Central Europe: The Continent's New Growth Zone

For many Americans, the 15 countries of Central Europe that stretch from Estonia in the north to Albania in the south are still defined by their four decades of communist rule. On occasion, I still am asked if they have communist governments. (FYI: None of them do. But good news seems to travel slowly.)

In the last weeks of 2002, while most Americans focused on Iraq, the economic and political map of Europe has been redrawn in a way that will have a profound impact on continent—and on the United States (US). At the North Atlantic Treaty Organization’s (NATO’s) November summit in Prague and the European Union’s (EU’s) December summit in Copenhagen, a majority of these nations were invited into membership in these quintessential Western institutions. Turkey also was invited but no date set to begin accession negotiations, pending continued progress in strengthening democracy and human rights.

EU expansion is certainly good for Europe, east and west. US companies who chafe at EU trade barriers may have mixed emotions. But for most Americans, including businesses well established in Europe, it’s good news as well.

Eight countries—Latvia, Lithuania, Estonia, Poland, Hungary, the Czech Republic, Slovakia, and Slovenia—will join the EU in 2004. Two more—Romania and Bulgaria—are expected to join within five years. Of these ten, three—Poland, Hungary, and the Czech Republic—are already members of NATO and the rest received invitations at Prague. And the other five—Yugoslavia, Macedonia, Croatia, Bosnia, and Albania—are moving at various speeds, but all in the same direction.

Joining the EU, as opposed to NATO, will likely have the bigger concrete impact on them—and on us. The European Union’s population will grow almost 20 percent immediately and, probably, by more than one-third within a decade. The EU, which in recent years has feared a future of shrinking population and slow growth, is annexing a region with common values, high levels of education, and much faster economy growth.

Contrary to outdated stereotypes, these nations are overwhelmingly democratic—with real elections and freedom of speech and of the press. Market economics dominate. Over 70 percent of economic activity is in the private sector. In Hungary and the Czech Republic, it’s more than 80 percent.

As a group, their official gross domestic products (GDPs) have recovered from deep recessions after 1989. Poland’s economy is more than 50 percent larger than it was in 1989. Slovenia has a higher standard of living than Portugal. Last year, the Balkans had the fastest growth rate in Europe. Overall, in the 1990s, Central Europe grew FASTER than Western Europe.

One of the big reasons is that, while poor by our standards, these countries are rich in human resources—universal literacy, skilled work forces and world-class scientific and engineering capabilities. They are already quite integrated with Western Europe and more competitive than is often assumed.

Today, two thirds of their exports go to EU countries, which are also the source of more than 80 percent of their foreign direct investment.

By far the largest share of these investments is in manufacturing, both privatizations of state-owned firms and greenfield operations. Central Europe has quickly become the preferred location for making goods—from clothing and shoes to computers and cell phones—for the European market.

Most of the Central European currencies already are effectively tied to the euro. Perhaps a half-dozen of the countries will adopt it within a few years; most within a decade. These trends have driven down capital costs in the region to remarkably low levels.

The EU’s decision to expand into Central Europe will accelerate these trends.

Adoption of EU rules by themselves will have a big impact by helping the new members reach consensus on the rules of the game. Americans may not like all the rules they adopt, but the nations of Central Europe are reaching world-class standards of government policy much faster than they could on their own.

The financial benefits are substantial, as well. Even before the first invitation was extended, the EU was spending billions of euros to promote the development of Central Europe. For candidate countries, the aid and government-sponsored investment adds up to several percentage points of GDP every year. When they become members, they will gradually be integrated into the EU’s array of agricultural and development subsidies.

Every country ever invited to join the EU has been admitted. Every country that has joined has prospered. Thus, the invitation itself creates a powerful sense of security—and momentum—for people who, for most of the 20^th century, had little of either.

For 40 years of communism, Americans viewed the countries of Central Europe as “captive nations.” For the last dozen years, we have seen them as “post-communist” countries, struggling to recover. The decisions being made by NATO and the EU this year should wake us up to the new reality—the transition is largely over and they are the “new growth zone of Europe.”