Gunter Deuber of DB Research -
Central and Eastern Europe - as a homogeneous and clearly definable economic area - no longer exists. A few successful transition countries will progress along the convergence path, while for others this process could take decades. We do not, however, expect catastrophic exchange rate or debt crises, as Western Europe's own interests in CEE are huge.
CEE has been hit hard by the escalation of the financial crisis since September. CEE currencies depreciated sharply, various countries announced their own stabilisation measures, while others had to be stabilised with the assistance of the IMF, EU, ECB and partner countries. Structural weaknesses, masked by the surplus of global liquidity were ignored for too long.
If we take a second look, however, it is clear that 20 years after the transition process began "Eastern Europe" has ceased to exist as a homogeneous and clearly definable economic area. This is not only because the Slovenians and Slovaks have adopted the euro, or because the Slovenians and the Czechs are - on average - at least as rich as the Portuguese and the Greeks. Also, the turmoil in the global financial markets has not rocked all CEE countries with the same force. The brunt has been borne by the banking sectors and the currencies of those states that have developed extreme economic imbalances. Hungary, the Baltic states and Southeast European countries came unstuck due to high double-digit consumption and credit growth rates, lower savings ratios and excessive balance of payments deficits. This resulted from their heavy dependence on external financing, which is the consequence of the aforementioned imbalances. By contrast, the Czech Republic and Poland are relatively stable. This is the payoff for the moderation of their citizens, their higher propensity to save and independent monetary policy.
The first conclusion we draw is that a low propensity to save and the resulting dependencies are the primary major structural shortcomings of CEE countries in a comparison of emerging markets worldwide. In addition, the Czech Republic and Poland have attracted high volumes of productive direct investment. Their competitive environment, which approaches Western European standards, makes it worthwhile doing business in these markets. In international rankings of competitiveness, both countries regularly score better than longstanding EU member states like Portugal, Greece and Italy. The second conclusion is thus that in selected CEE countries the transition has taken the form of a profound reform process. So the investor uncertainty about other CEE countries and those hit hard by the crisis is also a reflection of the failure to implement structural reforms for many years - just like in Portugal, Greece or Italy.
Besides Poland and the Czech Republic, the governments of Slovenia and Slovakia have also undertaken structural reforms. These four key industrial nations in Europe will feel the cyclical global downturn, but will also be able to quickly participate in a renewed upturn. A drastic decline in GDP in Hungary and the Baltic states as well as tough adjustment processes in the real economies of Southeast Europe will nevertheless ensure that CEE as a region will be characterised by very mixed trends in 2009. We expect that those countries that successfully implemented reforms will continue the process of convergence. Countries that are already crisis-stricken will get hardly any respite for the time being because of inevitable corrections. The persistence of distinct prosperity gaps relative to Western Europe and Eastern Europe's four key industrial states on the easternmost fringes of Europe could thus remain an issue for decades yet to come. Interestingly, this would mean history repeating itself with regard to the first modernisation of CEE countries, before the advent of socialism.
The current crisis has clearly shown that structural weaknesses and economic imbalances of major proportions can also impact countries after they have joined the EU and even as a direct consequence of their joining. For example, Hungary - once a leading growth exponent - has committed errors of its own that have reduced its prosperity compared with the EU-27 average over the last five years.
The risk of far-reaching currency and government debt crises on Europe's eastern fringes has, however, been reduced by substantial IMF- and EU-backed emergency credit and assistance programmes (or more programmes to come). It is nevertheless worth reflecting on several aspects of these measures. Firstly, it has become clear that EU membership is a stabilising factor, but does not guarantee swift economic prosperity. Secondly, successful transition countries and EU member states from CEE are among the donor countries providing emergency assistance to Latvia (and Iceland). Thirdly, the support measures initiated in Western Europe indicate that there is substantial self-interest in the stabilisation of crisis-stricken CEE countries and in the avoidance of contagion (effects). The self-interest derives not least from the fact that 19 of the 25 companies with the highest turnover in CEE and eight of the 10 biggest banks there come from Western Europe. Western Europe is thus even partially to blame for the current situation. It was first and foremost Western European banks and companies that stoked the credit and consumption boom and fed the excessive expectations of some Eastern Europeans.
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