Focus on Europe: Doing Business in Eastern and Central Europe

Article excerpt

International Affairs Section

As growth rates recover from the global downturn and as many Eastern and Central European countries prepare to enter the European Union (EU), they will become increasingly attractive locations for direct investment, sourcing and selling.

With signs of a sustainable economic recovery and an improving credit environment in Eastern and Central Europe, it's time for credit professionals to take a second look at business opportunities in that vast but complex market. As growth rates recover from the global downturn and as many Eastern and Central European countries prepare to enter the European Union (EU), they will become increasingly attractive locations for direct investment, sourcing and selling.

Many of the largest U.S. and European companies already do business in Eastern and Central Europe, and a number of significant factors indicate that conditions may be ripe for more midsize and smaller companies to step into the region. Experts agree, however, that doing business there is still a relatively difficult and risky process.

Regional growth dropped sharply to 1.1 percent in 2001, down from 4.9 percent in 2000, largely due to a deep decline in Turkey. The crisis in Turkey, however, remains relatively self-contained. Growth moderated in other Eastern European countries as export growth slowed with the weaker demand from Western Europe, particularly Germany. (See Figure 1.) Because of the slower growth in the region in 2001, little progress occurred in reducing current account deficits, which remain a source of vulnerability. Unemployment rates range from a low of 4.9 percent in Cyprus to 19.1 percent in Slovakia, with unemployment in seven of the thirteen EU candidate countries well above the EU's average unemployment rate of 82 percent.

Candidate Countries

Ten economies in the region are fixed on early accession to the EU, with detailed negotiations now underway and entry into the EU in 2004 a real possibility for the front-runners. Among the three largest of the front-runners, growth remains strong in the Czech Republic and Hungary, but Poland slipped into slower growth in 2001 and is only now showing any signs of recovery. Business failures and nonpayment in Poland increased throughout 2001 and into 2002. Poland now has one of the highest unemployment rates of any of the European countries.

Thirteen countries (Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia, Slovenia and Turkey) have applied for EU membership. Poland, Hungary, Slovenia, the Czech Republic, Estonia, Slovakia, Latvia and Lithuania are hoping to be in the first group to join, along with Cyprus and Malta. Romania and Bulgaria aim to become members later in the decade. The ten early accession candidates are concluding years of preparations to meet EU norms of democracy and open markets, and to bring their laws into line with EU regulations on a vast range of issues, from environment protection to antitrust policy.

According to Eurostat, the statistical agency for the European Commission, the total population of the candidate countries is 170.5 million, just less than half of the EU's 376.5 million, but the total GDP of the candidate countries is only 7 percent of the GDP for the EU. (See Figure 2.) GDP per capita in the candidate countries varies between 24 percent of the EU average in Bulgaria and 82 percent in Cyprus. Forging a plan to bring candidates into the EU without increasing income disparities in vulnerable sectors is proving to be a delicate task.

In January, the European Union unveiled proposals for a $35 billion support package to develop the economies of ten new members. The money is to support farmers and poor regions in the candidate nations through the first three years of their EU membership. The EU is the dominant trading partner for the candidate countries and has captured the markets for half or more of the candidate countries' imports. …