The shifting geopolitical landscape following Donald Trump’s return to the White House is pushing the European Union to reconsider its strict fiscal discipline. With the United States signaling its intent to scale back military support for Ukraine, EU leaders are urgently seeking ways to increase their own defense spending.
The most immediate solution under discussion is the exclusion of military expenditure from the deficit calculations that currently restrict member states under EU fiscal rules.
This would be a seismic shift in the bloc’s financial governance. The mechanism for such an exemption already exists: EU rules allow member states to invoke the “escape clause” in the event of exceptional circumstances that significantly impact their public finances. .
A European Commission spokesperson recently confirmed that governments can request this clause be activated, allowing them to spend beyond normal limits without facing sanctions. With NATO’s largest member retreating from European security commitments, many expect a majority of EU countries to take advantage of this provision to expand their defense budgets without breaching deficit limits. If widely implemented, this could effectively weaken or even dismantle the EU’s excessive deficit procedure, which currently applies to several countries, including Poland.
Andrzej Domański, Poland’s finance minister, acknowledged that discussions are already underway about different models of financing within the EU. However, he warned that this should not be seen as a blank cheque for unlimited borrowing. “Deficits remain deficits, and debt remains debt. Changing how we account for spending will not magically increase how much a country can borrow,” Domański said in an interview with Polish Radio, cautioning against unrealistic expectations of a fiscal free-for-all.
In addition to adjusting fiscal rules, momentum is building behind the idea of issuing joint EU bonds to fund defense expansion. Historically, Germany and the Netherlands have been the strongest opponents of such shared borrowing. However, in a notable shift, Friedrich Merz, leader of Germany’s CDU and widely expected to be the next German chancellor following Sunday’s election, has expressed openness to EU-wide debt issuance for military purposes. This marks a dramatic departure from the traditional German stance and indicates that Europe’s largest economy may be prepared to embrace a more collective approach to funding security efforts.
Further discussions on these proposals took place at last week’s summit of European leaders in Paris. Another alternative under consideration is reallocating unspent funds from the EU’s post-pandemic Recovery and Resilience Facility. Given the economic and security implications of the war in Ukraine, some policymakers argue that diverting these funds from pandemic recovery programs to defense spending is a logical step.
While no concrete decisions were made, EU leaders are expected to finalize plans at their next summit in March, where key details of Europe’s new defense financing strategy will be debated.
This would be a seismic shift in the bloc’s financial governance. The mechanism for such an exemption already exists: EU rules allow member states to invoke the “escape clause” in the event of exceptional circumstances that significantly impact their public finances. .
A European Commission spokesperson recently confirmed that governments can request this clause be activated, allowing them to spend beyond normal limits without facing sanctions. With NATO’s largest member retreating from European security commitments, many expect a majority of EU countries to take advantage of this provision to expand their defense budgets without breaching deficit limits. If widely implemented, this could effectively weaken or even dismantle the EU’s excessive deficit procedure, which currently applies to several countries, including Poland.
Andrzej Domański, Poland’s finance minister, acknowledged that discussions are already underway about different models of financing within the EU. However, he warned that this should not be seen as a blank cheque for unlimited borrowing. “Deficits remain deficits, and debt remains debt. Changing how we account for spending will not magically increase how much a country can borrow,” Domański said in an interview with Polish Radio, cautioning against unrealistic expectations of a fiscal free-for-all.
In addition to adjusting fiscal rules, momentum is building behind the idea of issuing joint EU bonds to fund defense expansion. Historically, Germany and the Netherlands have been the strongest opponents of such shared borrowing. However, in a notable shift, Friedrich Merz, leader of Germany’s CDU and widely expected to be the next German chancellor following Sunday’s election, has expressed openness to EU-wide debt issuance for military purposes. This marks a dramatic departure from the traditional German stance and indicates that Europe’s largest economy may be prepared to embrace a more collective approach to funding security efforts.
Further discussions on these proposals took place at last week’s summit of European leaders in Paris. Another alternative under consideration is reallocating unspent funds from the EU’s post-pandemic Recovery and Resilience Facility. Given the economic and security implications of the war in Ukraine, some policymakers argue that diverting these funds from pandemic recovery programs to defense spending is a logical step.
While no concrete decisions were made, EU leaders are expected to finalize plans at their next summit in March, where key details of Europe’s new defense financing strategy will be debated.
Stock market optimism wanes as Ukraine peace hopes fade
After weeks of surging optimism over a potential resolution to the Russia-Ukraine war, financial markets are beginning to retreat as prospects for peace dim. Earlier, speculation had been rife that the United States was negotiating a deal under which it would secure access to Ukraine’s rare earth mineral deposits in exchange for continued military aid. However, Ukrainian President Volodymyr Zelensky firmly rejected the proposal, arguing that it provided no real security guarantees and merely served American economic interests.
The fallout was immediate. U.S. President Donald Trump responded by launching a verbal attack on Zelensky, falsely claiming that the Ukrainian leader had lost the support of his people and should call fresh elections – an assertion quickly amplified by the Kremlin. In reality, polling data shows Zelensky’s approval rating remains above 50%, far from the political collapse that Trump suggested.
As tensions between Washington and Kyiv escalated, investor confidence took a hit. Stock markets in Warsaw, Prague, and Budapest, which had been setting new all-time highs daily, saw sharp declines. The WIG-Ukraine index, which tracks Ukrainian firms listed on the Warsaw Stock Exchange, became a barometer of investor sentiment. Between February 6-18, the index soared by 68%, driven by speculation of a swift end to the war. However, by mid-week, it had fallen 9% in a single day, followed by another 7% decline on Thursday. By Friday, when media reports suggested tensions between Kyiv and Washington might be easing, the index rebounded by 15%.
Poland’s labor market faces post-war uncertainty
A potential resolution to the war in Ukraine would not only reshape geopolitics but could also have profound consequences for Poland’s labor market. According to a report from the Polish Economic Institute (PIE), a significant number of Ukrainian refugees currently working in Poland may return home once conditions in Ukraine stabilize. Surveys indicate that 35% of Ukrainian refugees plan to leave their host countries when it becomes safe to do so.
With 4.3 million Ukrainians currently residing in the EU and nearly 800,000 of them employed in Poland, this could translate into a loss of around 300,000 workers from the Polish economy. The effects would be most pronounced in sectors such as construction, logistics, and manufacturing, which already face labor shortages. Employers in these industries may be forced to raise wages further to attract workers, increasing operational costs.
However, some analysts suggest the opposite could also happen. While many Ukrainian workers may return home, others – particularly young men who are currently barred from leaving Ukraine due to martial law – may seize the opportunity to migrate westward once restrictions are lifted.
The Polish Economic Institute notes that post-war wage levels in Ukraine will play a decisive role. If Ukraine sees rapid economic recovery and strong job creation, workers may be incentivized to stay. However, if opportunities remain scarce, Poland and other EU nations could see a fresh wave of Ukrainian migration.
Slower wage growth in Poland could influence interest rates
Despite ongoing wage increases, salary growth in Poland is beginning to moderate. In January, the average gross wage in Polish companies reached 8,482 złoty (€1,860), up 9.2% from a year earlier. While this remains well above inflation, it is the slowest rate of increase in recent years.
This development has sparked debate among economists. Some argue that slowing wage growth aligns with expectations from the National Bank of Poland (NBP) and could pave the way for interest rate cuts in the coming months. Others point out that, despite deceleration, a near-10% annual rise in wages is still high enough to keep inflationary pressures alive, potentially delaying any monetary easing.
A key factor influencing the slowdown is the smaller increase in Poland’s minimum wage this year, which rose by under 10% compared to last year’s dramatic 20% hike. This suggests that the underlying pressure on wages remains strong, reinforcing the view that Poland’s labor market is still tight.
Economic data shows mixed signals for Poland’s growth
New economic indicators paint a mixed picture of Poland’s economic performance in early 2025. Industrial production contracted by 1% in January compared to the previous year, reflecting ongoing weakness in the manufacturing sector. However, the construction industry performed strongly, with output rising by 4.3% – its best result since December 2023.
Retail sales also provided a boost, increasing by 4.8% in January, the fastest pace since May 2024. Consumer demand for durable goods was particularly strong, with spending on furniture, electronics, and household appliances surging by 13.6%. Economists view this as a sign that Polish consumers remain confident in their financial stability, which could support broader economic growth.
Polish employers ramp up hiring
The Polish job market is showing signs of renewed strength, with the number of job postings rising by 12% year-on-year in January, reaching 274,000 vacancies. This marks the second-highest level since the start of the Russia-Ukraine war and signals growing confidence among employers.
The biggest surge in hiring demand came from the construction and logistics sectors, where job advertisements increased by 17%. Healthcare was another standout sector, with job postings rising by over 20%, reflecting continued demand for medical professionals.
Interestingly, the technology sector saw a small decline, with IT job postings down by 3%, suggesting that the previously overheated market may be stabilizing. Nonetheless, overall hiring trends indicate that businesses are preparing for stronger economic activity in the months ahead.
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