Economic waters

By bne IntelliNews June 19, 2013

Tim Gosling in Prague -

Around two weeks after torrential rains brought the threat of catastrophic floods to Central Europe, the swollen rivers had mercifully receded, the deluge headed for the oceans to the north and south. The floods left behind around 20 dead and a trail of destruction to the tune of billions of euros. However, there is also hope that the clean-up could help pull some countries out of recession.

As the waters rose at the start of June, Austria, Germany and the Czech Republic - at the epicentre - held their breath, and prayed that the defences built in the wake of the 2002 disaster would hold. Despite the loss of life and damage, they did for the most part; a trend followed as the cresting water headed along river courses to the north and via the Danube through Slovakia and Hungary.

The Czech Republic announced a state of emergency on June 2 as the Vltava and Labe Rivers rose ominously following days of heavy rain. By June 12, the waters were (more gently) ravaging towns in northern Germany as the swell in the Labe (by that point known as the Elbe) pushed onwards. Meanwhile Hungarians were breathing more easily as the level of the Danube continued to fall from the 50-year high of 8.95 metres at which it had peaked two days earlier.

Despite spasms of storms prompting flash floods on June 9, the Mayor of Prague declared the same day that "the worst is over," and ordered the removal of the highest anti-flood barriers in the city to start. Thanks to those defences, the capital's greatest indignity was the closure of a large chunk of its transport infrastructure for several days. Other towns in the region of Bohemia - such as Melnik or Usti nad Labem - were not so lucky, with tens of thousands needing to be evacuated.

The floods of 2002 devastated much of the region, as water invaded major cities to bring them to a halt for days and destroy huge swathes of property. That prompted states across the region to announce expensive programmes to improve defences. Eleven years later, the waters returned to test those claims.

According to Erste Bank, a total of €3.3bn was spent across Central and Eastern Europe in the intervening years, and that "helped them to reduce the losses significantly," the bank's analysts suggest. They estimate the economic damage from the latest episode at a fraction of the €6bn or so incurred in 2002.

Counting the cost

The region's insurers are on the front line of all this. The Czech Insurance Association said on June 6 that it may have to pay out up to CZK7.5bn (€290m). Moody's Investors Service, the rating agency, said that although the losses are credit negative for those with exposure, "current information suggests that total claims to insurers will be less than the €3.5bn" that the industry incurred following the 2002 disaster.

Much harder to quantify is the effect on the wider economy, especially over the longer term. Large-scale operational stoppages were limited. However, it may never be known how many shops or fields were flooded, how many tourist trips cancelled, or how many deliveries and meetings failed to take place due to transport interruptions.

Carmaker Porsche was forced to close a German production line, but not because either it - or its supplier of body parts in Slovakia - was under threat from the water. Rather, those car parts couldn't navigate their way through the blocked Czech transport system.

However, Erste was already having a bash at pinning down some estimates as early as the first week of June. Analyst Martin Lobotka suggested the tab would clearly be a lot lower than the CZK73bn seen in 2002, and is more likely to be around CZK30bn.

With waters still high in the Danube and other rivers in Slovakia and Hungary at the time of writing, the tally is less advanced in those countries. Thanks to the strong performance of Slovakia's flood defences, the negative effects on GDP are likely to be negligible, Erste reckons. Due to limited closures of major businesses, the negative impact on Hungarian GDP should be below 0.2%, the bank notes, adding the events will affect its economic forecasts for the country.

An annoying buzz

On top of the clean-up, however, the worry by mid-June had turned to potential mudslides and an infestation of mosquitoes. While Czech authorities were mulling a plan to spray lying water containing millions of larvae, a new section of the D8 highway - still under construction, thankfully - was destroyed by a massive mudslide, with damage estimated in the hundreds of millions of crowns.

That presents the potential silver lining. As Governor Miroslav Singer of the Czech National Bank put it, the floods may have wiped out wealth, but they should also offer a small - but possibly significant - boost to growth in a region crying out for some economic momentum.

The Czech government has pledged to spend CZK7bn on infrastructure and other repairs, and forgive another CZK5bn in taxes for affected firms. In effect, Prague's hitherto harsh austerity drive - widely criticized for helping keep the economy in recession since the start of 2012 - will be forcibly derailed. Similar repairs and reconstruction will be needed in Slovakia and Hungary. That may worsen budget deficits or state debt levels somewhat, but the stimulus it will offer the region's economies is more important right now.

On top of the repairs, Erste suggests the positive experience with the flood protection systems will prompt governments to invest more in this area in the coming years. The Slovak environment ministry has already announced a plan to apply for €400m in EU funds for further anti-flood protection measures to be completed by 2020.

While the potential boost to growth will clearly be limited - most estimates suggest a maximum of 0.2% of GDP - it could at least push the Czech Republic over an important threshold. With the Czech government forecasting a stagnant economy in 2013, the flood could end up lifting the economy out of its longest ever recession. Hungary is in a similar boat.

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