How the European Crisis Affects the Visegrad Group

5 MINS READJun 26, 2013 | 10:30 GMT
How the European Crisis Affects the Visegrad Group
Hungarian Prime Minister Viktor Orban (R) and Polish Prime Minister Donald Tusk after a June 16 Visegrad Group meeting.

Members of the Visegrad Group — Poland, the Czech Republic, Slovakia and Hungary — are showing signs of stress brought on by Europe's economic crisis. For the past two decades, the economic strength of the Eastern and Central European economies forming the Visegrad Group was driven by the countries' competitive labor force, foreign investment and strong ties to stable northern economies, particularly Germany. However, as the economic stagnation in Europe's core and the risk of political instability increase, the consequential loss of attractiveness to foreign investors is likely to grow within the Visegrad countries.

Since the breakup of the Soviet Union and the collapse of communist governments during the late 1980s, Poland, the Czech Republic, Slovakia and Hungary have established strong institutional and economic ties with the West. In 1999, Poland, the Czech Republic and Hungary joined NATO. Slovakia joined the military bloc in 2004. That same year, all four countries became members of the European Union, and in 2009 Slovakia joined the eurozone.

The orientation toward the West was accompanied by greater economic prosperity brought about by access to Western European capital, exports and labor markets. Since the start of the millennium, the four economies have opened up more to trade, with exports and imports measured in terms of gross domestic product rising considerably. Although according to Eurostat, the Visegrad countries had negative trade balances in 2000, they all managed to produce positive trade balances in 2012. The export sectors in the Visegrad countries are especially fueled by the automotive sector, in which foreigners have invested heavily in order to profit from the countries' cheap but well-educated labor force and access to the large consumer markets in Western Europe.

In the years leading up to the financial crisis, the Visegrad Group had higher annual growth rates than either the EU or eurozone average. However, with the outbreak of the global financial crisis and ongoing European crisis, the promise of prosperity through EU membership came into question. Apart from Poland, all Visegrad countries saw a strong contraction of their GDPs during the financial crisis. 

While the group also saw a relatively fast recovery in 2010, the region is facing stagnation as it feels the effects of the slowdown in Europe's core economies, such as Germany, France and Austria, as well as neighboring countries. Germany is the most important export market; according to Trade Map, a service that compiles international trade statistics, the German market accounts for more than a fifth of exports from all four countries. Therefore, the low growth prospects in Germany are particularly troubling for the Visegrad countries.

Growing Political Instability

The economic slowdown is contributing to greater political instability throughout Europe. In late 2011, Slovakia's government had to call for early elections under pressure from the opposition, whose vote was necessary to approve the European Financial Stability Facility, an EU bailout fund. On June 16, the Czech Republic's government collapsed after a corruption scandal involving a close aide of Prime Minister Petr Necas, and the government is now struggling to find an interim successor. In Hungary, Prime Minister Viktor Orban, who came to power in 2010 after a political scandal and economic downturn that led to the collapse of the Socialist government, heads a stable government led by his party, Fidesz. Orban's comfortable majority in parliament has encouraged him to consolidate power amid opposition from the EU and foreign investors' growing concerns. Orban has tried to tackle the domestic economic crisis by propping up the government's finances by, for example, nationalizing the pension system and increasing taxes that especially target foreign firms.

Poland can be seen as the last country in the Visegrad Group entering a period of political instability. The Polish economy grew at 1.6 percent at the height of the financial crisis, while the rest of the European Union was contracting. However, for 2013 the Polish economy is expected to grow by only about 1 percent. While still higher than in most of Europe, the low growth expectations are important reasons the main government coalition party, Civic Platform, currently has the lowest approval ratings since it came to power in 2007. According to a poll released earlier in June by TNS Polska, the opposition party Law and Justice has 30 percent support while Civic Platform, led by Prime Minister Donald Tusk, has 23 percent.

Tusk is fighting the economic slowdown and faces growing divisions within his own party. To regain authority and the people's trust, Tusk has called for the party leadership elections, originally scheduled for 2014, to be held this summer instead. The results of the elections, which should be released in August, will likely show that Tusk can hold on to power. However, there is a growing risk of certain factions in the party splitting off, creating greater uncertainty about the government's support within parliament.

EU Labor Costs

Graph - EU Labor Costs

Risks and Relief in the Visegrad Economies

The Visegrad countries are likely to see an extended period of weak economic growth and stagnation considering that 75 percent or more of goods exported from the Visegrad Group go to the European Union. However, these countries do not face the competitiveness crisis that peripheral eurozone countries are experiencing. Apart from eurozone member Slovakia, all countries can to a certain degree use their independent monetary policy to benefit exporters by weakening their currencies. Moreover, the Visegrad countries have competitive labor forces that make them attractive to foreign investors. Labor costs in the Czech Republic, Slovakia, Hungary and Poland in 2012 were among the 10 lowest in the European Union, ranking below crisis countries such as Portugal, Spain or Greece.

The larger risk to these economies, as can already be seen in the case of Hungary, is related to uncertainties about political stability and policies toward Western investment, which has been crucial in developing the industrial base in the Visegrad countries in the past 20 years.

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