It was 20 years ago. In 2004, 10 countries – including Poland, Czechia, Slovakia, Hungary and Slovenia – joined the European Union (EU). These forerunners from the East were followed a few years later by Bulgaria and Romania (2007), then Croatia (2013). At the time, for all these countries, becoming part of the EU meant catching up economically. For example, between 2004 and 2022, Poland’s gross domestic product (GDP) per capita increased by a factor of 2.7 (170%), while France and Germany only grew by 30% and 45% respectively over the same period. And Warsaw is no special case: GDP per capita multiplied by 2.4 in Czechia (Czech Republic). Then there is Slovenia, sometimes called "the Switzerland of the Balkans". The country’s GDP per capita now exceeds that of Portugal and Spain.

While EU membership has played a key role in this growth, it is not the only reason. "The economic boom in Eastern Europe did not begin with EU integration," says Johannes Feist, CEO of Mikro Kapital Management. "From 1990 onwards, the collapse of the Soviet Union gave these countries the opportunity to transition to a market economy, adopting free-market measures that fuelled their growth." Christopher Howarth, investment manager in the European Equity Team at Baillie Gifford, shares this view. "Poland left the Soviet Union in 1990 and has since enjoyed 34 years of practically uninterrupted growth, which is quite remarkable." Poland, an exception compared with Western countries, did not experience a single year of recession until the COVID pandemic. Its economy continued to grow, even through the 2008-2009 euro financial crisis.

From the 1990s onwards, privatisation and price liberalisation helped Eastern European countries to boost their growth, but EU integration fast-tracked that development. "EU funding allocated to new Member States to reduce disparities between nations has gone into developing their infrastructure, improving their road and rail transport network, and enhancing their education system," Howarth adds. Poland has received the largest amount in subsidies from Brussels, i.e., more than €250 billion since 2004.

On top of EU integration, foreign companies have also been pouring investment into these countries. One telltale example is the takeover of Romanian automaker Dacia by its French counterpart Renault in 1999. And Western companies’ interest in Eastern Europe has not waned over the years. This is still true today, with investment from foreign companies accounting for 36% of Polish GDP in 2023. For instance, Intel announced in June 2023 that it would invest up to $4.6 billion to build a semiconductor assembly and test facility near Wrocław in Poland. However, this investment was frozen in September 2024 for two years due to the tech giant’s current difficulties. Chinese giant CATL is spending €7.3 billion to build Europe’s largest EV battery factory near Debrecen in Hungary, while in August 2023 German defence giant Rheinmetall opened a factory to produce Lynx infantry fighting vehicles in Zalaegerszeg, also in Hungary.

"To attract foreign firms, Eastern European countries benefit from a well-educated population, as well as lower labour costs," Howarth says. Low wages in former Eastern Bloc countries were a key factor in their economic development after the fall of the Berlin Wall, and this is still the case today, although this advantage is gradually dwindling as their economies move closer to Western standards. The minimum wage in Poland, now at 4,300 złotys (about €1,000), remains much lower than in France (€1,766.92) but is higher than in Portugal (€956.67) and almost equal to that in Spain (€1,323).

This trend could ultimately detract from the appeal of Eastern Europe. In a study published in November 2023, the IÉSEG School of Management reports that the rise in labour costs in Eastern European countries "has been much higher than that of the entire eurozone" since 2015. Between the first quarter of 2015 and the second quarter of 2023, the increase was 67% in Bulgaria, 62% in Czechia, 46% in Romania, 38% in Slovakia, 34% in Slovenia, 25% in Poland and 19% in Hungary, compared with just 16% in the eurozone. As a result, "For multinationals, Eastern European countries are becoming less and less attractive," IÉSEG writes.

But Eastern European countries are not merely the manufacturing hubs of foreign corporations. They now have their own industry leaders that have made a name for themselves in the rest of the world, such as cybersecurity expert Avast Software (Czechia), video game developer CD Projekt (Poland) and automation leader UiPath (Romania). These local companies have enjoyed a major advantage to fuel their growth: access to the European market. "Joining the European Union has given Eastern European countries access to the largest single market in the world, with no trade barriers," says Johannes Feist of Mikro Kapital Management. "For small countries like Slovakia, the narrow domestic market was no longer a problem from that point forward." Being geographically close to Germany, the Old Continent’s economic power-house, many Eastern European countries have latched on to Germany’s industrial fabric and piggybacked on its growth. Europe’s largest economy absorbs more than 25% of Polish exports.

However, as shown in this issue’s feature report, Western investors are relatively unfamiliar with most of the listed companies from Eastern Europe. But they are missing out. "Investors in the West don’t pay attention to Eastern markets, and that’s a shame," says Christopher Howarth of Baillie Gifford. "Countries like Poland have an impressive concentration of attractive companies. I would encourage investors to take an interest." Johannes Feist agrees. "I don’t think it’s too late for investors to take an interest in the Eastern European markets. Growth in these countries will remain above the EU average for at least the next five years." That is because they still have some catching up to do. Poland’s GDP per capita, for example, remains below the EU average (€30,100) compared to €37,600 in 2023).

But be advised: indices in Eastern European countries have flaunted higher returns than their Western counterparts in recent years, yet they are also more volatile. The MSCI Poland Index, which includes the largest capitalisations on the Warsaw Stock Exchange, lost 26.76% of its value in 2022, before rising by 49.45% in 2023. That is an emotional rollercoaster for informed investors. By way of comparison, the MSCI Euro Index, which covers the 10 most developed European countries, lost 11.07% in 2022, before bouncing back by 21.87% in 2023.

Furthermore, some dark clouds have gathered over the economies of Eastern Europe in recent months. Germany, the main partner of the former Soviet republics that have joined the EU, is currently ensnared in an economic crisis due to sluggish growth and falling industrial output. Another negative point common to all of Eastern Europe is demographics. Despite the influx of Ukrainian refugees, the population is steadily declining, while the unemployment rate is already at an all-time low (e.g., below 3% in Poland at end-2023). As a result, tensions are growing on labour markets and in turn fuelling inflation.

The geographical proximity of these countries to Russia has also become a problem since war broke out in Ukraine. "Eastern European countries, especially Poland, are investing massively in defence, rather than in other more productive areas such as health and education," says Mikro Kapital Management’s Johannes Feist. Lastly, the economies of the Eastern European countries remain highly carbon-intensive and dependent on Russian oil and gas. However Feist is not worried. "Nobody can predict what is going to happen in Ukraine," the analyst reminds us. "But so far, Eastern European countries have held up."