Commentary Guns

The European Single Market is important for V4 countries

The threats of trade wars launched by US President Donald Trump and Brexit draw attention to the question of who is commercially dependent on who in the world.

Who could be hit the hardest by trade restrictions? The Czech Republic is one of the most motivated countries to keep its current position because it has one of the most open export economies in the world.

The European Union Statistical Office (Eurostat) has published a new report on how much European states are linked to each other and how much they trade with other world partners. If the European Single Market is truly important for some of the states, it is the Central European countries of the Visegrad Group where it is paramount. At the same time, Slovakia excluded, these are the biggest opponents of deepening European integration, as advocated by French President Emmanuel Macron.

No wonder. The European Union is particularly beneficial for the V4 countries as a single market. So there is no motivation for the V4 to accept a common asylum and migration policy or sharing debts. Of all V4 countries, over 80 percent of exports head to other EU countries. Number one is Slovakia with 86 percent, followed by the Czech Republic with 84, Hungary with 82 and Poland with 80 percent.

For comparison, Europe's biggest powers, Germany and France, have a below-average dependence on the EU's internal market – 59 percent in both cases while the EU average is 63 percent.

Interestingly, most of the richer countries (with the exception of the Netherlands and Austria) are of below-average dependence, while almost all the poorer and Eastern states are more dependent.

It is not difficult to figure out what is the cause. It is the difference between the Central European subcontracting economy and the Western European branded economy. Joining the EU has made the post-communist countries of Central and Eastern Europe a demanded supplier of parts for Western brands because of their cheaper labor and often significantly lower taxes. It is also the reason why salaries are higher in the countries of Northern and Western Europe and traditionally the lowest in the countries of Central and Southeast Europe.

Eurostat has processed one more dependency statistic that shows how much countries depend on their largest trading partners. The Czech Republic is exceptional in this respect because it is the only country dependent on its largest trading partner, Germany, for more than thirty percent. Thirty-two percent of total Czech exports go to Germany. Second place belongs to Austria. Thirty percent of Austria´s trade is dependent on Berlin, followed by Poles and Hungarians with 27 percent.

From the V4 countries, parts for German products are mostly exported, while the final German products can be very successful in world markets.

Thanks to Central European parts, among other things, Germany is the world trade hegemon, which irritates Donald Trump with a huge surplus in trade with America. It climbed to US$68 billion last year. Germany does not have its biggest trading partner in the European Union, but with the United States, where eight percent of the total German exports heads to. German exports contain Czech, Polish and Slovak parts. Trump's business threats to Europe target Germany directly. If he fulfils the threats, it will affect the Czech Republic as well.

In recent years, the Czech Republic has seen one of the fastest growths in salaries over the past decades, but it has still not come close to Western countries. There are voices in business saying that such a rate of salary growth is not sustainable, but that is not entirely true. The Czech Republic lags far behind Germany and other rich countries in salaries, but not in labor productivity. Therefore, the corporate profits rate is very high in Czechia, at 49 percent of GDP and has not been decreasing for a long time, so the Czech Republic is losing profits.

Therefore, the Czech Republic will get rid of the role of a low-cost economy and become a country of strong Czech brands that pushes out its products from development to final product and marketing.

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