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Business Shrugs Off Central European Turmoil

Like other foreign investors in Central Europe, Patrick Cogny has more pressing worries than politics. As CEO Europe for outsourcing giant Genpact, 40% owned by General Electric (GE), Cogny is more focused these days on how to contend with other multinationals setting up back-office centers in Hungary and trying to lure away his employees. "They don't know how to train people, they just hire from others," Cogny complains of competitors.

Despite alarming images of burning cars in the streets of Budapest and reports of political turmoil elsewhere in Central Europe, Cogny's business-as-usual attitude seems typical of foreign companies operating in the region. Sure, they're worried about the current political situations in Hungary, Poland, and Slovakia. But they remain convinced that the newest European Union members, with their relatively low wages and well-educated workers, are still a good place to invest. "We're not going anywhere," says Cogny, who's also responsible for Genpact operations in Poland and Romania.

To varying degrees, most countries in Central Europe are feeling a popular backlash from citizens who feel they haven't shared in the benefits of the free market. The backlash has been most dramatic in Hungary, where demonstrations flared beginning on Sept. 17, after Prime Minister Ferenc Gyurcsány admitted he lied about the depth of austerity measures needed to get the government budget under control. In Poland, the coalition government collapsed on Sept. 22 amid bickering over the budget, while a new populist government in Slovakia is threatening to roll back pro-market reforms.

AS SEEN ON TV. But the political strife obscures the fact that economic performance in these countries remains strong. "If you put aside the fiscal situation of the central government and just look at the micro level, you actually find a quite healthy economy," says Zbigniew Kominek, principal economist at the European Bank for Reconstruction & Development in London, which lends money in the region. Hungary's GDP rose 4.1% in the first six months of the year, though a slowdown is likely next year as the government raises taxes to cut a deficit likely to top 10% of GDP. Poland's economic performance is even more impressive, with growth of more than 5%.

Business people are watching political developments warily. But they say the recent problems aren't as bad as they look on TV. "Obviously every investor likes a calm, quiet environment," says Péter Fáth, CEO of the American Chamber of Commerce in Hungary. Most of the protesters were peaceful, he notes, with only a few hundred soccer hooligans and right-wing extremists turning violent. "They managed to burn up one police car and that picture was on the front page of every paper," says Fáth. The protests already show signs of fizzling out.

The riots are hardly good advertising for Hungary as a business location. No one expects a flight of capital from Central Europe—the effect of the protests on currency rates and stock prices has been limited—but the turmoil could affect future investment.

Consider Genpact: Cogny says he expects the company's 700-strong Budapest workforce to remain stable, but he's expanding Genpact's operations in Romania, primarily because of its even lower wages. Genpact expects eventually to employ 1,000 people in Bucharest, up from 300 now.

BUSINESS BACKS EMBATTLED LEADER. Business people are anxious to see Hungary and other countries in the region continue on the path toward stable democracy and reliable economic infrastructure. Béla Forgó, Hungarian country manager for Alcoa (AA), says that the nation has to reform the overcrowded, underfunded university system to ensure a continuing flow of qualified workers. He's even willing to tolerate the government's decision to tack a 4% "solidarity" charge onto the existing corporate tax rate of 16%. "Of course, I don't like taxes being increased, but the No. 1 priority should be to work on long-term competitiveness," Forgó says.

Unlike demonstrators in front of the Hungarian Parliament building, business people want Prime Minister Gyurcsány to stay in office. A former leader of Communist youth organizations, Gyurcsány made millions after the transition to a free market with his own investment advisory firm. He knows how to talk to business and is seen as more likely to take the measures needed to restore fiscal stability to government. "Foreign investors have made it clear they support him," says Adam Strangfeld, senior European analyst for consultancy Control Risks.

Assuming Gyurcsány's Socialists aren't completely routed in municipal elections on Oct. 1, Strangfeld says, "He might still ride this one out." That could help restore some confidence in a region suddenly marked by a bout of political drama.

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