Central Europe; a safe harbour in the financial storm

September 23, 2008

euro.jpgIf being in the European Union were ever controversial in central Europe, the current financial turmoil may be delivering the ultimate proof that it was worth it.

While markets plunged in Russia and Turkey, the emerging markets of central Europe saw only muted reaction (some of their currencies are actually up on the year) largely because their EU status guarantees them access to easy money from the bloc.

“Convergence” — a gradual process of approaching the euro zone — provides priceless insurance, a point Austrian central bank head Ewald Novotny made this week.

“I think that, with some finessing, it (relatively good performance of central Europe) could be linked with the stability and investor confidence in the region due to their EU
membership and obligation to join the euro,” he said in the Slovak capital Bratislava.

The EU has earmarked over 300 billion euros for the region until 2013 to help it catch up with the richer west, in effect a fiscal stimulus none of the governments here could afford on their own in the face of the global slowdown.

Add to it low exposure of the region’s banks to toxic assets, low private sector debt, growing exports and still buoyant consumer demand — and one cannot avoid the conclusion that most of “new Europe” will sail through the turmoil in relatively better shape than many mature economies as well as more exposed emerging markets.

The real issue, though, is what comes next and here the challenge for the central Europeans is still daunting.

Playing the simple game of catch-up cannot go on forever. Spain’s example shows that it can stop as abruptly as it began if national leaders are lulled into complacency by the promise of perpetual growth on the back of EU money.

In central Europe, goverments are still largely fixated on bringing foreign direct investment into manufacturing rather than trying to come up with strategies for the future.

Central Europe is a major producer of cars, electronics and white goods as firms take advantage of a relatively cheap and eager labour force.

But convergence will gradually reduce this competitive advantage while the region still lags far behind in advanced technologies and top-level services. Research and development spending is low and higher education is largely a shambles.

“In the entire region we should apprach foreign investment through the prism of what it brings in terms of innovation,” said Michal Kleiber, head of the Polish Academy of Sciences.

Greater competition among universities and less “democratic” funding for them is also necessary to offer better pay and a world-class research environment for the best brains.

Local businesses have yet to discover the value of driving innovation and sponsoring research.

“We need the courage to be elitist in science and higher education, promoting those universities or departments that can provide leading-edge research and which will attract top caliber students,” Kleiber said. “Now the best leave and never return.”

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