Wow, this is in sharp contrast to the front page feature story in today's WSJ which argued that Europe was on the fast track to expansion, along with the USA and Japan. Is the glass half-assed?
Gene Coyle
Eubulides wrote:
New tigers bare their teeth
As Europe's traditional economic success stories struggle, seven countries in the east of the continent are forging ahead. Mark Tran explains
Tuesday August 12, 2003 The Guardian
The first estimates of economic growth in Germany and euroland for the second quarter, due this week, are likely to make bleak reading.
Both are expected to show very subdued activity, in line with the weak survey numbers and industrial production figures that have already appeared.
With Italy also in recession, countries that account for 60% of eurozone gross domestic product (GDP) were probably stagnant in the second quarter.
So euroland is doing a poor job of picking up the slack at a time when the world's traditional economic locomotive, the US, is having difficulty picking up steam.
However, while Europe's traditional economic powerhouses are barely ticking over, the continent is not entirely without its success stories.
To find them, you need to look east, to the three Baltic states (Estonia, Latvia and Lithuania) in the north, through Slovakia in central Europe, to the Balkans in south-east Europe (Bulgaria, Croatia and Romania).
In a report by HSBC, released last week, the seven countries are given a catchy name: new Europe's new tigers.
The new tigers should all record growth of more than 4% in 2003, according to economic experts. To put that into perspective, the UK, western Europe's fastest-growing economy, will be lucky to grow by 1.7% this year. The figure is well short of the chancellor, Gordon Brown's, forecast of between 2% and 2.5%.
Latvia and Lithuania are likely to match or outstrip even China's impressive growth this year. Admittedly, the new tigers started from a low base, emerging from inefficient, centrally-planned systems, so there was plenty of untapped potential. Still, their success should not be underestimated.
The Baltic states, after breaking away from the former Soviet Union, had to set up public institutions from scratch, while having to overcome the collapse of Russian markets. Meanwhile, Croatia was coping with the aftermath of the bloody Bosnian conflict of 1991-1995, and Bulgaria and Romania were weak states.
HSBC attributes the success of the new tigers to their zeal for economic reform. While central European countries such as Poland showed a diminishing appetite for reform, a byword for austerity programmes, the new tigers have yet to hit the wall.
The prospect of EU membership also acted as a spur to whip their economies into shape. Only Estonia received an invitation to open negotiations for EU accession in 1997, giving the others had plenty of incentive to put their economic houses in order to prepare the ground for entry into the EU club.
The reward for economic reform has been increasing direct foreign investment at the expense of central european countries such as Hungary and Poland.
"This not only provides a short-term stimulus for growth, but implies expanding manufacturing capacity, which is why we believe that this region will continue to grow rapidly over the medium term," says HSBC in a research note.
Another key advantage the new tigers have enjoyed is that they did not hitch their economic wagons to the stagnant German economy.
Instead, the Baltic states trade much more with Scandinavia. Italy, which should escape recession this year, is an important market for the Balkan countries, which also export heavily to the former Yugoslavia and Turkey. In addition, the new tigers have all benefited from exports to Russia, which is currently enjoying an economic rebound.
But - and there is usually a but - the new tigers suffer from big current account deficits (the broadest measure of trade). This is something of particular concern to the International Monetary Fund.
The IMF warns that they have to carefully watch government spending and tax cut commitments in order to meet balanced budget targets, as these are key to retaining investor confidence.
However, HSBC takes a bullish attitude even here, arguing that these current account deficits have been caused largely by the private sector: namely, equipment imported by private companies. Since such imports will eventually boost exports growth, they should be viewed as positive in the long run, it argues.
In a continent marked by lacklustre economic performance, new Europe's new tigers provide about the only bright spot. Maybe their vigour will rub off on the larger euroland economies.
· Mark Tran is Guardian Unlimited's business editor
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