No more low cost: East Europe goes up in the world as employment rates spike

BRATISLAVA: Central and Eastern Europe faces the end of an economic era.

With employment rates at record highs, and workers demanding wages closer to western levels, the cheap-labour model that has driven growth since the fall of communism is on the way out.

The challenge that faces governments and companies in the region over the coming years is to find new avenues to growth.

A walkout at the Volkswagen factory in Bratislava last month, the first strike at a major Slovak car plant, led to a staggered 14 per cent pay hike in what has become the latest and starkest sign of the shifting economic landscape.

VW was one of dozens of big Western manufacturers beating a path to Slovakia, the Czech Republic, Poland and Hungary after the fall of communism in search of cheap labour.

The rush eastwards marked the birth of an economic model that transformed the region.

But a quarter of a century down the line, the regional labour market is running dry, with record low unemployment rates of around 3-7 per cent across the region.

As a result wages are rising faster than in the West – led by Hungary with a 12.8 per cent yearon-year leap in March.

Zoroslav Smolinsky, the VW Slovakia union leader who engineered the strike, had joined the production line in 1992, when the plant had just been taken over by Germany’s VW .

He was paid the equivalent of 75 euros a month at the time. “We could live on it,” he said. “We had to.” Today Volkswagen’s 12,300 workers in Bratislava earn an average of 1,804 euros a month.

Such rates, however, remain less than half the average Volkswagen pay packet in Germany, and Smolinsky says such huge disparity can no longer be justified.

“Times have changed,” the 48year-old said.

“We’re in the EU and have to keep up with trends and gradually narrow the gap.” The strike was resolved with the wage increase phased over more than two years, as well as a 500 euro one-off bonus for each employee and an extra day of holiday.

VW is not alone in facing rising labour costs and strife.

French carmaker Peugeot and South Korea’s Kia have both raised pay this year in Slovakia, while Audi and Mercedes have faced strike threats in Hungary.

The moves by the car makers are particularly significant because the auto industry represents the lion’s share of foreign investment in Central and Eastern Europe.

Volkswagen units, for example, are the biggest companies in Slovakia and the Czech Republic, while Slovakia has become the world’s top carmaker per capita, producing more than 1 million a year.

Moscow-based investment banking group Renaissance Capital said foreign investors would not abandon existing projects in the region, but new investments were likely to go elsewhere.

“Never again is Central Europe likely to offer what it did in the 1990s,” it said in a note to investors.

Companies are taking steps to improve productivity via methods like increased automation in order to offset rising costs, say executives, policymakers and analysts.

In the longer-term some could go to other countries instead in search of cheaper labour.

Volkswagen signalled it could steer clear of Slovakia for future investments if faced with another costly showdown with workers.

Another sharp rise in wages would “threaten the stability of jobs”, Lucia Kovarovic Makayova, a spokeswoman for Volkswagen Slovakia, told Reuters.

“It could happen that the group gives preference to a factory with lower personnel costs when deciding on sourcing production of the next product.” Renaissance Capital said investors in search of cheap labour would ultimately look further south and east.

“When European business confidence is high again, we think the next wave of investment expansion will lap the shores of Turkey and the southern Mediterranean,” it added, also singling out Morocco, Tunisia, Egypt and possibly Ukraine and Iran.

Filip Eisenreich, CEO of Czech ventilation and cooling system producer Janka Engineering, a unit of India-based Lloyd Group, said his company was raising wages by 7-8 per cent this year and was “pretty much on the edge” in terms of labour costs.

“Further growth (in wages) without concurrent growth in productivity would not be sustainable for us,” he told Reuters.

While labour productivity has long been lower than in Western Europe, “this difference has so far been compensated for by lower wage costs, but those rise faster every year than in western European countries”, he added.