Benelux of the East?

15. 3. 2017

Europe is witnessing the resurgence of a political grouping which according to many politicians and commentators was doomed to bureaucratic atrophy. In the 25th year of its existence the V4 attempts to play a role of a catalyst or even initiator of changes in the European rules of the game. But what is the economic condition of the region? Does the economic potential of Visegrad correspond to its political ambitions?

According to a study published by the Polish Public Opinion Research Centre CBOS (from the summer of 2016), the economic situation is assessed as good by the same percentage of Poles and Czechs (31%), and a similar percentage of Slovaks and Hungarians (15 and 17% respectively). The economic condition is perceived as bad by 45% of Slovaks (with a decreasing trend), 37% of Hungarians (with a growing trend), 21% of Poles, and 24% of Czechs. But these opinions are not reflected in the results of political elections in these countries: the significant change of the political (including the European) course in Poland after the 2015 elections was not grounded in economic factors, while the deteriorating economic situation as perceived by the Hungarians is not translated into a change of political preferences (as shown by the recent referendum). Only in Czechia the economic optimism is correlated to voting preferences, which were tested in the October local elections, when the general preferences were shown to have remained stable (the liberal ANO, socialists from the ČSSD, and the communists from KSČM).

The optimism of the V4 residents is shared by foreign investors: according to the Economist Intelligence Unit, average annual foreign direct investment (FDI) will grow in Poland (from 10.2 million USD in 2008–2015 to 12 million USD in 2016–2020) and Czechia (from 6.2 million USD to 7.1 million USD in the same period), remain at a comparable level in Slovakia and significantly drop in Hungary (from 6.4 to 4.6 million USD). However, in all these countries the FDI index is much lower than in the record-breaking years after the EU accession in 2004 and before the 2008 financial crisis. Investors are also worried about the effects of the nationalist policies of Viktor Orbán’s FIDESZ government in Budapest, and the first economic consequences of the Law and Justice Party rule in Poland – in both cases the government declares its support for domestic and state-owned capital, curbing the privileges of foreign investors (despite the fact that the Daimler Benz investment in Jawor, Lower Silesia, is much hyped by the government propaganda), and more active support of investing in industry and innovation rather than services and BPO favored by FDI. We should note the disproportions in accumulated investments in the transition period: from 1990 to 2015, the Polish market attracted almost as much investment as Hungary and Czechia put together, although in “per capita” terms Poland comes last.

For foreign investors a favorable economic climate is the question of legal stability, red tape, and mechanisms for supporting investment in the form of economic zones, tax breaks, subsidies for various types of investment which generate innovation and jobs, subsidizing the offset of defense procurement (recently enjoying an unexpected notoriety in Poland due to the failure of negotiations with the French Airbus), and last but not least, labor costs. From this point of view, the V4 is no longer perceived as the investor’s paradise, which results in a lowered dynamics and even the loss of specific investments, which go to Romania, the countries of the former Yugoslavia, or even to the more stable countries outside Europe. Analysts and researchers warn that in the conditions of low inflation and very low domestic interest rates, budget deficit, and foreign debt (in Hungary standing at almost 78% in 2014) make the V4 economies fully dependent on maintaining the current level of foreign investments – and this does not look very likely.

The direct effect of these fiscal pressures has so far been mitigated by a high level of exports and a large share of exports in the GDP. Another problem is the level of savings (traditionally low), given the fact that some foreign banks withdraw from the region (the Austrian Raiffeisen, the Italian Unicredit, American GE Capital), while Warsaw and Budapest declare the intent of “Polonising” or “recovering” the banks. From the point of view of economic and trade partners, the most important factor of the economic prospects is the political stability of the V4 countries. After the successful accession in 2004, they took different political paths and their economic policies have diverging effects. The conservative-liberal governments of the PO-PSL coalition in 2007–2015 in Poland brought with them a steady although moderate growth, a slow decline in unemployment, and a significant increase in domestic consumption as a factor of growth (with the support of the EU funds from the 2007–2013 perspective). The right-wing governments of Czechia, replaced in 2014 by a right-center coalition, maintained the positive trends in exports supported by the currency policy of the central bank with its defense of the strong crown. The Hungarian government of Viktor Orbán has been pursuing a nationalist-conservative agenda for six years, nationalizing the financial sector, supporting domestic corporations (with some oligarchic elements), as well as family businesses and crafts – although in this last area the government’s actions are largely limited to the sphere of rhetoric and ideology rather than legal changes, which must be compatible with the EU regulations. The economic condition of Slovakia—the only member of the eurozone in the region—is strongly dependent on the prospects of the exotic government coalition under the radical social democrat Robert Fico. But the economic policy of the previous SMER party government since 2012 did not fundamentally differ from the one pursued now.

In all V4 countries, privatization has virtually ended (with some legal differences maintained), the implementation of “acquis communautaire” has created similar legal frameworks for business, the financial and telecommunications sectors are dominated by foreign institutions, the defense sector and natural resources are still owned or controlled by the government for reasons of strategy, social policy, or regional policy; in short, in the systemic aspects these economies are comparable.

Economic policies of all these countries are and will be strongly dependent on the ability to make use of EU funds from the new 2014–2020 perspective. Many changes have been announced in the EU budget for 2018–2022; some countries

(e.g. Italy) intend to use them for “punishing” the countries like the V4, which are not showing the necessary solidarity in the issues connected with the refugee wave. In the V4 countries—perhaps with the exception of Slovakia—there are no opposition parties capable of assuming power and significantly reorienting the policy of their countries in the immediate future. This means that recognizing the specific and short-term intentions of governments in the domestic and foreign policy, as well as identifying the interests of the main players, is perceived as all the more important by analysts, commentators, and lobbyists for specific industries and larger corporations.

Political decisions in economic matters are attuned to the interests of the government’s main constituency, which is similar in the four countries concerned: it consists of the inhabitants of the countryside, people without college education, small business, younger and frustrated unemployed people, and older pensioners, that is people passed over by the economic and cultural process of modernization in the last dozen years, associated with the European Union; at the same time, for this segment of the population the archaic and xenophobic slogans and clichés used by government politicians are both comforting and stimulating to political action. Thus we hear that the open market must serve the national interests, that excessive wealth is suspect and probably stolen, that the foreigner takes away your money and jobs; such is the general tenor of the politicians’ pronouncements, although, for obvious tactical reasons, such slogans are not placed on the facades of government buildings. If we add to that the natural fears connected with predatory globalization, migration explosion, the image of omnipresent terrorism created by the media, simple messages about the uses of political power coming from Russia or Turkey, or Donald Trump’s slogans, the end result is a citizen favoring a closed economy which must support “national goods” produced by “national champions.”

But for the time being, the V4 economies are very open and strongly interdependent with the European market and with each other. Every V4 country has one of the remaining countries from the group among the first three importers, and for Slovakia exports to the remaining three countries amount to almost one third of the entire trading volume (more than with Germany). It is worth noting that according to the World Bank, the share of exports in the GDP of the V4 countries (more than 46% in 2013 – close to the German level) is much higher than in the rest of major EU countries, such as Spain (32%), Great Britain (30%), and France (28%).

So it is reasonable to ask if there is still room for common elements in the V4 economic policies. Is the V4 capable of coordinating policies serving local companies, common investments in R&B, innovations, competitive industries, and transborder sectors or regions (e.g. Upper Silesia and Moravskoslezky´ kraj)? Will the common interests in such sectors as energy or defense allow the V4 countries to restore mutual cooperation abandoned after the collapse of communism, create common business groups or even holdings (some isolated examples of such cooperation can be quoted, e.g. Orlen/ Unipetrol, MOL/Slovnaft or recently PKP Cargo/ ATW)? Can this be pursued in the private sector (Polish Asseco once attempted to find partners in Slovakia and Czechia; another example is the partnership between Kofola and Hoop)?

The coming years will show whether the V4 has enough market and development synergies, whether the market with more than 60 million consumers/users, encouraged by government mechanisms, European funds, and research and development potential is going to build an Eastern Benelux 50 years after the original institution was founded.

Sergiusz Najar

Sergiusz Najar is a Polish manager and economic advisor; former Deputy Minister of Infrastructure (2002–2003) and Foreign Affairs (2003–2005); banking expert since 1992, member of the Program Council of the Czech Republic-Poland. He had stayed in Czechoslovakia, Czech Republic and Slovakia almost 12 years for various reasons; currently he lives alternately in Warsaw and near Broumov in eastern Czech Republic.

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