Central and Eastern Europe (CEE) is facing a historical
turning point, as the European Union is in the process of implementing a
project of deeper integration in various domains—from energy and public
finances to security and foreign policy. For CEE countries, the process of
Europeanisation has brought about significant gains, both financial (in terms
of economic growth and development) and normative (in terms of the quality of
democracy and governance).
However, human rights and rule of law are increasingly being
challenged by anti-establishment or Eurosceptic parties in the EU. The nationalist
and sovereignist platforms are gaining force. Beyond the posturing of
incumbents, such as Viktor Orbán in Hungary, Jarosław Kaczyński in Poland, or
more recently, Matteo Salvini in Italy, power is coming under increasing
contestation by the Rassemblement National (National Rally) in France, the
Freedom Party in Austria and the Alternative für Deutschland (AfD) in Germany.
So, how will the political balance tilt in Central and Eastern Europe (CEE) beyond the European elections? It is unlikely that the nationalist parties will be able to impose a drastic shift in the policy agenda (either in the European Parliament or in the individual nations). Although increasingly loud nationalist and Eurosceptic sentiments are resonating within leading political parties across Europe, the fact remains that integrationist policies have indeed taken effect at a steady pace and will likely continue to do so. With regard to the major threats that Europe is facing nowadays (i.e. migration, security, competitiveness on global markets) there is simply no solution at an exclusively national level—only together can member states prevail.
Still, within CEE there are persistent sentiments of being
left behind: from Macron’s two-speed Europe project and the increased
perception that Germany shapes Europe, to the persistent developmental
divisions, there is mounting pressure for a new approach towards the newer
member states in Europe. How will the EU address these sentiments in CEE?
The main offer so far has been based on investing in efforts
to overcome the development divide and the feelings of inequality and
unfairness that it breeds, with the aim of strengthening resilient pro-European
attitudes. While this might be a useful long-term response to short-term
outbursts of discontent, any integrationist agenda or political platform (see
the recent efforts by the French president Emmanuel Macron and the German
chancellor Angela Merkel) at the EU level should be as inclusive as possible
towards CEE member states, whose nationalist parties are currently gaining
ground. Secondly, CEE member states should seek increased partnership in terms
of energy, transport and digital infrastructure, to mention only the most
important areas of intervention. In the face of Russian posturing and cyber
threats, CEE must seek security through interdependence.
Regional specialisation and factor endowment
The current global economy can be characterised by the term
‘New Economy’, that is, economic growth driven by new, highgrowth industries
that are on the cutting edge of technology. While the term ‘new economy’ has
been popping up since the early 1990s, there is an argument to be made in
favour of current developments.
On the one hand, there has been an increase in the use of
disruptive technologies in economic sectors, and innovative solutions for
financing are clearly paramount in this overall context. On the other hand, the
institutional and regulatory frameworks are increasingly responsive to these
new developments, and whether they are adequate or not, it is clearer than ever
that there has to be dialogue between the financing sector and European &
national regulators in a meaningful, considerate manner. There is no
one-size-fits-all economic model for development across Europe; not all the
member states have reached the same level of development and convergence.
In CEE for example, Romania and neighbouring countries are
good examples of how to move from a low-value economy to a higher value-added
economy. Achieving this transition is very important in order to achieve
sustainable development. It is also the right recipe to escape the
middle-income trap in these countries.
The middle-income trap refers to a situation where the level
of wages in a country stagnate as a result of its own economic development;
more specifically, when the economic model based on low wages (e.g.
manufacturing) changes given a certain increase in wages, but at the same time,
the development of new high value-added industries lags behind.
The path to sustainable growth is very much influenced by
the availability of factors of production in a given country. For example,
Romania benefits from very high-quality human capital (e.g. trained and skilled
professionals), but very poor infrastructure.
As such, we see a value increase in human capital-intensive
sectors such as ITC, where we no longer see the highest frequency in
call–centre-type activities, but rather in high-tech and RDI-intensive
activities. In contrast, due to the poor infrastructure, there is slow progress
in the industrial sectors reliant on physical activities and logistics.
Industrialisation is essentially hampered by the very poor infrastructure.
Also, the issue of financing is important for economic agents, particularly
In Romania 75% of SMEs are self-funded; furthermore,
approximately half of them display no activity, and of those that are active,
many do not report profits. Therefore a vicious cycle develops between lack of
capitalisation in the start-up segment and the lack of sophistication in
New division lines are appearing in the European Union,
without the historical disparities of development between the member states and
regions having necessarily been resolved. The divisions within the different
categories of the population both across Europe and within member states are
currently just as important as the traditional divides across member states.
Regional divisions are persistent in the EU, and they no
longer align to the classical categories of old vs. new member states. The
latter are facing challenges of convergence, or catching up, as the European
Commission has recently labelled many of them as ‘lagging regions’.
However, although CEE is still struggling with low incomes
in some of its regions, high economic growth rates have been recorded across
the area as a whole, as opposed to older member states in Southern Europe (i.e.
Portugal, Spain, Italy and Greece) whose lagging regions are marked by low
economic growth. Many of the EU member states have seen rising regional
inequality, as convergence stalled during and since the economic crisis. Social
divisions have become increasingly apparent according to various Eurobarometer
data from the past decade.
Many of the EU member states have seen rising regional inequality, as convergence stalled during and since the economic crisis.
Social divisions have become increasingly apparent according to various Eurobarometer data from the past decade.
The values and beliefs of European citizens reflect new
division lines on top of the persistent socio-economic ones, as social
insecurity across Europe has been amplified by the economic crisis in Southern
Europe and its strong negative social impact, as well as the current migration
crisis. Capital cities are increasingly behaving very differently from rural
areas in elections (e.g. Poland, Hungary, Bulgaria, UK, and increasingly
Romania, as the latest European elections showed urban voters’ preference for
liberal and cosmopolitan platforms to sovereignist and anti-EU rhetoric),
according to different alignments of values: as the major cities remain
predominantly liberal and cosmopolitan, the rural areas are increasingly
turning to traditional or even fundamentalist values.
Economic divisions were meant to be tackled from the very
beginning of the cohesion policy and the integration process. Still, economic
grievances persist and amplify social and cultural insecurities. According to a
recent survey of CEE states, EU membership has made prosperity more achievable
for countries in transition, but has also made the consequences of failure more
apparent. EU-wide income inequality declined notably prior to 2008, driven by a
strong process of income convergence between European countries; but the Great
Recession broke this trend and pushed inequalities upwards, both for the EU as
a whole and across most countries.
Also, according to recent surveys, both inter- and
intra-generational mobility has stagnated or decreased in several member
states. Nevertheless, in a number of CEE countries (such as the Czech Republic)
citizens still believe they are better off economically than they ever were
before. Furthermore, several regions in CEE countries have changed their status
from ‘less developed regions’ to ‘developed regions’ over the course of the
current multiannual financial frameworks (MFF 2014-2020).
While member states in Central and Eastern Europe (CEE) have
showcased steady economic growth over the past years, the area still lags behind
its Western counterparts. It now stands at a crossroads, attempting to avoid
the ‘middle-income trap’. In order for this region to continue its path to
prosperity, it must enhance the competitiveness of its domestic SMEs and push
forward in new technologies and innovation.
Drivers of economic development: Romania’s local business
In the current context, in which global markets are marked
by growing uncertainty, ensuring sources of capital for investments is one of
the paramount conditions for achieving and sustaining economic growth and
development. For the EU member states, there is the added benefit of accessing
EU structural funding for investments, besides the capital markets, national
budgets and public-private partnership. Whatever the source of funding might
be, it is necessary to identify the specific needs of a given economy, and to
prioritise investment projects according to those needs. It is clear that in
the case of Romania there is an essential need to develop several priority
infrastructure projects. However, it is often difficult to properly understand
and address the investment needs from a national, or increasingly a European
Meanwhile, in a context in which structural funding is
mostly directed to projects that provide ‘European added value’, decreasing
attention is paid to local needs and opportunities. In a recent paper with
George Ștefan, we present an original metric to assess economic activity at the
local level: the Local Business Environment Index (LBEI).[i]
In the development of this metric we explored a large set of
variables that are disaggregated at municipal level. Following the extant
literature on the different drivers of economic development, we proposed four
major axes of assessment: entrepreneurship, innovation, investment financing,
and support from public authorities.
The highest scores in the 2018 overall ranking of the level
of attractiveness of the local business environment went to cities of various
sizes: Bucharest, Cluj-Napoca, Timișoara, Alba-Iulia and Sibiu. Each
municipality has a different distribution of its specific strengths.
Interestingly enough, it is not just the capital city of Bucharest that
dominates the different components of the LBEI.
In the case of the sub-index for Innovation for example, the
rankings are dominated by Timișoara, Cluj and Sibiu, and not the capital city
of Bucharest. In the case of the sub-index for Entrepreneurship, the top-ranking
city is Cluj, and not Bucharest. As such, we can see that there are elements
(competitive advantages) that define some Romanian cities and lead them to
excel in certain areas over others.
The two-tier approach of the EU might shelter Western countries from economic and social risks, but it also fuels tensions with new member states.
These rearrangements in the ranking of Romanian cities in
the sub-indexes of our proposed LBEI metric show the extent to which there are
specific local and regional economic opportunities and challenges. In the
cities that occupy the top positions, the economic growth rate and general
development level surpass those of many Western European cities.
It is important to understand the drivers of this economic
performance, as this is key to remedying the disparities across the wider EU.
Rethinking CEE: Bridging the divides
It is becoming increasingly obvious that the two-tier
approach of the European Union might shelter Western countries from economic
and social risks, but it also fuels tensions between old and new member states.
Economic development in many of the newer member states has been robust, albeit
heavily concentrated in major cities.
As shown in the case of Romania, the economic development of
many cities in Central and Eastern Europe depends on the extent to which these
are integrated into the larger European market: whether in terms of innovation
or access to capital, connectivity remains a central driver. Social integration
often comes by way of economic integration. For Central and Eastern Europe
(CEE) the path to further economic integration into the European Union lies
through (1) market linkages (e.g. integration into regional value chains,
development of high value-added economic agents, increased FDIs) and (2[ii])
institutional and policy instruments (e.g. adopting the Euro, EU-funded
In terms of institutional performance and policy choices,
political will and knowledge are essential in order to further economic
integration and effectively reduce disparities. For example, in the upcoming
Multiannual Financial Framework (MFF 2021-2027)2, the process of negotiation
will be very important as the EU may lose a net-contributing member state
through Brexit, which would cause a deficit in EU budget revenues estimated at
over €10 billion.
Central and Eastern European (CEE) member states are generally
net beneficiaries from the EU budget, and are heavily invested in programmes
such as those funded through the Cohesion Policy and the Common Agricultural
Policy (CAP) which specifically address the current disparities. As far as
Romania is concerned, it draws approximately four times the amount of money
from the EU budget as it contributes. Still, it is important to maintain the
same level of absorption of EU funds, as these are the third largest source of
financing for public investments apart from the national budget and capital
At this stage, it looks likely that Romania will be
allocated more resources than in the previous financial year (in current
prices), but the conditions of eligibility and the context are considerably
different, making it harder to draw the pre-allocated funding. Other CEE
countries whose regions have moved from ‘less developed’ to ‘more developed’
are likely to see their funding diminished, but they have a great deal of
experience in using the available funds optimally (e.g. Poland, Hungary).
Overall, the negotiations for the future MFF will be more
difficult for CEE member states in the coming period. With the growing concerns
regarding the future and sustainability of the European construction, we should
rethink the Central and Eastern European region not as a peripheral area, but
rather as a region in which further integration will yield higher rewards for
the EU as a whole.
This shift towards the core of the EU is based on three
elements. Firstly, there is a sociological component: in CEE member states
there is still a predominantly pro-European attitude, in contrast to the
increasing wave of Euroscepticism in Western Europe.
Secondly, there is an economic element, as CEE has also
presented a strong economic outlook over the past years, making it a key market
for larger European economies such as Germany. Finally, there is a geopolitical
argument, as many CEE countries have strong incentives to increase their
interconnectivity with Western Europe, so that they are sheltered from
instability, such as that in neighbouring Ukraine.
Volintiru, Clara & Ștefan, George (2018). ‘Economic Development and
Opportunities in Romania: Local Business Environment Index (LBEI)’. Aspen White
Paper; cf. Volintiru, C. et al. (2018). ‘Economic Development and Innovation at
Local Level-Local Business Environment Index’, Romanian Journal of European
Affairs, 18, 5
2. Dăianu, D., Fugaru, A., Mihailovici, G., and Volintiru, C. (2018).
‘Multiannual Financial Framework Post-2020: Risks and Opportunities’, European
Institute from Romania (IER) Strategy and Policy Study, no. 1/2018 [in