Toward a New Central Europe

IV

ECONOMIC PROBLEMS

MICRO- OR MACRO-ECONOMICS *) OF THE
CENTRAL EUROPEAN NATIONS

RICHARD K. BARTONIEK

THE West European nations now realize that a Common Market of several nations is necessary in order to raise their standards of living, competitive strength and to apply successfully modern production methods. Practically speaking, the Soviet Union is also a Common Market. East of the Carpathians there are no internal customs lines; no tariffs; one currency exists; unhindered facilities for long distance transport; and similar trade methods prevail. Thus the Soviet Union expects to reach the living standards of other "common markets,' like the USA, Canada, Australia and Western Europe. The economic future of the next decades belongs to such common markets. Their political form should be federalism or true "confederation" within which Macro-Economics can be practiced. Lacking this Common Market organization, small nations are and will continue to be at a great disadvantage in international competition while their standard of living remains at a low level.

Will not the multinational area between Western Europe and the Soviet Union be permitted to develop its own Common Market? How long will this area remain in its economic straight jacket of miserable micro-etatism which is so obvious to Central European visitors .

A real precedent for a multinational Central European Common Market

The area of the Habsburg Monarchy up to World War I formed practically the nucleus of a Common Market. It had an excellent silver-gold currency, freedom of movement for men and goods with out customs barriers at state frontiers, no passport and visa obligations. Although its political structure was outmoded, from an economic and historical-geographical viewpoint, the area formed a natural unit joined together by the Danube and its numerous tributaries. There were rich natural resources 1) of iron ore, coal and oil deposits, natural gas, water energy, vast forests and fertile lowlands.

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With the exception of cotton and tropical plants, agriculture could produce all the foodstuffs and textiles for a population of 50 to 100 million. Moreover, its economic institutions were not unfavorable to growth and development. The internal customs barriers had long since been abolished; long distance transportation and communication were unhindered. Under such favorable conditions some 47,000 km long railways were built between 1867 and 1913. (See map)2) The map shows how much better developed the railroad system was within the Austro-Hungarian "Common Market" area than to the South and East: Rumania, the Balkans and the Ukraine. The length of navigable rivers exceeded 11,000 km. In fact, plans were already under way to connect the Danube river system with the Elbe and the Rhine rivers. The monetary system was so exemplary that the American dollar was named after the famous Austrian Thaler.3) Before the outbreak of World War I, in my childhood, gold coins of ten and twenty crowns were in common circulation. The credit system, public finances, taxes, cooperation between complementary regions were well developed, and administrative and statistical methods had reached a comparatively high level.

Economic fragmentation after World War I

After 1919, the well-built railway system of the Danubian area (see map) was splintered by the boundaries of the newly created small states. The main arteries of communication, e.g., between Vienna and Budapest, Vienna and Triest, Budapest and Fiume, crossed so many frontiers that transportation and traveling were paralyzed. Several thousand kilometers of solidly built railroads and highways became overgrown and unused. Not only tariff walls were erected between the Succession States but bitter tariff wars frequently erupted. Formalities of customs declarations, export and import licenses became so complicated that perishable foodstuffs could not profitably be shipped from Hungary to Vienna and Bohemia. Moreover, the trade in manufactured goods and raw materials fell off to a large extent.

In 1913, Austro-Hungarian post offices handled 125 million parcels and 65 million money orders. Because of the new state frontiers and export-import license requirements, the number of parcels mailed dropped to one sixth, money to one third - of which the majority were inland. The international credit and money transfer system broke down almost completely. 4) Old public debts were divided between the Succession States but never paid; each new state created its own currency tone worse than the other); bank notes were printed without reserves to back them up, nullified and withdrawn several times. Inflation between 1920 and 1925 reached unprecedented levels; in consequence, savings dwindled, life and other

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MAP 3

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Then intensive pressure and interference were brought to bear by Germany, Italy and finally by the Soviet Union. Beside the payment of heavy war damages and requirements of the armies in the years 1944-1948, the small Danubian countries were obliged to start reconstruction from scratch.

A period of experimentation after 1945

A straight jacket, an etatistic kind of micro-economic was formally re-established under the eye of the Red Army. But even after the Communist takeover of the East European countries, the isolation and estrangement between neighboring countries increased for a period of about fifteen years from 1947 to 1962. During this decade there was scant intercourse over state frontiers with the exception of party and government officials or delegations, and collective groups of visitors. Family members separated by frontiers could not visit although physically they were perhaps only ten or twenty kilometers apart. After 1948 the Yugoslav frontier was completely closed toward the neighboring states, the whole area being sealed off toward the West by an Iron Curtain. Such measures so effectively cut off travel and trade, that one could only dream of a trip from Budapest to Vienna, Ungvar-Uzhorod to Kosice-Kassa or Kolozsvar-Cluj to Zagreb or Pragueówhich before 1918 had been such a simple journey. Most people gave up after unsuccessful attempts to get passports and visas. International trade was and continues to be strictly bilateral, a continuation of the rigid bilateral quota trade system in existence before 1944. All trade is now done exclusively by one Communist state bureaucracy with another state bureaucracy. Each export or import item is considered individually within quota agreements by a series of offices and the two National Banks. Pressures are exerted on all sides, premiums given or denied amounting to

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250-400 per cent above the official rate of exchange. Dumping in exports is practiced systematically by all Communist states.

All East European Communist currencies, including the rubel, are nonconvertible paper currencies for domestic use only. They are not negotiable abroad and cannot be legally taken out of the country. There is a certain official exchange rate but beside this other multiple exchange rates exist for different purposes. 8) E.g., traveling from Vienna to Czechoslovakia, the official rate as given in guidebooks, is seven korunas to the dollar. But over a certain amount the traveler receives 14 and even 28 korunas to the dollar and the black market pays about 40 korunas. In commercial transactions the National Bank grants all sorts of premiums and deducts special surcharges according to the individual case. All this makes foreign trade a purely political and bureaucratic affair.

In Communist satellite countries, domestic prices have also two or three levels having very little relation to the cost of production. For example, in Hungary and Rumania, corn is usually more expensive than wheat while bread is cheaper than wheat, etc. The difference is paid by the State and usually collected from indirect taxes. Every three to five years a complete and arbitrarily fixed overhauling of the chaotic and rigid price system is arranged and a "new economic policy" announced which quickly degenerates into another official blunder and makes calculations uncertain. Within the Moscow led COMECON, the terms of trade between the USSR and individual Communist countries, are kept secret. But those who have access to these figures have found them slanted heavily in favor of the Soviet Unionóthe stronger party to the bargain. The Communist bloc has made great efforts for many years to establish its own "Socialist international price system" independent of the fluctuations of world markets but it has never succeeded and has been forced to return to price calculations based on world prices and the American dollar. In 1962/63, the Soviet Union and its satellites organized an International Bank for Clearing purposes (MBES = Mezhdunarodny Bank Ekonomicheskogo Sotrudnyichestva) which tried to operate with a "transferable clearing rubel." But, because the rubel has no international value, the Poles and others demanded the balance paid in gold which was refused by the Russians. 9)

A brighter future:
an independent Central European Common Market possible

More than twenty experimental years have elapsed since 1945 and fifty years since 1918, but the economic life in Central Europe is still very abnormal, micro-economic and over-bureaucratic. In 1912, a writer like Franz Kafka, or a poet like Rilke could have walked to the railway station in Prague, bought a ticket to Budapest, Paris,

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Rome or London. They could have traveled without a passport to any European country, remain to study as long as their means allowed. Before 1915 an Hungarian engineer, a Czech scholar like Masaryk, a Rumanian lawyer from Transylvania, a businessman from Zagreb or Brunn did not require permission or passport to travel or stay abroad. But now?

Since 1962 most Communist regimes have relaxed somewhat the travel restrictions between their countries although remaining restricted for noncommunist countries. Yet in this respect it is still far from the no passport, no visa, no currency, no restrictions of the Common Market era before 1915. Today's tourist in the Danubian countries is under constant administrative control. He is required to show his passport, have five or six visas that he pays for, declare his currencies of so many denominations and produce other official papers. He must report to the police whenever he stays over a few days. On the other hand, returning to Vienna no one demands presentation of his currencies and statements about his plans, etc. In some respects, however, even free Austria and Switzerland have not yet returned to normalcy. Their own territories are too small for modern industries; their foreign trade is hampered by tariffs and other trade restrictions of other states. Now they are pressed between the East and West. Because they are neutral they cannot join the Western Common Market without causing political crisis.

The solution is a Common Market comprising all the small nations between Germany and Russia, neither isolated nor antagonistic to them. It is possible for two or three common markets to exist side by side in friendship and as good neighbors like Canada and the United States. As the West European Common Market evolved over a period of years so would the economic community of small nations in a neutralized Central European zone develop gradually. Finally, there would be not only a customs union but also a fully coordinated single monetary system. It may be noted that the Soviet Union introduced a currency unit nominally not very different from the American dollar (1 rubel = $1.10). Should not the other six or seven Central European currencies have the same basic unit and have a common Federal Board of National Banks? All bank notes would he federal Central European currency bank notes printed on one side with texts in the languages of all participating nations while on the other side, the text of the issuing and guaranteeing member state would be printed. They could, however, circulate freely in the entire area of the Common Market. Such a coordinated currency system would make possible the development of a single price system throughout the area within five to ten years. Because the production costs and prices would be easily compared, in the absence of internal tariffsólong-distance transport of goods and products would be advantageous and easy. Now that Central European

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countries have been industrialized, the antiquated communication system needs modernization, i.e., roads, trucks for long-distance hauling of perishable agricultural products, airlines, etc.; also, the use of water energy, bauxite, natural gas, etc., resources, navigable rivers, etc. need drastic improvement possible only within a Central European Common Market. 10)

*) The terms micro- and macro- economics are not used in the sense as Communist and some Western economists use them. Micro- and macro do not refer to enterprises but to States.

1) See the 24 volumes of Die osterreichisch-Ungarische Monachie in Wort und Bild. Vienna 1886-1902.

2) E. Radisich: Dunataj ó The Danubian Region Budapest. 1946, vol. II, p. 130.

3) In Bohemia, the valley of Saint Joachim was very rich in silver (at present its rich uranium mines are worked for the USSR). The famous silver Joachimsthaler was coined here since the 15th century. Well received the world over this Austrian Thaler became the ancestor of the American Dollar.

4) Leonhardt Compass. Finanzielles Jahrbuch Band: Osterreich; Ungarn; Yugoslavien, Rumanien, Tschechoslowakei, etc. Wien (Yearly publication on finances) .

5) Royal Institute of International Affairs South Eastern Europe. A political and economic survey. London 1939.

6) League of Nations: Balance of Payments, 1920-1937; League of Nations: International Trade Statistics, 1920-1938.

7) League of Nations. Report by the Stresa Conference for economic restoration of Central and Eastern Europe Geneva 1932.

8) See the description of multiple rates of all East European paper currencies in the authentic Pick's Currency Yearbook, New York. (Last volume 1965/66.)

9) Early 1967 the COMECON countries held a conference in Budapest on their almost unsolvable present price, trade and currency problems.

10) Interesting ideas in this field may be found in the lecture of Dr. Joseph Klaus, Austrian Chancellor, given in Budapest, May 3, 1967 on "An active policy of international relations in the Danubian Valley" published in the New Hungarian Quarterly. Budapest. 1967, no. 27, pp. 3-9. In the same issue Tibor Petho, a political commentator, favors "Modern forms of cooperation in the Danube Valley." pp. 10-17. See also the Budapest report of David Binder "Hungary Pursues a New Policy, Stressing Danube Cooperation" (New York Times Oct. 2, 1967).

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Toward a New Central Europe