European Green Deal & CE/SEE: Plenty of opportunities, but mind current gaps

By Gunter Deuber, RBI

Gunter Deuber

The Green Deal for Europe (EGD) is seen by some observers as a trend-setting and future-oriented EU project at the level of the Common Agricultural Policy (CAP) or even the foundation of the euro. However, it should be noted that such ambitious policy projects do not necessarily have a unifying character. After all, the CAP has an impact on almost all current EU members, while the euro has so far been more of a Western European happening. Moreover, the euro has not been and is not equally popular everywhere in Western Europe. During the euro crisis, a North-South divide in the euro area has often been cited as a reason for the crisis. This makes it even more important to bear in mind that there also is a certain East-West divide in Europe in the area of the EGD and, more broadly speaking, the green economy, and that very different starting conditions prevail here.

Mind the Greening-Competitiveness gap
Some Western European EU countries are among the global leaders in the areas of green economy and green finance (see also our recent Discover CEE blog post) or occupy top 10 positions in relevant rankings, such as the Global Green Economy Index (GGEI). Here, Western European EU countries such as Sweden, Finland, Germany, Denmark, but also Austria and France are among the global top 10 performers. The top-ranked EU country from CE/SEE here is Hungary ranking 32nd, while countries such as the Czech Republic, Slovakia or Poland have disappointing rankings in the GGEI in the 70-100 range. In some cases, here the CE countries are even lagging behind SEE countries such as Albania or Croatia. In aggregated terms, the average ranking of the Western European EU members considered here is 15th place in the GGEI index, while the “average” Eastern European EU member is ranked 71st. In addition, hardly any CE/SEE country is ahead of the Western European EU countries in the GGEI ranking.

It is interesting to note that this considerable gap, in combination with another indicators, lead to a further and even more controversial viewpoint. In terms of the overall attractiveness of a country on a company level, the gap between the two East-West country groups mentioned previously is much smaller. Some EU members from CE such as Slovakia, Poland and the Czech Republic are even ranked ahead of Western European EU members (like Italy and Greece) or at least almost on a par with countries such as the Netherlands, Austria and France in a ranking such as the World Bank’s Doing Business Index. When aggregated, the average ranking of the Western European EU members considered here in the Doing Business Ranking is 33rd place, that of the Eastern European EU members from CE/SEE 47th place. Put simply, the combination of both rankings suggests that many EU members from CE/SEE are currently closer in their profile from both rankings (green economy plus doing business attractiveness) to locations such as the USA or South Korea than they are to Western European EU members. For both non-European economies the Doing Business Ranking is significantly better than the Green Economy Ranking. To exaggerate, many western European EU countries are greener than they are competitive, while in the eastern parts of the EU it is often the other way around.

It is also clear that the current business location/green economy “profile” in CE/SEE also reflects voter preferences. The electorate in CE/SEE tends to focus on bread-and-butter issues rather than on so-called “post-materialistic” values. To this extent, in hardly any CE/SEE country – with the exception of Hungary – greenish political parties have so far achieved significant and sustainable voting shares.

EGD a departure from the “convergence claim”?

In this respect, it should not be underestimated that in CE/SEE – not only in Poland – the EGD is partly interpreted as an undertaking primarily focused on Western Europe. In a more negative view, the EGD is seen here as an instrument to secure prosperity in Western Europe or fend off international competition (keyword: border carbon tax EU). To put it somewhat exaggerated, the EGD can even be interpreted as a departure from the idea of convergence that had previously shaped the EU’s economic policy orientation. In a more positive, constructively critical view, the EGD can still be seen as an instrument for creating new competitive advantages for the EU, but with more near-term opportunities for Western Europe than for CE/SEE. A certain reluctance towards the EGD may also be related to the fact that Frans Timmermans (currently the driving force behind the EGD alongside the President of the EU Commission) had previously distinguished himself at EU level by pushing forward the rule of law agenda (with Hungary and Poland in focus). In this context, it should also be noted that the 2050 climate targets in the CE/SEE region, and especially in CE, are sometimes interpreted as too ambitious or even as a threat to the overall local business conditions. In this respect, it is not surprising that the CE/SEE countries are closer to the UK and France than to most other Western European countries in the context of the EGD debate on nuclear energy.

In sum, it will be important for the EU members from CE/SEE to be well involved in the clarification of the EGD which is now due in 2020. In addition, cushioning elements such as the Just Transition Fund or Modernisation Fund must be clearly and actively communicated in the region. Moreover, the fact that the euro area is largely limited to Western European EU members suggests that the ECB should not be (too strongly) instrumentalised for the EGD. Such a move would possibly fuel further scepticism among EU members in CE/SEE. In this respect, from an East-West perspective, a prominent role for IFIs such as the EIB or the EBRD, which are also deeply rooted in CE/SEE, seems to be more reasonable for the EGD on the financing side.

Green Economy & CEE: Various opportunities and win-win constellations

Despite the aspects outlined above, the following also applies: In the area of green economy, much is happening in CEE (see also our recent Discover CEE blog post on green regional start-ups) and there are also considerable opportunities in the region. First, the EGD will bring pressure to modernise in the region. Relevant sectors and aspects are here: energy and renewable energies, industry in general and the intensive cross-border value chains in the region or even agriculture. Secondly, the generally lower starting level in the green economy sector also offers rapid opportunities for catching up and growth. In this respect, a renewed inflow of FDI from Western Europe into the region seems conceivable.

However, the estimated investment sums for “greening” in CEE exceed the public funds that have been announced to date by far. In this respect, considerable co-financing by the private sector and markets will be necessary. This could contribute to the development of local capital markets in the area of long-term market-based financing and structured finance in the region. Participation in such a process would certainly be of interest to Western European foreign banks with expertise in green finance that are rooted in the region.

A bit beyond the near-term political agenda the EGD’s objectives imply that in the distant future, Europe would be less likely to purchase fossil energy from its current major suppliers and Russia in particular. A lower energy dependence of the EU on Russia could ease certain current West-East dividing lines within the EU. Moreover, such an outlook would ease the overall dependency of Western Europe on energy supplies from Russia, which is currently and historically viewed critically by the USA.

Gunter Deuber is Head of Economics, Fixed Income and FX Research Department at Raiffeisen Bank International in Vienna.

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