Chart of the Week: Emerging Europe

Weakness in the euro is a strength for Emerging Europe.

A strong currency tends to make exports more expensive, but Germany (the world’s #2 exporter behind China) remained globally competitive even as the euro’s value climbed to record highs against the U.S. dollar.

One of the key reasons: German manufacturers cut costs by shifting some production to Emerging Europe, where skilled workers are readily available at a far lower wage. The Czech Republic, Poland and other Emerging Europe countries send semi-finished goods to Germany, where they become finished products for export, primarily to Asia and North America.

According to some estimates, this strategy has raised the productivity of the German parent companies by 20 percent.

The euro has depreciated in recent months due to worries about the massive sovereign debt loads in Greece, Spain and other countries. Emerging Europe, by contrast, has much lower debt-to-GDP ratios, which enables higher growth rates.

The weaker euro has helped German exporters by making their products less expensive abroad, and as we pointed out in our latest Weekly Investor Alert, Emerging Europe has also gotten a lift.

The chart above shows the industrial production growth trend (rolling six months) for several Emerging Europe countries, along with Germany’s export growth outside the European Union.

Germany’s overall exports rose 9 percent in May to $98 billion, and were up 29 percent through the first five months of 2010. The government in Berlin now envisions GDP growth of 2 percent this year, higher than the official estimate of 1.4 percent – this would further benefit Emerging Europe.

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About Frank Holmes 282 Articles

Affiliation: U.S. Global Investors

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.”

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications.

Visit: U.S. Global Investors

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