Last week's resignation of Bulgaria's government
highlights the economic and political struggles plaguing
Europe's eastern flank, and the risks for investors and
companies looking to do business in emerging economies.
Unemployment in the eastern European countries is generally high,
and recent data show no relief is in sight. Making matters
worse, the austerity programs put in place to woo foreign
investment have led to social unrest, such as in Bulgaria, making
investors skittish and less willing to invest.
It is not the austerity programs alone, however, that have led to
seeming never-ending recession and public unhappiness. Two
countries illustrate the challenges faced by the emerging economies
of eastern Europe. Both Hungary and Bulgaria have educated
and skilled workforces, and their central locations in Europe and
low labor costs make them ideal candidates for employers looking to
expand operations. Unfortunately, both countries have been
held back by government mismanagement and corruption.
Bulgaria
The Bulgarian resignation was preceded by protests around the
country, sometimes violent, expressing widespread anger over
austerity policies and ongoing recession. Austerity measures
are not the only factor contributing to Bulagria's
problems. In addition to harsh austerity policies, Bulgaria
suffers from rampant corruption and the malign influence of
organized crime. Although Bulgaria began the economic crisis
with a balanced budget and austerity measures have been relatively
mild as compared to those of other countries like Greece,
government corruption and mismanagement and a corrupt legal system
have continued to deepen the economic crisis there.
Bulgaria touts itself as an investment haven by promoting its ten
percent flat tax and educated, skilled workforce, but it does not
appear those attributes have had much influence on foreign
investment. Bulgaria is still excluded from the European
Union Schengen zone (permitting passport free travel among members)
and its justice system has been under the oversight of the EU
because of corruption allegations. The average monthly salary
in Bulgaria is less than half the EU average, and its official
unemployment rate, which hovers around twelve percent, is thought
to be artificially low because of the thousands of Bulgarians who
have been unemployed so long they no longer receive unemployment
benefits. Bulgaria has been ranked 66 out of 185 places in
ease of doing business (according to the World Bank), and although
reforms were planned for 2013 to improve its ranking, its
government position leaves those reforms very much up in the
air.
The catalyst for the recent protests was a sharp increase in
heating and electricity costs, the costs of which rose to more than
half the average monthly salary and two-thirds or more of the
average pension. Embattled, the prime minister promised to
reduce electricity costs by eight percent, but gave no explanation
as to how he would do so. Resorting to xenophobic tactics,
the departing prime minister vowed to revoke the power distribution
license held by a Czech company. Indeed, many of the protests
in the past few weeks appeared to take on a nationalistic tone,
which can only serve to further scare off foreign investment and
employers hoping to capitalize on the educated, skilled, and
low-cost workforce.
Unfortunately, desperately needed reforms to the energy sector
have been put on the back burner, with the government's
resignation leaving the country's governance in disarray, and
countrywide protests have not ended. It remains to be seen
whether in the current climate Bulgaria will be able to attract and
keep foreign investors.
Hungary
An increasingly volatile and autocratic government in Hungary
has exacerbated already difficult conditions there. In
addition, effective January 1, 2013, regulations regarding the
enforcement of the new Labor Code and regulations modifying 68
legal acts, including multiple employment laws, came into effect,
creating compliance challenges for many employers.
Although the reasons for Hungary's continuing malaise are
slightly different than in Bulgaria, it too has been suffering from
an exodus of capital and decreased investment. Prime Minister
Viktor Orban recently imposed Europe's highest banking tax and
has threatened to boost taxes even further on foreign owned
retailers and utilities. Hungary's economy shrunk for the
fourth consecutive quarter, contracting 2.7 percent from October to
December 2012. The European Commission projects a budget
deficit of 3.4 % GDP both for 2013 and 2014, making it even more
difficult to leave the EU's excessive deficit procedure,
something it is eager to do. In addition, the EU projects a
0.1% GDP contraction for Hungary in 2013, which Hungary
disputes. Hungary responds that it expects one percent growth
in GDP in 2013, although it is unclear what factors would drive
that projected growth.
Much like his former counterpart in Bulgaria, Orban's Fidesz
party attempts to stir up nationalist fervor, with party officials
publicly making nationalist, anti-Semitic, and anti-Roma remarks,
with one prominent columnist with government ties calling for a
"final solution" for Hunagary's Roma
population.
The EU has accused Fidesz of making undemocratic changes to the
judicial and banking systems and for making constitutional changes
to the voting system which potentially has the effect of keeping
thousands of voters from the polls. Further, Orban's
policies have turned the Hungarian media into a highly-controlled
mouthpiece for the government, with very little room for
independent or critical voices. In response to EU and
international criticism, Orban complains that the EU is trying to
control Hungary and has threatened to turn down EU economic
assistance. It remains to be seen whether the EU will
actually impose any meaningful sanctions on Hungary, as its track
record on such issues is generally poor. In the meantime,
Hungarians, much like their Bulgarian neighbors, will continue to
suffer through government mismanagement and corrupt rule.
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