Transatlantic Politics

The Eastern European countries are engaging in what seems to be a race to the bottom in the implementation of a flat tax policy & rate. Trying to attract ore foreign investments than its neighboring country Romania, who adopted the flat tax at a rate of 16% in 2005, Bulgaria now announced it will introduce a flat tax of 10% in January 2008, the lowest rate so far. But other Eastern European countries are contemplating the idea of adopting this fiscal policy, and one has to wonder how low they can go with the taxation bar. For instance, the Czech Prime Minister announced in March that a 15% flat tax is "certain" to be introduced next year.

Implemented correctly, the flat tax policy has proved to be successful, at least in the Baltic states (which had higher rates though, between 24%-26%) when combined with strong emphasis on collecting the taxes and cutting red tape. In Romania, though, the policy is a mixed bag, the current Liberal minority government being backed by the Socialists in Parliament, has recently adopted a new pensions law that will most probably increase the social contributions and other hidden taxes. Cutting red tape has not been a priority so far, and foreign investors, although drawn by the new EU country, complain about the lack of transparency, bureaucracy and lingering corruption.

In the same race to the bottom spirit of Bulgaria, the Balkan country of Macedonia lowered its flat tax from 12% to 10% this year, claiming it's a "new business heaven in Europe". According to the Index of Economic Freedom,

"Macedonia is ranked 32nd out of 41 countries in the European region, and its overall score is lower than the regional average. Macedonia faces many challenges, including weak freedom from government, investment freedom, property rights, and freedom from corruption. Government expenditures are high, although state-owned businesses do not account for a significant portion of total revenue. The court system is prone to corruption, political interference, and inefficiency, partially as a result of the country's political turmoil."

Macedonia's agressive PR campaign might be thus a slight overstatement, though perfectly understandable as it is coming from a country that wants to join the EU and become more prosperous. Still, just by lowering the taxation bar and failing on deeper economic and political reforms doesn't do the trick.  Not in the long run.

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There is something about the Baltic states… something refreshing, inspiring and courageous.

Their recent history after the breakup of the Soviet Union is an economic success story with double-digit GDP growth rates. Estonia is the most high-tech society in Europe - with e-government & online voting - having earned the nickname "E-stonia".

Yet listening to the their three foreign ministers speaking about the 85 years of US-Baltic relations at the Heritage Foundation last Thursday, some differences do become obvious. Especially concerning their relationship with Russia.

The most pro-Russian stance was the Lithuanian one. Foreign Minister Petras Vaitiekunas, with a strong Russian accent, underlined several times that "Russia is not the USSR anymore, it differs profoundly" when the discussions were becoming too critical of Moscow. He also spoke of a "political brand of the three Baltic states", a brand that was not reflected in their very different views on Russia.

"We need Russia, so in our relationship, patience is the word" - Petras Vaitiekunas, Lithuanian Foreign Minister

Trying to strike a balance, the Latvian Foreign Minister Artis Pabriks first payed his tribute to the role of the US in the Baltic states' quest for freedom:

"All our achievements, in our economies, but also on a personal and professional level, could not have been accomplished if we weren't free countries. During the Soviet occupation, we used every opportunity to listen to Radio Free Europe, despite the Russian scrambling, and we really believed that one day we will be free countries." 

But talking about the Latvian relationship to Russia, Pabriks said that "this relationship shouldn't be a prisoner of the past".

Latvia just recently ratified a border-treaty with Russia, and the Foreign Minister proudly announced that his Russian counterpart Sergei Lavrov promised to visit Riga, Latvia's capital, soon.  Of the three Baltic states, Latvia should be considered the occupier of the middle ground with respect to how they view Russia.

A tougher stance came from Urmas Paet, the Estonian Foreign Minister, who was much more outspoken and than his Slavic counterparts.

"Russia is building up its foreign policy through confrontation with the US & EU, and through confrontations with its neighbors and the new democracies surrounding it." 

The recent row with Russia over the displacement of a Soviet statue and the following cyber-attacks against Estonian websites prompted the government in Tallinn, Estonia's capital, to take a firm stance against the Kremlin: Estonia successfully pushed to expand NATO powers onto the Internet.

"We experienced three weeks of cyber attacks, with 400 times greater traffic than normal, aimed to completely paralyze our country. The Internet has become the battlefield of the 21st century. It is possible to inflict serious damage in highly digitalized societies, just like a regular attack on conventional infrastructures", explained Paet.

The Estonian Foreign Minister requested that a "legal definition of cyber warefare" be formulated as soon as possible and announced the upcoming opening of a "cyber defense center" in Tallinn. 

Daniel Fried, Assistant Secretary of State for European and Eurasian Affairs,  confirmed the fact that "NATO is already working on the technical cooperation"  regarding  "these unconventional threats: Using energy for political aims, cyber attacks or financial pressure", obviously alluding to Russia's new power policies.

"Russia's policy is to surround these countries, to encircle them. The EU is very many things, but certainly not a conquering imperialist force. And isn't it in Russia's best interest to be surrounded by democracies? Russia should have learned from its experience that it is not democracies who pose a threat, but totalitarian regimes and dictatorships." - Daniel Fried, Assistant Secretary of State

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There is a good analysis on Eastern Europe in the current Economist edition. Bottom line:

"Overheating economies, slow reform and messy politics make a grim mixture"

Common problems: Governments and politicians totally  lack accountability, there is no real desire to further reform the countries now that they joined the EU, they have no strategy for clever economic and social development (similar to Ireland, for instance). And yet, all 10 former communist countries that joined the EU in 2004 and 2007 have "surprising" GDP growth: the Baltics even over 10%. But politics seem to get in the way of the economic boom:

"The underlying failing is weak and indecisive government across the region, which needs years of good government if it is to catch up. Romania, the second-largest east European EU member, is paralysed by a political feud between the prime minister and president. As a by-product, the upper house of parliament has voted to dismiss the justice minister, Monica Macovei. In sunny economic weather, such political shenanigans would be mere details. In a chillier climate, they make east Europe’s future more worrying."

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The small Baltic country Lithuania is teaming up with Poland in veto-ing an EU-Russia agreement that needs to be signed by the end of this year. Their request - to include tougher clauses on energy relations, so that politicized interruptions in gas and oil supplying are excluded in the future.
Russia refuses to sign an EU Energy Charta which would allow its energy market to open up to foreign investors. More so, Russian foreign minister Serghei Lavrov said EU’s new energy policy (developed by another Balte - the Latvian Energy Commissioner Andris Piebalgs) imposes “unacceptable” mechanisms for transit and investment. The key to the stalemate is of course Germany, who heads the EU presidency for this first half of 2007 and who has to keep the thin line between its own national interest (the direct pipeline being built from Russia under the Baltic Sea) and the EU interest - less dependency on Gazprom and the oil-pipeline Druzhba. The Poles and Lithuanians already have been imposed sanctions by the Kremlin, so Germany has to use its bigger negotiating power to obtain some compromise from Mr. Putin.

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