Weak Growth in the West - A Threat to Eastern Europe's Strong Growth

FRANKFURT: Current economic trends in Western and Eastern Europe are back to a familiar pattern of the past fifteen years: divergence. In the West, the picture is of economic pessimism and downward forecasts. Even if hopes for a recovery later this year materialize, GDP growth in EU countries will be down a third on last year. In the East, a growing number of economies -- exceptions come in the CIS, though Russia is starting to grow -- are expanding fast. Countries that tackled reforms in earnest should grow 5% or more for the next few years at least.

Should we believe such projections of opposing developments in the West and East? After all, the factors which once explained why economies often developed out of step no longer exist. The countries of Eastern Europe no longer function in isolation from the world market. Both the transition from a planned economy to a market economy and re-orientation towards the West are in advanced stages. Association agreements with the EU have improved Eastern countries' market access. This helped vastly increase their exports to the EU as a proportion of total exports. The figure is currently around 50%, and growing. So slower growth in demand in what has become by far the most important export market has significant potential to disrupt the progress of Eastern European economies.

Nonetheless, the basis for an upturn has broadened in many of these countries. Exports, traditional catalysts for recovery, have driven the restructuring process so far that both investment and private consumption now contribute increasingly to economic growth in a number of countries. More important: progress with reform has seen production bases expanded and diversified to an extent that allows a greater division of labor between Eastern and Western Europe.

This is where the challenge facing the economies of Western Europe to strengthen their international competitive position comes in. One reason for their weak growth costs. It has been caused by wages that are too high, too inflexible, insufficiently differentiated, and overburdened by social security costs and high taxes. The rise of the Deutsche Mark and the currencies in neighboring countries during the foreign exchange market upheavals of recent years made this problem even more painful. In order to survive, many companies are forced to exploit the advantages of low wage costs found in Germany's Eastern European neighbors. Even taking into account differences in productivity, these costs are generally between a quarter and a third of the level in Eastern Europe.