The EU members from Central and Southeast Europe need a new economic model if they are to continue their convergence with West European members of the bloc, economists from the Vienna Institute for International Economic Studies (wiiw) told a webinar on April 24. 

This year, according to wiiw’s latest set of projections, countries from the region are expected to outstrip the eurozone members when it comes to GDP growth, expanding by an expected 2.5% instead of just 0.6% for the eurozone. That trend will continue into 2025, when the eastern EU members are forecast to grow by 3% and the eurozone by 1.6%. 

However, wiiw deputy director Richard Grieveson told the event that economists at the think-tank are “sceptical” that full convergence can be achieved with the current growth model. 

“Catchup can continue for some time but we think the region needs – and especially the most advanced countries like Czechia and Slovenia – need a new growth model to fully catch up,” he said. 

“Catchup under this model probably has its limits. Countries are still focused on production which, considering [the region’s] level of development, is actually unusual in a global comparison. Normally countries at this level of development already doing a lot more research and development, marketing, sales and headquarter activities. This is still mostly missing in Central and Eastern Europe.” 

Grieveson pointed out that without a more active industrial policy and more focus on innovation policy, no country has yet reached fully developed status.

“CEE might buck this trend, but we think ultimately the transition to a different kind of growth model has to happen,” he adds. 

Shorter-term gains 

Still, there are several drivers for convergence in the shorter term. 

Zuzana Zavarska, economist at wiiw, detailed factors such as real wage growth, which in turn boosts purchasing power in CEE EU member states. As these countries have chronic labour shortages, this factor is expected to remain strong over the relatively long term. 

On top of this is the investment factor, especially concerning investments financed by EU funds, which wiiw anticipates will “pick up strongly, especially from 2025”, said Zavarska. 

The newer EU member states, especially relatively poor countries such as Bulgaria and Croatia, are set to benefit in particular from inflows of EU funds. 

Zavarska also noted that firms are expected to start expanding their capacity again, so investments will pick up as demand recovers.

However, even this shorter-term convergence will depend to an extent on the recovery in Germany, Europe’s largest economy that Grieveson singled out during the webinar as the “weak point in the global economy”. 

Companies in the manufacturing sector, particularly in the Visegrad countries, have close ties with the German economy. In fact, Germany is a major export destination for all of the countries in the region, receiving auto components and other product. 

In terms of the catchup, Zavarska said “the big question we were asking ourselves is whether the region can actually grow without Germany?” 

“As we have seen in the past year it is very difficult to do so, and has taken a toll on the convergence possibility, but the internal factors are strong which are allowing the convergence process to take place.”