Eastern members of the European Union are expected to grow almost twice as fast as the euro area over the next two years, even as their long-standing export-led economic model comes under strain and geopolitical risks cloud the outlook, a new forecast by the Vienna Institute for International Economic Studies (wiiw) showed.

The 10 EU countries of Central and Eastern Europe covered by the report are forecast to expand by an average 2.6% in 2026 and 2.7% in 2027, compared with euro zone growth of 1.4% and 1.5% respectively, wiiw said in its winter outlook for 23 economies across Central, East and Southeast Europe released on February 4.

Despite the stronger headline numbers, the institute warned that the region is entering a period of structural change, as rising labour costs and weaker competitiveness erode the foundations of a growth model built around low-cost manufacturing for Western European firms.

“In view of the acute loss of competitiveness in Central Eastern Europe’s export-oriented industry due to a steep rise in unit labour costs, the previous model of success as an extended workbench for Western corporations is increasingly undermined,” said Richard Grieveson, wiiw’s deputy director and lead author of the report. “Investment in greater productivity is therefore urgently needed.”

Consumption gives way to investment

In recent years, growth in the eastern EU states has been driven mainly by household spending, underpinned by rapid real wage growth. That engine is now stalling.

“The main driver of growth there has been private consumption as a result of strong real wage increases. This is losing momentum, with private and public investment gaining in importance,” Grieveson said.

The shift comes as industry in Germany – the region’s largest trading partner – remains weak, while budget deficits and long-standing structural problems weigh on growth in several countries, including Hungary, Poland, Romania and Slovakia.

Poland is set to remain the region’s fastest-growing large economy, with growth of 3.7% in 2026 and 3.2% in 2027, followed by Lithuania at 3.0% in 2026 and Croatia at 2.8%.

Hungary, where a closely watched parliamentary election is due in April, is forecast to rebound after stagnating last year, growing 2.2% in 2026 and 2.5% in 2027.

Outside the EU, the six Western Balkan economies are expected to grow by 3.1% in 2026 and 3.5% in 2027, although Serbia’s outlook was revised down due to months of protests. Turkey is forecast to expand by 3.9% this year and 4.4% next year.

The region has benefited from a surge in defence spending by Nato members since Russia’s invasion of Ukraine, but wiiw said this alone would not transform growth prospects unless more of that spending stayed at home.

“Significant growth momentum can only be expected if a larger proportion than before is invested in the procurement of weapons and equipment, and if these goods are also produced locally, rather than being imported from the United States and other third countries, such as South Korea,” Grieveson said.

Downside risks 

wiiw flagged several major downside risks, starting with renewed trade disruption linked to US President Donald Trump.

“Although direct trade flows between the US and Central Eastern Europe are negligible, lower US demand for European industrial products due to further tariffs on imports from the EU could indirectly drag the region down, as it is closely intertwined with Western European industry,” Grieveson said.

High public deficits in parts of the region could also force governments into austerity if bond markets turn volatile. Romania is already tightening fiscal policy, the institute noted.

Another risk is the possibility of a peace settlement in Ukraine that favours Russia.

“The lack of credible security guarantees for Ukraine is likely to deter investors and lead to considerable uncertainty, as Moscow can be expected to destabilise the entire region in this event,” Grieveson warned.

Ukraine’s outlook continues to deteriorate, with growth now forecast at 2.5% in 2026, down 0.5 percentage points from wiiw’s autumn forecast.

Russian missile and drone attacks on energy infrastructure have caused widespread power outages, while labour shortages driven by emigration and military mobilisation are hitting production.

wiiw assumes the war will continue until 2028, though it says a political solution remains possible.

“Economic recovery and reconstruction will depend entirely on whether the West provides Ukraine with credible security guarantees,” said Olga Pindyuk, a Ukraine expert at wiiw. “If the security guarantees are watertight, that could lead to an economic boom throughout the region. Otherwise, foreign investors will probably think twice about investing in Ukraine.”

Even with a peace deal favourable to Kyiv, recovery is likely to be slow. wiiw said historical evidence shows that rapid post-war rebounds are rare unless countries had strong growth and stable institutions before the conflict, suffered limited wartime damage and avoided renewed fighting.

“Unfortunately, Ukraine does not fare particularly well on any of these points,” Pindyuk said. “This makes credible security guarantees, a meaningful prospect of EU membership and massive financial support for the country’s reconstruction all the more important.”

Russia, meanwhile, is expected to remain close to stagnation, with growth of 1.2% this year and 1.5% next year, held back by tight monetary policy, weak investment and low oil prices.

“The main reason for Russia’s current economic slump is the Central Bank’s restrictive monetary policy,” said Vasily Astrov, a Russia expert at wiiw. “With interest rates currently as high as 16%, borrowing has become expensive, which in turn is stifling economic activity.”

Astrov added that low investment would likely damage Russia’s long-term growth potential. Although a future easing of sanctions could help, particularly by restoring access to Western technology, wiiw’s baseline forecast assumes the war continues and sanctions remain in place.