Germany's New East Bloc

With massive flows of investment and aid, Bonn is expanding its clout in Central Europe

On a steamy Saturday in July, two Polish security guards are having a tough time. German Chancellor Helmut Kohl, after a solemn visit to Auschwitz, is sight-seeing in Krakow, and the big man has been mobbed by cheering Poles as he crosses the Old Town square. The crowd sweeps him out of the guards' reach. When they finally shove their way to his side, Kohl, beaming at his fans, refuses to budge. Children try to touch him. One elderly woman grips his hand and won't let go.

A German hero in Poland? That's not so odd anymore. Central Europeans have good reason to be grateful to their former invaders. Every day, in Bonn's Ministry of Defense, top officials spend hours on plans to fulfill the dream of many Czechs, Poles, and Hungarians by bringing them into the North Atlantic Treaty Organization. And German politicians take every opportunity to lobby their counterparts in France and Spain to extend eastward the privileges of membership in the European Union.

In fact, Central Europe already has a distinct German accent. Europe's economic powerhouse has leapfrogged Austria and the U.S. to become Central Europe's biggest investor. Joint ventures bridge its borders, more than 6,000 in Hungary alone. Germany is Central Europe's most generous aid donor and its mightiest trading partner, accounting for more than half of the EU's total trade with the 12 eastern countries applying to join the union. "Germany is building a region of co-prosperity," says James Lister-Cheese, East Europe specialist at Independent Strategy, a London-based economic forecasting firm.

That region could prove to be a powerful presence in the EU. Together, the Czech Republic, Germany, Hungary, and Poland have a population of close to 140 million and a combined gross domestic product of $2.4 trillion. Germany and its eastern neighbors also have a special synergy, combining German technology with Central Europe's lower costs. That already is giving many German companies an edge over their Western European competitors.

Not everyone is thrilled about Germany's agenda in Central Europe. Bonn's politicians insist that integrating East and West, like forging monetary union in the EU, will make Germany more European, not Europe more German. But in reality, Germany is increasingly setting the terms for the continent's future shape. "Germany will be more central to the new geography of Europe," says Dominique Moisi, deputy director of the French Institute of International Relations. Some in Western Europe worry that Germany is substituting economic and political dominance for its former military supremacy.

THE FRONT LINE. Even in Central Europe, which stands to gain so much from the relationship with Germany, some people feel the Germans are taking advantage of them. Czechs living along the 507-mile German border seethe when Germans in Mercedes and BMWs roll into town for cheap beer, food, and cigarettes. In Poland, laws restrict land sales to foreigners for fear that Germans may flock to territory they once had owned. "Germany is simply too strong a partner not to raise some concerns," says Foreign Minister Dariusz Rosati.

Indeed, Germany is hardly acting out of altruism in forging such intimate ties with the East. Much more than any other European nation, it needs a Central Europe whose loyalties are firmly locked into the West. Although every EU member benefits from sharing a continent with stable democracies, Germany is on the front line. It has nine neighbors altogether and the longest border with the former Soviet bloc. Berlin is just 60 miles west of the Polish border.

Germany badly needs a buffer zone between itself and Russia, fearing that a violent conflict in the region could send millions of refugees into Germany. "We don't want a gray zone of instability," says Rudolf Seiters, a top foreign policy adviser in Kohl's Christian Democratic Union. What Germany does want is to bring the region under the EU and NATO umbrellas so it can share the cost of keeping Central Europe stable.

Kohl has done a masterful job of finessing the issue of NATO enlargement with Russian President Boris Yeltsin, to soften the blow to the former superpower. Moscow is pleased with Germany's approach. "The Germans have been much less pushy than the Americans were to make us swallow and digest NATO expansion," says Sergei Karaganov, deputy director of the Institute of Europe and a top foreign policy adviser in Moscow. And although some in Washington complain that Kohl is complicating the process of bringing Central Europe into NATO, many are grateful that Germany has been so sensitive to Russia.

Perhaps more immediate than any security concern is Central Europe's increasing importance to German growth. J.P. Morgan predicts that the region will buy 10% of Germany's exports this year and account for a quarter of its forecast 6% export growth. And nearly every Central European country gets at least 30% of its imports from Germany. Now, Germany's exports to the region are about the same as its exports to Western trade partners such as France. But Central Europe's economies are growing at an average of 5% a year--twice as fast as Western Europe.

At the same time, the region offers ideal conditions for German companies looking to boost their competitiveness by building lower-cost facilities than they could at home. Central European workers are highly skilled--and don't get the expensive benefits their German counterparts do. That's why Opel, the German arm of General Motors Corp., built a $440 million plant in Szentgotthard, Hungary, using local talent to make parts for and finish its Astra hatchbacks for export.

Business relationships between the Central Europeans and their old enemies are mostly thriving. Forte, a successful German-Polish joint venture, illustrates both the potential of such unions and the delicate handling they require. Founded in 1994 when a southern German kitchen-cabinet maker and a Polish furniture retailer joined forces, Forte had sales of more than $115 million in 1996. Its listing early last year in Warsaw was heavily oversubscribed.

RESPECTFUL. The two founders, from opposite sides of the border, hit it off well, even vacationing together with their families in Switzerland. One reason is that the German partner was respectful of his Polish counterpart--and his friend appreciated it. "Some foreign investors assume people here are still walking on all fours," says the Polish manager.

Politically, the most difficult relations are between the Germans and the Czechs--especially in the so-called Sudetenland, or northern and western Czech Republic. Not until December, 1996, did they agree on a pact of reconciliation, finally signed on Jan. 21, over the treatment of both Nazi victims and of 3 million ethnic Germans expelled from Czechoslovakia in 1945.

Balancing such tensions, however, are centuries-old cultural and commercial bonds between Germany and its neighbors. Czech and German engineers get virtually identical training. Hungary's constitution is modeled after Germany's. Big German industrial names, including Siemens and Volkswagen, were active in the region before the war and have good reputations. "We can work with the old values of German companies," says Roland Koch, head of Siemens' $1.73 billion telecom operations in Central and Eastern Europe.

Border areas already live in the rhythm of the German mark. In the Czech town of Cheb, a third of the businesses make a living off of Germans, some 65% of these catering to tourists. Oompah music greets them each Saturday afternoon in a town square that might well be in Bavaria. "When Germany does well, we do well," says Ladislav Mikes, owner of textile company Vlnap in the nearby town of Nejdek.

MUSCLE-FLEXING. German leaders like to stress their moral obligation to their eastern neighbors, and German politicians have shown great sensitivity in building trust. Yet as Germany pushes to consolidate its influence further, Western Europe is nervous. Bonn's efforts to call the shots simultaneously on monetary union and NATO expansion add up to a lot of muscle-flexing. And ultimately, both goals clearly help Germany more than anyone else in Western Europe.

In addition, there is danger in fostering expectations in Central Europe that can't be met. That has been at the root of continuing friction between eastern and western Germans, as easterners grow frustrated that it's taking longer than they thought to match the West's living standards. Despite Kohl's original target of 2000 for Poland's entry into the EU, it probably will take until 2003 or even 2005.

For now, Germany is doing its best to chaperon its neighbors into the Western clubs. "We'd like to see a happy ending to a difficult century," says Klaus Naumann, chief of the military committee of NATO and a German general. Once again, it is behaving like Europe's superpower. Around the world, people who remember sadder times are keeping their fingers crossed that this time, Germany's intentions are benign.