Hi, this is Piotr Skolimowski in Warsaw and Irina Vilcu in Bucharest. Welcome to our weekly newsletter on what’s shaping economics and investments from the Baltic Sea to the Balkans. You can subscribe here.

More Clouds

The region’s political mainstream may have won a reprieve in Romania, but pro-European Union forces now face a cliffhanger vote in Poland just as investors thought they might be able to breathe more easily.

Prime Minister Donald Tusk has a little over a week for his team to convince the electorate that their pick for president is the one. Warsaw Mayor Rafal Trzaskowski faces Law & Justice opposition candidate Karol Nawrocki in a runoff ballot on June 1 that’s a lot tighter than opinion polls had predicted.

The gap between them in last Sunday’s first round was less than two percentage points. Worse still for Tusk’s camp is that the far right did better than expected and those votes are now more likely to go Nawrocki’s way in what’s become a referendum on the government. The zloty weakened and stocks and bonds dipped.

The dilemma is what to do about it. There’s disillusionment over the perceived failure to come good on the promises that helped Tusk and his coalition partners sweep to power 18 months ago. But with Poland running the EU’s second-widest budget deficit relative to gross domestic product, it’s not clear whether the government can do what governments do in times like these: announce some more spending plans.

Donald Tusk, Poland's prime minister, has a little over a week to help his party’s presidential candidate secure victory. Photographer: Andrew Kravchenko/Bloomberg

Then there’s the nation with the EU’s widest deficit. In Romania, Bucharest’s independent mayor managed to keep out the far right to win the presidency, but it could take weeks to form a new government. One can’t come quickly enough. As S&P Global Ratings told Bloomberg, the nation faces a “substantial” challenge to correct its finances.

Around the Region

Serbia: President Aleksandar Vucic denied there was any snag in plans for Jared Kushner’s firm to build a luxury hotel and residences in Belgrade. The development is one of several real estate ventures embarked upon by Kushner in the region.

Poland: A Finnish maker of advanced Earth-observation satellites plans further investments in Poland as it sees increased demand from countries that want to improve their intelligence-gathering capabilities in space. 

Czech Republic: Colt CZ Group announced plans to double both its sales and operating profit over the next five years, mostly through acquisitions, as the gunmaker benefits from increased public spending on security.

Ukraine: US President Donald Trump said Kyiv and Moscow would “immediately start negotiations” toward a ceasefire, but he signaled they may be without the US and walked back his sanctions threat for Russia. The future of Ukraine and Europe's broader security is now likely to be shaped by events on the battlefield.

Lithuania: Germany is ramping up its battle tank brigade in the Baltic country to strengthen NATO’s eastern flank as European allies take unprecedented steps to deter an increasingly hostile Russia.

Chart of the Week

Romania’s central bank spent billions of dollars of reserves to shield the currency from political turmoil. After holding the leu stable, policymakers capitulated and let it slide to the weakest levels on record when support for the far right in the presidential election triggered a market selloff. The leu rebounded this week after a pro-European mayor of Bucharest won the runoff.

By the Numbers

• Romania’s newly elected president, Nicusor Dan, said a budget deficit of 7.5% of GDP is a realistic target for this year.
• The EU’s 27 member states gave initial approval to a €150 billion ($169 billion) defense fund that will distribute money to countries looking to invest in security capabilities.
• Latvia is in talks with German weapons manufacturer Rheinmetall AG on producing defense equipment domestically as part of an effort by the three Baltic nations to bolster military spending to 5% of GDP. 

Things to Watch

• Polish premier Tusk warned the Baltic Sea is becoming “a new area of confrontation” with Russia, putting the country’s critical infrastructure increasingly at risk.
• Hungary’s central bank is expected to keep its key interest rate at 6.5% on Tuesday due to global risks and expectations around inflation.
• The Czech Republic reports preliminary GDP data for the first quarter on Friday.

Final Thought

Hungarian Prime Minister Viktor Orban was a late-comer to using the mobile phone and is known for his preference for pen and paper to write speeches. But faced with a social media-savvy opposition leader, he’s changed tack. Last weekend, Orban spoke at a ruling Fidesz party event dubbed the “Fight Club,” where he sought to recruit what he called a “digital army.” Trailing in polls and with an election less than a year out, the five-term nationalist leader is taking no chances. A bill Orban is co-sponsoring would cut off funding to independent civil society groups and media in what critics say has echoes of Russia’s crackdown on dissent.

Viktor Orban’s “Fight Club.” Source: Prime Minister of Hungary

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