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East/West: Economic Slowdown Bodes Ill For All

The slowdown in the major Western European economies can be expected to have an impact on the transition economies of Central and Eastern Europe. The UN Economic Commission for Europe (ECE) characterizes transition economies as particularly vulnerable because of their dependence on exports to Western Europe. RFE/RL correspondent Breffni O'Rourke talks to a senior economist at the ECE about prospects for the Easterners.

Prague, 22 August 2001 (RFE/RL) -- The latest statistics show slowing growth or stagnation in the major economies of the European Union, reflecting the gloomy state of the global economy.

Germany, the giant in the EU and the third-largest economy in the world, stopped expanding in the spring, according to figures just released by the German central bank, the Bundesbank. Experts fear the economy may soon begin to contract.

Other important European countries, such as Italy and the Netherlands, are showing very low growth rates, and the previously buoyant French economy is also slowing.

The situation in Germany is particularly significant for the countries of Central and Eastern Europe. That's because Germany is the single largest Western market for the export of goods of the transition economies. For instance, some 40 percent of the Czech Republic's exports go to Germany.

Joseph Smolik is a specialist on Eastern Europe at the UN Economic Commission for Europe. Smolik tells RFE/RL that within the past 10 years the Central and Eastern European countries -- many of whom are candidates for EU membership -- have become increasingly integrated with Germany and the other Western countries. He explains:

"Of course, this has its benefits when there is an upturn, as we saw in 2000 when there was a very rapid rate of growth in the transition economies, which very much reflected Western Europe's own economic upturn. Unfortunately, this year it is going the other way around. In fact, one of our findings, and we were really quite surprised by this, is how sensitive the transition economies really are to the West European business cycle."

Smolik, who is based in Geneva, said that, last year, exports of transition countries to the EU grew by more than 20 percent, but this year the growth rate will likely be considerably lower, perhaps 6 or 7 percent. In its spring analysis, the Economic Commission for Europe said that if external conditions deteriorate, policymakers in the transition economies will have to be ready to act quickly with counter-cyclical measures to help offset the negative shock.

But Smolik notes that room for maneuver is limited, in that most of the countries of the region do not have a strong domestic demand, which could help replace lost exports. He says:

"In fact, they are very limited in what they can do. Already, as Western growth slows, as their [own] exports slow and as their own economies slow, they are going to have budgetary problems. One sees that already in Poland and maybe in the Czech Republic to a certain extent, so there is often very little scope for fiscal stimulus. It varies throughout the region, but given the fact that they do have their budgetary problems, they do pretty well have to depend on external stimulus, and that's clearly not coming through this year."

Of the three Baltic states -- Estonia, Latvia, and Lithuania -- Smolik says they have fared better than many other economies in transition:

"We have not seen the kind of slowdown perhaps in the Baltic states that we have seen [elsewhere] in Eastern Europe. But nevertheless [growth] is coming down. They are also extremely open economies and very much dependent on trade."

Economists note that candidates for EU membership will need years of sustained growth if they are to catch up with their Western partners in terms of living standards.