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CEE Explained: Growing up, at last

27 august 2015, 13:43
0

The collapse of the Berlin Wall continues to be the defining factor in the mass of territory spanning Slovenia to the Urals, but 26 years on, it's time for the region to leave behind adolescence and take its place on the global stage.

 It's not easy to define Central and Eastern Europe as a “region”. If anything, it's more of a geographic area defined by one historic event: The fall of the Berlin Wall in 1989. 

The fall of the Wall unleashed strong emotions, ideas, new economic systems and massive changes to the daily life of all the citizens from Eastern Germany to Russia-Asia and down to Bulgaria and Macedonia in the south.

Now 26 years later, the experiment is coming of age. When doing an analysis of economies, especially newly “democratised” economies, it is often helpful to compare it to the life cycle of a person.

How many 26 year olds do you know who have not made any mistakes? Taken too much risk or had a few too many? Very few I'd wager.

   Making mistakes

Similarly, part of growing up for this region has been about making mistakes. Only now at the grand old age of 26 has it’s time come to focus on career, pensions, and education for the kids. In other words — time to grow up.

I have had the luxury of visiting most of the countries in this area and I have been impressed. This region, especially Eastern Europe, had become the go-to region for manufacturing. If you are driving a German car, it is very likely that part of the chassis and most certainly, the engine has been built in Poland, the Czech Republic, Hungary or Slovenia.

It is not only the German export machine but also the French industry that has deep roots into factories in Eastern Europe and now – even this late in the cycle - these countries sport growth at two to three times the European norm.

A miracle? Hardly, but driven by cheap unit labour costs and a desperate need to facilitate change, it has in particular been facilitated by access to credit through EU funds, while nominal competitor old Europe, has struggled to get its hands on credit.

When I look back at my travels, there is one common denominator that unites the region — namely a willingness to open up for foreign capital. At the same time, there is a hesitancy to open up domestic markets.

This needs to change – in Hungary, Turkey and Croatia to mention a few – it’s more about “getting” than “giving”, as in complying with the stipulations for credit and support.

But that caveat aside, this region offers great hope for Europe as a whole. The productive base of Eastern Europe and the resources of Russia with all its satellite members is a perfect combination for old Europe’s technology, logistics and know-how.

I have often said that in economic terms, Russia and Europe would be a perfect marriage.

Europe is net short of energy and most resources, and Russia is short capital, investments, and technology. Both should be engaged in business-to-business exchanges but instead the relationship is driven by top-down political decisions, which have no room for real people or real business.

The real full upside for this region lies with two things:

   One — Russia’s relationship with Europe.

Many countries are actively, and some almost desperately, trying to decouple from Russia. Some are succeeding, some not and, what is most concerning, some do not want to change too much.

Russia may have its share of trouble with growth and its new model, but it remains a dominant force in many export/import ledgers.

The sanctions presently imposed on Russia are having negative spillover into just about all countries in this region. That is either through artificial trade patterns, lack of export potential, or simply through too much red tape.

Russia remains the dominant force through the region and sanctions are creating spillover throughout Central & Eastern Europe. Photo: iStock

  Two — So long ideology

For the whole region to move forward, there needs to be a farewell to the ideologies of 1989, which remain in place, certainly in political circles but also in the minds of many older generations.

There needs to be an understanding that open borders, exchange of information and ideas, business-to-business, and free competition does not make the domestic economy weaker but stronger and less volatile.

Looking forward to the rest of 2015 and 2016, this region will have several challenges. Low energy and commodity prices will test the fiscal discipline, the lack of export growth will hurt as data comes in from the second half off 2015, and stock markets will continue to come under pressure.

However, at the tender age of 26, there is plenty of time and room for improvement. I remain extremely positive about this region’s ability to renew and deal with problems, but the region overall now needs to act its age and grow up.

It's time to leave behind, old, worn-out ideologies. Photo: iStock


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