RussiaPrussia
01-25-2014, 04:08 PM
Central Europe's Convergence With The West Has Slowed Dramatically (http://www.forbes.com/sites/markadomanis/2014/01/24/central-europes-convergence-with-the-west-has-slowed-dramatically/)
Via Ed Lucas, with whom I almost never agree but who is never short of interesting ideas, I stumbled upon a report about Central Europe a decade after it’s accession to the EU. While the report is honest about some of the region’s difficulties, it is nonetheless extremely upbeat about the region’s economic trajectory calling it “a growth engine for the wider EU economy” and noting that the region was forecast to grow more quickly than Western Europe for the foreseeable future. Basically, the report says that “convergence” will continue, and that a generation or two from now the region will be on a level of development roughly equal to that of Western Europe.
The report accurately notes that debt dynamics in Central Europe are more favorable than in the West, and that the region’s workforce, which is low-cost and highly educated, presents an alluring target for European businesses looking to improve their competitive position. The problem is that, ever since the onset of the financial crisis, the region’s convergence with Western Europe has slowed to a crawl.
I quickly created a chart showing the weighted average income of the new EU members (Bulgaria, Czech Republic, Estonia, Croatia, Hungary, Lithuania, Latvia, Poland, Romania, and Slovakia) as a percentage of weighted average income in a “core” set of countries including Belgium, Austria, Germany, France, Netherlands, the UK, Switzerland, and Denmark. As you can tell by that roster, I deliberately avoided including the PIGS. Why? Well because Central Europe would look like it was “converging” with those countries even if it was totally stagnant. Everyone looks like a good swimmer in comparison to the guy who’s drowning. I think it’s more useful to look at developed countries that haven’t totally imploded during the crisis (though many of the “core” countries I examined are hardly going gangbusters: France, the UK, and the Netherlands are all either at or below their pre-crisis peaks in GDP).
http://b-i.forbesimg.com/markadomanis/files/2014/01/Core-Europe-New-EU.png
As you can clearly see in the chart although the new EU members experienced rapid convergence during the bubble years, ever since the bubble popped their convergence has slowed dramatically. In fact, if convergence continues at its 2008-13 pace (about 0.37% per annum) it would take the new EU members over a hundred years to match the core countries’ average level of income. Now it’s highly unlikely that things will develop in such a predictable, linear fashion and I’m not suggesting that we should all set our watches on the assumption that average incomes in Central Europe will match those in Western Europe in 2115. However, to the extent that Central Europe’s most rapid and sustained burst of convergence coincided with a credit bubble that is highly unlikely to be repeated, it seems more likely than not that the region’s convergence will be slower in the future than it was in the past.
It might make sense to think that, in an environment of austerity, the more nimble and debt-averse countries in Central Europe would dramatically out compete their Western peers. If anything, the opposite seems to be the case: tight money and tight budgets seem to systemically favor developed countries at the expense of the less mature, post-communist economies. To the extent that Europe’s future will be one of tight money and tight budgets, that suggests that Central Europe will be in for a rough ride.
Via Ed Lucas, with whom I almost never agree but who is never short of interesting ideas, I stumbled upon a report about Central Europe a decade after it’s accession to the EU. While the report is honest about some of the region’s difficulties, it is nonetheless extremely upbeat about the region’s economic trajectory calling it “a growth engine for the wider EU economy” and noting that the region was forecast to grow more quickly than Western Europe for the foreseeable future. Basically, the report says that “convergence” will continue, and that a generation or two from now the region will be on a level of development roughly equal to that of Western Europe.
The report accurately notes that debt dynamics in Central Europe are more favorable than in the West, and that the region’s workforce, which is low-cost and highly educated, presents an alluring target for European businesses looking to improve their competitive position. The problem is that, ever since the onset of the financial crisis, the region’s convergence with Western Europe has slowed to a crawl.
I quickly created a chart showing the weighted average income of the new EU members (Bulgaria, Czech Republic, Estonia, Croatia, Hungary, Lithuania, Latvia, Poland, Romania, and Slovakia) as a percentage of weighted average income in a “core” set of countries including Belgium, Austria, Germany, France, Netherlands, the UK, Switzerland, and Denmark. As you can tell by that roster, I deliberately avoided including the PIGS. Why? Well because Central Europe would look like it was “converging” with those countries even if it was totally stagnant. Everyone looks like a good swimmer in comparison to the guy who’s drowning. I think it’s more useful to look at developed countries that haven’t totally imploded during the crisis (though many of the “core” countries I examined are hardly going gangbusters: France, the UK, and the Netherlands are all either at or below their pre-crisis peaks in GDP).
http://b-i.forbesimg.com/markadomanis/files/2014/01/Core-Europe-New-EU.png
As you can clearly see in the chart although the new EU members experienced rapid convergence during the bubble years, ever since the bubble popped their convergence has slowed dramatically. In fact, if convergence continues at its 2008-13 pace (about 0.37% per annum) it would take the new EU members over a hundred years to match the core countries’ average level of income. Now it’s highly unlikely that things will develop in such a predictable, linear fashion and I’m not suggesting that we should all set our watches on the assumption that average incomes in Central Europe will match those in Western Europe in 2115. However, to the extent that Central Europe’s most rapid and sustained burst of convergence coincided with a credit bubble that is highly unlikely to be repeated, it seems more likely than not that the region’s convergence will be slower in the future than it was in the past.
It might make sense to think that, in an environment of austerity, the more nimble and debt-averse countries in Central Europe would dramatically out compete their Western peers. If anything, the opposite seems to be the case: tight money and tight budgets seem to systemically favor developed countries at the expense of the less mature, post-communist economies. To the extent that Europe’s future will be one of tight money and tight budgets, that suggests that Central Europe will be in for a rough ride.