On 1st of May 2004, 10 countries from the former communist block joined the European Union, a phenomenon known as the Big Bang.
It was the first wave of the EU enlargement towards Central and Eastern Europe (CEE), a process also determined by several economic rationales:
- competition among the main economic blocks of the world in the aftermath of the fall of the Berlin Wall, including access to the markets of the former communist states with huge potential for growth and development after their transition to the market economy;
- structural challenges companies in Western Europe faced at the beginning of the 1990s, including the pressure in terms of margins;
- demographic changes in Western Europe.
The enlargement of the European Union allowed companies from Western Europe to implement significant investment plans with high margins in CEE countries and attract an active labor force with low costs from these states.
The investment flows of the Western European companies and the implementation of EU funds (the multiannual financial frameworks) contributed to the significant increase of the net capital stock in former communist countries.
From 2003-2023 the net capital stock showed significant annual growth: 4.1% in Poland, 2.2% in Czechia, 3.0% in Hungary, 2.7% in Slovakia, 4.7% in Lithuania, 2.1% in Latvia, 1.3% in Slovenia, 5.2% in Estonia, 3.5% in Cyprus and 4.0% in Malta, above the level in Euroland (1.2%), according to the figures released by AMECO.
The strong increase of the investments in CEE countries had a positive impact for the multifactor productivity, contributing to the improvement of the potential output growth pace.
For instance, the figures of AMECO indicate an increase of the marginal efficiency of capital during 2004-2023.
Overall, the entry into the European Union supported the economic convergence of the countries in Central and Eastern Europe towards the development levels in the Western Europe states over the past decades.
Between 2003 and 2023 the GDP/capita (at purchasing power standards) (expressed as a percentage of the EU average) rose significantly, as reflected by the following chart.
Figure 1. GDP/capita at purchasing power standards (% of EU average)
Source: Eurostat, 2024
I underline the fact that the European economic convergence process is not a one-way highway, as reflected by the dynamics in several CEE countries (including Czechia, Slovakia, and Slovenia) following the outbreak of the global crises (the Great Financial Crisis, the coronavirus pandemic, and the intensification of the geo-political tensions – all shocks with symmetric impact, but asymmetric consequences for the countries across the world and in Europe).
Furthermore, I emphasize the fact that the speed of the European economic convergence diminished across CEE countries during the post-pandemic period.
Last, but not least, the economic distance between CEE countries and states in Western Europe remains large, as confirmed by the level of wages and digitalization indicators.
For instance, in 2023 the average hourly wage in all CEE states stood well below the EU average, while in Poland, Hungary, and Letonia it represented less than half the EU average.
At the same time, the CEE countries are in the second half of the EU in terms of the Digital Economy and Society Index (DESI), according to the European Commission statistics.
The EU membership supported the strong convergence of the CEE countries towards Western Europe levels, but with significant differences among these economies.
On the other hand, the speed of the convergence process has deteriorated in recent years, while the economic distance between Eastern and Western Europe remains high in the mid-term, with risks of widening, unless the structural reforms are accelerated in order to incorporate the Digital Revolution, the AI Revolution and to improve the regional economic convergence.
Andrei Radulescu is a macroeconomist with post-university studies and professional experience in Portugal and Romania. He is also a Senior Researcher at the Institute for World Economy and Macro-Modeling Centre at the Romanian Academy. Radulescu joined the Bretton Woods Committee in 2023.