Central and Eastern Europe (CEE) has long been pivotal to Europe’s industrial ecosystem. Over the past few decades, manufacturing gradually shifted from Western Europe to countries like Czechia, Hungary, Poland and Slovakia, as companies were attracted by their strategic location, skilled yet lower-cost labour and easy access to Europe’s biggest markets. 

As costs for labour and other inputs gradually increased in CEE, manufacturers fanned out to the south and east to newer, less developed markets. This has led to the creation of a huge web of suppliers in and around the European region — from the newer EU member states of Central and Southeast Europe, to the Western Balkans, Moldova and Ukraine, and northern Africa. 

Changing conditions 

For the last few years this has happened within an increasingly turbulent global economic and geopolitical context. The interconnected, globalised system of the early 2000s is no longer the reality. Geopolitical rivalries, economic shocks and massive uncertainty now dominate. Trade wars and shifting alliances have intensified competition for resources, while the pandemic and recent conflicts have exposed vulnerabilities in global supply chains.

China and the US are locked in a struggle for supremacy, with global implications. The pandemic, which temporarily disrupted supply chains and trading patterns, compounded these pressures. It forced a rethink of manufacturing networks that had sprawled across continents for everyday goods like cars, clothes and electronics. This highlighted the importance of nearshoring — shortening supply chains by relocating production closer to key markets — and friendshoring, which prioritises production in geopolitically reliable allied countries.

Even before Russia’s full-scale invasion of Ukraine, the European Union sought secure access to energy and mineral resources beyond Russia and other unreliable partners, while competing with China for critical inputs. Russia’s invasion of Ukraine amplified the urgency of these strategies, but with the return of Donald Trump to the US presidency his tariff policies have created new uncertainty, damaging investment and halting some earlier gains. The current reality is one in which there are relatively few new foreign direct investments into the EU and its periphery — and indeed across much of the world — as the intense uncertainty causes companies to put off decisions. Still, the long-term case for investment into these regions remains, albeit with some adaptations needed. 

Vital inputs

The shifts are not limited to manufacturing supply chains. Energy dependency remains a critical concern. A February 2025 brief from the European Union Institute for Security Studies notes that the EU faces “an innate vulnerability” due to external reliance: in 2022, 62.5% of its total energy supply was imported, including 97.7% of oil and 97.6% of gas, costing €448.8bn in 2023. That has changed since the outbreak of war in Ukraine, but Europe remains dependent on costly US liquefied natural gas (LNG), while uranium imports from Russia further expose Europe. Even renewables carry “supply dependencies”. with China dominating solar PV and permanent magnet production for wind turbines.

As the EU looked to diversify, Azerbaijan has become a key partner via the Southern Gas Corridor, reducing dependence on Russia. After the invasion of Ukraine, the EU and Azerbaijan agreed to double gas exports, potentially covering 6% of EU demand by 2027. Azerbaijan is also positioning itself as a supplier of renewable energy and green hydrogen. 

In north Africa, Algeria remains Europe’s third-largest gas supplier, according to European Commission data, exporting pipeline gas and LNG, while future cooperation will focus on hydrogen and renewables. Morocco contributes through solar and wind energy and undersea cable infrastructure under the EU-Morocco Green Partnership, positioning itself as a regional green energy hub.

Securing minerals and other strategic materials is equally important. As noted by the European Commission, “critical raw materials are indispensable for the EU economy” and essential for sectors including renewables, digital technology, aerospace and defence. The Critical Raw Materials Act aims to guarantee a “safe and sustainable supply” to meet the EU’s 2030 climate and digital goals.

With demand for lithium and rare earths expected to surge, the act promotes “diversifying imports,” strengthening “resilient and sustainable value chains”, and reducing dependencies through better monitoring, recycling, and circularity. When the European Commission adopted its first list of 13 strategic projects for raw materials outside the EU in June, they included projects in Kazakhstan, Serbia and Ukraine as well as further flung countries. 

Central Europe moves up the value chain 

In the manufacturing sectors, Central Europe has long been highly attractive to foreign investors. Western European firms, facing rising domestic costs, were drawn to competitive advantages including tax incentives, political stability, and proximity to established supply chains. Advances in logistics allowed companies to relocate production efficiently. 

More recently, supply chain disruptions and the push for regionalised production reinforced this shift. The region is now well integrated into European and global supply chains. Its location — close to Western consumer markets, with efficient transport and infrastructure — offers logistical advantages that new hubs further east or south cannot fully match. Sectors such as automotive, electronics, machinery and components have evolved from low-cost assembly to more technologically sophisticated production. The region is, for example, becoming a centre for electric vehicle (EV) and battery production in Europe. 

However, this came at a cost. The success of this model led to an extreme tightening of labour markets across the region and a corresponding hike in wages. It has come to a point where the low-cost manufacturing model is no longer sustainable, as pointed out in a recent Vienna Institute for International Economic Studies (wiiw) report. 

While Central Europe retains advantages in connectivity and skilled labour, firms are weighing these against rising overheads, exploring locations that combine affordability with strategic proximity. This suggests a gradual rebalancing of industrial investment, with southern and eastern regions emerging as complementary hubs alongside established CEE centres.

In short, the model of low-cost labour that attracted foreign investment for decades is changing. Richard Grieveson, economist at wiiw, highlights that some countries in the region have experienced nominal wage growth of over 200% in the past decade. “The model of attracting FDI based on cheap labour is over for the region and it needs a new model — a new kind of growth driver,” he told a wiiw webinar in October. The rising wages have coincided with increasing geopolitical uncertainty and energy costs, challenging the traditional economic logic that drew Western companies eastwards.

According to wiiw data, in the region FDI inflows as a share of GDP are now at a 10-year low, down from roughly 6% before Russia’s invasion of Ukraine to 2% today. Geopolitical risk is another significant factor deterring investment. 

Moving south and east 

As Central European economies have matured, rising labour costs have prompted manufacturing to look further south and east for cost-competitive alternatives. Countries like Romania, Bulgaria and parts of the Western Balkans offer lower wages, alongside a pool of unused labour, and modernising infrastructure giving better access to the largest EU markets, making them attractive for companies seeking to maintain cost efficiency while remaining close to their customers.

Countries in the Western Balkans are increasingly integrating into European supply chains. “Serbia has always been strongly integrated with Factory Europe. Their DCFTA dates back a long time, and there is very good infrastructure and geographic connections with Hungary, which is also a major manufacturing hub within the EU,” said Alexander Plekhanov, director for transition impact and global economics at the European Bank for Reconstruction and Development (EBRD) Office of the Chief Economist, in an interview with bne IntelliNews. 

“Serbia and North Macedonia are very well integrated into EU value chains,” commented Branimir Jovanović, economist at wiiw. “They produce inputs for factories in Germany and other Western European countries.”

This has happened to such an extent in Serbia that the country is now starting to experience similar problems with rising labour costs as its Central European peers, with a series of factory closures reported recently, 

Bosnia & Herzegovina is also looking to benefit. A spokesperson from the Foreign Investment Promotion Agency (FIPA) highlighted that “geographical proximity to the EU, a skilled workforce and competitive production costs make BiH [Bosnia & Herzegovina] an attractive partner for European companies.”

The advantages of moving operations to Bosnia are strategic and economic, according to FIPA. Its spokesperson noted that companies benefit from “reliable logistical connectivity with European markets, access to a skilled workforce and the opportunity to collaborate with local partners who can support technology transfer and production process improvements.” 

The spokesperson added: "there is a visible increase in interest and strategic planning among foreign investors, which confirms the country’s potential to become a reliable partner in production and logistics chains.”

Eastern neighbourhood 

Further east, with its rapid progress towards EU accession and the anticipated reconstruction of neighbouring Ukraine, factors are aligning to make Moldova an attractive destination for foreign direct investment, said Natalia Bejan, director of the Invest Moldova agency, in a recent interview with bne IntelliNews. 

Already, 85% percent of the country’s foreign direct investment stock already comes from EU countries, and 67% of its exports go to the bloc, according to Bejan. “Even though we are not yet a member, our economy is very much integrated [with the EU],” she says. "EU countries and the EU as a whole are absolutely our most important economic partners.” 

Ukraine itself represents a larger-scale opportunity, once the war is over. “Ukraine combines several strategic advantages: a large, educated workforce (over 30mn people today, and nearly 40mn pre-war), abundant and cheap green energy — particularly from nuclear and renewables — and geographic proximity to key European markets,” said Maria Repko, deputy executive director of the Centre for Economic Strategy in Kyiv. “Its logistics routes are short, and it has access to major Black Sea ports. Geopolitically, Ukraine’s EU orientation is now irreversible, which adds long-term security for investors.”

As with Moldova, there has been a decisive shift westwards economically. “Before 2014, Ukraine was still largely tied to post-Soviet supply chains. But since the Crimea annexation, its trade patterns have fundamentally shifted,” Repco told bne IntelliNews. “The EU is now Ukraine’s largest trading partner, and the Deep and Comprehensive Free Trade Area (DCFTA) signed in 2014 laid the groundwork for deeper integration. That pivot is now accelerating.” 

Moreover, according to Repco, “EU accession acts as a magnet for investment because it signals long-term market integration and legal stability. The prospect of joining the EU Single Market is what transformed investor confidence in countries like Poland. Ukraine is following a similar path—just compressed into a much shorter timeline. Progress on EU chapters is already solid.” 

Beyond Eastern Europe 

Also on the outer edge of Europe, Turkey plays a significant role in European supply chains, bridging Europe and Asia. Its industrial base spans automotive, textiles, machinery and electronics, with strong integration into EU production networks through trade agreements and customs arrangements. Turkish suppliers provide components and semi-finished goods to European manufacturers, benefiting from competitive labour, skilled workforce, and proximity to major EU markets.

“Their integration with the EU is close, they are in a customs union … that provides a lot of advantages. In most emerging markets the manufacturing sector has declined in relative terms, but Turkey has substantially increased its market share in manufacturing” said Plekhanov. 

“Turkey has the capability and skills in the private sector, and it had a massive depreciation of the currency over the years, which kept local labour fairly competitive. Turkey has market access, it has scale, and it has a track record.” 

In North Africa, Morocco is positioning itself as a strategic partner in EU supply chains, particularly in automotive, aerospace, electronics, and renewable energy. Geographic proximity, well-developed ports, and improving infrastructure make it attractive for companies seeking market access and logistics efficiency. Morocco has invested in industrial zones, skills programs, and energy projects—including solar and wind—supporting both traditional manufacturing and emerging green industries.

“Morocco has been growing its manufacturing base, and has a lot of links with French multinationals in the car assembly sector. The government has been helping with various skills programmes to get foreign investors and build up the skill base. It’s also a relatively large economy, with good infrastructure connecting it to Europe, but also to the US by boat,” said Plekhanov. 

While large-scale relocations of EU production are limited, Morocco is increasingly used for component sourcing, assembly, and renewable energy projects. According to a report by shipping giant Maersk, 4% of European companies are considering Morocco as an alternative sourcing location, driven by supply chain disruptions and the desire to shorten supply chains. EU-Morocco trade reached €53.3bn in 2022, covering machinery, appliances, transport equipment, and mineral products. 

A growing digital outsourcing sector also strengthens Morocco’s appeal, providing skilled developers and IT specialists. Elsewhere in north Africa, Tunisia has also become an IT outsourcing destination due to its skilled, multilingual workforce. 

Supply chains reshaped

The EU has already gone a long way towards reshaping its supply chains to “mitigate risks and align with evolving trade and industrial policies”, according to a commentary published by the Centre for Economic Policy Research (CEPR),  a pan-European non-profit. 

Between 2021 and 2023, EU imports have shifted “away from countries without trade agreements” and increasingly flowed “inwards and towards regional neighbours and distant partners engaged in active trade initiatives”. Early signs indicate a “reallocation of EU imports away from non-agreement partners and towards the EU27,” alongside a rise in sourcing from “agreement partners, both near and far”, revealing a mix of reshoring and partner-shoring strategies.

The European Investment Bank’s (EIB's) "Shock waves from turbulent times" report highlights that US tariffs have delivered “a shock for the global trade and production model,” challenging the EU, which has long benefited from “cost-efficient delocalisation of production.” The EIB finds that EU firms are “widely exposed to trade tensions,” facing “limited access to raw materials or disruptions in logistics.”

While there is “no clear trend of deglobalisation,” diversification is necessary to “de-risk and improve resilience”. Yet this is “complicated and costly” particularly for companies dependent on Chinese inputs or advanced technologies. To mitigate risks, the EU is accelerating trade agreements — including with Mercosur, India and Indonesia — and refining existing deals to secure supply chains in an increasingly multipolar world.

Nearshoring on hold 

It’s currently unclear to what extent nearshoring — a much used term in the years after the pandemic — has been happening on the periphery of Europe.

In 2024, a study by wiiw confirmed that nearshoring to the Western Balkans was taking place post-pandemic, with FDI inflows significantly surpassing long-term equilibrium values in some countries. Jovanović, the lead author of the study, said the think-tank’s analysis identified “concrete cases of near-shoring in five of the six Western Balkan economies – Albania, Bosnia & Herzegovina, Kosovo, North Macedonia and Serbia”. He added that Asian firms were taking a “highly strategic approach, deliberately positioning their production facilities near the EU’s economic core in order to have shorter supply chains”. 

Since then, however, abrupt cutoff in FDI in the more turbulent global investment climate in 2025 has stalled nearshoring momentum. 

Jovanović said in an interview with bne IntelliNews that, “FDI is half what it usually is… there is no near-shoring, there is no kind of shoring.” In short, political instability, global uncertainty, and unpredictable trade policies have created a climate that deters investors. “Investors don’t like uncertainty, don’t like unpredictability,” he said, pointing to trade relations, tariffs, and broader geopolitical risks. Jovanović described the trend as “slowbalisation”, a global deceleration of cross-border investment gradually spreading to Eastern Europe and the Balkans.

On a more positive note, wiiw’s Richard Grieveson said that while nearshoring in the Western Balkans “is a dog that hasn’t barked yet”, early signs exist in strategic sectors such as defence.

Still, officials and analysts in the region are confident in the long-term potential for nearshoring and more broadly a revival in FDI — once the current turbulence has subsided. 

“Bosnia & Herzegovina holds significant potential as a nearshoring destination, particularly in the context of global supply chain shifts triggered by the COVID-19 pandemic,” the FIPA spokesperson said. 

"Data from the study and local investment promotion agencies indicate a continued interest in BiH. Investors are planning various projects in the manufacturing and processing sectors, with a focus on stable and high-quality partnerships.” 

According to Bejan, Moldova is courting nearshoring manufacturers keen to move production from Asia to Europe. Its status as an EU candidate state — close to the EU single market but not yet bound by all its regulations — can be a selling point, she argued in an interview with bne IntelliNews.

“We have companies that are considering relocating from Asian countries to Europe, and for them locating business in Moldova is an advantage,” Bejan said. 

“Being part of the EU is generally regarded as a very good thing, but sometimes not yet being part of the EU — not yet having all the regulations but being right at the border, getting prepared and getting more and more trustworthy — can be very attractive.” 

Repco believes Ukraine “absolutely” has good potential as a nearshoring destination serving the European market in the long-term. 

“In addition to the educated workforce and green energy edge, Ukraine brings sectoral strengths that match Europe’s industrial needs. It has a strong base in advanced manufacturing, engineering, metallurgy, and IT,” she said. “But critically, Ukraine is now also a leader in dual-use and defence innovation. The war has made Ukraine a real-time testing ground for battlefield technologies—FPV drones, autonomous systems, cyber defence—where R&D cycles are measured in days, not years. It’s cheap, fast, and brutally effective.” 

However, with the war still raging, “Ukraine urgently needs air defence ... and war risk insurance — for investors, assets, and goods” if it is to attract larger-scale nearshoring and FDI.  There are also other barriers, according to Repco, specifically, the territorial and skills mismatches in the workforce and legal and institutional improvements to reduce risk and red tape.

The European Union’s supply web is being rewoven rather than dismantled. While the shockwaves of war, tariffs and political upheaval have slowed new investment, they have not erased the logic underpinning Europe’s regional integration. From Central Europe’s maturing industrial heartlands to the emerging hubs of the Western Balkans, Ukraine and North Africa, a new economic geography is gradually taking shape. Once the current turbulence subsides, investors are likely to rediscover these regions, not just as cheap-labour destinations, but as partners in a more resilient European production network.