If in the Next Few Days Central Europe Were to Shut Down, Western Europe Would Stop Functioning

The obstacles standing in the path of the economic growth of the region include the depleting labor market and the persistently low trust in the establishment, says Mojmir Hampl in an interview with Robert Schuster.

The world has been subject to the coronavirus epidemic for two whole years, affecting all areas of life as we have known it. What weaknesses has the pandemic uncovered in terms of the global economy?

I believe that it has foremost revealed its strengths. Covid has managed to shift the world’s perspective on globalization. We experienced the existential reality of globalization, and many of us realized what it actually entails. A whole host of people have, probably for the first time in their life, realized how much we all rely on each other, how the international division of labor connects us, meaning through our methods of production. A globalized economy has the character of a well-oiled machine- when it works, people don’t notice it. Only when it breaks down, we are suddenly very surprised.

A positive observation from the previous months has been that here in Central Europe we belong to the productive part of the world, meaning that we are capable of production.

Were some form of localization – that is, the opposite of globalization – to occur, we would see that our region would, in fact, be well-prepared for such an eventuality. By this I don’t mean to say that the consideration of localization is right, as it is not in reality a recipe for wealth, but for collective poverty. It wouldn’t be all bad if we did make everything in our own backyard, but it’s not the right way forward. If it were, in fact, true that the golden age of globalization is behind us and it’s all downhill from here, it would just mean that we would be a bit less dependent on global trends. After such an eventuality we would discover that Central Europe is well equipped for such a situation and that would give our region a comparative advantage. 

However, one of the more negative takeaways we’ve discovered is that our – Czech people’s –  trust in our institutions is overall lower than in the Western world. I don’t know why this is, if it’s because here we can talk about the impacts of Communism and the different regimes our country has experienced. Trust in the state and its institutions is much lower in the region of Central Europe, which has other consequences too, for example even in the resources used to fight this crisis and the overall loss of human life that this pandemic led to, rates of vaccination, etc.

Where does the relatively positive economical disposition in Central Europe come from? Is it connected to low labor costs? Or is it because of the creative potential in our society, which is connected to our many cultural transformations?

Let’s forget about the idea of cheap labor, because from a global perspective Czech labor is far from cheap. Maybe 15 years ago is the last time it could have been considered such. But some of our realities have very deep roots. For better or worse, the Czech Lands have for 150 years been an industrial nation, which wasn’t a part of some revolution or societal changes; some things just remain strong and last. In our living memory all we have had is our ability to create, manufacture, which is an incredibly strong  ability. I always compare our situation with Norway, which was a country of fishermen until they discovered petroleum and natural gas, and was completely transformed as a result.

What we’ve figured out during our transformation is that the expansion of Europe with the addition of its Central and Eastern parts not only helped the new additions, but also the Western block.

I believe that this fact gives the Central and Eastern block tremendous power over the smooth running of Western Europe, and I don’t think this is bad at all, in fact I believe the opposite. We barely acknowledge this advantage, mostly because we consider it a given. It’s simply a fact that there are a host of things that you wouldn’t create in Britain today, as there simply isn’t a labor force there that would be capable of it. 

Our economic strength stems from the fact that when we started the division of labor en masse, we had something to offer. Frankly speaking, if in the next few days Central Europe were to shut down, western Europe would stop functioning as a result.

Do we still have enough people who are capable of such production? Are our educational institutions capable of ensuring a steady supply of skilled workers?

That is an absolutely crucial question. I’m not sure whether we adequately realize the differences between the individual countries of our region. There are countries which have systematically been experiencing a long-term depopulation, like Romania and the Baltics, and for a long time this applied to even Poland and Slovakia. Then there are countries which defy this trend and are in fact gaining in population. Czechia falls into this category, with its steadily rising population. Today we’re at 10.7 million citizens. In 1939, before the outbreak of war, there were nearly 11 million people living in the Czech Lands, so we are nearly there. We still attract the labor force of the rest of Europe; it now partly applies even to Poland and Hungary. The long-term rule still stands, that you cannot have economic growth without capital, a labor force and new technology. Countries which are losing their labor force cannot experience economic growth and Czechia is still capable of attracting labor from abroad. 

It is somewhat paradoxical that we attract outside labor force, as this is happening without any active attempts or incentivization on our part; this occurs  spontaneously as part of the economic process. However, we could no longer function without these people, as the economy would lack its fuel. Our strength lies not only in that we actively participate in the global division of labor, but also that we have the ability to create these conditions in a host of others, including our closest neighbors. We will in fact need to enhance our ability to absorb labor from abroad. If we remain capable of functioning in such a mode, we have a strong chance of retaining our economic growth and keeping ahead of other countries. There’s only one single barrier to achieving this, which has made itself apparent during the covid crisis, and that is that we’re not very good at dealing with hard times, which is a rather Czech quality. If we compare the economic crisis from 2009 with our current one, once again the same image forms: the developed world falters more than the developing one, and in the scope of the developed countries we in Czechia falter more than others. We’re experiencing a situation, where for a relatively larger growth of national debt we’re receiving a relatively lower growth of the economy and a higher mortality rate as a result of the crisis.

This isn’t just us, but partly Central Europe in general. Slovakia today has the same deficit as us. This trend is strongly correlated with general mistrust and that is the deepest shadow that still remains from our checkered governmental legacy. 

Does the poor crisis management have something to do with who is currently in power? 

No, that doesn’t matter at all. But similar debates are taking place in other parts of Central Europe, Austria for example being in a very similar situation. Nevertheless their levels of trust in the state are overall higher and it’s exactly this that makes all the difference.

The pandemic revealed our economy’s massive reliance on China, whether for the supply of semiconductors or other components. Could the production of these materials return back to Europe and perhaps into the Central European region?

A global division of labor means a constant search for more efficient and cost-reducing means of production, which takes decades and there is no simple method of turning these processes off or having them go to different regions. The whole of Central Europe is reliant on the division of labor, and a sudden end of globalization would be extremely discomforting and would spell a way to global poverty. Globalization is extremely good for us and without it the wealth creation we have been experiencing for the last 30 years would not have been possible.

I do understand that initial gut reaction, when we’re unable to immediately make something that there’s an active shortage of. When we need several billion masks made in the course of a few days, there’s not a single economic model in existence capable of standing up to the task. The problem lies in our inability to always know what we’ll desperately need from day to day. From this stem all recipes for disaster, for example achieving food independence. Whatever crisis that would appear, it would be unable to compensate on any markets besides the domestic one. 

Disregarding this, it is true that the limiting factor of globalization is the economic competition between the United States and China. We’ve probably already gone through the most intense iteration of it, which will hopefully not be repeated again on this scale; maybe we’ve passed the peak. We have built our economic model on the expansion of the global division of labor. 

Another trend of recent years is the propagation of ‘Green’ economics. Who will this transformation hurt the most in Central Europe? Will it be the countries whose energy is built on coal mining?

If Green economics means just a small return of production to Europe, then it would be a return to the countries that are capable of production. Their ‘greening’ will, however, bring with it much larger pressure on the growing emissions. Our large amount of emissions per head is a result of being an industrial nation. As such we’ll be placed in a paradoxical situation, where we’ll desire a more ecological production, but we’ll also have a desire to increase digitalization. Those two are competing against each other a bit, as digitalization means a permanent dependency growth on uninterrupted electricity supply in all areas. In this regard the question of ensuring an adequate constant source of stable energy supply becomes an even more critical problem than it first appears.

What are Central Europe’s options when it comes to green economics? Is there potential for energy-efficient and environmentally-friendly technology to catch on?

I am opposed to the worldview that the farsighted West already has these matters solved and settled and it’s the backward Eastern Europe that doesn’t. The concept of carbon neutrality and the Green Deal are built on the idea that we have set out to achieve a goal, one that requires technologies we currently do not have, and we simply believe that on the path to the goal we’ll acquire them. It’s the first time in history that we have such a goal, but the path that we are supposed to take in order to achieve it is still obscured. If that is the case, then what that means for us is still a very basic challenge—to have a steady backup source of stable energy.

This is why the meeting of the Visegrad Four with the French president Emmanuel Macron doesn’t surprise me at all, nor does the fact that they are so hotly debating nuclear energy as a viable green source of energy. It seems to me that everything that appears extremely complex is actually quite simple: we’re all talking about the same thing, except we, unlike the Germans or Austrians, do not believe that we’re capable of achieving the big goal of climate neutrality without a stable energy source. It seems to me almost a sure thing that in the end the ‘nuclear’ will be acknowledged as a transitional low-emission energy source.

Has the covid pandemic revealed any opportunities or weaknesses when it comes to regulating and otherwise manipulating the economy, whether through changing the interest rate or in the form of various state relief and fiscal incentives?  Has a new culture, a new trend arisen from this perspective?

It seems to me that all over the developed world, counting Central Europe in the category also, we have chosen the same plan, at least in the beginning. In the first part of the Covid Crisis, the majority of economists advised us not to step on the brakes. We all expected a decrease in demand, similarly to the 2009 and 2010 crisis, meaning people would stop spending, stop investing and so on. 

Worldwide, economists were recommending strong fiscal policies, aiming ‘to douse’ the problem with public money. The trouble lies in the fact that nobody could predict the problem would last for so long. Everyone thought it would last maybe one or two, max three quarters. To think that by the end of 2021 there would once again be debates about lockdowns, that was a rare thought indeed. The problem with this form of financial support is that it is extremely expensive. In some economies, for example in the United States, such programs are even further strengthened, and in a situation where the supply side is faltering, it is unable to produce what the demand is capable of buying. People aren’t losing jobs all that much, aren’t seeing a drastic drop in their income while the supply side got completely seized.

It’s as if we’ve set off a train from the top of a hill, but we have no way of stopping it.

Our problem in Central Europe is that, if we look at the deficit rate as compared to the GDP, we’ll see that everyone has it similarly to us and in Czechia it’s especially extreme. Our deficit numbers during Covid times have started appearing much closer to the Southern part of the Eurozone, meaning those countries that we used to laugh at in the past, since we considered them completely fiscally incompetent. The level of debt isn’t actually the issue, but rather its rate of growth. Right now we don’t really know how to slow it down in a thoughtful manner, which I think is our biggest issue. We’ve essentially worked less, but our incomes haven’t dropped because of it. If we look at Slovakia or in some regards Poland, in many ways their situation is the same. We’re learning to live with debt for the first time, which signifies a large shift in macroeconomics and one that will remain so for some time. The problem is that when this is how it works for a year or two, people start believing that this is how it’s going to be from now on permanently. 

There is also a closely connected tool, one which the EU in the interests of a Post-Covid recovery reluctantly decided on and one to which it is quite new: it jointly obtained capital on financial markets. What’s your opinion on this? Should this matter simply be a one-time resort or should it become a permanent mechanism of the EU?

Foremost I’d say that the EU broke Germany on this after many years, as Germany had previously been opposed to something like this. It took a long time and required the Covid pandemic for Germany to relent and to accept the idea that in the moment, when multiple countries themselves are incapable of borrowing on their own, they borrow jointly and promptly  split the loan. I think that the Germans themselves know how large of a precedent this is, that if you do it once and it succeeds then there is no longer any way of getting rid of it, because there will always be some good reason for doing it again. The Covid crisis led to this just as it led to the breaking of the barrier of long-term fiscal conservatism in Czechia. The terms of these bonds are set in such a way that they will outlive not only the governments that agreed on it, but also the lives of the politicians who signed it. From now on this will only get repeated.

Do you expect that the new German government will be more amenable than the previous Angel Merkel government to similar actions in the future?

We’re in a different situation now. Back then we were at the bottom of the economic cycle, now reality forces us to slam on the debt brakes. There will also be pressure on the growth of interest rates, so currently it’s not about pouring more money into the system, but actually rather the opposite, of slowing down, as for example inflation in Germany is the highest in the last three decades. If you’re asking me whether the German elite is ready to repeat something like this again, then I would say yes, because the gates have been opened and they can be walked through more than once.

How do you view the overall economic prospects of Central European countries?

When it comes to the economies, I feel that we have a whole host of common interests, and in this regard I understand the need for collaboration among our countries, despite being limited by ideas such as status, politics or our symbolic temperaments, etc. I would say that in the future we will find, at the very least on the topic of economy, a much higher amount of agreement in Central Europe than we would with, say, Portugal. When, from the initiative of Vaclav Havel, came the Visegrad collaboration, maybe even he himself didn’t fully appreciate how such ideas can cast long shadows into the future. As is common in Europe, we have a tendency to view our neighbors critically. We should try to build past this, because despite all our historical preconceptions and biases, we have many common interests and it would be good to cultivate those.

Do I get the feeling that you’re looking at the Central European future rather positively in terms of its potential and its options?

Yes. That which we call convergence, that means the ability to grow faster and closer to others, that is still a process that we’re experiencing. We might not even be realizing it, that in that marathon we are still surpassing other countries. We can of course debate whether that is because the others are running extremely slowly or whether we’re actually faster than them. Basically I don’t think that there is any reason why it would, in the near future, stop. The only limit is the limited labor market, meaning there doesn’t necessarily have to be an available workforce, i.e. the fuel for further growth. That’s the one thing that I think could stop it. Otherwise I think that we still have a chance to grow faster, in good times, than the rest of the developed world, which is good news. After the Second World War there were only a handful of countries that were capable of moving from the low-income to the high-income category, where the transformation moved them onto the highest level of wealth. This only happened in eastern Asia and then in Central Europe and this success was not at all a given.

Robert Schuster

is the managing editor of Aspen Review Central Europe. He was the editor-in-chief of Mezinárodní politika monthly from 2005 to 2015, and a correspondent for the Austrian daily Der Standard in the Czech Republic from 2000 to 2012. He has been a foreign correspondent of Lidové noviny daily since 2015, where he covers news reports from German-speaking countries. He is a regular guest in commentaries broadcast by Český rozhlas Plus.

Mojmír Hampl

 is a Czech economist, banker and commentator with academic degrees from the University of Economics in Prague and the University of Surrey in the UK. He has spent most of his working life at the Czech National Bank (CNB), which he joined as an analyst after defending his thesis before the then CNB Vice-Governor Pavel Kysilka. After a break of four years working as an economist at Česká spořitelna and later as a member of the management of the Czech Consolidation Agency, he returned to the CNB in 2006, when he was appointed to the Bank Board. From 2008, he held the post of CNB Vice-Governor. His term expired in 2018. Throughout his working life he has repeatedly revisited the topic of money, currencies and central banks. He is known for his outspoken views on the euro and European integration. He has published more than 300 popular and academic articles on a wide variety of issues – from macroeconomics through economic history to cryptocurrencies.

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