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The Shaping of a New Europe
In Budapest in the hearth of Europe, I was asked to speak May 21 on how a new Europe is gradually emerging. Starting with the fate of Budapest itself, I try to describe not the least the economic challenges ahead of us.

The Shaping of a New Europe

Here, in Budapest, you are truly in the midst of the shaping of the new Europe.

A few days ago, the Parliament of Hungary meets for the first time after the recent elections, and the President asked for the formation of a new government.

A fairly normal occurrence in most of our countries, but a privilege in a country that until only slightly more than a decade ago was deprived of even its most basic freedom.

Budapest has been the scene of some of the most dramatic events of the modern history of Europe.

It was here, in the final days of 1944, that one of the last dramas of the Holocaust was played out.

When Hungary in the autumn of 1944 sought a peace with the Allies, the hard-core Nazis took power, the divisions of the German Army moved in and the SS henchman Adolf Eichmann was sent to finish off the last remaining major Jewish population of Central and Eastern Europe.

Literally as the guns of the advancing Soviet Armies were heard, the junior Swedish diplomat Raol Wallenberg went around and tried to save as many as he could. While the Jews of the Hungarian countryside were rounded up and marches to their death, he talked and manoeuvred to save thousands after thousands in the beleaguered ghetto of Budapest between the early days of November and the final Soviet advance in late January of 1945.

At the end of the day his actions during those weeks saved the lives of more than 100 000 persons that otherwise would have met a certain death. In January, with fighting still raging in the city, he himself was arrested by the Soviet forces, sent off to Moscow, never to be seen again.

His fate has never been entirely clarified, but in all probability he was murdered at the order of Stalin in the summer of 1947.

But Budapest and Hungary weren’t really “liberated” by the Soviet armies. It was the beginning of a new nightmare.

With the use of the famous “salami tactics”, a brutal Stalinist dictatorship was imposed on the country. Deportations, concentration camps and show trials become the order of the day. These were dark, horrible years across half of Europe.

In the mid-1950’s, enough was enough. When there was sign of the slightest of relaxation in Moscow, the people of Hungary rose in open revolt. In October of 1956, a popular rebellion truly liberated Budapest, and the pictures of the jubilant freedom fighters went around the world.

But the joy did not last. On November 4, the Soviet divisions re-entered Hungary, and fought their way back into Budapest in their tanks. Fierce fighting lasted for days in the streets of the city.

Thousands died. More than 200 000 fled the country. At the order of Moscow, the symbol of the attempt at freedom, former Communist leader Imre Nagy, was secretly tried and executed in 1958. A new darkness descended on the country.

But gradually, from the late 1960’s and onwards, Hungary found its own compromise with its fate. Gradually, it turned into what was often referred to as the best barrack in the camp.

But in the late 1980’s, it was obvious that time for change had come again. Again, Moscow was starting to crumble.

The painful memories of 1956 played a key role. Suddenly, it was proclaimed that “the events” of 1956 hadn’t been a counter-revolution, but a popular rising for freedom. The rehabilitation and reburial of Imre Nagy in the summer of 1989 energized the nation and paved the way for its true breakout from the Soviet system.

The borders to Austria had been opened for the citizens of Hungary already in May. Suddenly, there was a gaping hole in that Iron Curtain of barbed wire and minefields that stretched all through Europe. At the news of this, tens and tens of thousands arrived from East Germany – the so-called German Democratic Republic – in order to get out of their prison camp and into West Germany.

And it was the decision of the then Hungarian government in September of 1989 to let all those leave for West Germany that truly sealed the fate of the Soviet empire in Central Europe.

Like dominos, everything started to fall. Soon thereafter, the wall in Berlin fell, the entire GDR collapsed, the Soviet Union ceased to exist and we started a completely new chapter in the history of Europe.

Suddenly, there was the need to build no less than a new order of peace and prosperity in Europe. No longer based on military strength and deterrence, but instead on economic and political integration.

The last ten years have seen extraordinary successes and extraordinary failures in this quest for a better Europe.

If you follow the Danube downstream, you soon reach the mighty old Turkish fortress of Kalemagdan as the river Sava enters the Danube by modern-day Belgrade. Here, the Pannonian plains give way to the hills and the mountains of the Balkan peninsula.

Here, the mosaic of cultures and peoples of nations produced both by millennia of rule by multi-ethnic and multi-cultural empires, often centred on the Constantinople of yesterday that is the Istanbul of today, as well as its position as meeting place - between East and West, Europe and Asia, Christianity and Islam - has produced a brew of both creativity and conflict which we have had great difficulties in handling.

Wars in the Balkans are not something that is new.

The first decade of the 20th century, up to those shots in Sarajevo on the 28th of June 1914 that initiated the series of events that started the series of global wars of the first half of the century, was filled with them. But we were still unprepared for them as they started anew a decade or so ago.

Since then, we have seen wars or violent conflicts in Slovenia, Croatia, Bosnia, Kosovo as well Macedonia. Millions were forced to flee their homes.

Today, we have more than 40 000 international soldiers stationed there as we try to facilitate a more stable peace. But we have to recognize that core issues are still open, and that we are far from that self-sustaining stability that we are seeking.

The key lesson of the wars in the Balkans is that while nationalism can be a healthy force, it can also easily turn into a deadly one, and that it is only when embedded in wider structures of integration that the different nations of Europe will be secure, not least in their relations to the other cultures and nationalities that will increasingly be found within their borders.

Thus, the wars south of here served to remind us of the enduring necessity of building structures for integration to secure peace, and of the fact that until we have done so in all of Europe, we cannot say that peace in our time and in our part of the world is truly secure.

This is the essence of the process of gradual enlargement of the European Union. Economic integration certainly brings huge economic benefits. But the main benefits are the political ones as we create more of security and stability in that large part of Europe that lies to the West of Russia and the Ukraine.

Since its start in 1958 - then centred on the task of overcoming the centuries-old conflict between France and Germany - the European Economic Community of six nations then have become the European Union of 15 countries today.

But the great leap is ahead of us.

Negotiations are now about to enter their final and most difficult phase as no less than ten different nations – from Estonia to Cyprus, including Hungary – are aiming at signing their treaties of accession to the European Union in Copenhagen in early December this year.

After referenda during next year, they are scheduled to become full members by the beginning of 2004, taking part in the elections to the European Parliament in June of that year.

It has taken time to go from the peaceful revolutions of 1989 to the imminent enlargement of the European Union. Some of these countries – Hungary among them – have already been members of NATO for more than two years.

But what has been achieved has been enormous. And the aim of integration with the rest of democratic Europe is what has inspired the reforms and changes during these years. It’s been a question of building stable democracies, of creating competitive open economies, of securing the rule of the law, of setting up a functioning state structure in countries where virtually nothing of this existed.

Socialism not only denied these countries their democratic freedoms, but also created gigantic bureaucracies, everyday corruption and old-fashioned, uncompetitive economies tied into a rigid Soviet system.

Virtually nothing in these economies was ready to meet open competition from the world markets, not to speak about being able to compete on these. They were truly bankrupt.

Since then, they have all had to learn the noble art of building capitalism.

Different countries chose slightly different routes. While Russia hesitated, and the Balkans plunged into war, the Baltic countries and those of Central Europe plunged ahead with the privatisation of state assets, the liberalisation of the one market after the other and the introduction of institutions along Western models. Old subsidies were slashed, and old industries were closed down.

The more radical the reforms, the more rapid were the results.

If we compare with the starting point ten years ago, Poland today has a GDP app 50 % higher, while Serbia with its socialism and sanctions has a GDP only about 50 % of what it was then. Slovenia leads the league in GDP per capita, while Estonia probably leads the league in terms of the consistency of its reforms.

As a consequence, we have seen capital and investment flowing into these countries. They have been some of the most attractive investment locations in the world during the last few years, with Poland and Hungary in the lead, and the Czech Republic now catching up very fast.

We have seen – just to highlight one example - German industry moving east. Look at Hungary. Here, German companies have invested more than 10 billion Euros, directly created more than 200 000 new jobs, and today app a quarter of the GDP of Hungary comes from companies in which there is a smaller or larger German interest.

How many know that all those smart Audi TT’s that are the envy of so many are coming off their production lines in the Hungarian city of Györ?

The success story is obvious – from the Baltic Sea to the Balaton Lake. But we also know that there is much more that needs to be done.

GDP per capita in Hungary is still app half the average level of the present members of the European Union. This is roughly the figure for the entire region of Central Europe and the Baltic states.

If we go south, the figures are of course well below those levels. In much of South Eastern Europe, we are seeing a level a tenth of the average for the European Union.

Over time, these gaps must diminish, and we must create the conditions for this to happen. Half of Europe must overcome the tragic legacy of the decades of the socialist systems.

Experience shows that this is indeed possible.

In 1972, Ireland joined the then European Communities as its by far poorest member state. Since then, it benefited not only from the open markets and the direct support of its European partners, but also from its own policies of a creating a world-class environment for entrepreneurship and education, attracting both capital and talent from the rest of the world.

Today, figures show that Ireland has gone from the poorest member country in 1972 to the second richest in 2001, surpassed only by tiny Luxembourg with its special conditions. And the success of Ireland vividly shows the possibilities that European integration opens – but also the necessity to pursue policies that truly makes use of these.

This must be the course of Hungary and the other countries of Central and Eastern Europe within the new larger European Union. But it must also be the course of all of the European Union within the wider global economy.

During the 1990’s much effort was going into creating an economic and monetary union in Europe. Against many odds, it was in fact created, and we now have a common currency from Athens and Lisbon in the South to Helsinki in the North, with only three exceptions for the time being.

During the same decade, some countries speeded up the process of liberalisation and deregulation, and benefited from the results, while others lagged behind.

Sweden and Finland – just to take one example - paved the way for the radical liberalisation of telecommunications, and thus emerged as the two leaders in the transition of the European economies to the information age, while others took it more slowly, and still have to see the full benefits. It was only in 1998 that all of the countries of the EU did in this respect what Sweden and Finland did already in 1992.

Overall, it is obvious that we have done too little in these respects, and will have to do much more.

At their first meeting in the new century – in Lisbon in March 2000 – the leaders of the European Union set the ambitious aim of creating the most dynamic knowledge based economy in the world within a decade. In plain English - of catching up, and perhaps even overtaking, the United States and its vibrant economy.

That’s a tall order.

The transformation of the US economy started during the 1980’s, and gathered speed as the combination of the more open and flexible markets and the speedy introduction of new technologies created rapid growth in productivity and in the overall economy. From the mid-1990’s we saw the emergency of an economy performing in a new and better way.

Had the countries of the EU been growing as fast during the 1990’s as the US did, it would today be richer by the magnitude of an economy the size of the present French economy.

In fact, the gap between the US and the countries of the European Union hasn’t been as wide as it is today for more than a quarter of a century.

To close this gap will not be possible with aggressive structural reforms in all the European economies. But even so, it will take time. If we were to achieve an economic growth rate in the present EU no less than 0.5 % higher than the US growth rate year after year, it would still take more than a quarter century for us to get back to the relative situation we had between Europe and the US in only 1990.

We need to understand the reasons for the gap that we have seen.

It’s not that the US economy has access to technologies that are radically different or radically better than the technologies we have access to. Access to the advances of technology is truly global.

We can talk about two different differences.

The first is the level of investment in new advanced technologies in the respective economies. Here, the US is in a clear lead. Even after the distinct slump in high-tech spending, the relative levels of high-tech investment in the US are higher than the corresponding levels in Europe before the slump we have seen here as well.

But the second difference is probably even more important. And that’s the ability to innovate, change and adapt when it comes to using these new technologies across the board in the economy.

We have in fact learnt that initially investments in new technologies tend to slow down the rate of growth in productivity rather than the other way around. The explanation is that we tend to use new things in old structures and in old ways, and there is a corresponding mismatch between the two.

It’s only when we start to combine investment in high technologies with innovations in structures that we start to truly see the great gains.

This is the pattern of previous periods of technological revolutions, be that the steam engine in the early 19th or electricity in the early 20th century. And it is this that we started to see in the US economy from the mid-1990’s, which has the potential to dominate the early 21st century, but which we still have great difficulties detecting to any greater degree in the European economies.

The task ahead is thus an obvious one.

We have to increase the flexibility and adaptability, the climate for investment and innovation, throughout our economies, from the individual entrepreneur over the existing firms to the structures of the state itself. All have to do their share.

It is only thus that we can truly benefits from the revolutions in science and technology sweeping in, and create that new wealth that will be needed to integrate Europe and integrate our societies.

Tensions over immigration in a number of European countries have highlighted not least the later task. If integration of new citizens fails, tensions are bound to rise. And there is no better instrument for integration than a vibrant economy where everyone truly gets his or her chance to move forward.

In some respects, the countries of Central and Eastern Europe might have a greater potential than the countries of Western Europe when it comes to the transformation ahead. For these countries, the need to change and reform is obvious. For them, old structures meant old poverty and old repression. The urge to change, and the determination to go forward, is sometimes stronger in here than there.

Thus, we see a new Europe taking shape as a consequence of the gradual enlargement of the European Union to include all the countries to the West of Russia and the Ukraine and of the necessity to make our economies and societies more flexible and more vibrant in order to fully use the potential of the technological revolution.

We are, in my opinion, no more than half the way since the revolutionary year of 1989 with this momentous task. A constitutional convention is now elaborating how we should move forward with the building of that federation of nation states that is gradually emerging, based on the diversity that is the strength of Europe, but also on the determination to both secure the peace in Europe and contribution to peace in the wider world.

And this task obviously has gained an increased urgency after September 11 last year. There is no security for Europe alone. We cannot be secure if there is instability and turmoil in the world around us. And there will be instability and turmoil if core issues of development and reform are not addressed. .

The last four decades have seen income level in the developing world doubling. It’s been the fastest decline in poverty in human history. Contrary to popular belief, the gap between rich and poor in the world, after increasing for more than two centuries, has started to decline.

But still we see progress as too slow, and we know that it is too uneven, with important parts of the world still left out. Most of Africa South of Sahara. And most of the rapidly increasing and increasingly important Muslim world.

The neighbours of Europe are Russia, with its ongoing transition, and the Greater Middle East, from Morocco to Afghanistan, with its increasing turmoil. In the longer perspective, it’s easy to see that security here will be dependent on stability there. And stability there will be a function of the rate of economic and political reforms that can be achieved.

Today, these countries have app 300 million inhabitants. Fifteen years from now, they are likely to have app 400 million inhabitants.

On present trends, there is a high probability that by then most of the Greater Middle East will be significantly more populous, significantly more urban, significantly poorer and – accordingly – significantly more desperate.

The consequences of this are obvious. And this must impact on the urgency that we must feel in building our new Europe.

If we have strong economies, we can help.

If we can stand together in political terms, we can influence, and we can be a partner.

If we can liberalize and reform our economies, we are setting a model.

If we can show that old divisions can be overcome, we can set an example to those other parts of the world that otherwise risk being torn apart by tensions and turmoil.

Budapest has come a long way since those events in 1944, 1956 and 1989 that I referred to. But much as your conference will discuss the need for new investments and new innovations, we need to forge ahead with the same on the level of Europe as a whole.

Bildt Blog Comments

In addition to this webpage, and the email letters ongoing since 1994, I have now started a blog as well.

You find it at

At you will continue to find articles, speeches and different documents.

At the blog there will be the shorter and perhaps somewhat faster comments.

And the e-letter continues to give at the least an attempt at analys.

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