Expert View: Expect economic miracles among the EU's arrivistes

When Europe's heads of state met in Brussels last month to sign the treaty establishing a constitution for Europe, there were 10 newcomers round the table. The May enlargement of the EU was the biggest ever in terms of new members. It was the second largest addition to the population - 74 million people, or nearly 20 per cent. But it added less than 5 per cent to EU GDP.

When Europe's heads of state met in Brussels last month to sign the treaty establishing a constitution for Europe, there were 10 newcomers round the table. The May enlargement of the EU was the biggest ever in terms of new members. It was the second largest addition to the population - 74 million people, or nearly 20 per cent. But it added less than 5 per cent to EU GDP.

This was because the new entrants are still relatively poor. Incomes in Poland, the Czech Republic and Hungary are only around a fifth of Western levels at current market exchange rates.

The gap in real living standards is not so great, because the money goes twice as far. They are very cheap places to live and do business - cheaper than Turkey, Mexico or Korea, and much cheaper than Portugal.

Consider Poland, which has 38 million people and, like France, shares a long border with Germany. Because most international trade takes place between neighbouring states, you might expect Polish trade with Germany to be similar to French trade. In fact, German exports to Poland are less than a quarter of those to France, and German imports from Poland are less than a third.

These differences are in part a result of Poland's relative poverty: trade shares are measured by value, and the country's goods are relatively cheap. They also highlight a cause of that poverty: the political and economic barriers that isolated Poland from the West for half a century. Now those barriers are being dismantled, many of the conditions are in place for a Polish (or Hungarian or Czech) economic "miracle".

Normal economic growth in a mature industrial economy is of the order of 2 to 3 per cent. After the Second World War, Western Europe enjoyed a long period of 5 per cent growth. This happened because the capital stock and associated productivity in war-torn Europe were far below US levels. As the capital stock was rebuilt and productivity caught up with US best practice, the growth miracle occurred.

We may now be witnessing the start of the East European miracle. The new joiners are already growing much faster than the old EU, and taking a growing share of EU trade. This is not surprising since these countries were part of the European mainstream until devastated by war and communism. They have educated populations, social cohesion and the rule of law.

In some, there is a strong manufacturing tradition. In the 1930s, Czechoslovakia was annexed by the Germans for its manufacturing base. After the war, the Russians held on to it, for the same reason. So it is not surprising that the Czech car industry, which in the 1930s helped to make the country one of the richest in the world, is booming again.

One interesting precedent is the Irish growth story. When Ireland joined the EU in 1973, its real living standards were little more than half French levels. Over a period of 30 years, culminating in a spectacular growth spurt from the late 1980s onwards, they have caught up.

The Eastern European states start from a lower base and without some of Ireland's advantages (notably a large, well-educated, English-speaking expatriate population that was attracted back home as the economy boomed). But clearly an "Irish miracle" is possible for them too.

Possible, but not certain. When the Greeks joined the EU in 1981, their real incomes were some 30 per cent below French levels, leaving plenty of room for a "catch-up" growth miracle. But today the gap is the same as it was then.

If the new joiners draw the right lessons from this comparison, they can achieve outcomes closer to that of Ireland than of Greece.

Bill Robinson is director of economics at PricewaterhouseCoopers.