The Economic Impact of Central and Eastern Europe

The Economic Impact of Central and Eastern Europe

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Topic: The Economic Impact of Central and Eastern Europe

the perspective of the Central and Eastern Europe and little mention from the original 15 members except if they’ve impacted them.

The 4 chapters are:
6. Foreign Direct Investment
7. Migration
8. Future Challenges
9. Conclusions


Central and Eastern Europe (CEE) is a term used in reference to countries in Southeast Europe, Central Europe, Eastern Europe, and Northern Europe. It includes all the countries in the Eastern bloc, independent States in former Yugoslavia, Lithuania, Latvia, and Estonia. The countries were once communist States before the fall of the Soviet Union. After the fall, the countries began to integrate quickly with world markets from early 1990s. According to Bussiere, Fidrmuc, and Schnatz (2005), the countries have particularly been integrated with highly developed countries in Western Europe. Some of the countries in CEEC started to join the European Union (EU) in 2004 with the Slovak Republic, Slovenia, Lithuania, Hungary, Estonia, Czech Republic and  Poland, joining the EU. Bulgaria, and Romania joined the EU later in 2007 (International Monetary Fund (IMF), 2014). Other countries like Montenegro, Kosovo, and Bosnia-Herzegovina are not members of the EU. However, they are counted as CEEC countries. This literature review demonstrates that CEEC has influenced Europe both positively and negatively.

Positive Economic Impacts of CEE

Economic Growth of Countries

It is claimed by Bussiere, Fidrmuc, and Schnatz (2005) that CEEC is now one of the largest trading partners in the euro area. As a combination of different nations, the CEEC provides a wide market for products from other parts of the world. There are over 200 million people in CEE. According to Matysiak and Nowok (2007), there are over 38 million people in Poland alone. Due to the high number of people in the CEECs, CEEC has been one of the key markets for products from Western Europe and thus, enabling countries in Western Europe to benefit economically. This is in the form of a market for their products. In addition, current literature demonstrates that countries in Western Europe have benefited from cheap labour from countries in CEECs which has led to migration from these countries. Germany is one such country that has benefited due to cheap labour.

In spite of the ongoing European crisis, Germany has had one of the most successful economies. In 2014, its unemployment rate had fallen to less than 5.2 percent, and for Funk (2014), this was almost half the rate of the unemployment rate in about 10 years. The economic growth in Germany is mainly due to its export sector. Apart from China and the United States, Germany is one of the only three countries in the world that has export products and services worth over a trillion dollars. This can be said to be due to its Mittelstand of small and specialised firms, banking system, which prefer long-term relationships to short-term profits, and vocational schooling. However, Gross (2013) argued, these factors cannot completely explain Germany’s economic growth.

Germany’s commercial networks with countries in East-Central Europe are some of the significant foundations of Germany’s export economy. Germany has created a unique relationship with Poland, Czech Republic, Slovakia, and Hungary. It enjoys relatively cheap and skilled labour from these countries. German firms have taken advantage of the cheap labour by moving important stages of their manufacturing chains to the East. This has enabled them to save their labour costs. Germany is now the largest investor in countries in Central and Eastern Europe. It has built production centres in Poland, Czech Republic, Slovakia, and Hungary. Goods now flow between Germany and its Eastern neighbours (Gross 2013).

Apart from Germany, the United Kingdom has taken advantage of the cheap labour from the countries in CEE due to labour migrants. The EU is now one of the main recipients of labour migrants. It receives approximately 4 million to 7.5 million foreign workers every year. The flow of the foreign workers led to restriction of workers from Czech Republic, Slovenia, Slovakia, Poland, Latvia, Hungary, Lithuania, and Estonia from taking job opportunities in some countries in Western Europe. Fogel (2015) noted that four-fifths of EU-15 denied the workers job opportunities. Over one million migrants had registered in the UK by 2010. However, unlike the others, the UK, Sweden, and Ireland opened their labour markets fully to foreign workers from CEECs.

Due to the migration of workers from countries in CEECs, the government of the UK phased out traditional low skill immigration schemes for persons from other parts of the world. The government then required employers to employ only individuals from within the larger EU. However, due to ongoing concerns about the impact of migration on the UK, the new coalition government limited the number of migrant workers from countries outside EEA. Scullion and Pemberton (2015) claimed that the restriction of non-EEA migrants raised concerns among employers. For many employers, the act was detrimental to their businesses.

The flow of non-EEA migrant workforce did not affect the employment of local people negatively. The inflow of foreign workers from CEEC did not lead to increase in unemployment and/or fall in wages in Europe. In their study of the UK’s labour market, Lemos and Portes (2008) found out that there was no increase in unemployment rate and/or fall in wages in the UK in the period between 2004 and 2006, which is when the 10 countries from the CEE joined the EU. This happened in spite of the large and rapid concentration of huge numbers of foreign workers (Lemos and Portes 2008). Instead of the negative impact, Martin and Radu (2012) observed that the inflow of foreign workers has had a positive impact on receiving countries like the UK. For them, the migrant workers have led to an increase in the production capacities, lower wages, and reduced inflationary pressure. The inflationary pressure has reduced because of the increase in the supply effect. This has also been due to the fall in the rate of natural unemployment.

Improved Productivity in Europe

According to the International Monetary Fund (2015), the political transformations in Europe across the 1990s led to economic convergence through economic reforms in the form of trade liberalisation, privatisation, price liberalisation, and adoption of a legal framework. The political transformation led to change of institutions, which consequently led to the creation of an opportunity for rapid growth due to an external financing environment, reasonable infrastructure, and skilled labour force. According to the IMF (2014), the transformation led to an increase of productivity and income per person in the Euro Area countries by 20%. Countries that were once part of the Communist Federation, experienced economic prosperity as they transformed their economies from those planned centrally to market economies.

Svejnar (2006) argued that after the collapse of the Soviet Union, the transition economies began to formulate and implement strategies that they believed would help them overcome the economic challenges they were facing. The first strategy was on restructuring of microeconomics and stabilisation of the macroeconomics. The second one focused on development and enforcement of regulations, laws, and institutions that promoted the success of a market economy (Svejnar 2006). These changes led to rapid economic development. However, as noted by Svejnar (2006), there were limitations like corruption as well as lack of well-functioning legal systems. Limitations started to be eliminated when the countries began to cooperate politically and economically with the EU.

Dragan (2015) argued that the EU helped the countries to develop better systems. According to him, the EU developed a special relationship with its neighbouring countries with the aim of helping them develop prosperous economies and good political systems. The EU did so as the Lisbon Treaty required it. According to Dragan (2015), the EU caused particular changes in institutional structures across each of its cooperation with other countries. Before the countries in other parts of Europe could access the EU market, they were required to make both democratic and economic reforms. By doing so, the countries outside the EU created environments that were attractive to firms in the EU. This made the companies invest in these countries.

As a case study to show the improvement

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