Eastern Europe : Where Has the Dream gone?

In the land of promise that is Eastern Europe, where culture is rich, the land as fertile as anywhere else, and industrialization widespread, we look for the effects of the dream of liberalization and integration; has it been all that it was hyped up to be, or was it just an illusion created with smoke and mirrors?

After the collapse of the Soviet Union , the ensuing power vacuum was perceived as a cause for potential alarm to the stability of the rest of Europe . A seemingly listless and drifting Central & Eastern Europe, with its huge labor force and a potentially large consumer market base, could do more harm than good, unless embraced and folded into an economic and political trading partner. The European Union prepared a program of expansion and pursued an eastward direction. In 2004, the Czech Republic , Poland , and Slovakia , as well as Cyprus , Estonia , Hungary , Latvia , Lithuania , Malta , and Slovenia integrated with the European Union.

Perceptions and opinions on EU integration

Perhaps the strongest opinions and perceptions should naturally deal with economic factors as these are the ones tangibly felt by the population. In anticipation of integration, there will also be an expectation of increased economic benefits, either in the form of assistance, or through trade opportunities. This will result in an upward movement of GDP, as well as a rise in per capita income. However, perceptions and opinions are time-bound; if the benefits do not arrive as perceived, or arrive later than expected, then the populace may feel that they are not stakeholders anymore, and that there really are no positive changes to be expected.

Integration of two entities will often provide a proportionally bigger economic gain for the smaller of the two, as more opportunities will arise for industries, markets, and individuals alike. And as markets begin to liberalise, growth will also be realised. Correspondingly, the removal of trade barriers will compel Eastern European nations to make their products and services more competitive.

Foreign Direct Investment

As Eastern Europe is perceived to be lacking in capital resources, integration would also have provided access to foreign direct investments, which would have led to an increase in employment growth rates in those areas. As foreign direct investments find their way into the production and manufacturing sectors, more opportunities will open up which will provide employment in those sectors.

Investment climate

One significant effect of integration will be on the capital markets, as the Eastern European countries integrate theirs with the EU member states. Integration will lead to a bigger capital pool and will result in increased efficiency of capital allocations which will also result in economic growth.

Employment opportunities and improvement of the labor force

One of the premises for ensuring a competitive labor pool is to increase their employability by providing the appropriate skills through education and training. Poland has ongoing programs and policies designed to ensure further training for its workers. Aside from this, it has also instituted measures to offer more training to workers whose industry is in decline. Although in the short term the economic cost of these programs will impact negatively on an already fragile Polish budget, it nonetheless promises increased employability in the medium to longer term as it secures the future of their labor market.

Current GDP growth figures

GDP growth levels for the EU-15 countries have an average increase of 2.2 percent. In Eastern European countries, the GDP grew by an average in excess of 5 percent. This significant increase in year-on-year GDP is one of the major reasons why key industries are looking at Eastern European countries to fuel their growth projections.

Current private equity levels

Private equity fund levels, as sourced from data compiled by the European Private Equity and Venture Capital Association (EVCA) shows a doubling of funds raised during 2005 over 2004, with the actual year-on-year growth rate reaching 161 percent. The year-on-year increase of 2004 over 2003 shows a figure in excess of 60 percent.

In 2005, more than 85 percent of the private equity investments in the region was concentrated in Hungary , Romania , the Czech Republic , and Poland . The fund managers are continually on the lookout for areas with the strongest growth potential, thus the explanation for the sudden non-inclusion of Bulgaria in last year's frenzied market hunting, as Bulgaria has just recently completed two of the largest private equity deals in 2004.

In terms of investment utility, buyouts represented the biggest use followed by replacement capital. The combined percentage of buyouts and replacement capital in the Eastern European nations closely mimic levels in all of Europe . However, expansion capital transactions were higher while early-stage deals were lower. This is attributable to the high growth rates within the Eastern European nations, which fuelled a rush to expand to take advantage of the growth momentum. Divestment, by means of trade sales, was a popular exit route. In terms of percentage, trade sales diversification in Eastern Europe was triple the percentage level of the rest of Europe .

Telecommunications is another area experiencing growth rates that are higher than the European average. Between 2003-2005, the growth rate in telecommunications was 11 percent per annum. For the rest of Europe , the growth rate was just over 3 percent. There also appears to be a corellation between a high GNP growth with a high mobile penetration. Economic growth appears to also contribute to the growth of the mobile market as well.

From all the indicators that have been reviewed, it is fair to conclude that the Eastern European nations are actually already past the hardest parts of integration and may well be on their way to experiencing progress. In fact, it actually may even be fair to say that the growth potential being experienced now is actually just a portent of even better things to come. Perhaps, once everything has calmed, and access to capital and trade markets have normalized throughout Eastern Europe and the EU-15, then the dream may even be surpassed as the economic, political, and social benefits of joining the west are realized.