Tue
Jul
21

‘If the EU fails, we can say goodbye to the liberal order’ – an interview with Samir Saran

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Samir Saran is president of Observer Research Foundation (ORF), one of Asia’s most influential think tanks.

Europe is, paradoxically, the single most important geography that will define the future trajectory of the global order, because it has its foundations rooted in democratic principles and is currently the only power that can push the world towards a liberal trajectory, Samir Saran, President of the Observer Research Foundation (ORF), one of Asia’s most influential think tanks, told Eastern Focus in a video interview. We discussed the world’s “silly season”, the emerging global order and how, absent a hegemonic United States, “which has ceased to be a superpower ten years ago, with the financial crisis”, it is up to middle powers, including Central and Eastern Europe or the Asian countries of the Quad (India, Australia, Japan) to put up a united front to defend democracy in the face of a rising China.

Saran curates the Raisina Dialogue, India’s annual flagship platform on geopolitics and geo-economics, and chairs CyFy, India’s annual conference on cyber security and internet governance. He is also a Commissioner of The Global Commission on the Stability of Cyberspace, member of the South Asia advisory board of the World Economic Forum, and a part of its Global Future Council on Cybersecurity. He is also the Director of the Centre for Peace and Security at the Sardar Patel Police University, Jodhpur, India.

He writes frequently on issues of global governance, climate change, energy policy, global development architecture, artificial intelligence, cyber security, internet governance, and India’s foreign policy and authored four books, the latest of which is called ‘The New World Disorder’.

“It’s the do it or lose it moment for Europe”

Part 1

“For me, the most important unknown unknown is the future of Europe. Will the EU hold?, Saran told Eastern Focus. “Which way will the wind blow in the continent? Will it really be the bastion of the liberal order or will the liberal order be buried?”

He says that Europe is at a crossroads and because it is seen as democratic, liberal, open, pluralist, supporting a transparent and open market economy, defending the rule of law, defending the right of individuals and freedom of speech, Europe can give the world a chance to be liberal. “If the European Union is split between the north and south and east and west, and we see a large part of it give up on the Atlantic project, the liberal project, and align itself with more impressive authoritarian regimes – which is quite tempting these days, there’s a lot of money attached to that choice -, you will see the end of the Atlantic project. An EU that is not united in its ethics is an EU that will eventually write its own demise.

How will Europe swing? Will it be an actor, or will it be acted upon?

I think that a political EU may be born as the pandemic ends. If a political EU is not born, I will see the end of the European Union itself,” Saran says. 

He also points out that Europe has made a mistake in thinking that it would change China by engaging with it. “China will change the EU before the EU changes China,” he explained. “Beijing is not interested in politics, it wants your markets. And it will have them, one way or another.”

“Europe needs to see itself as an Indo-Pacific power. The Indo-Pacific is the frontline for European safety,” he insisted. “If China is able to change south-east Asia, don’t be surprised if Europe has the same fate”.

Central and Eastern Europe swinging between the EU and China

Part 2

Central and East European countries can be decisive and could form a bridge between the EU and Asian players. If only they wanted to take that path, Saran explains. “The choice for CEE is between becoming a bridge between East and West or becoming the venue of conflict.”

Central and Eastern Europe is facing two types of pressures and both are of an economic nature. On the one hand, the CEE countries are struggling to boost their economies and increase their income per capita by finding investment. “[They] will have to meet [their] aspirations while being political about it and worrying about the colour of the money,” he stresses.The second pressure is the nature of economic growth: are CEE countries going to continue to be cheap manufacturing centers for Europe, or will they switch towards becoming advanced technology societies? “Are you going to be the rule-makers of the fourth industrial revolution or the rule-takers?”

India – CEE cooperation
“These are the choices you have to make and I think here India becomes an actor. We have experience with these things over the last 20 years. We are also one of the swing states that would decide the new world order, we have lived this and maybe we can share our experiences with you.”GlobalFocus Center, the Observer for Research Foundation (India) and Keynote (Czechia) initiated the Central Europe – India Forum, whose first online meeting took place in June. CEIF will be a forum to explore avenues of cooperation between CEE and India in socio-economic, political and security arenas.

Industrial growth becoming “intimate”
“People are going to make far more political decisions going forward. That is one reality the pandemic teaches us. As we become more digital societies, […] your arenas of value creation are going to be your bedrooms. And you wouldn’t like to share those data sets with countries whose systems you do not trust. It’s going to be about the organs inside our bodies, how we eat, how we date, how we elect, whom we elect…”

The first global crisis without Captain America

Part 3

Saran explains that middle powers from across all regions need to take matters into their own hands if they decide to keep dwelling in a liberal system. “The old power [the US] is absent and engrossed in its own domestic realities, and you have the new power [China] that has been irresponsible and has put us in this position,” he said.

“This tells us that building a coalition of middle powers is absolutely essential. It is not a luxury, it is not a choice. This is something we must invest in for our own existential reasons.”

“So we have a democratic failure at one end, and a despotic emergence at the other end and we need to make sure that democracy survives despite this moment. None of us wants a ‘no China world’ because we all benefit from China’s growth; we want a responsible China world. [we need to] put up a united front and not negotiate individually, but as a group,” he insisted.

“The EU has done this longer than anyone else and that’s why the Chinese don’t like the EU and they want to slice you up”.

Saran also points out that, from an Indian perspective, Russia needs to be given more room in European thinking, so Moscow wouldn’t be pushed into the Chinese corner. “It would be a mistake to leave Russia no option but to partner with the Chinese, even if Russia’s neighbours may not find it palatable,” “We have to understand that Russia is not China, and that China is taking hegemony to a different level. Russia has a small economy and a huge military, there is an imbalance there; so we have to create economic incentives for the Russians, give them a stake in our common economic future.”

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Mon
Jul
20

“Governments can band together in a fight against China and authoritarianism, but the real threat is more from inside” – interview with Mathew Burrows

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Dr. Mathew J. Burrows, the director of the Atlantic Council’s Foresight, Strategy, and Risks Initiative in the Scowcroft Center for Strategy and Security

What would you expect to be the possible geopolitical fallout/aftershocks that will shape the post-coronavirus world? 

The obvious path that we are on at the moment is a world shaped by bipolarity, in particular by the competition between the U.S. and China. Within the West there are some common concerns about China. The Chinese side seems to feel more and more embattled, becoming more defensive in their diplomacy and announcements. There is very little multilateralism. The US pullout of the WHO, while a terrible idea, is also a leading indicator of the mood inside the Trump administration. There are other measures too: the Trump administration not allowing the US government pension system to invest in Chinese stocks; there is growing support for the repatriation of the supply chains in order to have far less dependence on China (especially for pharmaceutical supplies). If anything, I would say that we are seeing less globalisation (at least in terms of trade and investment flows), more political antagonism between the US and China and very little global cooperation. There will be less economic growth, a downturn in trade and investment across borders, and the movement of people will diminish, but none of all this will disappear unless the US and China get into a conflict which would end this period of globalisation.

There will be less economic growth, a downturn in trade and investment across borders, and the movement of people will diminish, but none of all this will disappear unless the US and China get into a conflict which would end this period of globalisation.

Can the COVID crisis become also an opportunity – a change in mindset for a more united West, especially a Europe ready to embrace the great power competition against China? Even the debate inside NATO has lately taken a China angle. Is COVID an opportunity for the Atlantic system, for reinventing the Atlantic strategic unity & solidarity?

I see Europe being ambivalent about going along with the US on all the measures that the Trump administration is taking against China: on tariffs plus a prohibition against Huawei in Western networks. I don’t think many in Europe want to be too closely aligned with the US in such strident attacks against China. They understand the US point of view and share many of the concerns, but they are also fearful of bipolarity, of getting into a world that sends everybody back to a 1950s and 1960s-style Cold War. There is another issue within Europe, a division over China, as some are increasingly economically dependent, reliant on China as an investor: for some countries in the south and east that are already bending towards China, the crisis could accelerate this path even more. Moreover, the EU took a blow in this pandemic, where every member state had to fend for itself. Certainly Italy felt that it didn’t get the support from the other member states that it was entitled to or from the EU as a whole. There is an ongoing debate about the economic recovery: who pays? Many feel that Germany and Nordic countries should be much more generous in terms of the economic recovery support. There is a lot of division, and Europe remains far from speaking with one voice.

For sure, NATO is also split. A key factor on the European side is the distress created by the Trump administration. Germans worry that the Trump administration could impose tariffs on the automobile industry, an export which the entire German economy depends on. Of course, if there would be a sudden Russian move against the Baltic states, I would still see NATO coming together. The problem to me is when there is no major live external threat like that, and given that you have different interests by all the players and a US administration that is disengaged, disintegration has the upper hand.  

Europeans are also fearful of bipolarity, of getting into a world that sends everybody back to a 1950s and 1960s-style Cold War. There is another issue within Europe, a division over China, as some are increasingly economically dependent, reliant on China as an investor: for some countries in the south and east that are already bending towards China, the crisis could accelerate this path even more.

How would you see the EU faring in a world in which power politics, not multilateralism is again the new normal? 

This is not the world that Europe expected. A decade ago the EU was looking forward to a postmodern world in which there were far fewer conflicts, where  European integration would become the model for others. Obviously that world is not happening. What is essential is Europe’s ability to reach or retain a political consensus. In the recent crises (whether the euro-crisis or the migration crisis) the end result has instead been a deepening of the divisions between east and west, north and south. The pandemic looks like that, too, deepening the same cleavages. That is what I worry the most about. Unless Europe finds a way of overcoming these divisions, the EU will gradually disappear or become irrelevant, particularly for younger generations. In general, the EU has a tendency of coming together at the eleventh hour, but in finding a solution at the last minute it allows hard feelings and resentments to accumulate. Trying to speed up some of the solutions will help the process of binding together the community again, necessary for remaining a force on the world stage.  

It is said that history rhymes. To some observers the current pandemic brings parallels with the type of world in which Spanish Influenza was spreading after WWI – intense geopolitical competition, inward focus and protectionism, nationalism on steroids and nation-first type of responses, democratic recession, a crisis of international architecture, all wrapped up in a profound economic recession. What can be done to avoid/ tame such an interwar cycle? What lessons should we be reminded of?

We should be very worried about the economic recovery. High unemployment and income stagnation could bolster populism and widespread discontent in those countries where the middle class are already under pressure. If you look at the economic recovery after 2008, it led to more inequality and to a part of society, the lower middle class, feeling its interests were not being looked after, that they were losers. The bankers got bailed out, it was the ordinary guys that paid the price. So if you have another iteration of the same pattern, you will create a class that feels that they have few stakes in society or in a democratic government that doesn’t work for them. This would be a very dangerous turn of events, and we know that part of what happened in the 1920s and 1930s was a middle class which felt dispossessed (by the combined conditions generated by WWI and the economic collapse that followed). Consequently, it didn’t have any particular faith in democracy and saw its salvation in strong leaders. That could happen again, although we are much more sensitive to the signs of that happening. The tendency with many economic crises has been that they do prop up the strong, and those that are weaker pay the biggest price. This has to be our number one concern. Another concern should be not to fall in the trap (which we see the US falling into) of seeking shelter under protectionism, even if the feeling against China is running very high. This is another lesson of the 1920s and 1930s, that protectionism may feel good in the short term, but it will make it harder to recover in the long run.

Unless Europe finds a way of overcoming internal divisions, the EU will gradually disappear or become irrelevant, particularly for younger generations.

These days we see the revival of an old idea meant to fix to some extent the crisis of multilateralism, but also to respond to the new revisionism – a global concert/alliance of democracies (supported in the past by John McCain, embraced today by Joe Biden, promoted in a certain version also by Heiko Maas). Is such an idea feasible and operationalised?

I am not sure that it solves what I think is the real issue. People lost faith in democracies because they don’t seem to be working particularly well for the less skilled or the lower strata of the middle class. There are very few people in the US that think this democracy works. So governments can band together in a fight against China and authoritarianism, but the real threat is more from inside than from the outside.

Are you worried about the domestic resilience of the West? Are we already too far in this process of polarising ourselves and becoming more like Sunni vs. Shia/Hutu vs. Tutsi? Can we come back? 

During the pandemic there was an initial period where people were coming together. Congress passed in record time the 3 trillion dollar stimulus and rescue plans. In the recent weeks it has returned to the old pattern of partisanship. The pandemic seems to be reinforcing the division between Blue and Red states. Blue states like New York and California have suffered far more so far than Red ones. At the same time Donald Trump openly tries to deepen these divisions as part of his strategy is to keep his base mobilised. It is very hard for both sides to work across the aisle, because they are stuck in a system in which they derive more advantages from this polarised atmosphere. Partisanship is deeply entrenched. In the long run, you may have more populism on the left, the kind of Bernie Sanders type of socialism focused especially on providing free university tuition and better healthcare to those struggling in the middle class. What certainly will be different for the US is that the state is going to be a lot more powerful as a result of it having to save the economy in this pandemic. In this context, it is very likely that we are going to see a revival too of the Tea Party on the right, opposed to the big government and to moving the US closer to the European model.

Is the West, and especially Europe in danger of over-learning the lessons of the post-9/11 campaigns, in the sense of ‘never again’? Everyone is running away from the liberal interventionism, stabilisation operations or R2P today. But sometimes they might be needed. Can Europe recapture the patience of winning the peace? Especially in a world in which Europe continues to be affected by MENA instabilities that could be even more significant in a post-pandemic world?

High unemployment and income stagnation could bolster populism and widespread discontent in those countries where the middle class are already under pressure. If you look at the economic recovery after 2008, it led to more inequality and to a part of society, the lower middle class, feeling its interests were not being looked after, that they were losers.

I don’t really see anybody prepared to do what the US and NATO did in the Balkans in the 1990s. In Europe the main effort will be to protect itself against huge flows of refugees. The effort will be focused on not allowing the crisis to get to the worst-case scenario. It will be an effort to drive down some of the worst outcomes of conflict, but not to really settle them. 

In the 1990s, the West — both the US and Europe — was at the height of its power, which also made it confident of solving others’ problems. Hence the wish to solve the world’s ills, from the Iraqi invasion of Kuwait, to the disintegration of Yugoslavia. There are groups today within Western societies — NGOs and civil society — that remain activists. The Bill and Melinda Gates Foundation has done enormous good in combatting disease in Africa and other developing regions. But because of the internal problems, Western governments don’t have the means or bandwidth to solve the world’s big problems. Instead of offense, it’s defence. They get involved if there is the threat of the conflict having the potential to spill over in the form of terrorism, threatening the West. And then the effort is to seal off the problem, not solve it. Syria is a prime example. The US effort was geared to combating ISIS, not supporting the rebels against Assad.     

Dr. Mathew J. Burrows serves as the director of the Atlantic Council’s Foresight, Strategy, and Risks Initiative in the Scowcroft Center for Strategy and Security. He was appointed counselor to the National Intelligence Council (NIC) in 2007 and director of the Analysis and Production Staff (APS) in 2010. He was the principal drafter for the NIC publication Global Trends 2030: Alternative Worlds.

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Thu
Jul
02

EU Can’t Afford to Lose the Battle for the Balkans

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China, Russia and the USA are using the corona pandemic to strengthen their positions in the Balkans, although their divergent interests threaten both the region’s EU perspectives and its long-term stability.

Over the last two months, the corona pandemic has thoroughly changed the world in many different ways, on the global, regional, local and individual levels. 

One of those changes has been the accelerated return of geopolitics, as manifested in the Balkans by China, the Gulf states, Russia, Turkey, and the US, who have been using medical assistance, political and PR moves to pursue their interests and strengthen their positions, with the mediation of some of their new (or old) allies in this volatile region.

These geopolitical moves are undermining the Balkans’ EU perspectives, and with it the region’s long-term stability, since for the past two decades hopes of EU membership have been the main, if not the only protection against the potential chaos underlying the region’s unresolved ethno-political issues. 

The EU response to this challenge was initially marred by a major blunder, as EU countries blocked exports of their medical equipment to other member and non-member countries, triggering furious criticism, from Italy and Spain, to Albania and Serbia.

Feeling shunned by the EU, in one of the most precarious moments of recent history, may prove to have been the last drop in the Balkans’ overflowing bucket of frustrations and dismay, and the final proof to local leaders that their interests will be better served in alliance with some other foreign actors.

At the end of April, the EU eventually corrected its course and provided a whopping €3.3 billion package for health, economic and social challenges in the Balkans. Yet this intervention may be coming too late for at least a part, if not all of the Balkans, where the EU has lost much – if not all – of its influence. 

In recent years, months and weeks, the region has been slipping away from the path towards the EU and its democratic practices, and turned towards autocracy, nationalism, corruption and other foreign influences. 

While EU leaders and officials are still pondering what further steps they should take in the region, most of them still do not seem to grasp the urgency or the seriousness of the situation. Even those who are aware of the risks seem to be at a loss as to what to do in the difficult and troubled region where – as some of them believe – they have already tried everything. 

Whether because of the EU’s ignorance, its own mounting internal problems, or because of the Balkans’ traditional complexity, the region is still far from the top of the EU agenda. The EU seems to have forgotten how dangerous the Balkans can be – for itself, the continent and the entire world – when divergent foreign influences rekindle the region’s unresolved national, religious and ideological differences.

The most flagrant such example happened more than a century ago, when the Austro-Hungarian Archduke Franz Ferdinand was assassinated in Sarajevo on June 28, 1914, which triggered the start of World War I. 

The Balkan powder kegs smoulder again

As this anniversary draws near, the geopolitical situation in the Balkans seems to be ever more complicated and dangerous. 

In addition to the new health, security, economic and social challenges caused by the pandemic, the region is witnessing a rekindling of many of its old problems, such as rampant corruption and internal ethnic & political divisions. Furthermore, most of the Balkan countries are already gearing up for elections this year, adding yet another flammable ingredient to the volatile concoction. 

Many experts and reports have been pointing to the serious democratic downturn in the region.

“The breakdown of the democratic consensus has been most visible in Central Europe and the Balkans, which experienced the greatest gains after the end of the Cold War,” warned the Freedom House’s global ‘Nations in Transit’ report, published on May 6.

The report noted a considerable decline in democratic practices in Montenegro and Serbia, as well as in the EU member Hungary. These three countries were “no longer democracies,” the watchdog organisation concluded, and added them to the group of ‘hybrid regimes’ with the rest of the Balkan countries.

The latest developments across the region have added more reasons for concern.

In recent days alone, Albania has seen clashes between the police and opposition supporters and activists over the disputed demolition of the National Theatre in Tirana. The demolition was carried out overnight, against the advice of EU officials and their efforts to find a compromise solution. The subsequent violent protests reflected growing tensions between the ruling and opposition parties.

Similar tensions are simmering in Montenegro, where the ruling regime of Milo Djukanović has been facing off against the opposition parties and the Serbian Orthodox Church, ahead of the parliamentary elections scheduled for the end of the year. The situation is no better in Serbia, where supporters of the ruling and opposition parties have been holding reality show-style protests against each other, while gearing up for parliamentary elections in June.

In Bosnia & Herzegovina, a complete political deadlock has been blocking the formation of a new government in the BiH Federation entity for some 18 months now, since the 2018 general elections, and is also preventing the adoption of the 2020 state budget. The latter will delay Bosnia’s upcoming local elections, which have currently been postponed until November, but will be delayed even further until the state budget is adopted.

In both Kosovo and North Macedonia, the governments’ efforts to control the coronavirus pandemic have from the very beginning been overshadowed by political and personal battles. North Macedonia is also distracted by the preparations for its general elections, while in Kosovo the Constitutional Court is set to rule on the recent controversial toppling of the government and indicate how a new government should be elected.

The EU is squandering its influence in the region

The local and regional power struggles in the Balkans have been augmented in recent years by various global actors, which have exploited the steady decline of EU interest and influence in the region to strengthen their positions and pursue their individual interests.

Since the early 2000s the Balkans have been yearning to join the EU, which was supposed to provide the region with more job opportunities and better living standards. Yet equally important was the fact that only EU membership could fulfil another Balkan dream; to enable all the region’s ethnic groups to live with their ethnic kin within the same borders.

It has been this second motive that made the EU the only option able to guarantee the region’s long-term stability and enable the gradual transformation of its nationalist ideals. All other options, meaning the absence of the EU and the presence of divergent foreign influences, would inevitably add fuel to the local ethno-political quarrels, thus destabilising the region in the long run.

Nevertheless, in recent years the enlargement process has gradually screeched to a halt. 

The region never fully recuperated from the impact of the 2008-9 global recession, and its readiness and capacity for economic and social reforms weakened as politicians and politics became more and more conservative.

 The global recession has strengthened conservatism and undermined internal cohesion within the EU too, which has weakened the Union’s readiness to accept new members. 

As a result, the accession process – which was both the EU’s technical toolbox and its only strategy in the Balkans – has become an exercise in bureaucratic procrastination, a game in which the Balkan countries pretended to still be willing to reform while the EU pretended to be ready to accept the new member states.

The Balkan summits in Sofia and London in May and July 2018 were the turning point, as they revealed that enlargement into the Balkans had effectively, albeit not officially, been taken off the table. At those meetings, the EU leaders – increasingly troubled by their problems back home – would not even allow use of the word ‘enlargement’, using terms like ‘connectivity agenda’ instead.

The Balkan leaders got the message loud and clear, and started turning more and more towards their historic allies: the Serbs towards Russia, and the Bosniaks towards Turkey and the Gulf countries – as well as towards the new, wealthy kid on the block – China. The Albanians, on the other hand, had always been linked much more closely to the US over the past two decades, but America’s new, chaotic foreign policy under Donald Trump threatens to change that too.

Global actors use the pandemic to strengthen their Balkan grip 

The new European Commission appointed at the end of 2019 seemed to be aware of the growing trouble in the Balkans, and appeared determined to restore at least some of the influence the EU has lost during the time of the previous Commission. Yet its efforts have been interrupted by the coronavirus pandemic, and the EU’s initial abysmal reaction to this difficult challenge made things only worse.

On the other hand, China and Russia proved once again to be better at the game of winning over Balkan hearts, and used the situation to gain additional leverage in the region by sending masks and other medical equipment early on.

Their assistance – in line with their strategic orientation in the Balkans – focused on Serbia, the biggest country and biggest market in the region. Serbia’s President Aleksandar Vučić did not spare the theatrics in thanking China and Russia for their aid, as it helped the country to fight the coronavirus while at the same time boosting his own popularity ahead of the elections.

China and Russia proved once again to be better at the game of winning over Balkan hearts.

With every new planeload, Vučić and other Serbian government officials made major public displays of gratitude, while Russian and Chinese flags, as well as billboards boasting ‘a friendship of steel’ with China and ‘historic relations’ with Russia lined the streets of Belgrade.

On the other hand, this assistance raised many eyebrows. Some experts warned that a significant portion of the Chinese aid deliveries seemed to be of poor quality, or that it was superfluous. Others questioned why the Russian health assistance was being coordinated by the Russian Ministry of Defence, why it includes military personnel, and why these military teams were allowed to move across the country, and even into Bosnia’s Serb-dominated entity of Republika Srpska, without any oversight or control.

In neighbouring Kosovo, meanwhile, America was also using the pandemic to pursue different but equally self-serving and potentially even more detrimental tactics. Thanks to the direct intervention of Richard Grenell, the acting Director of the US National Intelligence, the US Ambassador to Germany, and the Special Presidential Envoy for Serbia and Kosovo Peace Negotiations, the government of Albin Kurti was toppled in Kosovo on March 25.

Grenell pushed for Kurti’s removal as he was standing in the way of a US-sponsored agreement intended to at least nominally resolve the dispute between Serbia and Kosovo. The no-confidence vote in Kurti’s government opened up a new and complicated legal and political crisis in Kosovo, which is threatening to undermine Kosovo’s ability to deal with the health, economic, social and all the other consequences of the pandemic.

Over the last two months Serbia, Kosovo, Bosnia and all the other Balkan countries eagerly awaited and carefully counted the planeloads coming from China, Russia, Turkey and the Gulf states, as they meant not only a difference in fighting the pandemic, but also indicated the status of each country in relation to a different global actor.

The EU comes back strong, but is it too late?

The EU eventually realised that China’s ‘mask diplomacy’ and Russia’s military-driven health assistance was threatening to undo years of the EU’s strong presence in the Balkans. 

On March 26 EU leaders finally agreed to set dates for the start of negotiations with Albania and North Macedonia, yet this move was too little and too late to make a major difference. 

This step, which for the EU was just a small technical move, but which it nevertheless delayed, had been eagerly awaited by these two countries and the rest of the region for years – but it was almost completely buried under the avalanche of reports related to the fast-spreading pandemic. 

At the same time, EU leaders are still withholding the visa-free regime for Kosovo, despite the fact that the European Commission has proposed this already back in 2016, having concluded that Kosovo’s authorities had met all the agreed criteria. People in the Balkans see these and many similar cases as examples of the EU’s own inconsistency, duplicity and constantly changing criteria.

On April 29, the EU came back strong, announcing a massive package of financial assistance for the region. This included €38 million of immediate support to the health sector, as well as exclusive access to EU instruments and medical equipment; almost €1.2 billion euro in aid funding for the region’s social and economic recovery; and almost €2.2 billion to support businesses and public sector investments.

EU officials in Brussels, as well as around the EU and in the Balkan capitals, also stepped up their communication efforts to make sure that the Balkan peoples and their leaders understood that the Union still cared for the region.

The news was welcomed across the Balkans, although in Serbia it was still overshadowed by the Serbian government’s ever more emotional reactions to the much smaller gifts coming from China and Russia. 

The fact was not lost on Western officials and local experts. Many of them have expressed concerns that Vučić may have ‘passed the point of no return’ – that he may have concluded that, at least during his reign, Serbia’s future looks brighter in alliance with China and Russia, rather than with the EU.

The EU tried to further restore its position in the Balkans by holding a virtual Balkan summit on May 9, an event that was originally supposed to take place in Zagreb as a part of Croatia’s presidency of the EU.

The joint declaration which the EU and Balkan leaders adopted during the conference reiterated “unequivocal support for the European perspective of the Western Balkans”, and stressed that the EU’s support to the region went “far beyond what any other partner has provided.”

Yet by the end the Balkan leaders and their citizens remained clearly unimpressed by the event, whose biggest achievement seemed to be the fact that it was held in such a difficult situation, and which, once again, deliberately avoided even mentioning the word ‘enlargement’. 

As EU leaders and officials now ponder how to move on with the pledged assistance, including the conditionality that will be applied, experts say that the Union is still far from securing its position in the Balkans, warning that they cannot afford to lose it.“The European Commission promises €3.3 billion to help the Western Balkan countries mitigate the impact of the pandemic and bring them closer to the EU. Without a fundamental change of direction, however, this initiative comes too late,” a leading Balkan expert Dušan Reljić said in his analysis published on May 5.

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Wed
Jun
10

Relocating production from China to Central Europe? Not so fast!

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Western European imports from central Europe have fallen dramatically, while imports from China fell much less, and had already recovered to pre-COVID level by April 2020. Central European governments should instigate new measures to foster the transition towards knowledge-intensive economic activities.

The COVID crisis caused a major setback to global trade and disrupted the functioning of global production networks. From the perspective of Central, Eastern and South Eastern European (CESEE) countries, this has raised the hope that Western European manufacturers will bring their suppliers from East Asia closer, potentially boosting investment in CESEE.

The volume of merchandise trade is expected to drop by almost 20% in the second quarter of 2020 compared to the same quarter of the previous year, the steepest decline on record according to the World Trade Organisation. Almost half of global trade is composed of intermediate goods for production, and there were companies in Europe and elsewhere which did not receive essential intermediate inputs for production during the height of the COVID crisis. Such disruptions to global trade and global production networks, or global value chains (GVCs), can call the benefits of globalisation into question, and might prompt companies to bring their suppliers closer. For Western European producers, the CESEE region would be a natural place to relocate their suppliers due to its geographical closeness. Relocation would boost investment in CESEE, which in turn could speed up the recovery from the corona-recession and support medium-term growth and jobs.

Foreign trade facts disappoint relocation hopes

However, recent trade data paint a sobering picture of such hopes: the imports of the first fifteen European Union member countries (EU15) declined the most from the CESEE region, while imports from China had reverted back to their 2019 level by April 2020, the latest available data at the time of writing (Figure 1). Imports from CESEE declined by a shocking 35%, while within the EU15 imports (such as German import from France and French import from Germany) declined by 30% on average by April. EU15 imports from the United States and Japan declined by about a quarter. The decline of EU15 imports from China had already started in February 2020, earlier than from the rest of the world, given that COVID-19 hit China first. Yet even at the lowest point in March 2020, the EU15’s imports from China was ‘just’ 16% lower than on average in 2019, while in April 2020 it had returned to the same level as in 2019. 

Figure 1: EU15 imports from different regions, euro billions at current prices, seasonally adjusted, 2019 average = 100

Source: author’s calculation, using bilateral trade data from the IMF’s Direction of Trade Statistics dataset (accessed on 6 August 2020), which includes US dollar values. Average euro/US dollar exchange rates from Eurostat were used to convert USD figures to euros. The euro values were seasonally adjusted using the X12 method. 

Note: EU15: first 15 members of the European Union. CESEE13: the 13 countries that joined the EU in 2004-2013.

Among the 13 CESEE countries, Slovakia was hit the hardest by its exports to the EU15 almost halving. Romania was the second hardest hit, followed by Hungary and the Czech Republic with about 40% export losses. At the other end, Estonia, Latvia and Lithuania suffered from ‘just’ about 15% trade losses. 

Relocation would boost investment in CESEE, which in turn could speed up the recovery from the corona-recession and support medium-term growth and jobs.

The composition of EU imports from China shows that some product categories saw major increases, while others declined; however, several intermediate goods categories gained or did not suffer much from April 2019 to April 2020. The highest increases in April 2020 compared with the same month last year were recorded for automatic data processing machines (+€884 million, +33%), articles of apparel of textile fabrics (+€129 million, +36%) and electronic tubes, valves and related articles (+€92 million, +12%). (Textile articles include COVID-19 related products, such as textile face masks, surgical masks, disposable face masks and single use drapes). The largest decreases in absolute terms were observed for imports of footwear (-€254 million, -52%), telecommunications equipment (-€232 million, -6%) and baby carriages, toys, games and sporting goods (-€225 million, -28%). Other intermediate production inputs such as pumps, compressors, fans, electric power machinery and parts, motor vehicle parts fell less.

What can we make of these developments?

First, the limited fall and the quick rebound of EU15 imports from China is really remarkable, given that the economic activity and total imports of the EU15 was much lower in April 2020 than on average in 2019. Perhaps imports from China in April 2020 partially replaced imports from other countries suffering from COVID-related lockdowns. The rebound of imports from China suggests that East Asian supplier problems were short-lived; and from the perspective of disrupted supply chains, there is not much justification to relocate suppliers from East Asia to Europe. The adverse public health situation due to COVID-19 was addressed quickly in China, allowing suspended production and shipments to restart – and faster than in Europe. Such rapid control of the epidemic in China might even reinforce the reliability of Chinese suppliers.

The rebound of imports from China suggests that East Asian supplier problems were short-lived; and from the perspective of disrupted supply chains, there is not much justification to relocate suppliers from East Asia to Europe.

Second, while the CESEE countries are geographically close to consumer markets in the EU, they are still very far away for the value chains of some goods that are produced in China. For instance in ICT goods, the value chain is predominantly East Asian, so moving certain intermediate inputs from China to Europe would mean getting closer to the consumer but farther away from other suppliers. Replicating whole value chains in Europe seems to be a difficult and costly task.

Third, the lower decline of EU15 imports from the United States and Japan than from CESEE suggests that distance to Western Europe is not the primary determinant of trade flows, even in times of lockdowns and trade disruptions. The product composition of trade seems to be a more important factor. This again highlights that the geographic proximity of CESEE to Western Europe should not be overrated.

Fourth, the extent of trade losses depends on the sectoral and product composition of exports to EU15, including the mix of intermediate and final products. It seems that CESEE countries which are more integrated into Western European production networks, such as Slovakia, Romania and Hungary, suffered from larger declines in exports. Since the bulk of exports includes manufacturing products, export decline should coincide with industrial production decline. Indeed, industrial production fell the most (by about one third) from May 2019 to May 2020 in Slovakia, Hungary and Romania among EU member states, according to Eurostat. This suggests that greater participation in European value chains exposes an economy to greater variation in production, with associated consequences for employment and GDP growth.

Fifth, as industrial production recovers, so does trade. Eurostat data shows that industrial production started to recover from April to May 2020 since lockdowns were eased, and is expected to recover further in subsequent months. At the time of writing, the latest bilateral foreign trade data available is for April 2020. Hence the large drop in intra-EU trade by April is expected to correct itself, at least to some extent, over the coming months. It will be interesting to analyse whether intra-EU trade will recover as fast as EU15 imports from China, or whether it does so at a slower pace.

Greater participation in European value chains exposes an economy to greater variation in production, with associated consequences for employment and GDP growth.

And sixth, GVC-related trade also suffered much more in the aftermath of the 2008 global financial crisis than traditional trade, but it also recovered faster after 2009 (see Figure 1 here).

Thus, greater participation in GVCs exposes trade and production to greater variation, which can have adverse consequences for output, employment, government budget balances and many other indicators in times of economic shocks. Such adverse variation should certainly make CESEE policymakers think about their industrial policy strategies, although shorter-run (or cyclical risks) and longer-run structural impacts should also be jointly analysed.

Global value chain participation has longer-term benefits

Participation in GVCs has a number of longer-term benefits. As Richard Baldwin argues, emerging and developing countries with less developed industrial structures and smaller domestic markets can join the supply chains of firms from high-tech nations, instead of building such supply chains as Korea and Taiwan had to do over a long period of time, since these countries developed themselves before the GVC era. Joining GVCs since the mid-1980s has allowed less developed countries to embark on a faster-track development, specialising in certain tasks. 

A recent IMF study concludes that it is GVC-related trade, rather than conventional trade, which has a positive impact on income per capita and productivity, even though such gains appear more significant for upper-middle and high-income countries.

Such longer-term benefits have likely induced CESEE governments to attract as much foreign direct investment (FDI) as they can by offering the maximum amount of state aid which is possible in the EU, such as tax exemption for a decade, or financial support to train employees and reduce labour costs. FDI can foster participation in GVCs by local suppliers. The recent races between CESEE countries to attract prominent foreign manufacturers seem to suggests that this development strategy is set to continue. 

Most CEESEs have not moved up in the value chain

An important aspect of development is whether companies participating in GVCs gradually move up in the value chain: that is, whether the initial contributions to low-wage sectors are gradually replaced by higher value-added and higher technological-level production. The IMF study mentioned above finds unfavourable results for most CESEE countries, by analysing Germany’s auto supply chain: for the Czech Republic, Hungary, Poland, and Slovakia, the contributions of high and low technological-level sectors remained broadly the same between 2000 and 2013, suggesting there had been no moving up on the value chain. For Romania, in contrast, there has been a shift away from low-tech to more high-tech manufacturing. As regards non-EU countries, the study finds that China’s contribution to the German auto supply chain is showing a shift towards more high-tech services, while Russia’s contribution became more intensive in low-tech manufacturing due to the mining and quarrying sector.

The region’s advantage as a low-wage supplier of western European manufacturing networks is gradually diminishing.

Related indicators suggest similarly unsatisfactory progress for most CESEE countries. The European Union’s innovation scoreboard, which is measured using 27 performance indicators distinguishing between ten innovation dimensions in four main categories, concludes that with the sole exception of Estonia, CESEE countries rank well below the EU average in 2019. Moreover, the improvement in innovation performance from 2012 to 2019 in the Czech Republic, Hungary, Bulgaria and Slovakia was below the average improvement in the EU, and there was even a setback in innovation performance in Romania and Slovenia. CESEE countries do not rank highly in the World Economic Forum’s Innovation capability component of the Global Competitiveness Index either. Slovenia (28th), the Czech Republic (29th) and Estonia (34th) have the highest rankings in the CESEE out of 155 countries, while the lowest rankings in the CESEE region belong to Latvia (54th), Romania (55th) and Croatia (73rd). 

Overall, it seems that while participation in global value chains has brought major benefits to CESEE countries in terms of growth and jobs, it has not been associated with improved technological and innovation capabilities. This is a key problem, because with continuing fast wage growth and a deteriorating demographic outlook, the region’s advantage as a low-wage supplier of western European manufacturing networks is gradually diminishing. Most CESEE countries rank disappointingly in the World Economic Forum’s Skills ranking, which considers various indicators related to the current and future workforce, suggesting that the workforce is not up to the challenge of moving away from low-wage activities.

Sustained convergence requires transition towards knowledge-intensive economic activities

Sustained convergence toward western European productivity and living standards will be possible by moving up the value chain towards more knowledge-intensive activities. This, first and foremost, requires better education and research, which in turn necessitates higher public spending. 

For example, public expenditure on tertiary education is below 1% of gross national income in most CESEE countries, but around 1.5% or more in most northern and western European countries. In a forthcoming study we find a statistically significant correlation between public spending on universities and a number of educational result indicators. Primary and secondary education are equally important. As James Heckman argues, in disadvantaged families the highest rate of return in early childhood development comes from investing as early as possible, because skills beget skills in a complementary and dynamic way. There are many poor and disadvantaged families in CESEE. Secondary education, vocational training and lifelong learning are similarly crucial. 

Given the relatively low public debts of CESEE countries and their prospectively faster economic growth than in Western Europe (which will help their fiscal sustainability), it is surprising that these countries do not devote more resources to education and research. The COVID-19 economic shock and the associated collapse in trade should serve as a wake-up call for policymakers in CESEE countries. The existing economic model, which has fostered as much foreign direct investment as possible as well as greater participation in global value chains, has served its purpose, but it will soon run its course. Even a short-term boost cannot be expected from a hypothesised strategic reorganisation of suppliers from East Asia to CESEE. Instead, policies fostering upward movements on the values chain should be significantly stimulated.

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