Eastern Europe's miracle can survive protectionism

Taiwan Semiconductor Manufacturing

25/09/2026 15:37

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Jon Sindreu
LONDON, Sept 28 (Reuters Breakingviews) - When MAN Truck & Bus announced this summer that it would invest up to €1.2 billion in its Kraków plant in Poland, it put its parent, Volkswagen VOWG.DE, in an awkward spot. Some months earlier, the German group had decided to end car production in Dresden — the first such shutdown on German soil in the group's 88-year history.
The situation is emblematic of a wider economic trend. Since the end of the Cold War, Central and Eastern Europe (CEE) has been the site of a growth miracle rivalling that of China, South Korea and Taiwan. Instead of nurturing champions such as BYD 002594.SZ, Samsung Electronics 005930.KS and TSMC 2330.TW through state support and trade surpluses, fast development was based on riding on the coattails of Europe's industrial core, using a cheap but well-educated workforce to entice firms to move supply chains eastwards.
This all now appears existentially threatened by China's own export glut. Yet the region has been surprisingly resilient so far. With a purposeful shift to higher-value manufacturing and a steelier stance against Beijing, its manufacturing-led growth model may yet endure.
Oxford Economics forecasts GDP growth in CEE countries to expand 2% this year, compared with 1% for Germany. Poland is faring best and has returned to pre-pandemic growth of above 3%. Its new economic engines look more like those of a rich nation than a developing industrial one: booming consumption, a budget deficit worth 6.5% of GDP, and a diversified economy where autos make up just 8% of manufacturing value added, according to Eurostat.
This compares to 18% in Slovakia and 15% in the Czech Republic, Hungary and Romania. With German industrial output in July still 14% below where it was in 2019, these more auto-dependent countries have seen exports tank and face weaker near-term prospects.
Their vulnerability reveals the problems of an export-led economic strategy fundamentally dependent on decisions made elsewhere: it's much harder to shift into new products and markets. OECD data shows that, in 2022, roughly half of the value added of CEE exports came from abroad, compared with 14% for rich countries. Its leading companies are still largely foreign owned, and research and development spending also trails its richer counterparts. To boot, historic under investment in renewable power has made the recent surge in energy prices hit particularly hard.
The big question, then, is whether Soviet-bloc countries should completely change tack. GDP per capita in many of them is nearing that of Spain, meaning workers' pay has gone up enough to erase some of their competitive advantage. But households have also become rich enough for growth to be powered by consumption and services industries.
Indeed, Germany's dependency on the East is already being transformed: on top of relying on CEE economies for parts and capital goods, they are also increasingly a destination for auto, chemical and machinery exports that are no longer bought by China. For the troubled marques of Volkswagen, BMW BMWG.DE and Mercedes-Benz MBGn.DE, Poland and the Czech Republic, as well the Baltic states of Lithuania, Latvia and Estonia, represent an increasingly rare opportunity for expansion.
The Penn World Tables' productivity data for the 1995-2023 period suggests that becoming more of a consumer-led economy and deemphasising manufacturing could work. It shows that output per hour grew largely in line with countries' initial income levels: poorer economies tended to expand faster. There is no obvious sign that larger industrial investment paid off in better growth.
Yet extracting an overarching lesson from this phase of "catch-up growth" could be misleading. For countries that had reached Eastern Europe's current productivity level in the 1990s, success depended more on innovation and moving into higher-value manufacturing, as exemplified by Germany, Denmark and Switzerland. Those that focused less on industry such as Italy and Spain did worse. Worryingly, World Bank figures suggest CEE has gone down the value chain since the Covid-19 pandemic, becoming more, not less reliant on low margin assembly work rather than higher-tech production.
Governments recognise the problem. They have unveiled industrial strategies designed to move beyond car engines and gearboxes towards semiconductors, software and advanced manufactures, while diversifying exports towards the Gulf, Asia and Latin America. Poland and the Czech Republic have seized on EU semiconductor initiatives, with Prague using state aid to back projects such as Arizona-based Onsemi's silicon-carbide plant in Rožnov pod Radhoštěm.
Still, the CEE’s split over EU protectionism exposes the limits of its ambitions. When Brussels imposed tariffs on Chinese battery-electric vehicles in 2024, Poland, Estonia, Latvia, Lithuania and Bulgaria backed the measure, but Hungary, Slovakia and Slovenia joined Germany in opposition. The divide still matters as Brussels considers whether to extend trade measures to Chinese hybrid vehicles in diplomatic meetings next month. But fear of retaliation weighs heavily on CEE leaders, even as EU imports of these cars have surged 10-fold this year compared with the same period of 2024.
Unlike Germany, Eastern Europe exports few luxury vehicles directly to China, but would face severe input inflation if Beijing restricted critical minerals, battery modules and other subcomponents. Hungary in particular aims to preserve its status as China's European hub, anchored by BYD's new Szeged plant and Contemporary Amperex Technology's 300750.SZ Debrecen gigafactory, whereas smaller nations such as Slovakia remain beholden to their German job creators. 
To evolve from mere contractors to higher-margin autonomous suppliers, though, CEE nations must align on a longer-term vision. Protectionism isn't ideal: Eurofound data shows scant evidence that geopolitical turmoil has prompted Western firms to "nearshore" more operations to the East. But the dismantling of European industry is a far worse scenario.
Even as China's gateway into Europe, CEE needs Brussels to wave a big stick, ensuring that greenfield projects bring high-tech production, skills and knowledge transfer, rather than polluting assembly plants reliant on imported labour and lax safety standards. In Hungary, such concerns have become politically explosive, leading Prime Minister Péter Magyar to revise some of the subsidy commitments made by his predecessor Viktor Orbán.
Eastern Europe's growth model may not be built for a geopolitically fragmented world. But as other countries come to need its consumers as much as its factories, it can use that as leverage to adapt and thrive.  
     
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(Editing by Aimee Donnellan; Production by Streisand Neto)
((For previous columns by the author, Reuters customers can click on SINDREU/Jon.Sindreu@thomsonreuters.com))