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Strength in Diversity: Embracing New Markets in the EU11

June 13, 2013

The contribution of exports to growth was positive in the EU11 region: trade was fueled by strengthened links with non-EU markets in 2012

STORY HIGHLIGHTS
  • Countries in the European Union 11 (EU11) region will continue to experience limited economic growth throughout 2013
  • Despite slow growth, Foreign Direct Investment to the region has remained stable
  • The region has benefitted from a diversification of markets – most notably with Russia, which accounted for half of the exports to non-European Union (EU) markets

The enduring effects of the global financial crisis – including rising unemployment rates and decreasing exports – are continuing to impact countries around Europe, including the countries comprising the European Union 11 (EU11) – Bulgaria, Croatia, the Czech Republic, Estonia, Latvia, Lithuania, Hungary, Poland, Romania, Slovenia, and the Slovak Republic. In 2012, this group of countries experienced economic growth of just 0.8 percent – a four-fold decline from the previous year. Flagging domestic demand, negative employment growth, and declining intra-EU regional trade in the first half of 2013 are now pointing to an identical forecast of 0.8 percent economic growth in the region for 2013. While growth is expected to eventually pick up in 2014, the labor markets in these countries are likely to only recover in the medium term.

Despite the slow recovery of economic activity, EU11 countries nonetheless remained attractive for foreign investors amid stable economic policies, calm financial markets and ample global liquidity. With labor productivity continuing to outpace growth in labor costs, the region strengthened its competitiveness. The flow of Foreign Direct Investment (FDI) also remained stable.

Open Quotes

Although this expansion into non-EU markets did not fully compensate for the weaker export demand we saw from the EU itself, it is nonetheless a positive trend which will continue to help the region toward recovery. Close Quotes

Gallina Andronova Vincelette
Senior Economist, The World Bank

One positive economic trend that has gained momentum over the last year is an ongoing diversification of markets for exports coming from the EU11.  While more traditional trade with European Union neighbors like Germany, Greece, and Austria remain important, exports to a number of countries outside of the EU market have now gained prominence– in particular, exports to the United States, Ukraine, and Russia.  

“Although this expansion into non-EU markets did not fully compensate for the weaker export demand we saw from the EU itself, it is nonetheless a positive trend which will continue to prop the EU11 economic performance,” says Gallina A. Vincelette, Senior Economist at the World Bank and lead author of the latest EU11 Regional Economic Report, which looks at economic trends in the region.

The one country which stood out most for its role in this new diversification of trade in the region was Russia – accounting for approximately 25 percent of export growth from EU11 countries to countries outside of the European Union. As the newest member of the World Trade Organization (WTO), Russia has been experiencing changes to its import and export markets as a result of the various economic guidelines put forth by this organization. These changes have had an immediate impact on trade with the EU11 region. Declining tariffs for imports into Russia and eroding trade barriers have helped fuel an upsurge in trade by allowing goods from the EU11 to flow more freely into Russia’s $2 trillion economy and sell at more competitive prices.   

Although the overall extent to which lower tariffs alone are driving Russia’s growing role as a significant importer of goods from EU 11 countries is unclear, they seem at least to be a factor in this recent gravitation of EU11 goods toward the Russian market. With foreign import tariffs on commercial light trucks dropping as a result of Russia’s accession into the WTO, the impact on EU11 exports in this sphere was immediately obvious –exports of machinery and transport equipment grew by more than 23 percent between 2011 and 2012, accounting for more than half of the region’s export growth to Russia, with, exports of road vehicles accounting for almost 37% of this growth, while specialized and general industrial machinery combined to account for an additional 26% of this total.

With only limited growth expected for the EU11 region in 2013, these economic gains are taking on increased importance. By building on positive trends such as market diversification and stable levels of FDI, countries in the EU11 are positioning themselves to better exploit economic opportunities in an environment of limited global growth. By laying these types of foundations during times of relatively low growth, countries in the EU11 can thereby pave a way toward a strong economic recovery that may just come sooner rather than later.