When Defense Secretary Donald H. Rumsfeld sought to draw a distinction recently between the "Old Europe" represented by France and Germany and the "New Europe" of the fledgling democracies in the east, he stirred up a hornet's nest of criticism among Europeans who believed he was trying to divide the continent into skeptics and supporters of American policy toward Iraq and the Middle East.

Rumsfeld's observation was the right answer, but to the wrong question. There is no simple dichotomy in Europe as to who supports military action against Baghdad. Just as in the United States, you can find liberals in every corner of Europe who want to see Saddam Hussein overthrown, by force if necessary, and conservatives who think a U.S.-led military campaign would be disastrous for Western interests.

Where Rumsfeld's comments struck closer to the mark was in the implied notion that Europe's center of gravity is shifting east. In the postmodern European order, where war is now largely unthinkable, power is no longer measured by military arsenals but by economic vigor. Next year, when the European Union embraces 10 new members, the 25-nation group will include 450 million relatively prosperous citizens and account for more than one-fifth of global economic activity. But as the EU expands toward Russia's doorstep and consolidates its economic power, the locus of Europe's future economic dynamism will lie with the former communist societies of Central and Eastern Europe.

Over the next decade, Europe's fastest growth rate and biggest income surge are projected to occur in the eastern swath, stretching from the Baltic states to Bulgaria. American and European companies are beginning to pour investments into the region, seeking to capitalize on the desires of youthful populations eager to raise their living standards to match those in the West and to take advantage of labor costs that are one-fifth those in Germany. Jeffrey Immelt, chief executive officer of General Electric, says the new eastern states entering the EU will be a key corporate target over the next five years and could prove, in the short term, to be a more lucrative market than China.

The attraction of "New Europe" is not hard to understand. Deprived of material comforts during four decades of communism, tens of millions of Central and Eastern Europeans are determined to make up for lost time by acquiring the emblems of prosperity -- fast cars, stylish furniture, chic clothes and second homes -- that their cousins in the West have long taken for granted. The consumer frenzy gathering momentum in the east has not been witnessed on the continent since the go-go '50s, when Germany's postwar economic miracle bolstered the rest of Western Europe.

In addition to gaining a foothold in booming local markets, many American and European firms see the march of the EU toward the east as a way to cut costs while expanding their market share across the entire continent. It is no longer just big corporations such as Volkswagen and GE that are setting up factories and distribution centers in the east in order to service Europe-wide markets. Many smaller and medium-size companies are also pulling up stakes in France and Germany and shifting capital investments several hundred miles to the east where they can still satisfy their western customers but at much lower cost.

France and Germany remain, along with Britain and Italy, among the world's biggest economies, exporters and destinations for investment, but there are signs of trouble ahead. In some ways, "Old Europe" is starting to look like an industrial museum populated largely by elderly pensioners. Decades of low birth rates have created some of the oldest populations in the world. Within three decades, one of every two Germans will be of retirement age. The expansion of Germany's welfare state bureaucracy and the world's highest wage costs -- now estimated at about $35 an hour, compared with $16 in the United States -- have frightened off investors. Taxes are so high that an employee's take-home pay is less than one-third of his gross salary. And continuing policy blunders linked to German unification, with more than $100 billion a year being funneled into the area that once formed the German Democratic Republic even though unemployment hovers around 30 percent in some regions, have only exacerbated the drain on the nation's treasury.

Germany's university system, once the incubator of many of the world's greatest scientists and philosophers, is now mired in mediocrity. Professors rarely deign to mingle with students, classrooms are overcrowded and the quality of teaching has plummeted. Many students, cosseted by generous subsidies and discouraged by dismal job prospects, stretch out their stay at universities and postpone their entry into a productive career until they are in their late thirties.

In France, the other rickety pillar of the "Old Europe," the educational system is even more of a mess. The pecking order established by a handful of state-run elite schools, in which one's career success is determined by class ranking rather than the quality of work done later in life, dismisses the prospects of those who might bloom late or who do not get accepted into the top establishments. As a result, France is suffering a brain drain of talented young people who are more entrepreneurial than the chosen ones who become high-ranking civil servants. Tens of thousands of French youths have flocked to London or San Francisco, where they find employment -- and fortune -- as investment bankers or software engineers much more easily than they could in the closed society back home.

Ironically, France's hopes of becoming more competitive with the "New Europe" -- and with the rest of the global economy -- may depend on its ability to lure back many of these young expatriates. Yet many of the expats say that as long as France's burdensome taxes, work regulations and sclerotic social structure remain, they feel no compelling desire to return home. The prime beneficiaries of this brain drain are American companies such as Microsoft, Intel and eBay (founded by the young French-born Pierre Omidyar), which make it easier for these French and Germans to fulfill their ambitions.

When the EU opened its doors to the east, some immigration experts feared a mass exodus by the best and brightest minds toward the west. Now, in light of the booming growth prospects in the "New Europe," those assessments are changing. Poles, Hungarians and Czechs who had immigrated to Western Europe years ago in search of well-paying jobs are now heading home.

To be sure, past economic performance in the "New Europe" has been mixed. The Baltic states and Romania are growing fast already. In Poland, the Czech Republic and Hungary, growth is lagging and unemployment remains very high. But many major corporations are looking forward, not backward.

Western insurance companies, supermarkets, banks and automobile and machinery firms are flocking east to establish themselves in what is seen as a new mother lode of consumer markets. In Poland, the value of foreign direct investment has soared twentyfold in the past decade to more than $60 billion. France Telecom has invested more than $3 billion to modernize the country's telecommunications system, while Citigroup and General Motors have acquired huge stakes in Poland's banking and automotive sectors. Poland, the Czech Republic and Slovakia have already emerged as the new center of the European car industry, serving consumers all over the continent. Volkswagen's new factory in Slovakia, where more than 225,000 cars streamed off assembly lines last year, is primarily designed to build cars for the German market, not just for the east. The reason, of course, is that cars can be produced there for a fraction of the cost in "Old Europe."

As Europe expands its single market from the Arctic to the Mediterranean, and from the Irish Sea to the Black Sea, its greatest hope for future economic success will depend on rekindling the dynamism in "Old Europe" that characterized the economic and intellectual community in the aftermath of World War II. That spirit has been reborn in the ashes of communism in the east, but has been largely crushed by the welfare state in the west. Just like the Iron Curtain that sundered Europe during the Cold War, the emerging divide between Old and New must be eliminated to achieve the vision of a continent whole and free. William Drozdiak, a former foreign correspondent for The Post, is executive director of the German Marshall Fund's Transatlantic Center, an independent policy institute in Brussels devoted to the study of U.S.-European relations.