INTERVIEW - SEE well positioned on new supply chains – EBRD chief economist

“Firms seem to be interested in a ‘China plus one’, or ‘China plus many’ strategy, and the Eastern European EU member states are the obvious place to consider as locations for manufacturing activity,” Javorcik told SeeNews on the sidelines of the bank’s annual meeting in Yerevan, Armenia, last week.

“The catch here is that the price of carbon emissions under the EU trading scheme will go up by design. Access to renewable energy is a new determinant of competitiveness, i.e. what you need to attract FDI,” she added.

“What is good is that while before new EU members were quite sceptical of the green agenda, the mindset has changed, in different countries for different reasons - in some countries it is because of the war and energy security. That positions this part of the world well for catching some of the benefits of changes in the supply chains,” Javorcik noted.

“The catch here is that the price of carbon emissions under the EU trading scheme will go up by design. Access to renewable energy is a new determinant of competitiveness, i.e. what you need to attract FDI,” she added.

“What is good is that while before new EU members were quite sceptical of the green agenda, the mindset has changed, in different countries for different reasons - in some countries it is because of the war and energy security. That positions this part of the world well for catching some of the benefits of changes in the supply chains,” Javorcik noted.

The EBRD chief economist quoted recent OECD data which showed that Indian ICT exports are more than twice CO2 emissions intensive than ICT exports from emerging Europe. “This is an opportunity for Eastern Europe and other parts of emerging Europe to export more services."

Countries in emerging Europe have increased their ICT exports over the past few years, and are shifting their attention to services.

“Last year we did this survey of investment promotion agencies asking them about the sectors they target in their desire to attract FDI. What you see is that Eastern European EU member states are more interested in services than in manufacturing. They are interested in software, in ICT in general, R&D, biotech and back-office services. Services are a promising area because of increased attention to carbon footprint,” Javorcik explained.

On the other hand, economies in the Western Balkans have been increasingly trying to attract FDI by maintaining close trade ties with non-EU blocs.

“The question is how long you can pursue a multi-vector policy,” Javorcik stressed. If the world would break into two blocs, everybody would lose and countries having connections with economies in the two blocs would lose the most because they would be forced to choose, she noted.

In its latest Economic Prospects report, the EBRD projects that GDP growth in the Western Balkans region is expected to reach 3.3% in 2024 and 3.7% in 2025.

"For the Western Balkans, the best scenario is joining the EU because gravity matters, you want to be part of the large rich market nearby," Javorcik commented, adding that reforms of the institutions is what these countries desperately need.

In the EBRD's region of Southeastern EU, which comprises the economies of Bulgaria, Greece and Romania, growth will pick up to 2.8% in 2024, from 2% recorded last year, backed by accommodative fiscal policies and strong real wage growth, according to the EBRD report. In 2025, the region's economic growth is projected to accelerate to 3.1%.

“The war continues to cast a shadow over Europe. The price of natural gas in Europe, even though it dropped dramatically, is still four times as high as in the U.S. and this is eroding European competitiveness. Continued weakness of German economy will translate into lower demand for exports from emerging Europe and that can affect growth," Javorcik said. She also pointed to increased cost of borrowing as a fallout of the Ukraine war.

"At the moment Bulgaria and Romania are in a comfortable situation in the sense that they have access to EU funding. But the question is how much of the available funding they will be able to absorb, given the deadline. However, that is an opportunity because governments should use this funding to build foundations for future growth."

For Bulgaria and Romania, the first years after their accession to the EU in 2007 were a time of easy growth, of massive import of investment and technology – not just licences, but technology embodied in capital goods, parts and components, and managerial practices, Javorcik said.

Apart from funding, the EU accession gave direction and impetus for reforms and access to large and rich nearby markets.

“Gravity matters in international trade. You trade more with countries nearby. Trade with rich countries stimulates moving up the value chain because rich countries want higher quality goods, and firms respond with additional investment and product upgrading.”

“Now these countries have to grow through their own innovation, through productivity growth. That means that growth is becoming harder. There is no magic bullet there,” Javorcik stressed.

Political and macroeconomic stability is essential to maintaining growth, she went on to say.

“Bulgaria’s prospects of joining the euro augur well, you want good institutions and a predictable environment for entrepreneurs, as well as ability to absorb the EU funding that is available. All of these factors matter, none of them is going to make the growth rate skyrocket tomorrow, but each of them helps and they all mater in combination,” she concluded.