Where are Europe’s fastest growing economies to be found? They are in Eastern Europe. Over the past year, GDP has risen by 4.1 per cent in Romania, 4 per cent in the Czech Republic, 3.7 per cent in Poland, 3.3 per cent in Hungary, 3.1 per cent in Slovakia, and by 3 per cent in Slovenia. All these growth rates are at least double the average for the European Union (1.5 per cent) and triple the Eurozone growth rate of 1 per cent.
This is not a flash in the pan. Among countries which have joined the EU since 1980, Poland and Slovakia head the growth league – averaging nearly 4 per cent growth since they joined in 2004. The three Baltic countries, which also joined in 2004, have done well too – achieving average growth of around 3 per cent. The worst performing new entrant to the EU has been Greece. Since it joined in 1981, its GDP has risen by less than 1 per cent a year.
There are three main reasons why Eastern Europe has done so well. The first is its industrial heritage. Before the Second World War, economies such as Poland and the former Czechoslovakia were part of a central industrial heartland in Europe linked to Germany. The car manufacturer Skoda, for example, can trace its history back to the late nineteenth century. Skoda cars became a bit of a joke in the Communist era, but now that the link with Germany has been re-established through Volkswagen’s ownership, the quality of its products and the reputation of the brand have been restored.
The second reason for Eastern Europe’s success has been competitiveness. The countries of the region came into the EU with very low living standards and hence competitive wage levels. Even now, GDP per head in Poland is just two-thirds of the level in Greece and Portugal and less than half Spanish levels. This means Eastern Europe is attractive for international investors looking for a competitive production base in the EU.
The third driver of Eastern Europe’s economic success has been flexibility. This partly reflects relatively low levels of public spending and taxation. The Polish and Czech Republic governments spend just over 40 per cent of GDP, compared to a Eurozone average of 48 per cent. In France, Italy and Belgium and some other EU countries, governments spend over 50 per cent of GDP. Labour and business regulation is also relatively flexible in Eastern Europe.
Poland is the most significant of the Eastern European growth stars. It has a population of nearly 40m – the sixth largest in the EU. And it is already competing with Sweden to become the EU’s seventh biggest economy. And if we add together the six eastern EU economies now doing well – Poland, Czech Republic, Slovakia, Slovenia, Hungary and Romania – their combined GDP is over $1 trillion. These six economies are home to 85m people, more than Germany, a substantial market and a potential powerhouse for European growth.
We look east to Asia for economic dynamism. We should do the same within Europe. Greece and other struggling EU economies should seek to learn from the success of Poland and its neighbours in Eastern Europe.