Once the pandemic is over, Emerging Europe can expect a rebound in economic activity, but accompanied by mounting risks from climate change and geopolitical standoffs.
An online conference organised by the Vienna Institute for International Economic Studies (wiiw) on May 5 tackled the tricky subject of forecasting the future of the region for the rest of this decade. The following list of megatrends is based on projections by wiiw panellists and bne IntelliNews’ own reporting.
1. Roaring twenties redux with a risk of bubbles
The recovery of the Central and Eastern Europe (CEE) region was put on hold by the new wave of the pandemic at the beginning of 2021, but as the wave subsides and vaccination gets underway, better times are already in sight. wiiw expects most of the region to return to pre-pandemic GDP levels by the end of the year, and for robust consumption-fuelled growth to continue in the coming years.
Indeed, representatives of some international retail and consumer products giants are already projecting a repeat of the roaring twenties a century ago. But that didn’t end well, and this time around wiiw economist Olga Pindyuk warned there are already signs of bubbles forming in housing markets in the region, especially those countries like Russia and Romania that received a further boost from government programmes to support mortgage lending.
Growth won’t be evenly spread in the 2020s. The EU members that are already the richest and most developed in the region will receive extra stimulus from the bloc’s €1.8 trillion recovery and resilience package.
The Western Balkan countries that aim to join the EU are still a long way behind economically, and convergence will be slow. The World Bank anticipates only a subdued recovery in the region. Some – Montenegro and Serbia are the most advanced – may make it into the EU by 2029 but political issues on both sides are holding up enlargement and keeping candidate countries stuck in the EU’s waiting room.
Meanwhile, poorer countries, among them Europe’s two poorest nations Moldova and Ukraine, will take many years to vaccinate their populations at current rates, further delaying their recoveries.
2. Demographic collapse
Six countries in the CEE region – Albania, Bulgaria, Croatia, Latvia, Moldova and Poland – are set to lose 40% or more of their populations by 2021, according to long-term forecasts from the UN. The combination of low birth rates and mass emigration has already affected all of the region except the majority Muslim republics of Central Asia and Azerbaijan.
“Demographic decline was already unprecedented over the last decade, on a scale never seen outside of war or famine. This will continue,” said Grieveson.
Population decline has added to the labour crisis that intensified in the years before the pandemic, as many of those who move abroad are of working age. The fall in the domestic workforce is only partly compensated for by inward migration. High demand for labour and upward wage pressure are set to resume once the pandemic subsides.
Faced with a growing labour shortage, pre-pandemic companies from Central and Eastern Europe outstripped those in other world regions in the pace of investments into industrial robots, even though Eurostat data shows that in absolute terms they still lag behind their peers from Western Europe. An OECD report identified workers in Slovakia as the most likely among the 32 OECD members to lose their jobs as automation technologies are adopted.
4. Climate change and resource competition
The climate crisis is already leading to more extreme weather events: from droughts, flooding and wildfires, to the melting permafrost in Russa’s far north that threatens to cause entire cities to subside, to the severe dzuds in Mongolia, to rising sea levels. These are only expected to get worse during the first half of this century, despite global action to rein in the rise in global temperatures.
Climate change is exacerbating tensions over land and water, and new conflicts will emerge as resources become scarcer. A row over a disputed water distribution centre appeared to be the trigger for clashes between local inhabitants and the armed forces of Kyrgyzstan and Tajikistan in April. In Southeast Europe – seen as a global warming hot spot – shrinking water resources and other problems associated with climate change will worsen existing border tensions.
5. Green transition
Wth the climate crisis comes opportunities as new sectors emerge and investments are made into areas such as renewable energy generation, electric vehicles (EVs) and raising energy efficiency.
Carbon intensity per unit of GDP is higher in CEE than Western Europe. “Research we [have] done shows this is an opportunity for CEE,” said Grieveson. The region’s EU members in particular will benefit from massive injections of funding for the green transition.
But it won’t be easy. There is strong resistance to the shift to renewable energy generation especially in coal-dependent Poland, Ukraine and much of the Western Balkans because of fears that communities based around coal mines and power plants will be economically devastated. Tensions have been reported between EU member countries, notably Romania, and the European Commission as states’ need for road and traditional energy infrastructure clash with Brussels’ vision of a carbon-neutral Europe.
6. Food producers up their game
The world’s growing population combined with the threat to food production from climate change will put pressure on food supply, raising fears of scarcity. While populations are falling in CEE, globally demand for food will rise, driving up prices and creating incentives for food producers and exporters in the region to raise production and increase productivity.
Pre-pandemic, Russia and Ukraine were competing for the title of the world’s top grain exporter after several bumper harvests. In 2019, President Vladimir Putin said that Russia’s agricultural exports are expected to double, reaching $45bn in the next five years. This was interrupted by the pandemic, but is part of a broader trend towards higher production that extends to other Black Sea region grain producers like Romania (the second biggest wheat exporter in the EU in 2019) and Kazakhstan.
Aside from grain, countries from the region can boast strengths in a diverse range of areas: Russia, Poland and Serbia are among the biggest producers of raspberries; Turkey produces almost three-quarters of the world’s hazelnuts, and Uzbekistan is the second-largest producer of carrots.
The pandemic achieved what techies had been dreaming of for years: the immediate shift online of retail and services. From the Western Balkans to Uzbekistan there was a boom in online retail, new apps were developed to help people and governments cope with the pandemic and robots were deployed to enable social distancing.
Rather than this shift online dying away once the pandemic ends, the momentum it gave to the ICT sector is anticipated to continue.
At the same time, there is a culture shift towards remote working. As work from home has become normalised, the role of the office – for some companies at least – will shift from being an essential part of day-to-day work to a more collaborative space. Estonia, Georgia and Croatia already welcome digital nomads, and more countries will to follow suit. The hunt for talent – an issue in CEE’s tight labour markets – will diversify, with companies now able to recruit remote workers from poorer parts of the region (such as Armenia, Moldova or Ukraine) without the need for them to physically migrate.
8. More authoritarianism
The latest Nations in Transit report from Freedom House published in April points to a 17-year decline in democracy in the post-socialist space, where leaders are undermining democratic institutions to stay in power.
Nations in Transit 2021: The Antidemocratic Turn charts a “systemic shift toward authoritarianism in Europe and Eurasia”, where the number of countries classified as democracies has fallen to its lowest level since the report was first launched in 1995.
This is only set to worsen, said Michael J. Abramowitz, president of Freedom House. “Democratically elected leaders are turning away from democracy and creating their own warped realities to consolidate and retain power. Through their successes so far, these anti-democratic regimes are setting an example and fuelling the rise of authoritarianism in neighbouring countries. Left unchecked, they have the potential to undermine democracy and legitimise the abuse of power in Europe and beyond,” according to Abramowitz.
“How much does the increase in authoritarianism and state capture in the 10 years since the financial crisis matter from an economic point of view? Hungary, Turkey and Serbia have had some of the best economic performances recently, but I think there will be an impact in the medium to long term,” commented wiiw’s Grieveson.
9. Hardening West-vs-Russia divide
Looking at the geopolitics, Russia’s influence has dwindled in the western part of emerging Europe, where a growing number of states, not just Russia hawks Poland and Romania, have rejected Moscow’s influence. Several Western Balkan states are now NATO members, causing Russia’s sphere of influence to dwindle to Serbia and Bosnia’s Republika Srpska.
To the east, Russia has extended its influence in Eastern Europe and the Caucasus, where splitting states is a favoured tactic that has forced a Russian presence upon Georgia, Moldova and Ukraine. The eruption of the long-frozen Nagorno-Karabakh conflict into war in 2020 left Russia as the peace-broker with extended influence in both Armenia and Azerbaijan. Russia and Turkey were the main beneficiaries of that conflict, commented Velina Tchakarova, director of the Austrian Institute for European and Security Policy (AIES).
“The geopolitical lines – the West vs Russia, and the US vs China – that are global but played out in Europe have hardened a lot,” said Grieveson.
“I see the frozen conflicts in Eastern Europe still very much existent, with escalation phases and possibly some territorial changes. I wouldn’t exclude Russian military bases in Belarus by 2029,” said Tchakarova. As an alternative format, she speculated that a new China - Turkey - Russia - Iran axis could take shape in the region.
10. A bigger Chinese presence
China has been steadily increasing its presence across the region, from Central Asia to Central Europe, all of which is part of the Belt and Road Initiative (BRI) connecting East Asia to Western Europe along multiple land and sea routes. Investing into infrastructure, especially transport infrastructure, in the region gave China a chance both to improve transport links to Western Europe and to put excess engineering capacity to work.
This will continue as China was relatively quick to emerge from the coronacrisis, which – barring a new wave – puts it a strong position to continue investing. However, the Chinese style of investment is looking increasingly problematic. There have been objections over deals that fell through, pollution connected with Chinese investments in Southeast Europe and Central Asia and struggles to repay debt to Chinese banks.