The FT recently concluded that emerging Europe “shares some characteristics with other emerging markets in Latin America and Asia, such as a cheaper workforce, but also some of the more negative aspects of developed Europe, including high levels of social spending and relatively low savings rates.” So does something have to give, or can the best of these economies have it both ways? As it stands presently, the piece noted, central Europe came out of the [credit] crisis divided into three parts–a central core consisting of members of the Visegrad regional grouping of Poland, the Czech Republic and Slovakia, “with fairly strong public finances, strong banking sectors and decent growth prospects,” the Baltics to the north which face prolonged pain and the Balkans to the south including Hungary, where two-thirds of household debt is mainly in Swiss francs (oy vey!) and draconian regulatory headwinds on domestic banks will likely stifle output and consumption for some time, per Political Capital, a Budapest-based think tank.
Poland and Slovakia are both attractive ways to play emerging Europe, though admittedly their performance is strongly correlated with Germany as the two have become somewhat integral members to that country’s export-focused supply chain. Poland’s deficit (7.9% of GDP) and rising public debt (55%) are troubling high and in addition to already pushing back the country’s initial 2012 euro adoption target, may ultimately require spending cuts, analysts warn. That said, part of the decifit hike has been a function of a pension system overhaul over the past decade whereby the country has shifted employee pension contributions to private funds from the state-run system in order to curb the rise of obligations as the country’s demographic pyramid deteriorates and also to meet the EU’s deficit and debt criteria. To this end, by 2020 Hungary is projected to have the highest old-age dependency ratio among emerging market economies of 30.1%, up from 24.0% in 2010, while other countries with an old-age dependency ratio over 20.0% in 2020 will include Poland, Romania, Russia and Ukraine. Yet against the backdrop of continued largesse (€67bn from Brussels between 2007-2013 have turned Poland into “the EU’s largest construction site”), increased geopolitical clout and a politically and economically pragmatic approach to Russia in regards to energy and trade, Poland may be in the perfect position to adroitly navigate away from the negative and towards the positive aspects of emerging Europe.