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EU: Consumers Hold Key To Economies

The economies of the 12-nation euro-zone, led by Germany, are slowing but the effect that the slowdown will have on Eastern and Central Europe is not yet clear. Experts say a lot depends on how long the slowdown lasts and to what degree personal incomes and consumption are affected. RFE/RL correspondent Mark Baker talked to economists and reports that consumers -- in both Eastern and Western Europe -- hold the key.

Prague, 11 April 2001 (RFE/RL) -- It's often said in economic circles that when the United States sneezes, the European Union catches a cold -- so close has been the traditional dependence of Western Europe on the American economy.

But what happens to Eastern Europe when Western Europe sneezes?

Economic growth throughout the European Union is slowing. The Paris-based Organization for Economic Cooperation and Development, the OECD, yesterday became only the latest international group to revise downward its forecast for the euro-zone when it lowered its prognosis this year to 2.7 percent from 3.1 percent. The International Monetary Fund last week signaled it too would reduce its forecast for the euro-zone.

Germany, the largest economy in the EU's 12-nation euro-zone, is the biggest market for East European exports. Yet it is also slowing down the quickest. Yesterday, a group of six leading German research institutes slashed estimates for German growth to 2.1 percent from an earlier forecast of 2.7 percent.

But Charles Robertson, a regional analyst at ING-Barings in London, says the relationship between slowing growth in the West and the impact in the East may not be so straightforward. He says it all depends on what elements in the economy are slowing.

Robertson says in Germany, for example, the large exporters -- such as carmakers -- are being hit hardest by the slowdown. East European suppliers to the automobile industry -- for example steel-makers in Poland -- may see their export markets fall.

On the other hand, Robertson says if German incomes remain steady and consumers maintain spending on products like mobile phones and video recorders, then countries producing such products will continue to do well.

"If the German consumer is still spending money, he or she, [for example], will still be spending money on video recorders, perhaps, or on mobile telephones or on computers, and perhaps they are produced in the Czech Republic and Hungary. So the Czech Republic and Hungary will still do well, even if Poland is doing badly, because of the different product mix in their industries."

Paradoxically, Robertson says Central and East European economies could even gain from a slowdown in the West:

"In a weaker economic environment, consumers will tend to go for the cheaper, better-value goods if you like -- or perhaps the cheaper goods. And possibly what gets produced out of Central Europe can be sold at a lower price than what is produced in Germany itself, for example. You would assume that is the case given the much lower wages. So possibly people will tend to buy more Central European goods."

Wily Leibfritz, an analyst with the respected German Institute for Economic Research, agrees. He says he expects German consumer demand to remain strong based on tax cuts that are now in place. These tax cuts, he says, may offset the effect of the slowing economy on Eastern Europe:

"I think [the German slowdown is] more on the export side. In fact on the domestic side we see some recovery because of the tax cuts which have been implemented now, so private consumption could increase."

To be sure, it's not just what happens in Germany that is important. In the Baltic states, economic performance in Scandinavia will have a disproportionate impact on growth. Countries that depend on their commodities exports, like Bulgaria, will be more heavily influenced by global economic developments -- not simply what happens in the euro-zone.

Robertson says that this year and next consumers in East European nations themselves will be in a better position to take up the slack in regional growth. He points out that elections are coming up in several Eastern countries and that governments have increased public spending in a bid to woo voters:

"This year and next are different because there are elections in Poland this year and in the Czech Republic and Hungary next year. And because of the elections and government policies and so on connected to that, we're expecting domestic demand to increase in Central Europe. We expect people to able to spend more money and to get more wage increases and to be able to spend more money on themselves in Central Europe."

Robertson says government expenditure in Bulgaria, for example, has risen this year by around 40 percent. With inflation, he says this amounts to a 20 percent real increase. Bulgaria is due to hold general elections in June.

Similarly, Robertson says pensions have increased by 14 percent in Hungary -- a fact he attributes to elections coming up next year.

Robertson says that Central European countries in general, as leading exporters to the euro-zone, continue to improve their position relative to other countries.

"One very consistent thing over the past five to 10 years is that Central Europe is building up its market share of euro-zone imports. [The] Czech Republic, Poland, and Hungary are now three of the top 10 countries [in the world] that export to the euro-zone."

Robertson says that improvement will continue regardless of whether the euro-zone is growing slowly or rapidly.

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    Mark Baker

    Mark Baker is a freelance journalist and travel writer based in Prague. He has written guidebooks and articles for Lonely Planet, Frommer’s, and Fodor’s, and his articles have also appeared in National Geographic Traveler and The Wall Street Journal, among other publications.