How Western Capital Colonized Eastern Europe

by Leonid Bershidsky

Yet another Eastern European country is about to get a populist, anti-immigration, euroskeptic government: Billionaire Andrej Babis’s ANO party enjoys a wide poll lead ahead of the October parliamentary election in the Czech Republic. The central European country would join Poland, Hungary and Slovakia. If that sounds ominous, there is at least one bulwark against extremism in the region: Western European capital.

 Indeed, Western investment plays such an important role in economies of all these countries that nationalist politicians make their countries look more like truculent colonies than partners in a grand integration project.

In a recent paper, Filip Novokmet, Thomas Piketty and Gabriel Zucman bluntly call Eastern European nations “foreign-owned countries.”

 “The owners tend to come from EU countries (in particular from Germany),” they write. “So in some sense it is not entirely different from the situation of peripheral regions that are being owned by more prosperous central regions in a large federal country.” To Piketty and collaborators, this is a nuisance because it distorts inequality measurements: Much of a country’s wealth and income accrues to foreign shareholders who do not belong to the local top one percent, so the country looks more egalitarian than it actually is. But it also has broader implications.

Relative to their economic output, Eastern European nations have the biggest negative net investment positions in the EU, unless one counts Ireland, Greece, Cyprus, Portugal and Spain — all recipients of big bailouts during the recent financial crisis.

Unlike the crisis-hit “PIGS,” the nations of Eastern Europe developed these positions by consistently attracting more investment then they sent out. The foreign investment stock in these economies, relative to gross domestic product, is higher than the developed-country average.

Such levels of investment used to make these nations proud, showcasing their openness and their heartfelt desire to integrate into the wealthier part of Europe. But, until the EU was buffeted by economic storms, these nations didn’t fully realize that becoming “foreign-owned” has costs too.

Local companies found out during the financial crisis that the foreign banks were the first to shrink loan origination. In other sectors, a large foreign presence means a huge unemployment threat if a country suddenly becomes less welcoming to foreign capital. In Poland and the Czech Republic, a third of the workforce is employed by foreign companies. And these tend to be the biggest, most economically important companies, too: In Poland, they produce two-thirds of all exports; in the Czech Republic, they are responsible for 42 percent of value added. Losing even a few of these firms could cause a painful reversal of economic trends, something Babis, a businessman and former finance minister, understands well.

Germany, the Netherlands and France are the biggest investors in the Eastern European economies. The advantages of investing in the region are obvious for these countries’ firms: They can lower labor costs without moving production too far from their traditional markets or compromising on the protections they have at home. Populist governments can hit foreign banks and supermarket chains with special taxes, as Hungarian Prime Minister Viktor Orban and the Polish government have done and as Babis is likely to do if he comes to power, but only to a point; go too far and foreigners might decide to exit, leaving these relatively small economies in the dumps.

The Hungarian, Polish and Czech governments can resist European directives on refugee resettlement and posture defiantly when their efforts to take over the courts are challenged: “We will not be a colony,” Orban and Polish ruling party leader Jaroslaw Kaczynski have told EU officials on separate occasions. That, however, won’t change their de facto status as economic colonies of the wealthier West, unless the populist governments move to expropriate the foreign companies — an unthinkable development.

Milos Zeman, the Czech Republic’s populist president, said recently that it might be better to lose EU subsidies — something Western Europeans have threatened — than be forced to accept Muslim migrants. But the loss of aid is not the real threat; that would be foreign businesses’ unease about a changing business climate. Fracturing EU cohesion — and especially defying EU courts, which uphold the union’s policies — could in time lead to that because it would lessen the protection of Western European investors. Orban, who has been in power longer than his ideological allies in neighboring countries, understands that well: He has repeatedly softened policies as a result of European court rulings. Orban hasn’t directly challenged the recent decision by the European Court of Justice that obliged Eastern European countries to take part in the bloc’s refugee resettlement scheme.

The nationalist rhetoric may fool some voters into thinking their leaders are truly independent. But the choice politicians in Eastern Europe ultimately face is stark: Either they content themselves with mainly fig-leaf rebellion, or they raise the stakes and risk losing investment on which their economies depend.

It’s not really a choice; Eastern Europe will eventually need to champion integration, just as it once championed membership. My own view is that eventually, it will no longer matter where a European company is headquartered because a united Europe will have a common budget, and economic cohesion will become inevitable. Nationalism may be having a moment, but it’s too late: The Eastern European countries have been open to investors for too long, and they’ve lost too much control over their economic future to hold on to political control.

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