The Opening of a Central European Gap

At 2:01 p.m. on 3 February 2014 Poland’s public debt as a share of its gross domestic product was reduced by nine percent. Thanks to a radical overhaul of privately-managed pension funds and the transfer of the accumulated savings into ZUS, the state-run pension system, Poland’s state economy escaped the threat of automatic cuts required by the constitution. The overhaul of the 15-year-old pension system, which will affect the future workings of both the country’s pension funds and of the Warsaw Stock Exchange, may have been the most radical intervention in the country’s economy by Prime Minister Donald Tusk’s once liberal government since 2007 when he defeated Poland’s conservatives.

Following its 2012 election victory in Slovakia Robert Fico’s government has opted for deep cuts to ensure the country does not exceed the low public debt limits prescribed by the European Union. In Hungary, by contrast, Viktor Orbán’s government has spent the past four years testing the limits of written and unwritten EU rules, including a dismantling of privately-managed pension funds even more radical than the one in Poland. In the Czech Republic, Petr Nečas’s rightof- centre government may have actually prolonged the recession by excessively far-reaching cuts.

The countries of Central Europe have been trying to dig their way out of a 2007 crisis that followed the unprecedented boom after the EU accession, and out of the even more unprecedented subsequent crisis. It is becoming clear that serving as the cheap workshop of German economy has its disadvantages. Germany is the main trading partner for all four Visegrad countries, and this has created an almost unhealthy dependency.

Politicians in all four countries seem to have given up on actively pursuing their own economic agenda that might include, among other things, more domestic investment in research and development to drive future economic growth. Instead they seem to compete—even among themselves—for foreign investors and pride themselves particularly on the number of jobs they create without, however, asking what kind of jobs these are: how well-paid, how permanent and how demanding they are.

The advantage of being a source of cheap labor force in Germany’s vicinity won’t last long. It may turn out that what is more crucial is which country has invested how much not only in research and development of its own capacities (for example, the Poles have started laying the foundations for a new industry based on graphene, a revolutionary new material) but also in economic and political relations with Europe. In this respect, a gap has been opening up in Central Europe between firmly pro-European Poland and Slovakia on the one hand and more eurosceptic Czech Republic and Hungary on the other.

Fundamental differences are also emerging in the countries‘ prospects for future growth. To relaunch the process of catching up with the older EU members, which the global crisis has disrupted, the post communist countries of Central Europe need greater economic growth. European Commission predictions suggest that in 2015 Slovakia and Poland are headed for faster growth, at around three percent, while the Czech Republic and Hungary will count themselves lucky to achieve growth in excess of 1.5 percent.

Of course, it would be premature to draw any simple conclusions from this but the fact that Slovakia has joined the eurozone and that Poland is the sixth largest economy in Europe with a very positive attitude to European integration will undoubtedly play a role in future growth. Over the past few years the Czech Republic has, in terms of politics, pretended to be one of the British Isles although in fact it has been (in terms of the economy) closer to being the seventeenth German Land. Hungary, in turn, has tried to invent its own model of unorthodox economic policy.

The Slovaks have had a stable government and, whatever we may think of it in general, it has pursued a predictable economic policy, following the German example and obviously keen on being at the heart of the eurozone. Poland has also had a stable government whose clear long-term priority has been the maximum use of EU funds as the main engine of the economy, and economic ties to Germany.

Another thing Slovakia and Poland have in common is long-term structural unemployment with all that this entails, for example, a large number of people seeking work abroad. That is why these two countries need closer European integration which, in addition to funding, will provide them with a place where people can go to look for work, reducing domestic social tensions and demands on the state budget. Slovak and Polish politicians have yet to come up with an economic policy more groundbreaking than simply an unequivocal European orientation and cheap labor force.

The Czechs and Hungarians may feel they are coming from a different historical position. For a variety of reasons, politicians in these countries have kept their distance from closer European integration, regarding European funding as a less important source of growth and development both rhetorically and in real terms, although it is not quite clear why. Moreover, the population of neither country has sought work abroad in such great numbers.

On the other hand, while membership in the eurozone guarantees Slovakia a stable currency, the restrictive policies pursued by the country’s government have created less favorable conditions for small and medium-sized businesses. Furthermore, Slovakia, like the other countries, has economized on investment in research and development. Low labor costs and low taxes are the only (and short-term) advantage Slovakia currently has to offer. Economist Vladimír Baláž has pointed out that in this situation the only option for Slovakia is to reconfigure its economy, increasing the proportion of knowledge-intensive business services, i.e. services that can generate higher revenue and income both for employees and for the country’s budget.

In fact, this is the case in all four Visegrad countries. Even Hungary’s current way out of the economic crisis depends on foreign investment and the resulting exports, even though small and medium-sized businesses account for two-thirds of all jobs in the country.

However, as the example of the current Polish boom in service and administrative centers for Western businesses shows, this policy also has its pitfalls. Western companies have set up dozens of accounting, administrative and call centers in Poland’s cities but these are just a variation on car assembly shops, generating jobs that are based solely on low labor costs, albeit more highly qualified ones than those based on car factory assembly lines.

In addition to investing in research and development, which in the long run would generate autonomous sources of revenue—such as graphene in Poland or nanofibers in the Czech Republic—governments should reduce the pressure on smaller and medium-sized companies as this is the only way to help resolve the increasingly acute problem of job shortages.

This, however, would require a radical change in economic thinking on the part of politicians. Meanwhile they find it a lot easier and—given the close ties between various lobby groups and state budgets—also a lot more profitable, to compete for foreign investors and to plug holes in public finances from one election to another, by using savings from pension funds if need be.

In terms of Central Europe’s long-term prosperity the Polish and Slovak pro-European orientation makes more sense than the Czech and Hungarian solo acts, even if the European Union does not have a remedy for everything. Nevertheless, it does enable those who care about it to invest in the future.

Martin Ehl

Martin Ehl has been working for various Czech print and online media since 1992, since January of 2006 he is the Chief International Editor of Hospodářské noviny daily. He runs a regular bi-weekly column Middle Europa at English language Internet magazine Transitions Online (www.tol.cz), for this column he was awarded “Writing for Central Europe” prize in Austria in 2012. He is a co-editor of Visegrad Insight magazine.

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