Eastern Europe is expanding faster than any other part of the continent and completely changing how Europe works.
Western Europe still holds most of the wealth but no longer drives the momentum. Southern Europe has rebuilt its finances and is using its newfound room to help strained households.
The story used to be the East catching up to the West. But it’s turned into something far more interesting. The balance inside the European Union is changing in front of us, and the numbers show why.
Eastern Europe grows fast but unevenly
Poland is now the clearest example of steady and broad growth in Europe.
Output is rising close to 4% this year. Inflation is easing faster than expected, which allowed the central bank to cut rates by 125 basis points in 2025.
Consumption is strong. Industrial and construction data from late 2025 show an economy that still has momentum.
Poland is proving that a mix of domestic demand and disciplined monetary policy can keep growth high even when external conditions are soft.
Source: DW
The Czech Republic sits just behind Poland. Households continue to spend, and investment is slowly recovering after a weaker period.
But the main threat comes from outside the country. German industry produced almost no growth in the third quarter of 2025, and Czech manufacturers remain tied to that cycle.
The economy is stable, but cannot fully escape the drag coming from its largest trading partner. This is the first sign that the East is rising, but not in a straight line.
Hungary’s economy shows a very different picture. Output barely moved in the third quarter of 2025, and year-on-year growth is low. Inflation hovers above four percent and is expected to stay high for several years.
The central bank plans only very limited easing next year. The labour market looks tight because both supply and demand have shrunk. Hungary remains stuck and reflects the split inside the region.
Romania is dealing with its own mix of weak sentiment and high inflation. Growth for 2025 is close to zero, and manufacturing continues to shed jobs.
The deficit is more than 8% of GDP, though EU-funded investment is still flowing.
Inflation is lower than before but well above the levels seen in other parts of Eastern Europe. The central bank is expected to start cutting rates only in 2026.
Germany depends on rising Eastern demand
Germany’s traditional export model is under pressure. Shipments to China dropped almost 12% in the first nine months of 2025. Exports to the United States fell more than 7%.
The auto sector faces heavy adjustment costs. Domestic growth has been soft for several quarters.
The only clear source of support has come from Eastern Europe and nearby Central Asian markets. German exports to these countries rose more than 2% through September, reaching about 216 billion euros.
This makes the region a rare growth outlet for German firms facing weaker demand in the world’s biggest markets.
Companies now talk openly about the importance of Poland and Czechia as stable customers. This transition carries a weight. It suggests that the East is not only a production base but a key market as well.
German business groups now call for deeper ties with Eastern and Southeastern Europe and for faster EU enlargement.
The change also shows that the East is helping stabilise Europe’s industrial core rather than the other way around.
Southern Europe rebuilds its position
The South has changed more than many expected. Greece reported a fiscal surplus of 1.3% in 2024 and a primary surplus of 4.8%. Portugal also ran a surplus. Spain and Italy are close to the European deficit limit of 3% of GDP.
As a result, bond spreads across the South have narrowed to some of their lowest levels in more than a decade as investors regained confidence.
Source: Bloomberg
This new fiscal space is being used to help middle income households that lost purchasing power during the spike in prices. Greece cut income tax rates for several brackets.
Italy funded tax cuts worth up to 440 euros per worker by raising taxes on bank profits. Portugal raised thresholds and deductions so that incomes adjust to inflation.
These are modest steps, but they show a region that once faced heavy spending cuts now has room to act.
However, living standards in the South are still below the EU average. Wages have grown slowly, and employment, though better than during the crisis years, remains uneven.
Nevertheless, the fiscal recovery is real. Governments that once struggled to borrow now point to steady finances as proof that they can support households without risking another crisis.
A new economic map emerges
Europe is entering 2026 with a structure that looks different from the model that existed before the pandemic. Growth comes from the East. Fiscal strength now sits in the South.
And although wealth and capital remain concentrated in the West, that part of the continent is expanding more slowly. The regions generating momentum are not the same as the regions holding the highest incomes.
Poland grows while Germany adjusts. Czechia holds steady while Italy tries to lift real wages. Greece and Portugal run surpluses while France manages larger deficits.
Romania and Hungary show that Eastern Europe still has weaker spots, yet the overall direction is clear. The region is now a major source of demand and investment within the European Union.
The change is not about the East overtaking the West in living standards. It is about a shift in weight inside the European economy. The East is becoming essential for the continent’s growth.
The South has rebuilt enough credibility to regain influence. The West remains wealthy but no longer drives the cycle alone.
The numbers point to a future where Europe’s economic balance is more distributed than it has been in decades.
The post The new European order: how Southern & Eastern Europe are overtaking the West appeared first on Invezz
