Failed and Asymmetrical Integration: Eastern Europe and the Non-financial Origins of the European Crisis

Erik Reinert () and Rainer Kattel ()

The Other Canon Foundation and Tallinn University of Technology Working Papers in Technology Governance and Economic Dynamics from TUT Ragnar Nurkse Department of Innovation and Governance

Abstract: This chapter argues that the crisis in the Baltic countries can be properly understood only in the context of the dramatic de-industrialization and structural change that took place in these countries, and other Eastern European economies, following the fall of the Berlin Wall. It is argued that with the Eastern enlargement, climaxing in 2004 with formally admitting Eastern European economies into the Union, the European Union gradu-ally abandoned its previous strategy of symmetrical integration . based on principles surviving from the Post World War II era, inspired by Fried-rich List . integrating the region�s economies into a structurally asym-metrical relationship that has common elements with colonialism. Once the real-estate bubbles collapsed, this underlying structural weakness became evident, causing wage collapse and outward migration. We show that the Eastern enlargement . along with financial architecture of the euro zone . also undermined the success of previous waves of enlarge-ments, particularly that of Spain. In the Baltic countries the effect of the crisis was, as could be expected, a massive redistribution of income: wages as a percentage of GDP (the share of �the 99 per cent�) plum-meted by some 6 percentage points while profits and rents (the share of �the one per cent�) rose correspondingly. We also discuss whether the Estonian case actually deserves to be called an .internal devaluation�, and indicate that what apparently dampened the crisis were not local policy initiatives but forces external to the region. The chapter also presents two different scenarios from the crisis in the 1930s . the US and the German ones . and asks if this crisis is likely to follow the US or the German pat-tern of income distribution. It is argued that the pattern likely to be fol-lowed is the German rather than the US one, which in the present context is likely to produce a long crisis and at worst make EU wage reductions permanent.

Pages: 48 pages
Date: 2013-04
New Economics Papers: this item is included in nep-eec and nep-tra
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