However, this arrangement is now close to breaking as the very factors that once drove its success have turned into liabilities. The primary culprits? Structural problems in the German economy and rising labor costs across the V4 region.
The Origins of the Supplier Model
To fully grasp the current predicament, it is essential to understand how this model emerged. Following the collapse of communism in the 1990s, the V4 nations found themselves in a capitalist world with which they had little experience. International corporations and financial institutions, which provided the necessary capital to fund economic restructuring, therefore lent a hand in facilitating their transitioning away from state-controlled economies.by
Foreign banks—primarily Western European ones—played a crucial role in this process, working in tandem with international businesses. Much of the financing used in privatisation was allocated to these firms, leading to key industries falling under foreign ownership. These enterprises were either restructured to operate within the capitalist market or allowed to fail, creating market gaps that Western products and services subsequently filled. It is a playbook all V4 economies went through.
The arrangement benefited all stakeholders. Western corporations gained new markets and access to a cheap labor force. After the V4 nations joined the European Union, the alignment of their legislation with the EU’s further reassured investors that their capital was protected. Meanwhile, politicians in the V4 countries welcomed the new situation, as it freed them from the headache of managing their own economies. Above all, their primary role was now to accommodate foreign investors. For local populations, the arrival of foreign businesses promised more employment and the prospect of rising wages.
One crucial fact is often overlooked today. The West frequently claims that the Visegrád Group countries exploit the EU’s subsidy system. While it is true that since joining the EU, the V4 nations have been net recipients from, rather than net contributors to, the common budget, those funds they receive are neither gifts nor to be spent at their discretion. Instead, these subsidies are allocated to state institutions, which then redistribute them in accordance with the EU’s subsidy policies—which happen to be ideologically driven.
The Czech Republic well illustrates this point. In 2023, after deducting its contribution to the EU budget, the country received approximately €2.9 billion in financial assistance. Yet, according to data from the Czech National Bank, around €12 billion flowed out of the Czech economy in the form of dividends alone. EU subsidies, therefore, do little to stem the substantial outflow of capital from V4 countries.
Germany’s Struggles
The supplier model, in which the V4 countries acted as an industrial extension of Western Europe, received a further boost after the 2008 financial crisis. To remain globally competitive, European firms optimised their operations, shifting their supply chains to Central Europe. The V4 economies, which recovered from the crisis more swiftly than their Western counterparts, experienced a rise in domestic consumption, further supporting European industry.
However, concerns about over-reliance on Germany’s economy grew. Dependence on a single dominant trade partner made the entire system vulnerable. Any shock to this fragile structure risked bringing grave repercussions—such a shock finally arrived, with the war in Ukraine.
Germany lost access to cheap Russian energy, leaving it reliant on expensive renewables ill-suited for energy-intensive industries such as the manufacturing and chemical industries. Rising energy costs have reduced the competitiveness of German industry in the world and especially in China, a key market.
Though the full impact has yet to materialize in the V4 economies, it is worth bearing in mind that economic cycles are long, and that it is only a matter of time before the ripple-effect caused by Germany’s malaise is felt throughout the region. Given Germany’s role as the V4’s principal trade partner, the ramifications could be severe.
To illustrate the extent of this dependence, consider the following 2023 trade data. Poland’s trade with Germany amounted to €89 billion, representing 28% of its total exports. The Czech Republic exported goods worth €60 billion to Germany, accounting for 33.9% of its total exports. Hungary’s exports to Germany totaled €42 billion, or 30% of its overall exports. Slovakia, though slightly less reliant, still directed €22 billion in exports to Germany—20% of its total. Notably, Slovakia’s second-largest trade partner is the Czech Republic, which often acts as an intermediary for goods destined for Germany.
The End of Cheap Labor in the V4
Beyond Germany’s economic turmoil, another factor is signaling the end of the V4’s supplier model: rising labor costs. While economic cycles fluctuate and the V4 countries might attempt to wait for Germany’s recovery, the long-term trend of increasing wages renders the existing framework increasingly unsustainable.
Consider that, in 1999, the Czech Republic’s minimum wage stood at 3,600 CZK (approximately €95 per month). By 2008, it had risen to €320. As of 2023, it reached 20,800 CZK, or about €832 per month. Similar trends are evident across the V4. Inflationary pressures and demographic shifts continue to drive wages upward, while governments face mounting financial demands to sustain pension systems and healthcare services.
The pension system, in particular, is a looming crisis. While the baby boomers of the 1970s and 1980s are nearing retirement, birth rates have declined significantly since the transition to capitalism. Reducing wages to restore competitiveness is politically unfeasible—no party could hope to win an election on such a platform. Theoretically, the V4 could regain competitiveness through currency devaluation, but this option is only available to Poland, Hungary, and the Czech Republic, as they retain independent central banks. Despite calls from Polish Prime Minister Donald Tusk and Czech President Petr Pavel to consider adopting the euro, these efforts face strong public resistance. Slovakia, having already adopted the euro, lacks this flexibility.
The Absence of a Long-Term Strategy
The current situation exposes a fundamental weakness: the V4 nations lack a coherent long-term economic strategy. There is one exception however. Under Viktor Orbán, Hungary has pursued a more independent foreign policy, which carries economic implications with it. One notable initiative is Hungary’s investment in a Chinese BYD electric vehicle factory.
Meanwhile, the Czech Republic and Slovakia have only recently begun to acknowledge that a return to the old model is impossible. Even so, strategic planning remains absent, and their political leaders lack the resolve to challenge entrenched economic structures.
One possible avenue for greater economic self-sufficiency could be the establishment of a joint V4 stock exchange, fostering capital market development. Access to domestic capital is a critical component of economic sovereignty. Without such structural reforms, the V4 countries risk remaining in bondage to external economic forces, as it faces ever diminishing returns from a model that has long outlived its usefulness