The Transformation of Central and Eastern Europe in a Globalized World

December 5, 2024

WKO Conference Center, Wiedner Hauptstraße 63, 1040 Vienna
www.groweast.eu

A Review

On December 5, 2024, the 15^th Grow East Congress took place at the WKO Conference Center, hosting 140 participants. The event, spearheaded by Arnold Schuh, former Director and now Senior Advisor at the Competence Center for Emerging Markets & CEE at WU Vienna, and Manfred Berger, Partner at ICONIC Consulting and Founder of Neusicht Think Tank, was co-organized with Gudrun Hager and Gerd Bommer of Aussenwirtschaft Austria/Advantage Austria. The congress explored Central and Eastern Europe’s (CEE) economic and political transformation, Vienna's evolving role as a regional business hub, and the future of the Western Balkans.

Session 1: What is CEE’s current position and what is the outlook for the region?

The session was opened with a keynote speech titled “The New Ends of History – Economic Prospects and the Risks of the War” by the historian, Philipp Ther, Professor of Central European History at the University of Vienna. He started with an overview of the economic and social success story in post-communist Europe from 1990 on, mirrored in three- to fivefold GDP per capita increases in Central European countries, major reductions in unemployment rates down from 15-20% (e.g., Poland, Slovakia) to below 5% and expansion of life expectancy rates by five to ten years. Economic growth was fueled by Western foreign direct investments and the prospect of accession to the EU. At the same time, the CEE countries are still plagued by huge regional income disparities between capital cities and the rural areas. While in communist times education and welfare provision played an important role, spending was reduced in the transition period what contributed to anti-liberal sentiments.

The invasion of Crimea and eastern Ukraine by Russian forces in 2014 is seen as a pivotal point in the development of CEE. This brought up the question of ethnic vs state border because many Russian speakers live in those areas. The Europeans were not prepared for the use of military might, looked away and tried to solve it with diplomacy. The blackmailing with energy supplies by Russia after the full-scale invasion in 2022 triggered an economic crisis in Europe due to high inflation in energy and food prices. Europe is involved in an informational and economic war with Russia – Europe is not neutral anymore. Thanks to the regime’s control over media, we don’t know what is going on Russia but it is not the life that is seen in the Russian propaganda. Ther is not sure how all this will end. The Russian command economy combined with a still open global trade regime is advantageous for Russia. Europe has to invest in its security, has to build up its defense sector. To deal with such a crisis is a matter of spirit. What we can learn from history is that even after deep transformation crises like the oil crises in the 1970s the economies emerged in a better shape. A lack of future prospects and a missing belief in the future will prolong each crisis.

The second keynote speaker, Gunter Deuber from RBI, highlighted in his presentation Europe’s increased dependency on the US economy (exports/investments) since 2016 resulting in a weaker bargaining position to Trump’s USA. CE/SEE countries are less directly exposed to US-related GDP downsides via exports to the USA but indirectly via Germany. Since this year CE/SEE countries enjoy a private consumption driven recovery, have a higher investment growth (also thanks to Next Generation EU Funds) and more resilient labor markets with lower unemployment rates than the Euro area. Deuber regards CE/SEE a large opportunity for European and Austrian businesses given their combined GDP size equaling Italy’s (and soon France’s). There is a realistic potential for nearshoring, especially under intensified trade disruptions due to new US tariffs. For foreign investors CEE is still a gateway to enter EU market with the ongoing advantage of cheap and skilled labor and a good growth outlook. However, geopolitics and related industrial policies, the patchy execution of sanctions regimes, as well as unclear relationships of some CE/SEE states with Russia and China add uncertainty and complicate matters for businesses.

The two panelists, Martin Ehl, journalist from Hospodářské noviny in Prague, and political scientist Sebastian Schäffer of IDM, contributed their views in the following discussion that was moderated by Desislava Dikova, WU Vienna. Ehl emphasized that Europe is in war with Russia. He complained that this view is not shared by the Austrians and West Europeans. In order to oppose the aggression of Russia, Europe has to change to a war mindset. The cooperation and expansion of the European defense sector is a necessity from the security perspective and an economic gain too as it would foster the manufacturing sector and related R&D activities. A deepening of the EU and the Euro area is the other part of the answer. Europe needs more collaboration of like-minded countries. We have to start to act as Europeans.

Schäffer supported strongly this view. The only answer to the manifold crises in CEE and Western Balkans is European integration – in economic and democratic terms. Democratic stabilization has to come with an open society. People in the candidate countries of the Western Balkans want a strong signal of commitment and progress in the accession talks – they are fed up of broken promises. Deuber added that in economic terms the Western Balkans are fully digestible for the EU. And enlargement is an urgent issue – we don’t have much time. However, power politics play a more prominent role today and the large countries (France, Germany) are occupied with their internal problems. Ther suggested that medium-sized countries like Czech Republic, Austria and the Netherlands should take the initiative and play a more active role in EU politics. Continuing the accession process with sector-wise integration would be a smarter way than the common criteria catalogue whose fulfilment at the end often rests on promises by the candidate countries. According to Schäffer each EU member state has 75 opportunities to veto EU enlargement in the existing system. Decision making has to change in such a way that one state cannot block a (qualified) majority in going further. And Ehl added that we should not forget emotions. Leaving Romania (and Bulgaria) outside of the Schengen area due to a veto of Austria infuriated the people. They were fed up of being treated as second class citizens in the EU what erodes confidence in those institutions and fuels national populism.

Session 2: What is Vienna’s current and future role in CEE?

Vienna’s role as a business hub in CEE was in the focus of the second session. Co-organizer Arnold Schuh of WU Vienna opened the session with a brief introduction to the topic. He emphasized the strengths of Vienna that range from the central geographic position, its role as transportation (airport, main railway station) and education hub (200,000 students) to the public and legal stability. 40% of the inhabitants speak a CEE language what eases communications with and relations into the region. Contributing to the attractiveness of the location is the high density of headquarters in the city. 33% of the Austrian HQ and 45% of the international/regional headquarters of foreign parent firms are located in Vienna. Most of the subsidiaries of those HQ are located in CEE countries (by number 1. Germany, 2. Czechia, 3. Hungary, 4. Slovakia, 5. Italy, 6. Romania, 7. Croatia) underlining the role of Vienna as a springboard to CEE.

Compared to capital cities in CEE the metropolitan region of Vienna hosts three times as many large corporate HQ as Prague, Warsaw or Budapest. In the last years, more firms from CEE had chosen Vienna as a business location, especially firms from Ukraine, Czechia, Slovakia and Hungary. They are using Vienna mainly for their expansion to DACH and Western Europe. Moreover, Schuh emphasized the thriving ecosystem of organizations with a strong interest in and public engagement for CEE. To name just a few, the globally renowned think-tank wiiw, Erste Foundation, IDM, Aussenwirtschaft/ Advantage Austria and the Competence Center for Emerging Markets & CEE at WU are following economic, political and societal developments in the region and have regional expertise.

Andrea Gritsch of Wolf Theiss, a leading law firm in CEE/SEE with 390 lawyers in 13 CEE countries, stressed the strong Austrian banking and financial services industry as an entry point into the region. Wolf Theiss runs its operations as “One Region, One Firm” as this is the way how global investors and clients look at the region. Mihael Belic of Henkel CEE told the audience about the changes that the regional HQ in Vienna underwent in the last 20 years. The physical location lost in importance and was partly replaced by virtual and project-based coordination forms. Regional management has become a more fluid concept with no fixed place and fixed responsibilities. Both panelists pointed at the importance of talents for their businesses and the quality improvements that happened in the tertiary education in those countries. Fast adoption of innovation and digitalization will help Vienna and Austria to be able to compete in this fast-changing business landscape. Christian Frey of the Vienna Business Agency referred to the active role of his organization in strengthening and promoting Vienna as a business location. Supporting ventures that advance innovation and sustainability are on top of the agenda.

Session 3: Outlook on the Western Balkans

The Western Balkan countries show higher growth rates than the Central European countries and lower labor costs. Furthermore, the closeness to core European markets make them attractive for foreign investors. However, poor infrastructure, political instability, and weak institutions are preventing many foreign companies from engaging in these markets. Moderator Gerd Bommer of Advantage Austria led the discussion on the panel from local politics in Bosnia-Herzegovina, chances of joining EU in the near future to nearshoring opportunities and potential growth sectors. Rainer Schnabl of Raiffeisen Bank BIH talked about the rationality of politicians in BiH. He highlighted that they are fully aware that they have to act to bring their country forward. It is important to look behind the emotions to come to good solutions. With their politics they are losing masses of young and skilled people emigrating to the West as well as financial resources as funds go to the Ukraine.

Branimir Jovanovic of wiiw stressed the still lower labor costs as location advantage but doubted that the EUR 900/month in the official statistics are realistic as well as the high unemployment rate in BiH. Foreign investors complain how difficult it is to fill vacancies. Workers from the Philippines, Indonesia and India are a common sight in the region. Jürgen Schreder of Advantage Austria Belgrade pointed at the high Chinese investments in Serbia and that Western construction firms abstain from participating in public tenders of infrastructure projects as these projects all go to Chinese due to state subsidized lower prizes (and partly Turkish firms). Lisa Rilasciati of the Austrian Federal Economic Chamber confirmed the slow progress in the enlargement process and the various well-known difficulties. While there are many enlargement enthusiasts in the EU Commission, many of the EU member states show an “enlargement fatigue” what slows down progress.

Probably the wise saying of Rainer Schnabl with regard to changes in BiH also fits the EU enlargement: “When there is a political will, then it can go superfast.” There is no better summary of the discussion at the 15. Grow East Congress.

Congress Organizers

The Grow East Congress is a project initiated and organized by Dr. Arnold Schuh, former Director of the Competence Center for Emerging Markets & CEE at WU Vienna, and Dr. Manfred Berger, Partner of ICONIC Consulting & the Founder of Neusicht Think Tank. The Aussenwirtschaft Austria/Advantage Austria, the international arm of the WKO (Austrian Federal Economic Chamber), is the main Congress partner.

Contact:

Dr. Arnold Schuh

Senior Advisor and Lecturer

Competence Center for Emerging Markets & CEE

WU Wien

Welthandelsplatz 1, A-1020 Vienna, Austria

M: +43 699 11 86 92 05

arnold.schuh@wu.ac.at

Dr. Manfred F. Berger

IQONIC Consulting

Fischerstiege 10/15

A-1010 Vienna, Austria

T +43-1-513 37 98-13 and Mobile +43 664 393 21 73

office@berger-m.at