Greening Eastern Europe’s growth engines

Soňa Muzikárová May 11, 2023 09:33

Over the past three years, a series of overlapping crises has exposed the structural weaknesses in Central and Eastern European (CEE) economies. Coming on the back of rising labor costs and declining productivity growth, one setback after another – an unprecedented pandemic, supply-chain shocks, a brutal war raging next door, extreme weather events, and an energy crunch – pummeled the region. With such unrelenting pressure making it almost impossible to regroup or plan for the long term, CEE economies have struggled to retool for a rapidly changing world.

The stakes of inaction could not be higher – as demonstrated by last summer’s record-high temperatures. The extreme heatwaves severely reduced supplies of potable water in some parts of Slovakia, a country known for abundant freshwater resources. The resulting drought was among the worst in several centuries, destroying more than 500,000 hectares of crops in Hungary, at an estimated cost of more than €1 billion ($1.1 billion). Poland has suffered several years of drought, which, coupled with Russia’s war in Ukraine, has driven up food prices. Rising temperatures have also contributed to an increased risk of wildfires and other climate risks in Bulgaria and across the Balkan peninsula.

Yet even though global warming has resulted in sizable economic losses, the region has been fertile ground for climate skepticism, with political elites often downplaying risks or dragging their feet on meeting European Union policy targets. Polish President Andrzej Duda has been a vocal critic of the bloc’s climate legislation. Former Czech President Miloš Zeman expressed the belief that the fight against climate change was “exaggerated” and that climate action had morphed into a “religion.” He also advocated withdrawing from the European Green Deal.

The energy crisis triggered by the Ukraine war has, at long last, presented an opportunity for the region to wean itself off Russian natural gas and embrace renewables. To be sure, it prompted a quantum leap in supply diversification and energy-demand reduction. But implementing a long-term decarbonization strategy took a backseat to keeping households heated and industry humming.

One could even argue that the war caused climate backsliding: high natural-gas prices led to a significant increase in dependence on coal – the “dirtiest” fossil fuel by far. Ultimately, however, the region – led by the Czech Republic, Slovakia, and Hungary – resorted to nuclear power, the preferred source of clean energy for many CEE countries, though detractors raise concerns about radioactive waste and the industry’s overall safety record.

The region has a large auto industry and heavy manufacturing sector; both are carbon-intensive and difficult to electrify, making large-scale industrial decarbonization in the next decade an uphill battle. Nuclear is a familiar fallback, and the deployment of renewables has been lackluster, hovering below the EU average, which also reflects widespread climate skepticism and distrust of green policies, which CEE residents tend to view as a threat to their livelihoods, rather than as job creators.

But mass electric-vehicle (EV) use now appears inevitable, and the region is unprepared, having squandered years of low interest rates and cheap money that it could have used to fund the transition. Germany’s last-minute change of heart on the EU’s previously agreed decision to ban sales of new cars with internal combustion engines by 2035 reflects the political difficulty of implementing structural economic change.

The auto industry in Slovakia, which produces the world’s most cars per capita, illustrates how the region remains on the back foot. In 2022, only about 15% of vehicles produced in the country were EVs, leaving a lot of ground to cover in the next decade. To complete the shift away from internal combustion models, legacy automakers will need to overhaul entire assembly processes and supply chains; securing adequate supplies of batteries will be especially challenging. Countries can delay the inevitable by attracting new greenfield investments, as Slovakia did recently with German carmaker Porsche. Nonetheless, a massive shift in the next decade will be necessary to retain market share.

As CEE autoworkers correctly suspect, EVs will reduce the number of assembly jobs, all else being equal, because they require fewer parts. But the net effect will not be tragic, because job creation from new investments will offset some of the losses. Making up the rest will simply require upskilling, especially given the region’s longstanding labor-market tightness. In fact, the transition to EV production could lead to higher-quality jobs that are more intellectually engaging and better remunerated than assembly-line work.

In terms of scale and scope, the economic restructuring needed in Central and Eastern Europe is second only to the post-communist transition three decades ago. Russia’s invasion of Ukraine has forced the EU’s eastern flank to channel resources to more immediate concerns like beefing up defense capabilities, helping millions of refugees, and blunting the impact of sky-high inflation. But the region must not lose sight of the future – and the work that must be done to ensure that it is a prosperous one.

Copyright: Project Syndicate
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Soňa Muzikárová

A former economist at the European Central Bank and diplomat at the OECD, the writer is Senior Adviser to the Deputy Minister of Foreign Affairs of the Slovak Republic.