Eastern European countries are experiencing significant losses in competitiveness

2023-11-28 17:11:35

For multinationals, Eastern European countries are becoming less and less attractive. Indeed, we have observed a strong loss of cost competitiveness in most of these countries since 2015 compared to the euro zone. This trend is observed both in European Union (EU) member countries that have adopted the common currency and in those that have retained their national currency.

Among the countries that joined the euro, apart from the case of Croatia which only recently adopted the European currency, the growth in unit labor costs was much higher than that observed in the euro zone as a whole. The increase in wage cost per unit produced, from 1^is quarter 2015 to 2^e quarter 2023, was in fact 73% in Lithuania, 59% in Latvia, 55% in Estonia, 38% in Slovakia and 34% in Slovenia.

But if the operating rules of the single currency, which notably deprive States of the possibility of devaluing their currency to regain competitiveness, have prevented the countries of the East of the euro zone from compensating for the increase in wages induced by a strong inflation, those who have kept a national currency are still faced with an uncontrolled increase in the cost of labor in euros.

The impact of the exchange rate

Indeed, the wage cost per unit produced in countries outside the monetary zone, converted into euros, increased by 67% in Bulgaria, by 62% in the Czech Republic, by 46% in Romania, by 25% in Poland and by 19%. in Hungary between 1^is quarter 2015 and the 2^e quarter 2023.

Over this period, the Czech crown appreciated by almost 14% once morest the euro. The Hungarian forint depreciated by 19.7%. The Polish zloty depreciated by 7%. Romania’s leu depreciated by 9%. As for Bulgaria, it practices a regime of currency board, or monetary directorate, with a fixed exchange rate once morest the euro. The country kept this regime even following joining the European exchange rate mechanism, which would have allowed some volatility.

Certainly, the exchange rate once morest the euro might have aggravated or reduced the differences in the increase in wage costs in national currency, once converted into euros. However, on balance, we clearly observe a loss of competitiveness of these economies even though their States had the lever of devaluation.

A threat to German industry

As the unit labor costs of most Eastern EU countries have increased with greater intensity than those of the Eurozone, their relative attractiveness has been somewhat reduced for foreign investment. Also, the sales prices in euros of goods and services produced by these countries are likely to be less lower than before the sales prices of what is produced by the euro zone. As this loss of competitiveness is likely to depress exports and boost imports from the countries concerned, the trade balance of these countries might deteriorate.

Until now, it is mainly in Romania that the trade balance in goods (excluding energy) has deteriorated continuously since 2015, with a worsening of the deficit. But the situation might quickly concern other countries in the region.

This situation also poses a problem for European trading partners in country cases, and especially Germany. Indeed, German industry has long subcontracted massively to low-wage Eastern EU countries, which allowed it to reduce its costs. The increase in wage costs reduces this windfall from which Germany has benefited greatly. After the loss of cheap Russian gas supplies, another threat appears to the foundations of Germany’s industrial competitiveness. Of course, salaries in Eastern European Union countries are still lower than those in the West, but they need to be adjusted for productivity, and the gaps are narrowing.

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