12 juli 2011
Risks posed by a potential economic downturn in the core of Europe

While Greece – and with it the stability of the euro – is facing a struggle of sorts for survival at the moment, most of the countries in Central and Eastern Europe, including Poland and the Czech Republic, have a solid economic foundation to stand on. Hungary, which was on the brink of going bankrupt itself two years ago, has brought its budget under control for the most part with financial help from the IMF, EU and World Bank as well as its own budget consolidation measures (a requirement by the lenders). Now, despite a high level of government debt (80%), the country even has a budget surplus. Romania and Ukraine have also managed to improve their fundamentals considerably over the past two years. As a result, the debt situation in the CEE countries is now much better overall than the EU average. Foreign-currency loans are still a weak point, but the situation has turned positive with the help of various measures including the Vienna Initiative, which called on foreign banks to coordinate their actions when it comes to loans in Eastern Europe in order to keep the market liquid. One decisive factor in the stability of Central and Eastern Europe is the fact that its countries are only marginally exposed to Greece.

Germany is the most important trading partner for most of the countries – with the exception of Bulgaria, which has closer economic ties with Greece due to its close proximity. Thus, in terms of foreign trade relations, the crisis in Greece has had only a very minimal impact on most of the countries in Central and Eastern Europe. In addition, there are currently no signs of financial contagion (when the volatility of a country in crisis spreads to the financial market of another country). This could occur if banking transactions came to a complete standstill, but that is not the case at the moment.  In contrast to most of the CEE countries, Greece’s fundamentals were not sound and the country lost its contact to the capital market due to its excessive debt. The massive austerity measures to combat this were then bound to have negative effects on growth. Eastern European countries such as Poland and the Czech Republic do not face these same problems. Due to their low unit labour costs, these countries are still used as production locations by major companies, which brings capital into the countries.

 If these capital inflows became too massive, the countries with their own currencies would at least have the option of using currency appreciation to control exchange rates. However, developing countries with solid fundamentals are rather ambivalent about massive capital inflows: The resulting appreciation pressure on the exchange rate also raises concerns that the country’s competitiveness and economic growth could suffer over the short term. Conclusion:As long as the problem area in the Eurozone does not spread further – and, for instance, cause Spain to draw upon the billions coming down from the EU – and as long as the massive problems with Greece are handled in a cool-headed, controlled manner, the current crisis will not have any long-term, painful consequences for the countries in Central and Eastern Europe. However, a downturn in the core countries of the EU would have longer-lasting effects on the CEE countries. In this case, the strong trade dependence on Germany would cause export figures to suffer along with the robust fundamental data of the countries in Central and Eastern Europe. Romania and Bulgaria may be the exceptions to this, since they face different influencing factors as a result of their geographical proximity to Greece (for example, major Greek banks are active in both countries).   The author Ronald Schneider manages Eastern European bond funds for Austria’s leading fund management firm, Raiffeisen Capital Management.