Eastern Europe Influencing Western Europe?

September 29, 2005

For 50 years of the Cold War, it was the West that much of Eastern Europe looked up to and envied. Now the economic policies of Eastern Europe are being debated for their possible implementation in Western Europe, specifically the flat tax.

These new free market approaches coming from Eastern Europe, however, are being met with some resistance. As Business Week explains:

Russians do it, Romanians do it, even Lithuanians and Latvians do it. So far, though, few in western Europe have fallen in love with the flat tax.

Supporters say the flat tax, a system under which all taxpayers pay the same rate, cuts away complicated bureaucracy and encourages people to work harder, earn more, and keep more of their income.

But some see the flat tax as “voodoo economics,” stealing from poor wage earners and cutting public spending while widening the wealth gap.

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While the domino theory of fighting communism was met with mixed results, a similar domino theory of lower taxes and less regulation is unfolding across Europe. When one country in Eastern Europe that is looking to rapidly grow its economy lowers its taxes for businesses, it encourages business flow, making it a more attractive place for business compared to its neighbor. This forces the neighbor to lower its taxes on businesses in order to stay competitive, which in turn forces its neighbor to do the same, and hence a domino effect.

This domino effect has now reached the former Iron Curtain, or the divide between the former Soviet bloc countries of Eastern Europe and Western Europe. The issue of the flat tax reached that curtain in the recent German elections, where those that were still wary of this flat tax revolution survived the possibility of a complete overhaul, as the article explains. How long this wariness in Germany can persists as Eastern European countries continue to become more competitive is unclear.

Could this impact be felt outside of Europe? In short, yes. As the world becomes a more global economy and geography becomes less a barrier to trade, this domino effect will not be exclusive to countries that are merely geographically close. Or as Thomas Friedman would say, The World is Flat, implying that the global economy is becoming increasingly competitive and differences in economic policies across nations are much more important than they were even ten years ago.

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