The New Europe's Impact on the Global Economic Outlook

Dizzy Dean was once asked which team, in his opinion, would win the 1934 World Series. He offered a response that no one could argue with: "The Series is already won, but I don't know by which team!" The 1991 World Series may have already been won, but unfortunately not by the Toronto Blue Jays.

After a terrifically exciting and successful regular season of baseball, Toronto Blue Jays fans suffered through a holiday weekend of successive defeats at the hands of the Minnesota Twins. One of the lasting images of the American League Championship Series is the sight of Kirby Puckett, the little superstar that could, churning around the bases, arms and legs pumping furiously, the essence of unbridled enthusiasm and achievement.

With their team having come close on several occasions, Blue Jays fans have coined a phrase of last resort: "There's always next year." Next year--1992--will hopefully bring a new look, some additional talent and a reinvigorated team.

1992 is destined to be an important and interesting year for reasons completely outside the context of major league baseball. 1992--or more precisely January 1, 1993--marks the economic union of 12 European countries that will unite to achieve an integrated common market.

Arguably, the achievement of an economic union is not as gripping as other recent events in Europe. I am referring, of course, to the shrugging off with alacrity of the shackles of Stalinism. For a short while, North American TV screens were full of oppressed people reaching en masse for freedom, the fall of rotten regimes, the crumbling of barriers and the shining faces of the released. These are indelible images which have imprinted themselves on the world's consciousness.

These political developments, together with the move to economic union, suggest that Europe is alive with change--change that is every day building upon and altering the political and economic assumptions that underpin the world we inhabit.

North Americans were left shaken by the Japanese economic assault of the 1980s. According to Jack Welch, Chairman and CEO of General Electric: "The new Europe will make our experience with Japan seem like a cakewalk." The implementation of a single Europe within the next 600 days (or so) will impact on not just hundreds of millions of Europeans but on all of us on this side of the Atlantic.

Today, The Empire Club is fortunate to have as our guest speaker a recognized expert on economics and politics--an individual who was involved in the formation of the European Common Market in its embryonic stages.

Switzerland is celebrating this year the 700th anniversary of the signing of the Perpetual Covenant among three cantons--Schwyz, Uri and Unterwalden--that marked the effective start of the Swiss Confederation. Michael Porter, in his book The Competitive Advantage of Nations, writes that: "Switzerland has few natural resources--with the exception of sites for the generation of hydropower and a pleasant landscape that attracts many tourists." With respect, perhaps Mr. Porter overlooked one of Switzerland's most significant natural resources--our guest today, Dr. Peter Rogge, Senior Vice President and Chief Economist for Swiss Bank Corporation. He is a person of tremendous accomplishment in a number of fields.

Dr. Rogge's academic credentials are impressive. He studied economics, business administration and management at California State University, the German Universities of Goettigen and Freiburg, and the University of Basel. In 1957, he received a Doctorate in Economics from the University of Basel.

Dr. Rogge was involved in preparatory research work for the establishment of the Common Market on behalf of the European Coal and Steel Community. Subsequently, he served as CEO of Prognos A.G., the European Centre for Applied Economic Research in Basel which, under his leadership, grew into one of Europe's leading economic research and consulting firms. Since 1977, Dr. Rogge has been an executive of the Swiss Bank Corporation.

Two final observations on Dr. Rogge's background. First, he has served on municipal councils in a country where municipalities traditionally generate budgetary surpluses. And secondly, he has served as a director of the Swiss Federal Postal Services, in a country where the mail is delivered twice a day and on time. Dr. Rogge, you have no idea how unusual and impressive these two qualifications are to a North American!

Ladies and gentlemen, please welcome Dr. Peter Rogge.

Peter Rogge:

Mr. Chairman, Mr. Ambassador, ladies and gentlemen. Thank you very much for that kind introduction.

I am honoured to be with you once again. It has been two years, if I am not mistaken, since I last spoke with you. Imagine what has happened in the meantime. It is mind-boggling and it defies any description.

Europe is driving towards the year 1992 and this drive is changing the face of Europe, strongly so. We are very close to having a common currency, even without the world at large acknowledging it yet. Nevertheless, since 1989 Eastern Europe has been entirely in the forefront of interest and I would very much like to address some of the trends that are shaping up over there because that is another part of the continent comprised of 400 million people, the impact of which will be felt the world over, not the least in North America as well.

In Eastern Europe, 1985 marked the beginning of Perestroika. Since then a turnaround of six countries in Eastern Europe, comprising 120 million people a turnaround of the Soviet Union, comprising 290 million, has taken place, or is at least in the early stages.

Only 15 months ago, we observed the fall of the Berlin Wall. It has been a little over a year ago that Germany achieved monetary and economic union; and it's only a year ago that Germany's unification was consummated. It is only three months ago, ladies and gentlemen, that the Soviet Union went through a major change. Since then we see dissolution of this large country, the largest country in the world.

Now there are many questions arising from these historic developments for the world economy. What are the repercussions shaping up for trade, capital and the flow of people? More specifically, from the point of view of outsiders, will new locations of production shape up in the world? Will new competitors and new suppliers hit the world's markets? Will capital markets be able to finance Europe, the construction of the West? Will capital flows be redirected? Will productive energies be diverted into Europe leaving the rest of the world devoid of energies they formerly used? Will the world's wealth be redistributed?

Ladies and gentlemen, the importance of questions of this sort can certainly not be overestimated because, for the world economy, Europe is the most important supplier in the world with the largest population and the highest per-capita income.

Europe, together with Japan, is the most important source of capital and know-how for the rest of the world, and, what is more, the failure of command economies gives a boost to Liberalism for the world at large. So the questions that are shaping up are large and the impact is going to be immeasurable. Still, answers are far from certain. A "surprise-free future" is a thing of the past. There is an incredible speeding up of developments and economic trends are being shaped by political decisions. The former socialist countries are just at the beginning of a very long and treacherous road. Therefore, I would like to share with you some observation based on facts and figures which are available today and which may be indicators of things to come.

There is one common characteristic to all the facts and figures that I will share with you. They all point to tremendous changes and challenges, not only for the Europeans themselves, but for the world at large. So what is the present state of affairs in Eastern Europe? Presently we are observing a dramatic breakdown of the economies of all of Eastern Europe because the command economy has now been dismantled and disrupted. But there is no market economy yet in place and there is a complete disorientation of a population used to being told what they have to do and how they have to live. Productivity and capital stock in Eastern Europe is on average just 25 per cent of the levels in the Western world. There is no competitive position to make a living in the world economy for any of those countries.

There is an incredible monetary problem resulting from attempts to keep deficit prone Socialist sectors of the economy afloat by just printing money--which is now suddenly exposed by lifting official price controls. And there is the dismantling of the old Comicon system and that means that there is a loss of the traditional markets for all of these Eastern European countries.

Now what is the result? The result is obviously that these countries are faced with hardships all round. Soaring inflation rates. And Poland was in an abrupt transition from a price fixing system to a free market system. Inflation rose from 60 per cent in 1988 to 600 per cent last year. Government and private budgets, as well as external accounts, are completely out of balance for all of those countries. The budget deficit of the U.S.S.R, or what used to be The Soviet Union, ballooned to $33 billion (U.S). With an inflation rate of 250 per cent, the consequences of the government printing money just to pay their bills is that the inflation rate of The Soviet Union now hits the capacity of the printing presses of the government. There are huge external debts which are being piled up. In Poland, for instance, the foreign debt is 380 per cent of Polish exports. In Bulgaria it is 340 per cent. In Hungary it is 250 per cent. And there is a complete breakdown of an already extremely low GNP per capita with negative growth rates this year going all the way to 18 per cent calculated for The Soviet Union.

You have to go back in economic history to the Great Depression, and even then you don't find any up-down swing of this size. Most important of all there is unemployment--now coming into the open--that gives a really disquieting perspective.

The "lower term labour" market in all of Eastern Europe is now hit by the dismantling of Socialist economies and the turnaround. The lack of competitiveness and the inefficiencies of the Socialist system are being laid open. Present unemployment in Western Europe numbers approximately 12 million. In Eastern Europe present unemployment is already at 20 million and likely to grow to 50 million by 1994--an unemployment rate of 35 per cent. What this cooks up is the prospect of a new invasion. Germany's 700-mile-long eastern border is as powerless as a sieve, and so are others. Estimates now are for more than seven million people knocking on Europe's doors from Eastern Europe in the next seven years. And not only Europe's doors.

Recent opinion polls from Poland indicate 47 per cent of those questioned want to immigrate to the United States, 37 per cent to Canada From the U.S.S.R, we know that 37 per cent of the young people questioned want to immigrate to the United States, and 45 per cent to Canada From Hungary, 25 per cent would like to immigrate to North America.

Now ladies and gentlemen, a turnaround is absolutely imperative. Not only is it imperative for this part of the world--this Eastern Europe part--but for ourselves as well. Because if we don't take our capital to those people, these people will come and take capital from us. Literally, they'll be invading the rest of the world, asking us to share our wealth with them. Now the necessary turnaround has two prerequisites. One is serious progress on internal reforms--that is in the countries themselves. The other is a flow of capital, know-how and technology from the West. This, of course, dredges up the question: What is the size, what is the cost, what is the capital impact on the world's markets for all of us now that Eastern Europe has opened up and is begging for our help?

There are a number of calculations in trying to arrive at a ballpark figure. Let me quote just a few of these estimated costs. For instance, working upon the assumption that another Marshall Plan would be instituted. The Marshall Plan in the 1950s amounted to approximately two per cent of the GNP of the receiver nations. Two per cent of the Western European GNP was at that time donated by the United States to Western Europe. This would give us a figure of $14 billion per annum if applied to Eastern Europe. However, this would hardly seem to be enough because the rundown state of the economies of Eastern Europe call for more. They call, for instance, for financing their current deficits and repayment of debts because otherwise they can't make a living.

If we finance their current deficits in trade and if we take the repayment of their debts from them, it would call for $48 billion per annum for the next five or 10 years. But maybe that is not enough either, because that is just closing the gap. We want them to join the world's community, we want them to grow economically, we want them to earn a living in a way that makes living worth living.

Let's assume that they're driving at doubling their GNP over the next 10 years. Let me remind you that even the traditionally industrial countries of Eastern Europe, like Czechoslovakia, Eastern Germany and Poland, are at present only at approximately 30 per cent of the per-capita GNP of the West. Now a doubling of the GNP in Eastern Europe in 10 years would call for a 7 per cent growth rate. Based upon the present GNP and capital input needed to make GNP grow, we arrive at a staggering sum needed for investment in Eastern Europe of over $300 billion per year. If you don't invest it, you don't arrive at this figure.

Let's assume that productivity reaches Western levels. For instance, in the Bata shoe factories and in the tractor factories of Poland, to have productivity which is competitive to the West calls for more than $400 billion. I've just been talking about Eastern European countries minus The Soviet Union and minus the former German Democratic Republic. So these are huge sums indeed and it is very, very questionable whether this will come about.

But are we far from a solution? What is needed is capital, know-how and technology from Canada, United States and Western Europe.

We are welcoming new neighbours in the game. We have been applauding their drive for reform, for Liberalism, their drive away from Communism. Now we are closing our market and asking them to please pay for their own lives. The opening of our market is required, most important in the fields of food stuff, textiles, vehicles and machinery. Just two weeks ago the French militated strongly against the Polish appeal to open up the import of agricultural food stuffs.

And The Soviet Union has now requested grain aid to carry itself over this winter and our total aid up till now has been minuscule. This is a threat, this is a challenge, and it is a chance, all at the same time.

Chance from political and humanitarian aspects. Great chance, a great challenge, from the point of view of a business person, a banker and an economist.

There is another market of 400 million people shaping up and the demand potentials are uncertain. But they are unlimited when you take the example of passenger cars. For instance, Volkswagon has recently estimated the passenger car population in Eastern Europe and the potential for growth. Their figures are way beyond the growth rate of any other market in the world. Western industry is getting into the act. We agree with Mrs. Bata, someone who is already getting into this act. Others include the automobile industry, there are very important entries in the American electric industry, in Hungary for instance. Licences are being given to companies by Fiat and Mercedes. There are many other examples of firms entering or considering Eastern Europe. There is a substantial drive now shaping up, slowly shaping up, which is still just a trickle of investment but which is the beginning of a long way. And looking at this beginning I want to reiterate that it's the growth potential that should be kept in sight.

When you just take the railroad network reconstruction in Eastern Europe, and only look at the main trunk line, it has been calculated that to have a recovery of the railroad trunk lines in Eastern Europe calls for an investment of at least 10 billion German marks per year. There again is a challenge, and it may be a threat if we do not address it. It is a great chance for anybody who is getting into this act. Well this is what is happening in Eastern Europe.

You are confronted with misery and hardships all around, but you are confronted with hope, you are confronted with people, 400 million strong, who have one wish, mainly to become part of the rest of the world.

Now the rest of the world, and that really is my message, should not turn their backs on this part of Europe, this part of the old world.

We should not walk away. We should not just leave them and their troubles, but rather we should try to become active and turn what may otherwise be a threat for all of us into a challenge and into a long-term promise. If that happens it may be that one day Europe and North America will pull together very closely again as in the times of the Marshall Plan in the early 1950s. The bottom line is that it will be a victory for the free economy, a victory for democracy and, at the same time, it will pay for all of us.

I wanted to bring to you a message of hope, but it is also the message of a challenge which could turn to a threat if we do not live up to it.

Let's try to do that. Thank you.

The appreciation of the meeting was expressed by Robert Brooks, Executive Vice President, The Bank of Nova Scotia, and President-elect of The Empire Club of Canada.