The Coming Golden Age of New Europe

New Europe has never had it so good. Its income, quality of life and level of happiness have never been closer to that of the developed countries in Western Europe. With its per capita income at an all-time high and the quality of life almost indistinguishable from developed countries, the region is well on its way to achieving a higher level of per capita income than most emerging market countries. New Europe’s true Golden Age shimmers on the horizon. Already a significant global player with a combined GDP about the same size as that of Brazil and Russia, New Europe not only has stronger economic fundamentals, but is also less vulnerable than other emerging markets to political, social and economic Black Swans, catastrophic events that could wipe out much of its economic progress. The Golden Age, however, will not arrive without an assist from policymakers. The economic crisis has shown that the current growth model based on growing consumption fueled by imported savings has been largely undermined. New models are needed to lessen reliance on domestic consumption in favor of higher exports and stepped-up productivity. To this end, New Europe should enhance incentives for saving, introduce counter-cyclical fiscal policies and increase spending on human capital and innovation. It should also increase labor participation, open borders to immigration and strengthen financial sector supervision. Finally, New Europe should adopt the euro as quickly as possible, at a competitive exchange rate, diversify exports and promote further European Union (EU) integration and enlargement. The crisis provides a good opportunity to implement needed change.