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The New Silk Road, part II: implications for Europe

By Stephan Barisitz, Foreign Research Division, Oesterreichische Nationalbank; and
Alice Radzyner, European Affairs and International Financial Organizations Division, Oesterreichische Nationalbank

This paper is the second of a set of twin studies on the New Silk Road (NSR). While part I shows how the NSR is developing through the growing number of Chinese projects in several Eurasian and Asian emerging markets, part II focuses on Southeastern Europe (SEE), where Chinese investments seem to be paving the way toward the heart of the continent.

We feel that our brief discussion of concrete projects can provide valuable geoeconomic and geopolitical insights that help us understand the motives, goals and implications of this major endeavor. As far as we know, no other study has yet analyzed the NSR’s impact on Europe from a project-oriented perspective. Part II argues that trade facilitation that is, or may be, brought about by major infrastructural improvements, largely driven by Chinese investors, should have significant economic policy implications: first, for SEE and second, for the EU in the sense that it should strive for synergies with existing European connectivity initiatives.

Part II is structured as follows: Section 1 focuses on Europe and the NSR as well as on incentives and (controversial) institutional conditions for investments under the NSR or One Belt, One Road (OBOR) initiative. It discusses advantages and possibly problematic aspects from the viewpoint of the EU, China and SEE. Section 2 provides a discussion of the most important infrastructural links in SEE and the way these connect the region to the heart of Europe. Section 3 lists the relevant Chinese NSR projects in each SEE country and discusses their economic weight by comparing project volumes with the respective country’s FDI inflows. Section 4 summarizes, draws some conclusions and offers an outlook for possible geopolitical developments.

2. Infrastructural links and Chinese investments

As mentioned above, a strong network of ports, logistical centers and railroads will allow Chinese goods to be transported more rapidly to Western Europe and will thus intensify east-west trade. With sea shipping or the MSR being the cheapest (though not the quickest) route from the Far East to Europe, a major building block for Chinese investments consisted in buying into the Greek port of Piraeus, the first major European container port for ships entering the Mediterranean from the Suez Canal. But before we look in more detail at the Piraeus project, two other NSR corridors that link, or are intended to link, China with Europe should be introduced briefly. They are both land corridors and thus form part of the Silk Road Economic Belt (SREB). First, the New Eurasian Land Bridge passing through Moscow, Warsaw and on to Duisburg already exists and is being used (particularly its rail connection, the Trans-Eurasia-Express; see part I).8 Second, the China Central Asia-West Asia Economic Corridor may not only become a gateway for oil and gas (see part I) but may also link up with Europe via Turkey, once respective infrastructure connections are built. Actually, the MSR and its extension and the New Eurasian Land Bridge may directly link up with the Pan-European transport corridors established or projected by the EU and its neighboring countries:

  • the MSR could connect to Pan-European transport corridor X (branch B): Thessaloniki-Belgrade-Novi Sad-Budapest, and
  • the New Eurasian Land Bridge could link up with Pan-European transport corridor II: Nizhny Novgorod-Moscow-Minsk-Warsaw-Berlin.

The cooperative modernization of these largely rail-dominated connections leading from the southeast and the east into the heart of Europe could contribute to boosting trade and connectivity both between China and Europe and with numerous neighboring emerging markets.

Back to the MSR and the Piraeus project: COSCO took over 67% of the Greek state-owned Piraeus Port Authority (PPA) in August 2016, making COSCO the controlling shareholder, holding shares with a total value of EUR 368.5 million. COSCO now has management and operation rights to run the PPA until 2052 and it has already turned the port into a well-functioning and profitable enterprise that is now called the “Gateway to Europe.” COSCO has also agreed to carry out further investments of EUR 355 million. Transit time between Shanghai and Piraeus is about 22 days, which is 10 days shorter than the route between Shanghai and the northwest European ports of Rotterdam and Hamburg. Consequently, the duration for transporting goods from China to Europe has been reduced by one and a half weeks. In view of this cut in transit time, Beijing has already announced its plans to buy into other SEE ports such as Thessaloniki, Greece, or Bar, Montenegro.

Many projects financed and carried out by Chinese investors consist of modernizing or extending railroads, the most prominent one being the rail connection between Budapest and Belgrade (budget: EUR 1.5 billion to EUR 2 billion). Decided upon in 2013, the project reduces the travel time between the two cities from 8 hours to 2.4 hours. The plan is to further extend the route to Skopje, FYR Macedonia, and Athens, Greece. In the Balkans, the NSR will thus pass through the existing Pan-European transport corridor X, which links Central Europe to the Aegean Sea via Hungary, Serbia, FYR Macedonia and Greece and is being modernized step by step. Highways and railroads are also being extended to the Adriatic coast and its ports (e.g. the highway between Belgrade and Bar). Beside rail, road and sea transport, Chinese companies seem to be looking into air links as well. Most recently, the China Everbright Group bought the operating company of Tirana International Airport ..…

4. Summary and conclusions

In times of political uncertainty and rising nationalism in Europe, particularly those SEE countries that still have a long way to go before they join the EU will continue to look for quicker and easier financing alternatives before EU accession. Welcoming Chinese investments is part of this approach. Through the New Silk Road (NSR) or One Belt, One Road (OBOR) initiative, China and Europe are increasingly being linked together through the building or modernization of infrastructural trajectories which include rail, road, port, airport, pipeline, energy and communication infrastructure and logistics. With extensive financial support and experience being injected from China, roads, railroads and ports are being built or modernized in SEE in little time and without being held up by bureaucratic and legal obstacles; not to mention the fact that certain competition, tendering and procurement procedures as well as national safety and labor laws seem to be partly bypassed. In the future, more research will be needed to analyze these developments and to look deeper into the extent to which EU trade laws, tendering procedures and national regulations have been ignored so far.

This study lists the most important Chinese-financed projects in SEE and shows that the economic weight of these investments in the receiving countries cannot be ignored. In fact, the shares of Chinese-financed projects within total annual gross FDI inflows are as high as 8% in Serbia, 10% in Albania, 26% in Montenegro and Romania and even 48% in Bosnia and Herzegovina. Since Chinese investors often employ their own workers and preferably rely on their own resources, the direct spillovers of these projects to the local economies may be limited.

Nevertheless, we will be able to witness tangible effects of the NSR initiative for the SEE region in the near future: The modernization of rail and road infrastructures alone helps speed up the transport of persons and goods, which obviously not only benefits the NSR but also the SEE economies. SEE’s participation in the NSR initiative will probably stimulate the region’s economic growth and may even contribute to overcoming its traditional peripheral position in Europe. In fact, strengthened economic cooperation can only benefit all countries involved. From an EU perspective, access to EU funding for candidate and potential candidate countries will have to be improved so that investments from China are not considered attractive merely because financing The New Silk Road, part II: implications for Europe 80 OESTERREICHISCHE NATIONALBANK alternatives are lacking. Moreover, the EU will need to work together with SEE and China to effectively use SEE’s potential in a way to fulfill common interests and deepen EU-China relations. The OBOR initiative, for instance, goes beyond mere economic investments and translates into a framework for “soft power” not least through the 16+1 initiative’s wide range of activities.

This becomes even more important in a context where the U.S. administration has taken a protectionist stance on U.S.-Chinese trade relations and left open the future of trade negotiations with the EU. China and Europe now have the possibility to redefine their partnership and move closer together. In fact, the EU is China’s biggest trading partner and China is the EU’s second most important trading partner after the U.S.A. China and the EU are currently speeding up their negotiations on trade liberalization, given that European investors still face major barriers on Chinese markets. Once the conditions for European investors in China improve, Chinese FDI in Europe will also be welcomed more openly. From this point of view, the further enhancement of the NSR may truly become a turning point in China-EU trade and political relations.

This article was first published in Focus on European Economic Integration, issue Q4/17. Please click to read the full article.

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