Observatory on New Europe, 2011

Guest post by Valerio De Molli, Managing Partner of the European House-Ambrosetti

Though the focus of this guest post is the competitiveness ranking of the “new Europe” countries, the reality is that the entire CEE region seems to stand out as a relatively competitive region with stronger fundamentals. While rankings are always based on certain data points, for example R&D spending/GDP in this case, we know from our GE Innovation Barometer that when funds are allocated in a more structured, efficient and collaborative way and with a focus on market demand, they can have a much bigger impact. – GE for CEE

It’s not all about debt: the importance of competitiveness

„No apocalypse for CEE”, interview with Vladimir Dlouhy (International Advisor Goldman Sachs, former Minister of Industry and Trade in the Czech Republic)

An economy’s competitiveness and capacity to attract investments are crucial during periods of both boom and bust. However, in times of crisis, efforts to enhance competitiveness become no longer merely recommendable, they are indispensable.

The “Observatory on New Europe” analysis was developed by The European House-Ambrosetti and presented in Budapest on December 14^th on behalf of ENEL, GE, ING Direct, CIB Bank, Prysmian Group and Raiffeisen Evolution Project Development. The aim is to give an overview of the competitiveness situation in seven ‘New Europe Countries’ (NECs). The Advisory Board of the Observatory is currently composed of Mr. Peter Medgyessy (former Prime Minister of the Republic of Hungary) and Mr. Vladimir Dlouhy (International Advisor Goldman Sachs; Professor of Macroeconomics and Economic Policy, Charles University in Prague), as well as top managers of the supporting businesses, including Mr. Nani Beccalli-Falco, President and CEO of GE International and Mr. Francis Bailly, Senior Business Executive and Director European Operations, GE International. With the support of the Advisory Board, Ambrosetti selected 27 KPIs in six areas: Economic Growth, Macroeconomic Stability, External Openness, Business Environment, Innovation and Technology, Energy.

The 7 "New Europe Countries" considered by the Ambrosetti analysis

The analysis:

“It’s not all about debt: the importance of competitiveness” interviews with Valerio De Molli, Managing Partner of The European House-Ambrosetti and Vladimir Dlouhy (International Advisor Goldman Sachs, former Minister of Industry and Trade in the Czech Republic)

The NECs have experienced sustained and strong growth, each one growing faster than the EU-15 average in the last decade. Furthermore, four out of the seven countries are forecast to grow faster than the EU-27 average in 2011, with Poland and Slovakia showing growth rates well above the EU-15 standards: 4% and 2.9%, respectively. Despite a projected slowdown, there is also some leeway in terms of public debt: Hungary is the only one with a debt burden (over 80%), while all other NECs are currently meeting the 60% debt-to-GDP ratio Maastricht threshold.

The countries also show considerable exporting prowess, with Hungary’s exports, for example, accounting for over 86% of its GDP. There is also a gradual realignment of destinations in favor of emerging economies: the share of EU-NECs exports to the Big4 economies of the EU (France, Germany, Italy and the UK) has fallen from 50.5% to 43.5% during the 2001-2010 period, while exports to big emerging economies (Brazil, Russia, India, China and Turkey) more than doubled their share in all exports, currently accounting for 7.2% of the total. The trend seems to have accelerated in 2011: while exports to the Big4 were down 13.3% in the first semester of 2011 compared to the same period in 2010, exports to BRICT countries grew by a remarkable 24.5%. Trade among the NECs has also boomed, jumping from 13.3% to 18%.

NECs also lead the way in some facilitating factors of doing business: for example, the World Bank reports that the procedures to start a business in Slovenia are completely free and that doing so only takes four, six and seven days in Hungary, Slovakia and the Czech Republic, respectively.

Overall, Slovenia and the Czech Republic lead the group in terms of current competitiveness levels according to the Ambrosetti scorecard, while Romania and Slovakia have been the most dynamic over the past decade.

The path ahead

Attracting FDI is both a means and an end to retaining and enhancing competitiveness: foreign investment often facilitates technology transfer, while being an indicator of an economy’s current state of competitiveness. The Ambrosetti analysis shows that those countries that have invested more in the FDI enabling factors, such as focus on innovation, labor market flexibility and openness to external investors, have attracted more FDI stocks. In fact, the three countries that score better in terms of enabling factors are also the top three in terms of FDI stocks attracted.

Enabling Factors and FDI stocks - The European House Ambrosetti

Energy is also a crucial chapter in the path to competitiveness and one where NECs still have room for improvement. For example, all seven economies are more energy-intensive than the EU-27 average, some two or three times more. The 2011 National Reform Programmes presented in light of the EU2020 strategy stress the need to differentiate the energy mix (which varies greatly between individual NECs), work on smart grids and networks and invest in energy infrastructure.

In conclusion, strong of a more dynamic decade than their EU neighbors, NECs need not lose sight of the path ahead. The interlinked Global and Eurozone crises are resulting into an economic and social burden which needs to be opposed not only by short-term austerity measures, but through a concerted effort to preserve and increase competitiveness, for example by effectively supporting and regulating the financial and energy sectors, re-orienting exports towards high-growth markets and further developing the FDI enabling factors.