EU Entrants to Enjoy Faster Economic Growth

BUDAPEST, Hungary -- Poland, Hungary, Slovakia and the Czech Republic, the four largest countries joining the European Union next year, will have the fastest economic growth in four years as EU aid and a West European recovery boost investment and output, said executives at companies investing there.

Their $460 billion combined economy, accounting for more than 80 percent of the 10 future members' gross domestic product, will grow at least 3.5 percent, compared with 3 percent in 2003, the European Commission said. Poland will probably grow the fastest of the largest four largest countries, at 4.2 percent.

Polish auto-parts maker Stomil Sanok SA and the Czech and Slovak units of Volkswagen AG and other companies are raising production as business picks up in Western Europe, destination of more than 70 percent of the four largest entrants' exports. The first of the $50 billion in EU aid pledged through 2006 will also become available.

"The new members will benefit in particular from the emerging recovery" in Western Europe, said Michael Heise, chief economist for Allianz AG, Europe's No. 1 insurer that has a combined 11 percent market share in eight Central and Eastern European countries. "Foreign direct investment will remain high after enlargement. The contribution of the EU budget to the acceding countries will also be an impetus for growth."

The new members are outpacing Western Europe as they play catch-up after decades of communism and almost 15 years of developing functional market economies. Gross domestic product per person is about 6,000 euros ($7,455) on average in the largest four, a quarter of the EU average.

EU entry may add as much as 2 percentage points to economic growth beginning in the third year of membership, according to economists such as Zsolt Papp, an emerging markets specialist at ABN Amro in London. The driving forces: aid to farmers and construction projects for building roads and sewage systems. Farm aid and wage increases are set to spur consumer spending.

While some companies, such as Continental AG, shift production further east to Bulgaria and Romania in search of cheaper labor, other companies such as Volkswagen look to the new members as an EU foothold in a region where wages are still a quarter of the EU average. Ongoing asset sales and euro adoption, which will eliminate exchange-rate risk and transaction costs, will lure investment, Allianz's Heise said.

The four entrants have attracted about $160 billion in foreign direct investment since the 1989 ouster of communism, 72 percent of the total for all of Eastern Europe, the European Bank for Reconstruction and Development said.

Poland and Slovakia are finalists for a $1.5 billion factory by Hyundai Motor Co. The South Korean carmaker is expected to make its decision by February.

"One of the deciding factors was that these countries are joining the EU," said Hyundai Motor Co. spokesman Jake Jang. "Cheaper labor costs are also a factor."

PSA Peugeot Citroen, Europe's second-biggest carmaker, is building a 700 million-euro factory in Slovakia and Austrian paper mill Neusiedler AG, a unit of Anglo American, is spending 240 million euros to increase production 50 percent.

LNM Group, the world's second-biggest steelmaker, is buying a stake in Poland's Polskie Huty Stali, in a $2 billion accord. Poland raised $405 million in November by selling a minority stake in Telekomunikacja Polska, its biggest phone company.

With virtually no trade barriers between the new countries, more of the new members' companies will tap each other's markets, said Elek Straub, chief executive of Deutsche Telekom's Matav, Hungary's largest phone company, and chairman of the local German Chamber of Commerce.

That means companies such as Royal Philips Electronics NV, which has factories in Eastern Europe, can move their products within the region freely.

"The real big opportunities will open up for small and medium- sized companies to step beyond the borders," said Straub in an interview. "Also, multinational companies that haven't moved products around in East European countries much because of customs duties will begin to do so."