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The EU’s secret empire Wealthy states treat Eastern Europe as a colony

The elites have been shamed into silence (FILIPPO MONTEFORTE/AFP via Getty Images)

The elites have been shamed into silence (FILIPPO MONTEFORTE/AFP via Getty Images)


September 1, 2021   6 mins

Amid the schisms which increasingly sunder the EU’s West from its eastern members, both sides are, for their own reasons, careful to suppress the bloc’s big economic secret: that the Old EU runs the eleven newish members in Central and Eastern Europe as a colonial fief.

Against logic and justice, the EU’s 340 million western rich suck in wealth from the 103 million eastern poor. The elites in Central and Eastern Europe (CEE) rarely rock the boat as they hate to admit the facts; many have been co-opted or cowed. But now and then resentment bubbles up. “We’re not a colony, we’re not a second-class member”, Slovenia’s premier growled at the European Commission last year. Clotilde Armand, a Frenchwoman who is a mayor in Bucharest, has also been clear that “much of the wealth in Europe flows from the poorer countries to the richer ones”.

In the West, those in the know are not just quiet, they egg on the bien-pensants who are convinced that the Old EU keeps the East afloat. “See those pesky Poles, Czechs and Hungarians,” your typical Eurocrat will whine. “They’re lurching away from liberalism, even as their hot paws reach out for our largesse!” This kind of thinking is doubly skewed. The East’s purported nastiness merely matches supposed Western sins (compare Hungary on gender with Denmark on its Muslims, say). It’s the colonial status of CEE that really splits the EU, not any over-hyped cultural cleft.

To see what’s going on, start with the deal struck when the eleven joined in or after 2004. CEE was weak after communism but was forced to throw open its borders prematurely. Capital from the Old EU was to compensate. But as so often in history, the biggest impact was unforeseen. As frontiers fell, there was a human haemorrhage in CEE as the West hoovered in ten million of its workers. Up to a third had higher education; they’ve driven much of the West’s growth.

In Brussels, however, it is taboo to talk of this epochal shift of wealth. No one dares claim the credit for capturing those diligent white migrants, Christian in culture and capable of quick assimilation. Imagine the howls of “ray-cist!” if they did.

In the East, meanwhile, the elites are shamed to silence, for they’re complicit in a population collapse of wartime scale. Croatia has lost almost a quarter of its people (an existential meltdown, one premier dared to moan). Romania, Bulgaria and the Baltic three of Lithuania, Estonia and Latvia have seen a fifth of workers go. Poland has lost over a tenth.

The social devastation has been horrendous. Hospitals have been hollowed out. Of the EU’s top ten countries for excess Covid mortality, eight are in CEE. You can be sure that the dearth of doctors helped cause the 315,000 extra deaths tallied up to June. Overall, the demographic disaster has probably put paid to hopes of ever catching up. Beata Javorcik, Oxford professor and chief economist at the region’s development bank EBRD, judges that “Eastern Europe could grow old before it gets rich”.

The other unexpected consequence was a radical recasting of CEE’s business landscape. This too is a taboo topic in Berlin, and points West. Cash-rich offshore companies swooped in and bought the leading firms at knock-down prices. They rescued some bankrupt red behemoths (think VW with Skoda in the Czech Republic, Renault with Dacia in Romania). But it went much too far; with new implantations which followed, most key sectors in industry and services are now dominated from abroad.

In Poland, foreigners own a half of the manufacturing and retailing industries, mainly in the form of larger firms. Non-locals account for half of Czech and Polish industrial exports. In Hungary, it’s four-fifths. This is unprecedented in countries with their competence. After all, the Czechs remember that in 1938 they were as prosperous as Switzerland and Sweden; the Poles and Hungarians recall that they were ahead of Spain before the latter’s civil war.

Unpick the statistical thicket, and the balance is bittersweet. Take the lost workers. The rich-country club OECD says that in educating them CEE donated a mind-boggling €400 billion or more. This far exceeds anything Brussels has sent. (Poland spent €160 billion to educate the 2.6 million who’ve gone, so far it has received €138 billion.)

The boost to western GDP delivered by CEE’s migrants is more massive still. The Old EU benefitted by over €1,000 billion in just the three pre-Covid years, official figures state. Then there’s the corporate investment. It’s now mature, so foreign profits and dividends sent home from CEE often exceed annual transfers from Brussels. And in any case, much EU money is spent on infrastructure, where western firms recoup up to four-fifths of the flows.

On the plus side, the region is now a supply chain Powerhaus (so the German financial paper Handelsblatt calls it). The Old EU syphons out components and embeds them in exports to China and elsewhere. Poland outranks France, Italy and Spain as supplier to Germany. CEE is also the Old EU’s key, and wholly captive, market.

Its German hegemon depends on it. In 2020 Berlin exported €179 billion-worth to the eleven, compared to €103 billion to the US, €96 billion to China and a measly €23 billion to Russia.

The region’s economies have duly grown, but figures for real GDP per capita yield bitter reminders of the challenge still ahead. Poland generates only around one-half of the EU’s average, the Czech Republic two-thirds. Of course, this occludes the distance to the advanced Northwest. Your average Pole produces 26% of what a Dane does, your Czech, around one-third. Bulgaria generates a mere 14% and Romania 18% of Denmark’s output per head.

Will CEE ever catch up? The odds aren’t promising. Demography and China’s galloping self-sufficiency are brakes enough, but the colonial system could be the clincher. To enjoy advanced-country wealth you must match the productivity. Here CEE desperately needs to improve its pathetic innovation, but dominion status now is a major block.

In a branch economy non-local firms sit atop the best value chains. Foreigners skim the largest returns and send the profits back. Nothing guarantees they’ll reinvest. They do most development at home, and nothing forces them to share. The IMF confirms that increasingly they force their CEE offshoots to buy high-value inputs from outside. And foreign-owned firms are barred from classic routes to growth, such as building brands or buying out the competition.

So CEE depends on its native firms. They tend to be small and are hard pushed to innovate. They battle with EU bureaucracy and fight a plethora of extra ploys. Certification games can add a fifth to export costs (Northern Ireland ring a bell?). Public tender rules prevent you from favouring your own. You want your government to develop new sectors?  State aid rules are draconian. In one of those rare public outbursts Poland’s Premier Mateusz Morawiecki lamented: “The technology-rich EU sells us their VWs and Renaults. But when our truck drivers enter their markets, they go for protection”.

Dense webs of incumbents rig the rules. “In Brussels they feign surprise when no CEE companies turn up to plan standards,” a Czech official in charge of high-tech policy told me. “It’s pure hypocrisy. Our firms are too small, they aren’t in the old boy networks. Time and again the regulatory game’s been fixed before we get there, stitched up by the usual suspects”.

Lacking big industrial groups, the East is locked out of giant high-tech projects on which billions are lavished. The West hogs spending on space, defence and research and development (€120 billion is earmarked for these to 2027). Though it has over a fifth of the EU’s population, scandalously CEE received a mere one-twentieth of the €65 billion disbursed for R&D in 2014-20. (Compounding the insult, non-members Israel, Norway and Switzerland cashed in more.)

Things will get worse as the EU devotes more to chips, champions and other chunky goals which favour established players. Expect Old EU firms to grab most of the €56 billion in Covid recovery grants allocated to CEE (only 13% of the total, discrimination again). Then there’s the absurd net zero carbon target. The region can’t afford it. Nevertheless, cheap energy sources will be banned. CEE’s competitiveness will be squashed, and the region’s taxpayers will be made to subsidise western producers of green kit such as wind turbines and their ilk.

There’s little sign, then, that native firms can achieve global scale and productivity en masse. Meanwhile, foreigners will retain every incentive to milk their implantations and withhold the best technology. So CEE faces a “middle income trap”. It’ll be stuck behind for good, even as the Old EU’s anachronistic economies themselves battle to keep up with the US and Asia.

Of course, within the bloc the economic crevasse will still count. Too wide, and there’ll be a massive new mezzogiorno, festering with resentment, depopulating fast and prone to implode at any point. To minimise this threat Brussels must urgently cut a New Deal for its inland empire. It should free up its rules and help the region’s businesses to expand.

For their part, politicians in CEE should call out the colonialism and extract freedom for their firms. If there’s no radical change, the Old EU had better brace for the strange populisms and other ills that a chronically two-tier Europe would unleash.


Matthew Olex-Szczytowski is a banker and historian who has advised several Polish premiers and ministers.


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Brendan O'Leary
Brendan O'Leary
2 years ago

An economist friend once wrote: “Hyper-regulation is a subsidy from small business to big business”.
This immediately rang true from my experiences in business, so true that it hurts.
It seems that the same can be said within the EU from small country to Big Country.
And always, always, the hyper-regulation arrives under the banner of protecting something, or “fairness”.

Alan Thorpe
Alan Thorpe
2 years ago

Hyper-regulation of the UK energy industry has resulted in all the benefits of privatisation being lost and the government having more control than they did during nationalisation. The result is skyrocketing costs and threats of an unreliable supply system.

Billy Bob
Billy Bob
2 years ago
Reply to  Alan Thorpe

Rubbish. The failure was privatising the utilities in the first place. Supply and demand simply doesn’t work in industries of monopolies or when the customer doesn’t have the option of walking away entirely.
The problem with neoliberalist thinking is that it falls into the same trap as the communists. When communism started failing, the answer to their problems was always to go harder, more communism and even more state control. After over 30 years of neoliberalism not delivering the results we were promised, it’s cheerleaders response is always if we deregulate even more it will work the next time, conveniently ignoring the rampant inequality, stagnant wages and soaring asset prices that have happened since its introduction

Hugh Marcus
Hugh Marcus
2 years ago

That’s quite true actually. Though they can never see it, the bureaucrats who create such systems end up paying more for the services they commission. As the owner of a small business it made no economic sense to get all the certification needed. However bigger firms got the contracts & then subbed them out to people like us & put 15% on top of our costs

Brendan O'Leary
BO
Brendan O'Leary
2 years ago
Reply to  Hugh Marcus

And then you hire compliance consultants who mostly turn out to be enforcement bureaucrats who’ve jumped the fence. I mean, who better to guide you through the legislation than its creators?
The moral hazard should be obvious but they think that they’re the good guys.

Jon Redman
Jon Redman
2 years ago

Brussels must urgently cut a New Deal for its inland empire

That would entail reform. Not gonna happen; Brussels doesn’t do reform.

Terence Fitch
Terence Fitch
2 years ago

So he’s saying freedom of movement is a bad idea? As we know, it suits affluent folk of course and affects adversely the less well off and causes housing problems etc. Certainly the UK building industry with their insane management bonuses love population growth- cheap labour without pesky training and housing demand. Kerching! And never mind ‘rewilding’ or the environment.

Brendan O'Leary
Brendan O'Leary
2 years ago
Reply to  Terence Fitch

The affluent and well-educated can more easily get employment visas and work permits so don’t need “freedom of movement” (freedom of movement for employment, really, since post-Brexit, other movement for stays up to 90 days total p/a is unchanged as UK was never in Schengen).

Colin Elliott
Colin Elliott
2 years ago

I thought the article gave me a new insight into the situation, and indicated some contrasts and some parallels with the UK, but left the depressing thought that it is too difficult for any CEE to correct without substantial political change and pain; the EC has used Brexit as a warning to others.
It also touches on the bizarre fact that ‘freedom of movement’ has exacerbated overpopulation in the UK and underpopulation in the CEE.

Hugh Marcus
HM
Hugh Marcus
2 years ago
Reply to  Colin Elliott

Actually the real issue isn’t the myth of overpopulation of the UK, it’s really Germany that’s got the problem

Jon Grant
JG
Jon Grant
2 years ago

Thanks for the detailed numbers of which I was unaware.

William Clothier
William Clothier
2 years ago

Thank you Matthew for presenting some interesting stats here. But your article for me paints a bit of a one sided story and signs of playing the victim card. As a young budding entrepreneur I moved from London to Budapest nearly 20 years ago, contra to the general population flow as you point out. I have set up and managed a group of businesses in the property and hospitality sector. For me your article misses a few balancing points. For instance, I would be interested to see data on the amount of money being sent back by Eastern workers in the West to their families back East. Is there good data for that? And as for why they don’t return east? Since 2004 i can see a great improvement in living standards and quality of life in Hungary. I speak to many Hungarians that still live abroad and many would return if they were not so put off by the current void in moral and cultural leadership that fails to set the right conditions and inspire the kinds of people that might build the businesses you note are absent. There are of course many angles to this, for setting better conditions for growth and prosperity. For example, the abuse of EU funds for self enrichment of the few and fully ensuring their businesses are massively profitable is a very poor example to set to any budding entrepreneur who might be taking big personal risks to start something. And if wealth creation is largely about being ‘juiced in’, why invest in training to make your employees better leaders or managers or more productive teams, as your productivity data clearly points out! Indeed, the conditions are not favourable in producing the kinds of businesses you say are missing, but those conditions are far from all externally set.
If the plants are not growing well, adding more water (ie eu funds) might not be the answer, perhaps ones attention should turn to how to improve the soil….

Ian French
IF
Ian French
2 years ago

An eyeopener article. Wealth and need frequently propels the qualified in local populations to seek better rewards abroad. As a result relocating the gains of foreign opportunity seekers back home will occur. This is not new and has be repeated across the globe. I was made aware of this happening when I was a student in Poland 41 years ago, where Poles were allowed to possess foreign currency and use in foreign currency-only Pevex shops. Anything was available to anyone with hard currency, whereas Russians were prohibited and could get 7 years imprisonment for doing the same in the Beryozka buying tourist tat. Even then there was a sizable Polish diaspora sending money to family back in the old country. Such figures are not included in this article and although they are dwarfed by outflow to the EU, they will still be substantial nonetheless.

Last edited 2 years ago by Ian French
Gordon Black
Gordon Black
2 years ago

Well, I have ploughed through the 4 main articles today: each one I started speed-reading halfway in because I get the drift … (white) feminists bad; (white) animal lovers bad; (white) Americans bad; (white) western Europeans bad …… boring.

David Bell
David Bell
2 years ago
Reply to  Gordon Black

It’s a whiteout!

Franz Von Peppercorn
Franz Von Peppercorn
2 years ago

There’s probably some truth to this article but I suspect that if the EU put up barriers to eastern emigration it would be criticised as much.

Kasia Chapman
Kasia Chapman
2 years ago

The author had painted the people of Eastern block as a victims of the Western behemoth. I have experienced the transition from communism to capitalism in Poland by visiting twice a year for the past 40 years having been brought up in communist Poland. And I am proud of Polish people’s resilience and resourcefulness. I am also quite unsettled to see how quickly they embraced the rules of capitalism eg getting cheap labour. There is a sizeable workforce from Ukraine and Belarus working in hospitality, cleaning, care homes and shops while Deliveroo (and the likes) employ from further east. I do worry about the latter as they can be easily identified by their darker skin and Polish people are not used to it ( read: racist). But these days, when you visit Poland people will smile at you! I should find this the norm but I am still amazed and delighted to see that happening in a place that I remember very vividly in gray colours.

stephen archer
SA
stephen archer
2 years ago
Reply to  Kasia Chapman

Sounds great, Kasia, but look at Polish retail where French and German chains are sucking the profits out of Poland. I can believe the statistics, take Carrefour, Aucan, Intermarche, Castorama, Rossmann, Saturn (MediaMarkt), then there’s IKEA and Jula from Sweden and Jysk from Denmark.
Poland is a rich hunting ground for western retail chains.
Thanks to EU shared funding infrastructure is improving rapidly and would make countries like Scotland look like 3rd world such ones.
I’ve been coming 4 times a year for the last 30. Poland could well be the future model for Europe if they could just get rid of Kaczinski.

Chris Wheatley
CW
Chris Wheatley
2 years ago

This article is written in a ‘Shock! Horror!’ journalistic way and seems to me to be illogical.

I am very anti-EU but I can see a sort of point to it. The Eastern European countries lost communism in 1991, as did Russia. What happened to Russia? The vacuum brought in rich, gangster-like business men who captured all of the assets of the country. Arguably, Russian life (especially away from Moscow) has not improved much in the last 30 years.

Imagine now when Scotland goes solo and joins the EU. A million educated Eastern Europeans will flock into the country and take the best jobs. This will have two results. The people in Scotland will become more competitive and try harder to compete with the new immigrants and the latter will learn about democracy and will provide an intellectual backbone for their old country. They might send money back, they might go back home with more modern business ideas, they will certainly go home and tell about the new life in Scotland. After about 30 years there will be an equilibration. Scotland will win IF the people have the will to compete. If they don’t have this will, they will decline.

The hidden factor is that individual people have to try. They can’t just sit there and expect everything to be wonderful.

Brendan O'Leary
Brendan O'Leary
2 years ago
Reply to  Chris Wheatley

Regarding your paragraphs about Scotland, in the unlikely event that we go solo and join the EU, it’s as likely that the movement of “a million educated” will be outward.

Anna Bramwell
AB
Anna Bramwell
2 years ago

It didnt happen before when Scotland was part of the EU.

Brendan O'Leary
Brendan O'Leary
2 years ago
Reply to  Anna Bramwell

It would more likely though with an EU/UK border at Berwick and a separatist tax-and-spend, ban-and-prosecute, SNP-Greens government running Scotland.

Barry Wetherilt
Barry Wetherilt
2 years ago
Reply to  Anna Bramwell

They come to England.

Jon Redman
Jon Redman
2 years ago
Reply to  Chris Wheatley

Imagine now when Scotland goes solo and joins the EU. A million educated Eastern Europeans will flock into the country and take the best jobs.

Why didn’t that happen prior to 2019 when the UK was in the EU?
The thing is, anyway, that “the best jobs” in Scotland will instantly disappear if Scotland were to leave the UK.

Brendan O'Leary
Brendan O'Leary
2 years ago
Reply to  Jon Redman

Plenty of CE/EE, educated and uneducated, came to Aberdeen and Edinburgh, the only two net productive regions in Scotland with oil & gas engineering and finance industries respectively. Naturally, those are two industries that the SNP-Greens are most hostile to.

Hugh Marcus
HM
Hugh Marcus
2 years ago

And it’s likely that a fair chunk of Edinburgh’s financial sector will relocate to London in the event of independence as the SNP will want to tax the life out of it.