WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

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By Richard Grieveson

Four years after Russia’s full-scale invasion of Ukraine, Central, East and Southeast Europe (CESEE) is no longer Europe’s periphery. It is its frontline. The fallout has been profound, not only for Ukraine and Russia, but for the entire region. Even if the war ends soon, CESEE will not revert to its pre-2022 model.

The invasion marked a structural break. For decades, CESEE was primarily an integration story: convergence through trade, EU accession and foreign investment. Today, it sits on the frontline of a hot war in Ukraine and a broader hybrid confrontation with Russia. Moscow’s neo-imperialist aggression began earlier, in Georgia in 2008 and in Ukraine in 2014. But 2022 changed both the scale and the economic consequences.

Defence spending in CESEE is now substantially higher. NATO data show Poland spent 4.5% of GDP on defence in 2025, up from 2.2% in 2022. The Baltic states – those most concerned that they might be Russia’s next target – have also seen sharp increases. Higher defence spending need not be a drag on growth, as it can function as a kind of industrial policy. But this is only possible if procurement is domestic, focused on equipment, and financed with new money. Few countries in the region tick all three boxes.

Meanwhile, foreign investors have become more wary when pledging long-term capital to the region. Investors have not fled; but they are hesitating. New FDI has fallen sharply since 2022, more so than the global trend alone would justify. Long-term capital is wary of proximity to war. Our recent survey of business executives in CESEE found that geopolitical disruption was the No 1 risk they faced.

The war, following the pandemic and coinciding with renewed geopolitical volatility under US President Donald Trump, has permanently reshaped CESEE’s growth model. For three decades, the region converged through labour-cost competitiveness, foreign capital, and export integration into western European supply chains. That model has run its course. Wages have risen much faster than productivity since 2020. Real exchange rates have appreciated. Energy is more expensive. The region can no longer compete on cost alone. Instead, it must compete on capital intensity, technological upgrading, and strategic value.

As the EU reawakens to an age of great-power politics and confronts the weaponisation of trade, technology, and energy by China, Russia, and the United States, CESEE’s importance will grow. The region is the EU’s eastern industrial flank, its security buffer, a leader in defence spending, and a cornerstone of its energy transition. It is telling that one of Europe’s largest ammunition manufacturers, Czechoslovak Group, is the continent’s first major IPO of 2026.

The region will play a defining role in determining whether Europe can sustain prosperity in a more dangerous world. Strategically, CESEE will move closer to the EU core – and not just economically – and populist governments in some countries will not fundamentally alter this. Yes, Hungary under Viktor Orbán has been a thorn in the EU’s side. Yet Orban’s populism has had a significant economic cost and may spell the end of his period of rule. Enlargement, long stalled, has regained momentum. If Ukraine joins the EU with credible security guarantees, the economic geography of the region will shift again, and the bloc’s own defence capabilities will be materially enhanced.

The primary impact of the war is human. Ukrainians continue to fight and die to defend their sovereignty. But the economic consequences will outlast the battlefield. In just a few years, CESEE has moved from Europe’s converging periphery to its strategic frontline. Its future will be shaped accordingly.