In Davos, Merkel praises Eastern Europe's reforms

The German chancellor said that while investors call for reforms in the eurozone, they overlook those already undertaken in CEE

Request a PDF

“I’m saying this to investors who are pondering investment in Europe: Central and Eastern Europe has done, almost flying below the radar, a lot of reforms,” Merkel said during a speech at the World Economic Forum in Davos.

“Don’t forget that Central and Eastern European countries made enormous strides as regards reform. Look at the investment climate in Europe; it has changed for the better.”

All Central and Eastern European countries except for Poland suffered deep recessions in the aftermath of the financial crisis, as they were hit by a slowdown in exports, Western banks pulling out funds, and crashing domestic demand – which had risen to unsustainable levels because of a boom in cheap credit.

Most of the CEE governments resorted to painful structural reforms such as firing workers public sector workers and freezing hiring, cutting civil servants’ wages by as much as 25% and eliminating their bonuses, increasing taxes such as value added tax and property taxes and slapping additional taxes on pensioners to widen the tax collection base.

Four years later, analysts say countries in Central and Eastern Europe are in much better shape than Western European ones: their debt-to-GDP ratios are lower, their current account and budget deficits are generally within acceptable limits, some of them enjoy economic growth and inflation is relatively low.

Many companies went bankrupt and unemployment shot up during the reforms in CEE, but the effects were partially offset by some Eastern Europeans looking for work in richer European Union member states.

Merkel said the eurozone, and the European Union in general, needed a “convergence in competitiveness” that would mean “not accepting the lowest common denominator” but competitiveness that measures against the best members of the single market.

RAISING LABOUR MOBILITY

Raising the mobility of the workforce within the EU is one of the measures that need to be taken to ensure increased competitiveness, she said.

 More from Emergingmarkets.org
 Eurozone debt crisis risk still on for banks
 IMF cuts global growth forecasts
 Banks in Eastern Europe lash out at regulators
“We should do everything we can in order to ensure increased mobility of our labour force in the European single market.”

“The potential of the single market needs to be tapped for the labour market,” Merkel added, pointing to language barriers but also difficulties in transferring benefits such as social security between countries.

The European Union, which has 25% of global growth but 50% of the world’s welfare, needs to show that it has companies that are globally recognized and needs to solve the problem of youth unemployment, the German chancellor also said.

She warned that the financial crisis has taken its toll on the society and must not be repeated.

“Another bubble that we create, another deep crisis for the global economy will be very difficult for our democracies to master because people lose trust.”

The ultimate responsibility for painful but necessary structural reforms lies with governments, as “national banks will not be able to solve the structural problems,” Merkel said.

Talk of currency wars has resurfaced, but the German chancellor did not want to comment too much on the issue, saying only that she was “not completely without worries on this” and that she looked “with a certain degree of concern at Japan right now.”

Merkel called the European Central Bank “a very positive force” that will ensure that currency manipulation on the part of the eurozone will not happen.

“If everyone was acting like the ECB, I think we would have fewer problems across the world,” she said.