To save its manufacturing base, Europe needs to look east
This article is part of a series published by the Atlantic Council’s GeoEconomics Center examining how Central and Eastern Europe can navigate the profound shifts underway in European trade and industrial policy.
Something is stirring in EU trade policy. Paris, Brussels, and Berlin find themselves in a rare moment of alignment on the need for protectionist measures against Chinese overcapacity. Central and Eastern Europe (CEE), where industry still accounts for between 21 and 33 percent of national GDP, could be the missing piece. The region’s deep manufacturing base offers Europe an internal production platform that should make reshoring strategies credible.
But there is an imminent risk that falling demand will destroy this manufacturing capacity before it can be coherently redeployed. This is partly because too little attention has been paid to the resilience of CEE economies under pressure. And with the German economy facing well-publicized woes caused by the cutoff of Russian energy, transatlantic uncertainty, and declining demand from China, the strain on the region may soon be mounting. Though strong consumer demand and some export diversification, including to the United States, have so far prevented the German malaise from spreading eastward, Central Europe’s structural reliance on German demand means it cannot escape the knock-on effects.
It is imperative to stop the slowing of the German economy from pulling down CEE manufacturing with it. This would undermine the industrial capacity on which any credible strategy to reduce dependence on China ultimately depends.
China Shock 2.0 is hitting Germany. The ripple effects won’t stop there.
In recent months, Germany’s malaise has morphed into panic. Imports of cars, capital goods, and industrial machinery from China—which until recently were seen as impregnable centers of excellence for Germany and its supply chain—are rising rapidly, while Chinese demand for these very EU exports is declining. That combination has led to job cuts and growing demand for safeguards. The shift is so profound that even stubborn supporters of free trade are increasingly convinced that German manufacturing faces a China Shock 2.0.
For CEE, this should be a warning. Foreign direct investment (FDI) stock in the region remains overwhelmingly owned by EU investors, at about 85 percent. Yet FDI from Germany fell by 22.5 percent between 2022 and 2024 and has not recovered since. Investments from other large EU economies like France and from investors further afield have only partially offset that decline. European capitals cannot afford to wait for the knock-on effects to become even more painful.
Three decades of integration with the German and Austrian economies have kept CEE economies more industrialized than the EU average, but at the cost of heavy reliance on external investment and demand. While that model may no longer be the source of growth, it continues to anchor economic activity across the region. If it continues to falter, what began as a slowdown in Germany could tip parts of CEE into severe recession.
Czechia and Slovakia are the most exposed. Czechia sends 32 percent of its exports to Germany, and a sixth of its exporters serve no other market. Slovakia is similarly vulnerable: exports approach 90 percent of GDP, while automobiles make up 34 percent of exports, putting the country squarely in the path of Europe’s rapidly eroding automotive position. Since 2018, Germany’s share in CEE countries’ exports has declined by just one to three percentage points. Even in Poland and Hungary—where German dominance in investment and as an export market has generated political backlash—Germany still accounted for 27.1 percent and 24.9 percent of exports in 2024, respectively, far ahead of the next-largest destinations.
This pattern extends beyond CEE’s core four. Countries that integrated into the German-Austrian value chain more recently are also deeply exposed. Germany was the top destination for Romanian and Bulgarian exports in 2024, accounting for 20.5 percent and 15.2 percent, respectively. Meanwhile, Austria is an important destination for industrial inputs and an anchor for banking and services in Slovenia, Croatia, and the rest of the Balkans, where it is often the top investor outright.
The question is how much time the region has before the German malaise sets in. With notable exceptions like Poland, the early symptoms are already visible. Industrial output in both Hungary and Slovakia contracted throughout 2025. Romania shows a different pathology, with a budget deficit of 9.3 percent of GDP in 2024, the largest in the EU.
How much runway remains?
So far, CEE economies have managed to replace some lost German demand with domestic consumption. Poland, for instance, grew around 3.6 percent in 2025 on rising real wages, robust domestic demand, and absorption of EU funds. It has even overtaken China as Germany’s fourth-largest import source. Meanwhile, Hungary stayed afloat on the back of substantial wage increases that fueled consumption, even as exports and investment sagged. Tight labor markets have kept wage increases going and supported consumption across the region.
Exporters have also made a genuine effort to diversify, with double-digit growth in exports to intra-CEE markets (a good sign), the UK (still positive, though less reliable given the market’s openness to Chinese cars), and the US (more challenging because of tariffs).
But domestic consumption can only buy the region some extra time. While German firms are cutting expensive domestic capacity first, cheaper CEE plants will not be protected forever. The clear investment retreat, with greenfield pledges down two-thirds, will hit future capacity.
Berlin’s fiscal impulse might extend that runway further, but not by much. Germany’s own meager growth has come from consumption and government spending, while its exports—the basis of demand for CEE inputs—have been falling. Berlin’s new €500 billion infrastructure fund will create demand for raw materials and machinery, but spending is below expectations: just 65 percent of the fund’s allocation was disbursed in 2025. Defense spending is also unlikely to provide a new anchor. Even at 3.5 percent of GDP, only a fraction will go toward equipment, too little to drive a manufacturing sector that comprises one-fifth of the German economy.
CEE economies have shown considerable resilience, but that resilience should not be mistaken for insulation or become a source of complacency. The region’s task now is to shape the emerging European policy response and ensure that onshoring provides a viable path for CEE manufacturers to capture its benefits.
Claiming a stake in Europe’s industrial future
The knock-on effects of Germany’s China Shock 2.0 are inevitable for CEE. That makes Polish Prime Minister Donald Tusk’s declaration of a year of “turbo acceleration” for the Polish economy ring a little hollow. For the most part, leaders across the region have struck a more balanced tone, and the collaborative stance of Hungary’s new government is a welcome change.
Still, regional capitals need a more coherent strategy—and a louder voice—in shaping Europe’s response. Few were surprised, sadly, when a group of influential Western European thinkers set up yet another task force for growth last month—the Rhine Group—but failed to include proper representation from CEE, the EU’s fastest-growing region. Political and business elites from Warsaw to Bucharest should play on this irony.
CEE has at times formed a somewhat united front in EU policy debates. In recent months, the region has characterized Europe’s woes as a competitiveness problem that could be addressed through less regulation and lower energy prices. But dismantling longstanding policies such as the EU’s emissions trading scheme is a bargain few capitals will strike. Better to work within a loosened scheme and use the incoming Carbon Border Adjustment Mechanism to level the playing field against cheap Chinese goods.
As Paris, Berlin, and Brussels converge on subsidies and safeguards, CEE capitals should insist that those measures include local content requirements strong enough to ensure onshoring also lands in the region’s manufacturing base. After all, without CEE, European reshoring will struggle to deliver on its promise of a China-proof industrial strategy.
Charles Lichfield is the director of economic foresight and analysis and the C. Boyden Gray senior fellow at the Atlantic Council’s GeoEconomics Center.
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