IntroductioN 1 INTRODUCTION It has now been three decades since the fall of Communism and the establishment of market capitalism in Central, Eastern, and South-eastern Europe(CESEE). Since 2004, eleven CESEE countries have joined the EU(EU-CEE). Mem­bership to this coalition was contingent on the adoption of the EU acquis, fulfilment of the Copenhagen Criteria, and the completion of other important steps related to the economies of the region. Although far from identical, the economies of EU-CEE have therefore accepted an econom­ic model with common facets. 1 In a broad sense, this model has delivered a lot of econom­ic convergence. As of 1995, the first year for which fully comparable data are available, the eleven CESEE countries that are now part of the EU had a level of per capita in­come(in purchasing power parity terms) equivalent to 40 percent of the EU-15 level. By 2020, this had risen to 72 percent. 2 In the period since the global financial crisis, con­vergence has continued in EU-CEE. However, for the wealthier parts of the region, the pace of catch-up with the most successful economies of Western Europe, such as Germany, has generally slowed down. ing from demographic and environmental changes to in­dustrial and technological developments. These provide some opportunities for EU-CEE countries, while in many cases they also pose a further threat to the region’s future economic convergence performance. As we will go on to show in Chapter 3, these trends all manifest themselves in very particular ways in EU-CEE, creating unique possibilities and difficulties in the way they interact with the existing growth model. However, in this paper, we want to put these considera­tions in the context of the options available to actors in this process. Actors include governments and firms in EU-CEE, but also the EU itself. All are far from passive players in this process, and we will highlight the options that each has to try to achieve sustainable convergence in living standards for the populations of EU-CEE over the medium and long­term. 1.1 WHAT ROLE FOR NATIONAL GOVERNMENTS IN EU-CEE? This paper starts out with two hypotheses. First, while the economic model of EU-CEE has been largely successful in driving economic convergence with wealthier parts of the EU, it may be hitting its limit, especially for countries with the highest level of economic development, such as the Czech Republic and Slovenia. This points to endogenous challenges to the EU-CEE growth model. Our second hypothesis is that these endogenous challeng­es are now colliding with important exogenous trends rang­1 This model has variously been described as integrative and neolib­eral. However, it should be kept in mind that a neoliberal model un­der the umbrella of EU membership is not the same as the more ex­treme variant that has been applied in many parts of the world in recent decades. 2 Quoted data are from AMECO, the annual macroeconomic database of the European Commission’s Directorate General for Economic and Financial affairs. Data used are a simple(unweighted) average of the eleven EU-CEE countries. Despite the UK’s exit from the EU, AMECO continues to quote the EU-15 as a benchmark for comparison. We follow this approach here. One of our assertions at the start of this paper is that the state in EU-CEE has an important role to play in managing and adapting to the endogenous and exogenous threats to the region’s growth model, and most likely a much more ac­tive role than it has in the past. So far, the EU-CEE growth model has tended to rely on a fairly small state, 3 which is un­usual when combined with an often extreme openness measured in terms of trade and GDP(Rodrik 1996). The more exposed a country is to globalisation, the bigger the state needs to be to shield citizens from the volatility and distribute the(large) gains and costs in a roughly equal way. EU-CEE has generally not followed this pattern so far, with high economic openness generally accompanied by a small share of public spending in GDP by EU standards. This is like­ly going to have to change, not least because of the almost overnight increase in the role of the state in economic life as 3 Here, the comparison is important. Relative to Western Europe, gov­ernment spending as a share of GDP is fairly low in EU-CEE. This is one of the challenges of creating a»developmental state« in the re­gion. 5