The Baltic Sea boom

The five countries in the EU with the highest fourth quarter growth rates are all by the Baltic Sea. Is that a coincidence?

Danny Gohlke / AP / File
Members of a swimming club take a bath in the 3 degrees Celsius (37 Fahrenheit) cold Baltic Sea at the beach of Rostock-Warnemuende, northern Germany, Saturday, Feb. 5, 2011. Why do five countries all by the Baltic Sea have the highest economic growth rates in the EU?

Of the 19 EU countries that have reported fourth quarter growth so far, the 5 highest growth rates were recorded in Estonia (6.6%), Finland (5.8%), Lithuania (4.4%), Germany (4.0%) and Latvia (3.7%).

What do these countries have in common? They are all located in northern Europe, more specifically by the Baltic sea. Also located by the Baltic sea are Demmark, Sweden and Poland, who haven't reported fourth quarter growth yet, but had high growth during the third quarter and are therefore likely to report high growth during the fourth quarter as well.

Why is growth so high in these particular countries? Well, there are particular factors driving growth in the individual countries, such as the supply-side reforms in Sweden, but in addition to them, the most important explanation is that growth is contagious.

When a neighboring economy is booming, this usually helps a country's economy as demand for your exports increase. And because the relative geographical proximity minimizes transportation costs, growth in neighboring countries will usually benefit your economy more than growth in countries that are farther away. This doesn't hold of course if there are legal or social barriers that prevents or minimizes trade, such as in the case of Cuba and the United States or the Arab countries and Israel, but that exception is fortunately not applicable to the countries around the Baltic sea.

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