This Tuesday, February 21, Joe Biden is in Warsaw to mark the first anniversary of the war against Ukraine. Poland, together with its Baltic and Central European neighbours, is on the front line in this conflict. Their security and their economy suffer.
Overall and against all expectations, the economy of the 27 countries held up quite well during this year of war. The specter of recession is receding day by day in the west of the continent. But this is not true for all Member States. The most recent members, the three Baltic States as well as the countries of Central Europe have been hard hit by the energy crisis and the accompanying inflation. Their traditionally dynamic economy since the beginning of the 2000s, with average growth rates of between 4 and 6%, should mark time this year. The European Bank for Reconstruction and Development (EBRD), created to finance the development of states from the former Soviet bloc, expects a big breakdown. Average growth in this region is expected to fall from 4% in 2022 to 0.6% this year.
Inflation penalizes the region
It is on average 15% with a peak of 25% in January for Hungary. A country that entered recession in the fourth quarter of 2022, after the Czech Republic. Latvia is next on the list. In all of these countries, rising energy prices have eroded the competitiveness of industry. The rise in interest rates decided to curb inflation has also increased borrowing costs for businesses. In the Czech Republic, the most advanced country in the region, auto industry subcontractors who often work for German brands are preparing to cut production, due to the rise in energy but also to the transition green.
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Poland, on the other hand, is resisting rather well with sluggish growth at 1% announced for this year. This is well below the prowess of the 2000s but it remains sustainable. Moreover, in Poland as in the Czech neighbour, the labor market remains buoyant. Poland hosts one million Ukrainian refugees on its soil, mainly women and children, and it relies on this workforce in personal services.
Foreign investment down sharply in most Eastern European countries
The proximity of Ukraine and Russia, with which several of these countries have a common border, dampened the enthusiasm of investors. However, foreign investment was until then an essential component of the growth of these emerging countries. The EBRD does not believe in a rapid recovery of these investments. Even if the labor remains cheap, and the geographical situation in the heart of Europe rather favorable, it is not easy to convince the financiers to spend their money in a factory which could be a target in the event of an extension of the conflict. Building within range of Russian guns is a risk that few investors are willing to take. Only Romania is an exception and continues to attract foreign capital.
Could the war, which is set to last, curb the region’s growth?
The countries mentioned are all members of the European Union and benefit from the manna of Brussels to ensure their development, and among other things the energy transition. Even if the funds can sometimes be blocked for political reasons, Poland and Hungary have experienced this, they will eventually continue to attract investors.
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