The UK-EU split: The impact on Central Europe

By Tomas Valasek

The UK decision to boycott the new EU treaty removed an important liberal economic voice from the centre of European decision-making. This has left like-minded EU countries, including most of the Central European states, in a far weaker position to resist the etatist tendencies of France and (to a lesser extent) Germany - all the more so because Britain's actions have also shifted power in the EU from small to big states.

I spent the weekend at a Central European ‘strategy forum’ organised by the Slovak Atlantic Commission and attended by senior officials from the Czech Republic, Hungary and Slovakia. The economic crisis and last week's summit dominated the debates. The prevailing sentiment was one of disappointment that the new 'fiscal union' will operate on an intergovernmental basis: because the UK vetoed a new EU treaty the rest of the member-states will now set up a club outside existing EU rules. This weakens the role of common institutions such as the European Commission (in which each country has one member). The smaller countries prefer strong European institutions because they help balance the power of big member-states such as Germany and France. Germany wanted to work through the EU institutions too but France prefers a new club, seeing it as a way to undo the 2004 enlargement. The UK veto played into Nicolas Sarkozy’s hands, and cemented the dominant role of Germany and France in the new fiscal union, to the alarm of the Central Europeans. "We are being presented with decisions on which we have minimum influence", one official said at the event in Slovakia.

The new balance of power in Europe raises several worrying possibilities. The first is that the inner core will continue to shrink. This is because the perception of a Franco-German diktat is feeding a populist backlash in smaller countries. Voters in Central Europe but also in Finland or the Netherlands are alarmed by a lack of influence over their own affairs and turning to Eurosceptic parties. The Central Europeans worry that this might eventually cost them membership in the fiscal union: "The more excluded we are, the more difficult we find it to pursue sensible policies, and this in turn gives France more reasons to kick us out altogether", one participant observed.

The second key concern for the Central Europeans is that France and Germany may try to expand the remit of the core group beyond issues such as national budgets and deficits to include taxes or labour standards, as Nicolas Sarkozy's and Angela Merkel's joint letter from before the summit sets out. This presents a direct threat to the Central European economic model built on low taxes and investor-friendly laws. In particular, the French desire to harmonise some tax rates might remove one of the Central European economies' competitive advantages. I have heard a prime minister of one country in the region argue that "the freedom to set our own tax levels is an existential issue, for which we are willing to leave the core". If Paris and Berlin agree to unify tax rates, the EU's fiscal union could quickly lose more countries – as it is, the Czech and Hungarian governments asked for more time to assess whether they want to join in the first place.

In theory, the Central Europeans can veto any move to harmonise tax rates because it requires unanimity. In practice, smaller countries need the support of others to resist the pressure from the big countries. In the past, the UK could be counted on to fight alongside the Central Europeans to keep decisions on taxes and social issues in the hands of the capitals. But at the summit, London has managed to "drive itself towards the edges of European politics", one Central European ambassador said at the event in Slovakia. The remark was offered with regret, not glee. On social issues, taxation or the single market, the Visegrad countries are firmly in the UK, not Franco-German, camp. But they have little sympathy for David Cameron, who is seen as having brought the isolation on himself, and blamed for weakening common institutions and thus reducing the power of smaller states.

Another priority which the Central Europeans share with the UK is economic growth and a wish to rebalance Germany's one-sided insistence on fiscal austerity with measures to boost the European economies. At the Central European strategy forum, some think-tank participants argued that governments in the region should join forces with London to launch a drive to cut red tape and expand the EU's single market into new realms such as services and digital economy. The UK had proposed similar measures a few months ago, to little avail. A new joint initiative, in addition to boosting growth, would have the added benefit of underlining that decisions on issues such as single market, labour standards and tax rates are for the 27 to decide, not the core.

But the government officials present at the event showed little interest in the idea. Privately, they say that Britain has become toxic by association; that ideas which it sponsors will be resisted on principle, not on merit. And for governments that share London's liberal view on the economy, that is a depressing conclusion.