Eastern Europe's Economic Boom: The Tiny Tigers

By Marion Kraske and Jan Puhl

Accepted into the European Union last year, the former eastern bloc countries are the latest to capitalize on globalization. Followed by Slovenia and Slovakia, the Baltic States have set a cracking pace with their radical economic reforms. Their fervor is alarming its old-school neighbors in the West.

Cities across Eastern Europe, including Brataslava, Slovakia, have a lot to celebrate recently.
DPA

Cities across Eastern Europe, including Brataslava, Slovakia, have a lot to celebrate recently.

The day master joiner Rudi Finzgar returned to work, the future of the world was at stake. War was raging and the Nazis had seized nearly all of southeastern Europe. Finzgar, a ski jumper who hated the fascists, wasn’t going to stand idly by.

So he did what he did best: Tirelessly, he set about sawing and sanding in his small carpenter’s shop in Begunje – a village some 30 miles north of the Slovenian city of Ljubljana. But rather than tables or coffins, he made the skis he hoped would give the last remaining partisans under Marshal Tito a decisive edge in their battle against the despised Germans.

Today, more than 60 years after the end of the war, Begunje is still home to sawing and sanding. Its new spacious factories were erected back when Yugoslavia still existed, and the Elan company was still government-run. Times have changed. Now the company is packed with the latest production technology. It turns out 2,500 pairs of skis a day. The carpenter’s shop has metamorphosed into a major corporation, even if the Slovenian government still has a finger in the pie. Germany has long ceased to be the enemy; it has become a customer. One of many. Today, Elan has a bigger prize in mind.

The Slovenian ski-manufacturing industry has already worked its way up to eighth place in the sector’s global rankings. But few people in Begunje will be leaning back: “In the next five years, we want to make the top 5,” says Martin Lehner, a native of Germany’s Allgäu region and the company’s sales and marketing director. Annual sales have been rising by a steady 10 percent – despite a declining, highly competitive market, the German says proudly.

Other companies from the small Alpine republic are making a name for themselves in international markets as well. Revoz, a Renault spin-off, produces the Clio. Lek, a Sandoz subsidiary, sells pharmaceutical products. The exhaust-system manufacturer Akrapovic supplies components for high-end racing motorcycles. And Gorenje, which was making electrical goods for western markets as far back as Tito’s days, has shaken up the kitchenequipment industry and now even ships to China.

Reform obsession

The Slovenian economy is booming “thanks to our successful export industry,” says Irena Rostan from the Chamber of Commerce in Ljubljana. This year the EU newcomer is targeting 3.7 percent growth – a rate exceeding that of many long-time members, although most of these still play in a different economic league. But for how much longer?

Like Slovenia, other fresh arrivals in the European Union are producing stellar figures – thanks to their burning ambition, demand born of dispossession, a near-obsession with reforms, and a fearless approach to competition. Eighteen months after the eight countries were officially accepted into the European family, a region is clearly emerging between Tallinn in the north and Ljubljana in the south that is focusing its sights on the global market. The prospect has sent a shudder through the powerful yet lethargic industrial nations of Old Europe.

In Brussels, leaders are therefore eying the lengthening shadows cast by the brilliant newcomers: Service regulations? Need reworking fast. Social dumping? More controls required. Turkey, Bulgaria and Romania as the next new members? Agreed, only to be hotly contested again. And how long will net contributors like the German government continue to subsidize the new EU competitors from the East? While Franz Müntefering, until recently SPD chairman, garners public approval for condemning the evil power of international capital, the EU newcomers are putting it to profitable use.

German politicians know they are caught in a pincer movement: between new regulations coming from Brussels and low-wage workers coming from the East. A sense of unease has gripped Germany, producing more questions than answers – even among experts. True, the waves of cleaners and seasonal workers were welcomed with open arms. But will they soon be followed by a tide of migrants prepared to work more for less? Will the bloodletting continue, driving more German companies to the supposedly cheap-production countries?

Growth industry: corruption

Skyrocketing growth rates have set the tone of public debate in the new EU member states. They reflect a success painfully wrought from reforms engulfing everything from the job market to the healthcare system.

Solid economic growth in Eastern Europe.
DER SPIEGEL

Solid economic growth in Eastern Europe.

The winners are young, well-educated people. The losers are middle-aged employees, retirees, the rural population, fringe ethnic groups – and even ethics. One of the top growth areas in the new EU countries is corruption.

While a big, old, industrial nation like Germany is bogged down by what leading economic institutes call “fundamentally weak growth” – and is predicted to grind out a best-case gain of under 1 percent this year – the countries to the east have been posting growth ranging from 4 to 7 percent for years. Shades of West Germany’s economic miracle in the 1950s and 1960s.

While nearly 5 million Germans are out of work and not a day passes without some company, politician or union griping about the corporate exodus to Eastern Europe, new jobs are being created daily in what were only recently decrepit planned economies.

And while German President Horst Köhler appeals to his people to finally “put their noses to the grindstone” and introduce much-needed reforms, countries like Estonia, Latvia and Lithuania have not only revamped their governments, but also transformed their ailing economies into ultra-flexible powerhouses.

Closing the wage gap with the West

In no other place in Europe are entrepreneurs and consumers as optimistic as in Poland. Last year the country boosted its export volume by nearly 12 percent. The World Bank recently upgraded the “emerging” Czech Republic into a “developed” nation. Former Deputy Prime Minister Martin Jahn forecasts: “There will be fewer and fewer investments where low-cost labor plays a central role.” The subtext: We can be both low-wage and high-tech.

Even remote Lithuania, the poorest country in the EU along with Latvia, is planning its offensive: “The initial upswing was driven by booming exports; most recently, domestic demand is booming,” the World Bank said of the Baltic republic.

Hungary and Slovenia have been ranked the top economies of all the countries in transition by the rating agency Dun & Bradstreet. Germany is Hungary’s biggest foreign investor with about €10 billion. In addition to Audi and Deutsche Telekom, the country has attracted scores of automotive suppliers. Slovenia has sewn up the Balkans as an investment destination: Slovenian companies are thriving in the countries that emerged when multi- ethnic Yugoslavia fell apart. They speak the language; they understand the mentality.

Today, low wages are but one of many selling points in these countries. They have shed layers of bureaucracy, simplified their tax systems, invested in education, and overhauled their infrastructure. A bottomless resolve to make up for all the deprivations of the socialist regime is fueling these changes. The economic creed of eastern Europe is defined by a mood of new departure. “In the next 10 years, the gap between per capita incomes in the old and new EU member states will progressively close,” forecasts Andreas Polkowski of the Hamburg Institute of International Economics (HWWA). “Some regions may even overtake us.”

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