all over the place. There’s a slightly wild-frontier atmosphere


—KAI HAMMERICH, president of the Invest in Sweden Agency

in much of Slovakia. Over dinner, a halfdozen Canadians doing business there joked about how the thrill of having clients actually pay their bills hasn’t yet faded.

But last September, the World Bank reported that of 145 countries it studied last year, none had done more than Slovakia to improve the climate for business. “The problem in Slovakia isn’t high prices, it’s low salaries,” Pavol Rusko said. “If we want to improve this situation, we have to improve conditions for those who are generating resources”—business owners and their employees—

“not for those who are distributing resources. Including politicians, of course.”

Rusko’s formula is simple. Work should be rewarded; not working should be discouraged. He even takes it to the international level: if it were up to him, he said, he’d cut Slovakia off, cold turkey, from the generous flow of catch-up money that is one of the principal benefits of being a new European Union member state. “It may be pleasant” to get money from Brussels, he said, “and we are not going to veto this. But we don’t want to spend 90 per cent of our energy on what we can get out of Europe— we want to spend it on what we can produce ourselves.”

Rusko displays the surprising fondness the new European reformers display for the Euro-

pean Union, even when they think its economic priorities are wrongheaded. North American euroskeptics, who suspect the EU is just a plot to rob red-blooded nations like Britain of their vital bodily fluids, enjoyed a good laugh when Poland, Slovakia, the Czech Republic and other member states joined the U.S. “coalition of the willing” in support of the Iraq war. But disagreement with France is not a rejection of Europe. If anything, the new members may be the most enthusiastic Europeans. They simply want Europe to start doing its work differently.

One reason Rusko doesn’t particularly like the money Brussels sends to his government’s treasury is that so much of it

Economics | >


HOW DOES a small country position itself at the forefront of engineering? How does it show that its industries can beat the best the world has to offer?

Sweden has an answer that will be oddly familiar to many Canadians. Sweden designs and builds jet fighter aircraft. Depending who you ask-although it probably helps if you ask a Swede-the JAS-39 Gripen may be the best lightweight multi-role fighter in the world, designed for interception, ground attack and reconnaissance. It’s built by a jointventure group, Saab-BAE Systems Gripen AB. Saab and British Aerospace have equal shares, but Saab is the project’s system integrator, ensuring that components from a half-dozen countries work together in the most demanding circumstances imaginable.

Sweden cherishes its neutrality-the country sat out both world wars-but the Swedes have long made a habit of carrying a big stick. For more than a half-century Sweden has preferred its own fighters-Tunnan, Lansen, Draken, Viggen-to imports. And

Sweden has sold Gripen fighters to South Africa, Hungary and the Czech Republic, sometimes beating strong competition from U.S. and French systems. Spinoffs from Gripen technology have helped contractors, including Saab and Ericsson, keep their competitive edge in their civilian operations. “Today you have four, five nations in the world with this kind of capability,” Kai Hammerich, president of the Invest in Sweden Agency, said. “The U.S., Russia, U.K., France and Sweden. The whole chain from start to end.”

Any resemblance to the Avro Arrow project-which would have given Canada its own homegrown fighter capability but which John Diefenbaker cancelled in 1959—is purely coincidental. Today it may make perfect sense for Canada to stay out of fighter production. But Sweden’s Gripen is a handy reminder that small countries can set themselves the most formidable technical challenges, and get in the habit of meeting those challenges again and again, if they only decide to do so. P.w.

comes from France and Germany. “The Germans and French are actually paying their strongest competitors. If we want the EU to be competitive against the U.S. or Japan or China, the strongest economies must function. We cannot be interested in the stagnation of the French or Italians or Germans.” Which is precisely why business as usual in Europe pains Rusko so. “In its current

form, it’s not sustainable. It’s centralized, bureaucratized, over-regulated.” He recalled the “hundreds, thousands and thousands of experts” the EU shipped to Bratislava to tell the Slovaks how to prepare their economy for accession. “As it turned out, it would be better if they had stayed home and given advice to their own governments. Because the new member states were much

better prepared for the enlargement than the old members.”

Martin Bruncko, a 28-year-old U.S.educated adviser to Finance Minister Ivan Miklós, takes Rusko’s argument one step farther. “I would say more than that. Not only should the experts have stayed home, but the countries that have actually implemented reforms, instead of only talking, should send our own experts west to tell them what to do.” Yet even Bruncko worries that the Slovak boom may not last. There will always be lower-cost jurisdictions to park a factory and save a little on wages. Maybe Romania next year, or India or who knows where. “Probably we’ll stay competitive for the next 10 years. But in the long term, it may not be sustainable. Countries will be successful because they create innovative value, rather than cheaply producing goods created elsewhere.”

Ingrid Brockova, a World Bank representative in Slovakia, agrees. Despite recent attempts to step up scientific and industrial R & D and reform the country’s highereducation system, Slovakia still lags badly in its attempts to build a modem knowledge economy, she said. It’s an argument that clearly irks Rusko. “We don’t need somebody to tell us we need to deal with the knowledge-based economy. We need somebody who would help us secure enough resources so we can do all we need. If Slovakia didn’t have to pay unemployed people or social benefits, but could spend on new technologies, this might make sense. Of course, you can’t skip steps.”

A few days later and several hundred kilometres to the north, Mart Laar shook his head sadly in the cellar of a Tallinn café. “I know they say that in Slovakia. But they are wrong. They must start.” Laar was a 32-year-old historian when he became Estonia’s prime minister in 1992. The tiny country, across the Gulf of Finland from, well, Finland, has had a longer run of freedom and democracy than Slovakia. But along with its Baltic neighbours Lithuania and Latvia, Estonia started further back. The Baltic republics had their sovereignty stolen in 1940 by the Soviet Union under Joseph Stalin. They were, against their will, part of the Soviet Union until it collapsed in 1991. Decades of slaughter and repression had destroyed much of the Estonian population. Too many people disappeared into the nondescript KGB headquarters at 59 Pikk St.—the tallest building

in Estonia, it was said, because from the cellar you could see Siberia.

Then the Estonians had their freedom and very little else. “We were completely dumb,” Laar said. “Not only did we know nothing about the modern economy, we knew nothing about modern technology. We lived in the Stone Age. We were 50 years or more behind the world.” Laar and his government set to work. “I was 32. The minister of defence was 27 and the minister of justice was 28 and the minister of foreign affairs was 26. We did not know exactly what is possible and what is not. It means that we did a lot of things that were known to be not possible. Also, I didn’t know anything about economics.”

The Estonian transition was shorter, sharper, nastier—and in the medium term, far more lucrative—than any other former Communist state’s transition to a market economy. All subsidies to business were eliminated. All tariffs were dropped (until Estonia joined the EU and, paradoxically, had to adopt common EU tariffs against exports from outside). And, crucially, Estonia im-

Estonians made heavy use of public-private partnerships to leverage the state’s tiny resources into big results.

One of the most far-sighted projects was the “tiger leap” program: in six years Estonia

driven Estonia’s leaders to use technology to grind away the gap between what a government can know about its citizens and what citizens can know about their government. There may be no more transparent government on Earth. Within 15 minutes after Estonia’s cabinet starts meeting, minutes appear on the Internet. Citizens can see all government records of themselves online—along with a list of any government employee who has tried to see those records.

Estonia has done robust business exporting its flat-tax policies, first to its Baltic neighbours and now across central and eastern Europe, and its techniques for promoting transparent government. Estonian IT expertise helped develop the Kazaa file-sharing software platform and the Skype voice-overinternet chat system. Almost incredibly, Estonia has carved out a leadership niche in cutting-edge genomics research by developing a massive database of Estonians’ genetic characteristics. If Sweden leads with high skills and Slovakia with low costs, Estonia so far has managed to do both.

Mart Laar resigned as prime minister and




—IVAR TALLO, executive director of Estonia’s e-Governance Academy

plemented a high-tech, high-skills “big bang” that was simultaneous with its market-reform “big bang.”

Laar’s government studied the rise of Japan and Germany after the Second World War, because to the Estonians, their own country, compared to the modern capitals of Europe, looked as though it had been bombed to rubble. “You can make a leap. You can’t use the old technologies. You must move to the most modern ones, because this is your chance. Those big Western countries, which have developed step by step, they can’t make such a leap.” New information technologies, of course, turned out to be far cheaper, pound for pound, than older technologies. And from Day 1, the

wired 98 per cent of the nation’s schools to the Internet. “There were harsh dilemmas,” Ivar Tallo, executive director of Estonia’s e-Governance Academy, said. “Invest in school roofs because water is dripping down, or invest in computers? And we chose the latter. It’s paid off because this new generation has grown up with competitive skills. Whereas if we had repaired the roof, there might have been less humidity in the class, but that’s it.”

Estonians today use the Internet more than the French do. Much of the country is a Wi-Fi Internet hotspot. This year more than 70 per cent of Estonians filed their income taxes online. Most important, the memory of the Pikk Street atrocities has

sits these days as a simple MP, so he doesn’t chat with Tony Blair as often as he used to. But he knows from their earlier exchanges that the current European moment is unusually propitious. Blair has spent his career as prime minister trying to make Britons more European and to make Europe friendlier for people who share Britain’s ideas about the role of government. Now, and only until the end of the year, he has the enormous leverage the EU presidency offers. As if with an eye to that narrow window of opportunity, Europe grew only last year to accommodate a handful of countries that share Blair’s goals and admire his method. “It really is like the cavalry came over the hill at the last minute,” Laar said. M