Local relocations in Central Europe

The Holy German Economic Empire

The divide between the west and east of the European Union is not limited to the opposition between liberal democracies and authoritarian governments. It reflects an economic domination of the major powers over the countries of the former Eastern bloc, used as low-cost labour pools. As early as the 1990s, German industries were relocating to Poland, the Czech Republic, Slovakia and Hungary.

It is a beautiful novel, it is a beautiful story: considered in 1999 as the "sick man of the euro zone" (The Economist, June 3, 1999), Germany would have miraculously cured thanks to the laws of precarization of the wage labour (Hartz laws) which came into force between 2003 and 2005. These reforms alone would have restored the competitiveness of companies, revived Mercedes' sales abroad - and convinced Mr Emmanuel Macron to apply the recipe in France. Fatal mistake. "To understand Germany's success as a global exporter," says economic historian Stephen Gross, "you have to look beyond its borders. This model is based to a decisive extent on the development of commercial networks with the countries of Central and Eastern Europe (1). "And more specifically on unequal economic exchanges established with Poland, the Czech Republic, Hungary and Slovakia, a quartet called the "Visegrád Group". For a quarter of a century, wealthy Germany has been practicing with its neighbours what the United States has set up with its factories in Mexico: local relocation.

Firmly established between Otto von Bismarck's Second Reich and the Habsburg Empire at the end of the 19th century, the privileged economic exchanges between Germany and Central Europe are not new. Limited by the Cold War, they resumed in the 1970s in the form of industrial, technological and banking partnerships, thanks to the Ostpolitik (1969-1974) launched by Social Democratic Chancellor Willy Brandt. The fall of the Berlin Wall is the time for a meal for the wild animals. From the early 1990s, German multinationals set their sights on privatised state-owned enterprises in an atmosphere of industrial apocalypse. While the takeover of the Czechoslovak car manufacturer Škoda by Volkswagen in 1991 left its mark, the capitalist neighbour first used the existing facilities as subcontracting platforms.

To this end, it is taking advantage of an old delocalization mechanism that is as discreet as it is little known: outward processing traffic. This procedure, codified in European law in 1986, authorises the temporary export of an intermediate good (or spare parts) to a non-member country where it will be processed, shaped - perfected - before being re-imported into its country of origin with partial or total exemption from customs duties (2). After the collapse of the Eastern bloc, the expansion of import quotas from Central European countries opens up euphoric prospects for German employers. Subcontract the chrome plating of faucets or the polishing of bathtubs to overqualified but under-qualified Czechoslovakian workers? Entrust fabric to the agile Polish fingers paid in złotys and collect jackets that will be sold under a Berlin brand name? Shelling crustaceans in the neighbouring country? This is possible as early as the 1990s, as if the borders of the European Union had already been erased.

From the "Iron Curtain" to the "maquiladoras".

"The outward processing traffic is the European version of the American measure that paved the way for the development of the maquiladora in the border region between Mexico and the United States (3)," explains economist Julie Pellegrin. More than any other member country, Germany benefits from this processing subcontracting, mainly in textiles, electronics and automobiles: in 1996, Rhineland companies reimport twenty-seven times more (in value) advanced products into Poland, the Czech Republic, Hungary or Slovakia than French companies. In that year, outward processing traffic accounted for 13 % of the Visegrád group's exports to the Union and 16 % of German imports from that area. Some sectors are rushing into it: 86.1% of German imports of Polish textiles and clothing follow this regime. In less than a decade, says Julie Pellegrin, "companies from Central and Eastern European countries are integrated into production chains controlled mainly by German companies.

This arrest of nations still anchored in the East yesterday by the Council of Mutual Economic Assistance led by Moscow (CAEM, or Comecon, 1949-1991) was all the more rapid as the exaltation of the "liberated consumer" by access to Western products compensated for a time the disarray of the worker enslaved to the subcontracting of these same products.

As free trade agreements became tariff-free in the second half of the 1990s, outward processing traffic lost interest in favour of foreign direct investment (FDI). Multinationals are no longer content to relocate a small segment of their production, but are now financing the construction of subsidiary plants where labour costs are lower.

From 1991 to 1999, German FDI flows to Eastern European countries multiplied by twenty-three (4). In the early 2000s, Germany alone accounted for more than a third of FDI in the Visegrád Group countries and extended its capital-intensive influence to Slovenia, Croatia and Romania. The factories of automotive equipment manufacturers (Bosch, Dräxlmaier, Continental, Benteler), plastics processing and electronics are mushrooming. For, from Warsaw to Budapest, average salaries represent one tenth of those practised in Berlin in 1990; one quarter in 2010.

Yet workers have benefited from the strong vocational and technical education system in the East. Much more qualified than their Asian counterparts, they are also closer: if it takes four weeks for a container from Shanghai to reach Rotterdam, five hours are enough for a truck loaded with machined parts in the Mladá Boleslav workshops north-east of Prague to reach Volkswagen's headquarters in Wolfsburg.

At the turn of the millennium, Germany thus became the leading trading partner of Poland, the Czech Republic, Slovakia and Hungary. These represent for Berlin a hinterland of sixty-four million inhabitants transformed into an offshore production platform. Of course, Italians, French and British also benefit from this asymmetrical trade. But on a smaller scale. Audi and Mercedes might take up less road space in New York and Beijing if their prices did not include low wages in Poland and Hungary.

Extension of German commercial strength

https://www.monde-diplomatique.fr/IMG/png/empire-economique-allemand-ok.png

1986 :

Orange: Countries where the Federal Republic of Germany (FRG) is the 1st customer and the 1st supplier of goods

Yellow: Countries where the FRG is the 2nd customer and the 1st or 2nd supplier

Green: Council for Mutual Economic Assistance countries, integrated zone with very little trade with other countries

Grey: Other situations

2016 :

Orange: Countries where Germany is the 1st customer and the 1st supplier of goods

Yellow: Countries where Germany is the 2nd customer and the 1st supplier

Grey: Other situations

When the enlargement of the Union to include Central European countries took place in 2004, of which Germany was the indefatigable militant, the region's annexation to the Rhine industrial area was already well advanced. It will be even stronger from 2009, as the German automobile industry accentuates its relocations to the Visegrád group countries to restore its profits eroded by the financial crisis. "It is a paradox of history," notes researcher Vladimír Handl, "that it was precisely European integration - a project to tame the post-Cold War German economic giant - that pushed Germany into the role of a hegemon (5). »

The shadow cast by its power on the map of the continent draws an industrial Holy Empire whose centre buys the more or less qualified work of its provinces. To the northwest, the Netherlands (the main logistics hub of the Rhine industry), Belgium and Denmark have this large neighbour as their main commercial outlet; but their high value-added industries and developed states guarantee them relative autonomy. Like Austria in the south, it is also integrated into German production chains and interests, but has its own flagships, particularly in services and insurance. But in the east, in a subordinate if not colonial position, Polish, Czech, Slovak, Hungarian, Romanian and even Bulgarian industries depend on their first and main customer..: Berlin.

Without China at their doorstep, German industrialists and leaders would have had the greatest difficulty in passing the wage-labour system to the Hartz laws. Because it is easier to envisage being replaced at one's post by the Czech commoner than by a distant Vietnamese, neighbourhood relocations exert this powerful disciplinary effect described by a team of unsuspected leftist economists: "The new possibilities of relocating production abroad while remaining close have changed the balance of power between German employees and employers. Trade unions and/or works councils were forced to accept derogations from sectoral agreements, often resulting in lower wages for workers. "The employee representatives "became aware that they had to make concessions" (6). As a result, opposition to employment flexibilization laws was inconsistent. And wages collapsed. Director of the German Institute for Economic Research, Marcel Fratzscher noted in 2017 that, "for people with low qualifications, the hourly rate has risen from 12 euros to 9 euros since the late 1990s" (Financial Times, 12 June 2017).

Contested hegemony

In all respects, the development of an economic backyard was a good deal for German industrialists. Because a significant part of the European funds destined for the new member countries magically fell on Berlin. "Germany has been by far the biggest beneficiary of investments in the Visegrád Group countries under EU cohesion policy," explains Polish economist Konrad Popławski. 30 billion over the period 2004-2015. The benefit was not only direct - the contracts signed - but also indirect: a significant part of the funds was devoted to infrastructure, which facilitated the transport of goods between Germany and Central and Eastern Europe. A decisive point for German car companies, which needed good transport networks to build modern facilities in their eastern neighbours (7). »

For the countries in the Visegrád group, the picture is more mixed. On the one hand, German investments have renewed the industrial base, led to a massive transfer of technology, increased productivity and wages, created many induced jobs, sometimes skilled, to the point of alarming employers, who now fear a shortage of labour. But this relationship confines the region to an economy of subcontracting and subordination: the industrial tool belongs to Western European capital, German in particular.

This alienation became apparent at the end of June 2017, when a strike broke out for the first time since 1992 at Volkswagen's giant factory in Bratislava (8). The Slovak government then supported the demand for a 16% wage increase. "Why should a company that manufactures one of the most luxurious and highest quality cars, with high labour productivity, pay its Slovak workers half or a third of the amount it pays the same workers in Western Europe? "Prime Minister Robert Fico, a social democrat who governs with nationalists, asked himself (9). A month earlier, his Czech counterpart Bohuslav Sobotka warned foreign investors in almost similar terms (10).

The economic side of the authoritarian and conservative European counter-project developed by the leaders of the Visegrád group (11) is to move away from the role of assembly workshop and develop sovereign production for the large continental market. Otherwise, even if local wages soared, this relative prosperity could only favour the purchase of... German cars.

Pierre Rimbert