20 years of EU enlargement to the east

The enlargement of the European Union (EU) to Central Europe (CE) is a success story for the region, the EU and also for Austria's major banks, according to a recent study by Raiffeisen Research, which Gunter Deuber, Chief Economist of Raiffeisen Bank International AG (RBI), presented at a press conference. 

In her opening speech, Valerie Brunner, RBI Board Member for Corporate & Investment Banking - Customer Coverage, also emphasized the importance of the EU enlargement for RBI, "Without the political changes and the willingness of Austrian companies to expand, RBI's growth would not have been possible.”

Continuous catch-up process in Central Europe due to comprehensive integration into the EU single market
"Today, the aggregated GDP of the five Central European countries – the Czech Republic, Slovakia, Poland, Hungary and Slovenia – is around 150% of the economic output of the Netherlands. Twenty years ago, however, this ratio was only 80%," emphasizes Gunter Deuber, who explains that the continuous catch-up process in CE is based on the comprehensive integration into the EU single market. The Raiffeisen Research analysts attribute this to the region's high level of trade openness plus the high penetration of foreign direct investment. "Foreign trade in Central Europe accounts for around 170% of economic output. This is similar to a traditional trading nation, such as the Netherlands, and significantly higher than the Austrian trade openness ratio of around 125%. This shows the high degree of economic integration and the international competitiveness of the region," says Gunter Deuber. Based on this starting position, the Raiffeisen chief economist now sees good opportunities for the region to attract new investments. 

"Compared to some Southern European countries such as Greece or Italy, prosperity in Central Europe has never sustainably fallen below the EU average. There have only been phases of not catching up, such as in Hungary, Slovenia or most recently in the Czech Republic," explains Dorota Strauch, CEE Research Coverage Lead at Raiffeisen Research. The Warsaw-based economist sees this as a clear indicator of the sustainability of economic convergence in the region. She also points to the increasing degree of interdependence and intra-regional trade between the countries, a development that provides an attractive business area for locally rooted banking groups such as RBI. "Trade among the EU member states in Central and Southeastern Europe themselves now has a similar weight as trade with Germany," says Dorota Strauch.

Development of the banking sectors in Central Europe: differences and potentials
The catch-up of the CE countries regarding the level of maturity of the banking sectors in Western Europe has been somewhat less straightforward and regionally less clearly on an upward trend than the macroeconomic convergence. "The Czech Republic and Slovakia have experienced a sustainable development of their banking sectors in terms of the increasing maturity of the local banking sectors. Bank assets and, above all, socially relevant housing loans have grown durably here since 2004," states Ruslan Gadeev, Senior Banking Analyst at Raiffeisen Research. In banking markets such as Hungary and Slovenia, on the other hand, the banking sector has partly shrunk in relation to economic strength over the last decade, while Poland has seen a long period of stagnation. The mortgage loan markets in these countries are not yet broadly developed. According to Raiffeisen Research analysts, there is still a lot of catching up to be done.

Czech Republic and Slovakia most successful Central European countries in the Eastern enlargement round
Taking into account indicators of macroeconomic catch-up and convergence in the banking sector, Raiffeisen Research analysts currently consider the Czech Republic and Slovakia to be the most successful CE countries of the 2004 EU enlargement round. This can be derived from steady increases in income and the sustained expansion of the respective banking markets. Interestingly, both countries have pursued very different economic, monetary and currency policy strategies during their deep integration into the EU single market. Nevertheless, there are some similarities between the two countries, such as a long-standing focus on a stability-oriented economic policy and the openness to a high degree of foreign participation in the domestic banking market. "In the Czech Republic and Slovakia, foreign banks have an aggregate market share of 85 to 90%. This has obviously not stood in the way of the successful convergence of these countries in the economic and banking sectors," says Gunter Deuber. In Slovakia, he also believes that the euro has made a major contribution to the sustainable development of the residential real estate market. "Austria's banks are very well positioned as market leaders in the region," he adds. According to the Raiffeisen Chief Economist, the major Austrian banks focused on the region have a market share of almost 25% in Central Europe on a regional level as well as in the Czech Republic in particular. In Slovakia, the market share of domestic banks is almost 40%.

The positive economic development in the Czech Republic and Slovakia has not entirely protected these countries from populist-motivated political actors. However, in both countries, especially in the banking sector, there has never been any evidence of skepticism towards foreign companies. RBI sees particularly attractive local business opportunities in linking the competitive and industrially strong region of Central Europe with the western EU markets as well as with important economic partners globally. It also recognizes potential in supporting internationally oriented local flagship companies, in the already existing deep economic relations with the West, in the continued strong growth of regionally oriented foreign trade and in real estate lending.  

EU enlargement round of 2004: all in all an economic success story
In conclusion, Gunter Deuber emphasizes, "All in all, the EU enlargement round of 2004 was an economic success story. This momentum must be carried over into the upcoming enlargement processes and EU policymaking." However, he also makes it clear that some of the geopolitical implications of the EU's eastward enlargement and its effect on EU decision-making processes were apparently underestimated in 2004. In this respect, according to Gunter Deuber, these issues need to be sharpened up at EU level before the EU is ready for enlargement again.

You can download the study "Wide Angle Shot: 20 years EU membership CE - Successes, reversals and twist" here.