Central and Eastern Europe’s ability to compete in global markets is under mounting strain from China’s export juggernaut, weak private investment and fast-rising defence budgets, the European Bank for Reconstruction and Development (EBRD) said in its latest Regional Economic Prospects report. 

“There has been a structural change in the nature of Chinese exports. They have become more similar to exports from our countries of operations. This means EBRD regions are in a less comfortable position than other emerging markets whose exports overlap with those of China,” EBRD chief economist Beata Javorcik told bne IntelliNews. 

“China is a formidable exporter, exporting more than the US and Germany combined. EBRD countries with the greatest exposure to competition from China include the Czech Republic, Poland, Hungary, Turkiye, Slovakia, Estonia and Romania.”

China’s share of global manufacturing exports surged to 25% in 2024 from less than 10% in 2000, the EBRD report said. Beijing has moved beyond low-cost goods into cars and batteries, products that also underpin the manufacturing competitiveness of economies such as Hungary and Poland.

An EBRD index of export similarity shows the highest overlaps with China in Central Europe and Turkey, while resource-rich Azerbaijan, Kazakhstan and Mongolia, as well as Montenegro, show the least.

“China is an export market for commodity exporters like Kazakhstan, and for the richest countries like the US, Japan, Canada and Singapore,” Javorcik said. 

“For our regions, it’s more of a competitor than an opportunity in terms of market access.” 

The report warns that this structural shift puts pressure on manufacturers to climb the value chain, innovate and attract investment if they are to maintain their edge.

Investment gap undermines growth potential

Yet investment trends are moving the wrong way. “In the EBRD regions there was a huge drop in investment as a share of GDP from roughly 30% before the Global Financial Crisis to 20% now,” Javorcik said. “This is a huge decline in investment as a share of GDP that is not observed in advanced economies or other emerging markets.”

The EBRD said private investment has stagnated at around 20% of GDP — below pre-2008 levels and the rates seen in many advanced economies — while public investment now plays a bigger role than in other emerging markets. Venture capital activity remains thin outside a handful of digital hubs in the Baltics, Egypt and Morocco, limiting innovation and productivity growth.

Without stronger private capital flows and technology investment, the bank warns, competitiveness gains made over the past two decades risk stalling.

Defence spending rises

Rising geopolitical tensions have also pushed defence budgets sharply higher, with average spending across the region climbing to 2.5% of GDP in 2024 from around 1.5-2% before 2022.

“How the massive spending on defence will translate into growth depends on what share of the funding will be spent on narrowly defined defence, versus on resilience of the country, for example resilient infrastructure, cyber security or energy diversification,” Javorcik said. “The crucial part is what share of the budget will be spent on R&D, because it’s unlikely such big sums of money will be available in the future.”

The EBRD noted that investment now makes up 27% of defence outlays, up from 12% in 2010, but still lags the 32% average of comparator economies. Harnessing these funds for research and dual-use technologies could strengthen competitiveness if channelled effectively.