Economic Growth in the CEECs Increasingly Propelled by Local Demand

The economic recovery in the EU 15 in 2006 resulted in an acceleration of growth in Central and Eastern European countries (CEECs), particularly in the new EU member states of Central Europe. Helped by the recent massive inflows of FDI, these countries have become serious competitors on the European markets, particularly those of manufactured goods. The continuous nominal currency appreciations in Poland, the Czech Republic and Slovakia reflect their gains in international competitiveness and will not affect their economic growth. In contrast, foreign trade's contribution to growth was decidedly negative in most other CEECs, including the Baltics and the new EU members in South-eastern Europe. Their growth rates – quite high in some instances – were first of all due to a boom in private consumption, largely financed by external borrowing facilitated by the dominance of foreign-owned banks. In some cases, the credit boom is about to overheat and produce "bubbles", especially in real estate. However, the available policy options are limited: while monetary policy is constrained by fixed exchange rate regimes, fiscal policy is already quite restrictive in general. In the new EU member states, the labour market situation is continuing to improve given that their industrial restructuring is nearing completion, and not least due to the sizeable outward migration flows. In the West Balkan countries, on the other hand, unemployment rates are generally high and rising. Their recent progress towards EU integration has been generally modest, even though greater political stability and growing foreign trade both support their economic recovery. With the exception of Hungary (where large-scale efforts at fiscal consolidation have induced a noticeable economic slowdown), short and medium term economic prospects for the CEECs are positive, whereas growth in Serbia and Ukraine remains relatively vulnerable to political risks.MOEL Wirtschaftsbericht 2006 Osteuropa, Südosteuropa, Mitteleuropa