Funding will increase substantially in 2021-27 compared to the 2014-20 period. The CEE region is set to receive 46% of the EU's cohesion policy and rural development funding. It will also receive 22% of all grants and loans from the Recovery and Resilience Facility (RRF) and 21% of loans from Support to mitigate Unemployment Risks in an Emergency (SURE).

"An increase in European Union funding will speed up economic growth in Central and Eastern Europe, with fiscal metrics also likely to improve. That said, implementation challenges may slow or even reduce gains in countries such as Croatia, Bulgaria and Romania that would benefit most from funding," says Heiko Peters, VP – Senior Analyst at Moody's Investors Service.

Croatia, Bulgaria and Romania would see the largest gains of 1.0, 1.0 and 0.8 percentage points (pps) per year, respectively, over 2021-27 assuming full absorption of traditional funding and RRF grants. On the other hand, Slovenia, the Czech Republic and Poland will see the lowest increases of 0.2 pps per year.

Implementation challenges will be most profound in countries that stand to gain the most from EU funds, such as Croatia, Bulgaria and Romania. The Czech Republic and Slovenia are most likely to realize their relatively minor gains in full because of their favourable indicators measuring historical absorption rates and institutional capacities.

Consistent EU funding allocations will help finance regional and local governments' (RLGs) investments and support economic growth. Capital investment by RLGs will increase to approximately €139 billion in the 2021-27 programming period, from the previous €131 billion throughout 2014-2020.

Key points:

• Assuming full absorption of traditional funding and RRF grants, Moody's estimates EU funding will add 0.2 percentage points (pps) to GDP growth per year across the CEE in 2021-27. Croatia, Bulgaria and Romania would see the largest gains of 1.0, 1.0 and 0.8 pps per year, respectively, over 2021-27. Slovenia, Czech Republic and Poland will see the lowest increases of 0.2 pps per year.
• Fiscal metrics are also likely to improve as a result. Higher growth would see debt-to-GDP ratios fall by a cumulative 2.3 pps over 2021-27. Croatia, Romania and Bulgaria would see the largest cumulative reductions of 9.2, 4.3 and 3.7 pps in 2021-27. The Czech Republic (-1.1 pps) and Poland (-1.3 pps) would see the smallest falls. Given their higher funding costs than the EU, the debt-affordability metrics of most CEE countries would benefit most from RRF loans and SURE.
• Implementation challenges will delay or even curb gains for some countries. The Czech Republic and Slovenia are most likely to realise their relatively minor gains in full because of their favourable indicators measuring historical absorption rates and institutional capacities. Croatia, Bulgaria and Romania who would gain most if funds are fully absorbed are also confronted with the largest institutional implementation challenges.
• EU funding and strong fundamentals will support a rise in capital investment by regional and local governments. Moody’s forecasts an increase in capital spending to €139 billion in 2021-27, from €131 billion in 2014-2020. Co-financing will increase leverage, but debt levels will remain moderate relative to peers.