Germany's Rebellious Colonies


By Sam Vaknin
Author of "Malignant Self Love - Narcissism Revisited"

Invited by a grateful United States, the Czech Republic sent In February
2003 a representative to meet with Iraqi opposition in Kurdish north Iraq.
The country was one of the eight signatories on a letter, co-signed by
Britain, Italy, Spain and the two other European Union central European
candidate-members, Poland and Hungary, in support of US policy in the Gulf.

According to The Observer and the New York Times, American troops in
Germany - and the billions of dollars in goods and services they consume
locally - will be moved further east to the Czech Republic, Poland and the
Baltic states. This shift may have come regardless of the German "betrayal".
The Pentagon has long been contemplating the futility of stationing tens of
thousands of soldiers in the world's most peaceful and pacifistic country.

The letter is a slap in the face of Germany, a member of the "Axis of
Peace", together with France and Belgium and the champion of EU enlargement
to the east. Its own economic difficulties aside, Germany is the region's
largest foreign investor and trading partner. Why the curious rebuff by its
ostensible protégés?

The Czech Republic encapsulates many of the economic and political trends in
the erstwhile communist swathe of Europe.

The country's economic performance still appears impressive. Figures
released in 2003 reveal a surge of 6.6 percent in industrial production, to
yield an annual increase of 4.8 percent. Retail sales, though way below
expectations, were still up 2.7 percent last year. The Czech National Bank
(CNB) upgraded its gross domestic product growth forecast on Jan 30 to
2.2-3.5 percent.

But the country is in the throes of a deflationary cycle. The producer price
index was down 0.8 percent last year. Year on year, it decreased by 0.4
percent in January 2003. Export prices are down 6.7 percent, though import
prices fell by even more thus improving the country's terms of trade.

The Czech koruna is unhealthily overvalued against the euro thus
jeopardizing any export-led recovery. The CNB was forced to intervene in the
foreign exchange market and buy in excess of 2 billion euros last year -
four times the amount it did in 2001. It also cut its interest rates last
month to their nadir since independence. This did little to dent the
country's burgeoning current account deficit, now at over 5 percent of GDP.

Unemployment in January 2003 broke through the psychologically crucial
barrier of 10 percent of the workforce. More than 540,000 bread earners (in
a country of 10 million inhabitants) are out of a job. In some regions every
fifth laborer is laid off. There are more than 13 - and in the worst hit
parts, more than 100 - applicants per every position open.

Additionally, the country is bracing itself for another bout of floods, more
devastating than last year's and the ones in 1997. Each of the previous
inundations caused in excess of $2 billion in damages. The government's
budget is already strained to a breaking point with a projected deficit of
6.3 percent this year, stabilizing at between 4 and 6.6 percent in 2006. The
situation hasn't been this dire since the toppling of communism in the
Velvet Revolution of 1989.

Ironically, these bad tidings are mostly the inevitable outcomes of much
delayed reforms, notably privatization. Four fifths of the country's economy
is alleged to be in private hands - a rate similar to the free markets of
Estonia, Slovakia and Hungary. In reality, though, the state still maintains
intrusive involvement in many industrial assets. It is the reluctant
unwinding of these holdings that leads to mass layoffs.

Yet, the long term outlook is indisputably bright.

The ministry of finance forecasts a rise in the country's GDP from 59
percent to 70 percent of the European Union's output in 2005 - comparable to
Slovenia and far above Poland with a mere 40 percent. The Czech Republic is
preparing itself to join the eurozone shortly after it became a member of
the EU in May 2004.

Foreign investors are gung ho. The country is now the prime investment
destination among the countries in transition. In a typical daily
occurrence, bucking a global trend, Matsushita intends to expand its
television factory in Plzen. Its investment of $8 million will enhance the
plant's payroll by one tenth to 1900 workers. Siemens - a German
multinational - is ploughing $50 million into its Czech unit. Siemens
Elektromotory's 3000 employees export $130 million worth of electrical
engines annually.

None of this would have been possible without Germany's vote of confidence
and overwhelming economic presence in the Czech Republic. The deteriorating
fortunes of the Czech economy are, indeed, intimately linked to the economic
stagnation of its northern neighbor, as many an economist bemoan. But this
only serves to prove that the former's recovery is dependent on the latter's
resurrection.

Either way, to have so overtly and blatantly abandoned Germany in its time
of need would surely prove to be a costly miscalculation. The Czechs - like
other central and east European countries - mistook a transatlantic tiff for
a geopolitical divorce and tried to implausibly capitalize on the yawning
rift that opened between the erstwhile allies.

Yet, Germany is one of the largest trading partners of the United States.
American firms sell $24 billion worth of goods annually there - compared to
$600 million in Poland. Germany's economy is five to six times the
aggregated output of the EU's central European new members plus Slovakia.

According to the New York Times, there are 1800 American firms on German
soil, with combined sales of $583 billion and a workforce of 800,000 people.
Due to its collapsing competitiveness and rigid labor laws, Germany's
multinationals relocate many of their operations to central and east Europe,
Asia and north and Latin America. Even with its current malaise, Germany
invested in 2001 $43 billion abroad and attracted $32 billion in fresh
foreign capital.

Indeed, supporting the United States was seen by the smaller countries of
the EU as a neat way to counterbalance Germany's worrisome economic might
and France's often self-delusional aspirations at helmsmanship. A string of
unilateral dictates by the French-German duo to the rest of the EU -
regarding farm subsidies and Europe's constitution, for instance - made EU
veterans and newcomers alike edgy. Hence the deliberate public snub.

Still, grandstanding apart, the nations of central Europe know how
ill-informed are recent claims in various American media that their region
is bound to become the new European locomotive in lieu of an aging and self
preoccupied Germany. The harsh truth is that there is no central European
economy without Germany. And, at this stage, there is no east European
economy, period.

Consider central Europe's most advanced post-communist economy.

One third of Hungary's GDP, one half of its industrial production, three
quarters of industrial sales and nine tenths of its exports are generated by
multinationals. Three quarters of the industrial sector is foreign-owned.
One third of all foreign direct investment is German. France is the third
largest investor. The situation is not much different in the Czech Republic
where the overseas sales of the German-owned Skoda alone account for one
tenth the country's exports.

The relationship between Germany and central Europe is mercantilistic.
Germany leverages the region's cheap labor and abundant raw materials to
manufacture and export its finished products. Central Europe conforms,
therefore, to the definition of a colony and an economic hinterland. From a
low base, growth there - driven by frenzied consumerism - is bound to
outstrip the northern giant's for a long time to come. But Germans stands to
benefit from such prosperity no less than the indigenous population.

Aware of this encroaching "economic imperialism", privatization deals with
German firms are being voted down throughout the region. In November, the
sale of a majority stake in Cesky Telecom to a consortium led by Deutsche
Bank collapsed. In Poland, a plan to sell Stoen, Warsaw's power utility, to
Germany's RWE was scrapped.

But these are temporary - and often reversible - setbacks. Germany and its
colonies share other interests. As The Economist noted correctly recently:

"The Poles may differ with the French over security but they will be with
them in the battle to preserve farm subsidies. The Czechs and Hungarians are
less wary of military force than the Germans but sympathize with their
approach to the EU's constitutional reform. In truth, there are no more
fixed and reliable alliances in the EU. Countries will team up with each
other, depending on issue and circumstances."

Thus, the partners, Germany and central Europe, scarred and embittered, will
survive the one's haughty conduct and the other's backstabbing. That the
countries of Europe currently react with accommodation to what, only six
decades ago, would have triggered war among them, may be the greatest
achievement of the Euro-Atlantic enterprise.



Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant Self
Love - Narcissism Revisited and After the Rain - How the West Lost the East.
He served as a columnist for Global Politician, Central Europe Review,
PopMatters, Bellaonline, and eBookWeb, a United Press International (UPI)
Senior Business Correspondent, and the editor of mental health and Central
East Europe categories in The Open Directory and Suite101.

Visit Sam's Web site at http://samvak.tripod.com