Devaluation card may have helped some countries
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Playing catch-up
While playing the devaluation card may have helped some countries in the region ease the short-term pain of the recession, what about the longer term?
"They need to think about other drivers of competitiveness than low cost," says Erik Berglof, chief economist at the European Bank for Reconstruction and Development (EBRD).
Romania, for example, whose currency dropped 20% last year, has seen a big rise in labour costs wipe out much of its price advantage.
More importantly, the entire region still suffers from a huge "convergence gap" with the West, marked by lower living standards and poorer infrastructure.
Normally this would create the potential for a lot of catch-up growth.
But Mr Berglof says the crisis in the eurozone, the region's biggest export market by far, is bad news.
What a drag
If Europe's leaders fail to deal with the weaknesses in the single currency exposed by the crisis, the continent could face years of grindingly low growth.
And slow growth in Western Europe will inevitably be a serious drag on Eastern Europe's exports.
Selling their wares to other parts of the world could provide an alternative, but only in theory.
"In our region there's not much of an option," says Mr Berglof. "It's like asking Mexico to diversify away from the United States."
The nearby Russian market may at least be one alternative, as the country has very little manufacturing industry of its own and pays for a lot of imports with all the oil and gas it exports.
But Russia is not a big market, cautions the EBRD economist.
German model
A path already well-trodden by the Central Europeans, such as the Poles, Czechs and Hungarians, is closer integration into the German manufacturing leviathan, says Mr Blum at Ithuba Capital.
"I wouldn't undercut the importance of the German recovery," he advises.
The Central Europeans now do a lot of business selling equipment to West European manufacturers, or playing host to factories that form part of Western companies' supply chains.
As such, a lot of the European demand for these countries' exports is actually driven by global demand for the German export machine.
The biggest crisis may instead be faced by their Balkan cousins, the Romanians and Bulgarians, to the south, according to Peter Brezinschek, chief economist of Austrian bank RZB.
"In Central Europe, most foreign investment went into greenfield sites, promoting exports," says Mr Brezinschek.
But in the Balkans, he says, money poured into sectors such as housing construction, utilities or telephone networks that were oriented towards the domestic economy and did little to improve export competitiveness.
Investment binge
Mr Brezinschek thinks the Balkans would do well to follow the Central Europeans' lead.
But he says there is also still a shortage of basic infrastructure.
"The infrastructure is really terrible," says Mr Brezinschek, who points as an example to the near absence of motorways in Romania.
He says there also need to be major improvements in energy efficiency.
Mr Berglof at the EBRD agrees that serious investment spending is needed across the whole of Eastern Europe, with one big area being education.
"Managers typically list skills as being the number one obstacle they face," he notes.
So could these countries copy China's example, and offset weak export demand by ramping up government investment spending?
"An investment binge is not an option," cautions Mr Berglof. Why? Because the money simply is not there.
Just like their West European counterparts, governments in the region are busy cutting back their spending.
And, says Mr Berglof, private investment spending is also more difficult "in an environment of no very well functioning institutions" - a well-known euphemism for corruption and organised crime.
Home grown
Borrowing from abroad is less of an option these days. It was an abuse of cheap foreign loans that helped push Hungary and others into the arms of the IMF during the 2008 crisis.
Instead, with their own citizens likely to be a lot more cautious with their money in the coming years, governments will need to find better ways of funnelling those savings into local businesses.
Mr Berglof points out that, unlike many of its eastern neighbours, the Czechs have been borrowing and lending to each other in their own currency - the koruna - for years.
Because of this, "the least affected by the financial aspect of the crisis was the Czech Republic", he points out.
In its latest transition report, the EBRD recommends other countries follow the same route of financing themselves in their own currency, using their own domestic savings and home grown capital markets.
So is this a tacit recognition by the multilateral agency that euro membership is now off the cards?
"No," insists Mr Berglof. "It is an important step on the way to the euro."
The Czechs may beg to disagree.
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Submitted
2011-01-03 22:21:37 |
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