Now that the Obama White House has officially scrapped plans for an Eastern European Missile Defense shield (on the 70th anniversary of the Soviet invasion no less!), many have been left to wonder if there is anything the US could or should do to redeem their standing in the eyes of many slighted Poles and disillusioned Czechs. In short, the answer is yes. And it comes in the form of greater economic engagement.

For many Poles, the missile defense system symbolized more than just the promise of military and geopolitical security. It also brought the prospect of long-term economic stability, in the form of American trade, capital and foreign direct investment. Along with ground based interceptors, came expectations of increased defense knowledge sharing, military equipment sales and logistics support by both Polish civilian and military personnel.
 
While US-Polish defense cooperation is far from finished, there has been a clear shift in US priorities. However, there are still opportunities to further US-Polish ties through greater economic cooperation, particularly in the manufacturing, IT and environmental technologies sectors. Both US and Polish small and medium-sized enterprises (SMEs) stand to benefit from improved trade relations and expanded export markets. This is especially true for US manufacturers – many of them located in the recession hit Midwest – struggling to compete with cheaper producers in Asia.

According to the Polish Information and Foreign Investment Agency (PAIiIZ), the US ranks 6th in terms of FDI in Poland – behind Germany, France and even Luxembourg – making up only five percent of Poland’s total. Equally, Poland’s exports to the US do not even place it in the top 15.

Thus, both countries have a lot to gain economically and therefore politically.  President Obama and Secretary of State Clinton should be more aware of this, especially since both have roots in Chicago, a city well-known for having the one of the largest Polish (among other Eastern European) communities in the US.

As the dust settles on the battered economies of Central Europe, winners and losers have clearly emerged on this the one-year anniversary of the global financial crisis.

Poland, along with the Czech Republic and Slovakia, stand ahead of the pack due to prudent economic policies, manageable current account deficits and lower macroeconomic imbalances (including lower levels of indebtedness).

Romania's and Bulgaria's growth prospects, which face stiff competition from healthier CEE economies, will continue to be burdened by deep political and economic deficiencies. Unless major initiatives, both at the local and EU level, address chronic corruption and structural asymmetries, the two countries are headed for stagnation.

Finally, the Baltic States and Hungary, saddled with debt and strict austerity programs, have the toughest road ahead and the least amount of flexibility in their recovery programs.

Despite their various predicaments, Central Europe has the opportunity to emerge stronger and more economically viable. The key is to learn from previous mistakes (domestic, US and wider EU), resist reform fatigue and continue to converge with the EU-15. That responsibility must not rest solely on Central Europe.

The EU, particularly its wealthier members, must ensure that Central Europe continues to be deeply anchored in market principles and EU institutions. Most importantly, they must convince the region that they are critical players in Europe’s overall recovery and prosperity.

For Poland, the best path forward includes keeping public spending low, taking advantage of EU funds for major reforms (healthcare, education, infrastructure and business climate) and setting a date for euro entry that is most favorable to its economic development.

Most importantly, Poland must refrain from excessive expansionary fiscal policies. Not only will Poland be unable to afford the extremely high interest rates required to cover the cost of borrowing, it will further delay euro entry.

Instead, Poland should accelerate critical structural market reforms to gain a competitive edge, before the window of opportunity closes.

Even though Poland has managed to avoid recession as the only EU member to post positive growth forecasts for 2009, its economy remains susceptible to sluggish recovery. At a time when EU-wide solutions are essential, some Western European governments continue to prioritize domestic agendas over upholding tenants of the common market.

This leadership gap is most evident in Germany, a country whose historical legacy makes it a natural choice for encouraging convergence efforts and strengthening economic ties with Central Europe, especially Poland.

Instead, Germany has fallen victim to increased protectionist and domestic political pressures, heightened by this month’s national elections. Germany’s response to the crisis has been timid from the start, with harsh criticism by Angela Merkel towards EU-wide bank bailouts for Central European subsidiaries and other pan-European coordination efforts. In May, the German government announced that it was keeping labor restrictions on workers from Central Europe.

The controls were meant to expire in 2009, but Germany invoked a clause allowing two more years in case of “serious labor-market disturbances.” The idea that the free movement of Poles or Slovaks would threaten “serious” disruption does not have much credibility, as Germany still has sizable shortages of skilled labor in certain areas. Moreover, Berlin’s preference for a Magna-Sberbank bid for Opel was driven by promises to keep auto jobs in Germany, not operational efficiencies.

The outcome of Germany’s elections will not only be a referendum on its free market policies, but will also have a substantial impact on future Polish economic prospects. As Poland’s largest trading partner, Germany will determine its willingness to diversify beyond export-driven growth and increase internal demand through additional trade and market access for cost competitive Central Europe.

In the past, Germany has realized the importance of tying its security to improved economic relations with neighbors like France (EU Coal and Steel Community) and Russia (Nord-Stream/Gazprom). It is time it did the same with Poland.

As Poland gears up for Prime Minister Vladimir Putin’s visit to Warsaw (part of a wider international gathering to commemorate the breakout of WW II) government officials are working behind the scenes to ensure adequate Russian natural gas supplies to avoid another shut off this winter. At the same time, global climate and EU emissions standards are forcing Poland to lower the use of coal, its primary domestic energy source. In its quest for greater energy security Poland, like many other Central European countries, is looking to diversify its energy sources and suppliers. By investing in renewable energy, Poland not only stands to become a regional leader in the “green” revolution, but also strengthens its long-term growth prospects.

Poland (along with Bulgaria and the Czech Republic), is considered an up-and-coming wind energy destination. Industry insiders pinpoint good wind resources, improving energy infrastructure and EU subsidies as driving forces behind a viable wind industry, one that could eventually rival established producers such as Germany or Spain. GCube, a leading insurance underwriting agency dealing with renewable energy, has identified Central Europe as a growing market. This April, German electricity producer RWE announced plans to invest €500 (zł.2,000) million in Polish wind farms. Even the European Bank for Reconstruction and Development has stepped in to finance up to €35 (zł.143) million for the construction and operation of three wind farm projects in southeastern Poland.

The economic impact of developing a renewable energy sector in Poland is substantial. First, it sets higher standards through the application of international best practices and environmental impact assessments. This is critical to maintaining competitiveness across Poland’s SMEs, as they currently spend less on environmental compliance.

Second, it enables diversification away from higher labor- (and energy-) intensive manufacturing towards a more knowledge based “green” economy. Finally, making early investments will encourage long-term investor interest, especially as Poland seeks to attract investment and build partnerships with leading European and American environmental technology firms.

Despite current market uncertainty, Central Europe will remain an attractive business destination for Western investors. This is also true for emerging giants in Asia. Prior to the economic crisis, a number of Central European governments sought to diversify their trade relationships and lower export dependence on the EU-15. Consequently, growing Chinese and Indian business interest in the region, particularly in Poland, presents new opportunities for greater economic diversification as well as long-term growth prospects. This is key, since Asian economies are forecast to emerge as the leaders of the global recovery (while the EU-15 struggles with a lethargic recovery). Last year, Polish delegations traveled to China and India in an attempt to build foreign investment interest, stressing Poland’s competitive labor and operational costs, developing infrastructure and business law reforms.

Currently, both Chinese and Indian firms are vying to win lucrative road and infrastructure contracts in Poland. Moreover, this September Warsaw will host its inaugural LifeStyle Expo, a trade fair aimed at bringing together Chinese and Polish entrepreneurs to foster stronger business and trade relations. Indian investment is also increasing, specifically in the IT, manufacturing and biotech sectors.

As these new stakeholders increase their ties to Poland and other Central European economies, they bring additional influence on the future economic and political developments in the region. As evidenced by the overall lack of EU-wide coordinated response to the global recession, and the enduring appeal of economic nationalism in some Western member states, Poland has a clear interest in diversifying its pool of foreign investors and trading partners. Simultaneously, this will present new challenges for Western Europe and the United States. As the region’s primary investors, both can anticipate increased competition from emerging global Asian brands, especially as cash abundant economies like China continue to penetrate Central Europe’s markets with badly needed capital and business opportunities.