Germany’s Social Market Economy under Pressure: New Risks for East-Central Europe

Germany has been an economic and political stability factor in the East-Central European region since the Ostpolitik exercised by the West German Federal Republic from the 1970s until the end of the Cold War. The result has been a deepening mutual dependence between Germany and the countries in the East-Central European region. Politically Germany acted as a strong promoter of ECE accession to the European Union after the end of the Cold War. In return the new ECE member states supported the emerging leading position of the unified Germany in the EU and tied their economic transformation closely to the supply chain of the German export model. German industry has consequently benefitted enormously from cheap labour supply in the low-wage economies in the region. After the fundamental crisis of the early 2000s and the subsequent domestic Agenda reforms the German Social Market Economy has been a relative stability factor in the EU Single Market and particularly the eurozone, where it moved into the position of an agenda-setting semi-hegemon. The Covid pandemic and the current economic turmoil following Russia’s military incursion into Ukraine have however weakened Germany’s economic standing and ultimately risk putting its position as the leading economy in the EU in jeopardy. Germany’s heavily export-orientated economic model faces challenges which result from substantial changes in the geopolitical and global economic environment. These challenges also pose new risks for the ECE countries who are more or less strongly dependent on German Foreign Direct Investment (FDI). The paper analyses the current shape of the German Social Market Economy and the major challenges it faces under new geopolitical conditions with the focus on how these are likely to affect the ECE region. The main focus of the paper will be on the impact the potential decline of Germany’s position as the leading economic player in Europe may have on the countries in the ECE neighbourhood, here especially the countries in the Viségrad group.