By Alan Crosby and Boris Groendahl
VIENNA (Reuters) - Central Europe has emerged from its communist shadow, with strong growth and continued economic convergence towards its richer western neighbors set to make it an attractive investment target for years to come.
Participants at the Reuters Central European Investment Summit said central Europe has evolved from a collection of Soviet satellite states into the most dynamic part of the capitalist European Union in less than a generation.
And with the boost provided by accession to the Union, coupled with the goal of joining the euro zone in the coming years, emerging Europe's newest EU members are well placed to receive billions more in direct investment.
"I don't think we distinguish any more between eastern Europe and western Europe," said Lucas Wilson, a UBS managing director leading investment banking in the region, told the team of Reuters journalists and editors assembled at the Summit.
"Investors, private equity buyers and so on, they do tend to just look at it as Europe. Eastern Europe is not as scary as it was five years ago," Wilson said.
The more than a dozen top policymakers and executives said that while dwarfed by neighbor Russia and by China and India, countries in the region now combine the vibrant economic growth of an emerging market with the political stability and legal certainty that come with joining the EU.
This shows, for instance, in bond spreads that are significantly lower than they would be expected to be in countries with the same economic fundamentals.
"If you look at bond spreads there is an interesting phenomenon which we call the EU halo effect," said IMF regional senior representative Christoph Rosenberg.
"If you try to explain why spreads are as low as they are (with the regular models) ... you have a residual of 100 basis points. They are able to borrow at much lower rates than fundamentals suggest. That's what we call the halo effect."
CREDIT CRUNCH SURVIVORS
That stability has never been more visible than through the current global credit crunch, which so far has failed to have a marked impact on the region. But that is not to say that the EU's eastern members will avoid the crisis completely.
As growth accelerated since EU accession in May 2004, it has driven up wages and prices; a credit boom may have fanned a housing bubble; the adoption of the euro currency is slipping; and current account deficits have ballooned, raising fears of a possible collapse.
"(These countries) have done very well with the market turmoil until recently. We do think the countries have not used fiscal policies appropriately, some have really poured oil on the fire with their fiscal policies," IMF's Rosenberg said.
"The (economic) numbers look good but vulnerabilities are growing in the region... In general we think that in 2008 there's going to be a slowdown... Recent events have highlighted the downside (economic) risks," he said.
While most speakers agreed there are pockets of overheating in central European property prices, real estate executives and bankers in the region believe continuing domestic demand and economic growth will support the wider market. Continued...
© Thomson Reuters 2009. All rights reserved.
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