Economic Hinterland

BERLIN |

BERLIN (Own report) - A recent survey has confirmed German companies’ massive dominance over the East European economy. According to the report just published by Deloitte Consulting, the German automobile industry has a particularly strong influence in that region. German car manufactures integrated Poland, Hungary and other East European countries into their global value added chain, hardly leaving those countries room for their own independent economic development. This is one of the reasons why these countries remain in stagnancy, economists call "Middle-Income-Trap." For some time, these countries barely succeed in reaching the average EU gross domestic product. This is why some countries are changing course and focusing more on promoting the domestic economy. However, this approach must confront, not only internal contradictions, but significant external pressure, not least of all from the EU.

Top Positions

The Deloitte Consulting annual report, on the 500 largest companies in Eastern Europe, ranks subsidiaries and regional branches of German global players in top positions.[1] VW-subsidiary Škoda ranks third, Audi Hungaria Motor, sixth and Slovak Volkswagen, eighth. RWE ranks among the top 50, as well as Mercedes Benz Mfg Hungary, Lidl Polska and Metro AG. Genuine Eastern European firms barely reach the top ranks - and if they do, they are either completely or partially state owned companies in the energy and raw material sector or owned by oligarchs. Among the privately owned East European companies, only two firms from the less capital-intensive food sector - Agrokor and Eurocash - have succeeded in penetrating the top 50.

Go East

German car manufacturers holding top positions in Eastern Europe today had already started to build factories in the region in the 1990s. They intensified their activities following the 2004 EU enlargement, profiting massively from state subventions and the EU structural fund. Thanks to EU funds, VW, Lidl, Siemens and other German firms have been able to increase their export sales to the Visegrad Group countries - Poland, Hungary, Czech Republic and Slovakia - by 31.5 billion Euros between 2004 and 2015, according to an evaluation of a Polish institute.[2] In their "go east" drive, German car manufacturers reduced their investments at home and in Southern European countries. Portuguese Prime Minister António Costa sees this development as an ongoing aspect of this EU region’s economic problems.

Hardly Any Knowledge Transfer

Car manufacturers initially considered their new sites in Poland, Hungary and Slovakia mainly as extended assembly lines. Later, however, they increased the vertical range of manufacture. Some of them even established their own development departments in Eastern Europe. Like firms in other branches, they left their cutting-edge research in Germany. They also hardly leave room for initiatives to their subsidiaries. Contrary to Austrian firms, "German companies introduced their corporate culture and their own managers in their subsidiaries. This gave them more control over the innovation process on site," explained the economist Dalia Marin.[3] This is how German companies - contrary to their Austrian counterparts - succeeded in maintaining the upper hand over the most lucrative parts of the value added chain and prevent the outflow of profits to Eastern Europe, according to the economist.

Predominance of the Automobile Industry

German car manufacturers own 33 factories in Eastern Europe, which produce 3.6 million vehicles. This sector is therefore of high importance for those countries. The newly opened VW commercial vehicle plant in Września represents the largest foreign investment in Poland's history. This could significantly increase the proportion of cars and car components in the country's exports to Germany, which in 2015, was around 13 percent. This is also the case in Slovakia, where VW, Peugeot and Kia account for 44 percent of the overall industrial production and 35 percent of the country’s exports.

Stagnant Convergence

Even though not only the global players of the automobile industry are building up their capacities in Eastern Europe, the economic development is stagnating in these countries. For some time, the countries in this region have substantially not been able to bring themselves up to the EU’s average gross domestic product (GDP). The Czech Republic worked itself up from 80 percent in 2005 to only 85 percent of the GDP by 2015, Hungary from 62 to 68 percent, Poland, however, from 50 to 69 percent and Slovakia from 59 to 77 percent, whereas Slovenia dropped from 86 to 83 percent during the same period.[4]

The "Middle-Income Trap"

A study published by the Polish Center for Eastern Studies (Ośrodek Studiów Wschodnich, OSW) think tank, researching the economic relations between Germany and the Visegrad countries ("V4") warns, therefore, that "the cooperation between the V4 countries and Germany carries the risk that the V4 nations will stagnate in a ‘middle-income-trap’ of development."[5] According to the author Konrad Poplawski, though the Visegrad group countries have matured over the past few decades, to become important links in the value chain of German corporations, they have not developed the strength for an independent development. Because Poland, Hungary, the Czech Republic and Slovakia have neither their own high-tech companies nor highly profitable brands, they currently serve as merely Germany’s "economic hinterland." What Poplawski characterizes as a "middle income trap," which has recently become popular term among economists, is what other researchers refer to as "peripheral integration."

"Capital has a Homeland"

In response to the stagnation of the convergence process, some Eastern European countries are now focusing on greater promotion of the domestic economy. "Capital has a homeland," declared Poland's Economy and Finance Minister, Mateusz Morawiecki, of the conservative "Party for Law and Justice" (PiS).[6] This is why, following the example of measures taken by Hungary's Viktor Urbán, he is initiating measures to curb the influence of foreign credit institutions, which currently account for approx. 60 percent of the Polish market. Thereby, Morawiecki hopes to be able to create better financial sources. After all, until now, the Commerzbank and other financial institutions have hardly been willing to make larger investment credits available to Polish companies. According to the World Bank economist, Ismail Radwan, banks in Poland are among the most hesitant in Europe to provide loans to companies.[7]

Supermarket Taxes

In Poland, like in Hungary and Slovakia, efforts are also being made to limit the economic power of large supermarket chains. For example, the Polish government is introducing a supermarket tax, to give Polish small enterprises "the means to compete and assert themselves in the market," as Prime Minister Beata Szydło explained.[8] The PiS has also announced an extensive program to promote businesses.

Foreign Pressure

These efforts are not only having to confront domestic contradictions, but must also resist considerable foreign pressure. In September, the EU announced an investigation into Poland's supermarket tax, on suspicion of illicit state support and therefore suspended its application temporarily. Brussels has also intervened in Hungary for a similar regulation. In addition, banks in Poland are not obligated to pay for their business in Swiss franks, as the PiS had announced prior to elections. The credit institutions, making reference to the favorable interest rates, had aggressively advertised for mortgage loans in Swiss francs, which, following a rise in the exchange rate caused the customers great losses. Whereas Orbán could impose an obligatory currency exchange, the Polish government was forced to capitulate to the financial institutions. Now, only measures on a voluntary basis are in force. Moreover, the powerful actors in the financial market are creating problems for the country. The rating agencies, Standard and Poor's and Moody's have lowered their ratings for Poland's creditworthiness, which makes it more difficult for Szydło to finance the adoption of her social programs.

[1] Central Europe Top 500. www.deloitte.com.
[2] Evaluation of benefits to the EU-15 countries resulting from the implementation of the Cohesion Policy in the Visegrad Group countries. www.ibs.org.pl.
[3] Dalia Marin: Schwächer als Bratislava. Die Zeit 28.07.2016.
[4] BIP pro Kopf in KKS. www.ec.europa.eu/eurostat .
[5] Konrad Popławski: The Role of Central Europe in the German Economy. www.osw.waw.pl.
[6] Reinhard Lauterbach: "Kapital hat ein Vaterland". www.jungewelt.de 06.08.2016.
[7] Ismail Radwan: Avoiding the Middle-Income Trap in Poland. www.worldbank.org.
[8] www.premier.gov.pl.