Hamish McRae: A revolution that brings cheaper, better cars

With a bit of luck, the expansion of the European Union may be the best thing that has happened to the continent's car industry in years, as well as being a good thing for Europe in general.

Really? Well, yes. When the Berlin Wall came down cars from Eastern Europe were terrible. There was Polski Fiat, the Romanian Dacia (a 1960s' Renault 12), the Skodas and, of course, the little two-stoke East German Trabant. It was a particularly cruelty of the Russians to make the Germans, the people most interested in automotive excellence, produce the worst of the Eastern bloc's cars.

But look at what has already happened. Those Skoda jokes are history. The Czech Republic's Skoda is owned by Volkswagen and the cars are essentially more-affordable VWs.

In neighbouring Hungary there is another success story: Suzuki. The Japanese company chose Hungary as a European base, which has resulted in Suzuki becoming the market leader. VW produces Audi TTs and some A3s in Hungary. And I noticed last week in Renault's results that Dacia, which it took over in 1999, was contributing strongly to profits.

This is going to continue. Toyota has joined with Peugeot to build a huge 300,000-a-year assembly plant in the Czech Republic next year. And Korea's Hyundai is hunting for sites at the moment. While Eastern Europe cannot match the low costs of China, it does give established manufacturers a lower-cost base near home. Why take the political, practical, social and financial risks of building cars on the other side of the world when you can manufacture within the EU at acceptable cost?

I don't think we realise the extent to which the price of mid-range cars is likely to drop over the next 10 years. My guess is that cars will be 20 to 30 per cent cheaper. And that will put huge pressure on high-cost producers. Europe already has about one-third more car-manufacturing capacity than it needs. Inevitably, mid-range and bottom-end products will be made in the lowest-cost countries.

Of course, Germany remains the largest European producer and will be for the foreseeable future. High-end German production will not go abroad so swiftly and French output is also reasonably secure. But marginal producers such as Sweden and Belgium will find it hard to compete.

And in the UK? To some extent the market is protected by sterling. It makes sense, if you can do it, to produce cars in the same currency as you sell them. The manufacturers used to whinge about sterling and the euro. That has stopped now, for the continued strength of the British car market and the rise of the euro against sterling has made UK production more profitable.

Companies investing in Eastern Europe probably assume that the new states will adopt the euro. If they do, they will compete directly against Western Europe. That will be good news for manufacturers with plants there, but not for the weaker plants in Western Europe and their workers.