For the past couple of decades, member countries of the Visegrad 4 have enjoyed a period of strong growth and strengthened trade and economic ties with the EU. But recent clashes in ideals could put a stop to that. Aleya Begum Lønsetteig reports.
The alliance between the Visegrad 4 (V4) nations of Central and Eastern Europe is not one that has sought, nor received, much attention in the past. But the unity of the Czech Republic, Hungary, Poland and Slovakia has recently come to the fore as members of the quartet have clashed with the rest of the European Union on what the bloc describes as some of its core principles and values.
For the last 25 years, the economies of the V4 countries have been growing faster than the countries of Western Europe and, with it, trade has also increased – both in terms of imports and exports. Each country’s compound annual growth rate for trade has fared well over the 2010-2015 period and is predicted to be above the average between 2016 and 2020, according to trade data specialist Equant Analytics. However, if relations continue to sour between the continent’s east and west, this trend could reverse.
The name Visegrad belongs to a small town in Hungary, where, in 1335, the leaders of Bohemia (historical region of Czech), Poland and Hungary agreed to create new commercial routes to bypass Vienna and obtain easier access to other European markets. Hundreds of years later, in 1991, leaders of the respective countries (at the time still three, before the split of Czechoslovakia in 1993) formed the V4 alliance, having broken off from the Soviet Union, and inspired by that meeting and its objectives – to be better integrated with Western Europe. Today, however, that same name, in the context of European integration, is more likely to recall rebellion than unification.
In 2004, all members of the V4 became integrated into the EU and, for the better part of 25 years, the group’s activities remained obscure. But in 2015, when the migration crisis hit Europe, the group’s alliance emerged as it jointly opposed the EU’s migration policy and refused to accept asylum seekers under the migrant quota system. While they were not the only ones to dislike the quota system, they were the most vocal, and have so far succeeded in refusing to pay heed to EU appeals to reconsider their positions. Slovakia and Hungary went so far as to legally challenge the quotas at the European Court of Justice (ECJ), but the European Commission (the advocate general of the ECJ) has since dismissed the case.
The Brexit vote in 2016 further emboldened the group as it saw the referendum results as a blow to the ruling elite, arguing that the EU needed to change and pay more attention to citizens than institutions.
More recently the Hungarian and Polish governments have introduced new legislative acts that restrict political rights and undermine institutional foundations of democracy. The Hungarian Civic Party (Fidesz) government has restricted the activities of opposition parties and revised laws governing higher education in a bid to quash the Central European University (CEU), the only institution of higher education that is beyond its control.
The Law and Justice party (PiS) government in Poland has introduced a series of new bills that will abolish the independence of Polish courts, including the supreme court. Although Poland’s President Andrzej Duda unexpectedly vetoed two out of three laws put forward, the party has promised to continue its campaign to take over the Polish judicial system and also to target the Polish media.
Political commentators argue that Hungary and Poland can no longer be considered liberal democracies as both have adopted authoritarian systems giving significant unrestricted political power to the ruling party, and that their membership of the EU should therefore be challenged.
The V4 countries are connected by geography and history (including economic history), and so the ties between the countries are naturally strong. The four countries usually feature in each other’s top 10 import and export partners’ lists. However, on closer inspection, for all of these countries, the most important trade partner is by far Germany. In both the exports and imports of the countries of the group, Germany is usually several times larger than that of any other partners.
“In 2016, Poland’s exports to Germany topped €50bn, which was over 27% of total Polish exports. Exports to Germany grew by 3% year-on-year,” says Dominik Wieclaw, marketing specialist at Polish export credit agency Kuke. “The UK and the Czech Republic are Poland’s second biggest export partners at €12.1bn and €12bn respectively, representing a 6.6% share each.”
That story is the same for the Czech Republic, Hungary and Slovakia. According to the Exim Bank of Hungary, exports to Germany in 2016 totalled €25.6bn, while its second-biggest export market was Romania with a total export value of €4.6bn.
The biggest import and export sectors for the V4 are notably automotive and electrical and mechanical equipment – reflecting the increasing role these countries are playing in European supply chains. A study by the IMF, Cluster Report on German-Central European Supply Chain (GCESC), shows the evolution of a GCESC since the 1990s, for manufacturing of goods for export to the rest of the world. It highlights that the rapid expansion of bilateral trade between Germany and V4 has also led to technology transfers to the V4 countries as well as accelerating income convergence.
“These countries are some of the most economically integrated countries of the EU. More so than Spain or the Nordic countries,” says senior researcher at the European Trade Union Institute (ETUI), Bela Galgoczi. “In economic terms they are totally dependent on the EU. With the case of Hungary, 80% of its GDP is realised in exports, and 80% of that is with the EU. It is actually totally intertwined with the EU as an extension of the German supply chain – and it is the dependent part of that relationship.”
For its part, Germany’s trade with and investment in the region remains strong. In 2016, trade between Germany and Poland hit record levels and is reported to have reached €100bn. Meanwhile, automotive company Daimler invested €500mn in a factory in Lower Silesia last year and trade between the two countries is now almost twice as high as trade between Germany and Russia. A visit from German Chancellor Angela Merkel to Warsaw earlier this year saw her and Polish Prime Minister Beata Szydło confirm they wanted to see further development of economic relations.
More recently however, Merkel has struggled to keep a tight lip. At her annual press conference in early September, she told journalists that she “can no longer keep silent” and that “a European Union that forsakes the rule of law is no longer the European Union”. Merkel’s statement has been received as support for calls from the EC to strip Poland of its EU voting rights if it presses ahead with bills or action that restrict the independence of its courts.
Pivots away from Europe
While relations with the EU may have paled, the V4 alliance has been busy seeking new partnerships.
“The Hungarian government introduced the policy of ‘Opening to the East’ in 2013, targeting mainly the CIS countries, China, Southeast Asia and the Middle East,” says the Hungarian Exim Bank in a statement to GTR. “The policy not only focuses on boosting exports to these regions but on raising capital as well. Since the introduction of the policy, 25 trading houses have been opened in the targeted regions.”
In 2015, minister of foreign affairs and trade, Péter Szijjártó, announced the ‘Opening to the South’ strategy with a focus on Africa and South America. This led to the opening of four new embassies (in Ecuador, Ethiopia, Ghana and Angola) and six trading houses (in Ethiopia, Angola, Chile, Ecuador, Peru and Kenya).
“Currently Exim has completed the risk assessment for 65 countries in the east and 68 African and Latin American countries. The result of these assessments can provide a basis for initiating favourable credit conditions in the future in order to support Hungary’s export activities,” says the statement.
Similar diversification strategies are being followed by the other V4 countries.
“Our current system of trade promotion is set by the strategy of export promotion adopted in 2012. Its primary objective is focused on diversification of our exports – in other words, on helping our exporters to succeed in markets of countries outside of the EU,” says a spokesperson for the Czech ministry of industry and trade.
Meanwhile, Wieclaw at Kuke says the Polish government is focused on five prospective markets: Algeria, India, Iran, Mexico and Vietnam.
Hungary and Poland have also caught international attention with their wooing of Russian President Vladimir Putin and US President Donald Trump. Since coming to power in 2010, Hungarian Prime Minister Viktor Orbán has reinforced his relationship with Moscow and Putin, and actively opposed EU sanctions against Russia following the Ukrainian crisis in 2013. In 2014, the Hungarian government made a surprise announcement that it was awarding the €12.5bn Paks nuclear power plant expansion to a Russian state-owned company after initially indicating that it was planning an open tender for bids.
The project is backed by a €10bn loan from Russia which Hungary will repay over 21 years from when the plant starts operating. Hungary, which relies significantly on Russia for its energy supplies, also announced the establishment of four trading houses to be established in Jekatyerinburg, Kazan, Rostov and Saint Petersburg, and a new fund to help small and medium-size businesses to get access in the Russian markets.
In Poland, the ruling Law and Justice (PiS) party considered it a major coup when Trump made Warsaw the first stop during his European tour in July, promoting it as an endorsement of its government despite its clashes with the EU. Further, Trump’s anti-German rhetoric, shared hostility towards Muslim migrants and doubt over climate change all served well to raise some eyebrows in Europe.
Looking at the numbers however, trade with these new focus areas is still to materialise. The top 10 trading partners for all four countries are still all European (bar the US, which crept in at number 10 for Hungary) – and this is unlikely to change anytime soon given the existing volume and historical commercial ties.
“It is all just theatrical, to show we are not lost – but actually there is nothing,” says Galgoczi from ETUI. “The only thing that really developed is the nuclear power project between Hungary and Russia. But that itself is not substantial. It [trade relations] never really developed very much with China: that was more of an illusion with the Hungarian government.
“In Poland, the population is very pro EU – it’s not a US-oriented nation. I don’t think anything will come out of this. Of course, it gives a little bit of leverage, this apparent support from Trump, but it will not bring anything to Poland. Trump made a play with this because it’s an instrument to weaken the EU. Russia is playing the same game.”
It’s difficult to foresee how the current situation might pan out, or even what the V4’s objectives are with regards to its EU membership. The economic and trade benefits the group have through being in the EU are clear, but are the governments of these nations prepared to forsake these in their pursuit towards more authoritarian regimes?
So far, action from the EU has been limited. The union was constructed on the basis of solidarity, trust and voluntary co-operation and so finding the proper response has been a challenge – it’s a situation that was not anticipated. Furthermore, some actions need a consensus from all member states and both Hungary and Poland have pledged to protect one another.
“Once you are part of the single market, as the V4 are, there are no instruments like sanctions [for breaking the rules]. It is kind of an architectural failure,” says Galgoczi. “You can always impose some sort of restrictions, like infringements to state aid for example, but not political pressure. That doesn’t exist in the single market.”
Nonetheless, in the last couple of months the EC has launched infringement proceedings against Poland for breaches of EU law, and it seems likely that Article 7, which revokes EU voting rights, will be triggered. It will require an all-member consensus for the action to be imposed, but even if they are blocked, the move will carry significant symbolic meaning.
Other political commentators have pointed to a less formal option of reviewing the spending of the EU’s structural and cohesion funds, financial tools set up to implement EU policy that aim to reduce regional disparities in income, wealth and opportunities. Both Poland and Hungary are among the top beneficiaries of these funds and calls for more stringent monitoring of how this money is spent have been voiced.
“Poland is the biggest beneficiary of structural funds. €1bn of EU taxpayers’ money is going to Poland every month, of every year. I think this inflow of funds helps Jarosław Kaczyński (PiS party leader), finance many of his populist ideas,” says Henning Meyer, public policy researcher and editor-in-chief of Social Europe in a recent paper titled How to deal with Poland and Hungary.
“The same applies to Hungary. Of course, the structural funds cannot be cut for political reasons but I think the EU should start to monitor the process more tightly to make it more stringent. It needs to look very carefully at every euro being spent in those two countries to protect European taxpayers. This may be enough to significantly slow down the dispersion of funds and impose some real cost.”
Key EU leaders have also stepped up to voice their criticism and are no longer shying away from the issue. As well as Merkel, Luxembourg’s minister for foreign affairs Jean Asselborn has stated that “we need to ask Poland and Hungary whether they want to stay within the EU and observe its principles or whether they want to go their own way”. Meanwhile, French President Emmanuel Macron clearly articulated his position in an interview with European media pointing out that “Europe isn’t a supermarket, Europe is a common destiny” and warned countries that do not respect the rules will face political consequences.
Meanwhile, cracks within the V4 alliance itself have also been notable of late. Since Brexit, EU leaders have had to consider various reforms to the EU and its processes, and among those a tighter integration between Eurozone countries and proposals for a two-speed Europe (whereby different parts of the EU will integrate at different levels and different paces, depending on the political situation in each individual country) have gained traction. Fearing marginalisation and minimal influence in decision making, the Czech Republic and Slovakia have both expressed interest in being part of the core group of any future EU restructuring.
Slovakia is already part of the Eurozone and has said that being in Europe’s core group is more important than its V4 membership. Meanwhile, the Czech Republic has expressed interest in gaining ‘observer status’ for adopting the euro, a step that would boost its alliance with other EU member states. So, while the group has shared and demonstrated obstructionist viewpoints on some issues, like refugee policy, it is also apparent that each country has different strategies and stances on other issues, which could see co-operation among them fall apart.
“The recent meeting [in April] of the Czech and the Slovak prime ministers in Berlin with Merkel, where they said they wanted stronger integration and are against a two-speed Europe is concerning to the other two countries. It is showing that the alliance is weakening – it’s a bad message for the other two countries,” says Galgoczi. “It seems that this alliance is about to loosen and even lose importance.”