5. Europe as an Open System

How can the enthusiasm of the moment be converted into fact? As I have said before, membership in the European Community should be acknowledged in principle; but in the near term, association must take a lower form: access to the Common Market, economic assistance from the West, and the multiplicity of cultural and institutional ties that befit a pluralistic society: Equally important is the forging of ties among the East European countries. There is a latent rivalry between the European ideal and nationalist aspirations which could easily turn into overt hostility. In the only East European country where party politics have already developed, Hungary, the main division is drawn along this line. It is just as important to avoid hostility between the European and national ideals as it is to avoid hostility between the various nationalities. This means that it would be dangerous to propose a Central European Confederation, unless it was a stepping stone to membership in the European community. Without Western backing such a proposal would create more problems than it solves. For instance, the Slovaks may want to participate as a separate unit, upsetting the Czechs. The ground has to be prepared gradually, with increased contacts and shared institutions. It is up to the West to show leadership in this respect, and to deal with Eastern Europe on a regional basis rather than country by country.

An important step has already been taken. At the instigation of President Mitterrand, an East European Bank for Development and Reconstruction is in the process of being established with an initial capital of five or ten billion ear. The institution will function as other regional development banks do, and its capital is large enough to make a difference.

There is another area where action would be required at least as urgently as in financing development; that is in financing intra-regional trade. The Communist trading system, COMECON, is on its last legs; yet it plays a decisive role in the economies of Eastern Europe. The breakdown in trade with the Soviet Union has already begun and it threatens to leave the East European economies in shambles. The Sofia meeting of COMECON in February 1990 has resolved to design a new trading system as fast as possible but it is fair to say that, left to their own devices, member countries will be unable to do so. At best, there will be a series of bilateral arrangements, similar to what happened in Western Europe after the Second World War. At that time the United States came to the aid of Western Europe by financing the creation of a European Payments Union. That was the foundation of European economic recovery and of the evolution of a European economic community. There is an urgent need for similar assistance in replacing COMECON by a market-oriented institution that fosters trade in the region. That would be an appropriate replay of the Marshall Plan and the European Payments Union.

After the Second World War the problem was that European countries had an insatiable appetite for imports from America, but could not pay. Now the problem is that the East European countries depend on the Soviet Union for their energy and other raw material imports; the Soviet Union has an insatiable appetite for their exports but production and trade is organised on totally uneconomic lines so that the Soviet Union receives shoddy goods and East European industry remains uncompetitive in world markets.

The present plan is to switch COMECON trade to hard currency. This is bound to cause a virtual collapse in trading. The Soviets will cut back on their imports from Eastern Europe because they have no hard currency and to the extent that they can, they prefer to buy from the West. The East European countries will have to continue buying oil and other raw materials if not from the Soviet Union then from other hard currency sources, causing a significant deterioration in their balance of trade. Eastern Europe will be deprived of its export markets and the Soviet Union will be deprived of the goods that Eastern Europe supplies, however shoddy they are. That is the road to economic disintegration.

There is an alternative, but it requires Western assistance. An East European Payments Union sponsored by the West could provide a transition mechanism from uneconomic to market-oriented trade among the COMECON countries. Trade would be carried on in local currencies; only the differences would be settled in dollars. That means that each country would have to open its markets to imports and trade would expand rather than shrink as it would under a direct switch to hard currency settlement. Some of the difference would have to be settled in cash by the deficit country; some would be financed by the surplus country. The Western countries would act as bankers and guarantors of the scheme. Limits would have to be set as to the amount of credit available to deficit countries and remedial steps would be prescribed long before the limits are reached. The steps would include both devaluation and tight money. The participating countries would thus be subjected to the dual discipline of import competition and monetary constraint: they could not escape a full-scale conversion to market economies. Western participation is necessary to give the scheme credibility.

At first, the East European countries are likely to run a deficit vis-a-vis the Soviet Union because even if the Soviet Union continued to accept shoddy goods, it would pay less for them in hard currency than it does in COMECON barter. But gradually East Europe would increase its exports both in quality and quantity because the Soviet Union is a natural market for its products. Exporting to the Soviet Union would not be as harmful to East European industries as it is at present because they would have to compete on price if not on quality and they would earn hard currency. The danger is that Eastern Europe would develop a chronic trade surplus vis-a-vis the Soviet Union. It is at that point that the question of controlling the money supply within the Soviet Union would become a critical issue. The West cannot be expected to subsidise East European exports to the Soviet Union indefinitely. If trade is to be carried on in local currencies, the ruble has to be turned into a real currency.

The concept of an East European Payments Union could be extended to the Baltic States. That would allow the Baltic States to maintain their trade with the rest of the Soviet Union while enjoying local autonomy. In this way, Western credit could directly contribute to the transformation of the Soviet Union into a confederation.

The broad outlines of an economic policy towards the erstwhile Soviet Block are beginning to emerge. We may list the various steps according to the degree of difficulty and cost:

1. Economic assistance to East European countries to facilitate trade among themselves;

2. An East European Payments Union including the Soviet Union to replace COMECON;

3. Extending the East European Payments Union to the Baltic States;

4. Establishing and funding a functioning monetary system within the Soviet Union.

The proper place to start negotiations is at the second level. Neither the West nor the Soviet Union is properly prepared to start any higher; but to start at the lowest level and to deliberately exclude the Soviet Union from a proposed East European Payments Union would be not only an unfriendly gesture towards the Soviet Union; it would also confirm the economic disaster which is about to overtake Eastern Europe.

If the negotiations are successful, they will soon escalate to stages 3 and 4 because within two or three years the East European countries will begin to develop a trade surplus with the Soviet Union, and a functioning monetary system will be needed to prevent the Soviet Union from becoming a bottomless pit for East European exports. Settling relations between the republics and the Union is, in turn, a precondition for a functioning monetary system. If, on the other hand, negotiations with the Soviet Union do not make any progress, stage 1 will become a suitable fallback position.

Poland, Hungary and Czechoslovakia would be in a position to introduce an East European Payments Union almost immediately and East Germany should be in a similar position soon after the elections. All they need is the financial resources to make their currencies convertible for trade purposes. There would be quite a shock to the system, especially in Czechoslovakia where the necessary structural changes have not yet been introduced, but the economy ought to be able to take it. Indeed, it would make the internal transformation more viable. One of the main obstacles to the proper functioning of the market mechanism is the monopolistic position of most enterprises: competition from abroad would prevent the monopolies from exploiting their position beyond a certain point. Exports may also provide a safety valve when domestic demand collapses, as is now happening in Poland. Of course, there would be tremendous dislocations, structural as well as transitional unemployment, and often painful adjustments of relative positions. But Western backing for the scheme would give some assurance of better days ahead and ensure that the political will necessary to carry out the adjustments would be mustered.

The Soviet Union is less well prepared. Of course the internal markets could be opened up and they could absorb almost any amount of imports. But how to prevent them from becoming a bottomless pit? That is where the problem lies. Far-reaching reforms need to be introduced and the Soviet Union has neither the experts nor the institutions for carrying them out, not to mention the necessary political will. It may become easier to forge a political consensus when the markets are flooded by imported goods than it is now; but it would be impossible to get a monetary system working without foreign technical assistance and even so, there would be a lot of slippage making the scheme expensive for the West. In my opinion, the political benefits would render the cost and effort well worthwhile. Unfortunately, that will become apparent only after the West has failed to act. If and when the disintegration of the Soviet Union turns into civil war, millions die and a few nuclear accidents occur, the benefit of preventing these things from happening will be obvious.

Apart from the economic issues, the West ought to engage on a much larger scale in the kind of cultural, educational and intellectual assistance that my foundations are providing. Many such initiatives are already in various stages of realization and there is a great untapped potential in both Western Europe and the United States, not to mention Japan. It will take time before these efforts produce visible results and, if my analysis is correct, time is in short supply. That should not discourage anyone; on the contrary, it is a reason for moving more aggressively. The intellectual capital that is developed in these countries will not be lost, even if actual conditions take a turn for the worse; indeed, it will become more precious because it cannot be readily replaced. Take China: the clock cannot be set back because people have learnt about the outside world. Or visit Romania: Ceausescu has created a cultural wasteland which will make it very difficult for democracy to take root. I shall mention only one example from Hungary: the recent reform of Karl Marx University was spearheaded by a few people who visited the United States on Ford scholarships in the 1960s.

I, for one, have decided to go all out with my foundations in 1990, exactly because I am so pessimistic about the outlook. If my analysis is correct, I may not have the opportunity to spend so much money in the Soviet Union in the future; and if everyone followed my example, my analysis would prove incorrect.