Building bridges with Berlin

With the electorate in Germany poised to give the ruling Social Democratic Party a sound drubbing, the status quo between Warsaw and Berlin could be set for a major shake-up. If Angela Merkel does indeed win the election, it will be with a mandate to whip the German economy - Europe's biggest - into shape. But although some analysts say a resurgent Germany would be good for Poland, Chancellor Schroeder seems hell bent on forging stronger ties with Russia, and this could leave Poland in the historically familiar position of being trapped in the middle.

Germany is a country desperately in need of change. Its GDP grew just 0.8 percent in the second quarter this year, and growth for the whole year is forecast at less than one percent. The country is burdened with a national debt that has ballooned by EUR 200 (zł.800) billion since 1999 to EUR 1.4 (zł.5.6) trillion. According to CDU statistics, the German government now has to pay EUR 100 (zł.400) million per day in interest payments alone. Unemployment has been dogging Germany as well with some 4.7 million people (11.5 percent of the workforce) without jobs.

Indeed, the economy has come to dominate the political argument in the run up to the German general election on September 18 and a reinvigorated Germany could mean very good news for Poland. Angela Merkel, leader of the Christian Democratic Union (CDU), is poised to take power as part of a coalition with Christian Social Union (CSU), and she has already spoken warmly of strengthening Polish-German ties, economically and politically.

However, events took a turn for the worse last week, at least from a Polish perspective, as Chancellor Gerhard Schroeder finalized a deal with President Vladimir Putin to connect Russia and Germany via a gas pipeline through the Baltic Sea. The building of the gas pipeline, which will bypass Poland, raises fears in many Polish observers that it will hamper relations with both Germany and Russia.

"Dependence on supply from Russia is viewed differently in Poland and in Germany. For Germany the building of this pipeline is a way of diversifying its sources of gas. From this point of view it doesn't matter if the pipeline goes through Poland or under the Baltic sea. But things look different when you look at costs and economics," says Dr Sławomir Dębski, the head of the analysis bureau of the Polish Institute of Foreign Affairs. Indeed, the pipeline could cost up to EUR 12 (zł.48) billion.

Many in Poland view the transaction as harmful for the country's energy security. And although Economy Minister Jacek Piechota has played down the investment's possible effects on the security of Poland's gas supplies, the fact remains that it is not the first time that Germany and Russia have carried out mutual policies over Poland's head. The deal has already been criticized by the German President, Horst Koehler, and although opposition officials have underlined that they will respect the agreement, they have sent signals that there might be changes in Germany's eastern policy after this weekend's election.

Labor reform

But it is the economy that German voters will have in mind at the voting booths and CDU has outlined a raft of proposals to reinvigorate the country's sluggish industries. First among them are labor-market reforms, designed to make hiring and firing of employees easier - Germany's current labor regulations have been widely blamed for businesses' reluctance to take people on.

Merkel would lower the unemployment contribution rate for German firms from 6.5 percent to 4.5 percent starting January 1, 2006, and add incentives for businesses to hire idle hands. Employing someone who was formerly collecting long-term unemployment benefits would earn companies the right to pay that worker 10 percent less than the normal rate.

Merkel also wants to relieve some of German businesses' tax burden by reducing the corporate tax rate to 22 percent - just a tad higher than Poland's current corporate tax rate, at 19 percent. According to PAIiIZ, German companies have invested some $10.1 (zł.32.9) billion - nearly one eighth of all foreign direct investment - in Poland since 1993. Last year alone German firms pumped in $1.17 (zł.3.8) billion - 15 percent of last year's total. Some fear that if the twin incentives of low labor costs and low corporate taxes are reduced for German companies, the well of German investment in Poland could dry up.

Lifting the burden

Lars Bosse, general director of the German-Polish Chamber of Commerce and Industry, isn't one of the worriers. He argues that investment is not a zero-sum game. "I think there is no relation between investment in the home country and investment abroad. If the situation will be better in Germany, there will be more investments - but this has no relation in our point of view with investments abroad," he says.

Robert Gwiazdowski, president of the Adam Smith Center, agrees, saying the change could even benefit Polish businesses. "[Losing German investments] is not a problem just now, because we have a common market. The idea of a common Europe is based on the idea that a common market is better than small national markets. Changes that a new German government can make in the German economy can help Polish enterprise to go into the German market," he says.

Services show-down

Among countries fearing the ominous 'Polish plumber', the term 'social dumping' has become a thinly veiled reference to the proposed Services Directive, which was scuttled this year and which would have opened up the services market across Europe to Polish entrepreneurs. It seems Merkel and the CDU are no more enthusiastic about the Directive than Gerhard Schroeder and the current German administration.

In the party's program, the CDU claims that it will "move to counter wage and social dumping as a result of the enlargement eastwards and the black economy." Polish plumbers, construction workers and dentists will not be able to offer their services unless there is a "shortage of workers" in the sector, or unless they can "contribute to top performance in science and research, industry and culture."

Market moves

Germany is one of the 12 old EU members that still hasn't opened up its labor market to workers from the new members, though 360,000 Poles already work there legally and it is estimated that many more work there in the shadows. If Merkel's plans come to fruition, they may be looking for a new source of income. The CDU wants to halt the inflow of immigrants by instituting cross-border checks. They will also require all foreigners to attend 'integration courses'.

Gwiazdowski believes Merkel would be unwise to push for this full implementation.

"In such a situation it would be a stupid move. Polish workers are absolutely necessary to the German economy. They need us like we need Ukrainians," he says. "So, if the German market is closed to Polish workers, it will be bad not only from the Polish workers' point of view, but also from the German economic point of view."

The big if

Indeed, some argue that if Merkel does manage to institute market reform (a big if, considering the nature of German politics), the results for Poland could only be positive. Germany already accounts for 30 percent of Poland's exports and 24 percent of its imports. A more dynamic German economy will most likely buy more Polish products as well as produce better quality goods to be sold in Poland. The healthier the German economy, the more prosperous the Polish one, the logic goes.

"This is no big miracle and no secret," says Volker Berresheim, head of economic and commercial services at the German Embassy. "If the German economy develops better dynamics and better growth rates, then this is also good for the neighbors, as it is good for Germany when the growth rates in Poland are developing. So we have an interest in enhancing our cooperation in order to mutually promote the economic dynamics in our countries."

Drifting apart

On the political level, one thing is for certain - there will be changes. Bilateral relations between Poland and Germany, after a very warm period in the 1990s, grew colder in the last few years. Chancellor Schroeder's firm opposition to the war in Iraq and Poland's support for the invasion put the two countries on opposite sides in the worldwide debate over the war.

In Europe the two countries also drifted apart as Poland and other countries of the 'new Europe' were seen by France and Germany - the defenders of the European social model - as supporters of economic liberalism and the British (implying Anglo-Saxon) economic model. Schroeder's policy towards Russia was also a reason for the cooling of German-Polish relations.

Mates with Moscow

The Chancellor had very good personal relations with President Vladimir Putin and even considering the importance of Russia to Germany those relations simply overlooked the Central and Eastern European countries. So what changes can we expect if, as expected, CDU takes power in a coalition with Christian Social Union (CSU)?

Angela Merkel and CDU have on a number of occasions criticized the current Chancellor's policy towards Russia and his too-friendly relations with Putin. The party's program states that the future government "wants to entertain good relations with Russia, but not without consulting our neighbors."

"I wouldn't overestimate the value of these declarations, but it is an important signal that the new government will be more sensitive to the voices of the countries of the CEE region when shaping its policy towards Russia," said Dr Sławomir Dębski, head of the analysis bureau of the Polish Institute of Foreign Affairs.

Election promises

He added that one must bear in mind that Germany is in the middle of an election campaign and those statements might have more to do with criticizing Schroeder rather than re-shaping German foreign policy.

"However, if similar statements are made after the elections this could mean a re-interpretation of policy towards Russia," he concluded.

Prof Piotr Madajczyk from the Polish Academy of Sciences sees a chance for Poland if German-Russian relations go back to a normal, not too personal level. "Poland will have bigger opportunities for influencing the EU's policy towards Moscow, since it will no longer be seen as an unhappy party who is being left aside, but rather as a partner who can cooperate on a more constructive level," he explained.

US on board

Both experts agree that provide a CDU/CSU coalitianwins the elections, Merkel's government will try to improve relations with the United States. "Schroeder's policy towards the US was a total catastrophe," Dr Dębski says. Prof. Madajczyk expects the divergence between the two countries over global issues to lose its sharpness. "This in turn implies that Polish and German foreign policies in relation to the US will converge," he said.

With German-US relations likely to improve, and considering that Merkel has praised the British labor market and Prime Minister Tony Blair's new vision of Europe, the question arises as to whether this could mean an erosion of the German-French alliance, which has been the driving - or lately rather the braking - force of Europe. There has been speculation that countries such as the United Kingdom, or Italy, and possibly even Poland, might join the powerful duo in shaping the continent's future.

Driving force

But Merkel dismissed the proposals saying she will stay true to her mentor, former Chancellor Helmut Kohl's policy of France and Germany as the driving force of Europe. Experts expect that France and Germany will continue to play a leading role in Europe, but Dr Dębski points out that because of the French 'non' to the European Constitution, relations may become weaker than in the past.

"I expect Germany to conduct a more independent policy. I wouldn't see any negative consequences of that for Poland - on the contrary, it seems like a chance for us," Dębski concludes.

With the more pro-American Christian Democrats in power, relations between Poland and Germany are expected to improve and historical issues could re-emerge.

Border disputes

Merkel has voiced her support for a center dedicated to marking the movement of Germans from what is now Poland's western limit. In Poland this is often seen as an attempt to re-write history by the Germans.

"The past is the only real controversy in relations between the two countries," Prof Madajczyk said. "Although Merkel has spoken against any financial compensations for the expelled on Poland's side, I'm afraid there might be support for radical claims from some circles of the CSU."

Dębski is not as pessimistic. "Once again we have to keep in mind that this is the election campaign. We do not know if the same line will be kept after the elections," he said.

The EU brake

Prof Madajczyk identifies another issue that could cause disagreement between the two countries. Merkel has clearly indicated that after Bulgaria, Romania and Croatia, further expansion of the EU should be halted, while Poland supports both Turkey's and especially Ukraine's EU aspirations.

"Germany is interested in stability in Ukraine, but not in its entrance to the EU. Poland on the other hand has a great interest in the Union's expansion eastwards," he said.

The German elections are, in fact, likely to mirror Poland's public ballot by replacing social democrats with a center-right government. This, Prof Madajczyk believes, may lay firm foundations for improving future relations between the two countries. "I expect better cooperation and better understanding between the two governments," he said.