The New Cold War Is Exposing Europe’s Fault Lines

These regional dynamics are part of a much bigger story. The globalization of the 1990s now seems like a thing of the past. Call it “de-globalization,” “geoeconomic fragmentation,” or something else, but protectionism and geopolitical interference in global trade are on the rise. The global geopolitical order is increasingly bifurcating as China rises, while digitalization and the green transition challenge preexisting industrial status quos. “Disruptor” events further intensify the pressure: Donald Trump’s tariff escalations, the war in Ukraine, and the COVID-19 pandemic have each strained the flow of strategic commodities and technologies such as semiconductors, critical raw materials, and fossil fuels. The effect of these disruptions has been felt across global supply chains.

Among advanced capitalist regions, Europe has arguably the most to lose from this new landscape — and not only because it is caught between an increasingly hostile Washington and Vladimir Putin’s imperial revival. Its prosperity has long hinged on high-value exports and an open, rules-based trading system. But rising fragmentation, politicized trade, and the ascent of the Global South are now challenging the very foundations of that model.

Several years ago, South–South trade overtook, for the first time in history, the volume of trade between advanced northern economies, showing that trade flows are reshaping in ways that increasingly bypass Europe. And the fallout from these changes is now surfacing in the performance of Europe’s economic model. Germany — the heart of it, and the EU’s export engine — has been in a sustained industrial slowdown, underscoring the fragility of the bloc’s traditional growth architecture.

Fears of global decline have pushed the EU to abandon “business as usual” and embrace a more hands-on industrial policy agenda. The highly publicized 2024 Draghi report, a document put together by former prime minister of Italy and president of the European Central Bank to offer solutions to the continent’s growth crisis, warned of the EU’s “slow agony” unless competitiveness improves.

Even as it pursues traditional market access deals — like the long-stalled Mercosur free trade agreement between the bloc and Latin America — the EU is increasingly turning toward targeted support for strategic, geopolitically sensitive sectors. The EU Chips Act and Net-Zero Industry Act, flagship initiatives of the European Commission under Ursula von der Leyen, are backbones of its new industrial strategy, aimed at securing critical technologies and reducing dependence on foreign supply chains.

But while Brussels sets its sights on a sleek future of AI breakthroughs, green hydrogen, and homegrown semiconductors, not all of Europe is equally positioned to follow. Much of the EU’s Eastern periphery still runs on the logic of an older economic playbook: hands-on, carbon-heavy manufacturing, foreign-owned assembly lines, and reliance on export-driven industries. Small Central and Eastern European economies such as Slovakia, Hungary, or Slovenia are among the most trade-dependent in the world. Unlike much of the EU core, they lack large domestic markets or deep capital reserves and rely heavily on foreign capital and the appetite of others for their exports.

This reflects how Central and Eastern Europe was integrated into the European economy: liberalized, export-oriented, and capitalized largely through Western European investment. For years, the region specialized in low-margin industrial production, competing on cost and relying on incremental technology transfer. The model delivered clear convergence and sustained growth for the EU’s post-2004 Eastern entrants.

But it came with strings attached. Today much of Central and Eastern Europe’s industrial base supplies intermediate goods to larger economies, with little say over how value chains are structured or where profits land. And this dependence is now colliding with the EU’s evolving strategic direction and global trade turbulences.

First, the long-standing emphasis on exports and foreign investment pushed Central and Eastern European governments to prioritize cost competitiveness at the expense of wages. The result is weak domestic demand in economies that are already small and lack the scale of larger internal markets—leaving little buffer when global trade slows. Their size — and, in many cases, Eurozone membership — also means they have limited fiscal and monetary tools to stimulate growth or pursue large-scale industrial policies of their own. This makes it nearly impossible to replicate the West’s turn toward large-scale industrial policy and strategic investment.

Second, Central and Eastern Europe’s industrial orientation leaves it especially exposed to global shocks. Its economies are heavily invested in sectors they neither control nor anchor, like electronics and automotive, which rely on long, complex supply chains and access to energy and critical raw materials — all increasingly politicized. The pandemic and the war in Ukraine laid this bare, hitting the region particularly hard.

Third, the region’s growth was historically driven more by technology transfer than homegrown innovation. Research and development investment remained low, while social policy stayed focused on compensatory transfers typical of manufacturing-heavy economies, instead of human capital creation. That has left little foundation for a quick pivot into higher-value sectors, particularly in knowledge-driven services like information and communication technology. In a context where strategic autonomy, a byword for an independent European industrial and military strategy, now hinges on domestic innovation capacity, this puts Central and Eastern Europe at a growing structural disadvantage.

Yet the central vulnerability for much of Central and Eastern Europe is its one-sided reliance on Germany’s manufacturing complex. As global trade slows, Germany’s export-driven economy is stalling. The European Commission expects it to be the second-slowest economy in the EU in 2025, already following two years of recession. When Germany exports less, it invests less — and buys fewer inputs from its eastern neighbors.

Nowhere is this industrial exposure more concentrated than in the automotive sector. Car manufacturing has been central to German industry for decades, but in some Central and Eastern Europe countries, especially Slovakia, it is even more structurally dominant, with entire supply chains organized around it. And now the global shift toward electromobility is shaking the industry’s foundations. China’s rapid rise as an EV superpower is redrawing production hierarchies with supply networks reorganizing around new centers. Some European plants are facing closures. According to the International Monetary Fund, Czechia, Hungary, and Slovakia are among the most exposed to these disturbances.

The bottom line is that what once functioned as a workable model of external orientation is now turning into a structural liability. That model hinged on stable globalization, strong German demand, and EU cohesion funds, financial resources designed to reduce economic disparities across the bloc. But as trade fragments and sectors realign, those foundations are crumbling. The structural misalignment between core and periphery is deepening, and with it, the risk that Central and Eastern Europe is sidelined from Europe’s new strategic center of gravity.

The EU’s evolving policy response has done little to address this problem. If anything, it has deepened it in key areas. For instance, the bloc’s “strategic autonomy policy package” favors large economies that have the scale and fiscal and institutional capacity to act fast.

In “peace time,” EU cohesion funds have constituted the main tool for driving regional convergence. But their emphasis was on hard infrastructure, with technological upgrading receiving less priority. As a result, they did little to prepare the region for the kind of strategic autonomy Brussels now champions. The COVID recovery NextGenerationEU money briefly broadened this scope, but its one-off, front-loaded design and limited uptake left the structural gap largely intact.

Meanwhile, many Central and Eastern European governments have been slow to embrace the green transition. The region remains heavily reliant on fossil fuel imports, which, since the onset of the war between Russia and Ukraine, has translated into high energy costs that weigh on its industrial base. EU climate policies such as the Carbon Border Adjustment Mechanism — a new tariff on imported materials like steel and cement, based on how much carbon was used to produce them, scheduled to take effect in 2026 — are projected to add further strain on many regional industries.

But most crucially, in response to the US Inflation Reduction Act and the energy crisis, the EU relaxed its state aid rules: a special framework designed to prevent countries from freely subsidizing domestic industries and thus preserve competition in the EU single market. The rationale was to boost EU competitiveness by making it easier for governments to support strategic sectors. This had previously been a slower, more bureaucratically restricted process.

Unsurprisingly, this move has disproportionally benefited those already best equipped to act. In the first year after the relaxation, Germany and France accounted for nearly 80 percent of all approved state aid. With bigger coffers, more extensive bureaucracies and infrastructure, and bigger companies, the economic powerhouses have more capacity to deploy sizable subsidies fast, while smaller countries are structurally unable to compete.

Another case in point is the Chips Act. Though framed as a pan-European initiative for technological sovereignty, its implementation has so far concentrated overwhelmingly in Western Europe. Most major investment announcements and subsidy allocations have gone to Germany, France, Italy, the Netherlands, or Spain. While Poland has been selected for a pilot line in advanced semiconductor technologies, and Onsemi is planning a facility in the Czech Republic, these remain exceptions to a broader pattern.

In practice, the EU’s flagship effort to future-proof its economy is reinforcing the geographic concentration of strategic industries and deepening the structural misalignment within the Union.

And this misalignment is not just about economics. It is also shaping the region’s domestic politics and reinforcing a growing sense of strategic ambiguity — not only because of the war in Ukraine or proximity to Russia.

For years, Central and Eastern Europe has been the cradle of Euroskeptic politics and governments at odds with the EU mainstream. Hungary’s Fidesz regime remains the defining case of “illiberalism” on the continent. Slovakia, now again under Robert Fico, has repeatedly broken ranks on key international issues — recently prompting outrage over his visit to Moscow for the Victory Day celebrations. The European Commission spent years in conflict with Poland’s former Law and Justice (PiS)–led government. Other, less overt tensions have also surfaced: from political backsliding in Bulgaria and Croatia to the recent turbulent presidential elections in Romania.

These political trends originate predominantly from domestic dynamics and ideological battles. Local illiberal leaders have leveraged social grievances tied to the shock therapy of the 1990s, tapped into the region’s entrenched social conservatism, and exploited long-standing urban–rural and center–periphery divides.

But increasingly, these domestic trends are also shaping the region’s geopolitical orientation — adding a layer of strategic ambiguity to its relationship with the EU and further exacerbating the tensions stemming from economic dependence and structural misalignment. The result is a space where EU membership coexists with limited policy autonomy and growing openness to alternative capital and geopolitical alignments — conditions that China, more than any other actor, is now actively testing.

Hungary offers the clearest illustration of how this plays out in practice. Its relationship with China blends diplomatic alignment with a steady influx of capital — most notably in the electric vehicle sector. In 2023, Hungary attracted nearly half of all Chinese foreign direct investment into Europe, anchored by CATL’s planned battery megafactory in Debrecen.

These investments reflect Viktor Orbán’s long-running “Eastern Opening” policy, designed to diversify economic dependencies and hedge against Brussels, which helped Hungary soften the blow of Germany’s slowdown and bolster growth and employment at a time when core European demand is faltering.

Diplomacy has followed the money. Hungary has repeatedly shielded Beijing in EU forums — blocking a 2021 statement on China’s suppression of protests in Hong Kong and advocating for softening language on the South China Sea. Xi Jinping’s 2024 visit to Budapest, capped by an “all-weather partnership” announcement, confirmed as much and reinforced the sense of preferential treatment Hungary had already received — for example, through early access to Chinese COVID-19 vaccines. The message from Beijing is clear: strategic alignment is rewarded with capital, access, and status.

The same logic applies next door in Serbia, China’s second major partner. Here, an “ironclad friendship,” affirmed during Xi’s 2024 visit to Belgrade, has reinforced the vector of growing trade ties and Chinese investment, most apparent with a 2023 free trade agreement, the first of its kind in Central and Eastern Europe.

But the perhaps clearest symbol of China’s growing regional presence — and its entanglement with illiberal governance — is the Belgrade-Budapest railway, a flagship Belt and Road Initiative project. In November 2024, the collapse of a newly renovated canopy at Novi Sad station — part of the railway’s Serbian segment — killed sixteen people and sparked nationwide protests against the Serbian government. The protests have little to do with Serbian government’s foreign policy. But the symbolism is hard to miss: a Chinese-led megaproject, in a semi-authoritarian system open to foreign capital, ending in tragedy and sparking political outrage.

The interdependencies between economics, geopolitics, and diplomacy were also on full display during the EU’s 2024 vote on electric vehicle tariffs against China. The outcome revealed who has the most at stake in preserving good ties with Beijing: alongside Germany and Malta, only the three smaller, car-heavy Central and Eastern European economies — Hungary, Slovakia, and Slovenia — voted against. Poland, by contrast, backed the tariffs — and shortly after, Chinese automaker Leapmotor quietly withdrew a planned joint investment with Stellantis in Tychy, in a move widely seen as subtle retaliation.

China may be the clearest litmus test, but it’s not the only one. Other players — like the Gulf states, Turkey, or Russia — are also potentially in the picture. The deeper story is about shifting incentives. For small, export-oriented and often “illiberal” economies, foreign investment remains a lifeline. As EU policy increasingly consolidates around the strategic interests of its core through state aid and green transition, and Washington doubles down on China through “de-risking,” for example by pushing for the exclusion of the Chinese cellphone company Huawei from 5G networks — smaller Central and Eastern European states are expected to comply with frameworks they had no real hand in shaping, often at significant economic and political cost.

Hungary is proof that some are already turning to alternative capital to sustain their key sectors. In place of strategic autonomy, some Central and Eastern European states are beginning to see strategic ambiguity as an increasingly rational response to a world divided along complex political fault lines.

For now, the EU’s Eastern periphery is not about to break away. It is more about drift than defection: a slow erosion of coherence as the old growth bargain loses traction and new incentives emerge. Dependent integration no longer delivers the same returns, and Brussels offers few tools for those unable to pivot on their own.

Even within Central and Eastern Europe, the picture is uneven. In the north, Poland and the Baltics remain immune to strategic ambiguity. They are less dependent on the German industrial hub and firmly anchored in the Western security architecture due to their hawkish stance on Russia. A geopolitical drift away from Brussels — or especially Washington — is not on the table.

It is the smaller countries that make up the true “swing states”: Slovakia, Slovenia, Croatia, Romania, and Bulgaria — beyond Hungary’s already entrenched position. In Czechia and Slovenia, previous illiberal turns did not trigger lasting geopolitical pivots. But now, as elections loom and economic uncertainties deepen, the potential for such recalibration is growing.

Brussels has spent much of the past decade confronting Eastern illiberalism through rule-of-law conditionality and infringement procedures, while its economic offer revolved around cohesion funds and one-off instruments. But these tools were not built for today’s conditions, and they do little to resolve the deeper problem: a center-periphery growth model that no longer holds.

Genuine, EU-wide strategic autonomy cannot rest on a two-speed system, where some states shape industrial policy and global value chains, while others remain subcontracting platforms dependent on capital and demand they don’t control. Without a serious reckoning with the asymmetries in innovation, industrial capacity, and market power, the gap will only grow.

Sure, uneven development is nothing new for the EU — much of Southern Europe has spent the last decade navigating stagnation and austerity. But the challenge faced by Central and Eastern Europe is more about structural exposure without agency. These countries, while technically still “converging,” have few tools to chart their own course. And that’s what now threatens cohesion. When the model no longer delivers, and alternatives exist, even passive alignment becomes harder to sustain.

The paradox is that more autonomy for the periphery may be the only safe way to preserve unity at the core. That means bringing these states into the logic of EU strategy, not just its outcomes. As long as they remain passive recipients of capital rather than active shapers of it, structural misalignment risks hardening into political divergence. And the EU cannot build strategic autonomy on foundations that systematically deny parts of the bloc meaningful agency. If the core keeps pushing for a system that ignores the periphery’s position, it could end up losing it to those willing to make a better offer.