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Investors should go shopping in Slovakia
Few looked to eastern Europe with confidence after the fall of the Berlin Wall. But by and large, says Matthew Lynn, the doubters have been proved wrong.
Lots of moribund heavy industry. No experience of free markets. A workforce with few skills anyone wanted, and an exodus of the brightest and most energetic. When the Berlin Wall tumbled a quarter of a century ago, there were few reasons to feel confident about the outlook for much of eastern Europe. Yet by and large, doubters have been proved wrong.
This week, Eurostat released regional GDP data for the European Union. It uses purchasing power parity numbers that even out currency fluctuations. There are always some striking figures in the data. Inner London West now generates 529% of the EU's average GDP per head (the next closest was Luxembourg, on 266%). Kensington is one of the most powerful economic regions in the world.
But most remarkable is the progress being made by eastern Europe. Growth within many of these countries is very unbalanced (similarly to the UK), so the national figures don't always reveal the wealth being created in certain areas. But if you look at how some regional centres are doing compared to some of the great trading cities of western Europe, it provides a dramatic illustration of how much progress has been made.
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Bratislava, the capital of Slovakia, is now the EU's sixth-most prosperous region, ahead of Stockholm and Edinburgh. Prague, the Czech capital, is ninth for GDP per head about level with Paris (and certain to overtake it next year, given how the two countries are growing) and ahead of Vienna and Stuttgart. Those are the most dramatic examples, but there are many more.
Poland's GDP per head, at €18,600, is still 68% of the EU average. It takes a while to shake off the Soviet-era legacy of coal and ship-building. But Mazowieckie, the region that includes Warsaw, is on €29,800, 109% of the average. That is richer than Barcelona, or anywhere in France outside Paris. Hungary as a whole is not yet comparable to western Europe, on 68% of the EU average. But Budapest, on 107%, is wealthier than anywhere in southern or central Italy, and has overtaken parts of Sweden and the UK.
Of course, there's still much poverty. Of the 20 poorest regions, five are in Poland and four in Hungary. But some regions will always modernise first. Overall, progress is striking. This is in part an indictment of the ruinous policies of most of western Europe.
A toxic mix of high taxes, excessive regulation, centralisation of power, and the euro the most dysfunctional monetary system ever created has condemned much of Europe to stagnation or decline. Italy should not be going backwards as fast as it is. Spain, despite glimmers of recovery, has made little progress it should be further ahead of Hungary or Poland, given where it started.
But it's also a testament to the power of free markets and competition. Having access to western markets has helped it is as a low-cost manufacturing base that the likes of Slovakia have flourished. But it is mainly the liberalisation of their economies that has transformed these nations. They have few natural resources and haven't had vast amounts of foreign aid. But, scarred by the Soviet era, they believe in small government. Slovakia has a flat tax of 19%. Poland passed a law limiting the national debt to no more than 55% of GDP, low by global standards. None have let government spending run out of control.
This is also an opportunity for investors these are some of the least-appreciated markets in the world. Warsaw is on a price/earnings ratio of 15, low compared to the rest of Europe. Hungary was among the best-performing markets in 2015, up by almost 40%, but could have still further to go because at this rate, it is eastern Europe that will be the wealthy part of Europe, and the west relatively shabby and impoverished.
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Matthew Lynn is a columnist for Bloomberg and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
