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Such progress in enhancing governance institutions is vital for CEE-11 given declining rates of growth potential and reliance on foreign capital for investment, including crucially on disbursement of EU funding, which is contingent on governments’ respect for the rule of law.

The region’s declining growth potential reflects higher income levels and declining contributions of labour to economic growth in view of demographic ageing. At the same time, earlier high FDI inflows to CEE-11 are presently in structural decline, suggesting maturing consumer markets, largely exhausted potential for privatisations and completion of large-scale physical infrastructure projects.

“CEE governments’ abilities to develop and execute sound policies leveraging their skills bases, improving productivity and strengthening the role of domestic capital markets for investment are under scrutiny,” says Jakob Suwalski, analyst at Scope.

Latest indications of institutional health in CEE-11 are mixed and reflect diverging institutional developments, judging by the recently updated World Bank Worldwide Governance Indicators (WGI) – including as regards the rule of law and regulatory quality.

“Rule of law has declined in Poland since 2014, and more recently in Hungary, but has improved in the Baltics. Poland and Hungary are now around marks of countries such as Romania on subject of the application of the rule of law,” says Levon Kameryan, analyst at Scope.

Regulatory quality, defined as a government’s ability to formulate and implement sound policies in support of private-sector development – as the WGI category with the highest correlation with the level of investment of an economy – despite some decline, has, however, remained sturdy across the region.

Against this backdrop, the investment of Next Generation EU financing – and governments’ success in spending EU funds productively – will prove essential in determining economic outlooks in the CEE-11.

The EU Commission has postponed approval of national recovery plans of Hungary and Poland over rule of law concerns.

“We expect EU authorities to ultimately unlock EU recovery funding to Hungary and Poland after the countries have addressed rule-of-law concerns identified as part of EU-wide economic policy coordination,” says Suwalski.

“Diverging trends in institutional quality may become increasingly relevant for ratings outlooks of countries such as Poland and Hungary as well as that of Romania should soundness of political institutions notably deviate from country fundamentals, materially affecting potential for economic growth and sound governance in the future,” says Kameryan.