Central (?) Europe: It’s the Economy, Stupid!

15. 3. 2017

As both NATO and EU seem to be grappling for their identities and so is the Euro-Atlantic relationship, Central European countries find the pillars of their sense of security gone and their perspectives for prosperity dimmed

This seems to plunge them into their worst security nightmare, just as they are traversing particularly difficult economic times: that of finding themselves squeezed between two competing powerful blocs, or in a grey area of tension at the crossroads of great powers’ clashing agendas. It is true that their geopolitical position brings along also the advantage of being important to their Euroatlantic partners precisely as a buffer zone against Near and Middle Eastern instability. However, unless they realize that their security problem has turned largely into one of economic strategy and that it cannot be solved without strengthening primarily their economic influence, they will have to rely on short-term palliatives.

Not long ago in Bratislava, Zbigniew Brzezinski signaled that there is more energy and enthusiasm for European unity, as well as for a strong relationship between the US and the EU, in Warsaw or Bucharest than there is in Brussels, in Berlin or Paris. For obvious reasons, given the security gains and economic opportunity that came with EU and NATO accession, CEE countries continue to be strong supporters of transatlantic partnership and solidarity within the EU. In this, however, they increasingly seem to be swimming against the tide, as they now find themselves both abandoned by their American saviors disengaged from the region and sandwiched between an increasingly aggressive Russia, an unstable vicinity and an EU that marginalizes them to favor eurozone-driven policies. Most of their Western allies are competing against each other on economic policies, ideological models, political influence in Brussels, cutting down defense budgets etc.—but also feel a sense of competition against the “eastern bloc,”seen as a source of labor migration, political instability, corruption, economic stress, crime etc.

Having worked hard to overcome development gaps from the West and obtain an equal seat at the decision-making table, CEE countries see themselves stripped of the long-coveted prize and turned instead into a new European periphery; one which, after being a net beneficiary of transfer of both funds and democratic practices from older EU members, now feels its legitimate interests are ignored or outright rejected.

The impact is quite serious both East and West. From the onset of the economic crisis, Western European states have seen nationalism (economic and political) rise, as have racism and xenophobia, leading to an ascent of radical parties to power, social pressure and disunity. CEE societies have experienced their own setbacks in quality of democracy and rule of law once the EU has lost the levers it had during pre-accession, coupled with a lack of coherent economic strategies or the ability to enact them. Euroscepticism “a la Czech” has been replaced with sheer frustration and disaffection with Brussels/ Berlin-led Europeanism.

In this context, the region has recently awakened to a reality it had a hard time swallowing: that of the EU as a whole no longer nurturing it to progress and success and of individual members states engaging in a tooth-and-nail fight for their own diverging interests. Such new reality has found CEE unprepared to fight back just as expertly, inexperienced in the Brussels game, lacking the financial and economic means to stand up to powerful Western interests and less apt to build the much-needed alliances to advance their goals.

In recent years though, the region has doubled its efforts to catch up and stand on its own feet. Poland has a strong interest to brand itself as the regional leader, main US ally and major EU power and mobilize the rest of the former communist states behind it—and has had the capacity to do it quite effectively during the past years, given its sustained economic growth and ambitious military expenditure. Warsaw has also thrown in its talented political leaders, like Donald Tusk and Radek Sikorski. The Czech Republic has managed to project its economic influence in the region and human rights expertise worldwide, an efficient soft power tool. The Baltics, though at times temporarily beset by their own economic troubles, have made huge reputation gains thanks to their success stories and smart ways of linking up economically, politically and in defense strategies to the Scandinavian north. Though more of a lone rider in the region, Romania has voiced claims to be seated with the “big ones” in the EU, given its size and importance and has used its strong and loyal relationship with the US and UK to that end.

Recently, formats like Visegrád meetings and the Central European summit of heads of state have attempted to bridge north-south differences and speak with one voice to make the EU truly listen, to identify shared problems and devise common solutions and to establish itself more firmly into an EU which seems to be slipping away, as compared to the illusions of the 2004/2007 wave of enlargement. Some of these issues, which CEE has found it needs to push for together if anything is to come out are: energy (alternative routes and sources, prices), Russian influence and the way Moscow is now buying its way into eastern Europe now that military influence has diminished, the need for continued American engagement, (i.e. the missile shield, US bases), EU funds absorption and social policies meant to reduce gaps, the need for firm commitment from the Union that it will continue to enlarge to the Balkans and Eastern partnership countries.

Set at the crossroads of big actors’ power play, the region finds itself massively defined by the security environment rather than the economic one. This is one of the reasons why the mere feeling of being marginal is felt as being so unsettling. However, what some of the CEE states have already started to realize, while others are only beginning to learn is that security has become much more a function of the economy in recent times. Financial and economic strength, as well as stability have always been important security factors; of late though, they have become key in many more ways than before, because of the global impact of the economic crisis and the way it has reshaped power relations.

Much of CEE exports currently go to the EU, because of the ease of doing business (no barriers, uniform tariffs, but also influence of large European companies, as well as political lobbying). With the EU market shrinking and cash-stripped, these states have taken the heat too. At the same time, much of their economy is dominated by Western firms and banks. That leaves them both unable to take enough stock of their‘emerging market’ status (tight rules, dependence on EU policies and dynamics which may suit core EU needs more than their own, weak homegrown capital and industry) and likely to keep being affected by resurgent economic nationalism and general EU economic troubles. Rising labor costs and competition with non-EU neighbors are putting an end to CEE position as the locus of cheap manufacture too—as indeed it should, if it is to develop beyond that.

Now that the Asian boom (and the upcoming African and Latin-American!) has made it clear that much of global development will depend on the evolution of the eastern continent, it also becomes clear that the next development cycle for Europe also largely relies on two key strategic achievements: a) how Europe manages to connect to Asia (cash flows, manufacture, energy) and b) how the EU and US markets manage to connect together to balance Asia, the BRICS and the post-BRICS. Along both lines, CEE is placed in a privileged position, provided that it can use this advantage wisely. Should it succeed, that will also put it back on the map from a political and security point of view and will throw actual concrete weight behind its bid for influence within Euroatlantic structures.

As far as the Eurasian connection goes, it is time for the region to finally take stock of its land bridge position between the two continents, as well as of its maritime and river communication possibilities. The amount of trade between Europe and Asia makes it necessary for additional routes to develop beyond current capacity, both inland, through Turkey, Russia and also the Caucasus and Central Asia and by sea (to Black Sea and Adriatic ports). Currently, around 80 % or more of European imports arrive in the ports of Rotterdam and Hamburg, via routes that are both costly and lengthy as compared to the above-named alternatives, while the purchasing power centre of gravity is shifting east, to CEE. The region is therefore a rising final destination for these imports and it is also placed on both land and maritime corridors (with the option of the Black Sea-Danube-Rhine canal and trans-European corridors from Kiev, Constanta, Istanbul, Varna, Odessa or Burgas to Germany, Italy or Austria and beyond). Re-routing trade through CEE already saves significant time, money and risk (the main things business looks for).

The chance for the region to leapfrog as the option of choice lies in infrastructure development (ports, rail, roads, intermodal transport), logistics parks (which meets manufacturers’ needs to assemble their products as close to the final market as possible, creates local jobs and brings in FDI and revenue to state budgets) and integration (fiscal and customs simplification and harmonization, seamless transport). CEE still lags behind on all these counts, but there is opportunity in this gap. Investment, which can be supported by EU funding, can bring in quick returns; building from zero can make transport more efficient and ecological with smart use of modern technology; there is also much existing but outdated infrastructure to build on. If this can be a common undertaking, it opens up new opportunity for increased political cooperation too, around very concrete objectives which allow participant countries to overcome differences, include EU neighborhood partners too and avoid unnecessary competition or duplication.

Moreover, given the importance all CEE countries attach to energy security and considering the tight relationship between energy and transport (with transport capacity becoming even more important now that the Nabucco project was called off ), the interplay between the two can boost security at the same time that it brings economic gain. Add to that the importance of military transport routes as part of the ongoing engagement of the US in CEE as an outpost to the Wider Middle East and beyond and the result is a vision for integrated economic and security development rather than a mere set of transit routes. Indeed in fact, economic development along these lines can only take place in correlation with security considerations. Asian actors interested precisely in linking with Europe as well as in projecting their influence are making a push for increased cooperation with a region they have historically enjoyed good relations with: China has been seeking entry via Poland and Hungary; India has tried to stay in the game too; Kazakhstan, Azerbaijan or Gulf states are using their financial resources to fuel partnerships in energy or agriculture; Japan, South Korea or even Malaysia are seeking new markets. All of these come with well-known risks, which need to be carefully balanced, while taking advantage of the opportunities they open. On top of all this, there is the aggressive Russian cash offensive. Countering such threats can only be done through closer regional cooperation, as well as with US and EU partners.

A further risk comes from within and is amplified by the centrifugal forces of EU disunity previously cited. Growing nationalism and populism as a reaction to disaffection with the EU or distrust in its institutions causes trouble in older EU democracies but is unlikely to uproot established institutions. The strain it puts on the newer democracies of CEE (with still weak civil society and media) may however seriously affect rule of law here, internal capacity-building, state reform, institutional development and state and business transparency, at a time when these are seen as crucial to investment and growth. It may also encourage corruption, cronyism and give the political class significant leeway to advance private agendas and concentrate power in the name of stability and protecting national interest against foreign influence (see the recent case of Hungary).

A lot will depend therefore on the capacity and political will in CEE states to develop their own strategies and instruments to strengthen rule of law, as well as the other element essential to economic strength: home-grown capital. At this point, there are few indigenous companies that can both contribute to GDP growth and jobs creation, as well as project influence beyond borders—including at EU level in budget negotiations for instance. As multinationals seek to keep their costs down and Western banks have been externalizing profits and internalizing losses, crisis measures have tended to focus on austerity at the expense of the population, causing more social tension. Again, given that dependence on Western finance and companies is here to stay for a long time, a lot will depend on the capacity of the region to negotiate interests in Brussels cohesively, with one voice and find the right avenues for dialogue.

In this, Central-Eastern Europe has an important ally—and it is up to it to engage it effectively: the United States. This is the second pillar of its strategic development, as mentioned above. We will not dwell upon it extensively, since it mostly consists of developing and making the best of an instrument, which is already in the making: the Transatlantic Trade and Investment Partnership (TTIP). The TTIP aims to link and harmonize American and European markets and add essential substance to the world’s most solid alliance, currently under stress from various factors ranging from differences in defense budgets to recent NSA scandals etc. The TTIP, if effective, will not only rebuild a bloc able to sustain Asian (read Chinese) pressure, but will also benefit CEE largely: It will re-engage the US in Europe on economic, not just military grounds—the most suited perhaps nowadays; it will reduce the power of strongly protectionist EU countries; it will bring gains to the new members in sectors where they have been opposing big states’ policies at EU level without much success—agriculture, electronic information, military industry, services liberalization. Active involvement in negotiations on the TTIP thus gives CEE a chance to influence decisions while playing a constructive role which suits them best, given their strong Euro-atlanticism: that of strengthening EU-US ties.

The US has a strong interest now in cultivating this partnership with what it once used to call “New Europe” to contrast it with the less enthusiastically pro-American “Old Europe.” This “Old Europe” also has an interest in sweetening the pill of austerity and core-EU oriented measures to ensure that it doesn’t alienate new members; German elections, once over, will allow for more openness in this regard. Additionally, the rest of the world (China, the BRICS, Russia, and the Middle East) looks to CEE as a gateway to the EU. There is risk in being the focus of everyone’s interest, but there is also a host of opportunities. If they manage to effectively cooperate in defining their strategic interests, identifying their strengths and mitigating risks together, the countries of the region are just about to play their next winning card, as historic as reintegration with the West was in the 90’s and 2000’s.

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