COMMENT: CEE exceeds 50% of EU's average GDP per capita

By bne IntelliNews January 12, 2007

Hans Holzhacker of UniCredit Group -

Central & Eastern Europe's catching-up process is well under way.

The European statistical office (Eurostat) published data in December that indicate GDP per capita in the 10 new EU member states from CEE (including Bulgaria and Romania) – at purchasing power standards – has for the first time exceeded the 50% level of the EU25 average.

Purchasing power standards (PPS) is the Eurostat methodology to adjust for the different price level in the EU member states, while GDP calculations are based on standardized euro prices.

Less developed countries usually enjoy lower prices in general than more developed ones, especially for services. Therefore, the difference in GDP is usually larger when calculated at current prices and exchange rates than at PPS. GDP at PPS gives a more accurate picture of the actual divergence of productivity and welfare.

Slovenia wealthiest, Baltics fastest

The table below shows that Slovenia has remained the wealthiest country in CEE, reaching 83.6% of the EU25 average, up from 73.9% five years ago, or about the same level as Greece. Slovenia is followed by the Czech Republic. Both countries have overtaken Portugal. Estonia has improved its position most over the last five years (plus 21.3 percentage points), followed by its Baltic neighbours Latvia and Lithuania.

The Baltic states might grow a bit too rapidly and show some signs of overheating. But even if this results in a period of consolidation and slower growth, their performance is still impressive. Slovakia and the Czech Republic also show double-digit improvement. No CEE country lost ground; the CEE10 gained 8.1 percentage points; combined with the EU candidate countries the figure is 5.6 percentage points.

What are the further prospects for catching up?

Assuming average annual real GDP growth of about 5%, the CEE10 will achieve two-thirds of the current EU25 level by 2010 and the full level by about 2020. If the candidate countries are included this, will take a few years longer.

This means, on the one hand, that CEE citizens will still have to wait for one-and-a-half decades to reach the wealth of today's EU. On the other hand, this means there is enough room for more investment, transfer of technology, management and capital from the more affluent EU regions to CEE, which is good news for investors; and for the CEE countries it means sufficient opportunities to do things better than they were done in Western Europe.

The years 2007 and 2008 will be another period of catching up: we forecast for the CEE10 real GDP growth of 5.2% and 4.8%, respectively.

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