Business Briefing May 2014 | Vienna, Austria
25 years after the fall of the iron curtain: a look back and forward from an austrian perspective 44 years after the end of the Second World War, the division of Europe was overcome: the Iron Curtain was brought down, the state socialist systems in Central and Eastern European countries (CEECs) finally collapsed. Today, 25 years after this historic turning point, it is time for a look back from an Austrian perspective: Is Eastern Europe still a growth and success story?
In fact, no other country benefited as much from the fall of the Iron Curtain as Austria. The reasons for this are only partially based on history, as trade relations with former “Crown lands” never really stopped and only stagnated on a low level for a short time after the breakdown of the communist regime. The success story was started through decisive and quick action. Ironically, the EU and particularly Austria, who were frequently criticised for their complicated structures, were the ones to administer to the needs of these young democracies in the East. They removed economic hurdles and trade obstacles and fostered the integration of this part of Europe that used to be cut off from international trade with intriguingly unbureaucratic rules and regulations. Austrian companies proved their farsightedness: They did not shy away from the risks in these, at that time, “new markets” and undertook
significant investments. They laid the foundation for close interrelationships between Austrian and the CEECs. Both sides benefited from strong economic relations: Austrian companies used these new Eastern European markets to expand their market areas and therefore paved the way towards globalisation. The new export records that are broken almost annually are as much the result of the success of Austrian companies in the CEECs as of the disproportionately high number (in comparison to the country’s size) of “hidden champions” headquartered in Austria. At the same time, Austria is one of the most important investors in Eastern Europe: Studies estimate that Austrian companies created over 400,000 jobs in CEECs. Even for Austria’s financial sector the country’s strong commitment to CEECs has become a success story: In the sixth year after the start of the worldwide financial crisis one can see
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that domestic banks and insurances have mostly recovered from crisisrelated losses in CEECs. What remains is Austria’s crucial position on the European market, which would never have been possible without the CEECs. 25 years after the fall of the Iron Curtain, a new chapter begins for the relationship between Austria and the CEECs. The development of individual Eastern European countries becomes increasingly heterogeneous. Those countries that already caught up to the level of the EU-15 are using Austria as a gateway to the West today.
Austria and CEE: In Good Times and Bad Times The fall of the Iron Curtain in 1989 was just the beginning: Countries with staterun economies in the former Eastern Block quickly transformed into market economies and therefore were quickly integrated into the European Union1. Austria is one of the main profiteers of this radical change: The country moved back to the centre of the continent and defined its role as “hub between the East and the West” anew. At the same time, its domestic economy seized the opportunities of this new, enormous market area – and therefore achieved globalisation through a former backdoor. However, this focus on Eastern European countries made Austria vulnerable as well. The financial crisis, which started in
2008, hit the states of Eastern Europe hard: These young economies built up too little substance in this short time to grow independently from foreign direct investments and externally financed consumption. As a result, the economic development of the far from fully homogeneous CEE region drifted further apart. Added to this, the Austrian state came under pressure. The liabilities of Austrian banks in Eastern Europe (incl. Russia and CIS2) amounted to 225 bn. euro by the end of 2008. During the chaos on the financial markets after the Lehman bankruptcy on 15th September 2008 it was unclear how these loans were secured and how high the level of defaults would be in the end. On 13th April 2009 Nobel laureate Paul Krugman widely misjudged the situation and commented to journalists in New York that Iceland and Ireland were in a bad way, and that Austria may “join the club”. Later that week he said in his New York Times blog Austria may need a bank rescue that will seriously strain the country’s resources. The reason for his assumption was the commitment of Austrian banks to Eastern Europe. Risk provisioning actually did lower the profits of institutes operating in Eastern Europe during the crisis years, but loans issued by Austrian banks (incl. Unicredit Bank Austria) in Eastern Europe, Russia and CIS increased to 326 bn. euro by mid 2013. One sixth of this amount was more than 90 days overdue by the end of 2013, according to the International Monetary Fund. In March 2013, the rating agency Moody’s estimated that 15 percent of all loans granted by Austrian banks in Central and Eastern Europe are problematic. In Kazakhstan more than 30 percent of all outstanding loans were classified as high default risks.
1 The German Democratic Republic (GDR) was united with the Federal Republic of Germany (FRG) in 1990. Most transition countries joined the EU in the course of its 5th enlargement in 2004, Bulgaria and Romania followed during the 6th enlargement in 2007 and Croatia (the last accession country so far) in 2013. 2
The Commonwealth of Independent States (CIS) is an alliance of 12 of the 15 former Republics of the Soviet Union (Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldava, Russia, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan).
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Of course a national crisis including the country’s imminent bankruptcy, which were so populistically touted, did not occur. In 2010, Austrian banks were already reporting an annual surplus of more than 4 bn. euro – approximately a hundred times more than the annual surplus of 2009. Particularly risk provisions decreased from close to 10 bn. euro to a little over 3 bn. euro; the most important Austrian banks already fulfilled the requirements of the new and strict core capital regulations. Interest rates on Austrian government bonds are also constantly low at approximately 2 percent (as of February 2014, development of returns on 10year government bonds), the interest rate spread to Germany is highly stable at approximately 0.3 to 0.4 percentage points. Even after the onset of the crisis in 2008 Austria remained one of the model countries in Europe, with the highest growth rates and the lowest unemployment rates – which can be attributed mostly to the success of Austrian companies in the CEECs. The CEE region improved significantly yet again at the beginning of 2014. A forecast for the countries of Central Europe around Poland projects an average growth of 2.3 percent, the potential growth of Central and Eastern European countries is projected to remain at 3 to 5 percent.
I. Austria and CEE: United by history The often-mentioned cultural proximity of Austria to many Eastern European countries is rooted in the countries’ shared affiliation to the Monarchy3 that lasted until 1918. Even after the collapse of the Austro-Hungarian Empire and the division into individual states after the First World War, the successor states (Czechoslovakia, Hungary, Poland, Romania, Yugoslavia, Ukraine) remained the most important export destinations for Austrian companies. In 1924, 46.3 percent of all Austrian exports went to the successor states of the Dual Monarchy. To put this number into perspective: Exports to Germany amounted to 33 percent at that time and those to the USA to 5 percent. In the first years of the Second Republic, the by then socialist successor states were important destinations for Austrian exports as well, however with rapidly decreasing significance. Germany became Austria’s most important export market in the early fifties. Even though Austria was separated from Eastern Europe by the Iron Curtain, trade relation to its neighbours to the East remained intact. For many COMECON countries Austria was among the most important trade partners in the West. The significance of Eastern European countries (excl. Russia) as an export destination, first dropped below 10 percent in the eighties. At the time of Germany’s reunification in 1989/90 the “eastern export” share (exports to former Crown countries, Russia, Bulgaria, Belarus, the Baltic states) still amounted to 10.4 percent of Austria’s total volume of exports.
3
Besides Austria, the Czech Republic, Slovakia, Hungary, Slovenia and Croatia. Additionally, regions of today’s Poland, western Ukraine, parts of Romania, Serbia as well as Bosnia-Herzegovina.
4
Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Croatia, Bulgaria, Romania, Estonia, Latvia, Lithuania, Albania, Serbia, Macedonia, Bosnia-Herzegovina, Kosovo.
3
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Austria: Export share (% of total goods exports) Exports to CEE: strong increase, approaching Germany‘s
40
38
45
30
35 30
21
25
14
20 15
7
9
10 5
Ge
Since Germany’s reunification, trade relations in the CEE region developed in a dynamic way. No other region became more significant for the Austrian foreign trade sector than the CEE region. In 2012, Austria’s export ratio to the CEEC174 and CIS-Europe (Russian Federation, Belarus, Moldova and Ukraine) amounted to 20.98 percent (import ratio: 18.39). To put this figures in perspective: Austrian exports to Germany amounted to 30.36 percent (however, 37.57 percent of all imports came from Germany).
II. The “miniglobalisation“: CEE and the internationalisation of the Austrian economy
1995
al y It
rm an
CEE
y
0
2013
Source: Thomson Reuters, Raiffeisen RESEARCH
CEE on Austrian foreign trade. They showed the importance of the CEE-10 (EU accession countries) and the CEE-21 (the entire region) for the Austrian economy through the dynamics of foreign trade growth. As the export ratio (share of nominal export value in the gross domestic product) nearly doubled from 21.3 to 41.7 percent from 1993 to 2008, the ratio of goods exported to the CEE-10 more than tripled from 2.2 to 7.3 percent within the same timeframe. The economist Susanne Sieber wrote5 that: More than one third of Austria’s successfully internationalised goods traffic of the past 25 years is due to exports to the entire Central and Eastern European region. In fact, there is no other country among the EU-15 for which exports to the CEE-10 are as important.
Austrian is an export nation: Exports amount to 57.1 percent of the gross domestic product, 47,000 of Austria’s 404,690 companies are exporting products and services. Numerous economists (e.g. Stankovsky, Breuss, Sieber) have examined the impact of
5
Source: WIFO monthly report 2/2010 (The importance of Central and Eastern Europe for Austrian Foreign trade)
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Austria: Exports of goods (1995 = 100) Austrian exports to CEE: the major growth story 500 450 400 350 300 250 200 150
Total
CEE
Germany
III. Developing market power: Austria’s direct investments in Central and Eastern Europe The degree of internationalisation of the Austrian economy was very low prior to the fall of the Iron Curtain and Austria’s accession to the EU. This is reflected in international direct investments of Austrian entrepreneurs. Austrian companies only started investing more internationally than foreign companies invest in Austria in 2003. The impulse for international investments was once again initiated by the fall of the Iron Curtain. In 1990, 11 percent of Austria’s international direct investments were invested in CEE countries, which, in absolute figures, amounted to the moderate sum of 300 m. euro. The returns on these investments were low and very risky. A study commissioned by the Federation of Austrian Industries shows that the average return on equity of investments in the CEE in 1995 was at -0.3 percent (the profitability of direct
Italy
13 20
12 20
11 20
10 20
09 20
08 20
07 20
06 20
05 20
04 20
03 20
02 20
01 20
00 20
99 19
98 19
97 19
96 19
19
95
100
Source: Thomson Reuters, Raiffeisen RESEARCH
investments in the EU-15 was at +0.9 percent at that time). Rapid globalisation in the nineties as well as the integration of Austria into the EU and the Union’s clear commitment to the rapprochement with these eastern countries led to a significantly increasing stream of investments. From 2000 onwards, Austrian companies invested (with the exception of the crisis year 2001 when the so-called IT-bubble burst) more than 6 bn. euro annually in foreign countries. The share of direct investments in CEE in the total volume of international investments increased to over 50 percent. Furthermore, the target countries for investments were expanded: In the nineties, the focus was on the CEE-5 (neighbouring countries, particularly the Czech Republic and Hungary, followed by Poland, Bulgaria and Romania), but by the turn of the millennium investments expanded more and more to other eastern and south-eastern European markets as well. The financial sector, particularly Austrian banks and insurance companies, were of significant importance to the strongly increasing level of investment.
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international investments is remarkably high and reached close to 50 percent. In other western European countries this share amounts to less than 10 percent. Even in Germany, one of the most important investors in the CEE, this share remains below 10 percent.
From 2006 onwards, Austrian companies invested tens of billions abroad. The constant growth of direct investments in CEE – which, in 2007, reached 50 percent of all active direct investments of Austrian companies globally – can be explained by the significantly increased return on equity. In 2000, the return on equity for investments in the CEE countries was at an average 10.4 percent (investments in the EU-15 were at 6.0 percent at that time), by 2005 it reached 15.6 percent in the CEE, but decreased to 4.9 percent in the EU-15.
The clear concentration of Austrian investment activities in the CEE led to an extraordinary position for Austrian companies in these target countries: Austria is the biggest foreign investor in Slovenia, Croatia, Bosnia-Herzegovina and Serbia – in Slovenia, 47.8 percent of all direct investments come from Austrian companies. In Romania, Bulgaria, Slovakia and Macedonia, Austrian companies rank second, in Albania, the Czech Republic, Hungary and the Ukraine, Austria is among the top 5 foreign investors; in Poland and Russia, Austrian investments are significantly higher than the respective country’s economic importance overall.
Studies mainly attribute the quick development of direct investments in the CEE to three factors: Geographical proximity, historical interconnections and public subsidies encouraging Austrian companies to invest. Another motor was the EU’s eastward enlargement talks. The resulting legal framework encouraged even small and medium-sized companies to invest in the East. As a result, the importance of the CEE-15 for the total volume of TOP 5 countries in FDI in selected CEE countries (% of total inward FDI stock, avg. 2010-2012) 30 25 20 15 10 5
Czech. Rep.
Hungary
Romania
Russia
Austria
Netherlands
Cyprus
Germany
Bermuda
Russia
Bahamas
Virgin Islands, British
Cyprus
Netherlands
Italy
France
Austria
Germany
Netherlands
Italy
Slovakia
Czech Rep.
Austria
Germany
Netherlands
France
Austria
Netherlands
Germany
Luxembourg
France
Austria
Luxembourg
Germany
Netherlands
0
Ukraine
Source: wiiw, Raiffeisen RESEARCH
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IV. The second change: Austria as the gateway to the West
V. Status quo and perspectives: The end of homogeneity
Other countries also use the strong connection between Austria’s economy and the CEE. Vienna was considered as the gateway to the East. According to Austrian Business Agency, approximately 300 companies have their Eastern European headquarters in Vienna, including 28 Fortune-500 companies. More than 1,000 international companies like Siemens, Beiersdorf, Eli Lilly, Henkel or FedEx coordinate their CEE business from Austria. Approximately 40 international institutions connected with Central and Eastern Europe are located in Austria. In the past two years, Austria reported a net growth of 14 headquarters.
25 years after the fall of the Iron Curtain the close relations between Austria and the CEE have solidified. Austria still generates a trade surplus from foreign trade with the CEE-countries. Imports from the CEE-10 increased significantly in 2012, while exports remained unchanged. The Czech Republic has established itself as one of the most important trade partners for Austria, while trade relations remain stable with Hungary, Poland, the Russian Federation, Slovenia, Slovakia and Romania. These countries are all among Austria’s 20 most important trade partners and when it comes to domestic exports they are more important than Western European nations such as the Netherlands, Spain, Belgium or Sweden, and they are also more important than exports to the economic superpower Japan. The demand for Austrian products in Southeast European countries (Albania, Bosnia-Herzegovina, Croatia, Kosovo, Macedonia, Montenegro, Serbia and CIS) even became a pillar for economic growth during the crisis, when it increased by 5.9 percent from 2011 to 2012 and was therefore as strong as the combined growth in non-EU countries. This growth, however, can mostly be attributed to increasing exports to CIS countries, Russia, Kazakhstan and Azerbaijan.
But what really changed over the past years is the one-sidedness of this eastwest-hub. In the past, investments flowed clearly from or via Austria to the East, but now Austria was being used more and more by companies of the CEE as a gateway to the West. In 2013, every fifth company founded in Austria was the result of an investment from the CEE. A total of 2,571 companies founded in the previous year originated from the CEE region – in 2003 there were only 567 newly founded companies. The competence centre for CEE at Vienna’s University for Economics and Business Administration estimates that this trend will continue to grow, because particularly small and medium-sized companies from Eastern Europe will use Austria more often for their first venture into western markets. The reasons for this trend are the search for new markets and particularly the better image of Austria in comparison to their respective Eastern European country of origin, as investors in the CEE believe that this move increases the sales opportunities of their products.
An important reason for the solidification of economic exchange is the fact that Austrian companies remained committed to the CEE after the crisis. Investments may have dropped at the beginning of the crisis from over 10 bn. euro in 2008 to 2 bn. euro in 2009, but Austrian companies’ share in the total amount of investment remained stable between 40 to 60 percent. There were hardly any
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Nominal GDP per capita (current USD, WEO) 25,000
20,000
15,000
10,000
5,000
CZ
HU
PL
divestments. The profitability of Austrian subsidiaries in Central and Eastern Europe may have deteriorated due to the crisis, but has recovered due to the macroeconomic improvement of the economic situation. As a general rule, Austrian direct investments in the CEE yield profits after 3 to 4 years, which continue to increase quickly after they break even. The use of these profits depends on the length of the trade relations with the respective target country: In the CEE-5, where Austrian companies have been investing since the early nineties, the reinvestment ratio is approching to 80 percent. This value corresponds to the reinvestment ratio in subsidiaries of Austrian companies in Western Europe. In those CEE where Austrian companies only invested for a shorter time (more distant countries, Southeast Europe), the reinvestment ratio is significantly higher. The most important change after the beginning of the worldwide financial crisis in 2008 is the definitive end of homogeneity of an “Eastern European economic area”. Moody’s Dietmar Horning praised Austrian banks at the 27th Alpbach Financial Symposium (2013) for their commitment to the East,
RO
RU
UA
11 20
06 20
01 20
96 19
19
91
0
Source: IMF, Raiffeisen RESEARCH
but also commented that the view of Eastern European countries would transform from a phase of convergence into a phase of differentiation. These views appear at odds with recent moves by some rating agencies to downgrade Austrian banks due to Eastern Europe risk. Hardly anybody can afford to ignore this “extended home market”. This means that Austrian companies will remain committed to the CEE in the future. The exodus towards China or to the – recently disappointingly performing – BRICs did not happen; a shift from the CEE to overseas territories is not expected anytime soon. But domestic companies, however, do differentiate much more where they invest. Current studies (CEE Country Attractiveness Report by the University of Economics and Business Administration Vienna, survey by GCI Management) show that domestic businesses focus particularly on the Czech Republic and Poland. In Southeast Europe, Serbia is considered as the big hope for the future – to a much higher degree than the economic facts and research may lead one to believe.
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Despite close business relations to neighbouring Hungary, the country is considered a less profitable target for local business activities due to politically questionable decisions and the resulting growingly restrictive climate. Austrian managers are also sceptical towards the developments in Romania – despite the country’s tremendous market potential, Austrian management levels are not sure if the country will take the right course. Political turbulences in Turkey and more recently in the Ukraine dampen investment incentives in these countries. A further research result in this area shows that Austrian companies are inclined towards centralisation again: Decision-making competences are shifted back from CEE subsidiaries to Austrian headquarters.
In short: 25 years after the fall of the Iron Curtain, the countries in Central, Eastern and Southeast Europe are no longer an “adventure” for Austrian companies. They became reliable partners long ago. And they are a counterweight to the still strong dependency on Germany that remains important for the domestic economy.
For further information: Verena Nowotny verena.nowotny@gaisberg.eu www.21st-austria.at
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