Throughout the past decade, Central Europe's real estate market was one of its fastest growing and most lucrative investment sectors. Investors and speculators across Europe as well as Central European diasporas took part in the buying frenzy.
By early 2009 Central Europe's capitals had some of the most expensive housing prices within the EU. Seven Central European cities ranked in the top 50 most expensive real-estate markets in the world including Bucharest, Kraków, Prague, Riga and Warsaw.
The global financial crisis and subsequent credit crunch burst the region's property bubble. Central Europe's banks tightened lending requirements while buyers were worried that their euro- and Swiss franc-denominated mortgages would raise debt obligations as regional currencies plummeted. This was especially problematic throughout the Baltic capitals and Bulgaria's resurging Black Sea tourist outposts (whose local currencies were all pegged to the euro).
Now that the eurozone is experiencing its own market turbulence, perhaps it's time to reassess Central Europe as a high-risk real-estate investment. Unlike southern tier hot spots Greece and Spain, markets in Poland and the Czech Republic did not experience a total property bust.
In addition to attracting urban buyers (due to growing local middle class ambitions) both countries were able to take advantage of their non-euro status, via independent currency flexibility, and adjust prices.
Moreover, since local economic health drives housing prices, Poland's property market is in a much stronger position than say Bulgaria or Hungary. While all out investment pessimism towards Central Europe's property markets has abated, investors still need to be discerning when buying in the region. Like countries within the eurozone, it is important to distinguish that one size does not fit all.
The EU's current efforts (led by France and Germany) to rescue Greece from its colossal debt crisis will surely result in greater EU-wide scrutiny, but it could also spark a new wave of tighter economic and financial supervision. Greece's public sector, long accused of fraudulent accounting practices, corruption and tax evasion, offers sobering lessons for countries across Central Europe grappling with their own structural limitations, deficits and eurozone accession strategies.
The Greek conundrum highlights the economic limitations of establishing a monetary union without a complimentary fiscal union. Having sixteen separate fiscal policies, particularly during economic downturns, not only results in growing economic discrepancies (and animosity) between fiscally disciplined and fiscally loose member states, but enables individual members to avoid accountability to a central fiscal authority. Ultimately, this threatens the strength and stability of the euro, as we have seen in this week's sell-off.
The eurozone's debt crisis has enabled EU leaders to call for greater fiscal integration, coordination and most importantly stricter implementation of structural reforms throughout the eurozone and within those countries vying to join it. This poses challenges for countries like Poland and others throughout Central Europe which could see greater engagement from Brussels over future budget and economic policies, as creating an increasingly finer line between meeting Maastricht criteria and economic recovery.
Poland in particular will see its debt management strategy tested. It has a legally restricted debt-to-GDP ratio of 55 percent, which if surpassed would force the government to restrict borrowing and make additional cuts to public spending.
This poses challenges for several reasons. First, Poles, along with Central Europeans in four other countries, are preparing for national elections in 2010. Despite being the only EU country to avoid a severe recession, Poland's recovery is still shaky and an additional round of austerity measures will not sit well with voters.
Second, though the euro convergence plan is still aimed for 2012, it will be increasingly difficult for Poland to cut its budget deficit from almost seven percent to under three percent in less than two years.
Finally, much of Poland's debt strategy rests on the success of upcoming privatization deals and high economic growth. With the eurozone influx, the American recovery uncertain, and global trade yet to rebound, achieving this goal will be challenging. The lessons from Greece are twofold: first, rushed euro convergence, while creating short-term stability, ultimately creates larger structural economic deficiencies. Second, getting into the eurozone is just half the battle, thriving in it is another story.
