The shift of the EU's economic center of gravity to the East
Why is it that when traveling between France and Poland, it is becoming increasingly difficult to discern the wealth disparity between the two countries? To the point where we may wonder if it even exists. In the former, one sees large, solid but old buildings that are less and less well maintained, while in the latter, one sees new villas. By the roadside, one sees cows and sheep in one country, and production centers in the other. I exaggerate a bit, but you get the idea. In 15 years, Poland has completely changed, and the difference in development is no longer noticeable when visiting.
The fact is that GDP per capita at purchasing power parity is not so different in France ($58,828, IMF, 2023) and Poland ($45,343, IMF, 2023). A Pole is 77% as rich as a Frenchman in terms of real economic activity. In 2000, it was 38%. If one excludes Paris, which is a cosmopolitan city, and only keeps the provinces of both countries, the gap narrows even more. In a few years, Poles will be richer than most Western European nations in terms of real domestic economic activity. These figures differ significantly from the comparison in terms of nominal GDP, still largely unfavorable to Poland, although the change between 2000 and 2023 is of the same magnitude.
So what justifies that the value of the French economy is higher than that of the Polish economy in terms of price as well as exchange rates? This gap between these two ways of measuring GDP is justified by the fact that one can have an international economic power that exceeds the power of its domestic economy. One can have a lot of investments and economic activities abroad while not developing its domestic economy. A large part of the French economy relies on its large international companies that own assets all over the world, but pay their taxes and dividends in France. The same goes for French banks, which are the largest in Europe, and for the insurer Axa, which is the largest in the world. France thus controls part of the economy of other countries and receives numerous financial flows due to its international heritage and often disconnected from its national production. Poland has nothing like this and its portfolio of international investments is almost non-existent compared to that of France. Some parts of the Polish economy even find their place in the French international portfolio. The international capital amassed by French investors is totally unreachable for a country like Poland, both in the short and medium term. The difference is seen when comparing net financial assets per capita: $66,572 for France versus $9,882 in Poland (Allianz Global Wealth Report 2021). But we are even more struck when comparing stocks of Foreign Direct Investments: $1.854 billion for France versus only $66 billion for Poland in 2019 (IMF). France's FDI are therefore 27 times higher than Poland's in total value. Conversely, France receives less FDI than it makes: its stock of FDI received was $1.208 billion in 2019 (+17% between 2009 and 2019, IMF), while its outgoing FDI stock had increased by 23% between 2009 and 2019. This gap is symptomatic of the deterioration of the French economy and the quite limited enthusiasm it inspires in investors. France is in a very bad position in the international ranking of countries receiving the most FDI. In 2019, it ranked a little better than Belgium ($988 billion), than Spain ($932 billion), and less well than the UK ($2.378 billion) or Ireland ($1.774 billion). The stock of FDI received by Poland, meanwhile, had jumped by 40% (from $194 billion in 2009 to 273 billion in 2019).
One of the mechanisms that best illustrates the disparities between the international economic power of countries is the increased productivity of those at the top of the value chain. This concept is essential to understand how they dominate global trade. A country at the top of the value chain can impose its prices on others through its international companies. These companies are few in number, of gigantic size, and control almost all production and sales circuits, from production to the final buyer. If a subcontractor or supplier is too expensive, they can change it, find hundreds or even thousands in other countries. If the supplier finds that the multinational to which he sells his products is not generous enough, he has only a few other multinationals to turn to. One of the most extreme examples of this phenomenon is the production of cocoa in Africa: 4 companies buy it from six million local farmers, and 6 international companies process it. It should be noted that this situation occurs within an international trade system whose rules everyone has accepted, rightly or wrongly, but not necessarily because they had a choice.
The same phenomenon is at work with Polish subcontractors. German employees earn more than Polish workers often doing the same job and working less. This is explained by the fact that their "productivity" is higher, given that what they produce is a final product, composed of secondary products bought at low cost from Polish subcontractors and suppliers.
In sum, developing countries pay to equip their economy and gain market share. They invest in their future economic power by undervaluing their workforce. They are not being robbed, but they must comply with the conditions imposed on them until they can impose their own, after having sufficiently developed their domestic economy and built companies that can take the place of the multinationals of the countries that had economically dominated them. The usual mistake made by the former masters of the economy is to underinvest in their domestic economy and increasingly rely on subcontractors who gain in competence, until they entrust them with essential tasks and become dependent on them.
This underinvestment and loss of international economic power is precisely the ailment that France, which has always been at the center of Western Europe's economy, is increasingly suffering from: there is a sort of relative deflation of the French economy compared to other economies in the Eurozone. Let's illustrate the problem: let's say that the French cooking pot and the German pot cost 30 euros. A year later, the French pot costs 32 euros and the German pot costs 35, due to various production costs subject to inflation. Who is winning? France gains competitiveness but, if exports do not increase, becomes poorer in comparison to its neighbors and has more difficulties than they do in repaying its debt. It seems to become a kind of supplier-consumer of Germany, following the path of peripheral economies of the Eurozone where prices are roughly half of those in the economic center. The absence of inflation here manifests as a sort of return of devaluation. Since the adjustment cannot be made by the exchange rate, it is done by modifying prices within the Eurozone. Thus, the degradation of the French economy reaches the foundations of its international economic power, as its revenues decrease and it has fewer and fewer funds to reinvest. France's record trade deficit in 2022 is a glaring proof of this: it was 164 billion, or 7% of French GDP (+100% compared to 2021, which was already a record). On top of this, France has gorged itself on debt like a third-world country, and I am not even talking about public debt: French corporate debt totalled $4,7 trillion in 2021 (4th largest corporate debt stock in the world after China, the US and Japan). If it gets out of the system, it is financial collapse. If it stays in, France becomes something between a centre and a periphery. It is true that France’s debt is mainly internal, but the French banks cannot function without the ECB.
So, there are two main business models in international economics: economies that invest heavily abroad and where prices are high, to support their investments and their international purchasing power, and countries that seek to attract investments and develop their economies. Some aim to maintain their international economic power despite a domestic economy that is no longer up to par, and others aim to develop their domestic economy. But there is a third business model: countries that are losing their international economic power and their domestic economy, like France. Finally, there is still a fourth model: countries that have considerable international economic power but continue to invest at home and attract international investments as if they were still developing countries. It is in this last category that the turbo-capitalist American model falls, whose Net International Investment Position is very largely negative.
That's why the United States can perfectly support its role as the world's leading power. Not only do their companies dominate the international value chain, but they are often young, dynamic, and feed on funding which, as in the case of Tesla, is not concerned with the classic caution of finance and views the future as a project of collective economic success rather than as a financial model. That's why I use the term "turbo-capitalism".
The strategy of developing Poland's relations with the United States and not bowing to all the demands of Germany and France is perfectly justified and relevant. European leadership can no longer rely on states that fail to adapt to the contemporary world and are content with having developed economies, but whose development has stopped and do not know how to go further.