It’s a drum that Reinvantage has been beating for some time: Central and Eastern Europe’s low-cost ‘extended workbench’ growth model is in trouble, and badly in need of reinvention. Without it, the region risks becoming uncompetitive, undoing three decades of unprecedented progress.
It’s a warning that was echoed this week by the Vienna Institute for International Economic Studies (wiiw), which published its latest economic forecast for the region. While most economies of Central, East and Southeast Europe are showing solid growth, wiiw says, the EU members of the region will continue to perform at below their potential.
Structural change is taking place in the Eastern member states of the European Union. “The main driver of growth there has been private consumption as a result of strong real wage increases. This is losing momentum, with private and public investment gaining in importance,” says Richard Grieveson, deputy director of wiiw and lead author of the forecast.
“In view of the acute loss of competitiveness in Central and Eastern Europe’s export-oriented industry due to a steep rise in unit labour costs, the previous model of success as an extended workbench for Western corporations is increasingly undermined. Investment in greater productivity is therefore urgently needed.”
In principle, the region is benefiting from the sharp rise in defence spending by NATO members there. “However, significant growth momentum can only be expected if a larger proportion than before is invested in the procurement of weapons and equipment, and if these goods are also produced locally, rather than being imported from the United States and other third countries, such as South Korea,” adds Grieveson.
For 2026, wiiw forecasts average growth of 2.6 per cent for the EU members of the region,
the same as was expected last autumn. Growth is also likely to be similarly high in 2027, at 2.7 per cent. Compared to the autumn forecast, this represents a slight upward revision of 0.2 percentage points for 2027. Despite some difficulties, these countries are likely to grow almost twice as fast as the euro area both this year and next (2026: 1.4 per cent; 2027: 1.5 per cent).
Poland is once again the growth leader among the Eastern EU member states, both this year (3.7 per cent) and next (3.2 per cent), followed by Lithuania (2026: three per cent) and Croatia (2026: 2.8 per cent). In Hungary, where the landmark parliamentary election due to be held in April could cost Prime Minister Viktor Orbán his post, the economy is picking up again after stagnating last year (2026: 2.2 per cent; 2027: 2.5 per cent).
The six countries of the Western Balkans are expanding at a comparatively rapid rate (2026: 3.1 per cent; 2027: 3.5 per cent), even though Serbia’s forecast has been revised downwards on account of the ongoing protests. Things are also going well in Turkey, which is expected to grow by 3.9 per cent this year and 4.4 per cent next year.
By contrast, the outlook for war-torn Ukraine continues to deteriorate. For 2026, wiiw expects growth of 2.5 per cent, a further downward revision of 0.5 percentage points on the autumn forecast. Economically, too, much will depend on the form of Western security guarantees in the wake of a possible peace agreement. In the case of aggressor Russia, near-stagnation will continue both this year (1.2 per cent) and next (1.5 per cent), due to high interest rates, low oil prices and meagre investment.
Trump, high budget deficits and a dictated peace in Ukraine as downside risks
The biggest downside risk to the forecast is further disruption from new US trade policy
measures initiated by Donald Trump. These could have an adverse impact on exports.
“Although direct trade flows between the US and Central Eastern Europe are negligible, lower US demand for European industrial products due to further tariffs on imports from the EU could indirectly drag the region down, as it is closely intertwined with Western European industry,” explains Richard Grieveson.
Added to this are the high budget deficits in some countries, particularly Romania, Hungary, Poland and Slovakia, which could force them to implement growth-dampening austerity measures in the event of turmoil on the bond markets. Romania is already having to pursue such a policy.
A dictated peace in Ukraine in favour of Russia could also have a negative impact on the
region. “The lack of credible security guarantees for Ukraine is likely to deter investors and lead to considerable uncertainty, as Moscow can be expected to destabilise the entire region in this event,” warns Grieveson.
Ukraine faces a difficult future
The Russian escalation of attacks on Ukraine against the backdrop of ongoing negotiations is increasingly affecting the country economically. For 2026, wiiw forecasts growth of 2.5 per cent for Ukraine, a downward revision of 0.5 percentage points compared to the autumn. The huge destruction of energy infrastructure caused by massive Russian air strikes and the resultant widespread power outages are increasingly undermining economic activity in the country. Added to this are the loss of those production facilities that have been destroyed and the rampant labour shortage caused by emigration and military mobilisation.
In its forecast, wiiw assumes that the war will continue until 2028 despite the current negotiations, though a political solution is still possible in the meantime. “Economic recovery and reconstruction will depend entirely on whether the West provides Ukraine with credible security guarantees,” says Olga Pindyuk, Ukraine expert at wiiw. ‘If the security guarantees are watertight, that could lead to an economic boom throughout the region. Otherwise, foreign investors will probably think twice about investing in Ukraine, which means that not enough private capital will flow into the country for reconstruction and a sustainable economic upturn.”
Even with firm security guarantees, however, recovery after the war is likely to be difficult—despite the fact that in this case Ukraine would probably be integrated more rapidly into the EU, with all the positive effects that would bring. In its new forecast, wiiw has taken a more detailed look at the prospects for recovery after the war. Its conclusion: even with a peace agreement favourable to Ukraine, the economic outlook for the country is not very bright. This is evident from historical examples: in most cases, a country has only been able to recover rapidly after a war if it already had strong economic growth and stable democratic institutions before the war; if the war did not last too long; if the economic slump during the war was limited; and if there was no resurgence of armed conflict.
“Unfortunately, Ukraine does not fare particularly well on any of these points. This makes credible security guarantees, a meaningful prospect of EU membership and massive financial support for the country’s reconstruction all the more important,” insists Pindyuk.
Sustaining growth
The Vienna Institute’s report makes it clear that sustaining growth in Central and Eastern Europe now depends increasingly on investment, both public and private. Public investment will be supported in the near term by EU funds, particularly the accelerated drawdown of RRF resources (the EU’s Covid-19 recovery fund) before the August 2026 deadline, and by defence-related spending.
However, the critical uncertainty is private investment. Labour shortages, rising unit labour costs and stagnant productivity have all eroded competitiveness and weigh on FDI. To remain viable, firms must invest in automation, digitalisation and AI-driven productivity gains. If that happens, growth will strengthen.
Over the medium term, the region’s economic outlook remains favourable relative to Western Europe, but success is no longer automatically guaranteed. The next growth phase will be investment led, productivity driven and far more sensitive to policy choices and geopolitical outcomes.
Photo: Dreamstime.
