How Poland became Germany’s indispensable economic backyard

Border controls between Germany and Poland are facing increasing resistance from the German economy. A major factor in this is the critical role Poland plays for German capital.

Last week, Dirk Jandura, President of the German Foreign Trade Association (BGA), stated that serious damages would occur if trucks were caught in traffic jams and Polish workers could not reach their jobs in Germany on time.

The background to this is that Poland is extremely important for German industry. The country has surpassed China to become the fourth-largest market for German companies. One of the most significant reasons for this is Poland’s position as a low-wage location for labor-intensive activities in German companies’ production chains.

German companies supply intermediate goods to the neighboring country and then re-import them for further processing. This situation also boosts exports to Germany, which constitute one-third of Poland’s total exports.

According to an analysis by German Foreign Policy, 8.2% of all employees in Poland were dependent on exports to Germany in 2020. Poland’s dependent position in German production chains has also been stabilized with the help of EU funds.

A low-wage haven for German industry

With the end of socialist systems in Central and Eastern Europe, Western and especially German capital rapidly entered the region.

Germany played a significant role in Poland, as it did in other countries in the region. In the first phase of German-Polish economic relations after 1989, German investors participated in the privatization of state companies and opened their own factories in Poland. At that time, the focus was primarily on low production costs.

The removal of investment barriers with the EU’s eastward expansion in 2004 initiated the second phase of German capital’s spread into Central and Eastern Europe. At the same time, investments in the low-wage countries of Central and Eastern Europe were used as a tool to pressure trade unions in Germany, forcing them to accept major social cuts and the restructuring of the labor market, namely the “Hartz reforms.”

The economic division of labor between Germany and Poland

Simultaneously, simple tasks in particular were moved from Germany to Central and Eastern Europe, which led to the restructuring of production and the creation of new skilled jobs in the Federal Republic of Germany.

During Poland’s integration into the German production process, this led to a division of labor between the two countries that continues to this day. This means that low-value-added activities are carried out in Poland, while high-value-added activities are performed in Germany.

While know-how, modern means of production, and consequently complex work processes developed in Germany, simple and labor-intensive activities for the supply chains of German corporate headquarters predominate in Poland, as is the case throughout Central and Eastern Europe.

Poland became a lifeline for Germany during the Eurozone crisis

The financial crisis of 2008 marked the beginning of the third phase in German-Polish economic relations.

Poland was the only EU country that did not experience a recession, and this led to a further increase in German investments in Poland. In the years after 2008, the German industry’s focus on Central and Eastern Europe helped Germany increasingly recover from the Eurozone crisis.

Due to the shift to the East, Germany’s already low willingness to “share the costs of economic stability in Southern Europe” further decreased during the Eurozone crisis.

At the same time, Poland’s deep integration into German production chains was further strengthened by German investors being much more active than those from other EU countries.

The core activities of Polish factories were focused on exporting products to German companies. In this context, the Central European countries—the “Visegrad Four”: Poland, the Czech Republic, Slovakia, and Hungary—have a similar export structure dominated by four sectors: the chemical industry, metal production, the electrical industry, and the automotive industry. A strong export increase has been recorded, especially in the latter two sectors.

Poland is of critical importance to the German export market

Poland’s role as a producer of intermediate goods for German industry enabled the country to surpass China last year to become Germany’s fourth-largest sales market.

The reason for this is that most of the products Germany exports to Poland are processed in Polish factories and then exported back to Germany. Poland is therefore an important intermediate stage in German production chains.

Looking at the other side of the equation, in 2024, more than 27% of Poland’s total exports went to Germany. This rate is far above that of the Czech Republic and France, which account for just over 6% of Poland’s total exports.

Poland’s economic dependence on Germany is also reflected in the fact that in 2018, almost 10% of Poland’s gross domestic product was tied to trade with Germany.

More than 7% of this figure stems from the demand of German end consumers, while 2.6% comes from deliveries to German factories.

In 2020, 8.2% of all employees in Poland, or about 1.2 million people, were dependent on exports to Germany.

Central and Eastern Europe compete for German investment

Another factor in favor of German industry is that the countries of Central and Eastern Europe compete regionally with each other to offer the most attractive investment conditions.

For example, in the mid-1990s, the Polish government established the first special economic zones, offering tax breaks for investments in structurally weak regions.

After joining the EU in 2004, the Polish Ministry of Economy launched a targeted aid program primarily for large companies. Until 2004, investment zones were determined by Warsaw. After Poland’s accession to the EU, foreign companies were able to choose their own locations.

Many companies followed their competitors or business partners, which led to a concentration of foreign companies in special economic zones that were already in a better economic position.

An example of how German companies benefit from regional competition in Central and Eastern Europe is Volkswagen’s (VW) plan to build six battery “giga-factories.”

Poland and Hungary have so far managed to outperform other candidate countries. Thanks to the competition between them, VW received the largest possible investment incentives through tax breaks, the construction of transport infrastructure, and the retraining of workers.

EU funds for Poland are actually flowing to Germany

Since joining the EU, Poland has had access to comprehensive EU funds. Most of these funds come from the EU Structural Funds, created to reduce regional disparities.

Between 2004 and 2018, Poland received just under 102 billion euros in funds. It used this money to expand road infrastructure, develop renewable energy sources, and finance environmental protection measures.

Poland is a recipient country in this context: it receives more funds than it contributes to the EU budget.

An important principle for accessing EU funds is national co-financing: Poland must contribute its own state funds to the supported projects.

Research shows that the EU’s cohesion policy has further deepened the German-Polish division of labor: German companies supply machinery, chemical products, and construction materials for EU-funded projects.

In this way, EU subsidies to Poland and the Polish state funds required for co-financing increase the profits of German companies.

In contrast, Central and Eastern European countries receive only a small share of the EU’s research and development funds. For example, 95% of the funds from the Horizon 2020 program (2014-2020) went to the EU-15 countries before the EU’s eastward expansion, especially Germany, the United Kingdom (before Brexit), France, Spain, and Italy.

The Central and Eastern European EU countries, however, received only 4.7%.

EU funds, therefore, act as a decisive lever in reproducing the existing division of labor within the EU. These funds contribute to countries like Poland remaining in a kind of “extended workbench” status for Germany.