Now comes an even bigger danger: a sharp economic slowdown in Germany, their biggest trading partner and foreign investor. “Germany is by far the biggest culprit for the recent economic weakness in Central and Eastern Europe, ” economist William Jackson of Capital Economics in London says in a note to clients today. He estimates that exports from Central and Eastern Europe to Germany fell 2.5 percent during August, as Germany’s economy shrank 0.2 percent during the second quarter and remained flat during the third.
Since the 1990s, the region’s economies have become tightly intertwined with Germany Inc., as German companies set up manufacturing in the East to take advantage of lower labor costs. Germany invested heavily to build these operations—and it became the key purchaser of their output, from cars and auto parts to electrical equipment and chemicals.
The arrangement, which the International Monetary Fund has dubbed the German-Central European Supply Chain (pdf), leaves some countries perilously dependent on Germany. The Czech Republic sends more than 30 percent of all its exports to Germany, with the value of those exports equaling about one-fourth of the Czech economy. The corresponding figures for Slovakia and Hungary are only slightly lower than that. Poland and Romania also have high volumes of export to Germany, but their value is much lower as a share of those countries’ economies.
Germany’s economic malaise helps explain why year-on-year economic growth across Central and Eastern Europe has slowed to about 2 percent, down from 3.5 percent during the first quarter of 2014, according to Capital Economics estimates.