Eastern and central Europe, long spared the economic fallout of surging oil prices, is only now beginning to awaken to the risks costly oil poses to growth and inflation.
While high oil prices have long cast a pall over the global economy, the regions' firming currencies last year, led by the Polish zloty's 24 percent rise against the dollar, helped the region cap the costs of oil imports, economists say.
They say this effect is now beginning to gradually wear off since the region's currencies have weakened moderately against the rebounding dollar, in which oil is priced. "Appreciating currencies have helped contain the impact of high oil prices, but this effect is slowly disappearing and what up to now has been a minor problem will become a greater worry," said Michal Dybula, regional economist at BNP Paribas in Warsaw.
The region has been helped by its lower dependence on oil and higher use of other energy sources such as natural gas and coal than in the rest of the European Union. Eastern Europeans drive fewer cars and rely more on coal-fired power plants for electricity than their euro zone peers
For Poland, the region's biggest economy, the Czech Republic, Slovakia and EU candidate Bulgaria, oil accounts for a fifth or less of total energy use compared with a European Union average above 30 percent, International Energy Association data show.
For Hungary and EU candidate Romania, the ratio is more than a quarter, still below the EU average and only the former Yugoslav republics stand out with their high dependence on oil.
BIGGER WORRY
As a result, while the European Central Bank has sharpened its anti-inflationary rhetoric over the past months and last week cut its euro zone growth forecasts, the eastern and central European region has remained optimistic about the price outlook.
Too optimistic, say some economists.
"I feel people in the region are too relaxed about the risks posed by high oil prices," said Reinhard Cluse, European economist at UBS in London.
Economists say high share of fresh food in consumer spending has helped offset the impact of costly oil during the summmer months when food prices fall. But they warn the effect will be the opposite when a seasonal rebound in food prices coincides with a peak in energy use.
Czech and Slovak central banks have held rates at record lows near euro zone levels while Poland and Hungary have seen continuous rate easing in past months.
With the exception of Poland, where investment is slow to pick up in an election year, the region's economies expect to meet their growth targets this year after a buoyant 2004.
Also in contrast to the euro area, where politicians have scrambled to find ways of softening the blow to consumer spending and confidence, such as petrol tax cuts, governments in central and eastern Europe have remained hands-off.
In fact the finance ministry in Warsaw recently contemplated raising the fuel tax to make up for costly pre-election tax cuts and spending increases passed by parliament. But hefty rises in fuel prices this year, up by more than 20 percent in some countries, aggravated in recent days by worries over global output in the wake of Hurricane Katrina, have put oil back on the agenda.
In the Czech Republic, the finance ministry rejected on Monday an opposition proposal to cut fuel taxes, saying such a move would not help bring prices down.
In Poland, politicians of all colours have called for a cut in petrol tax to ease the burden for the consumers and Warsaw became the first government to agree to this, lowering the excise from Sept. 15 until the end of this year.
"We hope this will help prevent economic slowdown and even boost growth in the second half of the year," Finance Minister Miroslaw Gronicki said.
The Polish excise tax will be cut by 0.25 zlotys ($0.079) per litre of unleaded gasoline from the current 1.57 zlotyys.
Source: Reuters
06.09.2005