Demographic decline does not necessarily condemn CESEE EU countries to a low growth future

Labor markets in many EU countries in Central, Eastern and Southeastern Europe (CESEE EU) are increasingly tight, reflecting strong growth, emigration and demographic decline. This Situation will only get worse in the coming years, and represents an increasingly significant challenge to economic growth. Immigration from Ukraine is a partial short-term fix, but not a long-term solution. Significant returns of workers to the region after Brexit seem to be unlikely. For political reasons, large-scale immigration from outside Europe is impossible to imagine. As a result, there is a risk that – faced by persistent labor shortages and higher wage demands – firms will move production away from the region, and that the CESEE EU countries will be condemned to a low growth future. However, this is not inevitable. First, there are big incentives for capital owners to Keep production in CESEE EU countries despite strong wage increases, including proximity to Western markets and the quality of governance, institutions and infrastructure relative to other European or nearby emerging economies. Second, recent rises in productivity, and moves toward automation, indicate a possible long-term solution to demographic challenges.