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to sizable sums from the €1.1 trillion seven-year Multiannual Financial Framework (MFF) as well as a newly created COVID-19 recovery fund of €750bn. With drivers of growth in CEE-4 shifting from exports toward domestic spending, Germany’s export and growth performance has become less relevant for the CEE-4 economies,” says IIF.
Even if the rest of Europe in general, and Germany in particular, has become less important to the well-being of the CEE4, as all of them have big manufacturing sectors, and especially automotive, their economies remain tied to the wider neighbourhood and exports is a contagion channel through which other countries’ woes can affect their economies.
The four have been trying to diversify their economies away from the automotive sector without much success, as capital investment into the sector by the car companies has continued to build up their importance and has even shifted some of the production share from Germany to Central Europe.
“As the CEE-4 have been unable to diversify their manufacturing sectors away from heavy reliance on auto production, challenges loom going forward in light of the structural changes the industry is likely to experience,” says IIF.
Changes in the automotive industry are expected to take some of the wind out of their sales. For example, the shift to electric cars means few workers will be needed, as electric cars have much fewer parts. At the same time, the carmakers moved to Central Europe because of the lower wages, but the labour market and booming economy are pushing those wages up and so undermining one of the region’s key attractions. As bne IntelliNews has reported, at some point production will move on to Southeast Europe where the wages are lower, but experts don't expect this to happen for several years yet.
“Over the near term, however, the relative complexity of hybrids will continue to support such companies’ prospects. The Czech Republic appears to be the most vulnerable country in the region; others are not too far behind,” IIF said.
Viktor Orban floats idea of bilateral agreements if rule of law conditionality blocks approval of €750bn recovery fund
Tamas Szilagyi in Budapest
Prime Minister Viktor Orban hinted that Hungary may block approval of the EU's pandemic recovery fund if payouts are linked to rule of law issues. Before leaving for a two-day summit for Brussels on October 1, Orban said bilateral agreements could be an option if the debate over rule of law conditionality prevents the launch of the EU's €750bn Next Generation recovery fund.
EU leaders gathered in Brussels for a two-day summit discussing foreign policy issues such as tensions in the Eastern Mediterranean, the situation in Belarus and the armed conflict in Nagorno-Karabakh.
Talks at the summit are likely to touch on the agreement member states reached in July on the EU’s multiannual financial framework for the 2021- 2027 financial cycle and a recovery package to offset the damage wreaked by the coronavirus pandemic, the prime minister said. The deal was still complicated by disagreements as certain member states wanted to tie it to the issue of the rule of law.
The Hungarian government says that Europe should focus on managing the coronavirus crisis for now and the pandemic rescue package should be made available to member states in need of help as quickly as possible.
"We shouldn’t slow things down with debates on the rule of law," it said. Orban expects heated debates on the issue and recommended that member states could make intergovernmental deals bypassing EU institutions to allow fast access of funds for countries that need it the most.
Hungarian opposition parties said the prime minister was just bluffing
and by blocking any deal would hurt Hungary as the country is one of the biggest beneficiaries of the next budget. According to conservative estimates, EU funding for Hungary could jump to €52.8bn in 2021-2027 at 2018 prices compared to €39bn during the 2014-2020 EU budget cycle.
The country is set to receive €8bn in grants and €9bn in loans under the NGEU recovery fund. This would be supplemented by €10bn own contribution. Including the latter, Hungary's total funding available during the next EU cycle would be boosted to around €61.5bn, which is 43% of the country's annual GDP.
On Wednesday, the Council adopted its negotiating position on the so-called rule of law conditionality after a compromise text was put forward by Germany, the current EU presidency holder.
The proposed text scrapped all language referring to "generalised deficiencies as regards the rule of law", replacing it with more general references to "breaches of principles" and made it significantly more cumbersome to suspend EU payments.
The Council, with Germany at its helm, will now enter into negotiations with the Parliament, which already said that it will want to see strong links between rule of law and EU spending before signing off on the next seven-year budget.
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