Iana Dreyer in Brussels -

“All the economies of the European Union are expected to grow in 2015 and 2016, the first time this has happened since 2007, ” World Bank analysts highlight in the recently released inaugural “EU Regular Economic Report”. And as growth picks up – albeit moderately – in Europe, the continent will be at the forefront of a global trade revival, Raoul Leering, head of international trade research at ING, argues in another report entitled, “The world trade comeback”.

These two insights should be keenly watched in Central and Southeast Europe, where trade remains a key engine of economic growth.

Europe accounts for 35% of world trade, but only for 25% of world output. This means it is overrepresented in world trade, Leering says. Once output growth picks up, this will translate into even higher rates of trade growth, his study argues.

The industrial ‘value-chain’ and ‘processing trade’ phenomena, in which offshoring and the relocation of manufacturing activities play a major role, contributes to explaining this. The majority of goods traded across borders are intermediate products that are imported to be processed and then re-exported. This inflates trade figures during growth periods; when output drops, trade figures drop even more. Cross-border services – from research to logistics – are also increasingly important in global production processes.

Star performers

Emerging Europe has played a special role in the EU as a major offshoring destination for globally competitive Western European firms in the automotive, machinery, textiles and chemicals sectors, among others. The region's integration into European ‘value chains’ has spurred their growth and helped Western European companies become globally competitive – and explains partly the continent’s over-representation in world trade.

Compared to Eurozone and other Western European economies, Central and Southeast Europe member states have weathered the economic crisis relatively well, and their trade has remained relatively buoyant. With 3.4% and 3.6% GDP growth in 2014 respectively, Hungary and Poland have been regional star performers. Consumer demand and the rising sophistication of an increasingly prosperous and qualified Central European workforce are re-balancing trade patterns in favour of more imports in these two traditionally very export-oriented economies.

The growth pick-up further west in Europe means Central and Southeast European industries are benefiting particularly. “The Czech Republic, Hungary, and Poland are witnessing the highest Manufacturing PMI index in the EU,” says the World Bank report.

Many economists predict that technological change such as 3D printing in manufacturing,  a widely touted ‘re-shoring’ trend in industry as labour and other costs in emerging markets countries increase, could put the brakes on the kind of offshoring activities that Emerging Europe has benefited from. But this global trend hasn’t materialised yet.

Automotive companies continue to place bets on the region. A most notable example is Cooper Standard’s announcement earlier this year that it would offshore activities to Central Europe. This is because labour costs alone do not determine an offshoring decision; labour productivity and the quality of the workforce also play a big role, and these factors have been improving in the region.

In fact, proximity to the big Western European markets and EU membership remain a major advantage for Central and Southeast European countries. In an interview with bne IntelliNews, ING's Leering says: “With the labour force relatively educated and trained, Western European companies outsource more knowledge intensive tasks within their value chains”.

This not only holds true for the richer Visegrad countries that joined the EU in 2004 and attracted car and machinery manufacturers on a large scale; the poorer EU newcomers like Bulgaria, Croatia and Romania are also enjoying their own distinct style of export-led growth. Instead of relying heavily on foreign manufacturing investments as their Visegrad neighbours have over the last two decades, they export more services. Their area of excellence is information and communication technology services. “Bulgaria’s, Poland’s and Romania’s goods exports grew significantly more than in other EU countries,” says the World Bank report. “Between 2010 and 2014, Bulgaria’s, Romania’s and Poland’s export volume grew by more than 35.3 percent, 27.3 percent and and 24.2 percent respectively”.

But rising services exports are a general trend in the region. And it’s not all about tourism, which counts as a service export, but is increasingly about modern services such as research and development, management consulting and professional services, technical and trade-related services, and operational leasing. “The contribution of services to overall export growth was particularly pronounced in Bulgaria, Croatia and Romania in 2014,” says the World Bank.

Foreign firms play a dominant role in these countries’ exports. Foreign direct investment (FDI) to the region has declined significantly since the 2008 crisis, especially in construction and banking, points out the World Bank. Overall, Central and Southeast Europe countries need to take their economic reforms a step further if they want to continue to receive quality foreign investments over the medium to long term. This involves reforms to the state, rule of law and the judiciary, and more investments in knowledge and education.

But in the shorter term, there is an upside to the recent drop in FDI: “A higher share of FDI is now destined for sectors with export potential, such as manufacturing and services,” says the World Bank.