Brexit: Czech Republic, Poland and Hungary among most vulnerable EU countries

London, United Kingdom – After months of backbreaking negotiations, the EU and UK have reportedly agreed on a draft version of a withdrawal treaty. As the Brexit deadline draws nearer, a new ING report sheds some light on the countries most at risk, including the Central European nations of Czech Republic, Hungary and Poland.

According to the paper, released on Tuesday by the Dutch bank, “after the Netherlands, it is the Czech Republic, Poland and Hungary with the largest relative exposures to UK demand”.

Firstly, changes to key supply chains and disruption of bilateral trade might put the Central European economies at risk. In the case of the Czech Republic and Hungary, the impact will be strongest in the car-making industry, crown jewels of their manufacturing sector and strong driver of their exports to the UK. Britain is, for instance, the second exports market for the Czech auto industry after Germany.

Poland’s agricultural sector might also take a strong hit from the disruption caused by Britain’s withdrawal, as agricultural & processed food exports to the UK account for 1.4 million euros and 12% of overall exports to the country, according to the report.

The expected drop in remittances – money expat workers send back to their homeland – also contributes to those countries’ exposure to Brexit – especially Poland. According to the World Bank, the UK is the fourth largest remittance-sending country in the world. With total inflows of 1 billion euros a year from the UK (out of 2.6 billion from the EU), Poland is the largest recipient of remittances and is therefore vulnerable to stricter immigration rules set to kick-in after Brexit. Hungary and the Czech Republic are far behind, with 0.15 and 0.14 billion euros of remittances respectively.

However, the ING report points out that Polish workers, some of whom have been established in the country for over a decade, are more likely to receive a “settled status” than newer EU immigrants, like Romanians.

Britain’s exit from the bloc will also leave a hole in the EU budget that might directly impact the Central European countries, who count among the largest recipients of the EU’s structural funds (roughly 40% of total EU budget expenditures). During the last multi-annual financial framework (2014-2020), the UK contributed to around 6% of the EU budget. The impact might however be diminished if the Brexit transition period is extended beyond 2020, in which case Britain would still contribute to the EU budget during that period.

The UK’s exit will also have another, indirect impact: the country’s withdrawal from the bloc will cause the decline of the EU’s average GDP per capita, meaning that some Central European countries are poised, after Brexit, to cross above the 75% EU average threshold and will thus become less eligible to EU funds. Moreover, new criteria to EU funds eligibility (such as youth unemployment rate, migrant integration, low education level, etc.) might also redirect some of the bloc’s structural funding from Eastern to Southern European regions.

Overall, ING estimates that Poland, Hungary and the Czech Republic might potentially see a “20% decline in real terms” of EU funding in the next multi-annual financial framework (2021-2027). And one should also keep in mind that some EU countries are attempting to link European funds to respect for the rule of law, a move targeting Poland and Hungary over their controversial domestic reforms.

With Brexit, Central European countries have lost their closest and most influential political ally within the bloc. It also appears that they are going to lose one of their main economic partners.