Max Gebhardt: China’s Belt and Road Initiative – Hungary at a Crossroads

My most recent publication, courtesy of the Atlantic Council approached the question of European infrastructure expansion from the perspective of China and their Belt and Road Initiative (BRI), however, Hungary already believes it has the answer to the question of how Europe should approach BRI. Hungary has moved forward to allow a Chinese-financed railroad extension from Belgrade to Budapest, going as far as to vocally stand against EU challenges to the no-bid project and finalize membership in China’s Asian Infrastructure Investment Bank (AIIB).

The latter is especially curious, as Prime Minister Victor Orban was adamantly against Hungary maintaining a debt with the International Monetary Fund (IMF) as it added foreign entanglement and control over Hungarian economic policy, while now potentially diving in to create the same relationship with a Chinese-majority controlled AIIB. What makes the IMF and AIIB so very different, and why is Chinese-financed infrastructure preferable to EU or IMF financed infrastructure?

The View from Budapest

Straddling both sides of the Danube, Budapest has stood as a gateway to the Orient for Europe since the days of the Roman Empire. Central and Eastern Europe (CEE), and the more recent “Eastern Opening,” are the euphemisms of choice used by Hungary to reflect its role as a country simultaneously straddling both “old” Central Europe and the new frontier of Eastern Europe and Asia. This worldview has given the current government of Hungary confidence that they possess an understanding of Asia and China in a way that major European powers do not, but this balancing of European and “Eastern” interests between major powers in conflict has been Hungary’s policy for a long time and driven its approach to handling conflicts historically.

Hungary has had to balance between the Austrian and the Ottoman Empires in the 17th and 18th century, between supporters of regional autonomy and European empires in 1848, between Germany and Russia in the first half of the 20th century, and most recently between the Soviet Union and the West during the Cold War. As for a guess on how Hungary might survive between any potential collision of the EU, Russia, and China, as George Freidman most recently noted at his presentation to Budapest Brain Bar “Is Hungary going to wind up on the wrong side of the war? We’ve had a perfect record so far.” Personally, I don’t know the future, but I agree with George Friedman’s assessment that Hungarian history presents a compelling picture of how things might go wrong.

As for a guess on how Hungary might survive between any potential collision of the EU, Russia, and China, as George Freidman most recently noted at his presentation to Budapest Brain Bar “Is Hungary going to wind up on the wrong side of the war? We’ve had a perfect record so far.”

Personally, I don’t know the future, but I agree with George Friedman’s assessment that Hungarian history presents a compelling picture of how things might go wrong.

Into the Weeds: Corruption at the Heart of it All

Europe and China, in particular, consistently prohibited public corruption by law, but also have very different views on the nature of relationships between the people and laws in theory and in practice. Speaking in a very general sense, Chinese find the shame that would result from not helping friends and family to be a much greater problem than any guilt felt by transgressing laws.

Public corruption and enriching friends and family, as a result, is tolerated so long as it remains within acceptable bounds set by the government – although President Xi has seen fit to tighten these bounds while also removing political opponents.

Broadly speaking, Europe historically has supported powerful families and aristocracy, ensuring that they keep their positions as they are “more equal” than others and building regulations and systems to reward existing winners. In many ways large multinational European companies, many owned by those same families, have taken the aristocracy’s place while preserving the systems that favor them. Large state-owned Chinese corporations might seem similar to Europe’s large corporations, but speaking historically they are a very new development in China and on the world stage, and still very dependent on the interpersonal relationships of individual leaders in government and leaders in industry.

Both Europe and China have massive corruption issues, but they are fundamentally different types of corruption. European corruption is usually a question of the close relationship between industry and government while Chinese corruption can be seen as collusion between networks of individuals in government and in business. Chinese corruption, in a way, is more fluid and less stable, while European corruption focuses on maintaining the status quo and stability.

In Hungary, we see corrupt behavior more akin to that of China – supporting friends and family – and that creates a certain affinity to the Chinese system over the European system. Russia merges the two, supporting some large state-owned enterprises, while oligarchs demonstrate a more friend-to-friend Chinese style of doing business. Firms like Deutsche Bank, BNP Paribas, Volkswagen, Airbus, and others have benefitted from the post-war European system, and might not have thrived or even survived without the current system. This can stifle competition and innovation in favor of stability, and given the history of Europe, stability has been hard to come by.

We have seen plenty of innovative “unicorns” in Western Europe and the United States, but no examples of CEE producing “unicorns” – new tech companies valued over $1 billion – without those companies losing majority control to outside investors. A major role is played by large financial institutions controlling the investment space, supported by EU policies that benefit them, such as ECB monetary easing boosting their balance sheets, creating an environment that doesn’t support the creation of a strong venture capital sector willing to take a minority stake while nurturing start-ups.

Start-ups are possible, but they quickly encounter capital barriers and are forced to sell out if they want to continue growing. Hungary’s LogMeIn was founded in Budapest but is now an American company based out of Boston, while Prezi has been supported almost entirely with American capital.

European financing was simply not a viable option because of the strings attached. Prime Minister Orban, proposes a third way – strong economic nationalism with collusive state financing and support – as an alternative to allow chosen politically loyal Hungarian companies and businessmen to compete on the European stage in hopes that they can grow to compete with established European firms.

So Why Does This Matter? Accepting Reality.

If Hungary does not see enough benefit from the EU’s financial system, and if corruption in Hungary tends to favor more of a Chinese or Russian model of doing business, then why is the answer not simply to embrace China and Russia and leave Europe behind?

There is the Hungary that Hungarians wish exists – a free, successful, and wholly independent power in the region – and the Hungary that is – a country chained to the EU by economic and social reality. According to the World Bank, trade represents 174% of Hungary’s GDP, up from 159% in 2010, and approximately 80% of Hungarian trade is intra-EU. According to MIT’s Trade Atlas, in 2015 only 4% of exports and 10% of imports involve Russia and China, including critical energy imports like natural gas from Russia.

By some estimates, as many as 500,000-1,000,000 Hungarians, as much as 5-10% of Hungary’s citizens, live and work outside of Hungary in other EU states thanks to EU free movement of labor.

Hungary’s reality is bound to the EU. Hungarians can dream all they want, but without the EU, Hungary’s economy would not exist. Hungary must either abandon its own oligarchic system and monetary policy — giving itself over to EU multinationals, the Euro, and the EU system — or abandon the EU as its primary marketplace for goods. Finding a new marketplace to replace the EU will take a generation, and likely fail. The choice is clear.

Getting Back to the Belt and Road Initiative…

The European Commission (EC) has made it known that it has no patience for Hungarian tenders (or lack thereof) that do not give “equal” weight to all companies. In a tender process that favors openness and focuses on the lowest bid, large and established European firms will tend to win on price, and their seasoned lobbying teams will outclass local competitors. Hungary has persisted in trying to accept a Chinese no-bid plan to improve trade links to China, betting big on Hungarian firms being able to somehow benefit from subcontracting, while the EC has made its opposition to this move very public.

Hungary has focused on the question of how these links are built in the tendering process, rather than the much more compelling question of why the links are necessary in the first place.

In my humble opinion, the EU, much like many historical empires, will tend towards autarky as it grows. Just look at EC forward planning for evidence of this. The current EC infrastructure plan makes no plans for funding interconnections between the EU and non-EU border states, let alone funding infrastructure far afield like China’s BRI proposes.

Of course, the EU does very significant trade with the rest of the world, but trade is not growing in importance. Since 2011 EU Trade as a percentage of GDP has been flat, around 81-83% of GDP. In China we have seen a major drop in the importance of trade, the beginning of a drop in the United States, and stagnant trade numbers in Russia. European trade is holding, but cannot hold for long in the face of the rest of the world reducing dependence on trade.

Are the Lamps Going Out?

Trade as a percentage of global GDP peaked once in 1913, and then the world suddenly changed course. Perhaps George Freidman is right that the next global conflict is upon us, the trade data would suggest a world pulling apart rather than globalizing, which could foreshadow conflict. If the EU, Russia, and China really are gearing up to go head to head in the economic sphere, Hungary is simply too small to think it can stand up to either side effectively, and it finds itself at a familiar choice – to choose between autonomy and survival.

If Hungary fully gives itself over to either China’s growing sphere of influence, Russia’s undeveloped Eurasian Economic Union, or deepens ties with the EU by adopting the Euro and surrendering an independent monetary policy, it would surrender some autonomy in the process. Either Brussels, Moscow, or Beijing will dominate politics and decision-making. Hungary cannot continue to stand apart from both and survive economically or politically.

As I suggested earlier, Hungary’s reality is that the EU has already “captured” Hungary. Hungary is a full EU member and has been so for over a decade. Hungary can reject reality, at its detriment. Hungary does have an opportunity to truly express an argument within the EU that all can accept – that the EU must look outward if it intends to survive, that it can learn something from the Chinese focus on improving trade links and infrastructure outward, and that the Belt and Road Initiative is not something to oppose on simple existential grounds, but rather an idea to be embraced and emulated so long as Europe benefits.

If Hungary can take a leadership role and make its voice heard on this matter within the EU, then it preserves its autonomy and benefits economically. On its current path, however, Hungary is bound to make Brussels reject the entire project altogether.

Written by Max Gebhardt

Disclaimer: The views expressed here are solely those of the author and do not in any way represent the views of any organization, company, or the U.S. Government.

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