Convergence of WB with developed Europe is slowing

The 16 countries in this region include 11 EU members (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia) and five Western Balkan countries (Albania, Bosnia and Hercegovina, Macedonia, Montenegro and Serbia).

Over the past decade most of them have made large strides in improving their business environments, the report said. However, it added, reform momentum appeared to have slowed, especially for some countries after EU accession.

The region's adverse demographics and intensifying skills shortages will pose an increasingly serious challenge. Central and Eastern Europe are ageing fast, the EIU's report warns.

In addition, strong emigration, especially of skilled workers, is set to continue. Over the past 25 years, some 20 million people have left the region—more than five percent of the population—most of whom were young and well educated.

The EIU’s report continues with saying that it has been almost three decades since the start of the transition in Central and Eastern Europe in 1989 and since then, economic performance has been mixed within the region. Progress in convergence in income levels with the 15 EU members from before the 2004 enlargement has been modest, especially since the 2008 global financial crisis.

The report said that three phases of the transition could be distinguished. The first phase, during the 1990s, especially in the first half of the decade, was marked by deep recessions and the impact of conflicts in the Western Balkans.

After 2000, there was a rapid recovery and catch-up with the EU15 in most Central and Eastern European countries. That lasted until the 2008 global financial crisis. After that the pace of convergence slowed, especially in the Western Balkans, the report said.

It added that the transition growth model had reached its limits, and there was now a need to develop growth strategies that were not overwhelmingly dependent on direct foreign investments (FDI).

It is possible that the countries in the region are suffering from the so-called middle-income trap—a slowdown in growth observed when an economy approaches the technological frontier, the EIU's report says, adding that as countries develop and approach the technological frontier, their focus needs to shift from imitation to innovation.

Within the EU11 about half of the countries in the group experienced rapid convergence—Poland, Slovakia and the three Baltic states. For the Czech Republic, Slovenia, Bulgaria and Romania, and especially Hungary, the pace of convergence was more modest.

Croatia was poorer relative to the EU15 in 2017 than in 1989.

The external economic situation is unlikely to provide the same tailwinds as before the global financial crisis. The world economy is finally picking up, but medium-term growth prospects remain subdued.

Crucially important for Central and Eastern Europe, the IMF estimates that potential growth rate in the Eurozone—the major trading partner for the region—is 20 percent slower than it was before the 2008 crisis, the report concludes.