Central and Eastern Europe and the Global Economic Fragmentation

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Summary

Since the 2020s, what the International Monetary Fund calls “global economic fragmentation” (GEF) has intensified, marked by weakening trade coordination, the return of protectionism, and the increasing alignment of trade flows with geopolitical blocs. Key drivers include the war in Ukraine, the long tail of the COVID-19 pandemic, escalating China-US tensions, structural transformations such as the rise of digital services and the green transition, and most recently the second Trump administration’s weaponization of tariffs. 

The countries of Central and Eastern Europe (CEE) are particularly exposed to the GEF. They benefited substantially from past waves of globalization, building growth models centered on foreign direct investment (FDI), integration into global supply chains, and high export dependence, especially toward Western Europe.

The CEE countries can be divided into four clusters based on their trade-growth models. Balanced Exporters combine domestic consumption with moderately diversified exports across manufacturing and services. Germany-Affiliated Industrialists form the high-manufacturing, high-FDI hub tightly linked to the German industrial base. Northern ICT Regionalists rely more on dynamic ICT service exports and have stronger ties to Nordic economies than to Germany. Volatile Resource Economies are marked by weaker industrial bases, lower FDI, and a higher share of raw-goods exports. Not members of the EU, they are characterized in part by political instability and fragile institutions.

These different models shape how the CEE countries experience the GEF. Their opportunities include the potential to attract reshoring and friendshoring investment or to act as “connector economies” in a bifurcating global trade system. But they also face major risks. The realignment of the global automotive sector, energy-market disruptions, and the broader slowdown in Germany—all magnified by the GEF—pose structural challenges. The key concern is that fragmentation entrenches CEE’s dependence on Western European supply chains, making it harder to diversify trade, to escape the middle-income trap, or to expand into markets beyond Europe.

The Germany-Affiliated Industrialists are the most vulnerable, due to their narrow trade portfolios and exposure to fluctuations in global manufacturing demand. The Balanced Exporters, with larger domestic markets and more flexibility, are better positioned to absorb shocks. The Northern ICT Regionalists and the Volatile Resource Economies sit in between, with specific sectoral and geopolitical sensitivities. Albania, Estonia, Hungary, and Poland illustrate these dynamics.

In the emerging geo-economic landscape, size and diversification matter. Larger economies with stronger domestic demand and broader export mixes—such as Poland and Romania—have more tools to manage volatility. Sustained stagnation in the EU core could, however, prompt some CEE states—especially export-dependent ones—to seek deeper economic ties beyond Europe, following Hungary’s lead in cultivating links with China.

From the EU’s perspective, supporting CEE’s geo-economic autonomy will require more than cohesion funding. It means helping these economies to move up global value chains, to reduce their overdependence on Western Europe, and to expand their exports to new markets. This would not only future-proof the region’s growth but also help defuse political tensions and temper the appetite in CEE for ‘alternative’ geopolitical alignments. 

Jan Boguslawski is a ReThink.CEE Fellow 2023 of the German Marshall Fund of the United States.