FRENCH and Dutch voters decisively rejected the European constitution last week, exposing the faultlines between the “old” Europe of the west and the “new” Europe of the east and the Baltic region.

The French and Dutch “no” votes were, in part, a protest against the sluggish eurozone economy, which is expected to grow by only 1.2% this year, according to the Paris-based Organisation for Economic Co-operation and Development. This figure masks an even deeper malaise: Italy is in recession and unemployment in France and Germany is running at about 10%.

In contrast, many of the 10 eastern European and Baltic states that joined the EU on May 1 last year are growing at more than three times the pace of “old” Europe. The economies of the Czech Republic, Poland and Slovakia are expanding by about 4% a year, while Estonia, Latvia and Lithuania, known as the “Baltic tigers”, are enjoying growth of more than 6% as foreign investment floods in.

Companies are tempted to eastern Europe by labour costs that are about 40% of those in Germany and by low flat-rate taxes. Slovakia has a rate of 19% on corporate profits and personal income, Poland is set to introduce a flat tax of 18% in 2008, and Estonia has a rate of 24%. These compare with an average of more than 30% in western Europe.

The French “no” vote was a protest against economic malaise, but it was also an objection to the liberal economic policies espoused by the likes of Britain and Poland to get the eurozone moving again.

Martin Robertson of the Scottish Investment Trust, a global-growth fund, said: “Western European citizens are unhappy and are taking it out on their politicians. Their economic model is in disarray, unemployment is high and the social safety net is disintegrating. They are fighting the Anglo-Saxonisation of their economy with one hand and ‘new’ Europe, with its low-wage, low-tax dynamism, with the other. Unfortunately the world has moved on. Old Europe will have to change or face the consequences of being overtaken by the ‘new’.”

Many investors are therefore looking to new rather than old Europe, but they must tread carefully. We assess eastern European property and stock markets.

Property

Property prices in many eastern European countries that have recently joined the EU, or are due to join in the near future, have been soaring. Prime flats in Sofia, the Bulgarian capital, have been rising by about 30% a year for the past few years. Bulgaria and Romania are due to become EU members in 2007, although the process may be thrown into doubt following last week’s “no” votes.

Nick Dare, director of Letterstone, a property consultant specialising in eastern Europe, said: “When countries join the EU, their housing markets go through a two-stage process. First, international companies move in and bring with them expatriates who want to rent historic properties in city centres. Second, the wealth filters down to locals who start to demand a better standard of property. At the same time, interest rates come down, stimulating the local mortgage market.”

In the Czech and Polish capitals of Prague and Warsaw, this process is already well advanced and some prime properties are out of reach for British investors, let alone locals. A prime flat near the centre of Prague costs €350,000 to €400,000 (£236,000 to £270,000).

Dare said: “There are signs that the top end of the Prague and Warsaw markets have peaked, and prices have fallen in some cases.”

However, he said money could still be made lower down the housing ladder, particularly in less developed markets such as Bratislava in Slovakia and Sofia in Bulgaria.

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