Is New Europe out-gunning the Old?

COIMBRA, Portugal – Two days before Christmas, Portugal’s Rua Ferreira Borges was almost deserted.

In the country’s fourth-largest city, there were no shoppers on the streets. A cluster of stores were shuttered along the cobbled high street running through downtown. The scene was a poignant reminder of the grim economic downturn that darkened Portugal’s year-end holidays.

A few days earlier, at the other end of Europe, an altogether different scene played out — one that underlines the complexity of Europe’s crisis.

Festive Poles bustled in and out of plush new boutiques and cosy cafes lining central Warsaw’s Nowy Swiat thoroughfare.

Portugal’s economy has continued to stagnate through the past decade, and is expected to shrink more than 3 percent this year, making it the world’s worst performer after Sudan and Greece, according to the Economist Intelligence Unit.

Last week, matters worsened as Standard & Poor’s rating agency downgraded the Portugal’s sovereign debt to junk status. Now, the country’s bonds are trading as if its government is about to default.

More from GlobalPost: Greek debt talks halted for 'reflection.'

“2011 has left a deep mark on the lives of many Portuguese. Almost everywhere there is the painful imprint of unemployment, economic difficulty and anxiety about the future,” President Anibal Cavaco Silva said in his New Year's address to the nation.

“In this year now starting, things won’t be any easier. We can have no illusions about that,” he said.

In contrast, Poland is the only one of the EU’s 27 countries to have avoided recession over the past decade. Its economy has grown at a healthy average of over 4.2 percent over the last five years — boosted by a combination of tax cuts, infrastructure investments and prudent banking.

Poland’s position outside the euro zone — but close to Germany, the currency bloc’s economic engine — also played a key role.

“The [Polish] zloty devalued 50 to 60 percent back around 2009, and that had a huge change in our competitive position with exports filling the gaps in domestic demand,” says Grzegorz Ogonek, economist at ING Bank Slaski in Warsaw. “Our economic relationship with Germany has also been important… It’s by far our biggest market, taking about one-third of our exports.”

And while Portugal’s debt languishes in junk territory, S&P still scores Poland’s long-term debt at a respectable A-.

It's tempting to see the economic fault lines within the European Union as the lean new Easterners outshining the jaded, older West, or to conclude that those outside the euro zone straightjacket profit from more flexible policies.

Indeed, Portugal’s economic competitiveness has been eroded by the entry of Poland and other eastern European nations into the EU in 2004. But the full picture is more complex.

Hungary, a non-Euro, free-marketeering eastern European country, rivals Greece as the EU’s shakiest economy. It’s teetering on the brink of bankruptcy, with growth showing little sign of recovering from a 6.8 percent contraction in 2009, inflation tipped to more than double the EU average this year and its credit rating reduced to junk status.

More on GlobalPost: EU launches legal action against Hungary over democracy concerns.

Moreover, the Baltic states were among the hardest hit by the financial crisis of 2008. Lithuania and Estonia saw their economies shrink by roughly 14 percent in 2009. Since then, both economies have bounced back: Estonia which lies within the Eurozone, had growth of 8 percent last year, while Lithuania — a country outside of the euro zone — grew by 4.6 percent.

To the West, Germany has been enjoying something of a boom over the past two years. On Jan. 3, it announced unemployment had fallen to 6.8 percent, the lowest rate since reunification in 1990. On the same day, figures from Spain showed that over 300,000 people joined the ranks of the unemployed in 2011 — meaning 22 percent are out of a job, including almost half the country’s young people.

Britain, firmly outside the euro zone, has the EU’s second-highest budget deficit after Greece. At 9.4 percent of GDP, it is over half the euro zone's average.

This patchwork of data shows that despite a common currency that marked its 10th birthday on the first of the year, and despite over 50 years of integration since the launch of the EU project in 1958, Europe’s economies remain divergent. Policies remain essentially national.

As a result, although the euro zone’s over all debt is lower than that of the United States, it’s the wildly-differing national situations within the bloc – and the lack of policy tools at a European level to deal with the divergence — that has plunged Europe into crisis and threatens to pull the currency apart.

In response, the euro zone is moving toward greater fiscal coordination and tighter oversight of national budgets to prevent countries running up Greek-style mega-debts.

On Jan. 11, the EU’s head office used its new supervisory powers to warn Hungary to cut its budget deficit or face sanctions. A treaty which the EU nations – minus Britain – are seeking to conclude in March will further tighten budget policies. Faced with German opposition, however, the EU is still far from any agreement to share out debt burdens through transnational euro bonds.

Meanwhile, there are few bright spots on the horizon in 2012.

Even Poland’s growth is forecast to slow to 2.4 percent this year.

Still, Portugal would be grateful for such figures. The Bank of Portugal last week on Tuesday predicted the economy will contract by 3.1 percent this year and grow by just 0.3 percent in 2013.