AUGUST 2020 AUGUST WARSAW Building closer connections ISBN 978-83-66306-81-3 The Three Seas region as an economic area Warsaw, August 2020 Authors: Konrad Popławski, Jakub Jakóbowski Editors: Jakub Nowak, Małgorzata Wieteska Graphic design: Anna Olczak Graphic cooperation: Liliana Gałązka, Tomasz Gałązka, Sebastian Grzybowski Joanna Cisek Polish Economic Institute Al. Jerozolimskie 87 02-001 Warszawa © Copyright by Polski Instytut Ekonomiczny ISBN 978-83-66306-81-3 3 Table of contents Key findings. 4 The report in numbers �������������������������������������������������������������������������������� 6 1. The Three Seas – motives, genesis, institutions . 7 Via Carpatia – the result of Three Seas cooperation . .9 2. The Three Seas’ economic potential ������������������������������������������������ 10 3. Demographic and cultural potential ������������������������������������������������ 15 4. Development of connectivity in the Three Seas countries . .22 Energy . 24 Transport and logistics ����������������������������������������������������������������������������������������������� 26 Digital infrastructure ����������������������������������������������������������������������������������������������������31 5. Financing regional connectivity. 32 EU funds and the Three Seas’ instruments ������������������������������������������������������������32 External partners – the US, China, Japan ��������������������������������������������������������������� 35 Private investment and capital markets. 36 6. New Trends in the Three Seas region. .39 List of figures, tables and charts ������������������������������������������������������������ 41 References . .42 4 Key findings → The Three Seas Initiative is made up In these countries, the average share of val- of twelve EU member states in Central ue added generated by industrial produc- Europe: Austria, Bulgaria, Croatia, the tion in GDP is 16.7 per cent, compared to Czech Republic, Estonia, Hungary, Latvia, 13 per cent in the rest of the EU, that is al- Lithuania, Poland, Romania, Slovakia and most one-quarter lower. Slovenia. Now that Britain has left the EU, → Almost all the Three Seas countries face they cover 29 per cent of the EU’s territo- the spectre of the demographic trap. Their ry, have 25 per cent of its inhabitants and societies risk growing old before they get produce 19 per cent of its GDP. The initi- rich. Despite strong economic growth, al- ative is the result of consistent work by most all the countries in Central Europe Polish analytical circles backed by Polish have experienced waves of emigration and politicians and US diplomacy. The Three a low birth rate. Seas was originally inspired by a joint re- → For decades, infrastructural investments in port by two think tanks: Central Europe the Three Seas region focused on linking Energy Partners in Poland and the Atlantic it to industrial centres in Western Europe, Council in the US. while neglecting development along the → Despite many differences, the Three Seas north-south axis. This is one of the reasons countries are united by their geographi- why trade within the region has been rela- cal location and the resulting geopolitical tively stagnant, compared to trade with the consequences. This may be the source of rest of the EU. In almost all Central Europe, the region’s relatively strong attachment transport, logistics, energy and digital in- to transatlantic cooperation (compared to frastructure is relatively underdevel- Western Europe) and its sensitivity to se- oped, both within countries and between curity topics. Most of the Three Seas coun- them. Catching up with the most devel- tries are also part of a certain community oped countries in Western Europe in this of conservative values. dimension is a fundamental condition for → Over the past 15 years, the Three Seas the Three Seas’ further development, as countries have been among the most rap- well as the creation of a regional network idly-developing regions in the EU. In 2004- of connections driving economic growth. 2018, their share in generating EU GDP in- → The Three Seas region is gradually becom- creased by almost 4 percentage points, ing a significant hub for maritime and rail to 19 per cent. The leaders were Poland trade between Europe and Asia. The re- (5.3 per cent), Slovakia (4.8 per cent) and gion is investing heavily in transport infra- Romania (4.7 per cent). All the countries in structure, which fosters the development the region (except Croatia) grew at least of logistics and transport. This opens the three times faster than the EU average. way to increasing regional connectivity → The Three Seas countries already consti- and obtaining the benefits of the develop- tute an important industrial centre in the ment of intra-industry trade, using compar- EU, especially for the automotive sector. ative advantages and regional production Key findings 5 specialisations. This requires further in- Central Europe could be a significant new vestment in cross-border infrastructure source of funding for the development of and integration of the regional logistics infrastructure. Using new instruments to market. mobilise private capital is key, including → Energy cooperation as part of the Three through guarantees and limiting invest- Seas region seems to be a model for co- ment risk modelled on the new instru- operation in the region in other areas. Early ments for financing development in the EU on, the states recognised that the limit- (including the Juncker Plan). ed infrastructural connections between → The Three Seas Initiative could help cre- them in this area weaken their security and ate a new model for Central Europe’s de- competitiveness. velopment. On the one hand, countries → The economic consequences of the in the region could be hit by the con- COVID-19 pandemic and the reduction sequences of the crisis in the automo- in EU funds for the Three Seas countries tive sector, which will suffer significant expected in 2021-2027 means that a new losses due to the COVID-19 pandemic. source of external capital needs to be On the other hand, serious shifts in sup- found to finance the region’s further inte- ply chains, and perhaps also the return gration. The increased engagement of non- of some industrial production from Asia European development institutions – from to Europe, will become a source of new the US, Japan or China, among others – in investments in the Three Seas countries. 6 The report in numbers the average growth rate in Poland, per cent the fastest-growing economy 5.3 in the Three Seas region in 2004-2019 of EU GDP was generated 15 per cent by the Three Seas region in 2004 of EU GDP was generated 19 per cent by the Three Seas region in 2018 increase in trade turnover 243 per cent in Three Seas countries in 2004-2018 total capitalisation of the Three Seas EUR 347 billion stock exchanges in 2018 value of transport, energy and digital EUR billion projects funded by the EU in Three Seas 80 countries in 2014-2020 in the Trans-European Transport 5 out of 9 Network (TEN-T) pass through corridors the Three Seas region 7 1. The Three Seas – motives, genesis, institutions The Three Seas Initiative is a political become the largest beneficiary of mediating platform coordinated at the presidential level these flows and, through its infrastructural launched in 2015 on the initiative of Polish coherence, diversify energy supplies. President Andrzej Duda and Croatian President The idea of increasing connectivity Kolinda Grabar-Kitarović. It brings together in the Baltic, Adriatic and Black Sea region twelve EU member states in Central and Eastern proposed as part of the Three Seas Initiative Europe: Austria, Bulgaria, Croatia, the Czech expresses a new way of thinking about devel- Republic, Estonia, Hungary, Latvia, Lithuania, opment policy, which is increasingly widespread Poland, Romania, Slovakia and Slovenia. Now in the EU, the US and China. It aims for synergy that Britain has left the EU, the twelve Three Seas in the development of various types of infra- countries1 cover 29 per cent of the EU’s territory structure (transport, energy, digital) and focuses (1,210,000 km2), are home to 25 per cent of its in its long-term effects: stimulating transport inhabitants (112 million) and produce 19 per cent and logistics connections, creating new supply of its GDP (based on purchasing power parity). chains, closer integration of economies and The idea of building stronger con- societies and, as a result, creating a community nections between countries in Central Europe of interests when it comes to politics and is not entirely new. Ideas for managing the re- security. gion, where conflicts between the two powers There are many differences between the were often played out, emerged over the past Three Seas countries in terms of historical tra- 150 years. In the 19th Century, Prince Adam ditions. Austria, Poland and Bulgaria’s ex- Czartoryski was already trying to create, with periences have been completely different. the West’s support, a political community of Not all the countries belong to all the Western Poles, Czechs, Slovaks, Hungarians, Romanians institutions: Austria is not in NATO; just Austria, and Southern Slavs. German politician Friedrich Estonia, Lithuania, Latvia and Slovakia are Naumann proposed the idea of Mitteleuropa members of the Eurozone, and Bulgaria, Romania (covering a similar area to the Three Seas region) and Croatia have not yet received permission as a community of states linked by strong to join the Schengen Area.