East Europe’s Most-Vulnerable Nations as Brexit Turmoil Unfolds

Eastern Europe has been singled out as the region with most at stake in the aftermath of the U.K.’s Brexit vote. Some parts are more exposed than others to the turmoil.

Workers from the Baltics to Bulgaria flocked to Britain as the European Union broke down borders. The bloc’s development funds have helped build roads and bridges in Poland. Exports have flourished from free trade.

The uncertainty that’s gripped the continent since British voters decided last month to split from the EU has put all of that in jeopardy. Amid uncertainty over the fate of the 1.5 million citizens of eastern European countries living in the U.K., the EU budget and trade rules, those most at risk are becoming clear.

“Lithuania, Latvia, Hungary and Poland are the most exposed if the U.K. leaves,” Aarti Sakhuja, a credit analyst at S&P Global Ratings, said in a note. She cites “their large migrant populations, remittances, trade links, and the importance of EU funds to finance investment.”

Lured by higher wages and low unemployment, Poles and Romanians make up the biggest share of eastern European immigrants into the U.K. Workers from Poland, the EU’s largest eastern member with a population of 38 million, began arriving after entry into the bloc in 2004, while Romanian citizens gained access to work freely in Britain in 2014.

With the U.K.’s conservative party having just named a new government, their fate -- and that of the EU’s principle of free movement -- remains unclear. Philip Hammond, the U.K.’s newly appointed chancellor of the Exchequer, urged Brexit Secretary David Davis to secure as much access to the EU’s common market as possible, a goal that will probably require a trade-off in maintaining free movement of labor with the bloc.

While Poles also send the most money home, at $1.2 billion a year, the figure represents a small fraction of the nation’s $471 billion economy. Remittances are a bigger issue for countries such as Latvia, whose gross domestic product is less than a 10th that size.

In terms of trade, the Czech Republic and Latvia send most exports to the U.K. -- about 4 percent each, S&P estimates. A shock through this channel isn’t likely though, with the region largely dependent on other trading partners within the bloc, according to Erste Group Bank AG

“The largest negative impact on growth in central and eastern Europe will not come through any possible deterioration of direct trade relations with the U.K.,” it said in a report the day after the referendum, highlighting a potential bloc-wide slowdown as a bigger risk.

Development funds are the final unknown. With 114.7 billion euros ($127.4 billion) earmarked in subsidies from the bloc’s 2014-2020 budget, Poland has most at stake, though Britain won’t stop paying until its completing departure at least two years initiating it. Even then, London may have to contribute funds to maintain access to the  EU’s common market.

Hostility toward the EU from nations such as Poland and Hungary, which has intensified since the Brexit vote, also heightens the risk transfers could drop.

“A key long-term consideration is whether the EU will reduce funding to the region after the current budget expires,” Sakhuja said. “Cuts to structural and cohesion transfers could be substantial, particularly if the main benefactors were to take a tougher stance on the trend of unilateralism in the region.”

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