Economic Prospects for Central, East and Southeast Europe

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Domestic factors are more likely to inhibit economic growth in the EU’s new member states than external ones, argue a group of scholars from the Vienna Institute for International Economic Studies in a February 2008 paper.

The main driver behind growth will continue to be household consumption in the new member states (NMS), say the scholars. They argue that this is based on increases in “transfers from the EU budget and foreign direct investment (FDI) inflows”. 

The authors describe how the majority of the NMS’ government finances performed better than expected in 2007. However, in some cases the need to reduce budget deficits resulted in economic stagnation and public unrest, as was seen in Hungary, they add. For the Czech Republic, Hungary and Poland, government deficits will continue to exceed permitted EU thresholds and as a result these countries will not be joining the euro zone in the near future, claim the authors. 

In the last seven years over 2.5 million jobs were created in the NMS, dispelling the myth that economic growth in these countries is “jobless”, say the scholars. There is, however, a shortage of skilled workers, which they believe “could well become a serious constraint on their economic growth.” 

The agriculture sector is losing the most workers, while the construction and services sectors have a higher rate of employment, the authors note. But vacancies are being reported in most sectors and are hard to fill due to “qualification mismatches”, they explain. 

The scholars show how GDP growth has grown 5% since the NMS’ accession, reaching 56% of the EU 27 average, meaning Slovenia, the Czech Republic and Estonia “are now more affluent than Portugal”. Economic growth will continue due to rising consumption, rising labour incomes and FDI, argue the authors. 

As for the Balkan region, the authors see industrial production outstripping economic growth in the medium term, and for all countries apart from Montenegro and Serbia they predict employment growth. Yet they foresee a bleak future for the Balkan export sector as these countries cannot attract enough FDI and greenfield investment to make exports sustainable. 

Current global financial turmoil, rises in oil and food prices and the sub-prime mortgage crisis are only expected to have minimal impact in the Balkan region. 

The scholars conclude that with Sarkozy’s assumption of the presidency in France, the prospects of Balkan countries joining the EU “have greatly improved”. Croatia should join by 2011 with the others looking to join by 2015, they believe. However, Turkey’s accession could become problematic as it still does not have the support of many of the NMS, they finish. 

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