The economic landscape in Europe, particularly among countries supported by the European Bank for Reconstruction and Development (EBRD), is facing significant challenges, especially in Central Europe and the Baltic states. Recent economic reports suggest that trade tensions, competition from China, and internal fiscal vulnerabilities are weighing heavily on the growth prospects of these nations.
Economic Overview of EBRD Countries
The EBRD’s latest economic outlook indicates a growth uptick from 2.8% in 2024 to 3.3% in the first half of 2025 across the 43 countries in which the bank invests. However, projections for the second half of 2025 suggest a notable downturn in growth, affecting regions like Central Asia, the Southern and Eastern Mediterranean, and Central and South-Eastern Europe. The forecast anticipates overall growth at 3.1% in 2025, with a slight acceleration to 3.3% in 2026, though this represents a downward revision for several countries, particularly those within the EU.
Key Economic Risks Identified
The EBRD identifies multiple risks stifling growth in its member countries:
Trade Tensions: Confrontations in global trade, particularly between the U.S. and China, have resulted in tariffs that squeeze the export capacity of EBRD member countries. Nearly all EU exports to the U.S. are subject to a 15% tariff, creating a short-term boost due to frontloading but risking significant long-term damage.
Competition from China: As China increasingly enters the export markets for goods traditionally produced by EBRD countries, the competition heightens the vulnerability of these economies. China’s expansion into sectors like automotive and technology sectors presents a dual-edged sword: while it signifies market opportunities, it also pressures EBRD countries’ competitive positions.
Fiscal Vulnerabilities: Many EBRD countries are grappling with the debt servicing costs that strain public finances. For instance, Hungary faces costs around 4% of its GDP for debt servicing, while Poland and Romania’s costs exceed 2%. Economic growth in these regions relies heavily on effective management of these fiscal pressures.
- Weak Global Demand: The persistent reduction in global demand is especially apparent in Hungary, where investments have lagged due to frozen European funds and higher financing costs, alongside a considerable contraction in Germany’s manufacturing sector—crucial for Hungarian exports.
Country-Specific Analyses
Countries like Slovenia, Hungary, and Romania have witnessed significant downward revisions in their economic prospects. Slovenia’s growth outlook was slashed by 1.2%, with an expected growth of merely 0.7%. Similarly, Hungary’s forecast was reduced by 1%, projecting only 0.5% growth. These downward adjustments underscore the limitations on growth caused by external demand factors and high tariff impositions.
Conversely, Poland and Lithuania present more promising economic forecasts. Poland’s outlook has improved due to robust infrastructure investment, which includes energy transitions and public works, forecasting a growth rate of 2.5% for 2025. Chief Economist Beata Javorcik points out that larger economies like Poland benefit significantly from diversifying their economic activities, making them less reliant on exports.
Future Prospects for EBRD Regions
Despite the myriad challenges, the EBRD remains cautiously optimistic about growth prospects for the coming years. The regions of Central Europe and the Baltic states are expected to improve slightly, reaching growth rates of 2.4% in 2025 and 2.7% in 2026, driven, in part, by higher infrastructure investment that could mitigate some of the adverse impacts of trade tariffs and weaker external demand.
Strategic Responses to Economic Challenges
To navigate through these turbulent waters, several strategic responses are necessary for countries within the EBRD framework:
Boosting Infrastructure Investment: Increased public investment, particularly in infrastructure, can create jobs and stimulate local economies. Prioritizing projects that enhance energy security, digital infrastructure, and transportation networks can yield substantial long-term benefits.
Leveraging EU Funds: Countries like Romania, which face challenging growth conditions, must fully leverage their EU funds to stimulate their economies. Effective allocation of resources can initiate growth phases and cushion the impacts of external economic shocks.
Diversification of Economic Activities: As shown in Poland’s performance, countries that diversify their economies are better positioned for growth. Investments in industries beyond traditional exports, particularly in technology and services, can bolster resilience.
Defence Spending as an Economic Lever: The discussion surrounding increased defence budgets must be approached with a dual lens—meeting security needs and stimulating economic growth. Allocating defence funds towards infrastructure development and R&D investments can provide economic benefits that ripple through the private sector.
- Navigating Trade Flows and New Markets: EBRD countries must assess the potential in markets where the U.S. aims to reduce reliance on Chinese exports. By identifying sectors where their goods can substitute for Chinese products, these economies can navigate tariff challenges more effectively.
Conclusion
As the EBRD’s member countries grapple with an array of economic challenges, the path ahead requires a concerted effort to pivot towards strategies that foster resilience and adaptability. By prioritizing diversification, infrastructure, strategic investments, and exploring new market opportunities, these countries can bolster their economic prospects and navigate the risks ahead effectively. By leveraging both local strengths and broader trends in global trade, EBRD nations can chart a course toward sustainable growth amid uncertainties.
