Hamish McRae: West looks over its shoulder

Bucharest – It has been a week when the attention of Europe shifted east. There was an EU-Russia summit and, more significantly, the signing of the agreement to set up the Nato-Russia Council. For the first time Russia will have a direct say in the deliberations of the western alliance. From a security point of view the significance is obvious. Less evident, but equally important, is the economic significance.

This link between security and economics was brought home to me here in Bucharest. Romania is seeking to become a full member of Nato, and this looks like happening later this year. Why bother? I asked the editor of the leading financial newspaper here. Because it demonstrates to foreign companies that Romania will be a safer place to invest. It has been getting some foreign direct investment but nothing like on the scale of Hungary and the Czech Republic. German companies in particular are shifting their sourcing eastwards to try to escape from high domestic labour costs. For example, some BMW steering wheels are made in Romania. But the really big money has yet to come.

It will do. One of the great underwritten economic stories is the scale of the boom that is taking place in central and eastern Europe. Which European economy grew fastest last year? Ireland? No, Albania, which apparently had over 7 per cent growth.

Of course, the base from which eastern European growth is starting is quite low, but not as low as it would appear. If you look at money GDP per head, Russia's is a little over $2,000 (£1,360), less than one-tenth of the UK's. But for purchasing power parity (PPP) it is $7,500, more like one-third. The latest PPP figures I could find were for 1999 (middle graph) and by now both the Czech Republic and Hungary, the two richest economies, will be up to half the average level of GDP in the EU.

Moreover, the gap is closing fast. Eastern Europe has been a recession-free zone. While western Europe and the US were struggling last year, this region continued to boom: Russia managed 5 per cent growth, Romania 5.3 per cent (right-hand graph). This sort of performance seems set to continue this year. In fact the only country having a really tough time is Poland, which after a good run in the late 1990s has had two years of very slow growth. There have been considerable social costs here, with inflation of 30 per cent now and unemployment more than 18 per cent. Trend growth seems to be about 4.5 per cent, so if it falls below that, unemployment rises.

The Polish example, however, brings home the really positive point about the economies of the whole region. Give or take the odd percentage point, Eastern Europe is capable of growing at 4-5 per cent a year. That is roughly double the rate of western Europe. In the UK the Chancellor thinks the trend is 2.75 per cent, though some doubt that; in Germany trend growth is almost certainly below 2 per cent.

A couple of percentage points difference in growth rate may not sound a lot but over a generation the effect is huge. If you look forward it is not hard to see the economic gap between, say, Hungary and Germany closing altogether. The Czech Republic could be richer than Italy. On the eastern fringes of Europe some sort of gap will still exist, but not the yawning one evident now.

The extraordinary thing is the way in which the economic relationships of a century ago seem to be reasserting themselves. Thus Russia is resuming its role as supplier of raw materials (and clever people) to the more developed West. On the raw material side, commodities like timber were its most important exports a century ago; now it is oil and gas. On the human capital side it used to be authors and playwrights; now it is computer programmers. But the pattern is the same.

You can catch some feeling for this reversion in Bucharest. The city had a boom at the end of the 19th century and a further golden period between 1918 and 1939, when it was dubbed "Little Paris". The parts not bulldozed by Ceausescu in his quest for monumental grandeur are now being restored and the place is again looking like a typical stylish European city. It has the traffic jams to match – one of the great signs of rising prosperity is a surge in car ownership, and first-generation motorists are jolly well going to use their cars.

This growth is taking place despite less-than-optimal economic policies. Corruption is rife, bureaucracy hampers the creation of new businesses and the currency is spectacularly weak: one million leu are worth about £20. There is a plan to knock off some noughts to create a "heavy leu", reissuing the currency with five to the pound instead of 50,000. But people feel this would be a waste of time as it would soon depreciate again. Better to wait until Romania joins the EU and adopts the euro.

A place in the EU is the holy grail for the region. The deal to extend membership to the first tranche of candidates, including Hungary and the Czech Republic, may be agreed next year and I suppose you could pencil in Romania around 2010-2012. In terms of the history of a country whose inhabitants speak the nearest living language to Latin, 10 years is not very long. But there are widespread reservations within Europe about the whole process of enlargement and, it should be said, growing reservations within several eastern European countries as to whether the EU is a club they should seek to join.

The one thing absolutely clear to any visitor to eastern Europe is that the region has an economic vibrancy most of western Europe lacks. The figures say it is growing fast, and it actually feels as though it is growing fast. There is, in the EU, an inevitable tendency to think of the candidates for entry in terms of whether they are ready or not; do they qualify? I suggest it would be wiser to see them in terms of opportunity – a source of energy and vibrancy. Sclerotic eastern Europe is not.