Location still counts in central and eastern Europe

March 4, 2009

Poles and Czechs, their economies still relatively robust  despite global recession, are up in arms about what they see as international investors’ tendency to tar them with the same brush as their more troubled neighbours such as Hungary, Ukraine and Latvia.

But if history is any guide, investors are unlikely to be impressed, at least in the shorter term.

Poland’s zloty has fallen more than debt-ridden Hungary’s forint since last summer, even though Budapest had to negotiate an emergency IMF-led bailout, while the Czech crown is also down
some 16 percent from its 2008 highs.

But at an EU summit last weekend, Polish and Czech leaders refused to back a Hungarian appeal for a 180-billion-euro region-wide bailout, saying they did not need such help.

The European Commission and German Chancellor Angela Merkel have endorsed the Polish and Czech pleas to be judged on their own merits rather than by their geographical location.

“Not all the countries are in the same situation. You cannot compare the situation of the Latvian economy to the situation of the Czech economy,” European Economic and Monetary Affairs
Commissioner Joaquin Almunia said in Prague this week.

However, in his book “The Return of Depression Economics”, Nobel economics laureate Paul Krugman describes how countries as diverse as mainly agrarian Indonesia and industrial powerhouse South Korea were swept up by the 1997 Asian crisis.

“The appetite of investors for the region had been fed by the perception of a shared “Asian miracle”. When one country’s economy turned out not to be all that miraculous after all, it shook faith in all the others,” he wrote.

Krugman also analyses how quickly contagion, in an age of huge cross-border cash flows, struck Latin America in a similarly indiscriminate way, and on several occasions.

Fast forward to 2009, and emerging Europe’s ‘miracle’ is rapidly dissolving. Policymakers will point out that the Czech Republic has higher GDP per capita and far less debt than some older EU member states, but such virtue is not an automatic defence in turbulent times.

And while there are obvious differences — many, though not all, states in central and eastern Europe are EU members which can draw on help from the Union’s institutions, including the European Central Bank — there are some parallels too.

Back in 1997, then-Malaysian leader Mahathir Mohamad accused speculators such as international financier George Soros of being responsible for Southeast Asia’s economic woes and called
for a ban on currency trading.

In a joint statement on Wednesday, eastern European bank supervisors hit out at negative Western press over their financial sectors following commentators’ suggestions that the region may prove to be “the sub-prime of Europe”.

And Polish central bank governor Slawomir Skrzypek called for talks with the European Central Bank and the European Commission on ways to prevent “speculators” who profit from steep falls in currencies such as the zloty from receiving public funds in bailouts being organised by Western governments.

Polish tabloid Fakt was more succinct, comparing foreign bankers speculating against the zloty to “vampires”.

(Poland’s Prime Minister Donald Tusk (L) leaves after shaking hands with Czech Republic’s Prime Minister Mirek Topolanek, whose country currently holds the rotating presidency of EU, at the start of an emergency European Union leaders summit in Brussels March 1, 2009. EU leaders meeting in Brussels on Sunday will discuss possible action on the financial crisis amid concern Eastern European countries may need more help. REUTERS/Sebastien Pirlet (BELGIUM))

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