KfW Research Focus on Economics Will economic relations between Germany and Poland thrive post-coronavirus? No. 296, 27 July 2020 Author: Dr Matthias Bittorf, phone +49 69 7431-8733, [email protected] The economic relations betw een Germany and Poland determining factor in Germany’s consistent support for have continued to develop w ith remarkable dynamic in the Poland’s integration into the West (particularly NATO and the last decade, after already experiencing a rapid upturn w ith EU) . Poland’s accession to the EU in 2004. The volume of trade has grow n tw elve-fold since 1994. Today’s very Ge rm an-Polish trade has grown continuously over many lively economic exchange betw een Poland and Germany years can rightly be described as an important anchor of stability In the ranking of Germany’s most important trading partners, in the relationship betw een the tw o countries. The asym- its second-largest EU neighbour – w hich has been grow ing at metry that still characterises German-Polish economic above-average rates – has continuously climbed the ladder relations is diminishing. Poland is Germany’s fifth most in the past years – from rank 12 prior to EU accession to rank important supplier and its investment in Germany is 6 (as at 2019; behind China, the Netherlands, the US, France increasingly gaining importance. As neither of the tw o and Italy but ahead of the United Kingdom). The volume of countries is able to w ard off the coronavirus-induced trade betw een Germany and Poland has grow n massively recession, the question now is w hat consequences the since 1990, increasing by 4.2% to EUR 123.5 billion in 2019 pandemic w ill have for bilateral trade and w hether they (see Figure 1 for the development of bilateral exports and can continue on the path of economic cooperation that imports), w hile Germany’s foreign trade overall increased by 4 has been so successful to date. a mere 1.0% in 2019. Poland’s foreign trade – a fundamental structural change Figure 1: Trade between Germany and Poland since 1990 with a strong shift to the west In EUR bn The political upheaval of 1989/1990 and Poland’s resulting 70 decision to transition to a market economy system initially spelled the end for the economic exchange betw een the 60 Federal Republic of Germany and Poland under the rules of 50 1 traditional East-West trade. With the implementation of a 40 comprehensive economic liberalisation (specifically including 30 foreign trade) on the basis of the Balcerow icz Plan 2, the 20 sector ministries that had full competence w ere dissolved 10 and businesses on the Polish side w ere subsequently permitted to manage their foreign trade partners themselves 0 1990 1994 1998 2002 2006 2010 2014 2018 w ithout restriction as w ell. This resulted in a very far-reaching DE exports to PL DE imports from PL regional reorientation of foreign trade. The share of Polish foreign trade w ith developed Western economies grew fast Source: German Federal Statistical Office from 1990, the more so as the loss of most of the Soviet/Russian market forced imperatively a sw ift German-Polish trade has also show n impressive grow th diversification of sales markets. Poland’s rapid economic compared w ith other central European countries (cf. Fi- orientation tow ards the w est w ent hand-in-hand w ith a gure 2). Ow ing to its proximity and gradually modernised quickly grow ing foreign trade volume. The resulting need for economic structure, Germany’s eastern neighbour has modern technologies and consumer goods w as largely met benefited greatly from the strength of the German economy by neighbouring Germany – the w orld’s third-largest in the past decade and the resulting demand for goods and economy at the time. Germany’s steady sales market services. Germany is far and aw ay Poland’s most important provided a very propitious environment for the development trading partner – for imports as w ell as exports. of aspiring Polish companies interested in planning certainty. At the same time, German enterprises benefited from the By w ay of illustration, Germany accounted for 27.5% of Polish sales market, w hich w as very receptive after years of Poland’s goods exports in 2019 (follow ed at a considerable undersupply, from local industries’ vacant production distance by the Czech Republic w ith 6.2% and the United capacities and, not least, from labour cost advantages. This Kingdom w ith 6.0%). It is also Poland’s main supplier w ith a enabled the Federal Republic of Germany at the beginning of share of 21.4% (follow ed by China w ith 12.3% and Russia 5 the 1990s to become Poland’s most important trading partner w ith 6.5%). Poland’s export structure, w hich has been 3 by far. The closer economic ties forged at the time w ere a gradually improved since 1990 and is now extremely w ell Note: This paper contains the opinion of the authors and does not necessarily represent the position of KfW. KfW Research 6 diversified (w ith no sector currently taking more than 12%) , Poland have risen continuously and the country has lost its is characterised by processed goods such as motor vehicles importance as a location for mass industrial production of including accessories, mechanical engineering products and goods w ith a high proportion of manual w ork to countries a significant amount of furniture and household appliances, such as Romania and Ukraine. as w ell as high-quality food products (Germany’s imports from Poland w ere last dominated by motor vehicles and parts Figure 3: Target sectors of German investment in Poland w ith 13.6%, machinery w ith 9.9% and food w ith a share of In per cent 7 9.3%). Numerous foreign direct investment (FDI) trans- 3.4 1.1 actions drive this modernisation and export grow th and 4.3 significant amounts of German investment in Poland since 6.9 the beginning of the transition of 1989/1990 (cumulative inflow s of EUR 35 billion up to 2018) have been flow ing into 38,9 high value-added manufacturing (especially the automotive 10.9 industry) and the finance and insurance industry. Consider- able sums have lately been going to the outsourcing of business processes (particularly in the IT sector) (cf. Figure 3). 17.2 Figure 2: Development of foreign trade volume between Germany and selected countries In EUR bn 18.1 Manufacturing 140 Providing financial and insurance services 120 Trade; Vehicle upkeep and repairs Information and communication 100 Real estate Providing other economic services 80 Energy provision Other 60 40 Source: Polish-German Chamber of Industry and Commerce Figure 4: Target regions of Polish foreign direct 20 investment for 2020–2021 0 In per cent of internationally active companies 1990 1994 1998 2002 2006 2010 2014 2018 EU-28 63.1 Poland Bulgaria Slovakia Czech Republic Germany 15.8 Hungary Romania Other EU-15 Member states 15.8 Source: German Federal Statistical Office Czech Republic 10.5 In the other direction as well, investment in Germany by Other Central European 21 Polish firms that have bolstered their capital base has member states increased noticeably. Polish direct investment in Germany North or South America 10.5 grew vigorously of late, 8 filling a stock of EUR 2 billion according to Deutsche Bundesbank (2018). The Africa 10.5 approximately 1,500 Polish companies currently operating in Germany are mainly active in the construction, Ukraine 10.5 transport/logistics and food sectors. Many successful, w ell- Russia 5.4 funded Polish SMEs are aspiring to expand into international markets. Germany is a particularly attractive investment 0 10 20 30 40 50 60 70 destination (cf. Figure 4).New business development is Source: Polski Instytut Ekonomiczny (PIE) especially w elcome and needed in the border regions of Brandenburg and Mecklenburg Western Pomerania, many of Poland – an attractive but changing market as a result of w hich are structurally w eak, demographically disadvantaged the coronavirus crisis German businesses very quickly recognised Poland’s poten- and in search of new prospects. All of this also underscores tial as a country 9 w ith a domestic market of 38.5 million the fact that the lopsided image of Poland as an ‘extended residents w hose economy w as opening up to the West and w orkbench’, w hich was justified to a certain extent in the stabilising. For the now approximately 5,000 German 1990s, no longer reflects the reality. Since then, w ages in Page 2 Focus on Economics businesses operating in the Polish market (as at 2020), the experiences from the crisis. These additional funds w ould main investment motives – apart from the highly educated, help Germany’s second-largest neighbour, w hich has gener- motivated w orkforce and the tight netw ork of qualified ally proven to be very capable of responding to the crisis, to supplier firms – include attractive taxation rates (a 19% push forw ard programmes already designed at national level corporate tax rate, much low er than in Germany), competitive that are aimed at improving the public health system, w hich labour costs and generous support schemes available from is suffering from structural deficits, and the still extremely EU funds, w hich along w ith the national support instrument of alarming air quality. A substantial portion of EUR 1.6 billion Special Economic Zones also benefited the considerable from the national crisis support package is also intended to local investment activity of the German automotive industry, bolster the healthcare system.