20 years of EU enlargement: the success story continues

Nevertheless, it is now time for these countries to develop a new economic strategy, says the Vienna Institute for International Economic Studies (wiiw). Romania, Bulgaria, Poland and the Baltic states have caught up particularly strongly, starting from a very low level of around 30 to 40 percent of the EU-15 average in 2004. Lithuania and Estonia now have GDP per capita at more than 80 percent of the old EU countries, i.e. roughly at the level of the Czech Republic and Slovenia, which have improved less strongly from a higher level. Poland’s GDP per capita in 1990 was about as high as that of South Africa, Brazil, North Macedonia and Turkey – but in the following years Poland overtook all of these economies, according to wiiw.

It is undisputed that EU membership has played a significant role in the economic success of these countries, say the wiiw economists. With the necessary institutional reforms undertaken by the then candidate countries and the reduction of trade barriers between “new” and “old” member states, foreign direct investment (FDI) flowed into the region to benefit from low-cost, skilled labor. As a result, EU-CEE countries became important nodes in international production networks, especially in medium-high technology manufacturing sectors.

Change is becoming more urgent

But after 20 years, a change from this FDI-based growth model in the EU-CEE countries is becoming increasingly urgent, according to the special edition of the wiiw monthly report, which takes stock of the EU’s eastward expansion. Especially after the global financial crisis of 2008/2009, the potential of FDI to create jobs declined and labor productivity growth never returned to pre-crisis levels. Most of the “low-hanging fruit” of EU membership has already been picked, and a strategic realignment towards a new, innovation-driven growth model is now necessary.

For a modern industrial policy, states must play a more proactive role in connecting key players in the economy, including the private sector, academic institutions, key ministries and economic development agencies, the economic researchers recommend. Secondly, it is important to harmonize industrial policy with EU rules and regulations and make the most of this integration. In addition, the young EU countries would have to rethink their approach to FDI promotion if they want to go beyond their current role as an extended workbench in the value chain. Institutional improvements and reforms must go hand in hand with political efforts to avoid corrupt practices and distorting interventions. Finally, structural changes are also necessary, including a comprehensive social safety net, to ensure that neither people nor regions are left behind.

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Gains from progress not evenly distributed

The economic researchers note that the gains from economic progress over the past 20 years have not been evenly distributed. There are still large regional differences and some regions are well below the EU average in terms of industrial development and living standards. Accordingly, the capitals of the CEE countries in the EU now have GDP per capita levels that are sometimes well above the EU average, such as the Czech capital region of Prague with 207 percent of the EU average, and the greater Bucharest area with 177 percent and Warsaw with 162 percent. These regions would also have more complex specializations in global value chains that go beyond production and assembly. On the other hand, the GDP per capita levels of the poorest regions in these three countries are 60, 46 and 54 percent of the EU average.

In recent years in particular, the EU-CEE region has also struggled with institutional setbacks, which in Hungary and Poland even led to a temporary suspension of the disbursement of EU funds. This is a worrying trend because the institutional environment should normally improve as economies develop.

Lack of people is a major challenge

Another major challenge concerns people – or more precisely, the lack of people. According to surveys, more than 30 percent of companies in the Polish manufacturing industry suffer from a labor shortage, in Slovenia it is more than 25 percent and in Slovakia and Hungary it is 20 percent. Together with the Netherlands, these are the countries in the EU that are having the most difficulty finding enough workers. It will therefore be absolutely necessary for these countries to increase employment rates, promote immigration and starting families and minimize emigration.

Emigration is one of the biggest problems in the countries of Central and Eastern Europe. After the fall of the Iron Curtain and even more so after the CEE countries joined the EU, migration began in Europe that had not been seen since the Second World War. Only three countries – Czech Republic, Slovenia and Slovakia – recorded positive growth rates of 4.7 percent, 5.8 percent and 1.1 percent. All other EU-CEE countries experienced a population decline, particularly Bulgaria, Latvia and Lithuania (by around 16 percent). This is in stark contrast to Austria, Germany and Spain, which have experienced population growth in recent decades through continuous east-west migration. In addition to emigration, low birth rates and a slow improvement in life expectancy also contributed to the negative population dynamics in the EU-CEE region.

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The average natural population change, i.e. the gap between births and deaths, was at or below zero in all EU-CEE countries between 2004 and 2022 – this also applies to Austria, Germany and Spain. The natural population decline was particularly severe in Hungary, Latvia, Lithuania and Bulgaria, which can be attributed to falling birth rates. The positive population growth in the “old” EU member states and in some EU-CEE countries was only achieved through positive net migration. In all EU-CEE countries except the Czech Republic, Estonia, Hungary and Slovenia, average net migration over 2004 to 2022 was zero or negative.

An expansion of the EU to include the countries of the Western Balkans, Georgia, Moldova and Ukraine could be both an opportunity and a risk, say wiiw economists. On the one hand, the newly integrated countries would have a significant wage cost advantage, which could affect the currently strong positions of the EU-CEE countries as assemblers in the EU value chains. On the other hand, it is precisely this shock that could lead EU-CEE countries to improve their positions in these value chains, according to the analysis.

The necessary decoupling of the region’s growth from fossil fuels and the creation of a greener economy will require retraining and redistribution mechanisms. The labor shortage will have to be addressed by exploiting the possibilities of automation and by integrating women, young people, older people and foreign workers more closely into the labor market.