For centuries Central Europe has had the fate of its citizens and territories held in the balance by outside forces. The countries of Poland, Slovakia, Hungary, and the Czech Republic have been part of multiple empires, called different names, and been in different places. After the fall of the Soviet Union in 1991, things looked like they were going to be different. These countries started to make a name for themselves, and they appeared have broken free from the shadows of other countries to become players in the realm of geopolitics. Unfortunately, with new global crises unfolding, it is becoming quite evident that these countries are still at the whim of leaders outside of their own capitals. So while these countries have succeeded in developing their own autonomy over the past two decades, Central Europe’s fate is still tied to that of outer forces, mainly Germany and Russia. The recent crises in Greece and Ukraine will not only solidify this, but they will also have a huge impact on their future.
As of right now, Germany is the heartbeat of the European Union. They are the largest economy in the EU, which makes Germany a huge player. Since the fall of the Berlin Wall, Germany understood that they could use their new Central European brothers as markets for their goods. This idea exploded, and as of today, the economies of Germany and the countries of Central Europe are extremely intertwined and dependent on one another. According to Jan Cienski, Warsaw Correspondent for the Financial Times, “Germany is currently the leading foreign investor across the region, and exports to Germany power all the local economies.”1 Her article goes on to explain the economic scale of investment into this region using the Auto industry as an example. In the capital of Slovakia exists its largest exporter—a German owned Volkswagen plant. The company has pumped over two billion euros into the factory over two decades. The largest exporter in the Czech Republic is a car company called Skoda, owned by German parent company Volkswagen. In Central Poland, Volkswagen again spent over one billion euros to build a car factory that produces utility vehicles. Then in Hungary another German car manufacturer, Mercedes, invested 800 million euros in a factory to produce their new B-Class.1
Not only are these countries receiving huge amounts of investment, which create jobs and capital, but also these plants are upgrading Central European technology— thus leading other companies to have faith in investment in these countries. BASF (another German company) just invested 150 million euros to create a plant producing catalytic convertors in Western Poland. These parts are not low grade; car parts manufactured across the region are able to live up to Volkswagen’s and Mercedes’ extremely high standards, allowing these companies to outsource their manufacture to these countries. Overall, German investment across all sectors in the region comes to 32 billion euros each to the Czechs and Poles, 16 billion euros to Hungarians, and nine billion euros to Slovakians. In the words of Cienski herself, “When the German economic engine sputters, as is now happening, the region suffers.”2
It is interesting to look at the economic growth of countries in Central Europe and Germany. If you look at Figure 1 you will notice that the GDP growth of the countries of Central Europe and that of Germany follow a very similar trend. This is not just a coincidence. The fates of these countries are very closely related to that of Germany. After the financial crisis of 2008 there, with the exception of Poland, was a complete drop off of economic growth. After a slight recovery, the 2012 crisis in Greece brought all these economies to near stagnation. These countries have developed strong ties to Germany, so outer crises that affect Germany will also affect them, that is why the non-resolution of the economic crisis in Greece will have such a profound effect on the countries of Central Europe.3
The Greek crisis started in 2012, and with that came a drop in economic growth for every single country listed above. The ramifications from this crisis were great, and the unresolved issues of that crisis continue to have effects to this day. The Greek financial crisis is far from over, and with the election of a hardliner leftist party into Greece’s government, uncertainty is at an all time high with many seeing a “Grexit” (Greece exiting from the European union) as the most likely course of action. If that ever happens, it would send a ripple effect throughout not just Central Europe—but through the entire European Union as well.
According to former U.S. Federal Reserve Chairman Alan Greenspan, an exit from the European Union by Greece will cause an end to the single currency system seen throughout the European Union.4 Even if the single currency system persisted past an exit by the Greeks this would have quite a few ramifications on Central Europe over the next few years. Currently, the only Central European country that uses the euro is Slovakia; they switched from the Koruna in 2008. With the end of the euro, Slovakia would be forced to switch back to the extremely weak Koruna or create a new currency, most likely causing economic turmoil and extreme inflation in the country. Poland, the Czech Republic, and Hungary do not yet use the euro, but according to the terms of joining the EU outlined in the 2003 Treaty of Accession, they have agreed to eventually switch to the euro. Both Poland and the Czech Republic are economically well positioned for switching to the euro, but public opinion in these countries is strongly against the switch. Because of the crisis in Greece, the citizens and the leaders in these countries are growing even more opposed with the knowledge that the single currency system could fall apart at any time. In the foreseeable future neither Poland nor the Czech will be switching to the euro.
Hungary has the most to lose by not switching to the euro. Switching to the euro would increase foreign investment in their country by about 30%.5 As of 2012, Prime Minister Viktor Orban has said that the earliest his country could possibly switch will be in 2018, but with the current climate it will probably much later.6 A 30% increase in foreign investment would be a much needed lifeline to one of the weakest and most vulnerable economies in the Eurozone.
While the non-adoption of the euro will hurt investment into Hungary, according to David Kennedy of the Financial Times, the possible exit of Greece could lead to decreased foreign investment across the region.3 If a recession were to hit the Eurozone due to a Grexit, most countries in the EU would experience an economic downturn, including Germany. If Germany is in the midst of an economic recession, they are going to be turned inwards trying to rehabilitate themselves. While Germany will still be putting money into Central Europe, due to their reliance on exports to the region, they will be hard pressed to increase that investment. This is where the reliance on Germany will make these countries vulnerable. With Germany unable to increase investment, they will have to look to other foreign partners to loan them money and to invest into their economy. With a region wide recession due to the Grexit, it will be near impossible to find foreign investors; investors will be looking for safer, more fiscally sound shores in which to invest their money. This will only deepen the recession for these countries, and they will not have anyone to bail them out. Germany will have already failed to bail Greece out of a huge recession, and the weaker economy of, say, Hungary will only spiral further into debt.
The Grexit is not the only external crisis of which the countries of Central Europe must be wary. How the crisis in Ukraine plays out will also have major repercussions for these countries. Russia officially annexed Crimea in March of 2014. Following this annexation the worldwide community placed sanctions on Russia. They have currently imposed two different rounds of sanctions on Russia. A threat still looms from the EU and the United States for a third, and much harsher, round of sanctions that could be imposed on Russia. These sanctions would include harsh restrictions on the critical commodity of Russian Oil, and further Russian asset freezes. These sanctions would have gone into effect had the May 25th, 2014 elections in Ukraine been tampered with, but because of Putin’s seeming willingness to cooperate with democratically elected President, Petro Poroshenko, the sanctions have been delayed further.
Currently, the European Union gets 24% of its oil from Russia, with a little over half of that gas supply running through pipelines built across Ukraine. Vladimir Putin knows that Europe needs his energy resources to power their economies, and that is what is leading him to walk such a hard line in Ukraine. He knows that long-term sanctions restricting his export of oil will hurt his economy, but will also be extremely tough on the economies of Europe. Russia has played hardball with their energy resources before. In 2009, Russia completely shut down the pipelines that run through Ukraine for two weeks. This resulted in extreme shortages of energy across Europe, and with the sudden decrease in energy came a rapid increase in energy prices. This was not the only time Russia has manipulated oil. From 1991 to 2006, Russia used politically motivated oil shut offs 55 different times. In 2008, during a dispute with the Czechs, Russia cut off energy resources to them, resulting in price increases.7 Then, in 2009, Russia threatened to shut off all oil exports to Slovakia, Hungary, and the Czechs over a price dispute, which could have shut down their economies until the dispute was resolved.
Figure 2 (above) shows the extremely heavy reliance on Russian energy to fuel Central European economies. Every single Central European country receives over half of their energy from Russia. If this third round of sanctions goes into effect there could be huge economic consequences. The Economist predicts that with sanctions put in place, and Russia’s future manipulation of oil, the European Union could see a rise in gas prices by almost 50 billion dollars to receive only 62.5% of the energy resources they need.9 Not only would there be a shortage of gas, but Europe would have to pay extremely high prices for that shortage. This would force Europe to import energy from elsewhere. Though this may quicken the pace on their development of renewable energy sources, it will also take time, and cost more money, than just receiving oil from their Russian neighbors. The repercussions from a possible Grexit, coupled with the energy problems that the Ukraine crisis may bring around, are going to bring a severe change to Central Europe.
Poland may be the most well suited to survive another a Eurozone recession, but they will still be hit incredibly hard due to the need for outside investment and loans. They are the sixth largest economy in the EU, and the chart shows that they were the economy that was best able to absorb the hard blows of the 2008 meltdown and the first wave of the Greek crisis. A third meltdown, caused by the possible end of the euro, paired with the Grexit would undoubtedly hurt the Polish Economy. According to David Turner of Institutional Investor, while Poland’s economy may look good from the outside they are still hugely at risk from the weak Eurozone. They are currently the largest recipient of EU Structural Funds and The Cohesion Fund, which is distributed from the richer countries of the EU to the poorer.10 With further weakening of the Eurozone, this money could drop off drastically and cause economic problems in the immediate future. While Poland may be shielded from problems of the single currency system due to use of the zloty, further weakening of the Eurozone due to a Grexit will still have profound effects on their economy.
Poland learned a valuable lesson in the gas dispute with Russia in 2009. Since then they have started building new pipelines to connect with Germany and the Czech Republic; they also have invested heavily in a new liquefied natural gas terminal, and, after another two year delay, will start importing natural gas from Qatar in mid-2016.11 If a Russian cutoff did occur with supply from Germany, with their own production coupled with a heavy increase in natural gas from abroad, Poland could meet their own energy needs. While this is an impressive feat, energy costs would see a massive increase. The new natural gas plant, already having lost billions before it much delayed completion, will cost about three times more money to import energy than their older means.12 Poland would see an increase in gas and other energy prices, raising the price of commodities. So if a Grexit and Russian energy cutoff were to occur, Poland is the most well suited of the Central European region to continue on, but they would still see a noticeable increase in the price of energy and commodities, coupled with less foreign investment and a recession within Poland in the next few years.
The International Monetary Fund (IMF) lists Hungary as the economy most vulnerable to an outside crisis in the Central European region. This is due to large amounts of debt coming due for not only the public sector, but also the private sector.13 Hungary had its strongest economic year of growth in eight years at 3.6%. This was due to improved fiscal and monetary stimulus from the European Union.14 So while they are able to grow with help from the Eurozone, if this money was to stop coming in, they could have an economic catastrophe. Studying the effects of prior and external crises to Hungary shows a clear trend of less investment in a time of crisis.
Figure 315
Due to the 5-year period spanning the 2008 global downturn, and the Greek financial crisis, there was an 18.9% net loss in foreign investment to Hungary. While there was an encouraging upswing in 2013, it must be troubling for the leaders of Hungary to see that when there is an external crisis their country’s foreign investment drops off heavily. Hungary is already missing out on a 30% increase in foreign investment due to their inability to convert to the euro, and, if Greece does end up exiting from the European Union, Hungary will see another sharp decline in foreign investment. Due to their private and public sector debts, coupled with the external crises, the conditions are ripe for a serious recession in Hungary within the next five years.
The energy problem in Russia will only further complicate the situation in Hungary. With over 80% of energy resources coming from Russia, a shutoff could be disastrous. Prime Minister Orban knows that Russian energy is crucial to the Hungarian economy. He is very outspoken against EU sanctions on Russia, has circumvented the EU in supporting the Russian backed South Stream pipeline to circumvent Ukraine, and recently signed a new 5 year energy deal with Russia.16 Hungary is directly opposing the European Union, and, while tensions may have cooled with the delay of the third round of Russian sanctions, if conflict between Russia and the EU re-escalates that could pose huge problems for Hungary as far as their status in the EU. While Hungary may be securing energy for the next five years, their recent rhetoric towards the EU and NATO over Russia could isolate them from their EU partners. They are already extremely vulnerable to external crises, and if they continue to distance themselves from the EU, when the recession hits within the next five years, the EU may not be willing to risk a cash influx and bailout like they did in Greece. Energy costs may stay down, but Hungary is in a bad economic spot over the span of the next five years.
If all stays well in Europe, the Czech Republic will continue to see economic growth over the next 2–5 years. The key here is for all to stay well in Europe. This increasingly looks like it will not happen, and like the crises in Greece and Ukraine will have repercussions for the Czechs. With the Czech republic being tied with Poland for the largest receiver of foreign investment from Germany, anything that could upset the German economic machine could upset the Czech economy. The crisis in Greece will result in less investment into the Czech economy for the foreseeable future.
The gas crisis in 2009 was a wake up call for the Czechs. After that, they contracted with the Germans and Polish to link gas lines between the three countries. While this has the ability to lessen the need for Russian oil imports, they are still quite reliant on Russian energy resources, receiving about 57% from Russia. Like Poland, the Czechs could look to other suppliers of energy, including local coal, but if Russia were to cut off energy the price of energy in the Czech Republic would increase drastically in the short term until they could stabilize their resources a few years down the line. Despite the possible crises in Greek, and Russia, the Czechs have positioned themselves well to deal with external problems, without too much economic downturn.
As mentioned earlier, the possible collapse of the euro could cause turmoil in Slovakia. The fact that all of the countries in Central Europe use the euro can be seen as a form of insulation that shields Central Europe from some of the external crises occurring in the Eurozone. If Greece exits the Eurozone and ends the use of the single currency system, some economists believe it would cause an inflationary spiral in the country. This would coincide at the same time when their biggest foreign investor Germany would also be going through a possible recession, lessening investment from them and due to the economic turmoil of the region new investment partners would be hard to find for the small country. Slovakia could possibly see the rapid end of their currency, reverting them back to a weak currency, a drop in foreign investment, and at the whim of Russian energy policy.
Slovakia is at risk for a huge energy crisis in the next few years. Slovakia, more than any other Central European country, is completely reliant on Russia for their energy needs. 83% of their energy needs are supplied through Russia. After the energy crisis in Central Europe in 2009, Bratislava knew they had to diversify their energy policy. According to the International Energy Agency, since 2009 Slovakia has coupled their electricity market with the Czech Republic, and is seeking a north-south pipeline to link up with the liquefied natural gas plants of Croatia, and Poland.17 These are good first steps, but they are still extremely reliant on Russia. If Russia decided to end energy exports to Slovakia, they simply could not power their economy, and the energy they could get through partners and energy stores would be extremely expensive. Slovakia needs more than 5–10 years to further diversify their energy resources, but it looks like before they can diversify further they may have to deal with an energy crisis. Slovakia, like Hungary is extremely susceptible to external crises.
Central Europe is far from being completely independent of outside world powers. The fact of the matter is: in the world that we live in, with extreme globalization, no country is independent of factors outside of their borders. The EU counts for one fifth of the world’s global trade; if they were to hit a major recession it would cause waves around the entire world, including big markets like the United States and China. Naturally, a region wide depression due to a fiscal crisis in Greece, and an energy crisis due to sanctions on Russia will cause a region wide recession in Central Europe. The countries of this region have made strides over the past 20 years to make themselves less dependent on foreign powers. While they have made these strides they are still, as a region, too dependent on the economy of Germany and the energy of Russia. A disruption in either of these two machines will cause economic problems for the region in the next 5–10 years, Central Europe must be wary of the future.
Bibliography
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