Central to Europe: The Advance of the Visegrád Four

Central to Europe: The Advance of the Visegrád Four

Pre-pandemic economic and social progress looked very good for Czechia, Hungary, Poland, and Slovakia, and troubling for Germany and France. If these trends resume—and there is no reason to think they won’t—the East will soon outshine the West.

EVEN MORE remarkable is the failure of the euro, one of the central “achievements” of the EU, championed by Germany and France. Twenty years after its introduction, according to the Centre for European Policy (CEP), a German think-tank, most countries that adopted the euro have experienced a drop in prosperity. While the economies of Germany and Denmark have gained by adopting the euro, five of the eight countries CEP studied—Spain, Belgium, Portugal, France, and Italy—all suffered negative impacts, ranging from about €5,000 to almost €74,000 per person. Italy’s losses totaled €4.325 billion, and France’s were €3.591 billion from 1999 to 2007. Greece experienced a modest gain in this period, but all of it before the crash of 2008–09; in every year since, Greece has suffered increasing drops in per-capita GDP. 

While the CEP study has its skeptics, a recent report on the twentieth anniversary of the euro from the European Parliament acknowledged,

While the euro may have contributed to some efficiency gains, it seems to have done little to facilitate intra-euro-area trade … and the process of greater financial integration has thus far provided to be a destabilizing factor for the euro area rather than a force for sustainable growth.

This currency—lacking a common state, budget, or finance ministry—will always remain hostage to its weakest members, which makes the euro very weak indeed. This is why Czechia, Hungary, and Poland have thus far avoided the eurozone.

AVERAGE LIFE expectancy across Western, Central, and Eastern Europe is 78.3 years, as measured by the United Nations for the years 2015–2020, and it is 82.5 years in France and 81.1 years in Germany. Despite living very impoverished lives as recently as 1991, however, life expectancy in the V4 countries has been advancing rapidly, pegged now at 79.2 years in Czechia (an increase of 6.7 years since the period 1990–1995), 76.6 years in Hungary (an increase of 7.2 years), 78.5 years in Poland (7.3 more years), and 77.3 years in Slovakia (up by 5.7 years). During this same period, the average increase in life expectancy was only 5.1 years in both France and Germany.

This is supported by health and welfare metrics moving in unexpected directions. Such metrics still show mixed results in comparisons between France and Germany, on one hand, and the V4 countries, but it remains surprising, for example, that the 2019 Bloomberg Global Health Index scores show Germany dropping seven places, from the sixteenth to the twenty-third healthiest country, while Hungary moved up four places and Czechia and Slovakia each moved up one place, albeit with overall lagging health scores.

IN THE Visegrád countries, the tax burden on both individuals and families is lighter, reflecting an average of 4.6 percent of GDP in these four countries, whereas it doubles to an average of 9.7 percent of GDP on the French and Germans. Total national taxes are also higher in France and Germany, which collect taxes amounting to an average 45 percent of GDP, while in the V4 countries that average is 36 percent.  

Despite lower taxes, government debt is also lower in Central Europe, with total public debt in the V4 countries averaging 50.3 percent of GDP in 2018, according to Eurostat, the European Union’s statistics office. Paris and Berlin do much worse on debt, and in ways that undermine the stability of the euro. National debt rose to 60.9 percent in Germany and a whopping 98.4 percent in France. This is not only a policy failure and a sign of weak leadership, but it shows how Berlin and Paris break EU rules rather than lead by example—yet without any criticism that they undermine the “rule of law,” so often invoked by critics of the EU’s easterly members.

The Maastricht Treaty governing the EU prohibits its members from incurring debt in excess of 60 percent of GDP, a rule long violated by France and Germany. Indeed, public debt has been growing among most eurozone members since the financial crisis of 2008, and France ranks among seven nations with the highest government debt ratios. Hungary, meanwhile, is the only V4 country whose 2018 debt likewise exceeded the EU’s threshold; Prague, Warsaw, and Bratislava all obeyed the rule.

Stronger economies and fiscally conservative governments made Central and East European countries better prepared than West European countries to weather the covid-19 pandemic and recession, according to financial analysts. In the V4, a report in Euromoney said

Government debt-to-GDP levels across the region have declined substantially over the last decade on the back of strong economic growth, falling borrowing costs, and prudent budget management. This means most [V4] countries have room for fiscal stimulus to mitigate the impact of coronavirus.

The European Bank for Reconstruction and Development forecasted a GDP contraction of 4.3 percent for the eight Central European countries it monitors but said the region will “bounce back strongly in 2021.” By comparison, in the eurozone—which includes Slovakia but none of the other V4 countries—the economy will contract by 8–12 percent, according to the European Central Bank.

REFUTING AN impression that the V4 countries are isolated, backward, and unable to compete, they are much more engaged in the global economy than either Paris or Berlin. Exports account for an average of 73.4 percent of GDP in the V4 countries, while imports account for 70.8 percent. By comparison, exports account for an average of only 30.2 percent of GDP for France and Germany, and imports account for 28.4 percent. As with their rates of GDP growth, moreover, exports of goods and services are growing in the V4 countries, increasing an average of 5.3 percent in 2018 over the prior year, compared to France and Germany’s anemic growth rate of 2.8 percent. To put this in perspective, if the Visegrád 4 were one country, according to an analysis by Brussels-based Carnegie Europe, “they would be by far Germany’s largest trading partner, with an annual turnover in bilateral trade nearly twice the size of China.”

Global engagement at the most personal level—travel and tourism—shows that Hungary has a higher ratio of tourists to local residents, 145 percent, than does France at 126.4 percent, and that Hungary, Czechia (109.2 percent), and Poland (43.4 percent) all have higher ratios of foreign visitors to locals than does Germany (43.3 percent). Another example of Central and Eastern Europe’s larger global role is the €7.7 billion that has been invested in the CEE’s commercial real estate market by East Asian sources since 2013—with South Korea leading the pack—a mere €1 billion less than Europe’s economic giant, Germany, has invested. Another sign is the twenty-six Indian software firms—one of which employs 2,000 people—that established operations in 2019 in Hungary, where more than 20,000 Chinese expatriates are also working.

While foreign direct investment is important to the V4, the largest driver of Hungary’s booming national economy is a 15 percent annual surge in wages. Partly as a result, Budapest ranked number one in 2018 in housing price increases across 150 cities worldwide, while Berlin ranked twenty-ninth and Paris sixty-third, placing the City of Light behind Bucharest, Romania; Bratislava, Slovakia; Warsaw, Poland; and Sofia, Bulgaria.

DESPITE ITS more expansive engagement with the world, Central and Eastern Europe have avoided the high levels of Chinese state-driven investments in key industries that is widespread in Western Europe, where Beijing’s role and influence is often hidden. Since 2012, when China launched its 16+1 initiative to invest billions in sixteen CEE countries, there has been much alarm about Chinese economic influence in this region, especially since eleven of the sixteen countries are EU members.

Yet as with so many issues, the real picture is the opposite to what the alarmists imagine. In fact, Chinese economic penetration of Western Europe far surpasses its role in Central Europe. Overall, Beijing’s investment in all EU-member countries has risen dramatically since 2000, from fewer than 500 million euros to more than 3.5 billion euros in 2018, according to Dutch data sciences firm Datenna, whose “China-EU FDI Radar” tracks Chinese foreign direct investment in the EU to provide greater transparency regarding the investments and their ties to the Chinese government.

There is often a significant government role in such investments, which are often disguised as private investments, giving Beijing hidden control or influence inside European industry. “In many of the European mergers and acquisitions, Chinese state influence was effectively hidden by layers of ownership, complex shareholding structures, and deals executed via European subsidiaries,” according to The Wall Street Journal. Datenna’s analysis of the complex structures concludes that Chinese parties have acquired 479 companies in Western Europe (including Cyprus and Malta), with Chinese government influence in at least 181 of them. In Central Europe, there were only forty acquisitions and in only twenty-one of them does Beijing exercise influence.

The EU’s own European Court of Auditors agrees with this broad outline of the problem, saying in a recent report that “it was difficult to obtain complete and timely data and thus to gain an overview of [Chinese] investments,” and that “concerns have been raised … in the EU about the dependence on Chinese investments in strategic industries [and] their concentration in sensitive or strategically important sectors.” Yet the agency’s country-level data also reveal that every one of the top thirteen recipients of Chinese investments are in Western Europe, while thirteen of the fifteen countries that receive the least investment are located in Central and Eastern Europe.