Special

Article 1

The Pandemic’s Impact on Central
Europe in a Historical Perspective
By Krassen Stanchev

Author Krassen Stanchev

Central Europe is a denotement in EU-speak that refers to Bulgaria,
the Czech Republic, Hungary, Poland, Romania and Slovakia, inorder to distinguish them from other new members of the European
Union in the Baltic or Adriatic regions. Geographically, othercountries (Austria and Liechtenstein) also belong to the region but
are rarely grouped with these six.
In the last 30 years all European ex-communist economies have
proved a remarkable success, performing on almost all economic
indicators, except productivity, better than the economies of Western
Europe. According to IMF and World Bank definitions, thesecountries used to fall into the groups of both “developing” and“emerging” economies; now all of them, except Bulgaria, belong to
the category of “high income” and the Czech Republic and Slovakia
are already developed nations, and the Czech Republic is not counted
as an emerging market.
The intention of this article is to give additional insights into thebackgrounds and impacts of Covid-19 on emerging and developing
economies, including the prospects for recovery of Central Europe.

The Second Half of the 20th
Century
The economic and politicaldevelopments of 1989-1999 were arestoration of normal economic
conditions, not a “transition” to a farfetched, problem-free social order. The“normality” of this should be understoodin the economic policy terms stated by
Janos Kornai (“What the Change ofSystem from Socialism to Capitalism Doesand Does Not Mean”, The Journal of
Economic Perspectives, Vol. 14, No. 1,
Winter 2000) as a return to political power
friendly to markets and private property,
hard budget constraints as the leadprinciple in public finance, buyerdominated markets with rare andtemporary shortages, unemployment as a
product of technological change, typicalbusiness (not political) cycles, and politicalpluralism and competition. Of all these,
only political liberalization was fast andhttps://www.jef.or.jp/journal/

costless.
This restoration of normality came at the price of the liquidation of
inefficient and loss-making state sectors, a restructuring that
resulted in a severe loss of prosperity. In the first half of the 1990s,
the level of GDP per capita in these (and all other post-Communist)
countries had fallen to below the world average. By the time Central
European countries joined the EU in 2004 (Bulgaria and Romania
became members in 2007), they were already at least 30% richer interms of GDP per capita than the rest but twice as poor as theWestern part of the continent.
The Chart, based on statistics from Our World in Data by Oxford
University, shows details of GDP per capita in Central European
countries over a period of 100 years, comparing their economic
development with neighbors like Greece, Austria and Germany. One
can see that at the end of World War II, Central Europe was atcomparable level of GDP per capita – still poorer but in a moreadvantageous relative position to its neighbors.
In 1945, Bulgaria (today the poorest country in the EU) was only
30% less prosperous than Austria, but better than Greece and even

CHART

GDP per capita, 1920 to 2016
GDP per capita adjusted for price changes over time (inflation) and price differences between countries – it ismeasured in international-$ in 2011 prices.
Germany
Austria$40,000$30,000

Czech RepublicCzechoslovakia
Slovakia
PolandHungary
Greece$20,000

Romania
Blugaria$10,000

$0
1920

1940

1960

1980

2000

2016

ourworldindata.org/economic-growth ● CC BY
Note: These series are adjusted for price differences between countries based on only a single benchmark year, in 2011.
This makes them suitable for studying the growth of incomes over time but not for comparing income levels incountries.

Source: Maddison Project Database (2018)

Japan SPOTLIGHT • March / April 2021

37

twice better than Romania. In 1948, Czechoslovaks ($5,800 per
capita GDP) were more prosperous than Germans ($5,700) andAustrians ($3,500), and Hungarians ($5,900) were 40% better off
than Austrians, while Bulgaria was already 30% worse off than
Greece (parts of which Bulgaria occupied as an ally of Germany from
1941 to 1944). There is no data on war-torn Poland but it is wellknown that it was additionally robbed by the Soviet Union, along withother Central European countries: on the pretext of reparations,irrespective of whether a country was an ally of Germany or invaded
by the Nazis, industrial facilities were dismantled and shipped to the
USSR. This period of Poland’s economic history is well documented
by Anne Applebaum in her Iron Curtain: The Crushing of Eastern
Europe, 1944-1956 (Penguin, 2012).

Pre-Pandemic Golden Age
In 1999 the restoration process was over and these six countries
plus Estonia, Latvia, Lithuania and Slovenia set out on a path to join
the EU, benefiting from a market of 500 million consumers, lowtransaction and unit labor costs, the rule of law and resulting foreign
direct investment (FDI). UNCTAD’s Inward FDI Performance Index of2007 and 2008 shows Bulgaria in second place in the world after
Hong Kong as an investment destination (UNCTAD 2008 Investment
Report: https://unctad.org/system/files/official-document/wir2008_
en.pdf).
Despite ups and down and remaining differences between
themselves, the Central European countries enjoyed a period of aprosperity without parallel in their entire history. Journalist Shaun
Walker wrote in The Guardian on Oct. 26, 2019: “Central and Eastern
Europe over the past 30 years has witnessed one of the mostdramatic economic spurts of growth that any region of the world has
ever experienced. People live longer, healthier lives. Air quality is
better, and individuals are on average twice as wealthy.” He also
quoted Polish economist Marcin Piatkowski: “The whole region has
been successful, as reflected in the fact that on average, no
Bulgarian, or Romanian or Pole has ever lived better than they donow, both in absolute terms and in relative terms compared to theWest.”
The average economic growth rate of all European postCommunist economies from the end of the 1990s to 2009 was 2.5-3
times higher than the average growth rates of the EU or North
America.
The 2009 recession in the region was often sharp (in Romania andSlovakia by more than 5% of GDP, in Bulgaria, the Czech Republicand Hungary by less than 5%, and just a slowdown in Poland) but
short-lived. Eurostat data shows that economic growth resumed in
the spring of 2010, and by 2015 the same comparative growth
pattern vis-à-vis Western Europe was restored; for Poland andRomania at the level of 4-5% of GDP, and for the rest of the region(except the Czech Republic) at 3-4%. Post-2009 recession
employment rates in Eastern Europe are at their highest historiclevels, wages have grown relatively fast and comparative advantages
38 Japan SPOTLIGHT • March / April 2021

TABLE

Per capita GDP at PPP(US$1,000, 1996 & 2019)
Country

1996

Country

2019

Germany

34.8

Germany

55.0

Austria

32.3

Austria

54.0

Greece20.3

Czech Rep.

39.3

Czech Rep.

18.6

Slovakia

37.3

Hungary

14.0

Hungary

34.5

Slovakia

12.2

Poland33.5

Poland

11.6

Greece30.5

Romania

10.4

Romania

27.8

Bulgaria

8.4

Bulgaria

24.6

Source: World Bankin unit labor costs have disappeared.
According to Eurostat labor force surveys, in the years between
2015 and the end of 2019 the unemployment rate had shrunk by 2.5
times in Bulgaria, the Czech Republic (with the lowest rate in the EU
at 2%), and Poland, and by two times in Hungary, Romania andSlovakia. The highest regional rate is in Bulgaria at 4.2% (6.7% in
the EU).
The Table gives the numbers of the historic “leap forward” byCentral Europe. It was triggered by regions’ dismantling of central
planning around 1996 and the 15 years of EU membership (2019) interms of GDP per capita (at purchasing power parity). The
comparison is again between the economies of Central Europe andAustria, Germany and Greece. Greece had lost the bulk of its
previous advantage, having defaulted on its foreign in debt in 2011and entered a long period of recession. Other countries moved
beyond the $30,000 per capita GDP threshold or approached it(Romania), except for Bulgaria.
For this period of 25 years, Austria, Germany and Greece had
improved their GDP per capita (at PPP) by 50% on average (Austria
by 67%). For Slovakia the improvement was 3.1 times, 2.92 times in
Bulgaria, 2.88 times in Poland, 2.67 times in Romania, 2.46 times in
Hungary, and 2.1 times in the Czech Republic.
However, irrespective of the success of the years of EU integration,
the difference between Central Europe’s well-being and that of the“old” EU members remains noticeable. It drains human capital to theWest and correlates with the situation in the domestic labor markets
and the level of productivity.

Covid-19 Impacts
At the start of the pandemic, its social and economic costs wererelatively mild. By the end of May-September 2020, Eurostat datasuggested the following regularities:- Unemployment in the region grew by 25-35% (30-35% in
Bulgaria, Poland and Romania) but remained less pronounced
than the EU average, which approached 8% by June. The pace of
new job creation had slowed down marginally for the EU from
1.9% to 1.7% of the employed from the first to the third quarterof the year. In the Czech Republic and Hungary the demand forlabor in September was higher than the EU average – 5.3% and2.1% respectively but less than 1% for the rest of the countries.
- As mentioned above, unit labor costs in Central Europe havebeen registering an uptrend in the last five years; in 2019 the rate
was above 10% on an annual basis, with Bulgaria and Romania
growing “only” by 6% and 7.7% respectively.
- In terms of the expected GDP decline (as indicated by the EU2020 Autumn forecast), Poland is the best performing EU
country in Central Europe, at -3.6% of GDP in 2020 and a
projected recovery of 3.3% in 2021 (almost restoring the“losses” of the last year).
- All other countries are not expected to fully recover in 2021;
provided there is no severe third wave of the pandemic, thereturn to the pre-pandemic GDP levels will come in 2022.
- For Bulgaria the estimated 2020 GDP contraction is 5.1%, and2021 recovery 2.6%. For Hungary it is -6.4% and +4%; Romania-5.2 and +3.3%; the Czech Republic -6.9 and +3.1%; andSlovakia -7.5% and + 4.7% respectively.
- All countries except Slovakia are seen as better GDP performers
than the EU average, where the overall decline in 2020 is
expected to reach 7.4%, with the 2021 recovery at 4.1% of GDP.
- Generally speaking, the public finances of Central European
countries are better positioned to deal with the negative impactsof the pandemic. For the three years before 2020, Bulgaria
registered a comfortable fiscal surplus of almost 1.7% of GDP
and the Czech Republic 0.9%. Hungary, Slovakia and Poland’sbudget deficits were relatively negligible at 2.17%, 0.8% and0.7% of GDP respectively. Only Romania had an average fiscal
deficit of 2.9% (4.4% in 2019) of GDP, still under the 3% of GDP
threshold requirement.
- In 2019, all countries had government debt-to-GDP levels
considerably below the EU average of 77.6%: Bulgaria at 20.2%,
the Czech Republic 30.2%, Romania 35.4%, Poland 45.7%,
Slovakia 48.5%, and Hungary 65.4%. These levels ofgovernment debt remained until July 2020, while the EU averagelevel had risen to 87.6% of GDP.
The lowest ratios of EU countries’ government debt to GDP at theend of the second quarter of 2020 were recorded in Estonia (18.5%),
Bulgaria (21.3%) and Luxembourg (23.8%). The debt and fiscal
position of Central European countries is not expected to raise theircosts of borrowing. In fact, EU and European Central Bank policies
led to unprecedentedly low costs of borrowing and Bulgaria,
Hungary and the Czech Republic did borrow on the eve of the second
wave of the pandemic in October 2020. For the other countries theshare of debt somewhat declined. The government debt-to-GDP ratio
for the region as of mid-January 2021 is: Bulgaria 24.3%, the Czech
Republic 30.8%, Hungary 66.3%, Poland 44%, Romania -35.2% andSlovakia -48% of GDP.

Health Systems Under Pressure
The above quoted GDP assessments and forecasts changed atleast three times during the year. The overall methodology did notseem fit to take into account the impacts of restrictions on thehuman and physical factors of economic life caused by quarantines,
lockdowns and transport and travel complications associated withthe pandemic. In many respects recovery will depend on Covid-19,
vaccination efficacy and the health and economic policies of thecountries themselves and the EU.
In the first wave of the pandemic the Central European countries
registered relatively modest human life losses from Covid-19. By theend of May, deaths per 100,000 residents were 6.3 in Romania, 5.2
in Slovakia and Hungary, 3 in the Czech Republic, 2.7 in Poland, and
1.9 in Bulgaria. Only Greece fared better with 1.6 fatal outcomes per
100,000 citizens. In Germany and Austria the indicator was 10.1 and7.3 respectively, and several times higher in many other countries
which were among the best in 2019 Global Health Security Index.
As a result of the second wave of the pandemic the countries ofCentral Europe were already among the most severely hit membersof the EU. According to the statistics of the European Centre for
Disease Prevention and Control, by the last week of 2020 the Czech
Republic had registered the highest number of deaths per 100,000
residents at 1,119.19, followed by Slovakia at 674.5, Hungary at
472.73, Poland at 316.67, Romania at 253.1 and Bulgaria at 160.37.
In is not exactly clear why the pandemic was not contained before
the second wave of Covid-19 hit the region. Central European
healthcare systems seemed well equipped with hospital beds andhealthcare personnel at the start of the pandemic. The statistics forbeds (the latest available are for 2017) showed Bulgaria leading with
616.8 beds per 1,000 citizens; Germany next with 601.5 beds;
Romania with 525.3; Slovakia with 490.7; Poland with 485.1; andHungary with 427.1 beds. The lowest number of beds was in the
Czech Republic at 410.9, but even this number is significantly larger
than the average for the EU of 372.2 beds.
Healthcare personnel statistics for physicians per 100,000
residents and ratios between “specialists” and “General
Practitioners” (2012-2017) for the majority of the new member
states and Central European countries are somewhat advantageous
but there are no leading positions. Only Poland and Slovakia had
fewer physicians per 100,000 residents (in 2017) than the averagefor the EU.
The problem in all countries but particularly in Bulgaria was,perhaps, the “quality of beds”, and the overall organization andfinancing of healthcare. Pandemics are difficult to predict but evenmore difficult is to plan the finance to fight them in normal times.
In Central Europe, the number of beds is relatively high because
many state and municipal hospitals were not closed or renovated.
The medical institutions of pre-1989 are still there, coexisting withrecently established private hospitals. The medical equipment andoverall facilities are often of better quality in private hospitals than in
public ones, but private hospitals lack “universality” because their
Japan SPOTLIGHT • March / April 2021

39

business strategies in the last 20 years were mostly niche oriented.
The matter requires further study on how the system functioned
under pandemic pressure in individual countries. But it seems thateverywhere the difference between hospitals led to a cumbersome
reaction in the first weeks and months of the pandemic. Most
pressure was taken by the public segment of the system and there
was a delay in securing the involvement, cooperation andinformation flow between institutions in the entire healthcare andcounter-pandemic process.
The promising statistics of the first months of the pandemic andquantitative data were misleading in many countries. In Central
Europe, but not only there, time had been lost by the authorities inallocating speedy and sizable state budgets for both private andpublic hospital training, salaries, equipment, sample testing andinformation exchange that would have at least prevented theworsening of the situation due to the lack of experience, knowledge
and personnel.
One indicator that demonstrates how mature a healthcare system
is, is the share of out-of-pocket payments (OPP) for medical care byresidents of the countries. It is defined as a percentage of total
current health expenditure. Most Central European countries have far
from best practice. According to Eurostat data (2012-2017), thepicture is as follows:- Only the Czech Republic is around the average EU OPP at 14%(in France below 10%, Germany 14%, Luxembourg around 11%,
Sweden and the United Kingdom 15%);- Estonia, Slovenia and Croatia are very similar to these countries;
Lithuania resembles Mediterranean countries, where OPPs arewell above 30% of health payments;- All other countries, except Bulgaria, are in the belt of between
20% and 30% in payments for medical services: Romania at
21% (improving from 23% at the beginning of the period);
Poland at 23% (average); Hungary at 27% in 2017 (down fromapproximately 30% in 2012); Slovakia at 18.5%, (improvingfrom 23% before 2014);- It looks as if the levels of OPPs in Central Europe areapproximating the level in Austria (19% on average for theperiod), Finland and Ireland;- The outlier in the EU is Bulgaria where OPPs are firmly at thelevel of 47% in the last 10 years; only Latvia has a 40% OPP on
average.
In theory, OPPs may be used to develop better health services, but
so far this does not seem to be the case in Central Europe.

Recovery Plans & Risks
The pandemic was and still is a test of how robust Central
European countries and governments are to unexpected shocks andprofound uncertainties like those of 2020. It looks as if the recession
caused by the pandemic coincided with a cyclical downturn trendthat was in the making and was expected by risk analysts.
The health and economic statistics suggest that Central European
40 Japan SPOTLIGHT • March / April 2021

countries have been and could be more resilient to such challenges
than the EU average. On the other hand, however, the region’s
economic indicators for at least the last five years suggest that they
are losing potential. Overall, economic inertia since the recession of
2009-2010 has registered less potential for economic growth (2.53.5% of GDP per annum compared to above 5% in the period prior
to the 2009 recession), job creation (due perhaps to rising unit laborcosts but also unfavorable demographics) and investment growth(due to much lower FDI).
Eurostat data on labor productivity per person employed andhours worked for the last five years tell an important part of thestory. In the 2015-2019 period they improved relative to the EU
average from 44.6% to 48% in Bulgaria; from 80.5% to 85% in the
Czech Republic, from 74.6% to 79.7% in Poland and from 58.6% to
73% in Romania. In Hungary the level of productivity declined to70.7% from the EU average of 71.9% in 2015, and in Slovenia from
83.6% to 73%.
The better fiscal and government debt position of the Central
European countries might be helpful in a post-pandemic recovery.
However, actual recovery will depend on how policies are
implemented by the governments of the individual countries. The
challenges ahead are far from trivial.
On the one hand, there is a massive 1.8 trillion euro post-Covid-19
recovery plan by the EU. Its beneficiaries are first of all the Central
European countries and Croatia. For Croatia the ear-marked
allocation is 28% of its 2020 GDP, for Bulgaria 24%, and for
Slovakia, Romania and Poland 17%, 15% and 13% of GDP
respectively. Next comes Hungary at 12% and the Czech Republic at
about 7%. The national plans are still being drafted but what
information is available tells us that the underlying ideas (often
dominated by construction projects) are not likely to make adifference in productivity and FDI.
On the other hand, the governments of the EU are incentivized to
become an investor of last resort, and the EU itself is evolving into a
key investor. After April this year the EU will have the right toincrease revenues from its own resources by about four times. A
precondition for that is the agreement of the member states tointroduce elements of European common fiscal policy – a carbon tax
of sorts, a “harmonized” tax base and a common way of calculating
minimum wages. These policies have been discussed since 2018
and were approved by the European Council in May 2020. For thetime being it is hard to imagine how the individual governments ofCentral Europe will address these three elements and other limits tocompetition within the EU.Dr. Krassen Stanchev teaches Public Choice and Macroeconomic Analysis of
Politics at Sofia University in Bulgaria, as well as the history of economic ideas.
He is also CEO of KC 2 Ltd. and board chairman, founder and former executive
director of IME, Bulgaria’s first independent and free market think tank, as well
as a former member and committee chairman of the Constitutional Assembly(1990-1991).