Central and Eastern European Economies Run Into Trouble

In recent years, Central European countries with diversified economies and close ties with the broader European economy have performed quite well, recording some of the highest rates of economic growth outside of Asia prior to the Covid-19 pandemic.

In contrast, Russia and other East European countries that remain largely isolated from the global economy and who have failed to diversify and modernize their economies have struggled to generate much growth in recent years.

In the second quarter of this year, both Central and East European economies suffered major losses as a result of the Covid-19 pandemic, even as many countries in this region did not suffer as high of a number of cases of the virus as most of their counterparts in West Europe.

One reason for this was that most governments in Central and East Europe aggressively enacted lockdown measures aimed at preventing the pandemic from spreading across that region. However, these measures also resulted in major declines in domestic spending in this region.

Another reason for this poor performance was that demand in West Europe for manufactured goods produced in Central Europe collapsed in the second quarter as no region in the world suffered greater economic losses during that period than West Europe.

Issue to Watch

Potential Long-Term Gains: In the wake of the Financial Crisis in 2008 and 2009, many manufacturers took the opportunity to scale back operations in expensive West European locations and moved more manufacturing operations to Central and East Europe in the following years.

Looking Ahead

The Need for Healthy Export Markets: There are a number worrying signs for Central and East Europe, including rising numbers of cases of Covid-19 in some areas of the region and the threat of a very uneven recovery in many of the region’s key export markets in West Europe.