Jurgen Rigterink, EBRD, First Vice President
Hilton Hotel, Vienna, Austria
The Central & Eastern European Forum 2020
Ladies and gentlemen,
Good morning and thank you for the invitation to address you today on behalf of the EBRD. This is a great honour for us – and for me personally – because we share with you the commitment to the region that is at the centre of our gathering today and tomorrow – central, eastern Europe.
Today we are marking the 25th anniversary of the Central and Eastern European Forum in Vienna. Congratulations to Ruth and the Euromoney team for establishing this event as a must in the business and social calendar for the region. As an opportunity for insights, exchanging views, talking business and networking your new year kick-off in Vienna remains the place to be.
At the same time, after 25 years, do we not also have to ask ourselves: Does the region still need – or even merit – a dedicated conference? Have we gathered here today because the region is so attractive or because it is still not as strong as other markets? Is it a vanguard or a laggard?
As I was pondering these questions I checked for advice what to do when you are 25. I particularly liked a list provided by the TV channel Vice, which is targeting an audience for whom 25 is probably already ancient. Here I found a few recommendations which also seem applicable to the countries represented here today.
First recommendation: Get your finance together
The countries of central and eastern Europe have made enormous progress in their economic development and consistently outperform their western peers. Take, for instance, growth: According to the latest EBRD forecast, the region will grow by over 3 per cent this year. In comparison, the European Commission expects growth in the Eurozone in 2020 at no more than 1.2 per cent - and for the EU as a whole at 1.4 per cent.
Meanwhile, the countries are in very different financial health. Again, the countries of central, eastern and south-eastern Europe are leading the way: The highest government debt to GDP-ratio in the EU in the second quarter of 2019 was recorded in Greece with 180 per cent. On the opposite side we find Estonia with 9%, Bulgaria less than 30% and the Czech Republic with 33%.
While recent trade wars, the crisis of globalisation and protectionist moves have significantly hit foreign direct investment, some countries still performed strongly: FDI increased by 38 per cent in Poland in 2018, according to the consultancy Ernst & Young. Risk-takers can still expect to be rewarded handsomely. The think tank Bruegel reports: “The rate of return on foreign direct investment in central Europe remains large”.
Second recommendation: Decide what friends you want to have some memories with
Following the end of communism, the countries of central and Eastern Europe were unanimous in their choice. They joined Nato and the European Union. In the early 1990s, it was Nato membership which was politically controversial, whereas EU membership was more like an exam: Once a country has passed all the 35 chapters of the acquis communautaire, becoming a fully integrated member with equal rights was a mere formality.
Today, quite the opposite is true: The latest country to join Nato was Montenegro in 2017, whereas the European Council meeting in October 2019 blocked the applications by Albania and North Macedonia for a start date for EU membership negotiations. This was widely seen as a severe setback for the Western Balkans.
The EBRD, which invests more than EUR 1 billion in the region every year, remains convinced that EU approximation and, eventually, accession remains the key instrument and incentive for reform, development and progress.
Recommendation three: Learn something new
The institutional and security anchor provided by membership in the western alliances is all the more important as the geopolitical situation is far from stable. We are living in a period of massive disruption: Geopolitical tectonic plates are shifting. Globalisation is in crisis. Mass migration is threatening the fabric of societies. Politics is clueless. Technology is revolutionising the way we work. That is, unless the consequences of climate change will sweep us all away before anything else.
How does central and eastern Europe fare in this environment? If we sample surveys of rapidly emerging economies, the region is conspicuously absent. Last year, the World Economic Forum identified 18 high-growth “outperformers” that achieved powerful and sustained long-term growth. The list includes China, Indonesia and South Korea, but not a single country from CEE.
This raises three questions: Does the region have an environment that allows business to prosper? Can new enterprises find access to affordable finance? And: Do the economies of central and eastern Europe still produce the right things?
Let us take the automotive sector as an example: The region is fully-integrated in global supply chains. Relative to its population, the Slovak Republic is the world’s largest car producer today. Similar ratios are true for many other countries of the region.
But what was an engine of growth is now becoming a cause for concern. And this is not a cyclical slump ladies and gentlemen, no, it is a fundamental shift triggered by the need to combat climate change, global trade disruptions and rapidly changing consumer patterns. For the countries of our region the urgent task now is to take the next step in their economic development. Firmly integrated into international trade flows they now must progress from the workbench to the lab.
Recommendation four: Listen to your parents
Many countries in the region are small with a limited domestic market and a shrinking population. But if we look at a country like Austria, where we are today, there are two conclusions we can draw: The country learned to succeed and thrive in exports and for this, integration is not an option but a necessity. This can be done, indeed has been done, in the region.
Here is an example: in 1989, Eugeniusz Słominski, a carpenter from northern Poland, founded in the proverbial garage a company for woodwork called Polcom. A sharp businessman, he soon spotted a market niche – hotel furniture. It was not long before the company became a pioneer in modular building systems. Today, Polcom counts Marriott, Hilton or Accor among its global clients.
But Polcom also demonstrates one of the persistent weaknesses of the region: venture capital remains scarce and to conquer international markets the company needed an investment by Pimco, the leading global fund, which acquired a majority stake in 2018. In the development of domestic capital markets the region clearly has some way to go. This is also where choosing friends is important: most of the countries are sub-scale when it comes to capital markets, yet international cooperation is painfully slow. We support the growth of SEElink to foster cooperation among exchanges in the region. More needs to be done here.
Recommendation five: Be the coolest uncle or auntie possible
Ladies and gentlemen, the scarcest resource today is neither capital nor a commodity, but attention. In our age of weapons of mass distraction, it is no longer good enough to do the right thing. It is equally important to attract investors’ interest with the right policies, sound economics and a captivating reputation. Essentially, a sound business environment based on the rule of law, transparency and a level playing field for all market participants. It takes years to build a reputation, but only moments to destroy one.
Too often we still find vested interests, non-transparent links between politics and business and a dubious role of courts in countries of the region. None of this is what investors need.
Recommendation six: Never let your battery die
A recent study commissioned by the European Commission about “Five key global trends to 2030” found that, and I quote: “global competition for access to natural resources will continue to intensify.” This must be a particular concern for central and eastern Europe where high dependence on energy imports meets low energy efficiency. Despite significant investments, energy intensity in the EBRD region remains twice as high as in advanced economies of the west.
We welcome that a process of reassessment has begun. In Poland, a change in legislation has allowed the EBRD to return to the market for renewables. In Serbia and Kosovo, we are financing the largest wind power projects yet. Thanks to technological advances, economies of scale and appropriate legal frameworks renewables have become competitive. This is essential if we are to progress towards our emission reduction targets.
The EU has set itself a zero-emissions target by 2050. But we note that the chosen path remains narrow and steep. Not only do we have to change the way we generate and use energy. We also must not forget that this includes us all – in terms of responsibility as much as affordability. If the green transition is to succeed it also has to be just.
Recommendation seven: Care about politics
Politics matters, greatly and perhaps more than ever. The 2008/09 financial crisis has put an end to a seemingly unstoppable upward trajectory of our societies as a whole. According to the Oxfam Wealth Report, in 2018 the top 26 wealthiest people owned US$ 1.4 trillion or as much as the 3.8 billion poorest people. The year before, it was the top 43 people.
No longer does the evidence support the view that “the rising tide lifts all boats”. Yet for millions of people who live in poverty, whose opportunities are thwarted by corruption, who try to escape armed conflicts or whose livelihoods are destroyed by climate change, the west remains the promised land. The latest “Transition report” of the EBRD puts it quite bluntly. Governance is a driver of migration. But if migration remains “the fastest and safest way to boost one’s income”, as “The Economist” recently said, it is also an indictment of the practices and the opportunities in the places that people leave.
The perception that the political decision-makers have lost control is widely shared. So is a wide sense of political disillusionment. This is a dangerous mistake. Regardless whether we agree or disagree on certain questions, the main point is to take active part in the political process. As Charles de Gaulle once put it: “Politics is too serious a matter to be left to the politicians.”
Recommendation eight: Stop trying to be your heroes
Role models are important. They provide us with guidance. They can show us who we want to become and how. The central, east and south-east European countries are spoilt for choice: Who would not want to combine German manufacturing excellence with French prowess in engineering, British financial wizardry and Swedish design magic?
But the time has come for our region to stand on its own feet. The model of the extended workbench has been successful. Now it is coming to an end. It is time that Europe learns more about Hungary’s mathematical genius, Poland’s booming gaming industry or Bulgaria’s start-up scene. And the way to do this is outlined in the last point I would like to make.
And my final recommendation: Embrace the novelty of growing up
In many respects the revolutionary changes we are witnessing will level the playing field. No longer do established giants enjoy an uncatchable head-start. Today, a behemoth like Volkswagen is spending billions to find an answer to its Californian challenger Tesla.
Global value chains are evolving, reshaped by technology. They are becoming more knowledge intensive and reliant on high-skill labour. Finally, goods-producing value chains are becoming more regionally concentrated, as companies increasingly establish production in proximity to demand. For our region this represents unique opportunities.
Those in the forefront reap the benefits: companies that are digital leaders have faster revenue growth and higher productivity. They improve profit margins three times more rapidly than average, according to a study by McKinsey. And while the forces of digital have yet to become fully mainstream, the next wave of innovation in the form of advanced automation and artificial intelligence has already started.
Ladies and gentlemen, the countries of central and eastern Europe have the potential to benefit from these developments. The region’s talents flourish in London, Vienna or Zurich. Our goal and responsibility as investors and policy-makers is to create an environment where can achieve the same in Riga, Budapest or Zagreb. And with your continued engagement I have no doubt that this is absolutely possible.
I wish you a successful conference and thank you for your attention.