Southern Europe Down, Central Europe Up

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landesmannCentral Europe has been developing at a remarkable rate; the area’s economic significance in Europe has grown by five percent over the past eight years, while Germany’s has grown only 2 percent. Though Ireland is advancing in every field, the aggregate economic and trade production of southern and western EU member countries is somewhat weaker – compared to ours. In total, the western and southern countries lost four and a half percent from their economic and trade weight.
The topic is further elaborated in the study – which is referenced by The New York Times too – by Michael Landesmann, scientific director at The Vienna Institute for International Economic Studies and professor at Johannes Kepler University.
In the interview he gave to alapblog.hu he says that the increasing appeal of the Central European industry is due to the German economic growth. Our region – even though the production of its countries is not steady, with the Hungarian being weaker than the others – is becoming the centre of the European industry. The bad news is that the a reason behind Southern Europe lagging behind is that it fails to draw in external industrial capital.
The poorer or medium income countries cannot afford to depend solely on the service sector like the British do. It cannot be done without the industry… – says Professor Michael Landesmann.

Péter Zentai: Basically, you say that since the end of the WWII, this has been the first time when countries of Central Europe are in the position which Southern Europe used to be; belonging to the West and its people living better than those in our region.
Michael Landesmann:
This is also true, but the development of Europe’s and the European Union’s position in the world is in the main focus of the study. The main message is that Southern European countries – from Greece to Portugal, and partially Spain and even France too – are drifting towards a hopeless financial situation, the process, which fundamentally undermines European stability. All in all, our point of origin is that in the last twenty years – especially in the last couple of years – Europe’s ‘productivity map’ has radically changed: the majority of the European ‘industrial GDP’ used to be produced in Western and Southern Europe, but now it has shifted to Central and Eastern Europe. The main figure, who propels this process, is Germany. This country has become the absolute engine of the continent. Its ‘agglomeration’ has profited the most from their engine role. This ‘agglomeration’ is made up of Austria, the Czech Republic, Poland, Slovakia, and Hungary, and slowly but surely Romania is going to belong to this block. The classic industrial areas of Western and Southern Europe have disappeared.

The South, which used to have excellent standard of living, is now declining, while us, Eastern and East-Central Europe seem to grow steadily?
Basically, this is the case. The circumstance behind it is not only that Central Europe can make significant profit from the German take-off, but also that Southern Europe cannot offer any convertible products apart from tourism that could be sold abroad.
Greece, Portugal, Spain, and Italy, each in their own ways, consumed more than they produced in the last decades, and always imported more than they exported. In the case of Italy, the irresponsible and chaotic management and policies were the severest problems. The deficit in the balance of payments has become constant in these countries. Places that used to have industrial production became obsolete, whereas Asian and Eastern European to a certain extent proved to be more competitive: compared to the latter ones, higher wages, but lower productivity was typical for Southern Europe. Then the crisis hit, ruining everything and making that irresponsible game impossible to continue. Severe debts could not have remained hidden anymore, so the curtailments required by ECB and Germany significantly set back Southern Europe’s internal purchasing power too. This contributed to the burst of real-estate bubble – which at least supported the building sector. However, the curtailment, saving pressure, and debt aversion together do not encourage new industrial and export-oriented investments.

There is no substantial production in the rich and untroubled West either.
There is not. A good example for it is Great-Britain. However, this does not really troubles the English, since they have high quality financial and other types of infrastructure, which can be sold in any part of the world. It is the service sector of the British economy that is globally sought and not its industry, and being a competitive ‘product’, they can excuse their lack of industry. The problem is, if there is no convertible and exportable service or significant industrial or scientific product either. Just like in Southern Europe.

Where is France on the new economic map of Europe?
It is in big trouble. In the last decades, we could hear the French leaders talking about different plans of industrial policies, and that France was going to become the shining economic star of the coming decades. It never happened, and the industrial production-to-GDP ratio of France just reaches 10 percent – so it is lower than Britain’s! However, compared to Britain, France is not a competitive power in the field of globally-sought economic, financial and other services. The deficit in the balance of payments has become permanent, similar to the South. France does not dare putting life-saving structural reforms into action.

Not like us in Central Europe?
East-Central Europe is in a better situation, indeed. Especially the Czech Republic, Poland, Slovakia, Slovenia, the Baltic States to a certain degree. Hungary managed to stabilize its macro-financial situation after the crisis; their trade deficit was not that significant even before the crisis hit. The new round of the German growth – starting from 2010 – quickly spread to East-Central Europe. Now, we can say that this area is the main industrial region of Europe. Of course, it does not mean that all of them are performing equally well…

Where is Hungary on this list?
It is the last among these countries. It is mainly because of internal and domestic policy reasons. While Hungary used to be among the leading countries in the nineties, acknowledged for its ability of renewal, openness for financial and economic reforms and improving workforce quality, now, a decade later, the country’s situation is the exact opposite. It is negligent, irresponsible of its financial and monetary arrangements and making economic players unconfident… this is the picture of Hungary lately. Whereas, based on its objective and historical circumstances, the country could be exceptional…

But it is hard to deny that Hungary is indeed a part of this great Central European growth, isn’t it?
Of course, it is a part of it; the GDP growth of the last one and a half years does support it too. Now, it is a warning sign that Hungary’s performance has been below its neighbours’ – it was stagnant, fallen into recess, while the Czech Republic, Slovakia, Poland were flourishing, and the Baltic states too were more stable in the last four years. Not so much was Romania, however, the rate and quality of its growth is predictable and exceptional. Those countries did not, but Hungary did raise concerns to foreign investors. Some of them became uncertain, and its consequences are yet unknown… Hungary’s attractiveness for foreign capital remains lower than most of its neighbouring countries’.

Mercedes and Audi are feeling great in Hungary…
Surely.  The Hungarian performance in Central Europe calls for caution in every way because their model developed for handling capital is unprecedented: the Hungarian government favours certain foreign investors, while puts others in a disadvantaged situation. Audi and the other car manufacturers, producers, and industrial investors do not experience anything from those punitive measures aimed at foreign commercial chains and service providers. We have not seen such differentiation in the other countries of the region, but it does not mean the Hungarian model cannot be successful. We will see. In the development of the Hungarian financial future, whether driving away foreign capital and banks causes industrial investors to leave or become too cautious is critical. Based on the experiences of the last decades, big multinational producers tend to stick with their own, so to say ‘home-banks’: usually internationally renowned financial institutions. If Hungary drives out foreign banks, such industrial investors may follow them or become extremely insecure as a consequence.  Especially, if the Hungarian banks taking their place cannot fulfil the financial needs of foreign investors. In this regard, Hungary is in a quite malleable situation, which cannot be seen in other countries of the region.

What happens if Germans leave our region? I suppose, the cheap workforce is behind the current growth.
This is in the very nature of international industrial capital. The great industrial shift in East-Central Europe’s advantage is due to the low wage levels of the region. Before, Germans and other Western-European countries installed work-phases here, which did not demand high skill levels. However, eventually it has changed to more and more precise and high quality production. Now, Germany pays relatively low wages to employees producing high quality and expensive goods in East-Central Europe. Despite that, the wage level keeps rising in your country too.  Of course, this is far below the Austrian and Scandinavian, which also benefits from the German industry. Austria, Sweden, and Netherlands have to bring a high and stable production along with a high quality, and safe, financially and economically predictable political environment in exchange for the high wages. Everyone has to fight for keeping and even expanding the foreign (mainly German) industrial capacity – especially our eastern neighbours, which are in a more malleable situation compared to Austria.
It is important to see that for big international industrial decision-makers wage levels are no longer defining factors – especially, with automatization and robotization gaining ground. Productivity is important. Just like turning the environment more and more predictable, and making sure that this environment can provide sustainable increase of the standard of living because foreign investors are looking for the possibilities of expanding the internal market in the country and the region their industrial goods are produced. Poland, Slovakia, the Czech Republic, and especially Slovenia along with the Baltics are showing up great results, while Hungary and Romania are more uncertain. Croatia faces the same problems that Southern Europe does. The country does not have any convertible product or service apart from tourism, and there are no new producing investments. On the periphery of the Union, in Bulgaria, and outside of the EU, such as Ukraine, the situation seems to be disastrous.

Does East-Central Europe’s flourishing contribute to the decline of Southern Europe?
Fundamentally, the sources of the South European problems are different, than those being fixed in Central Europe. For example, export in Greece contributed to its GDP in 15-20 percent only, while in the case of Hungary, this rate was 60-70 percent.
However, our main message is that only certain wealthy European countries can allow themselves to abandon industrial production and exclusively focus on the service sector. To the poorer countries of Europe, building and expanding industrial production and its representation in world markets is vital.
I think the billions of euros that the EU is planning to spend on financing European investment projects should be spent almost exclusively on promoting and supporting industrial production and its preparative logistical and infrastructural innovations. Without such investments, Southern Europe will certainly decline and take the whole European political system with itself. Central Europe, including Hungary, is in a better situation, indeed. It is in a safer road so the future of the region is not that worrying.

Original date of Hungarian publication: March 23, 2015