Economic Growth & Resilience

Abstract

This chapter looks at the overall macroeconomic and social situation of the CEEE at the onset of Russia’s aggression on Ukraine and over the consecutive 18 months. Given its close proximity to the Covid-19 crisis, we interpret these shocks together as a twin crisis and draw parallels with the 2008-12 Global Financial Crisis (GFC). Unlike during the GFC, most of the CEEE seems to have recovered from the first phase (the Covid-19 shock) quickly. Under the surface, one can nevertheless discover important vulnerabilities and imbalances, in energy prices and supply security, the build-up of inflationary pressures and a decreased fiscal space. Though the status of the resilience capacities of the CEEE in early 2022 was still better than before the GFC, it was somewhat weaker than before the Covid-19 shock. Moreover, through their fossil energy imports, the CEEE had a substantial direct exposure to Russia. At the onset of the Ukraine shock, there were widespread fears of catastrophic consequences for industry, households in the winter, and further massive increases in energy prices. Such doomsday scenarios did not materialise, as European countries reacted more flexibly to both the quantity and price shock than anticipated. While in the majority of the CEEE the Ukrainian war lead to either a recession or a slowdown of the recovery from Covid, the recession is fairly shallow and seems to be mostly transitory. Overall, the main consequence of the war seems to be inflation, with a heterogeneous impact on the population. This may increase social pressures further, and coupled with increased societal polarisation, it may jeopardise the green transition. Finally, the war will have important geopolitical repercussions. With stronger geoeconomic and geopolitical competition, globalisation patterns may change, which will surely affect the CEEE that are highly integrated into the world economy.