Features

Emerging Europe comes of age

Central Europe is enjoying an EU-backed boom as manufacturers open facilities in countries such as Slovakia and Hungary.

908_MW_P05_Markets_Prague
Central Europe is shrinking the income gap

A new BMW car factory is to be built in Hungary. This is likely to raise investment in the country by 1% a year, and boost growth in 2019-20 by 0.2%, according to Capital Economics. While not exactly a huge boost, BMW's willingness to invest in Hungary is a sign that the populist government isn't necessarily an obstacle to attracting foreign investment. Meanwhile, Jaguar Land Rover has been the latest carmaker to come to Slovakia, which already hosts VW, Kia and PSA. The arrival of foreign companies and investment like this "gives a fair picture of Slovakia's, and more broadly central Europe's, model of development", notes The Economist and it has been a successful one.

An EU-backed boom

The European Commission tracks the progress of five European Union members east of Germany the Czech Republic, Hungary, Poland, Slovenia and Slovakia and compares them with its wealthier neighbours, Austria, Denmark, the Netherlands and Sweden. In 1995, average GDP per person was around 55% lower in the five central European countries. But two decades later the gap had shrunk to 39%. The average incomes of these central European countries are now equal to those in Portugal and far above Greece, with the biggest gains in Slovakia.

GDP per head in the Czech Republic is now close to that of Spain. The Czech central bank has just raised rates for the fifth time in a year to cool its booming economy, which grew at an annual rate of 4.2% in the first quarter, reports James Shotter in the Financial Times, with unemployment falling to just 2.4%, the lowest in the EU.

EU subsidies, common in central Europe, have been a huge help. EU funds boost investment in infrastructure, such as roads and rail, which appeals to foreign investors, notes The Economist. In Poland, such funding will account for nearly 3.5% of GDP and 10% of public spending each year until 2022. In Hungary, it added spending worth an average of 5% of GDP over the five years to 2015.

While there are worries about the region's increasingly populist politics, "foreign companies seem unruffled". Regardless of the antics of Viktor Orbn, an "illiberal authoritarian", Mercedes Benz invested €1bn in Hungary two years ago and plans to make 330,000 cars a year there by 2020. It seems "central Europe's Goldilocks economies" are set for sustainable growth. But to continue flourishing in future, central Europe needs its local firms to innovate more. And it needs to overcome its dependence on EU funding. After all, the next round will be less generous. The European Commission plans to give Poland, for example, €64bn, down from €84bn in 2014-20.

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Will a stronger euro ruin Europe's rally?
European stockmarkets

Will a stronger euro ruin Europe's rally?

International investors have been buying into European stocks, driving the euro higher. But that surge now risks dampening the recovery that started i…
21 Sep 2020
No deal is the best deal for Britain – and the EU too
Brexit

No deal is the best deal for Britain – and the EU too

Europe has a lot to gain from a thriving, independent Britain, says Matthew Lynn.
6 Sep 2020
Europe’s magic works better in the dark
EU Economy

Europe’s magic works better in the dark

Europe’s latest fiscal intervention looks like the kind of muddle-through that makes a United States of Europe more likely, says Merryn Somerset Webb.…
28 Aug 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
Don’t miss this bus: take a bet on National Express
Trading

Don’t miss this bus: take a bet on National Express

Bus operator National Express is cheap, robust and ideally placed to ride the recovery. Matthew Partridge explains how traders can play it.
19 Oct 2020
Three stocks that can cope with Covid-19
Share tips

Three stocks that can cope with Covid-19

Professional investor Zehrid Osmani of the Martin Currie Global Portfolio Trust, picks three stocks that he thinks should be able to weather the coron…
12 Oct 2020