The region has deep economic scars. We have compared our current forecasts with our forecasts for the region before the pandemic, IMF Managing Director Kristalina Georgieva said at a conference in Dubrovnik. We find that real GDP in 2024 will be 3.5% lower than we expected at the start of 2020. It’s like someone took 50 billion euros out of people’s pockets in these five years, she added.

What else did the head of the IMF say:

• It’s a pleasure to come to Dubrovnik, a city I admired long before its Game of Thrones glory. Our conference is so fittingly located here, a place that offers refuge from the stormy waters.

• Since this conference was last held in 2019, the world has indeed been in turbulent waters. We were hit with shock, shock, shock, as we all know: Covid. Russia’s war in Ukraine. The cost of living crisis.

• These recent upheavals – especially the war – have been difficult for the CEE region. For Ukraine, the war was absolutely devastating, both for people’s lives and for the economy. For the rest of the region, this has triggered an unprecedented gas crisis and rising food prices, particularly affecting the most vulnerable.

• The war also accelerated geo-economic fragmentation. Post-Cold War peace dividends are disappearing as defense budgets grow. And European and global supply chains had to adapt to new realities.

• What did all this mean for the region’s economy? Constantly high inflation and weak growth. Headline inflation has eased since the end of 2022, but is still very high, and core inflation has yet to show clear signs of abating.

3 challenges

• A weak recovery, persistent inflation and high uncertainty mean the region will continue to face stormy weather. But this is a stable region. Indeed, we can learn from the history of Dubrovnik how to overcome modern challenges.

• Dubrovnik was then called Ragusa – and it was ahead of its time in many ways. For example, the government provided services to poor people and orphans and invested heavily in education. And Ragusa flourished. Let’s try to adapt how the story applies to three big challenges facing your region today.

• The first is to reduce inflation while supporting the recovery and laying the foundations for future growth. This requires coordination of monetary and fiscal policy. On the monetary side, countries with independent central banks will need to maintain a tight stance and possibly tighten monetary policy further if inflation remains high.

• From a fiscal point of view, let us remain prudent, but at the same time protect the vulnerable, as Ragusa did. Consolidation should be even more ambitious than currently planned. While this will require difficult decisions, it will have the triple benefit of reducing inflation, reducing debt servicing costs and strengthening financial stability.

• Investing in people also requires structural reforms. This is easy to say, but difficult to do in a period of fiscal consolidation. But actions such as reskilling workers and subsidizing child care are needed to expand the labor force and alleviate labor shortages that are holding back growth in the region. The integration of Ukrainian refugees will also help. While supporting their return to Ukraine is important, for many of them it can take a long time.

• Poland and Estonia have created online tools to help Ukrainians find work faster than previous groups of refugees. The Czech Republic is solving the problem of underemployment by facilitating the recognition of professional qualifications of refugees.

• The second challenge facing the region is energy security. Although the life resources of the time did not include energy, Ragusa can still inspire us. To ensure vital water resources, the city built a 12-kilometer aqueduct. Big state investments!

• Ensuring energy supply today also requires large infrastructure connections. The Baltic Synchronization project to connect Estonia, Latvia and Lithuania to the EU electricity grid is a great example.

• The third challenge is whether we can take advantage of the opportunities that arise in a fragmented world. Ragusa skillfully managed ‘fragmentation’ over the centuries, maintaining open trade with empires to the east, west and north in an ever-changing geopolitical environment. Today, fragmentation creates both risks and opportunities for the region. One risk is that some multinational corporations will want – or have an incentive – to keep production at home. This will make it difficult to develop the economy in the region by inserting them into the supply chains of these companies, as the Czech Republic, Slovak Republic or Slovenia did in the past. And there is an opportunity to move some factories from Asia closer to home.