The auto sector is macro-critical in a number of European countries. It comprises a large share of
manufacturing, employment, and exports. For instance, in Germany—the largest auto producer in Europe—the sector constitutes about 20 percent of manufacturing, 12 percent of employment, and 10 percent of goods exports (Figure 1). In some countries in Central, Eastern, and Southeastern Europe (CESEE), such as the Slovak Republic, it has an even larger footprint. The European auto industry is among the world’s biggest motor vehicle producers and the largest private investor in research and development among all sectors in the European Union (EU).1
The auto sector also constitutes one of the main supply chains in Europe. In the early 1990s, as many
countries in CESEE opened their borders to international trade and investment, their geographical proximity and cultural similarities, along with the large labor cost differential and increasing competition, led many German auto producers to shift large parts of their production to these locations, thus creating the German-Central European supply chain (IMF 2013). Since then, the sector has become increasingly complex with further fragmentation of production enabled by technological change and globalization. While bringing substantive efficiency gains, the fragmentation of production has also exposed the sector to disruptions in other
sectors and countries, as exemplified during the COVID-19 pandemic.
The COVID-19 pandemic hit the auto sector hard. Containment measures ground car production to a halt in mid-2020. Subsequent lockdowns had a more limited impact on production, but in 2021 the sector was challenged by rising global demand for semiconductors, due to a boom in the production of household electronics, and disruptions in the supply of key inputs, because of the combined effects of the pandemic, weather events, and trade policies. As a result, auto producers were forced to scale back production of certain car models, and reduce the number of shifts of their workers.2

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