News & Analysis

European Commission: Growth to continue, but challenges remain

Dubrovnik Croatia emerging europe

The European economy is expected to grow for the seventh consecutive year in 2019, with expansion forecast in every member state. Employment is at a record high and unemployment at a record low. Public finances have also improved across the board, although some countries are still facing high levels of debt.

These are the main findings from the annual assessment of the economic and social situation in all member states by the European Commission.

However, challenges remain. All over the region the shrinking population, notably of people of working age, remains a major bottleneck to growth.

“Demographic change and new technologies are reshaping the labour market, while skills shortages are on the rise in many member states. We need to shift up a gear,” said Marianne Thyssen, commissioner for employment, social affairs, skills and labour mobility. “Investing in people’s skills, especially lifting the skill levels of the low-skilled, must be our top priority if we are to maintain our living standards.”

Lithuania’s population has fallen by nearly 25 per cent since the early 1990s, due to high emigration and adverse demographic trends, while Latvia’s population is projected to shrink on average by nearly one per cent annually over the next 20 years. This will mean that the ratio of non-working population to working population is set to increase at a faster pace than before, which puts an increasing burden on pension policy.

Regional disparities are also high, leading to stark differences in overall prosperity, quality of social infrastructure and public services. The relatively well-developed capitals stand in contrast to weak regional centres and a large number of very small settlements, which struggle with degrading infrastructure and depopulation. In Hungary recent policy initiatives aim to strengthen larger cities and improve quality of living in villages, but a more holistic approach to territorial development is needed. The Tallinn area enjoys income levels close to the EU average. But its economic performance is characterised by higher wages, better employment opportunities and higher productivity than other Estonian regions, which are marked by a dwindling population, higher poverty rates and increased pressure on public services like healthcare and education.

Bulgaria, Croatia and Romania are all experiencing economic imbalances. Steps have been taken to strengthen the stability of the Bulgarian financial sector, as banks and other financial corporations have made further progress in implementing reform, although fragilities linked to weak governance, asset quality and supervision remain, while new challenges are emerging in the insurance sector. Although Croatia’s vulnerabilities have been narrowing over the past few years, remaining challenges are linked to high levels of public, private and external debt in a context of low potential growth. Finally, in Romania vulnerabilities are linked to cost competitiveness losses and a widening current account deficit in a context of an expansionary fiscal policy and an unpredictable business environment.

“Maintaining momentum into the future will require a high level of competitiveness, as well as continued upward convergence”, commented European Commission Vice President Valdis Dombrovskis. “To unlock the full growth potential of our economies, we need structural reforms. We also need well-targeted investment to bolster productivity growth across Europe.”

Finally, focusing investments on human capital, innovation, using resources more efficiently and improving transport connections are key to boosting productivity growth. For example, Croatia’s low level of capital investment affects growth potential. The quality of service and connectivity of the transport infrastructure, in particular railways, are underdeveloped. Improving energy efficiency, water management and facilitating the transition to a circular economy also require infrastructure investment. Investment in public and private R&D and digitalisation would help to support the economy’s capacity to innovate, if acting in synergy with investment in the education system to improve people’s skills.

In Estonia, a significant proportion of companies operate in medium and low-technology sectors. Low investment in research and development partly explains why productivity has been lagging behind. More targeted investment in research and economy wide innovation would increase productivity and competitiveness. A stronger connection between the public research system and the private sector will also help the economy grow. Digitalisation and automation could support the competitiveness of small and medium-sized firms in the medium term but require specific skills. Modernising the insolvency framework can also help unlock Estonia’s business potential.