A seismic shift is underway in Germany’s economic policy. Friedrich Merz, widely expected to be the country’s next chancellor, has announced plans to amend the German constitution to ease fiscal restraints, paving the way for a historic increase in government spending.
His proposal includes a €500 billion investment fund for infrastructure projects, particularly the modernization of energy grids, as well as a substantial expansion of military expenditure.
If implemented, these policies could revitalize Germany’s sluggish economy and, by extension, boost growth across Central and Eastern Europe, which heavily depends on trade with its western neighbor. For years, Germany has been known for its strict budget discipline, emphasizing savings and debt reduction. Now, Merz is proposing a complete reversal, potentially injecting close to €1 trillion into the economy without a significant increase in debt.
Financial markets immediately welcomed the announcement. Germany’s stock market surged to record highs, while the euro strengthened significantly against the dollar as investors bet on accelerated economic growth. At the same time, German bond yields experienced their sharpest one-day increase since 1990, underscoring the magnitude of this shift. Some analysts argue that these fiscal changes could be Germany’s most significant economic transformation since reunification in 1990.
However, higher economic growth often brings higher interest rates. Goldman Sachs has called Germany’s fiscal pivot a “game-changer” for monetary policy, warning that the era of ultra-low rates may be over. In response, Central European currencies surged, reflecting a revaluation of expected interest rates. The Polish złoty appreciated sharply, with the USD/PLN exchange rate falling from 4.03 to 3.84 in just one week, a similar trend observed in the Czech koruna and Hungarian forint.
Yet, before Germany’s fiscal revolution can begin, constitutional hurdles remain. Merz will need to summon the previous Bundestag—where the outgoing parliament still holds the necessary majority—to pass the constitutional amendment. A vote is scheduled for March 18, just one week before the newly elected Bundestag convenes on March 25.
If implemented, these policies could revitalize Germany’s sluggish economy and, by extension, boost growth across Central and Eastern Europe, which heavily depends on trade with its western neighbor. For years, Germany has been known for its strict budget discipline, emphasizing savings and debt reduction. Now, Merz is proposing a complete reversal, potentially injecting close to €1 trillion into the economy without a significant increase in debt.
Financial markets immediately welcomed the announcement. Germany’s stock market surged to record highs, while the euro strengthened significantly against the dollar as investors bet on accelerated economic growth. At the same time, German bond yields experienced their sharpest one-day increase since 1990, underscoring the magnitude of this shift. Some analysts argue that these fiscal changes could be Germany’s most significant economic transformation since reunification in 1990.
However, higher economic growth often brings higher interest rates. Goldman Sachs has called Germany’s fiscal pivot a “game-changer” for monetary policy, warning that the era of ultra-low rates may be over. In response, Central European currencies surged, reflecting a revaluation of expected interest rates. The Polish złoty appreciated sharply, with the USD/PLN exchange rate falling from 4.03 to 3.84 in just one week, a similar trend observed in the Czech koruna and Hungarian forint.
Yet, before Germany’s fiscal revolution can begin, constitutional hurdles remain. Merz will need to summon the previous Bundestag—where the outgoing parliament still holds the necessary majority—to pass the constitutional amendment. A vote is scheduled for March 18, just one week before the newly elected Bundestag convenes on March 25.
Europe ramps up defense spending with massive boost
A military spending revolution is underway in Europe, with the European Commission announcing a plan to increase defense expenditures by an unprecedented €800 billion.
For comparison, the total U.S. military aid to Ukraine since 2022 has been just over €100 billion, while European contributions have amounted to around €130 billion. The new EU initiative would dwarf those figures, signaling a fundamental shift in Europe’s approach to security.
The package comprises a €150 billion loan fund for member states, exempting military spending from the EU’s strict fiscal rules—a move that will allow national governments to increase their defense budgets by up to €650 billion without violating deficit limits. Additionally, the European Investment Bank (EIB) will lift restrictions on defense-related financing, allowing European arms manufacturers to access credit more easily to expand production capacity.
Poland, already one of NATO’s top spenders, is doubling down on its military investments. President Andrzej Duda has submitted a constitutional amendment mandating a minimum defense budget of 4% of GDP, while Prime Minister Donald Tusk has hinted at pushing this figure to 5% in the coming years. To facilitate this, Poland will create a National Security and Defense Fund, redirecting €7 billion in EU recovery funds to military spending.
A report by Deloitte projects that Poland will spend a staggering PLN 1.9 trillion (€440 billion) on defense between 2025 and 2035, marking a PLN 1.1 trillion increase compared to 2015-2025. The firm warns that, while initial spending will be financed through public debt, long-term sustainability will require either spending cuts in other areas or new taxes.
For comparison, the total U.S. military aid to Ukraine since 2022 has been just over €100 billion, while European contributions have amounted to around €130 billion. The new EU initiative would dwarf those figures, signaling a fundamental shift in Europe’s approach to security.
The package comprises a €150 billion loan fund for member states, exempting military spending from the EU’s strict fiscal rules—a move that will allow national governments to increase their defense budgets by up to €650 billion without violating deficit limits. Additionally, the European Investment Bank (EIB) will lift restrictions on defense-related financing, allowing European arms manufacturers to access credit more easily to expand production capacity.
Poland, already one of NATO’s top spenders, is doubling down on its military investments. President Andrzej Duda has submitted a constitutional amendment mandating a minimum defense budget of 4% of GDP, while Prime Minister Donald Tusk has hinted at pushing this figure to 5% in the coming years. To facilitate this, Poland will create a National Security and Defense Fund, redirecting €7 billion in EU recovery funds to military spending.
A report by Deloitte projects that Poland will spend a staggering PLN 1.9 trillion (€440 billion) on defense between 2025 and 2035, marking a PLN 1.1 trillion increase compared to 2015-2025. The firm warns that, while initial spending will be financed through public debt, long-term sustainability will require either spending cuts in other areas or new taxes.
EU economy gains momentum, but still trails U.S. growth
The European economy grew by 1.4% year-on-year in Q4 2024, its fastest expansion in two years, according to Eurostat.
Despite the improvement, Europe’s recovery remains slower than that of the United States, where GDP grew by 2.5% over the same period.
Within the EU, Ireland led with an astonishing 9% GDP growth, followed by Denmark at 4%, while Poland and Lithuania tied for third place with 3.7% growth. Meanwhile, Germany, Austria and Latvia remained in recession, with negative year-on-year GDP figures.
In Central Europe, Czech GDP rose by 1.8%, Slovakia by 1.7%, Estonia by 1.1%, and Romania by just 0.7%. Hungary barely escaped recession, growing by 0.1%, but its economy had contracted in the previous two quarters.
While stronger than expected, the EU’s economic expansion remains uneven and fragile, with Germany’s performance a key risk factor.
The latest Purchasing Managers’ Index (PMI) readings suggest that Poland’s industrial sector is finally emerging from a prolonged downturn.
February saw improvements across key indicators, including new orders, production and employment, while business confidence for the next 12 months reached its highest level since 2021.
The PMI rose from 48.8 in January to 50.6 in February, surpassing the crucial 50-point threshold that separates contraction from expansion. This marks the first time since April 2022 that Poland’s manufacturing sector has returned to growth—a clear sign that the industrial recession triggered by the war in Ukraine and energy crisis may finally be over.
Despite the improvement, Europe’s recovery remains slower than that of the United States, where GDP grew by 2.5% over the same period.
Within the EU, Ireland led with an astonishing 9% GDP growth, followed by Denmark at 4%, while Poland and Lithuania tied for third place with 3.7% growth. Meanwhile, Germany, Austria and Latvia remained in recession, with negative year-on-year GDP figures.
In Central Europe, Czech GDP rose by 1.8%, Slovakia by 1.7%, Estonia by 1.1%, and Romania by just 0.7%. Hungary barely escaped recession, growing by 0.1%, but its economy had contracted in the previous two quarters.
While stronger than expected, the EU’s economic expansion remains uneven and fragile, with Germany’s performance a key risk factor.
Polish PMI hits highest level in three years
The latest Purchasing Managers’ Index (PMI) readings suggest that Poland’s industrial sector is finally emerging from a prolonged downturn.
February saw improvements across key indicators, including new orders, production and employment, while business confidence for the next 12 months reached its highest level since 2021.
The PMI rose from 48.8 in January to 50.6 in February, surpassing the crucial 50-point threshold that separates contraction from expansion. This marks the first time since April 2022 that Poland’s manufacturing sector has returned to growth—a clear sign that the industrial recession triggered by the war in Ukraine and energy crisis may finally be over.
Polish housing market heats up, but prices hold steady
Poland’s housing market is regaining momentum, with February witnessing a 20% jump in home sales compared to January, the highest level in a year.
Developers in Poland’s seven largest cities sold 3,500 new apartments, exceeding the 3,200 new listings added to the market. The shift suggests that demand is beginning to outpace supply, a trend not seen in recent months.
Mortgage demand is also rising. In February, Polish banks received over 33,000 mortgage applications, the second-highest total since December 2023. The average mortgage value hit a record 449,000 złoty (€107,000), up 5% year-on-year.
However, price data remains mixed. Reports from Big Data Rynek Pierwotny and the Polish Economic Institute (PIE) show that housing prices in Warsaw, Łódź and Poznań remained unchanged, while Krakow saw a 1% drop. The biggest price increase was in Trójmiasto, up 3%, with Wrocław following at 1%.
For the first time since 2021, year-over-year prices have declined in Warsaw (-0.3%) and Krakow (-3.3%), suggesting that, despite rising demand, housing affordability concerns are limiting further price increases.
Poland’s government ended February with a record €46.8 billion in budget reserves—marking the first time in history that this financial buffer has exceeded €45.9 billion. This figure represents a significant increase from €42.2 billion at the end of January, meaning the reserve grew by more than €4.6 billion in just one month. The cushion consists of funds already borrowed from financial markets but not yet spent. Typically, this reserve peaks in the early months of the year, as governments secure financing in advance, taking advantage of usually favorable market conditions at the start of the year.
Despite this substantial liquidity, Poland’s total borrowing needs for 2024 stand at a staggering €127.1 billion. This amount includes not only maturing debt repayments but also interest payments and the budget deficit, which must be financed with fresh borrowing. According to the Finance Ministry, Poland still has €33.3 billion in outstanding debt obligations to be repaid this year. While the current reserves could theoretically cover these liabilities—even in the event of financial market turmoil—further borrowing remains inevitable. The government has already secured 50% of its annual financing needs, but Finance Minister Andrzej Domański still faces the challenge of raising over €64.3 billion by the end of the year.
Developers in Poland’s seven largest cities sold 3,500 new apartments, exceeding the 3,200 new listings added to the market. The shift suggests that demand is beginning to outpace supply, a trend not seen in recent months.
Mortgage demand is also rising. In February, Polish banks received over 33,000 mortgage applications, the second-highest total since December 2023. The average mortgage value hit a record 449,000 złoty (€107,000), up 5% year-on-year.
However, price data remains mixed. Reports from Big Data Rynek Pierwotny and the Polish Economic Institute (PIE) show that housing prices in Warsaw, Łódź and Poznań remained unchanged, while Krakow saw a 1% drop. The biggest price increase was in Trójmiasto, up 3%, with Wrocław following at 1%.
For the first time since 2021, year-over-year prices have declined in Warsaw (-0.3%) and Krakow (-3.3%), suggesting that, despite rising demand, housing affordability concerns are limiting further price increases.
Poland’s budget reserves hit record high
Poland’s government ended February with a record €46.8 billion in budget reserves—marking the first time in history that this financial buffer has exceeded €45.9 billion. This figure represents a significant increase from €42.2 billion at the end of January, meaning the reserve grew by more than €4.6 billion in just one month. The cushion consists of funds already borrowed from financial markets but not yet spent. Typically, this reserve peaks in the early months of the year, as governments secure financing in advance, taking advantage of usually favorable market conditions at the start of the year.
Despite this substantial liquidity, Poland’s total borrowing needs for 2024 stand at a staggering €127.1 billion. This amount includes not only maturing debt repayments but also interest payments and the budget deficit, which must be financed with fresh borrowing. According to the Finance Ministry, Poland still has €33.3 billion in outstanding debt obligations to be repaid this year. While the current reserves could theoretically cover these liabilities—even in the event of financial market turmoil—further borrowing remains inevitable. The government has already secured 50% of its annual financing needs, but Finance Minister Andrzej Domański still faces the challenge of raising over €64.3 billion by the end of the year.
Polish banks enjoy strong start to 2025
Polish banks kicked off the year with robust earnings, benefiting from high interest rates and solid lending margins. According to data from the National Bank of Poland (NBP), the net profit of the banking sector in January reached €918 million, up nearly 8% from a year earlier.
Interest income, primarily from loans, surged by 9%, while interest-related costs, such as payments on customer deposits, rose at a slower pace of 7.3%. This widening spread between lending and deposit rates—the core of banks' profitability—has allowed financial institutions to maintain high earnings.
The Polish Bank Association (ZBP) has also weighed in on the factors behind the persistently high loan margins. The association attributes a significant portion of these costs to legal disputes over improperly structured loan agreements and Poland’s bank tax. Legal risks associated with court rulings invalidating flawed credit agreements add 0.81 percentage points to loan margins, while the banking tax contributes another 0.24 percentage points.
Effectively, this means that Polish banks are passing the costs of legal battles and regulatory levies onto their existing customers, further inflating the price of borrowing. While banks continue to report strong profitability, these dynamics contribute to the ongoing debate over the fairness of lending practices and the broader cost of credit in Poland.
Interest income, primarily from loans, surged by 9%, while interest-related costs, such as payments on customer deposits, rose at a slower pace of 7.3%. This widening spread between lending and deposit rates—the core of banks' profitability—has allowed financial institutions to maintain high earnings.
The Polish Bank Association (ZBP) has also weighed in on the factors behind the persistently high loan margins. The association attributes a significant portion of these costs to legal disputes over improperly structured loan agreements and Poland’s bank tax. Legal risks associated with court rulings invalidating flawed credit agreements add 0.81 percentage points to loan margins, while the banking tax contributes another 0.24 percentage points.
Effectively, this means that Polish banks are passing the costs of legal battles and regulatory levies onto their existing customers, further inflating the price of borrowing. While banks continue to report strong profitability, these dynamics contribute to the ongoing debate over the fairness of lending practices and the broader cost of credit in Poland.
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