Over the last five years, Eastern European stocks have blasted ahead of all regions recording a wicked 36.7% annualized gain, according to MSCI/Barra. Compared to staid “Old” Europe, which logged a 15.8% annualized return since March 2002, that’s a big difference in total return.

But in 2007, the tables are slowly turning in favor of the Old World as rapid economic growth over the last several years has resulted in growing fiscal deficits and major trade imbalances for several markets east of the Danube River. In fact, for the first time since 1998, the MSCI Europe Index of mature economies is outpacing the MSCI Eastern Europe Index, up 3.3% this year versus a 1% decline for the latter.

Eastern Europe is undoubtedly home to some of the fastest-growing markets in the world.

Since breaking from the shackles of communism in 1990-1991, these countries have dramatically boosted their economies by slicing corporate tax rates, encouraging foreign multinationals to tap into domestic cheap labor while launching a blizzard of public offerings to boost the value of domestic stock exchanges. Over the last decade, Eastern European bourses, including Poland, Hungary and the Czech Republic, have more than quintupled in value. And Russia, by far the world’s top-performing market since the Russian debt crisis nine years ago, has seen the Moscow RTS Index skyrocket more than 2,500%.

But high-growth comes at a price.

The Baltic Republics, which recently joined the European Union and the older emerging markets of Poland, Hungary and the Czech Republic, are all suffering either chronic or growing trade imbalances over the last 12 months. Some countries, particularly Latvia and Hungary, harbor among the highest debt-to-GDP ratios in the world. In early March, investors scrambled to dump the Latvian lat after bearish deficit figures slammed the market. The same mini-crash occurred last year in Iceland and Turkey, two currencies which plummeted in value but later regained their lost footing.

Other regional markets in East and Central Europe are also experiencing growing pains.

In Croatia, one of the hottest real estate markets in the Balkans, property prices have gone through the roof as regional and international investors bypass the expensive Mediterranean sun-belt for more compelling values surrounded by spectacular scenery. But here, too, foreigners have already lunged at property bargains since 2000 while the Croatian kun has rallied sharply, hurting the relative appeal of the market.

Old Europe, by stark contrast, is making a comeback this year after a decade of slow economic growth. Germany, the region’s largest economic locomotive responsible for 35% of gross domestic product (GDP), is finally recording some strong economic numbers over the last six months, including massive foreign direct investment, mainly in real estate.

Yes, Western Europe is still challenged by rigid labor laws and high wages; but increasingly, the Old World has learned an important lesson from the Japanese in a world marked by intense trade competition. Western Europe is becoming more flexible with labor, lengthening work hours and even shortening holiday periods to boost productivity. And after years of direct foreign investment across the Danube River into Eastern Europe, Western European multinationals have finally halted rising costs and high borrowing.

The way to make money in Old Europe is to isolate those multinationals with a heavy presence in East and Central Europe where profit margins will continue to rise. And although smaller companies have been quicker to seize this transition over the last five years, they remain expensive. Large European stocks, on the other hand, dominated by the financial services and energy complex are very inexpensive and generally pay fat dividends.

At the European Advantage Tour in June, I’ll be making the case for several exciting Old World investments with New World profit margins. See you in Zurich!