Eastern Europe Drives European Growth in 2013 by Shifting Focus to Other Emerging Economies

In 2013, eight of the ten fastest growing economies in Europe are forecast to be Eastern European, transition economies. Click to Tweet! Given the high level of European integration that Eastern European states had been pursuing prior to the eurozone sovereign debt crisis, many expected these developing states to be disproportionately affected by the crisis. However, despite relying on the eurozone as a main source of capital and as their biggest export markets, these Eastern European economies have seen an upturn in growth levels. Growth rates aren’t quite back at pre-crisis levels, however, and these economies are looking beyond their immediate neighbours in Europe for prospective investors. Risks to sustained economic growth are still present in Eastern Europe and countries like Slovenia, Hungary and Croatia are all struggling to grow because of weak export growth, banks deleveraging and fiscal consolidation programmes, all by-products of the eurozone debt crisis.

Real GDP Growth of Top Ten Fastest Growing European Economies: 2013

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), World Economic Outlook (WEO)

Note: Data for 2013 are forecast.

High exposure to eurozone debt crisis

Since the breakup of the former Soviet Union, countries in Eastern Europe have been going through a period of convergence, whereby their growth levels tended to be higher than their developed counterparts as real growth began from such a low base. The global financial crisis of 2008-2009 couldn’t have come at a worse time for some of them as this meteoric growth was already cooling. Immediately, Western banks that were the primary sources of credit for Eastern European businesses and consumers began to deleverage in order to bolster their balance sheets at home which led to subdued credit growth and a collective slowdown in the eastern economies.

Real GDP Growth in Western and Eastern Europe: 2007-2013

Source: Euromonitor International from national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF), World Economic Outlook (WEO)

Note: Data for 2013 are forecast.

Improving competitiveness is key to boosting economic growth

In order to ensure that these economies didn’t get completely steamrolled by the eurozone debt crisis, governments have had to adopt definitive policies to remain competitive and attract investment from elsewhere.

• Georgia, which is the highest ranked of the Eastern European economies in the 2013 World Bank Ease of Doing Business Index, has built up an excellent investment environment thanks to its well regulated business environment and its low rate of corporate tax, 16.5%, which is lower than the average Western European tax rate. Georgia is expected to have the fastest growing economy in the region in 2013; Click to Tweet!
• Moldova has made reducing state-intervention a key priority and is pursuing a deep range of privatisation measures to encourage Foreign Direct Investment (FDI) and increase competitiveness, as well as significantly reducing red tape;
• Ukraine has agreed a loan arrangement with China; in exchange for Ukrainian maize, China offered Ukraine lines of credit worth US$3.0 billion in 2012. This is a prime example of emerging markets becoming more dependent on each other, a trend we’re expecting to see much more of in 2013. Ukraine is also home to one of the largest potential amounts of shale gas in central and Eastern Europe which will attract investors as well as drive up the country’s terms of trade;
• Russia, the region’s largest economy, will also perform strongly in 2013, with real growth of 3.7% forecast. Low unemployment levels and high capacity utilisation in 2012 will continue into this year but risks remain given the country’s dependence on the energy markets. The country’s accession to the World Trade Organisation (WTO) in 2012 should also help its trade growth over the medium term.

Eastern European countries have learned from their neighbour’s mistakes and are becoming dynamic, outward-looking economies. This process may ultimately slow deeper integration with the rest of Europe but it will ensure that these countries achieve sustainable, long-term growth.