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Littleton, Colorado, US — Central Europe’s economies have long been overshadowed by their larger peers in the West, but may be primed for greater prominence ahead given the region’s cost competitive manufacturing base and increasingly clean-burning power systems.

Large industries based in Germany, by far Europe’s largest manufacturer, have been slammed by high power costs and energy use restrictions since Russia's invasion of Ukraine in 2022 severed natural gas flows and sent energy costs surging.

Power prices have retreated in 2023, but remain above long-term averages and businesses still face restrictions in terms of access to power fuels and sources of low-emitting electricity.

As a result, many companies are considering shifting some production to other parts of Europe where operating costs are lower and where energy systems are undergoing overhauls that may be capable of cutting emissions while boosting overall generation totals in the years ahead.

Central Europe’s perks

Much of Central and Eastern Europe has a reputation for being home to outdated heavy industry that once powered former Soviet enterprises and churned out low grade machinery and appliances.

In reality, much of Europe’s top-tier electronics production facilities are based in Hungary and Romania, while Poland, Slovakia and Czechia all boast major automotive production industries with extensive integrated supply chains.

In addition, Poland and Hungary are some of the largest rechargeable battery producers outside of China, boasting shares of 6% and 3% of global capacity respectively in 2022, according to the Warsaw Institute Review.

While those capacity shares pale in comparison to China's 77%, there are plans for rapid growth in Central Europe's battery-making clout that indicate the region has the potential to play an integral role in key high growth industries over the coming decades.

Low-cost, Clean-ish power

A major driver of the growth seen so far in manufacturing across Central and Eastern Europe has been the relatively low cost of labour and land in those areas.

Hourly labour costs in manufacturing in Poland, Hungary, Romania, Slovakia and Czechia were all less than half the hourly rate in major Western European economies such as Germany and France in 2021, data from Destatis shows.

Large skilled talent pools, low living costs, strong intra-regional transportation connections and relatively easy visa issuance are other draws to the region. A more recent draw is the emissions profile of some of Central Europe's power sectors.

While Poland — Eastern Europe's largest economy after Russia — relies heavily on coal for power, many other major economies in the region source more than two-thirds of their electricity from clean sources, data from think-tank Ember shows.

Those high proportions of clean power are well above the average for Europe as a whole, and are also above the average for the richer nations within the European Union. That may present a strong pull for companies looking to relocate production capacity from high cost hubs.

Key markets to track

Slovakia, which is expected to see GDP expand by more than 2% in 2024 due to strong capital investment, gets roughly 84% of its electricity from clean sources, including nearly 60% from nuclear and 14% from hydro sources.

The country opened a new 471MW nuclear plant in 2022, which helped turn the country into a net power exporter, and there are plans to scale up the local wind industry before the end of the decade.

Romania is on track to source 71% of its electricity from clean sources in 2023, thanks in large part to a big increase in hydro power generation which accounted for over 36% of electricity supplies during the first eight months of 2023, compared to around 26% during the same period in 2022, Ember data shows.

The country plans large increases in both wind and solar capacity over the coming years to help the country reach a government-set target of securing over 30% of electricity from renewable sources by 2030.

Hungary's power system is also primarily clean, with nearly half coming from nuclear and over 15% from solar.

The country's government is targeting 90% of electricity to come from low-carbon sources by 2030, according to the International Energy Agency (IEA).

Comparatively low power sector emissions are expected to trend steadily down as the region rolls out more renewable energy supplies.

The combined emissions from the power sectors of Romania, Hungary, Czechia, Slovakia and coal-heavy Poland were roughly 20% below those of Germany's over the first eight months of this year.

Alongside substantially lower labour costs, the relatively cleaner power profile of several Central and Eastern European countries may be enough to draw some industrial capacity away from Germany in the coming years, and may elevate Central and Eastern Europe to key drivers of the regional economy.


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