For the second time in two years, I found myself in an intensive German language program at the University of Vienna. The majority of my classmates were young, bright, eager students from Poland, the Czech Republic, Slovakia, Hungary, Serbia, Croatia and Slovenia—countries we used to think of as trapped behind an iron curtain. Typically, these students were studying to prepare for practical careers in business, economics, engineering, medicine and law.
On the short trip by rail to Bratislava, the capital of Slovakia, I was struck by the number of long trains carrying new automobiles streaming west, headed toward Vienna and on to Western Europe. Near the towns in the productive agricultural countryside east of Bratislava stand modern factories producing those cars and other consumer goods. Slovakia, by replacing many taxes with a flat 19 percent income tax and implementing other laws favorable to capital, is on the way to replicating the Irish “economic miracle.” So, too, are many other countries in the former Soviet bloc.
Are the people of these Eastern European countries simply being exploited by Western capitalists because they’re willing to work for lower wages? Their development of modern infrastructure, such as highways and public transit systems, plus their efforts to replace or beautify the drab Soviet-era public housing, say no. And then there are those many students flooding into Vienna. As the Japanese, Koreans and Chinese have done and the Indians are now doing, the people of Central and Eastern Europe are relying on a manufacturing-for-export base to support top-to-bottom economic development.
The people of Central and Eastern Europe have long and proud histories. Until disrupted by the dreadful internecine wars of the 20th century, and then by four decades of grinding communist oppression following WWII, these nations were part and parcel of mainstream European civilization. In the latter 19th and early 20th centuries, Budapest, now again a vibrant city, enjoyed a golden age of economic and cultural advancement until the fateful assassination of Archduke Ferdinand in Serbia in 1914 brought war to most of Europe.
The Czech Republic, Slovakia, Poland, Slovenia and Hungary became members of the European Union in 2004. Bulgaria and Romania followed in 2007, while Croatia is expected to join by 2012. Drawn by stable legal and political systems and development of infrastructure, much of the investment in these Eastern and Central European countries consists of direct investment by large, multinational manufacturers.
Individual investors can also participate in this exciting growth through mutual funds. Two funds that have achieved excellent returns in recent years are the Metzler/Payden European Emerging Markets Fund (symbol MPYMX) and the U.S. Global Accolade Eastern Europe Fund (symbol EUROX). Both funds are available with no load or transaction fee through Schwab, Fidelity and TD Ameritrade. However, both have significant positions in Russian companies—MPYMX, at 25 percent, and EUROX, at 37 percent. Investing in Russia, with its reputation for gangsterism and doubtful rule of law, is fundamentally a different proposition than investing in the developing countries of Central and Eastern Europe.
Right now, there are no exchange-traded funds that focus on companies doing business in the developing Central and Eastern European countries. But again, Vienna presents an interesting way to follow this theme, by way of the Barclays Austria iShare exchange-traded fund (symbol EWO).
Given its location at the geographic heart of Central Europe, and excellent transportation and communication systems, Vienna is enjoying strong economic growth as it resumes its historic role in trade and finance for the lands of the former Habsburg empire, which included much of what we think of today as Central and Eastern Europe. Most of the Austrian companies that make up EWO are involved in banking, communication and trade. However, the former Austrian state oil company, ÖMV, now publicly traded, comprises 13 percent of the fund. ÖMV is aggressively expanding eastward, and its branded stations can be found throughout the region as far east as Bulgaria. In 2004, ÖMV acquired the Romanian state oil company, Petrom.
Poland, the Czech Republic, Slovakia, Hungary, Serbia, Croatia and Slovenia have a combined population of about 78 million. Add in Austria at the core, and you get a region with about 86 million people (roughly the size of Germany), all of which is developing at rates generally faster than most Western European economies. With rapid economic integration, a well-developed rule of law, advanced educational systems and mostly stable political systems, the region presents investors with an intriguing growth opportunity at what should be significantly less risk than other developing regions of the world.
