Even if Monti seems to have succeeded in dragging the spreads closer together, there are plenty of problems around the European economy. Bloomberg reports on central and eastern Europe’s economies in search of a growth model. So far, some of them chose export-led growth and integration into (basically) German automotive supply chains, and others had a credit and property boom.
Well, it’s pretty easy to work out which was the better idea, but the problem is that with demand (especially for cars) across Europe in the toilet, the export plan isn’t looking too great either. Worse, some of the exporters are seeing their exchange rates rising fast. Poland, which is the paradigm case of an EU accession state that specialised in exporting into the German automotive supply chain, saw its currency rise 9.4% in 2012.
Diversifying trading partners away from the euro region should also “help at the margins,” Ulgen [HSBC chief economist for the region] wrote, adding that Poland and the Czech Republic have already managed to increase trade with countries from the former Soviet Union. Polish exports to the Commonwealth of Independent States rose 21 percent in the first nine months of last year and Czech exports increased 42 percent, according to HSBC.
While fiscal stimulus is not an option, there’s also further room for monetary easing in Poland and Hungary, while the Czech Republic, with the policy rate near zero, may need to resort to currency intervention, Ulgen wrote.
The problem here is that the plan is now, apparently, “export to countries that are poorer than we are”. This being Bloomberg we get a ritual reminder that “labor and pension rules” must change. But the Czechs’ GDP per capita at purchasing power parity is 123% of Russia’s.
The Austrian central bank governor, Ewald Nowotny, is apparently a leader in this effort and if anyone ought to be batting for Central Europe it’s the Austrians. However, out of the three banks who have cut their lending in the region the most, two of them are Erste and Raffeisen.
The problem is not trivial. McKinsey estimates that private investment in Europe has fallen by €354bn since 2007, while the corporate sector has about €450bn in cash on its balance sheet. Being who they are, it’s all about “regulatory barriers” and such. But look at this chart.
What on earth are European governments doing contributing to the problem here?