Central Europe and the European economy

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By Thibaud Cassel.

Central Europe – Economic competition confronts Europe with the rest of the world, but first of all European countries with each other. The political dispute over migration quotas has recently crystallized one of the economical tensions that runs across the continent: some comparative advantages of Central Europe vis-à-vis Western Europe and the relevance of the distribution of European Structural Funds.

This article aims to unravel the web of European interdependencies, analyze the economic and political logics at work and identify, as much as possible, some perspectives.

I. The collapse of the Eastern Bloc

1. 1990s: economic transition or transition of civilization?

The IMF dates the transition to the capitalist economy of China in 1978, that of Vietnam in 1986, but this same IMF does not take into account Perestroika in 1986 for the Soviet Union, or 1982 for Poland, with the declaration of urgency and the concomitant program of economic reforms, nor 1968 with the first economic changes implemented in Hungary: for the countries of the Warsaw Pact, only the date of the collapse is retained. (Communism had certainly lobotomized its satellite economies: Czechoslovakia, the world’s 10th largest industrial power in the interwar period, ranked 40th in 1990). But this choice has the consequence, if not the aim, of delegitimizing, beyond the socialist regimes, the countries themselves and the affirmation of their economic interests. They then had to be educated by the exclusive neo-liberal principles, which triumphed in the United States under R. Reagan as in the EEC with the adoption of the European Single Act (1986).

To this end, the European Bank for Reconstruction and Development (EBRD) was founded in 1990. Headquartered in London, its first president is none other than Jacques Attali. The speech pronounced on April 15, 1991 by François Mitterrand, at the inauguration of the Bank, exposes in a remarkable way the different logics at work in this project and their current consequences.

The restored unity of the great European family, proclaimed with emphasis, naturally constitutes a cornerstone of the speech. The other two important aspects are complementary: a market economy and a modern democracy, like the two perspectives of the same horizon of the “end of history”: European civilization arrived safely to its outcome.

We can see how much the EU yoke of 2018 is already in place, while the EEC of the 12 has not yet adopted the Maastricht Treaty …

2. Foreign capital and emerging markets: from complementarity to grabbing

In the early 1990s, the mature economies of the west saw a windfall in these so-called “emerging” countries, which are only emerging markets, and open to quasi-colonial development: the absorptive capacity of productions of rich countries (especially their multinationals) and use of their labor force to increase the profits of these same multinationals (offshoring). These countries have not been left with the choice of their role. They have been deindustrialized before being reindustrialized, to suit the needs of Western European capitalism.

What defines the level of colonialism is the degree of political independence of the emerging market; and the whole difference between the CEECs and China is that the latest set the rules for its economic transition, while the CEECs had nothing to do with the complacency of the socialist elites who jumped from an ideology to an other without caring to defend their national interest, these elites cultivating the habit of serving foreign interests. Thus, the change of regime is called “change of gangsters” in Hungarian.

The weakness of the states, the shocking effect of an unexpected collapse and the fervent desire to return to the European family have concurred, in the CEECs, to give way without measure to Western, and especially German, investors. As Thomas Pikkety recalls on his blog, they “have gradually become the owners of a considerable proportion of the capital of the ex-Eastern European countries. This amounts to roughly a quarter if we consider the complete stock of fixed capital (including housing), and over half if we restrict ourselves to the ownership of firms (and even more for large firms).”

II. A “Profiteering East” or a “Predatory West”?

1. ERDF, ESF, EAFRD: what is the use of the EU Structural Funds?

The Structural Funds are part of the same “development” logic as the EBRD. What differs is the origin of the funds. They come mainly from the pocket of the West European taxpayer and not from shareholders. They are therefore not loans but tools put in place by the EU to make Europe a coherent economic whole, and then enjoy mutual benefits. Moreover, in this same spirit of cooperation, the co-financing of projects requires the participation of the recipient countries.

From a strictly economical point of view, the structural funds are the institutional aspect of the liberal double logic: to develop the market and the society the most adapted for its optimal florescence (the so-called “open” society). This double development operates under the rule of law.

2. A balance that benefits Western capitals

The balance of Central Europe between inward public transfers and outflows is clearly in deficit. This is again demonstrated by Thomas Pikkety on his blog. “The rate of return on the private investment from the West was high and that the flows of profits paid today to the owners of the firms far exceeds the European transfers going in the other direction.” The Structural Funds are not alms, but a lucrative investment: “a considerable share of the higher incomes from the East European capital are paid abroad.”

From Piketty’s blog: http://piketty.blog.lemonde.fr/2018/01/16/2018-the-year-of-europe/

The economist thus explains his graph: Between 2010 and 2016, the annual outflow of profits and incomes from property (net of the corresponding inflows) thus represented on average 4.7% of the gross domestic product in Poland, 7.2% in Hungary, 7.6% in the Czech Republic and 4.2% in Slovakia, reducing commensurately the national income of these countries

By comparison, over the same period, the annual net transfers from the European Union, that is, the difference between the totality of expenditure received and the contributions paid to the EU budget, were appreciably lower: 2.7% of the GDP in Poland, 4.0% in Hungary, 1.9% in the Czech Republic and 2.2% in Slovakia (as a reminder, France, Germany and the United Kingdom are net contributors to the EU budget of an amount equivalent to 0.3% – 0.4% of their GDP.

3. A ruthless economic logic

Tax optimization …

The trend is not encouraging. Multinational companies are organizing to pay less and less taxes, as the Visegrád Post recently detailed. While Romania has experienced a growth in its GDP of 7% last year … the tax revenues of the Romanian State from corporate profit tax decreased by 7%. The benefits of this legal fraud are thus added to the already huge surpluses that the low cost of labor can generate in Romania as in the other CEECs.


… and monopolization of distribution networks

Another aspect of the economical subservience of this region: the large-scale distribution. The NGO Impact 2040, based in Latvia, which aims to defend consumer rights, echoed in July 2017 the problematic use of EBRD credits, of which, as we have seen, J. Attali has been the first President.

It is the use of EBRD funds that is in question, which are mostly public funds because the EU, the European Investment Bank (EIB) and the Member States together constitute 62.8% of the bank’s capital. The NGO observed contributions of several hundred million euros to develop a famous supermarket chain, namely Lidl, in the CEECs. With such public financing, Lidl announced in 2016 the opening of 100 new stores in Romania in one year, in addition to the 200 existing stores.

This leads to a monopolistic situation in some regions, and the effects are quick to be seen:

  • Exclusion of local products, even if they are of superior quality, for the benefit of the brand’s products, especially industrial food from Western Europe (the German agricultural surplus can be partly explained in this way).

  • Dumping to eliminate local players in small distribution, where the average quality of products is higher, and taking advantage of the public financial windfall.

4. The Western middle class, the other loser

It will be understood that the antagonism is not between the economies of Central and Western Europe, but between those who produce, wherever they are, and those who reap the greatest benefits from it. But at the end of the chain, the ultimate loser seems to be the Western worker: by his taxes, he contributes significantly to the European funds. And the investments allowed by this manna develop a market that does not bring him anything! Indeed, the profits generated by a German or French company do not return to France or Germany but to shareholders and other happy few of the globalized economy. Although a good part of German society still manages to benefit from this situation, Latin Europe, including France, loses on both sides: it contributes to the exploitation (or enhancement) of countries from which it gets no benefit. Posted workers are the symmetrical process of this same economic reality. This is the inevitable consequence of free trade in term of factors of production: capital goes where profits are highest.

III. The economy in the face of politics

1. Economic inferiority and political isonomy

The economic reality is clear: the 100 million European citizens of the CEECs are cash cows for the German economy, the guarantee of its continental predominance and its global reach. Central Europe does not yet have the weight or the strength to tackle the great question of the increase of wages and standard of living. In addition to coordinating the different countries of the region, this issue can not be solved without the full co-operation of their respective central bank, whose independence from political power is a crippling handicap.

But the diplomatic successes of the Visegrád Group, and the real improvement that has been seen in this region for several years, prove that economic subservience is neither complete nor overwhelming. Far from limiting its political weight to its low salaries, the Visegrád Group exploits its profitability to defend its primary political interests.

From this point of view, Germany does not face subordinate economies but historical nations. And it is as much the medieval past as the most current European political framework that allows such a claim.

2. History’s weight vs. money’s weight

The countries of Central Europe gauge an evil by comparing it with another: they knew the Russian occupation and do not want it at any price; they know that Ottoman power is never far away and dread it even more. On the other hand, they belong, for the better and for the worse, to the Western Christianity of which they constitute the Eastern flank for more than 1000 years. And this civilizational determinism outweighs economic conjectures.

This common legacy which, according to the V4 countries, justifies the European Union and determines its future, seems to have been forgotten by Germany. It has momentarily lowered itself to consider no other dimension of existence than the economic dimension. To the point of seeing nothing in a “migrant” as a potential economic agent. The current German government does not understand Central Europe because one claims what the other is trying to forget.

In the eyes of Central Europe, since economic wealth is not the highest honor, relative poverty is not the greatest fall. And, in addition to holding firmly on migratory and societal issues, these countries exploit their economic leeway as much as possible.

3. The establishment of a national economic model

From his first term as Prime Minister, between 1998 and 2002, Viktor Orbán displayed a deliberate desire to build a Hungarian capitalism, on the shoulders of an enterprising middle class committed to national values. “The volume of public works significantly increased. As a result of public investment, 10 – 15,000 new homes were built and 46,000 jobs were created. In 2002, the construction industry grew by 23%. Domestic firms enjoyed significant advantage when applying for tenders, which of course naturally resulted in negative reactions from the countries in which foreign companies working in Hungary (for example, road construction) were headquartered, primarily in Austria. When Austrian politicians ask the question of when their companies would be able to take part in the construction of Hungarian motorways, Orbán frankly replied that this would happen when Hungarian companies would be able to participate in construction projects in Austria.” (I. Janke, In the History of the Hungarian Prime Minister Viktor Orbán, p.179)

Back in power after the 2002-2010 eclipse, Viktor Orbán has continued to strengthen and develop the capacities of the national economy. This is the main reason for the dispute with Brussels. In 2013, the Tavares report attacked the Orbán government’s policy for very slight pretexts of “breaches of the rule of law”, but it was the framework favorable to the defense of national interests that Brussels aimed at. After eight years of continuous efforts, Orbán was able to flatter himself on February 18: “We have Hungarian utilities, and families do not pay the profits of multinationals through their utility bills” (State of the Nation Address – 2018). This is to be compared to the sale of motorways by the French State to multinationals built with public money. It is a State, and not Brussels, which in these two cases chooses whether to defend the users against the multinationals or defend the multinationals against the users.

This national voluntarism also has the merit of sustaining the combativeness of policy makers in all circumstances. To a journalist who questioned him on December 7, on the quarrel of European funds and quotas of migrants, Orbán swept the blackmail that is done to Hungary: “they induce that we gave up our freedom for money? “

Hungary has been the pilot fish of a national recovery within the EU. In 2015, the victory of the PiS committed Poland on this same path, and the Czech Republic led by Andrej Babiš following the elections of autumn 2017 reinforces this dynamic, both national and European.

IV. Europe divided: two uncertain situations

1. Lesser degree of community integration

With the exception of Slovakia, the Visegrád Group countries have not yet joined the Eurozone. The currency is an essential instrument of a national economic policy. The exchange rate allows to maintain this competitiveness which is the key to their success, and the pressure of the European Central Bank which is exercised so powerfully on each government of Euroland is spared them. As explained recently the Polish Prime Minister: “We are only coming out of communism and our enormous dependence on foreign capital imposed on us by the economic model chosen more than a quarter of a century ago means that we face very different challenges from the ones faced by the southern or by the northern countries of the euro zone. If the structure of our economy and our per capita disposable income become similar to those of the Netherlands, Austria or Belgium, then we will be able to talk about the euro again.

2. Discomfort and viability

In the early 1990s, France, like Italy and to a lesser extent Spain, had a mature economy characterized by high wages and saturated consumption: the interest of multinational companies was then to invest the profits elsewhere in order to develop a new market where to generate new profits. François Mitterrand may have thought, with the EBRD, of building a counterweight to German power in Central and Eastern Europe. But it’s absolutely the opposite that happened. And already during the 1990s, France has not been able to prevent the dismantling of Yugoslavia, which was one of these counterbalances.

Today, if Central Europe can strive in a relationship that it considers win-win with the Germanic world, the stalemate is more obvious for France, Italy, Spain and Greece. The question of the euro, again, is central. As the economist Charles Gave predicted even before the introduction of the single currency, “the euro will lead to too many houses in Spain, too many factories in Germany and too many officials in France”. We can today observe that the situation in Central Europe is uncomfortable, and that in Latin Europe it is no longer viable.

V. A central European model?

1. What does really mean the federal option ?

The structural deficits of Latin countries in the face of the phenomenal surplus of the German trade balance condemn the Eurozone to eventually implode, unless the Euroland is completely federalized, with, therefore, the increasing economic specialization of the continent which will make Germany a huge factory where will work by millions Italians, French and Spaniards. The fruit of their labor would then be transferred to their country, a little like the charity to the deserted French departments surviving on the Paris region’s financial redistribution. This ruination of whole nations is as unhealthy as it is absurd. It is to plunge entire countries into a deadly atony, to deny centuries of glorious history and to flout the very dignity of peoples to justify the adventure of the brilliant brains who imagined the euro.

Yet it is the option of the headlong rush that is recognized today, in various ways. The most grotesque is that of free thinkers on the left, who think basically that money solves all problems, and that paying may overcome troubles. But the myth of redistribution is peppered with democracy and dialogue, so that the dignity of a man who has succumbed to being assisted is believed to be restored by political status. The fruits of such widespread productivity would cover the problems and let them ferment, while the competition of the most mobile ones would continue ruthlessly until the next crisis.

It can be noted that the defenders of this line fear protectionism, because it would open Pandora’s box of retaliatory measures. But if we fear more harm from the retaliation towards others than we expect from what we can build, it is to base little esteem on our work and to rely on the outside as Providence. From this point of view it’s morally blameworthy, but it is also politically absurd not to defend our interest on the pretext that it has a price.

2. The outline of another European economy

This is where Hungary, which moreover loyally assumes its membership of the European Union, has another lesson to give us. It is in fact from the foundations that Viktor Orbán obstinately defends a strong Hungary, through strong cities and dynamic regions, themselves strong through families and committed citizens. This good citizen is called “Polgár” in Hungarian, and Orbán’s party made it a real political notion and popularized it in the mid-1990s. “The Polgár is a conscientiously thoughtful citizen who knows the country’s history and its traditions, is aware of the place he occupies in society, owns property (one or more flats and/or houses), has a family and had earned the respect of their neighbors” (id., p156). We are quite the opposite of the decline described above, and this prospect seems to us the ferment of the best that can happen in all European countries.

Facing the Carolingian core, in the meantime so hegemonic and so insane, the Latin countries and Central Europe would win to agree to “stop Brussels” and refuse the specialization of European economies under the pressure of alienating rather than stimulating competition. If the continent’s civilizational unity is expressed by nations, and not against them, likewise, complementarity and European partnerships develop on the basis of robust national economies, which draw their strength from their own local dynamism.

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