Germany's New East Bloc

How its influence is growing in Central Europe

On a steamy Saturday in July, two Polish security guards are shouting into tiny microphones, sweat streaming down their faces. German Chancellor Helmut Kohl, after a solemn visit to Auschwitz, is sight-seeing in Krakow, and the big man has been mobbed by hundreds of 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. With four swift phone calls, executives of a German bank save a Czech bank from collapse. 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. Cautiously, Europe's economic powerhouse has returned to the region it once traversed in tanks. It 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 (charts). "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.

"MORE CENTRAL." Little Polish kids may want to kiss Kohl's hand, but not everyone is thrilled about Germany's agenda in Central Europe. Bonn's politicians, especially Kohl, insist that integrating Eastern and Western Europe, like forging European monetary union, is for the greater good of Europe as a whole. German leaders love to repeat that binding their interests to those of their neighbors 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 Moïsi, deputy director of the French Institute of International Relations. Privately, some French politicians are concerned that a powerful German bloc within a bigger EU will neutralize France's influence.

Some worry that Germany is substituting economic and political dominance for its former military supremacy. Sir James Goldsmith has made fear of a German-inspired federation of European nations a linchpin of his new Referendum Party campaign in Britain. His rhetoric suggests that if Britain joins monetary union, it would effectively be ceding sovereignty directly to Helmut Kohl, by way of the evil EU bureaucrats in Brussels.

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 815-kilometer German border seethe when Germans in Mercedes and BMWs roll into town to load up on cheap beer, food, and cigarettes. Loud groups of Germans swagger from pub to brothel. Scuffles often break out between outraged residents and drunken tourists prowling for prostitutes. 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.

After four decades of unease, Germany is desperate to extend the frontiers of democratic Europe. It wants 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, pragmatically, is to bring the region under the EU and NATO umbrellas so it can share the cost of keeping Central Europe stable.

Security bonds already are tight. In 1994, German paratroopers conducted the first joint maneuvers on Polish soil. Now, Poles train in eastern Germany, and in 1995, a German earned the top marks at the Polish military academy. Poles tremble at the thought of being left alone, dangling next to Russia. "As long as Poland is alone, it is temptation for potential enemies," frets National Security Adviser Jerzy Milewski.

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. Bonn persuaded Moscow to drop demands for veto power over new NATO members and has proposed a cooperative charter between NATO and Russia. 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.

FAST GROWTH. Although some in Washington complain that Kohl is complicating the process of bringing Central Europe into NATO, others are grateful that Germany has been so sensitive. "Where Kohl has shown strategic vision is to bring Russia into Europe," says one senior U.S. official. "In that sense, Kohl and we have seen eye to eye."

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 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 educated--and don't get the expensive benefits their German counterparts do. One example: Opel, General Motors Corp.'s German arm, built a $440 million plant in Szentgotthard, Hungary, using local expertise to make parts for and finish its Astra hatchbacks for export. Thanks in part to good publicity, the Astra is one of Hungary's top-selling cars.

Central Europe's economies, for their part, owe much of their progress to Germany's integration strategy. Striving to be members of the Western clubs imposes needed discipline. Every law is passed with an eye to EU standards. Governments are merging legal and financial systems with those of the West. They are struggling to get inflation and budgets under control and maintain stable growth. The prospect of joint security is quelling potential ethnic tensions. Hungary has signed agreements with Romania and Slovakia over the rights of their Hungarian minorities, to prevent nationalistic flash points.

NEW OWNERS. Business relationships between the Central Europeans and their old enemies are mostly thriving. "I like the Germans. I like the way they work," says Bretislav Masek, owner of A plus B Autotechnik in the Czech town of Cheb, which leases and services German-made cars. "If I do a good job, I'm paid, I'm not cheated, and that's it." Denes Pap, managing director of bottle-cap maker Bericap Magyarorszag in Szekesfehervar, near Budapest, feared his new German bosses when they bought his company in 1993. He was pleasantly surprised. "I get plenty of support with no interference," he says.

Forte, a successful German-Polish joint venture, illustrates both the great potential of such a union and the delicate handling it requires. Albert Nothdurft, second-generation boss of the family-run kitchen-cabinet maker Alno in southern Germany, wanted to tap new markets. Maciej Formanowicz, a high-energy entrepreneur running a Polish chain of retail furniture stores, wanted to expand his fledgling kitchen-equipment production. So, in 1991, Formanowicz began importing products from the German. Three years later, the pair founded Forte, a 50-50 venture to make kitchen goods. Sales topped $115 million in 1996, including exports to Germany and other Central European countries. Forte's listing early last year in Warsaw was heavily oversubscribed.

The two men hit it off well, even vacationing together with their families in Switzerland. Nothdurft backed the venture with a $23 million credit guarantee and sent German advisers--including his son--to help in management, marketing, and finance. Formanowicz runs the company, but only one German remains on the ground. "Poles don't like to be dictated to by Germans," Nothdurft says. Formanowicz appreciates his sensitivity. "Some foreign investors assume people here are still walking on all fours," he says.

Some Germans display a lingering arrogance at home, too. Wojciech Pakowski, a Polish painter, has often visited Germany since 1984. "They think every Pole is a car thief," he complains. Adds his wife and business partner, Ania: "They don't accept that we could be the same as they are."

Politically, the most sensitive relations are between the Germans and the Czechs--especially in the so-called Sudetenland, or western Czech Republic. Not until December, 1996, could they agree on the wording of an agreement of reconciliation, signed on Jan. 21, over the treatment of both Nazi victims and of 3 million ethnic Germans expelled from Czechoslovakia in 1945. Those German families had lived on the land for 800 years. "I was robbed, and that's not right," says Heinrich Pascher, whose family was driven from their home with two hours' notice when he was 19. "[The Czechs] should admit that the guilt is not one-sided," he adds.

Nevertheless, sharing a border has more advantages than disadvantages. Germans have centuries-old cultural bonds with their neighbors. The first German-speaking university was founded in Prague, in the 14th century. Czech and German engineers get virtually identical training. Similar commercial codes are being reinstated from pre-communist times. Hungary's constitution is modeled after Germany's. Big German industrial names, including Siemens and Volkswagen, had been 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.

Economic links are set to grow even more rapidly. German banks finally are diving in after making huge investments in eastern Germany after reunification. Their presence will pave the way for more midsize German companies to set up shop in the East. Six German banks now operate in Warsaw. Bayerische Landesbank has a majority stake in a Hungarian bank and is negotiating for a piece of a bank in Prague. Commerzbank already has outpaced earlier Dutch and American rivals to become the biggest foreign bank in Prague.

German leaders like to stress their moral obligation to their eastern neighbors, and German politicians have shown great sensitivity in building trust. Even before Europe began fretting over the potential threat of a unified Germany, Volker Ruhe, now Kohl's Defense Minister but back then deputy party chief of the CDU, argued in Parliament in 1985 that should Germany ever reunify, it ought to recognize the existing boundary with Poland. "Without this reassurance, we could never have supported Germany unity," says former Polish Ambassador Janusz Reiter.

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. After monetary union, Germany would no longer have to worry about other countries devaluing their currencies to gain a price advantage. Taking the East into the EU would spread the cost of bringing the region up to speed economically to all of 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. "This make-believe period can only last for a certain time," notes Jonathan Eyal, director of studies at the Royal United Services Institute, a London think tank.

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.

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