Despite Political Tensions German Investments are Still Resilient in the Country

Despite political tensions, there has been no change in German economic activity in Hungary. In fact, more German investment flows into Hungary than to the Czech Republic or Slovakia, reports Index.

The economic ties between Hungary and Germany have been robust for decades, bolstered by Hungary’s EU membership. This relationship has also led to closer political ties between Budapest and Berlin, evident in the substantial influx of German heavy industry capital into Hungary. Notably, major players like Audi, Mercedes, and BMW have established factories in Hungary, with even the German defense industry, through Rheinmetall, making its presence felt.

However, while Hungary heavily relies on German investment for its economic performance, this dependence also imposes constraints. The traditional automotive industry, pivotal to Hungary’s economy for the past two decades, is expected to decline significantly by 2030.

This necessitates Hungary to explore new avenues.

One such avenue is the involvement of battery factories from China and South Korea, directly linked to German car factories, which enables the production of electric cars. Leveraging its existing infrastructure, Hungary aims to capitalize on this opportunity, even amidst the EU’s transitioning from a corporate tax rate of nine percent to a global minimum tax of 15 percent.

Rheinmetall plant in Zalaegerszeg (western Hungary). Photo: X/SPARTANAT

Yet, potential hurdles loom. Concerns have been raised regarding the political relationship between Hungary and Germany, which could adversely affect the flow of German capital into Hungary.

Moreover, foreign multinationals operating in Hungary have faced pressure from pro-government circles to sell all or a significant part of their subsidiaries to domestic entrepreneurs, as evidenced by the SPAR case.

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A Bloomberg article has highlighted Hungary’s increasing perception as a risky area for German investors, citing a purported one-third decrease in the value of German investments over three years. However, data from the Hungarian National Bank (MNB) presents a nuanced picture.

While 2020 witnessed a significant decrease in the value of indirect investment from Germany, subsequent years have seen a rebound.

Although the aggregate balance for 2020 to 2022 falls short of 2019 figures, drawing far-reaching conclusions from this data remains debatable. Historical trends reveal fluctuations in German investment, with some years experiencing deficits attributed to crises like the refugee crisis in 2015 and the COVID-19 pandemic in 2020. Nonetheless, German private equity investment in Hungary reached its highest level since 2011 in 2022, indicating sustained interest.

Comparisons with neighboring countries underscore Hungary’s resilience. While Slovakia and the Czech Republic also rely heavily on German investment, their recent experiences mirror Hungary’s to a large extent.

Despite political tensions, German economic activity in Hungary remains stable, outperforming regional counterparts.

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Via Index; Featured Image: Facebook/Audi Hungaria Győr

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