Emerging European Economies after the Pandemic

This chapter focuses on the main macroeconomic developments in the Emerging European Economies (EEE) group leading up to and during the Covid-19 pandemic, and also on the longer-term outlook after the crisis. The emphasis is on economic convergence and crisis resilience, with a comparison of economic and social indicators during the current pandemic and the previous large economic shock, the global financial crisis of 2008-2012. The goal here is to set the stage for the more detailed analyses of subsequent chapters, and provide a context in which those details can be interpreted. Our main message is that while the EEE overall have exhibited significant convergence to the more advanced European Union (EU) member states, gaps remain, especially when we look at various social indicators. Crisis resilience also improved after the global financial crisis, so there is hope that the EEE will emerge faster and stronger from the current crisis than it did from the previous one. To complete the convergence process, to reap the benefits of a potential relocation of global value chains to Europe, and to avoid persistent negative consequences of the economic shocks, it is important to boost productivity, increase innovation, and invest in human capital.

This chapter provides an overview of the financial markets in the Emerging European Economies. The financial systems of these countries are less deep and less advanced than those of the more developed countries of the European Union. Generally, the lag is more substantial in capital markets. Nevertheless, due to the significant foreign ownership of all eight countries’ financial sectors, they are highly integrated into the EU’s financial markets. As the activity of financial market participants seriously contributed to the Global Financial Crisis (GFC), and several financial institutions failed during this period, after the crisis, the approach to and the tools of banking and capital markets regulation, as well as the business practice of financial institutions changed significantly. The capital base and the funding structure of banks became significantly more robust. However, the process of re-regulation and the strengthening of the financial system had not yet been fully completed when the Covid-induced financial crisis hit the financial system. On the one hand, this means that the banking system was not fully equipped with all the necessary tools to be able to absorb shocks. On the other hand, the Covid-related crisis management, which included the widespread use of the loan repayment moratorium, regulatory forbearance, direct state grants to non-financial companies and private persons, and monetary easing, significantly relieved the banks’ burdens and contributed to the fast recovery of capital markets. The chapter analyses the post-GFC structural changes to financial intermediation in the EEE, and the main regulatory changes, risks, and vulnerabilities of the financial systems of the region in two periods: between the GFC and Covid, and during the Covid pandemic.We find that besides similarities, country specific factors play a major role, that is, the EEE do not constitute a homogenous region from the point of view of financial markets.

The Covid-19 pandemic and the resulting economic crisis have led to structural rearrangements in the business sector. Most companies were hit by the pandemic, but some earned new opportunities, mainly firms which were able to use digital techniques, directly or indirectly, and remote working. In the first part of the chapter,we analyze the size distribution of firms in theEEEcompared to other regions of the EU and its implications for average labor productivity. Our main message is that not only is the EEE characterized by a lower average firm size and lower labor productivity than the EU average, but the differences in productivity between small and large firms are also much more substantial than in more advanced EU members. SMEs were more vulnerable to the damage caused by the Covid crisis, but this is unlikely to significantly change the firm size distribution in EEE. In response to the Covid-19 pandemic, the European Commission has announced a large-scale support program to help Member States mitigate the economic downturn and other economic and social damage. Our results highlight the importance of monitoring the use of this support program, preventing misuse, irregular activities, and mitigating corruption risk, especially in the EEE where the quality of state institutions is relatively poor, and the rule of law is weaker. The use of EU subsidies and the risks of corruption in the EEE need to be examined vigorously because there is a greater chance that EU subsidies will increase corruption and weaken market competition.

This chapter covers labour market developments in the eight members of the Emerging European Economies (EEE) in Central and Eastern Europe from the financial crisis in 2008-2009 up to the pandemic in 2020. The emphasis is on the relevance of various structural characteristics (demography including gender and age aspects, labour migration, skills and sectoral employment structures, regional patterns, wage growth, income adequacy, etc.) which shaped how the economies were affected by the two crises.

After the fall of communism, the Emerging European Economies inherited a transport sector characterised by low car ownership rates, heavy reliance on public transport, and a sparse infrastructure network. This chapter presents a systematic review of the evolution of transport policy through the region’s EU accession, the 2008 financial crisis, and the Covid-19 pandemic. The transport sector is one of the major recipients of EU funding in the region’s economies, but we observe that the objectives of territorial cohesion are not fully met due to inefficiencies in transport project appraisal and ex-post monitoring. This chapter puts an emphasis on emerging transport technologies, such as electrification, automation, and micromobility, alongside discussing the prevalence of online forms of activity participation. We argue that the density of public transport provision, the changes in spatio-temporal travel patterns during the pandemic, and the time lag in the adoption of travel habits, such as online shopping, offer an opportunity to leapfrog the challenges that are already visible in Western European cities. Towards this end, we present a number of policy recommendations aimed at the transport sector.

The chapter provides an overview of the conduct of monetary, macroprudential, and fiscal policies in the Emerging European Economies since the Global Financial Crisis, including the policy response to Covid-19 and the post-pandemic challenges. We show that changes in the institutional frameworks both at the regional and national level led to a significant expansion of the instruments available for policymakers, as well as enhanced fiscal frameworks and resilience in the financial sector. At the same time, monetary policy was constrained by several factors, including the global financial cycle, the long-term decline in interest rates, and the globalization of inflation. The large policy accommodation in response to Covid-19, including through the use of unconventional tools, helped mitigate the economic damage. The post-pandemic challenges, however, are significant, given the limited policy space, some structural factors affecting inflation and interest rates, as well as potential threats to independent institutions.

This chapter focuses on two United Nations Sustainable Development Goals to measure the impact of Covid 19 on the sustainability efforts in the Emerging European Economies (EEE). These goals are: SDG7 Affordable and Clean Energy, and SDG13 ClimateAction. Analyzing indices connected to both SDG7 and SDG13 a demonstrable perpetual weakness in energy and climate issues is being addressed. The results of our analysis show that the EEE were failing to improve their SDG7 and SDG13 in 2019. By 2020, Covid pushed the region further behind. Covid had a moderate negative impact on SDG7, but in the case of SDG13 the consequences are more uncertain. The European Union has set a 2050 target of carbon neutrality regarding the long-term goals, which means net zero emissions of greenhouse gases by this date. Based on historical trends, these targets will be missed unless new policies are implemented. Final energy consumption (TOE per capita) was higher in 2019 than in the prescribed 2020 targets adopted in 2012 (Eurostat, 2021). The failure to improve – that is to reduce energy consumption – demonstrates the overall lack of progress in decoupling economic growth from energy consumption. This chapter makes three key policy recommendations: 1) ’Creative carbon accounting’ cannot be a means to make the EEE ’succeed’ in their SDGs; 2) Economic growth must be decoupled from energy consumption; and 3) National and regional economic recovery plans must prioritize energy efficiency improvements (including for the poorest households), and renewable energy sources need to be framed in terms of resiliency for the environment and society.

This chapter provides evidence that population health in the Emerging European Economies (EEE) lagged behind the EU average before the start of the Covid-19 pandemic. We then assess the direct health impacts of the pandemic in the EEE and how they differed from other European countries. We also offer early evidence on Covid-19 vaccination rates in the EEE.We analyse the policy responses of governments to mitigate the consequences of the Covid-19 shock and discuss the pandemic’s indirect impacts on health and social security. Finally, we draw conclusions for health policy.

This chapter studies the impact of the Covid-19 pandemic on aging and pension systems within the Emerging European Economies (EEE). In the first part, it presents stylized facts from recent decades. The most important findings are that (1) the total fertility rate in the EEE is around 1.5 and is only slowly increasing; (2) life expectancies at 65 differ within the EEE and still lag with respect to older EU members; and (3) a mandatory private pillar was established between 1998-2010 in most members of the EEE, but from 2011 they were cut back and sometimes eliminated.

In the second part, we study the impact of the Covid-19 pandemic on pension systems. This can be important as changes in the age structure of the population strongly influence economic developments, as well as modern pension systems. We find that the per capita number of victims varies in the EEE between very high and average, which leads to a temporary drop in life expectancy and GDP. However, as the increase in mortality is likely to be temporary, the financial impact of the pandemic on pension systems in the EEE is quantitatively small. Nevertheless, it might still lead to important pension-related policy changes.

This chapter presents evidence that already before the pandemic, therewere large differences between members of the Emerging European Economies (EEE) in the effectiveness of their public education, and accordingly, their stock of human capital. While in the majority of the EEE, in terms of expected years of schooling, young people get the same or even more public education than the EU15 average, the quality measures of public education are very variable in these countries. In most of the EEE, the level of basic skills of young people is below that in more advanced economies. There is growing evidence that the inability of middle-income countries to improve the quality of public education is an important factor in the emergence and persistence of the middle-income trap. The education systems, although of very different quality in the EEE, were equally severely affected by the pandemic during the last two academic years (the second half of 2019-2020 and 2020-2021). Schools were closed, and on average, only one-fifth of schooling took place under ‘normal’ conditions in the EEE. This has resulted in large learning losses, the extent of which this chapter examines via published statistics and the authors’ own estimates and calculations. On this basis, the claim is made that not only did the pandemic heighten pre-existing disparities, but it also exposed the EEE with previously successful public education policies to the risk that their former advantage could disappear if they fail to offset the effects of the pandemic. This, in turn, has the potential to contribute to these countries falling into a middle-income trap. This, however, can be avoided through appropriate educational policy responses, to which the chapter also offers some suggestions.

This chapter argues that the way out of the middle-income trap in which the Emerging European Economies (EEE) seem to be stuck is through R&D and innovation with the support of a competitive, high quality, and research intensive higher education sector. Using detailed and extensive data analysis, we show how far they lag behind the more advanced EU countries in these areas, and as contrast, how this creates significant opportunities for economic growth and structural changes that could help these economies and societies navigate out of the trap. We also provide some very specific policy recommendations.

The chapter summarizes recent trends in inequality in the Emerging European Economies (EEE) since the Great Financial Crisis (GFC) of 2008-2009 and analyses potential effects of the Covid crisis on income distribution in these societies. Inequality paths diverged between 2009 and 2019: while disposable income inequality markedly increased in Bulgaria and, to a lesser extent, in Hungary, in Poland the Gini index declined, and in other countries income inequality remained stable. The relative at-risk-of-poverty rate showed fluctuations in 2009-2019, while absolute poverty – measured by the indicator of severe material deprivation – declined, mirroring economic growth and the general convergence process of the EEE. The second part of the chapter describes the inequality impacts of the Covid crisis. As data on the income distribution of the relevant years (2020, 2021) are not yet available, analyses of inequality simulate impacts using various methods. Studies that focus on the inequality of disposable income consider both labour market effects of lockdowns and the effect of various policy measures (including the usual measures and new policies such as wage compensation schemes). Studies based on actual employment changes during the first wave of the pandemic have found that among the EEE, Bulgaria and Hungary showed increases in the at-risk-of-poverty rate higher than the EU average. The chapter also warns that the success in building prosperous and inclusive societies largely depends on the portfolio of institutions, values, and behaviours. Full-fledged effects of the Covid crisis will depend on the way policies are changed both in labour markets and in the health sectors.