V4 countries have decent chance to grow despite pandemic

The V4 has a potential for above-average economic growth

editor: REMIX NEWS
author: Petr Sklenář, Pavel Ryska

The COVID-19 pandemic and restrictive government measures have delivered a negative shock that has severely affected and will continue to affect all Central European economies, however, we see several reasons why Poland, the Czech Republic, Slovakia, and Hungary have the opportunity to continue to deliver above-average economic growth within the European Union.

Central European countries are clearly among the winners when it comes to the growth of international trade in recent decades. Success in the area of foreign trade has been one of the drivers of their economic growth and underlines the potential for the future. The volume of exports in each Visegrád Four (V4) country is about seven to ten times higher than in 2000. The region, with its population of 64 million, represents about 0.8 percent of the global population, but its share of global GDP is 1.2 percent, and its share of world trade is more than 3.3 percent.

There is no significant deposit of minerals (oil, natural gas, metal ores) in the region, but, even so, all four countries have a trade surplus. That shows that the countries of Central Europe have undergone a successful economic transformation since the 1990s and that today they offer quality products on the world market at competitive prices. The shock of the COVID-19 pandemic has not changed that reality. In fact, Poland and the Czech Republic are heading for a record foreign trade surplus in 2020.

It is often mentioned that the Czech economy is highly dependent on Germany because a third of the Czech export goes there (this share is similar to that of Poland). However, hand in hand with this, both countries have gradually become key trading partners for Germany. Currently, Poland is the fifth and Czechia the seventh biggest import partners for Germany. Germany reports higher imports only from France, the United States, the Netherlands, and China. To illustrate this point, the annual foreign trade turnover between Germany and the Czech Republic exceeds €92 billion, which is the same turnover as between Germany and Russia and Turkey combined. Germany itself is successful in world trade, and the fact that the V4 countries have become an important trading partner for the nation plays in their favor.

So, what accounts for Central European competitiveness? Poland, the Czech Republic, and Hungary are not in the eurozone, and yet, or rather because of that, they are strengthening their position regarding mutual trade. Their own currency with a free-floating exchange rate allows their economies to respond to external shocks, and there have been three in the last decade: the global financial crisis, the eurozone crisis, and now COVID-19. That explains why from 2000 to 2008, Slovakia’s export to Germany grew the most in the region, while since 2009, when the country joined the euro area, this export growth was the slowest within the V4 region. The possibility of weakening the currency in the event of a negative shock and aiding exports thus outweighs the benefits of a fixed exchange rate in periods of relative calm. Having our currencies is a clear advantage for our region.

The second key strength of the V4 region is its relative macroeconomic stability and the absence of significant imbalances. Although Hungary has the highest regional government debt — representing about 70 percent of GDP in mid-2020 — even this figure is well below the EU’s average of 88 percent of GDP and the euro area’s average of 95 percent.

Inflation has been slightly higher in the V4 recently, but still relatively stable at around 3 percent. The Czech Republic and Poland have an unemployment rate of about 3 percent, which is the best result in the entire EU. Hungary has an unemployment rate of around 4.5 percent, which is still almost half the euro area average. The result of this competitiveness is that all V4 countries report a trade surplus. At the same time, low unemployment and relatively low indebtedness also help maintain the excellent position of the financial sector and banks.

The harsh restrictions associated with COVID-19 have brought nothing positive to any economy. And despite the economic downturn in the European Union, some regulations have been further tightened such as those concerning emission limits.

We consider pressure from the so-called New Green Deal to be a risk, especially in the case of Poland and the Czech Republic. Similarly, enforcing mandatory quotas for electric cars is risky for the industry of the Czech Republic, Slovakia, and Hungary. Nevertheless, we believe that the countries of Central Europe are entering the next decade with better prospects for economic growth than most European countries. The condition for this relative advantage will be a conservative economic policy, maintaining the advantage of their own flexible currencies and promoting a free business environment without excessive regulation.


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