Divergent Economic Trends in Romania, Poland, and Portugal Share a Common Denominator: Pressure on Public Finances and High External Financing Costs. Accelerating the Use of EU Recovery and Development Funds (Next Generation EU – implemented in Poland as the Recovery and Resilience Plan, KPO) Should Be a Priority for All Three Governments.
- Recent elections in Romania, Poland, and Portugal reflect political fragmentation seen across Europe. In Romania, pro-EU candidate Nicușor Dan won the presidential election, stabilizing bond yields amid expectations of fiscal consolidation and resolution of a dual deficit near -9%. Meanwhile, the strong showing by ultranationalist George Simion highlights widespread dissatisfaction.
- In Poland, centrist Rafał Trzaskowski faces conservative Karol Nawrocki in a key runoff that will be crucial for EU reforms.
- In Portugal, the rise of the far-right Chega party signals voter discontent, though fiscal conditions remain solid, as evidenced by a recent credit rating upgrade and low risk premium.
- Overall, financing risks have intensified, making urgent acceleration of Next Generation EU (NGEU) spending a priority for all three governments.
The elections in Romania, Poland, and Portugal reflect a broader trend of growing right-wing populism and anti-establishment sentiment across Europe, according to Allianz Trade. European leaders expressed relief at the pro-EU centrist Nicușor Dan’s victory in Romania’s presidential race (53.6% vs. ultranationalist George Simion’s 46.4%), but the narrow margin and strong Simion result reveal deep societal dissatisfaction. Simion’s AUR party, founded just five years ago, is now the second largest in Romania’s parliament and could gain further support amid upcoming austerity aimed at controlling the fiscal deficit. Dan, currently independent but formerly founder of the reformist USR party, gained recognition as Bucharest’s mayor. His win came after traditional Romanian parties scored a dismal combined 20% in the first round—a clear voter rejection of the political establishment.
Meanwhile, in Portugal, the far-right Chega party, which barely registered any votes six years ago, surged in the recent parliamentary elections and could place second once overseas votes are counted on May 28. Chega’s rise pushed the Portuguese Socialists toward their worst result since 1987, while center-right parties now hold two-thirds of seats. Rising polarization—and to a lesser extent political fragmentation—in Romania and Portugal have increased the political instability index (Chart 1).
Conversely, Poland has seen a significant decline in political instability recently, largely due to reduced political alienation (increased engagement). However, with the June 1 presidential runoff approaching, prospects remain uncertain. In Poland, centrist Rafał Trzaskowski (31.4%) will face conservative Karol Nawrocki (29.5%) in a fragmented field where right-wing candidates collectively won over half the votes (additionally Sławomir Mentzen 14.8% and Grzegorz Braun 6%). While Poland’s political divide is less stark than Romania’s dual deficit, the June outcome will heavily influence Poland’s EU stance. A Nawrocki win could derail pro-EU reforms under Prime Minister Donald Tusk. The message in all three countries is clear: while centrists hold their ground, right-wing populism is gaining momentum and voters demand change.
Chart 1: Political Instability Index
Sources: National polls, Wikipedia, EiQCC, Allianz Research. Note: The index comprises three elements: fragmentation (share of 2 largest traditional parties, number of parties >10%), polarization (share of far-right, far-left and populist parties, based on EiQCC from Cambridge University), and alienation (share of non-voters in last election, referendum influence).
Each of these three countries exhibits different economic and political trends affecting growth and inflation. The election of pro-EU reformer Nicușor Dan, focused on fiscal consolidation, is expected to boost government stability and investor confidence in Romania, though this is not yet confirmed. Romania’s GDP grew +0.6% q/q in Q1 2025 (Chart 2, left), rebounding from just +0.1% in Q4 2024, signaling industrial production stabilization. Nevertheless, caution is warranted, with full-year growth forecast at +1.6% in 2025, compared to +0.8% in 2024 and +2.3% in 2026. Despite EU-funded investments and resilient private consumption, political uncertainty over forming a new coalition may delay reforms. Inflation remains a challenge, with prices rising +4.9% in April 2025 (Chart 2, right).
Poland’s GDP growth slowed to +0.7% in Q1 2025 from +1.4% in Q4, yet exceeded expectations. Growth of +2.8% is forecast for 2025 and +2.9% for 2026, driven by a large domestic market and EU funds. Inflation dropped to +4.3% in April, down 0.7 percentage points from October 2024, prompting the National Bank of Poland to cut rates by 50 bps in May—the first since October 2023. Political risk remains high, as the June 1 presidential election could either support reforms or destabilize the government.
Portugal’s economy contracted -0.5% q/q in Q1 2025, likely correcting a strong +1.4% gain in Q4 2024 fueled by temporary private consumption boosts. Household disposable income growth stemmed from 2024’s retroactive income tax changes and a one-off pension bonus in October 2024. Despite this temporary setback, production remains 16% above pre-pandemic levels, and Portugal continues to outperform the eurozone in this regard. The Q1 reading raises downside risks for the 2025 growth forecast of +1.9%. Inflation’s downtrend is largely on track, but the cost-of-living crisis dominated the short election campaign. Prices rose +2.1% y/y in April, up from a seven-month low of +1.9% in March, driven mainly by services. Allianz Trade expects annual inflation around +1.9%.
Chart 2: GDP (2019=100, left) and Core Inflation (% y/y, right)
Sources: LSEG Workspace, Allianz Research
Public finance pressures are mounting. Each country faces unique fiscal challenges shaped by politics and economics. Romania’s situation is most severe, with a projected -8.7% of GDP budget deficit in 2024 and public debt forecast to exceed Maastricht’s 60% threshold by 2027. It suffers large twin deficits—fiscal and current account—near -9% GDP, making it heavily reliant on capital inflows. Recent fiscal deviations stemmed from inflation-related expenditures and unsatisfactory EU fund disbursements. Under the EU Excessive Deficit Procedure, Romania must reduce its deficit below -3% by 2031. Political uncertainty and lack of clear fiscal plans risk further delays, but Dan’s victory opens a path to stability and renewed fiscal discipline.
Poland, though better positioned, also faces fiscal consolidation pressure. The 2024 budget deficit is estimated at -5.3% GDP, less severe than Romania but still significant. Improvement is expected, aiming for -3% by 2028. Political uncertainty before the presidential runoff increases risks as the incumbent blocked judiciary reforms critical for unlocking EU funds. A pro-EU Trzaskowski win would remove this obstacle and enable a credible fiscal strategy, including full access to NGEU funds.
Portugal stands out with fiscal resilience and recent improvements. Despite political fragmentation, the center-right coalition’s win signals policy continuity. The country posted a budget surplus in 2023, and debt-to-GDP dropped over 40 percentage points from a 95.6% peak in 2021, with further declines expected. However, planned government defense spending hikes from 1.55% to NATO’s 2% target by 2029 will slow debt reduction.
Financing risks have risen sharply, making urgent acceleration of Next Generation EU (NGEU) spending (Recovery and Resilience Facility) critical for all three governments. Portugal, Romania, and Poland are major NGEU beneficiaries, set to receive funds amounting to about 10% of GDP during 2021-2026. Yet all three show low absorption rates relative to GDP (Chart 3). Access to NGEU funds is vital for Poland’s long-term investment plans, especially infrastructure and green transition. A pro-EU government engaged in reforms could finally unlock full disbursements, much of which is frozen over rule-of-law concerns. Further EU alignment would boost investor confidence and fully unleash NGEU’s transformational potential for Poland (KPO). Romania’s slow Recovery and Resilience Plan (RRP) implementation exacerbates challenges. The country has used only 33% of funds and achieved just 14% of milestones, with ongoing political divisions and prolonged elections hampering reforms.
Without accelerated reforms, future EU payments are at risk, raising the likelihood the government will have to self-finance or cancel key projects. This would hinder medium-term growth and increase Romania’s external vulnerabilities given its significant current account deficit. Moreover, Romania’s central bank’s recent decision to hold interest rates at 6.5% for the fifth straight meeting, despite inflation and fiscal uncertainty, limits the government’s ability to ease domestic financing conditions. Finally, Portugal’s government has already highlighted risks in meeting deadlines and milestones, which could prevent maximizing benefits from allocated loans (Portugal has received 50% of its €5.9 billion allocation).
Chart 3: Recovery and Resilience Facility (RRF) Funds Allocated (% of 2021 GDP) and Progress on Milestones
Sources: European Commission, NGEU Tracker, Allianz Research
Financial markets reacted cautiously to the elections. After Romania’s first presidential round, 10-year bond yields spiked 100 basis points to 8.5%, while the leu weakened 3% versus the euro to a record low of 5.12/EUR. Facing capital outflows and external financing challenges, the central bank intervened to support the currency. Although bond yields fell to 7.6% following Dan’s pro-EU win, the leu continues to weaken by about 1.5% against the euro. Markets expect further stabilization if the new government restores fiscal discipline.
Poland’s financial markets remain strong, among the best performing in emerging market equities this year, supported by solid economic performance, limited exposure to global trade tensions, relatively high defense spending, and expected stimulus from Germany’s fiscal package. Around 75% of Poland’s trade occurs within the EU, making it attractive for foreign investors. However, investor sentiment now hinges on June 1’s presidential runoff. Trzaskowski’s victory could enable continued reforms, while his loss risks renewed political instability.
Portugal presents a different picture: just two weeks before its government fell in March 2025, S\&P upgraded Portugal’s credit rating to A from A-, citing improved external finances and accelerated debt reduction. Since then, market response has been muted with no signs of significant idiosyncratic risk, and Portugal’s government risk premium remains below French spreads (Chart 4).
Chart 4: 10-Year Government Bond Spreads vs. German Bunds
Sources: LSEG Workspace, Allianz Research
