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MNI INTERVIEW: ECB Rate Hikes, German Downturn Threat To CESEE

(MNI) LONDON

European Central Bank interest rate hikes and the slowing German economy are further undermining already sluggish growth in much of central and eastern Europe, a leading economist told MNI.

Despite having their own inflation targets, many Central, Eastern and Southern European countries are in practice compelled to follow policy moves by the ECB, Mario Holzner, Executive Director of the Vienna Institute for International Economics (WIIW) said in an interview, leaving them reliant on the exchange rate to help set local conditions.

With the ECB raising rates by 400bps since the start of its hiking cycle, those non-euro area members most closely tied to the bloc’s supply chains have been forced to follow suit, harming growth in the process.

“I think the ECB has got it completely wrong,” Holzner said.

“Monetary policy that tries to deal with the supply shock by increasing interest rates doesn't work. It will definitely bring down growth, but it's a very costly way to reduce inflation by a little," he added.

“In any case, these (CESEE) countries basically have to do more or less the same interest rate hikes in order to keep the exchange rate somewhat stable,” he noted.

SLOWING GROWTH

Most countries in the region will likely see a growth slowdown this year, with overall EU members recording an average of +1.2% (compared with + 4.2% in 2022), while Visegrad countries are projected to see average growth of just 0.6%.

Hungary, where the central bank has raised its key interest rates to 13%, is the only country where negative growth (-0.5%) is anticipated, as it wrestles with the economic effects of “de facto” EU sanctions relating to problems of democracy and EU law, Holzner said.

By contrast, Albania (+3.3%), Croatia (+2.5%), Montenegro (+3.5%) and Turkey (+2.6%) will see the greatest economic boost, thanks largely to a post-Covid rebound in tourism, with Romania and some parts of the western Balkans also growing strongly.

Germany’s slide into technical recession will bring down growth rates by a few tenths of a percentage point in those countries that are part of the Central European manufacturing core, Holzner told MNI, speaking ahead of an ECB conference on CESEE countries to be held on July 17.

Germany’s car industry struggles -- attributed to high energy prices, costs associated with the green transition and increased competition from China -- are a particular cause for concern. With few CESEE countries having their own industrial policy, decisions are made in German corporate boardrooms, a driver of investment across the region.

“Germany is really in a difficult situation right now,” Holzner said. “The whole question of the future of the automotive sector -- the heart of the German industry -- over the next decade, is unclear. Which means that the heart of industry in Central and Eastern Europe is also unclear”.

ENERGY SUPPLIES

Energy supply remains “probably the most important issue for Europe,” Holzner said, with Austria, Hungary and Slovakia still dependent on Russian pipeline gas. Austrian reserves should be at 100% by the winter, three quarters of which will have been imported from Russia, with the possibility of covering one third of additional consumption via imports from Germany and Italy in an emergency.

“Russia has probably lost the gas war,” and would probably benefit if it actually boosted its supply of gas, Holzner said. “But if Ukraine or other countries in Central Europe unfriendly to (the Kremlin) stop delivering Russian gas in the near future, that could cause another crisis.

MNI Frankfurt Bureau | +49-69-720-146 | luke.heighton@marketnews.com
MNI Frankfurt Bureau | +49-69-720-146 | luke.heighton@marketnews.com

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