Download The German Economy Today: Exports, Foreign Investment, and East

The German Economy Today: Exports, Foreign Investment, and East-Central Europe
Stephen G. Gross
Over the past decade Germany has had one of the most successful economies in the developed
world. Despite the ongoing euro crisis, unemployment has fallen below 7 percent, reaching its
lowest levels since German reunification in 1990. Germany’s youth unemployment is among the
lowest in Europe, far beneath the European average.1 One of the most important engines of the
German economy today, and in fact throughout the 20th and 21st centuries, has been its export
sector. As Ludwig Erhard, Germany’s Economics Minister during the economic miracle of the
1950s, remarked, “foreign trade is quite simply the core and premise of our economic and social
order.”2 According to various estimates, exports and imports of goods and services account for
nearly half of German GDP—up from one-quarter in 1990. Germany is one of only three
economies that do over a trillion dollars worth of exports a year, the other two being the United
States and China. And while many advanced economies have suffered from
“deindustrialization”, Germany has actually expanded its manufacturing sector, selling capital
equipment, high-end machinery, automobiles, and a variety of other products throughout the
world.3
Many causes lay behind Germany’s success as an exporter. The varieties of capitalism literature,
for example, looks to the deeper structural roots of the German economy, highlighting its
Mittelstand of small and specialized firms, its vocational schooling system, its banking system,
and the influence its labor unions wield through co-determination.4 More recently, scholars have
pointed to the Hartz IV reforms of the early 2000s. These liberalized Germany’s labor market,
allowed small firms to hire and fire workers more easily, and reduced welfare benefits. A recent
if provocative study estimates that roughly half of Germany’s recent success in outperforming
the rest of Europe in exports stems from the Hartz IV reforms, the other half coming from the
easy monetary policy pursued by the European Central Bank since the early 2000s.5
1
Bundesbank statistics quoted by Bloomberg news service, accessed on May 7, 2013 at
http://www.bloomberg.com/quote/GRUEPR:IND
2
Timothy Garton Ash, In Europe’s Name: Germany and the Divided Continent (New York:
Vintage Press, 1994), pp. 244.
3
World Bank national accounts data, and OECD National Accounts data files: accessed on May
7, 2013 at http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS; World Bank Country
Benchmarks. Export Generation: Germany accessed on May 7, 2013 at
http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/ECAEXT/0,,contentMDK:2307
4114~pagePK:146736~piPK:146830~theSitePK:258599,00.html.
4
Peter Hall and David Soskice, Varieties of Capitalism: the Institutional Foundations of
Comparative Advantage (New York: Oxford Univ. Press, 2001); Mary Nolan, “Varieties of
Capitalism and Versionen der Amerikanisierung,” in Gibt es einen deutschen Kapitalismus?
Tradition und globale Perspektiven der sozialen Marktwirtschaft, ed. by Sigurd Vitols and
Volker Berghahn (Frankfurt: Campus, 2006), pp. 96–112.
5
http://www.spiegel.de/wirtschaft/soziales/hartz-reform-volkswirt-will-erfolg-bewiesen-habena-893186.html; Adam Posen, ‘Hartz IV Worked—As Far As It Went,’ Op-ed in Die Welt
March 14, 2007.
But one crucial source of German economic vitality that often remains overlooked is the
networks that Germany has developed with the economies of East-Central Europe over the past
several decades. Through geography, and through an active investment policy pursued by the
state and by private business, Germany has forged a unique relationship with the economies of
Poland, Hungary, the Czech Republic, and Slovakia. Known as the Visegrad Group since 1991,
these countries are home to relatively skilled and relatively cheap labor. On the one hand,
German firms have taken advantage of this by relocating crucial stages of their manufacturing
and commodity production chains eastwards. In doing so, they save labor costs and compete
more effectively on the global market. One can draw a parallel here with American-owned
factories in northern Mexico—the Maquiladoro industrial centers. Indeed, throughout the 20th
and early 21st centuries many of the world’s leading economies have benefited from geographic
proximity to a supply of low-cost labor. Germany is no exception.6 On the other hand, the
Visegrad Group economies have become so dependent on intra-industry trade with Germany that
they now have a vested interest in preserving this relationship, and consequently of maintaining
stability in the euro zone.
This paper shows how Germany’s ability to exploit the labor markets of Eastern Europe is not a
recent phenomenon, but rather belongs to a historical process rooted in three major transitions:
German Ostpolitik of the 1970s; the liberalization of Eastern European economies after 1989;
and the expansion of the European Union (EU) eastwards in the 1990s and early 2000s. By the
turn of the millennium, Germany became the single largest investor and trading partner with the
countries of East-Central Europe. Historically, these two varieties of trans-border commerce—
direct investment and foreign trade—have evolved in tandem, and East-Central Europe has been
no exception. German foreign direct investment (FDI) built up production centers in the
Visegrad Group, which then shipped back parts and supplies to manufacturing centers in
Germany. Consequently, a large portion of the flow of goods between Germany and its eastern
neighbors is within a given firm or industry: intra-industry trade. An extended example of the
automotive sector—one of Germany’s largest and most globally competitive industries—
illustrates how this relationship between direct investment and intra-industry trade, and between
Germany and the Visegrad Group, has evolved over the past two decades.
The 1970s: German Ostpolitik and Eastern Bloc Reform
In many respects, Germany’s economic ties with East-Central Europe date back to the 19th
century. But Germany’s two bids for continental hegemony and its war of racial extermination
severed many of the commercial networks that had linked the country with its neighbors to the
East.7 In fact, the origins of Germany’s current economic relationship with Poland, Hungary, the
6
Rachael Kamel and Anya Hoffman (eds.), The Maquiladora Reader: Cross-border Organizing
Since NAFTA (Philadelphia: Mexico-U.S. Border Program, 1999); On commodity chains see
Gary Gereffi and Miguel Korzeniewicz (eds.), Commodity Chains and Global Capitalism
(Westport, Conn: Greenwood Press, 1994).
7
Robert Mark Spaulding, Osthandel and Ostpolitik: German Foreign Trade Policies in Eastern
Europe from Bismarck to Adenauer (Providence: Berghahn Books, 1997), pp. 15–61; Ivan
Berend and Gyorgy Ranki, Economic Development in East-Central Europe in the 19th and 20th
Centuries (New York: Columbia Univ. Press, 1974), pp. 156–70.
Czech Republic, and Slovakia date to German Ostpolitik of the 1970s, when the Cold War in
Europe first began to thaw. In 1970 Willy Brandt, West Germany’s Social Democratic
Chancellor, initiated a campaign to normalize political relations with Germany’s eastern
neighbors. In a series of treaties—the Moscow and Warsaw treaties of 1970, the Basic Treaty of
1972, and the Prague Treaty of 1973—West Germany recognized the territorial integrity and
sovereignty of the GDR and Poland, and addressed the poisonous legacy of the 1938 Munich
Agreement with Czechoslovakia.8 One of the main purposes of Brandt’s Ostpolitik, however,
was also to cultivate a climate more conducive to East-West trade and investment. Brandt
believed that deepening economic relations with the Eastern bloc would engage the Soviet
leadership to make political concessions. Providing Eastern bloc countries access to western
technology, know-how, and markets, in other words, would open the door for political
cooperation.
Over the course of the 1970s, then, Brandt’s Ostpolitik paved the way for West German firms
and banks to move into the Soviet Union and its Eastern European satellites. Through its trade
and diplomatic missions, the West German government began offering negotiating assistance to
German businesses involved in the Eastern bloc. In 1975 West Germany concluded technical and
industrial treaties with Poland, Czechoslovakia, and Hungary to encourage joint undertakings
between West German firms and Eastern bloc state enterprises, the aim being to help these
countries manage their chronic trade deficits—“import hunger”—with West Germany. Just as
important, Germany’s corporatist organizations took a more proactive role supporting exports to
Eastern Europe. In the 1970s the Ost-Ausschuss—West Germany’s Committee for Eastern
European Economic Relations founded back in 1952—created research groups for Hungary and
Czechoslovakia to coordinate the spread of information and evaluate market opportunities and
risks in the Eastern bloc. Through the Hermes export credit the state began underwriting
investments on the other side of the Iron Curtain, assuming much of the risk if state-run
enterprises in Poland, Hungary, or Czechoslovakia defaulted on their end of the contract with
German firms. By 1976 business in the Eastern bloc accounted for 20 percent of these insurance
contracts.9
German Ostpolitik coincided with a period of economic stagnation and reform in the Eastern
bloc. Before 1970 extensive growth in basic heavy industries had driven the economies of
8
For a recent survey of West Germany’s Ostpolitik see Carole Fink and Bernd Schaef (eds),
Ostpolitik, 1969-1974: European and Global Responses (New York: Cambridge University
Press, 2009). Relevant here are the contributions from Krzysztof Ruchniewicz and Oldrich Tuma
on Poland and Czechoslovakia.
9
Randall Newnham, Deutsche Mark Diplomacy: Positive Economic Sanctions in GermanRussian Relations (University Park: PSU Press, 2002), pp. 162–74; Sven Jüngerkes, Diplomaten
der Wirtschaft: Die Geschichte des Ost-Ausschusses der Deutschen Wirtschaft (Osnabrück: Fibre
Verlag, 2012); Michael Kreile, Osthandel und Ostpolitik (Baden-Baden: Nomos, 1978), pp. 142–
159; on the chronic “import hunger” of Eastern bloc countries during their economic reforms of
the 1970s, Janos Kornai, The Socialist System: The Political Economy of Communism
(Princeton: Princeton Univ. Press, 1992), pp. 346.
Poland, Czechoslovakia, and Hungary.10 As this type of growth plateaued, Eastern bloc countries
began searching for new ways to reinvigorate their economies, above all through the
Comprehensive Program for Socialist Economic Integration of 1971.11 Among other things, this
program liberalized trade regulations with Western Europe. Hungary, Poland, and
Czechoslovakia decentralized their foreign trade monopolies and allowed individual enterprises
to pursue their own trade agenda in Germany and other market economies. After 1973 Hungary
and Poland allowed foreign firms to establish missions in their countries to perform market
research and advertising. Czechoslovakia and Hungary established a framework for long-term,
transnational cooperation between their own enterprises and foreign firms to share technological
expertise and production methods, and to manufacture goods in the Eastern bloc. Poland
followed suit in 1976. Through these new regulations Eastern bloc leaders hoped, above all, to
accelerate technical innovation at home.12
In effect, the combination of German Ostpolitik and Eastern bloc reform in the 1970s enabled
West German companies to begin, however slowly, investing directly in the economies of
Eastern Europe. By the 1970s West Germany boasted the largest number of cooperative
industrial enterprises in the Eastern bloc, and it also exported more industrial machinery and
plants there than any other nation.13 By the 1980s West German firms were involved in over a
hundred joint ventures in Eastern Europe, mostly in the Soviet Union but many in East-Central
European states as well. In Hungary, for example, by 1989 one-third of all joint ventures were
with German firms and one-quarter of the country’s foreign trade was with Germany.14
The 1990s: the Collapse of Communism, the Expansion of the EU, and the Explosion of
German Foreign Direct Investment
By the late 1980s, then—even before the collapse of communism—West Germany was
already on the way to establishing a uniquely intricate economic relationship with the countries
of East-Central Europe. But this relationship deepened even further, and in fact changed
qualitatively, after the collapse of communist regimes in 1989. As Poland, Hungary, and
Czechoslovakia transitioned to market economies in the 1990s, German direct investment surged
10
Ivan Berend, Central and Eastern Europe, 1944-1993: Detour from the Periphery to the
Periphery (New York: Cambridge Univ. Press, 1996), pp. 182–222.
11
Randall W. Stone, Satellites and Commissars: Strategy and Conflict in the Politics of SovietBloc Trade, Princeton Studies in International History and Politics (Princeton, N.J.: Princeton
University Press, 1996), pp. 35; Ivan Berend, Economic History of Twentieth Century Europe:
Economic Regimes from Laissez-Faire to Globalization (New York: Cambridge Univ. Press,
2006), pp. 166–69.
12
Friedrich Levcik and Jan Stankovsky, ‘Industrial Cooperation between East and West,’ Soviet
and Eastern European Foreign Trade 14/ 1-2 (1978), pp. 56–73; Harriet Matejka, ‘Foreign
Trade Systems,’ in Hans-Hermann Höhmann (ed.), The New Economic Systems of Eastern
Europe (Berkeley: UC Press, 1975), pp. 443–79; Kornai, The Socialist System, p. 346–47.
13
Levcik and Stankovsky, ‘Industrial Cooperation,’ p. 168–69.
14
‘Germany/Eastern Europe: German Firms Lead Integration,’ United Kingdom, Oxford: Oxford
Analytica Ltd (Jan. 14, 2004). ProQuest. Accessed on April 26 2013; Newnham, Deutsche Mark
Diplomacy, p. 185–227.
into the region. This FDI would subsequently enable German firms to incorporate Eastern
European enterprises and workers into their production chains by the early 2000s.
Following the momentous events of 1989, German firms began investing directly in the former
Eastern bloc countries, which were now rapidly privatizing their state-owned enterprises. Eastern
European leaders and their western advisors saw privatization as a crucial pillar in the transition
from a command to a market economy. Privatization belonged to a collective package of policies
that, in the minds of leaders like Leszek Balcerowicz of Poland or western advisors like Jeffrey
Sachs, logically fit together, including the liberalization of prices, the stabilization of monetary
and fiscal policy, and the dismantling of barriers to foreign trade and investment.15 Poland,
Czechoslovakia, and Hungary all moved at different paces through privatization, particularly
with respect to the larger state-owned enterprises. Czechoslovakia, for instance, proceeded
quickly through its “big bang” voucher program, Poland much more slowly. But all three
suffered from a dearth of domestic capital, opening the door for western European investors,
above all German investors, to buy many of these newly privatized enterprises in the energy,
communication, and transportation sectors.16
Shock therapy and the “fire-sale of publicly owned assets” in East-Central Europe created a host
of structural problems that took a decade or longer to overcome. Industrial output across the
region crashed by nearly 50 percent in four years, inflation reached destructively high levels, by
1993 GDP per capita fell to roughly 80 percent of its relative peak in 1989, and hundreds of
thousands of workers lost their jobs. The dislocation of social and economic life, in other words,
was enormous. In the worst cases, privatization created a kleptocracy of bureaucrat-business
owners and laid the foundation for scandals and a nationalist backlash against profiteering.
German and other western European investors were an intimate part of this destabilizing process.
As one popular joke in Prague recounted: “I have some good news and some bad news about
Czechoslovakia’s post-Communist prospect. … What’s the goods news? … The Germans are
coming! … And the bad news? … The Germans are coming.”17
Interestingly, though, privatization in the Eastern bloc countries was not the only engine driving
German direct investment eastwards. As privatization slowed in the mid-1990s, German
15
For contemporary views on the application of shock therapy to Eastern Europe see, for
example, Jeffrey Sachs, ‘Poland and Eastern Europe: What is to be done?,’ in Andras Koves and
Paul Marer (eds.), Foreign Economic Liberalization (Boulder, Co.: Westview Press, 1991), pp.
235-46; Leszek Balcerovicz, ‘Understanding Postcommunist Transitions,’ Journal of
Democracy, 5/4 (October 1994), pp. 75-89; for a highly critical evaluation of these policies see
Joseph Stiglitz, Globalization and Its Discontents (New York: Norton, 2002), pp. 133–94.
16
Ivan Berend, From the Soviet Bloc to the European Union (New York: Cambridge Univ.
Press, 2009), pp. 57–65; Jamuna Prasad Agarwal, ‘European Integration and German FDI:
Implications for Domestic Investment and Central European Economies,’ National Institute,
Economic Review 160 (April 1997); ‘Germany/CEE: Trade and FDI Patterns Shift Eastwards,’
United Kingdom, Oxford: Oxford Analytica Ltd (Sept. 14, 2007). ProQuest. Accessed on April
26, 2013.
17
Tony Judt, Postwar: A History of Europe since 1945 (London: Pimlico, 2007), pp. 688–91;
statistics from Berend, Soviet Bloc, p. 74–78.
investment did not trail off but actually increased. This stemmed in part from developments in
European integration: German capital moved to wherever the umbrella of the EU provided a
clear legal framework for investment. In 1986 European leaders, led by Jacques Delors and
Christian Democratic leader Helmut Kohl, had renewed their quest to forge a common European
market by passing the Single Europe Act. Among their goals, Delors and Kohl aimed to create a
single European market in financial services and remove capital controls to permit investment to
flow more easily within Europe. This stimulated the outflow of German FDI, which went
wherever the EU reduced barriers to entry. In the middle of the 1980s Germans invested in
Western Europe, the first region to experience a more liberal regulation of cross-border
investment. In the early 1990s Germans began investing in Austria, Finland, and Sweden in
anticipation of their EU entry in 1995. Likewise, once the Europe Agreement of 1991 and the
Copenhagen Council of 1993 set the basic criteria of EU accession for the post-communist
states—including rules on capital movement, competition, and intellectual property rights—
German FDI moved into Poland, Hungary, the Czech Republic, and Slovakia.18
Initially, German investment in these four states went toward the transportation, energy, and
communication sectors. But by the late 1990s Germans were increasingly investing in
manufacturing. And they were no longer just buying up old enterprises; they were also helping to
found brand new ones. By the end of the 1990s, three-quarters of German FDI in Eastern Europe
was in manufacturing, and one-third of all German investment in the region went toward
“greenfield sights,” or new production centers. All told, between 1990 and 1997, 11 percent of
all German FDI went into Eastern Europe, and German firms acquired or established some 2,300
affiliates. By the end of the 1990s, between 20 and 30 percent of the foreign investment flowing
into the Visegrad Group was German.19
The German Economy and East-Central Europe Today: Supply Chain Center
By 2000, then, Germany was the single largest foreign investor in Hungary, Poland, the Czech
Republic, and Slovakia. And, crucially, German investment was a key factor driving the growth
of German trade in the region. Indeed, by 2000 Germany was also the single largest trade partner
with the Visegrad Group. In 2004 Germany’s share in the trade of all Central and Eastern
European countries had risen to 21 percent. By contrast Russia, the largest commercial partner
with these countries before 1989, accounted for just 9 percent.20
18
Barry Eichengreen, The European Economy Since 1945: Coordinated Capitalism and Beyond
(Princeton: Princeton Univ. Press, 2007), pp. 336–45; Agarwal, ‘German FDI’; John Gillingham,
European Integration, 1950–2003: Superstate or New Market Economy (New York: Cambridge
Univ. Press, 2003), pp. 414–15.
19
Heinz-Joseph Tuselmann, ‘German Direct Foreign Investment in Eastern and Central Europe:
Relocation of German Industry?,’ European Business Review, 99/6, pp. 359–67; On the Visegrad
Group’s transition from communism see Dorothee Bohle and Béla Greskovits, Capitalist
Diversity on Europe's Periphery (Ithaca: Cornell University Press, 2012), pp. 138–82.
20
G. Giovannetti and F. Luchetti, ‘Trade and Foreign Direct Investment: Italy, Germany and the
New Europe,’ in A. Quadrio Cruzio and M. Fortis (eds.), The EU and the Economies
of the Eastern European Enlargement (Berlin: Physica-Verlag, 2008), pp. 73–84.
German direct investment stimulated trade with the Visegrad Group precisely because so much
of it went into outfitting Polish, Hungarian, Czech, or Slovakian subcontractors. German FDI, in
other words, helped create a regional industrial cluster in East-Central Europe where local firms
have now become critical producers in the supply chain of many German enterprises, both large
and small.21 Now much of the trade between Germany and the Visegrad Group takes place
within a given firm or within a single vertical production chain. The earlier stages of production
are now often located in East-Central Europe, while research and development along with design
and marketing are based in Germany.22
German firms benefit from their intra-industry commercial relationship with Poland, Hungary,
the Czech Republic, and Slovakia by acquiring access to relatively productive and relatively
cheap labor. In comparison with workers in other developing countries, after forty years of
communism East-Central European employees were literate and well-trained in vocational
schooling: 80 to 90 percent of young adults in these countries attended school through their
teenage years.23 And these workers were a bargain for German firms. In 1990 the average wage
of workers in East-Central Europe was 10 percent that of German workers. In 2010 German
manufacturing wages averaged $44 an hour, those in the Visegrad Group were just a quarter of
that, ranging between $8 and $12 an hour. Labor markets in East-Central Europe also tended to
be less tightly regulated, more flexible in terms of hiring and firing, and taxed at a lower rate
than in Germany, particularly before the Harz IV reforms of 2004. To be sure, productivity of
Czech or Hungarian workers is significantly lower than German workers. But this still comes out
as a net gain for German firms willing to relocate their more labor-intensive stages of production
to the east.24
21
Michael Clarkson, Matthias Fink, and Sascha Kraus, ‘Industrial Cluster as a Factor for
Innovative Drive in Regions of Transformation and Structural Change: A Comparative Analysis
of East Germany and Poland,’ JEEMS 12/4 (2007), pp. 340–64; on industrial clusters and their
importance for innovation and growth see Michael Porter, Competitive Advantage of Nations
(Basingstoke: Macmillan, 1998); Guiseppe Celi, ‘The Impact of International Trade on Labour
Markets. The Case of Outward Processing Traffic between the European Union and Central
Eastern European Countries,’ CELPE Discussion Papers 54 (June 2000); ‘German Firms Lead
Integration,’ Oxford Analytica.
22
For a provocative study on the distribution of commodity chains across geographic regions see
Miguel Korzeniewicz, ‘Commodity Chains and Marketing Strategies: Nike and the Global
Athletic Footwear Industry,’ in Gary Gereffi and Miguel Korzeniewicz (eds.) Commodity Chains
and Global Capitalism (Westport, Conn.: Greenwood Press, 1994), pp. 247–66.
23
Slavo Radosevic, ‘The Knowledge-Based Economy in Central and Eastern Europe,’ in
Krzysztof Piech and Slavo Radocevic (eds.) The Knowledge-Based Economy in Central and
Eastern Europe: Countries and Industries in a Process of Change (Houndmills: Palgrave
Macmillan, 2006); Berend, Soviet Bloc, p. 226–31.
24
U.S. Bureau of Labor Statistics, ‘Competitiveness in Manufacturing,’ in Charting
International Labor Comparisons (Sept. 2012); Eva Katalin Polgar and Julia Wörz, ‘Trade with
Central and Eastern Europe: Is It Really a Threat to Wages in the West?,’ ECB Working Paper
Series 1244 (Sept. 2010); Berend, Soviet Bloc, p. 125–28.
German enterprises are not alone in relocating manufacturing to the Visegrad Group: major firms
from other developed countries have done so as well. All of the leading automotive companies,
for example—from Fiat and Peugot to Hyundai—have now built production centers in EastCentral Europe. Yet Germany has reaped the largest rewards from using FDI to build intra-firm
supply networks, above all in the chemical, machinery, electrical equipment, and automotive
sectors. Subcontracting networks that deal in physical goods entail transportation costs, and the
manufacturing centers of Stuttgart, Bavaria, and Berlin are simply closer to subcontractors in
Poland or Hungary than are producers in other parts of Western Europe. German firms and the
German government, moreover, have pursued an active policy of building these supply networks
in East-Central Europe since the 1970s. As a result, already by the late 1990s intra-firm or intraindustry trade between Germany and the Visegrad Group was quite large. In 1998 this type of
exchange accounted for 35 percent of Poland’s trade with Germany.25 The figures are even
higher for the Czech Republic, where intra-industry trade with Germany surpassed 60 percent. In
comparison, just 9 percent of the Czech Republic’s trade with the Soviet Union—formerly its
largest commercial partner—came from such intra-industry trade.26
The Visegrad countries, for their part, have also benefited in a variety of ways by being the
destination of German FDI and the location of German offshoring. First, and most basically, they
have experienced a massive influx of long-term foreign capital. In the 1990s foreign direct
investment amounted to 10-15 percent of the GDP of these nations, and it financed major
infrastructural improvements. Leading up to the financial crisis of 2008, foreign investment into
East-Central Europe averaged $65 billion a year, or roughly 5 percent of the combined GDP of
these countries between 2004 and 2007. Over one-third of this went into building up the region’s
manufacturing base. More specifically, with FDI and the involvement of foreign firms has come
new technology—a spillover effect from their partnerships with German and West European
firms—that has enabled many Hungarian, Polish, Czech, and Slovak companies to move into
higher value-added activities. This is particularly important for these countries because they
spend, comparatively speaking, very little on research and development.27
As a result of German and Western European FDI, these countries have created an entirely new
manufacturing base to replace the old one dismantled in the privatization wave of the 1990s. In
the decade before the financial crisis, the countries of East-Central Europe nearly doubled their
market share of world manufacturing exports, most of which went to Germany and Western
Europe. These countries have now become centers for leather, textile, plastic, and even
25
Statistisches Bundesamt, ‘Foreign trade: Ranking of Germany's Trading Partners in Foreign
Trade (With Turnover and Foreign Trade Balance) 2012,’ Wiesbaden, (February 2013).
26
World Trade Organization, Trade Policy Review: Czech Republic 2001, Geneva (December
2001); World Trade Organization, Trade Policy Review: Poland 2000, Geneva (October, 2000);
World Trade Organization, Trade Policy Review: Slovak Republic 2001, Geneva (January 2002);
OECD Economic Outlook 71 (2002), part VI, pp. 160–67.
27
M. Ferrazzi and D. Revoltella, ‘Trade and Foreign Direct Investments: The Point of View of
Central Eastern European Countries. Changing Hierarchies in a Pan-European Perspective,’ in A.
Quadrio Cruzio and M. Fortis (eds.), The EU and the Economies of the Eastern European
Enlargement (Berlin: Physica-Verlag, 2008); Berend, Soviet Bloc, p. 112–15.
automotive production, and many observers are calling East-Central Europe the new “production
arm of Old Europe.”28
The Automotive Sector
Developments in the automotive sector illustrate just how intimately interconnected Germany’s
direct investment and its subcontracting supply chains are, and how this relationship has in some
ways benefited Germany alongside Poland, Hungary, the Czech Republic, and Slovakia. Since
the 1950s Germany has been home to some of the world’s most competitive automobile
manufacturers. Firms like Volkswagen, BMW, and Mercedes have become almost synonymous
with the economic miracle that lifted Germany out of the destruction of World War II. And for
good reason: automobile production is a complex process involving many backward linkages
that generate demand for a vast array of inputs.29
Yet since the middle of the 1990s nearly all of Germany’s largest automotive companies have
relocated substantial parts of their production chain to southwest Poland, northern Hungary, the
Czech Republic, and Slovakia. Volkswagen inaugurated Germany’s move eastward in 1991 by
purchasing 31 percent of Skoda, Czechoslovakia’s largest automotive company. Over the
coming decade Volkswagen expanded its investment in Skoda, building a new plant in Mlada
Boleslav and modernizing Skoda’s production process. In 1999 Volkswagen invested in and
expanded the Motor Polska plant in Polkowice, southwestern Poland, to produce engine parts.
Three years later it helped found a 31-hectare supply park near Poznan that attracted
international parts suppliers, where it began manufacturing components for the Volkswagen
Passat. Here Volkswagen could draw on an existing base of skilled Polish workers who had
worked at an older automobile factory: 70 percent of the production workers in Volkswagen’s
Poznan center already had vocational degrees. More recently, Volkswagen invested in a new
factory in Gyor, Hungary, building engines for its Audi line of luxury cars, and in Bratislava,
Slovakia, where it produces the body of its Porsche Cayenne SUV. The Audi subsidiary is now
Hungary’s top exporter, and Europe’s largest facility for producing 4, 6, and 8 cylinder
engines.30
Despite the recent economic downturn Volkswagen has actually expanded its operations in
Eastern Europe. All together, Volkswagen estimates it saves $1.8 billion annually in lower labor
costs from its production centers in East-Central Europe. Other German firms have recognized
28
Ferrazzi and Revoltella, ‘Trade and Foreign Direct Investment,’; Giovannetti and Luchetti,
‘Trade and Foreign Direct Investment’; ‘German Firms Lead Integration,’ Oxford Analytica.
29
On the German automotive industry in the postwar years see Simon Reich, The Fruits of
Fascism: Postwar Prosperity in Historical Perspective (Ithaca: Cornell Univ. Press, 1990); on
Germany’s economic miracle see Mark Spicka, Selling the Economic Miracle: Economic
Reconstruction and Politics in West Germany, 1949–1957 (New York: Berghahn Books, 2007).
30
Berend, Soviet Bloc, 125–27; ‘Hungary: FDI Inflows Continue into Automotive Sector,’
United Kingdom, Oxford: Oxford Analytica Ltd, (July 2, 2008). ProQuest. Accessed on April
26, 2013; Martin Krzywdzinski, ‘Work models under strain of offshoring. East-West competition
in the European car industry,’ Paper presented at the 16th GERPISA International Colloquium,
June 18-20, 2008, Turin.
the benefits of relocation and they have followed Volkswagen’s lead. In 2008, for example,
Mercedes opened its first non-German production site in Hungary. 31
As a result of this investment East-Central Europe, next to China, has become the world’s fastest
growing location for automotive production, earning the perhaps dubious label of the “New
Detroit”. The local firms first began manufacturing car parts that would be shipped to Germany
for assembly, but they are now progressing to more complex inputs such as shock absorbers,
steering systems, electrical equipment, car bodies, and in some cases even the final car itself.32
One of Europe’s largest commercial truck factories, for example, is a Volkswagen plant located
in Poland that exports 95 percent of its production. And these large manufacturing centers, often
owned by German companies, have generated substantial spinoff effects for local economies as
hundreds of small and medium-sized firms have grown up to supply the inputs. In the decade
after 2000 Volkswagen’s Skoda plant, for example, bought 70 percent of its components and 60
percent of its materials from local Czech producers.33
Conclusion
For Poland, Hungary, the Czech Republic, and Slovakia there are certain dangers inherent in
their current economic relationship with Germany. For one, they have now become highly
dependent on exporting goods to Germany and acquiring their investment from German firms.
Hungary offers the most extreme example. Before 2008 foreign companies accounted for 47
percent of employment, 82 percent of investment, and 89 percent of industrial exports in
Hungary. German firms alone own nearly 20 percent of all productive assets in the country.34
The other Visegrad countries are not far behind: altogether 70 percent of exports out of the
Visegrad Group are accounted for by foreign-owned firms, Germany being the largest
stakeholder. More tellingly, the export of manufacturing goods to Germany alone—largely intraindustry trade—accounts for between 13 and 19 percent of total GDP in the Czech Republic,
Hungary, and Slovakia.35
Just as dangerous for the countries of East-Central Europe, however, is their potential to get
stuck at the lower end of the production chain. As the automotive industry illustrates, this may
not necessarily happen. German firms are moving more complex stages of production and
31
Volkswagen Financial Services Aktiengesellschaft, The Key to Mobility Annual Report (2010);
Berend, Soviet Bloc, p. 125–27; Andrzej Kublik, ‘Europe Is Going Forward, We Are Going
Backward,’ BBC Monitoring International Reports (November 05, 2012).
32
Frost & Sullivan in cooperation with the Polish Information and Foreign Investment Agency,
‘White Paper: The Automotive Sector in Poland,’ (October 2008).
33
Michael Steiner, ‘Restructuring Industrial Areas: Lessons in Support of Regional Convergence
in an Enlarging Europe,’ in Gertrude Tumpel-Gugerell and Peter Mooslechner (eds.) Economic
Convergence and Divergence in Europe (Cheltenham: Edward Elgar, 2003); Berend, Soviet
Bloc, p. 128.
34
‘FDI Patterns Shifts Eastwards,’ Oxford Analytica; Berend, Soviet Bloc, p. 115.
35
Allen & Overy, Foreign Direct Investment in Central and Eastern Europe Report, Allen &
Overy LLP (2011); ‘Love in a Cold Climate,’ The Economist (Feb. 4th 2012); Kublik, ‘Europe Is
Going Forward’.
assembly eastwards. Nevertheless, the slices of the production chain that generate the most
profit—research and development, design, marketing, and the manufacturing of machines that
make other machines—remain located in Germany itself.36 And within Poland, Hungary, the
Czech Republic, and Slovakia a technological and productivity gap is opening between foreignowned firms and domestic firms. The former are pulling away by importing new equipment from
their partners in Germany, while the latter suffer from a chronically low level of domestic
research and development.37
For Germany, however, its economic relationship with Poland, Hungary, the Czech Republic,
and Slovakia remains a fundamental source of its prowess as a globally competitive exporter. As
it was before World War I, Germany has again become the beating heart of the Central European
economy. Germany’s direct investment in and commercial ties with East-Central Europe began
with a deliberate policy of Ostpolitik in the 1970s, accelerated through the privatization wave of
the 1990s and the expansion of the EU in the early 2000s, and continue today. For Germans, the
expression “Polish Economy” used to be a byword for economic disorganization; now it is
becoming a compliment. Through an extraordinarily dense network of intra-industry trade,
German firms have spread their chain of production to take advantage of the cheap and relatively
skilled labor force of their eastern neighbors. As a group Hungary, Poland, the Czech Republic,
and Slovakia now account for 22 percent of Germany’s foreign trade, more than America, China,
France, or Great Britain taken independently.38
Both major political parties in Germany—the Christian Democrats (CDU) and the Social
Democrats (SPD)—have at different moments pushed this relationship along. CDU Chancellor
Helmut Kohl advocated financial market liberalization in the European Community, and
presided over negotiations that initiated the entry of the Visegrad countries into the EU. In doing
so Kohl directly, if not deliberately, improved the ability of German firms to invest and trade in
East-Central Europe. This should come as no surprise, given that the CDU has traditionally been
the business-friendly party. Over the past 45 years, however, the SPD has done perhaps even
more to interlink Germany’s economy with those of its Eastern neighbors. It was the SPD of
Willy Brandt that inaugurated German Ostpolitik in the first place. And it was the SPD of
Chancellor Gerhard Schröder (nicknamed the “Auto Kanzler”), who sat on the board of
Volkswagen as it expanded into Poland, which completed the negotiations that finally brought
the Visegrad countries into the EU.
Yet neither party, it seems, nor the German public truly realizes just how interdependent
Germany has become with the countries of East-Central Europe. In discussing the future of the
euro, German leaders have generally done a poor job tallying up the economic costs and benefits
Germany has gained from a stable Europe. The costs, particularly the fiscal costs of bank
36
Krzywdzinski, ‘Work Models under Strain’; Ulrike Hotopp, Slavo Radosevic, and Kate
Bishop, ‘Trade and Industrial Upgrading in Countries of Central and Eastern Europe Patterns of
Scale- and Scope-Based Learning,’ in Emerging Markets Finance & Trade 41/4 (Jul. - Aug.,
2005), pp. 20–37.
37
‘Trade and FDI Patterns Shift Eastwards,’ Oxford Analytica; Berend, Soviet Bloc, p. 130.
38
Statistisches Bundesamt, ‘Foreign Trade: Ranking of Germany's Trading Partners in Foreign
Trade (With Turnover and Foreign Trade Balance) 2012”, Wiesbaden (February 2013).
bailouts and the potential costs of a common euro bond, are clear and easily estimated, whereas
many of the benefits to a stable EU economy are indirect and harder to assess. One matter
German leaders and the German press consistently pass over is the gain that Germany reaps as an
exporter because its firms can draw on the workers and factories of East-Central Europe.
For Poland, Hungary, the Czech Republic, and Slovakia the immediate benefits of close
economic ties with Germany, for the time being, outweigh the risks. A German recession or a
halt to German investment would spell catastrophe for these countries, generating a ripple effect
that would threaten the foundation of their economies. Since the financial crisis of 2008 the net
flow of cross-border capital has actually been out of East-Central Europe not into it, as Western
European investors have sought safer havens. Most of this is in the form of short-term mobile
capital, not long-term direct investment. But FDI too, as a portion of these countries’ GDP, has
declined substantially.39
The public and many political leaders in East-Central Europe have recognized the benefits of
their country’s economic relationship with Germany. As of 2012 between 54 and 73 percent of
Czechs, Poles, and Slovaks believe they benefit materially from their participation in the
European Union. Economic ties with Germany are a defining aspect of their material connections
with the EU.40 This is best illustrated by Poland, a country that has every reason to harbor
anxiety over a confident and active Germany given its experience under Nazi occupation during
World War II. Until very recently few Polish leaders would have dared express a desire for a
powerful Germany. Yet given their nation’s growing commercial interdependence with
Germany, opinions are changing: economic stability in Europe and economic partnership with
Germany is now a critical concern. Prime Minister Donald Tusk, along with many in the Polish
business community, see Poland’s economic future as so intimately intertwined with Western
Europe’s that they want to join the euro, despite the current mess. Others have gone further in
expressing their appreciation of Poland’s growing interdependence with Germany. As Radoslaw
Sikorski, Poland’s Foreign Minister, remarked in 2011: “I will probably be the first Polish
Foreign Minister in history to say so, but here it is: I fear German power less than I am beginning
to fear German inactivity.”41
39
‘Reverse Contagion,’ in The Economist (Dec. 10, 2012); OECD, Competitiveness and Private
Sector Development: Eastern Europe and South Caucasus, the World Economic Forum (2011).
40
Eurobarometer Survey (May 2011).
41
Timothy Garton Ash, ‘The Crisis of Europe: How the Union Came Together and Why It’s
Falling Apart,’ Foreign Affairs, Sept/Oct (2012); Jan Puhl, ‘Core or Periphery?: Poland's Battle
Over Embracing the Euro,’ in Spiegel Online International (February 6, 2013).
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Stephen G. Gross
Assistant Professor of History
New York University