WARSAW — Corona bonds aren’t a thing in Central Europe.
That means Warsaw, Prague and Budapest haven’t been involved in the bruising battle among eurozone countries on whether to issue joint debt backed by all of the zone’s 19 member countries. It also means they don’t have access to European Central Bank measures providing up to €3 trillion in liquidity to banks, a €1.1 trillion bond-buying program, and €240 billion in credit lines provided by the European Stability Mechanism under the deal struck Thursday by EU finance ministers.
That’s a lot of firepower that the non-eurozone Central European are missing out on (although they will be part of the €300 billion in loans to companies and workers that was also part of Thursday’s deal).
As a result, those countries are being forced to rely largely on their own central banks and increases in government spending to fend off economic collapse — plus a boost in direct support from the EU’s budget. It’s raising fears that the region — especially poorer countries like Bulgaria and Romania — will have a tougher time fending off the impact of the crisis, something that may deepen divisions in the EU.
“In the immediate term, eurozone countries can borrow as much as they want,” said Richard Grieveson, deputy director of the Vienna Institute for International Economic Studies.
“[The] domestic situation in our countries is quite fragile” — Tadeusz Kościński, Polish finance minister
Central European countries that aren’t in the common currency are Bulgaria, Croatia, the Czech Republic, Hungary, Poland and Romania. (Sweden and Denmark aren’t in the eurozone either, but they’re much wealthier and face very different constraints.)
They face the same challenges as Western Europe — borders are closed, airplanes aren’t flying, shops and restaurants aren’t open and unemployment is spiking. Plus, in many of them, the car industry accounts for a tenth or more of the economy, meaning that they’re hammered by shuttered factories and collapsing sales.
The Poles are worried that efforts to fight the crisis will focus on the eurozone, not the full EU27.
“As this is not the euro area crisis, it is of utmost importance that we are all engaged in the process of tackling the economic consequences of the pandemic in the spirit of European solidarity,” Polish Finance Minister Tadeusz Kościński wrote to his counterparts in an April 1 letter seen by POLITICO.
“[The] domestic situation in our countries is quite fragile,” he wrote. “We are facing or will face falling budget revenues and necessity to finance increased health spending, social benefits and temporary assistance to businesses.”
National capitals and local central banks are pouring money into their economies.
The Polish parliament on Wednesday approved a second round of its “anti-crisis shield” economic rescue measures — a mix of tax cuts and deferrals and cheap loans for companies that keep their workers on staff. Grieveson estimated that the measures come to about 3 percent to 6 percent of GDP, depending on how much red tape companies have to face in getting at the cash. If tax deferrals and other payment delays are added, the Polish measures come to about 15 percent of GDP.
The National Bank of Poland also cut its benchmark interest rate to 0.5 percent — a record low — and pledged its own financial bazooka of buying unlimited bonds issued by the government’s Polish Development Fund, which is supposed to provide financial support to businesses — all worth about 3 percent of GDP.
“The Polish economy will get out of this a little battered, but certainly stronger than others,” Prime Minister Mateusz Morawiecki said Thursday.
Other Central European countries are also ramping up rescues.
The Czech Republic has put forward fiscal measures worth about 3 percent of GDP; if government guarantees are added, it rises to about 20 percent of GDP, and the central bank slashed interest rates to 1 percent and launched an asset buying program.
Hungary’s plan comes to about 20 percent of GDP, according to the Vienna institute. The ruling Fidesz party has combined crisis measures with efforts to boost its own political priorities, confiscating 50 percent of the public funds that are supposed to go to political parties — something that could cripple the already weak opposition — and setting special taxes on foreign retail chains like supermarkets.
Those three countries are wealthier than other parts of Central Europe.
Romania’s package is worth about 4 percent of GDP, but the country faces more financing difficulties than its regional peers, said Liam Peach, an analyst with Capital Economics. Local business wants a rescue package of 15 percent of GDP, but it would be difficult for Romania to borrow that kind of money on international markets.
“Croatia has a high level of public debt, and they are planning a very high level of public spending of 11 percent,” said Grieveson.
If the virus spreads into the summer, Bulgaria’s and Croatia’s tourism industries would be devastated — pummelling their economies even more.
“Central Europe’s governments and central banks have actually reacted pretty aggressively and policy packages have been quite large,” Peach said. “They haven’t been caught up in the issues of the eurozone of having to coordinate a policy response.”
East vs. West
Germany isn’t using a financial bazooka — rather it’s unleashed a howitzer. Its program comes to about 60 percent of GDP, according to the Bruegel think tank.
Italy, with the highest death total in Europe, is spending €750 billion, or about 40 percent of the economy.
“Our shield looks very modest when compared to those programs,” Witold Orłowski, chief economic adviser for PwC Poland, the consultancy, wrote in a column. “But we can’t complain. The most important thing is for the aid to begin to flow.”
Without the backing of the ECB, Central Europe is being forced to rely more on help from the EU budget. The European Commission has proposed releasing €8 billion of unused cohesion money, which countries would normally have to return to Brussels, to fight the virus. Morawiecki greeted the idea by grumbling: “Unfortunately the EU hasn’t given a single cent yet to fight coronavirus.”
The Commission also plans to boost spending from its next seven-year budget to fight the consequences of the pandemic, although it’s unlikely to be anything like the scale of the postwar Marshall Plan.
In his letter, Kościński called for making “maximum use of the EU budget” including boosting the size of the bloc’s next seven-year spending plan.
For now Central Europe is handling the crisis relatively well. The number of coronavirus cases is lower than in many West European countries, as much of the region implemented lockdown measures before any people had died. It’s just a question of whether those countries have the resources to tough out an unprecedented economic catastrophe relying more on themselves than on a bigger bloc of countries.
“Poles, Czechs, Hungarians — their borrowing costs have stayed well-behaved,” said Timothy Ash, an emerging markets economist with U.K.-based BlueBay Asset Management. “Their currencies have adjusted a bit — so far they are doing OK, and they do have some policy flexibility. The caveat is that we don’t know how bad this is going to be.”
Bjarke Smith-Meyer contributed reporting.
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