Sustainable and equitable convergence and integration in Central, Eastern and Southeastern Europe

The transformation of Central, Eastern and Southeastern European (CESEE) economies from centrally planned toward open market economies has been inherently linked with their Integration into the European Union. The widely held desire to join the EU was a major Driver of economic reform. Such reforms not only improved the efficiency of resource allocation but also made EU membership a plausible outcome, which in turn attracted FDI and accelerated integration. EU accession crowned this process and unleashed historically unprecedented private and public capital flows. The positive climate that such rapid growth and convergence created temporarily masked the deep-seated problems that weak institutions and slow social learning had created, while the excessive capital inflow led to resource misallocation in the economy. The financial and economic crisis that hit the CESEE region in 2008 thus revealed deeply rooted problems, which these countries now need to face during their journey toward the frontier of development. Reform reversals have become widespread, in some cases touching the very foundations of a modern market economy. This article argues that the speed, sustainability and equity of future convergence in the region will crucially depend on renewed reform efforts. Reforms will also allow these countries to fully benefit from the continued deepening of European integration, further accelerating convergence.