Strategic investment in CEE critical for the region and for Europe as a whole

Consumers in Central & Eastern Europe (CEE) struggled to afford traditional holiday festivities as the cost-of-living crisis bites hard. Prices of basic commodities, including food and energy, are soaring—in Hungary, for example, 2022 food prices were a staggering 45 per cent higher than the previous year—as inflation in eastern European countries drastically outpaces their Western counterparts.

Indeed, the figures are stark. While on average, EU inflation is barely in the double digits, it’s climbed to 20% or more in some CEE countries, exacerbating existing east-west divides within the EU. Investing smartly in Central & Eastern Europe will not only help close these gaps but represents a remarkable opportunity to accelerate the entire bloc’s development and economic growth.

CEE feeling the squeeze, but opportunities for change

After the wave of CEE accessions to the EU, the region initially experienced a steep growth trajectory – both as a result of access to accession funding and the common market, but also due to large foreign direct investment (FDI) inflows. Recent developments including the war in Ukraine, however, have curbed this soaring growth, and today, CEE citizens’ purchasing power is well below that of other EU member states, while per capita GDP in CEE is less than half the EU average–– a situation that is worsening amid the current perma-crisis.

Beyond the short-term unsteadiness, however, CEE presents a remarkable investment opportunity. A new report from global consultancy Bain & Company predicts that private equity in the region is about to undergo a period of impressive growth, despite the ongoing geopolitical turbulence. In fact, with GDP growth in Poland and Romania forecasted at 4.2 per cent and 5.1 per cent, respectively, it’s likely to outperform the euro area, which is expected to show just 2.7 per cent growth.

These predictions are supported by a swathe of recent international investments, notably in the establishment of research and development (R&D) centres and hubs: CEE is now home to more than 6,000 multinational R&D facilities, almost four times the number in 2010. Further, with investments in CEE standing at over €4 billion last year, CEE is the currently fastest-growing venture capital (VC) market in Europe.

CPK and Rail Baltica represent pivotal investments in transport

Certain sectors are already attracting strategic investment. Gaps in transport infrastructure, for example, have stymied the region’s growth for years. Major planned infrastructure projects such as the Centralny Port Komunikacyjny (CPK) transport hub and the Rail Baltica scheme, however, are on the cards to address this longstanding lacuna, netting economic benefits while bolstering the continent’s security.

Centralny Port Komunikacyjny is one of the most ambitious infrastructure projects in Poland’s history and a key component in the region’s broader growth plan, heralding a historic infrastructure reboot in the vital transport sector. Designed to efficiently integrate air, rail, and road transportation, CPK will embed a multimodal transport hub around a central airport supported by a newly modernised and extended (2,000km) rail network providing rapid connections between Warsaw and Poland’s largest cities; additional road connections will make Poland among the best-connected places in Europe. The CPK has undeniable security benefits as well—Ben Hodges, the commander of U.S. ground forces in Europe, called CPK a boon for NATO, noting that “the project will add a capability and capacity that no other node in Poland, or elsewhere in Eastern Europe, can match.”

With similarly lofty ambitions, Rail Baltica’s fully electrified greenfield rail scheme, the largest infrastructure project in the Baltics for a century, is intended to integrate the Baltic States with neighbouring Poland and Finland and beyond to the entire European rail network, creating 870km of lines over its 10-year construction schedule.

Initiatives such as Ventures Thrive try to tap into tech talent

In addition to closing longstanding transport gaps and bolstering the region’s infrastructure, CEE is particularly ripe for more tech investment. In fact, the region is rapidly becoming one of the most important tech ecosystems in Europe and is currently home to four of the top six countries in the world – Slovakia, Poland, Hungary, and Czechia – in terms of quality of software development talent.

Funded by the European Innovation Council (EIC), a new accelerator – the Ventures Thrive initiative – has advanced plans to encourage more CEE deeptech startups, with the carrot of ‘equity-free’ gap stage funding. It’s hoped that the accelerator can help to bridge funding shortfalls faced by young CEE startups, while also addressing their key growth challenges. The accelerator’s partners have €1.5 million budget to spend over the next two years, during which time, it expects to raise a further €18.5 million in equity funds, public funding, and other procurement opportunities.

Keeping pace with the competition

Tech innovation in Europe is essential if the EU is to keep pace with China and the US and establish long-term resilience in a turbulent economic landscape. One report estimates that unless the innovation gap is addressed, the corporate added value of between €2 and 4 trillion a year – equating to 30 to 70 per cent of Europe’s forecasted GDP growth between 2019 and 2040 – could be lost in the next 20 years, depressing wages, investment, and growth across the region.

CEE countries have a wealth of tech talent and untapped potential that could provide an answer to Europe’s longstanding innovation deficit against economic rivals. Renewed investment by private investors, as well as from within the EU itself, could create an environment that not only enables a tech renaissance but would also help boost the quality of life for Europe’s citizens – in the East and the West – for the long term.

All of Europe is facing economic pain as the war in Ukraine drags into its eleventh month and a “toxic mix” of lagging growth and high inflation plagues the bloc, but CEE is particularly feeling the bite this winter. Smart investment in strategic sectors in the region, such as transport and tech, holds the key to a sustainable economic recovery in CEE and beyond.

(Disclaimer: The opinions expressed are the personal views of the author. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)