The Second Transition

A New Paper by FES on the Growth Model of Central Eastern and South Eastern Europe.

The Eastern member states of the EU have seen impressive economic growth since joining the European Union. This is especially true for the Visegrád countries (Czech Republic, Slovakia, Poland and Hungary), but also, for example, for Romania or Lithuania. For some countries - like the Czech Republic with its long industrial tradition - such a development had rather been expected. But there were also many cases where the economic development was far better than predicted at the time of EU accession. The German economist Dalia Marin recently called Poland a "star of globalisation" (FAZ, 17.8.2022) and the Polish economist Marcin Piątkowski already some years ago pointed out that Poland has been the world's fastest-growing middle income economy over the past twenty-five years.

The basis of this success was the integration of the Eastern accession countries into the industrial division of labour in Europe. They assumed an important role in industrial subcontracting and manufacturing for international corporations, many of them from Germany. Today, Germany’s combined trade with the four Visegrád states is more important than its trade with gigantic China. A long-standing industrial tradition, lower wages combined with a relatively high level of skills and education, good investment conditions and geographical proximity to the markets of Western Europe were important success factors. Today, the economies of Central Eastern Europe (CEE) are highly industrialised "factory economies" that are in a symbiotic relationship with the "headquarter economies" of the EU15 states.

However, this success story also had its price, not least an ecological one: The economies of the region are characterized by a high resource and CO2 intensity of value creation. But also the technological sovereignty of the countries is very limited: The European division of labour into headquarter and factory economies means that CEE’s domestic companies, but also the states themselves, spend comparatively little on research and development. According to a study by the EU Commission, thirty years after the fall of communism only six of the 200 companies with the highest research and development expenditures in Europe are based in the accession countries.

As technological innovation becomes more and more important for the economic performance of enterprises and countries, the Central European growth model seems to be slowly running out of steam. The Visegrád countries have caught up with, and in some cases even overtaken, the Mediterranean EU countries in terms of per capita income. But compared to the technologically leading headquarter economies such as Germany, the Netherlands or the Scandinavian countries, the gap in per capita income has been stagnating for years. Here, the EU convergence process in terms of income and productivity has almost come to a standstill.

In order to change this situation and move further towards Western standards of living, the countries of Central Eastern Europe must consider renewing their growth model. They must succeed in attracting more knowledge- and know-how-intensive parts of the production process and produce their own innovative domestic companies. The high dependence of some countries on fossil fuels, especially coal, must be significantly reduced. 

In order to successfully follow this path, the CEE countries must pursue an active industrial and innovation policy in a much more intensive form than they used to do in the past. Within the framework of the growth model of the last decades, these policy fields were neglected. The impulses for innovation and technological modernisation were essentially set by Western corporations and companies. Today, the countries of the region must begin to build up their own innovation systems and shift to a more know-how-driven growth model. Only in this way the countries of Central Eastern Europe will succeed in closing the existing gap in terms of productivity and per capita income.

"The Second Transition", the new study of the FES programme on "European Economies of the East" describes some of the core aspects of the upcoming renewal of the Eastern European growth model and outlines the direction of the necessary reforms. The main impulses for the argumentation come from studies of the Vienna Institute for International Economic Studies, comparative studies of the European Commission, but also from the debates of the “Economic Forum” of the German SPD as well as from the broader industrial policy discussions in Germany.

With this study, FES continues its work on the development perspectives of the economies in Central Eastern and South Eastern Europe, which was initiated in 2021 with the study "A New Growth Model for EU-CEE" (written by a team of authors from the Vienna Institute for International Economic Studies).

The author of the study on the "Second Transition", Dr. Ernst Hillebrand, is the director of the new FES programme on CEE economic development. He has gained broad experience in the region as former head of FES’s Central and Eastern Europe Department and the FES representation in Poland.

The aim of the new FES programme is to engage in an intensive exchange with progressive political, social and trade union forces in the CEE region about the perspectives of the region's growth model. The population of these countries rightly has the expectation that similar living standards will be achieved throughout Europe in the medium term. Meeting the ambitious EU climate targets and securing Europe's technological and industrial competitiveness and "resilience" under the conditions of intensified geopolitical and trade rivalries is only possible with the active involvement of the industrial economies of Central and South-Eastern Europe.