November 26, 2018 / 2:27 PM / 23 days ago

Europe's East not catching up, may question value of EU: ECB

VIENNA (Reuters) - Economic convergence between east and west Europe has practically stalled, a potential threat to the European Union, a European Central Bank board member said on Monday.

FILE PHOTO: European Union flags are seen outside the EU Commission headquarters in Brussels, Belgium October 14, 2018. REUTERS/Francois Lenoir/File Photo

Former communist nations on the bloc’s eastern periphery are struggling to catch up three decades after the fall of the Iron Curtain and some populist parties are increasingly hostile to the union, even if support for the bloc remains widespread.

“If there is no credible prospect of lower-income countries catching up soon, there is a risk that people living in those countries begin questioning the very benefits of membership of the EU or the currency union,” Central Bank board member Benoit Coeure said in Vienna.

“Such doubts would be particularly worrisome in the unstable world we are currently living in,” he added.

Trust in the EU is falling in some east European states, such as Hungary and Bulgaria, but the vast majority of people in the EU’s eastern nations still say their country benefits from being a member, the EU’s own surveys show.

Coeure said the key issues are the big drop in productivity growth and the lack of capital.

“These economies are now faced with a notable capital shortfall,” Coeure added. “And, worse, investment rates have fallen further since the crisis.”

Coeure added that the drop in foreign direct investment may not be as temporary as some think as firms are now reassessing how they invest.

Wages have gone up, reducing the potential for cost savings and firms are now relying more on automation at home to replace labor elsewhere. They are also simplifying their value chains to reduce the risk of disruptions, decreasing the need to invest in the East.

“Europe can and should help, in three main ways,” Coeure said,

“First, by providing the market that makes the development of new industries profitable. Second, by channeling funds to sectors and countries where capital can be used most productively. And, third, by providing direct financial assistance to foster convergence and support national reform efforts.”

Reporting by Francois Murphy,; Writing by Balazs Koranyi, editing by Ed Osmond

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