Sopot Harbor, Poland

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In February 1991–a moment in time bookended by the fall of the Berlin Wall and the dissolution of the Soviet Union–the heads of state of three centrally located new European democracies met in Visegr?d, Hungary, to discuss their future. Neighboring Hungary, Poland and Czechoslovakia (which would split to become the Czech Republic and Slovakia in 1993) agreed at the meeting to form an alliance in the post-Comecon years, with an eye toward economic growth and Western European integration.

Today, the Visegr?d Four, or V4, are the wealthiest former Soviet states (with the exception of Slovenia). Following a period of massive growth and rapid privatizations in the 1990s, the four countries became European Union members in 2004, and today are well established as Central European business hubs and cost-effective manufacturing sites for products bound for Western Europe.

While the past year hasn’t left the V4 unscathed, the youthful free market economies are experiencing the global economic meltdown in unique ways, optimistic about resuming their growth trajectories once the world marketplace rebounds.

Poland: Head Start

Twenty years ago, Poland led the way to market economies for Central and Eastern Europe with the first free elections in the history of the Soviet bloc. The victorious Solidarity party, spawned nine years earlier with the formation of an independent trade union in the shipyards of Gdansk, joined with two smaller parties to form the first noncommunist government in the Soviet-dominated region.

During the ensuing two decades, Poland built one of the strongest economies in the region. Investments poured in from around the world, some from Polish-American businesses as well as from U.S. corporations in search of new markets. The economy picked up steam after Poland joined the European Union (EU) in 2004.

Even the past year’s global recession hasn’t seriously tarnished Poland’s shining success. In mid-August, the International Monetary Fund (IMF) predicted that after 17 consecutive years of growth, the country’s economy would contract by 0.7 percent in 2009–a grimmer forecast than other predictions of modest growth for the year. But that is a relatively benign drop compared to some of Poland’s neighbors–the IMF expects a negative growth rate of 5.6 percent in Germany, for example. And although the zloty has fallen 30 percent from its peak, Poland never faced the kind of financial disaster that hit Hungary, where the IMF last year bailed out a country on the brink.

Overall, says Lejb Fogelman, a partner at Dewey & LeBoeuf’s Warsaw office, Poland has been relatively unscathed by the global economic meltdown, and its prospects for the future are bright. Just as it once served as the pacesetter for political change, Poland seems poised now to lead the region out of economic distress.

“We are talking about an economic miracle of sorts,” Fogelman says. “The economy is sound and it seems we are turning the corner on the crisis, so Poland should recover at a geometric pace.”

Conservative Consumers

Some of the factors that helped Poland avoid the worst of the recession are the same things that make it an attractive target for U.S. business expansion. For example, the country’s large and upwardly mobile population of 38.5 million creates a huge internal consumer base that global companies want to reach. That largely undeveloped market for goods and services has created an internally focused economy rather than one dependent on exports–which proved to be an advantage once neighboring economies collapsed.

“Many years ago we were ashamed not to be linked to the global economy,” says Krzysztof Wiater, DLA Piper’s country manager in Poland. “But who knows–maybe it saved our economy.”

Poland also has benefited from an influx of EU development funds to modernize its infrastructure, spurring ongoing public-private partnerships that have both helped stabilize the country’s economy and provided opportunities for foreign companies. For example, Peter Swiecicki, a partner at Squire Sanders’ Warsaw office, has been working on a $2 billion toll highway project in Poland with 60 percent of the financing coming from the European Investment Bank. Swiecicki points out that the project has generated ancillary investments from companies such as 3M, which makes highway signage, and Caterpillar, which sells construction equipment.

Poland’s hard-working, fiscally conservative population also gets some of the credit for the country’s positive fiscal outlook. While U.S. consumers took out jumbo mortgages and amassed credit card debt, Poles saved their money and incurred little debt. That helped the banking system, which avoided the level of bad debt most U.S. banks experienced, says Fogelman. He adds that most Polish banks are subsidiaries of foreign banks. While the parent companies have suffered serious problems, their Polish outposts have not.

“The banking industry here was much more scrutinized than in the West,” Fogelman says. “There was suspicion that the Western institutions would siphon money out of Poland, so they were watched closely.” As a result, Polish banks eschewed investments in the exotic financial instruments that proved the downfall of financial giants elsewhere.

Investment Incentives

What some might perceive as an economic negative–a relatively high unemployment rate, currently about 10 percent–has kept wages down and made Poland a low-cost alternative to Western European countries for companies with labor-intensive businesses. Swiecicki notes a current trend of businesses moving operations to Poland from elsewhere in Europe as their need to economize becomes more pressing. The workforce is well educated, with a younger generation that commonly speaks English.

“Investors have no problem finding well-educated engineers and technicians,” Wiater says. This is an asset that spurs investment in computer hardware, electronics and aviation. Shared services such as accounting also find fertile ground in the country. “For all types of investment you need good staff, and this is typical in Poland,” he adds.

The government has encouraged foreign investment in special economic zones where companies can receive tax reductions based on where they invest and the size of the investment. While designed to develop the country’s less attractive regions, “There is actually a tremendous degree of flexibility in terms of the [locations eligibile for favorable tax treatment] if you are setting up a major operation,” Swiecicki says.

Finally, Wiater says, investors keep coming to Poland, with its stable government and increasingly transparent legal system, because it is “predictable.”

Bureaucratic Headaches

All this is not to say that doing business in Poland is problem-free. The very stability that has kept the country anchored in turbulent times, Folgelman says, “also means it doesn’t move as fast as it should in terms of streamlining legal procedures.”

As a measure of how far Poland still has to go in reducing bureaucracy, the country is 76th this year on the World Bank’s ranking of 181 countries by ease of doing business.

And some of the government’s efforts to improve that rating seem to be having the opposite effect. Swiecicki points out that it actually takes longer to register a business now that the government has created a single stop for business registration. In the past, people representing new businesses ran from office to office to obtain three different registration numbers. Now they simply file registration papers with the court–which may take several weeks to mail them to the offices that provide the needed numbers.

“It creates all kinds of headaches,” Swiecicki says. “You can’t get [the courts] to do what you were able to do yourself. The process has backfired.”

U.S. business people also are befuddled by the formalities and paperwork required for such processes as reporting the value-added tax. “In the U.S. you have more flexibility in recordkeeping. Here there are more requirements and the number of bookkeepers you need will increase,” Swiecicki says.

But he notes that one business hurdle has receded: “Poland used to have a system where you could not request a binding interpretation of a tax issue [such as the correct depreciation rate for a particular class of property]. Now you can do that, and it is a big step forward.”

But the tax system still has its bureaucratic quirks.

“The tax authorities take a very formalistic view–you have to get so many things completely right,” says Nick Fletcher, a partner at Clifford Chance. He notes that to claim a deduction for taking a client out to dinner, for instance, you need a special invoice from the restaurant. “It takes so long that you are still waiting a half-hour after the clients have left,” he says. “You have to send someone to pick it up the following day.”

Fletcher also believes that strict compliance requirements undermine the value of the tax incentives that Poland offers for setting up businesses in the special economic zones. “If you make a mistake in tax compliance, you could lose all the advantages you were given,” he adds.

Friendly Faces

Attorneys representing U.S. business interests agree that Poland’s legal system has gotten better, but it still needs to improve the speed with which cases are resolved. EU membership means that Americans accustomed to doing business in Western Europe will find many similarities in the overlapping laws. Polish law is based on the Continental system, like Germany’s, rather than the Anglo-Saxon system on which U.S. law is based.

“Quite often I explain to clients that you can find the functional equivalent of American law, but it may look different [in Polish law],” says Fogelman. “It will do the same thing as the American mechanism, but the route may be different.”

As in many countries in the world and the EU specifically, Poland’s pro-employee labor and employment law is one area where there are major differences with American law.

“What is sometimes surprising to American attorneys is that the employer can’t just say, ‘You are fired,’” Wiater says.

But what tends to be the biggest surprise about Poland for U.S. business people has more to do with affinities than differences–the people are friendly and hard working, and Americans find it easy to do business on a personal level. Americans who remember images of Poland from the days of communism are often surprised by the entrepreneurial spirit and energy of today’s population.

“Poland has done a great job of changing the mentality [from what it was under communist rule],” Wiater says. “From U.S. clients their comment is, ‘I didn’t imagine that this was such a dynamic country.’”

Hungary: Distressed Darling

During the 1990s, Hungary was the belle of the Central European ball. Blessed with a capital city perched on the Danube, rich in architectural charm, and just a short drive from Vienna, it lured international business people eager to cash in on the newly freed Soviet bloc. Hungary’s “goulash communism,” which permitted limited private enterprise, paved the way for foreign investors. The government passed laws providing for foreign investment and joint ventures in 1988, a year before it opened its borders to the West. Once Hungary became a free country, the government rushed to privatize state-owned enterprises, providing attractive investment opportunities.

“Those factors led Hungary to be the destination in the region that many investors chose first in the early ’90s,” says David Dederick, managing partner at Weil Gotshal’s Budapest office.

But successive Hungarian governments made some critical mistakes. They went on spending sprees, chalking up high budget and current account deficits. Overspending was one part of the problem; a large gray market that dodged taxation was another.

“Politically the Hungarian government chose to spend its way forward,” says Kevin Connor, regional director of Squire Sanders. “Poland, the Czech Republic and Slovakia took it on the chin, pared down, took more stringent steps. Hungary’s bloated administration continued to spend, and found itself in a dicey situation.”

Those factors made Hungary even more vulnerable than its neighbors when the global financial crisis unfolded in 2008.

“The deficits became a serious issue for investors in Hungarian state obligations,” Dederick says. “At the peak of the crisis, with investors leaving emerging markets en masse, Hungarian authorities discovered that investors were no longer willing to buy state bonds. The bond market essentially froze up.”

The exchange rate on the forint plummeted. Because Hungarian banks often denominated loans in foreign currencies rather than the forint, many consumers and corporations couldn’t meet their debt payments with the depreciated currency. Very quickly, the country went from the region’s darling to a near disaster.

With its economy on the verge of total collapse, the International Monetary Fund (IMF) and the European Union (EU) stepped in with a $25 billion financing package in October 2008. It came with strings attached: a mandate to restructure public finances and reduce the deficit.

“There’s a silver lining to all this,” Dederick says. “Although it doesn’t paint Hungary as the most attractive country in the region [for foreign investors] at present, the introduction of IMF and EU assistance has forced the current Hungarian government to adopt reforms that will set the country on course to becoming competitive in the not-too-distant future.”

Dederick says the fact that Hungary has had to address its fiscal problems sooner than other countries will give it a leg up in the post-recession period. “When it does emerge, many of the factors that made Hungary a favored destination for investors in the past will still be relevant,” he says.

Investor Assistance

Those factors attracting foreign investors include Hungary’s location, adjoining Western Europe, and its skilled, low-cost labor force. English is becoming a more common second language, replacing Russian and German. And after five years of EU membership, the country’s laws have been harmonized with EU directives, though Dederick says the speed and transparency of the court system still need some improvement.

The government has worked hard to make it easy for foreign businesses to enter the country. ITD Hungary, the Hungarian investment and trade development agency, works with international law firms to help business people make connections and find the best location for a new operation–whether an undeveloped area that qualifies it for government incentives or elsewhere.

“It’s great for investors,” says Ildik? Cs?k, a partner at White & Case’s Budapest office. “They can make an educated decision on whether they are interested in an investment.”

Cs?k says it’s easy to set up shop in Hungary. The court of registration can approve within an hour a business that meets the prerequisites and uses the standard articles of association form, she says. Capital requirements are low–just $2,700 to establish a limited liability company.

But other business costs surprise some foreign investors, including pension and health insurance costs. Hungary’s strict Labor Code also restricts employers. After a three-month probationary period, it’s very difficult to terminate an employee. “Whenever an employee is terminated for bad behavior or incompetency, it usually ends up in court and the burden of proof is on the employer,” Cs?k says.

On the positive side of the labor equation, wages remain low compared to Western Europe.

Positive Signs

For investors weighing the pros and cons of Hungary, important news broke in July when the government raised $1.4 billion by selling bonds on the international capital markets. “This was a very positive sign to the investor community,” says Connor. The forint has regained stability and the swap market for foreign exchange is returning to normal, according to an August IMF report. Connor says now the country is “on the upward curve.”

But the IMF has warned that the country is not out of the woods yet. Hungary’s economy is export driven–exports account for 80 percent of GDP–and closely linked to that of Western Europe, which is recovering from the recession more slowly than the U.S. The IMF projects Hungary’s GDP to contract 7 percent in 2009.

In the meantime, some companies have packed up and left the country, and most foreign investors are staying away. Clifford Chance closed its Budapest office this year.

“We had a very strong office there, but we were unable to grow, mainly because the Hungarian economy is the most fragile [in the region] so the level of international business isn’t there,” says Michael Cuthbert, regional managing director for the international law firm. He points out that its small population and government instability are among the reasons Hungary’s economic activity is falling behind the rest of
the region.

And whether current efforts to rein in government social welfare spending under Prime Minister Gordon Bajnai–who was chosen by the ruling Socialists and the Free Democrats in April when his predecessor stepped down under pressure–will result in long-term economic reforms remains in doubt. Hungary’s right-of-center Fidesz party is expected to win elections next spring, and has said its economic strategy will focus on boosting growth rather than cutting spending.

But other international law firms remain optimistic. “It appears things are picking up,” Cs?k says. “We have transactions in the pipeline and interest in greenfield investment.” She notes that Daimler is proceeding with a major expansion that will further enhance Hungary’s reputation as an automotive center.

Dederick adds that with private equity on the sidelines for lack of bank financing, strategic investors have an increasing advantage.

“Instead of auctions in which private equity investors bid up prices to astronomical levels, now we are seeing strategic players buying companies based on industrial logic rather than on the idea of flipping them a few years later,” he says. “In sectors that are resilient, like energy, pharmaceuticals, media and communications, M&A is still relatively active.”

Prague, Czech Republic

Czech Republic: Lessons Learned

Of all the V4 countries, none blurs the boundaries between Central and Western Europe like the Czech Republic.

Of all the former Soviet satellites, the Czech Republic is widely viewed as having turned furthest from the East to adopt the most Western-friendly economic policies after the end of communism.

It was the first of the former Soviet bloc states to become a member of the Organisation for Economic Co-operation and Development, and today, the Human Development Index ranks it above Hungary, Poland and Slovakia. Its capital, Prague, is mentioned in the same breath as Western European crown cities like London, Paris and Berlin.

“It’s fair to say the Czech market is firmly integrated within the [European Union (EU)] economic space,” says Vlad Petrus, a partner at Clifford Chance in Prague. “It’s a full EU integration, both in terms of regulations and laws but also just doing business and conducting commerce in the broadest sense.”

Of course, the Czech Republic’s realization of its Western aspirations also means that the heady days of youth are over for the country and its investment potential.

“The big opportunities and big incoming investments are basically over,” says Pavla Prikrylov?, a partner at Peterka & Partners in Prague. “The companies that wanted to relocate to Central Europe are already here.”

The foreign companies that do have operations there are in a good position, however. And the Czech Republic’s recent economic history has it poised to weather the current global meltdown without incurring major damage.

Cautionary Crisis

In the early 1990s, the Czech Republic came fast off the starting block, bolstered by a tradition of industry dating back to the 19th century, when Czech lands were known as the industrial heart of the Austro-Hungarian Empire. With the goal of privatizing as quickly as possible, the government instituted a voucher privatization program.

The process was not without flaws, but it achieved the government’s goal of speed. Under the scheme, adult citizens could purchase affordable vouchers to buy shares in Czech companies. More than 1,600 companies were fully or partially privatized in the two waves of the program, launched in 1992 and 1994. In the end, 75 percent of the eligible citizens took advantage of the program. Today an echo of this “big bang” privatization can still be seen in the large numbers of small Czech shareholders that exist in the country. In 2005, President V?clav Klaus even took steps to ensure the rights of majority shareholders against their force, signing a law that made it easier for majority holders to scoop up the shares of smaller shareholders.

Czechoslovakia had been a founding member of the International Monetary Fund and World Bank Group before the communist takeover in 1948, and after post-Velvet Revolution economic reforms and its split from Slovakia, the Czech Republic excelled at attracting foreign capital. The country shifted its export focus to Western Europe from the former Soviet states, and began adjusting its laws and regulations to match–a process that reached its apex when it became an EU member in 2004 and adopted its directives. That means a degree of comfort for foreign companies accustomed to doing business in the EU–with a caveat for locals. “Czechs might tell you it’s not all good because of this new layer of regulation,” says Vladimira Papernik, managing partner of Squire Sanders’ Prague office.

In 1994 the Czech Republic repaid an IMF loan two years ahead of schedule, making it the first former Soviet bloc state to operate without IMF aid. The next year the Czech koruna became fully convertible for business purposes, and by 1996 President Klaus had declared the transition to a free market complete.

Coming on the heels of such achievements, the currency crisis that hit the country in 1997 was a reality check that led to more cautious financial practices. And that cautiousness over the years has been crucial to the Czech Republic’s present-day economic resilience compared to Western Europe.

“The Czech banks had a lot of bad debt on their balance sheets, and that was essentially shifted to a state bailout agency,” Petrus says. “The banks were managed fairly prudently in the last decade, and did not really deal in [collateralized debt obligations (CDOs)], securitizations–the stuff that caused problems in the more developed and sophisticated markets.”

Ninety percent of Czech household debt is held by these local banks, and their health has helped insulate the local economy from many of the effects of the global crisis.

That’s not to say it has escaped scot-free–the country has seen its share of layoffs and some foreign companies have shut down Czech locations or called expatriates back home.

The country’s exports also have taken a hit. The Czech Republic is heavily export oriented. A supply of coal and iron made for a strong manufacturing environment that lured industries producing autos and machinery. The past 10 years have seen a shift toward software and IT, with investments from Sun Microsystems, HP and IBM. And they’re just a few of the wide-ranging Western companies with operations in the country. Their bleary-eyed IT workers, for instance, can always swing by a Starbucks for a pick-me-up.

Aim Adjustment

In the past few years, the government has overhauled the incentives it gives businesses, focusing less on manufacturing and instead targeting the scientific and research and development sectors, with a strategy of using the Czech workforce’s know-how and education to push the country to the next level in terms of high value-added investments.

“I think it was quite an appropriate move for the government to try a different approach to try to attract a different type of investment,” Prikrylova says.

That’s because going forward, one disadvantage the Czech Republic confronts is the rising cost of doing business in a country with such a skilled workforce and living standards fast approaching those of Western Europe.

“For certain types of production that can be relocated to the Far or Middle East, the know-how of the people is not that crucial,” Prikrylova says.

Taiwan electronics manufacturer Foxconn, for example, recently relocated a plant to Turkey, which has a lower-cost workforce.

“The question is, to the extent that the competitive advantage is doing business in an EU country at half or 60 percent of the cost of doing the same business in neighboring Germany, how long will that competitive advantage last?” Petrus says. “But at the moment, it’s still the fact that foreign investors are attracted to the Czech Republic … by its stable political system, relatively well-functioning legal system, stable currency and low inflation, in combination with relatively cheap and skilled labor.”

Bratislava, Slovakia

Slovakia: Speed Bump

Oh, what a difference a year can make. In the Slovak Republic, the global economic crisis brought to an abrupt close a five-year period of heady growth that outpaced all other EU member states and took the country, and the world, by surprise. Combined with a new government widely perceived to be less business friendly than the one that presided over the height of the boom, the country now stands at what many believe to be a critical juncture.

Following the Velvet Revolution and the country’s split from the Czech Republic in 1993, the Slovak Republic remained economically undeveloped through the ’90s. The turning point came under Prime Minister Mikul?? Dzurinda, who took office in 1998. Dzurinda’s Slovak Democratic and Christian Union (SDKU), a more pro-Western regime than its predecessor, ushered in a period of economic and political reform that earned the country the nickname of “Tatra Tiger”–so named for the Tatra Mountains. In 2004, Slovakia became a member of both the EU and NATO. The same year, Dzurinda’s party established rovn? dan, or “equal tax,” a major simplification of the country’s tax system. It introduced a 19 percent flat tax rate on corporate income, personal income and value-added tax, at the time a unique proposition. Meanwhile, the Western-friendly government courted foreign investors, putting the country’s low-cost, educated workforce center stage.

It worked. That year GDP growth jumped to 5.2 percent from 1.4 percent in 2000. In 2006, Slovakia was the fastest-growing economy in the Organisation for Economic Co-operation and Development (OECD); by 2007 it outpaced all its fellow OECD and EU members with an average GDP growth of 14.3 percent. By the end of 2008, Slovakia’s three-year average real GDP growth was third only to China and India among OECD members.

“Up until the end of 2008, Slovakia was truly the economic tiger of the region,” says Martin Magal, a partner at Allen & Overy’s Bratislava office. “That has now changed slightly.”

New Regime

Like most countries, Slovakia now confronts a recession. The OECD projects that Slovakia’s GDP will contract in 2009, followed by a slow recovery through 2010. In addition to the global financial crisis, Magal points to the new government as the second key factor breaking the chain of healthy growth. In 2006 Prime Minister Robert Fico and his Direction-Social Democracy party won the elections and formed a coalition government with the People’s Party (HZDS) and Slovak National Party (SNS). Some accuse the new regime of changing the business world’s favorable perception of Slovakia established under the SDKU.

“The CEO of the subsidiary of a leading U.S. company in Slovakia summarized it very well when he said, ‘While the previous government was business-friendly, the current government is merely business-tolerant,’” Magal says.

In its first two years, the current administration was careful not to rattle the cage, but in 2008 it took actions that Magal says have shown the party’s “true socialist-oriented tendency,” such as laying the groundwork to re-nationalize the health care and pension sectors, which were privatized in the 2000s as the final leg of the privatizations that started in the early 1990s. Such moves make next June’s elections one to watch.

Crisis Watch

But while the new government takes some blame for Slovakia’s slowdown, the global economic crisis also had an impact, although it hit Slovakia differently than the U.S. and Western Europe. In late 2008, as the U.S. watched Lehman Bros. fall and confronted a new reality, Slovakia was still riding its wave of growth. “If you’d have asked anyone in Slovakia in November or December whether they see any approaching drop in GDP, most of the people and politicians would have said no,” Magal says.

By now, however, the recession has arrived in Slovakia. Slovak banks are healthy compared to their Western counterparts, but 95 percent of the country’s banking sector is foreign-owned, so credit has tightened somewhat. The more visible problem is that Slovakia’s export-oriented economy has taken a hit.

A cornerstone of the Slovak economy is the automotive industry, with its car assembly plants and component manufacturing plants earning the country–along with other V4 countries–the nickname “Detroit East.” Recent projects that Kia Motors and PSA Peugeot Citro?n have undertaken are the biggest investments made in the country to date, estimates Peter Suba, a partner at Squire Sanders in Bratislava. Together with Volkswagen, the three companies’ Slovak facilities employ 80,000 people. From 2006 to 2008, the country doubled its output to 591,000 vehicles. But like its namesake, Detroit East’s Big Three also are faltering–in the past year Volkswagen temporarily shut down assembly lines, Kia cut shift hours and Peugeot Citro?n laid off 6 percent of the 3,500 workers in its Trnava plant.

Some of Slovakia’s efforts to avoid the original Motor City’s fate are familiar–the government rolled out its version of the Cash for Clunkers program in April. “This measure certainly helped the auto industry maintain their sales, especially Peugeot Citro?n, which is producing smaller cars,” says Katarina Cechov?, managing partner of Cechov? & Partners, a commercial law firm in Slovakia.

For broader recovery, Slovakia also passed new stimulus legislation that includes an initiative providing direct financing and tax breaks to companies pursuing research and development projects in the country, with a goal of attracting higher added-value operations.

“In the past, the main investors coming to Slovakia–who received mounds of state aid from the government–were those who had low added-value activities,” Suba says. “But it’s fairly easy for those investors to complete the manufacturing facilities in Slovakia and move to other parts of the world, and that’s what happened.”

In February, U.S. auto parts manufacturer Molex announced it would shut down its Eastern Slovakia facility, cutting 1,000 jobs and becoming the first major foreign investor to depart the country. Some similar investors have followed.

The stimulus plan addresses that exodus, requiring companies to keep their R&D operation up and running for five years to keep the benefits.

Euro Power

One thing that has helped Slovakia enormously throughout 2009 is its currency. Its Jan. 1 adoption of the euro has distinguished Slovakia from the other V4 members. The timing was crucial–as the local currencies of Hungary, Poland and the Czech Republic slumped in value this past year, the euro’s stability at least temporarily stanched the impact on Slovakia of the global economic crisis. For foreign investors it is a crucial difference. “It’s a plus for foreign investors comparing between Slovakia and, say, Poland,” Cechov? says. “The euro is more stable for purposes of foreign trade.”

However, adopting a different currency also has presented Slovakia with dilemmas unique among the V4. The devalued currency of its neighbors means they offer cheaper goods relative to Slovakia, so residents who live near the borders are doing their shopping elsewhere. “The retail sector has been hit very, very hard,” Magal says.

And the products aren’t the only thing Slovakia’s neighbors can offer for cheap.

“A big part of foreign investment in past years was motivated by cheap labor in Slovakia,” Magal says. “Because now they’re paid in euros, salaries haven’t gone down–and salaries are going down in the surrounding countries due to the devaluation of currency. To the extent they were only there for cheap labor, they’re now thinking of relocating.”

Overall, however, Magal is optimistic about Slovakia’s future. The country’s obstacles, he says, remain secondary to its assets–a quality workforce, central location and well-developed infrastructure. And its economic strength over the past five years puts Slovakia in an advantageous position to move beyond recent setbacks.

“Things slowed down later here than in the U.S.,” says Guido Panzera, an associate at Squire Sanders in Bratislava. “It’s certainly not as bad, and it probably will recover. If there are opportunities for below-market deals, now is the time.”