Valuing a close connection

A new ING study measures the strength of the connection and shows what major benefits have resulted from the economic relationship between Western and Central and Eastern Europe, Russia and the other countries of the Commonwealth of Independent States (CIS) over the last 25 years.

It is the first time the connection is measured by including trade flows, bank loans and foreign direct investments. It is also the first time the economic impact both regions have on each other is measured and how this translates into production and employment. The study illustrates that since 1995, demand from CEE and Russia for products and services from Western Europe has added US$ 240 billion value to Western European GDP and created almost 2.7 million jobs. In the same period demand from Western Europe added US$ 272 billion to GDP of CEE plus Russia and created 1 million jobs in CEE while Russia lost 0,5 million jobs

ING seeks to answer the question: 'What has been the contribution to economic prosperity that the relationship between Western Europe and Central and Eastern Europe plus the Commonwealth of Independent States (CIS) has helped to create over the past 25 years?'

To identify the overall relationship ING has introduced the ING Connection Rate, which captures the values of trade flows, FDI stocks and bank loans expressed as a percentage of GDP.

While both regions have shown a substantial increase in prosperity since 1995, GDP and GDP per capita has risen more rapidly in Central and Eastern Europe and CIS. This growth accelerated in 2004, partly because of the accession of 8 CEE countries to the EU. This process is linked to increasing bilateral trade flows, foreign direct investments and bank claims

The connection rate in Western Europe has steadily increased since the mid-1990s, despite the effects of the global financial crisis. It reached 20.6% of WE GDP in 2012. The connection rate by terms of CEE+CIS GDP increased to 82% of GDP in 2007, but has shown a decline since 2008 to 65% in 2012, due to the higher economic growth figures for the CEE+CIS region than in WE.

This strong economic connection between the regions resulted in huge benefits leading to growth in employment and GDP.

In Western Europe:

• The ING Connection Rate was equivalent to around 20% of Western European GDP in 2012.

• US$ 240 billion has been added to GDP in Western Europe due to demand from CEE and Russia between 1995-2012.

• The main beneficiaries in US$ have been Germany, Italy, UK, France, Spain and the Netherlands

• Almost 2.7 million jobs were created between 1995 and 2009, due to demand from CEE and Russia

In CEE and Russia:

• In CEE and CIS, the ING Connection Rate was equivalent to 65% of their GDP in 2012

• US$ 272 billion has been added to GDP in CEE and Russia due to demand from Western Europe between 1995-2012

• The main beneficiaries in US$ have been Russia, Poland, Turkey, Czech Rep., Hungary and Slovak Rep.

• CEE saw an increase of 1 million jobs between 1995-2009 due to increased demand from Western Europe. However, Russia lost some 0.5 million jobs in this period, which leaves the total job increase for CEE and RU at around 0.5 million

Rob Ruhl, Head of Business Economics at ING, concluded: "By also taking into account foreign investments and bank loans, the connection between Western and Eastern Europe gives a picture of the real value of the overall economic relationship between these two regions. There is no other region with a stronger connection with Western Europe, except for Western Europe itself. The study shows the close connection has been of mutual benefit in terms of GDP growth and job creation."

About the authors

Rob Ruhl, Head of Business Economics
Mohammed Nassiri, Economic Researcher
Anke Martens, Economist

This report is partly based on the work done on the World Input Output Database by a team from the University of Groningen in The Netherlands, Faculty of Economics and Business. The project was led by Professor Marcel Timmer. Gaaitzen de Vries helped to calculate the impact of final demand of Western European economies on Central and Eastern Europe