2023 was a good year for centrist parties in elections in Central Europe and the Baltic states, particularly given the dire economic environment and worrying geopolitical picture.

It was also a year when the region remained largely stalwart in its support for Ukraine, despite the efforts of populists to whip up fatigue. This is likely to continue, almost regardless of the news from the battlefield.

In Poland and Estonia, centre-right parties under strong leaders who promised stability and security in challenging times were able to outmuscle their radical right-wing opponents. Populists suffered setbacks everywhere, except Slovakia, where left-wing strongman Robert Fico squeezed back to power for a fourth term in the September elections.

In the most crucial contest, Poland’s radical right-wing government under the de facto leadership of Jaroslaw Kaczynski was defeated by a broad coalition of centrist and left-wing parties under returning premier Donald Tusk in general elections in October.

In January, distinguished former general Petr Pavel defeated billionaire populist and former premier Andrej Babis in the contest for the important Czech presidency.

Meanwhile in the Baltic states, Kaja Kallas’ centre-right Reform Party seized a vital victory in March over the radical right-wing EKRA party in the Estonian general election, while in Latvia, the ruling coalition was restructured in September by ejecting the radical right-wing National Alliance and bringing in centrist and centre-left parties.

Orban isolated

The failure of populists once again to make a breakthrough and in particular the defeat of Kaczynski’s Law and Justice Party has left Hungarian Prime Minister Viktor Orban – Russian dictator Vladimir Putin’s only ally in the EU – even more isolated than before.

The Polish election result ended the Warsaw-Budapest axis that has obstructed European Union decision-making and helped give Hungarian premier Orban an outsized international importance. The axis, already battered by Orban’s defence of Moscow, is now beyond repair.

The relationship between Hungary and the EU deteriorated further in 2023 as Budapest’s EU funds remained frozen over Orban’s hollowing out of his country’s democracy, leading the Hungarian strongman to step up his obstruction of the bloc’s decision-making.

The tensions culminated at the December 14-15 summit, when Hungary’s radical right-wing leader blocked an amendment of the EU’s long-term budget to provide much-needed funds to Ukraine. The bloc is now scrambling to put together a plan B for aiding Kyiv, though there is hope that Orban will once again back down.

Fico’s professed support for Orban will offer scant consolation for the loss of Poland’s, as he is unlikely to go to the wire to defend him.

Fico won the September 30 Slovak elections campaigning to end military support for Ukraine, though he will not block commercial deals. During his visit to Budapest in January, the left-wing populist offered his support to Orban on limiting EU financial aid to Ukraine, but stopped short of threatening to join Hungary in vetoing the EU’s €50bn four-year plan. He also said he would veto any attempt to take away Hungary’s European Union voting rights or extend majority voting in the European Council.

Orban will be hoping for more allies following the European Parliamentary elections in June – though centrists are likely to be able to maintain an overall majority in the chamber. Afterwards Hungary will hold the bloc’s rotating presidency, which will at least offer the diminutive Hungarian strongman a higher platform.

Outside events offer more hope for the “Viktator”. Irregular migration will be the gift that keeps on giving for populists, with several countries in Central Europe suspending the Schengen passport-free regime in 2023 to try to halt refugee flows. And populists everywhere will be looking to the US election in November for the return of Donald Trump.

Poland to realise potential

Poland’s landmark election result will have wider international repercussions than just Central Europe. It should allow Poland to realise its potential as a significant actor inside the European Union, where it is likely to bypass the divided and moribund Visegrad Group of Central European states and deal directly with the bloc’s heavyweights such as Germany.

But it won’t all be plain sailing. The Polish government is likely to disagree with Brussels on the pace of how the bloc approaches green issues designed to tackle climate change and make future growth more sustainable. It will also continue to fight against quotas for accepting refugees, and will be suspicious of greater majority voting in the European Council.

On the Ukraine conflict, Poland will be an even stronger backer of Kyiv, though there are likely to be continuing tensions over grain imports and trucking. Poland, with its big farming sector and as a large recipient of EU structural funds, will also inevitably want to preserve its interests when Ukraine enters proper negotiations to join the bloc, as it will be a natural competitor for both aid and exports.

Looking at the outlook in domestic politics, Donald Tusk’s centrist coalition has had an extremely rough start in office, with fierce opposition by Law and Justice MPs, President Andrzej Duda and the party’s placemen across state institutions and the judiciary.

The government faces the tricky task of removing the obstructing officials (many of whom were appointed or entrenched in controversial circumstances) and pushing through its reforms, particularly on repairing the rule of law, without trampling on the rule of law itself. The European Union has signalled that it will soon release aid frozen over Law and Justice’s breaches of the rule of law, but it might have difficulty justifying this if the government is too aggressive in seizing control of the state apparatus.

Opinion polls indicate that voters still remain behind the government, but the biggest tests this year will come in the local elections in April and the European Parliamentary elections in June.

Fico confirms fears

In Slovakia, incoming premier Robert Fico is so far confirming the worst fears of his critics. As well as embedding its own people throughout the state apparatus, police and prosecution service, the populist government has put forward a set of legislative measures that will make it more difficult to prosecute its supporters already on trial for corruption, or to prosecute them in the future.

The package would dismantle the Special Prosecutor Office and change the Criminal Code to reduce sentences for corruption, shorten the time to prosecute offences and weaken the status of whistle-blowers. The measures have sparked big protests, parliamentary filibustering and criticism from EU policymakers.

Whether the EU decides to penalise Slovakia over any breaches of the rule of law, as it did with Hungary and Poland, will be one of the key questions this year. If the EU does so, it could turn Fico into an even firmer ally of Hungary’s Viktor Orban, which would obstruct EU policymaking, particularly on Ukraine.

The big electoral test this year will be the presidential election, which could consolidate Fico’s control of the political system.

Polls show former Minister of Foreign Affairs and pro-Western diplomat Ivan Korcok and Parliamentary Speaker and leader of the coalition’s centre-left Hlas party Robert Pellegrini are the most likely candidates to face each other in the run-off in April. Pellegrini is currently in the lead, but his popularity may be dented if the protests against the government escalate and the EU gets involved.

There is also a chance that the government itself might fall apart. It only has a narrow majority of 79 seats in the 150-member parliament, and both Hlas and the far-right Slovak Nationalist Party are showing signs of fragility.

Czech government staggers on

In Czechia, the second least popular government in the country’s history is likely to stagger on, despite electoral tests in the European Parliamentary elections in June and regional and Senate elections in September. The centre-right government’s ratings are unlikely to be boosted by the country’s mediocre economic performance and the impact of its austerity policies. Its only hope in the 2025 general election appears to rest on opposition leader Andrej Babis’ shortage of potential allies. His “technocratic populist” ANO party vehicle is currently polling at a massive 35%.

Hungarian politics also look quiet this year, with the feeble and divided opposition struggling to make an impact in Viktor Orban’s restricted democracy. The sovereignty bill, which resembles Russia’s foreign agent legislation, and the setting up of the Sovereignty Protection Office could serve to further intimidate and silence critics. The main test for Orban’s regime will be the European parliamentary and regional elections in June, where his Fidesz party is expected to sweep the board outside Budapest.

In the typically fissile Baltic states, the focus will be on Lithuania, which will hold a presidential election in May, and parliamentary (Seima) election in October. Incumbent President Gitanas Nauseda appears a shoe-in for the presidential election, while the Social Democratic Party of Lithuania (LSDP) looks likely to oust the ruling centre-right Homeland Union-Lithuanian Christian Democrats.

There is a question mark still hanging over the future of Estonian centre-right premier Kaja Kallas, who is deeply unpopular for pushing through tax rises just after her re-election, and because of the Russian business activities of her husband.

Change can also not be ruled out in Latvia, where the New Unity-led government of new centre-right premier Evika Silina only has a majority of 53 in the 100-member parliament. Nevertheless, in December the centrist government managed to ratify the contentious Istanbul Convention on violence against women, leaving Lithuania as the only holdout among the Baltic states.

Slow crawl back to growth

Central Europe is emerging slowly from the cost of living crisis and slowdown triggered by the Russian invasion of Ukraine. Czechia and Hungary experienced recessions over 2023 and growth elsewhere was feeble.

This year the region is expected to outperform the Eurozone, though growth will still be undistinguished. Forward-looking indicators such as purchasing manager indices (PMIs) in Poland and Czechia remain negative and have been so for a year and a half.

Consumption is now gradually reviving as the historically high inflation rates fall sharply. This is enabling central banks to cut interest rates, which in turn reduces mortgage payments, supporting consumption. Unemployment remains low, and real wages – which fell across the region in 2023 – are now only negative in Czechia and Slovakia.

The uncertain geopolitical environment, the interruption of supply chains, together with high interest rates and energy prices, have kept investment low. This year investment is expected to recover as interest rates fall, foreign direct investment rises and the region starts to receive more EU money from the Recovery and Resilience Facility.

On the negative side, Eurozone growth is now weakening, which will depress exports, and companies will be running down their huge inventories. At the same time, many countries are launching austerity packages to close deficits swollen by post-pandemic spending, which will turn the impact of the public sector negative.

The region’s worst growth performer is Czechia, the only EU economy that has still not recovered to its pre-pandemic level. Czech gross domestic product (GDP) fell back again in the third quarter, decreasing by 0.8% year on year and by 0.6% quarter on quarter. The Czech National Bank (CNB) has worsened its outlook, expecting an overall GDP drop by 0.4% for 2023 and growth of only 1.2% for 2024.

Hungary’s performance has also been dreadful. The recession there ended in Q3 2023 after four consecutive quarters of contraction, the longest decline since 1995. The Hungarian National Bank in December revised its 2024 GDP target downward to 2.5-3.5%. The economy should benefit this year from booming foreign direct investment (FDI), which doubled in 2023 to €13bn, but it is still suffering from the lack of EU funds, which have been frozen over the Orban regime’s violations of the rule of law.

In Poland, GDP grew 0.5% y/y in the third quarter, after two quarters of y/y declines. ING estimates GDP growth of 0.3-0.4% in 2023 and around 3% in 2024. In Slovakia, UniCredit bank forecasts that growth will remain subdued, rising to 1.4% this year from an estimated 1.1% in 2023 as EU funds are released.

The International Monetary Fund (IMF) forecasts the miserable economic growth in the Baltic states will come to an end, with 2.9% growth for Lithuania, 2.7% for Latvia and 1.9% in Estonia in 2024.

Partly because of the impact of recession, the region’s inflation – previously the highest in the EU because of the high weighting of food and energy prices in its CPI baskets – has fallen dramatically, in Hungary by around 20 percentage points and more than 10 percentage points in Czechia and Poland. The disinflationary trend is expected to continue this year, albeit at a slower rate.

Hungary’s inflation peaked at 25.7% in January and hit just 5.5% in December, averaging 17.6% for the whole year, the highest level since 1997. In Czechia, inflation was 6.9% in December, while in Slovakia it was 5.9%, and 6.2% in Poland.

Rate cycle turns again

Falling inflation has enabled central banks to begin to cut rates. The region was the first in the EU to begin raising rates in April 2022; it has now become the first to cut them. The Polish, Hungarian and Czech central banks have already started a new cycle of monetary easing, which is expected to continue this year.

Once again Hungary launched the new trend by cutting its interest rate from a peak of 18% in May. At its last rate-setting meeting in December the central bank cut the base rate by 75bp for the fourth straight month, which brought it to 10.75%.

Poland’s central bank controversially began cutting rates just in September before the October election and, after another cut in October, the reference interest rate is currently at 5.75%. Many analysts expect the current pause in cuts to continue for the moment, given that inflation may revive in the second half of the year.

The Czech central bank belatedly began cutting in December, by 25 basis points to 6.75%, in the first change since June 2022, and it is expected to accelerate the monetary easing this year.

Central Europe also stands out in Europe because of its high budget deficits, which have ballooned because of state support to help mitigate the impact of soaring energy prices. This year three out of the four Central European governments are likely to enter the EU’s Excessive Deficit Procedure for running deficits of more than 5% of GDP, well above the 3% threshold. The traditionally more austere Baltic states, meanwhile, are all expected to run deficits close to 3% of GDP.

The Czech and Hungarian governments have already begun tightening fiscal policy but Hungary’s problems are so dire that the deficit could still hit 5% of GDP this year. Czechia should manage to keep its deficit to around 2.8% of GDP, avoiding EU scrutiny.

Poland and Slovakia, meanwhile, are not even attempting to cut their deficits, as the new governments fulfil their election promises. The Polish budget deficit could hit 5.7% of GDP this year, while the Slovak figure is likely to be even worse at 6.3% of GDP, according to the European Commission. In December, international rating agency Fitch Ratings lowered Slovakia’s credit rating from ‘A’ with a negative outlook to ‘A-’ with a stable outlook.

These figures are particularly worrying given that all the governments will need to spend more on ramping up defence, on pension and health systems as populations age, and on switching their economies onto a green and higher value-added track in order to restart convergence with Western Europe.

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