Hi, this is Milda Seputyte in Vilnius and Alberto Nardelli in Brussels. Welcome to our weekly newsletter on what’s shaping economics and investments from the Baltic Sea to the Balkans. You can subscribe here.

War Bill

To much fanfare in the Hague this week, NATO leaders agreed to boost defense spending to 5% of gross domestic product and renewed their “ironclad commitment” to mutual security. It was a win for Donald Trump, who has lambasted his European allies for underspending. In return, the US will remain committed to collective defense should a member come under attack.

Despite the latest assurances, though, European leaders aren’t fully convinced they can count on the Americans anymore just as Vladimir Putin ramps up Russia’s military. While a war on NATO territory looks unlikely for now, NATO Secretary General Mark Rutte has suggested that Russia may be in a position to consider an attack within five years.

In such a scenario, Estonia, Latvia and Lithuania on NATO’s northeastern flank would be the most likely flashpoint. Such a war, even in its initial phase, would likely trigger a flood of refugees and exact a heavy economic and human toll.

Bloomberg Economics estimated that the direct cost of destruction in the warzone, higher energy prices and a selloff in financial markets could cut global output by 1.3% in the first year. In monetary terms, that’s $1.5 trillion, almost as much as the impact of the full-scale invasion of Ukraine. The losses would be much greater if the conflict spilled into other European countries.

To gauge the cost of the first year of the war, Bloomberg Economics used various models to estimate the impact of lost output in the conflict zone, spillovers across European supply chains, reduced Russian oil and gas exports, wider credit spreads in European markets, higher European defense spending and increased uncertainty globally.

Leaders in the Hague said the result of their latest summit will serve as a deterrent to Russia because it shows NATO is stronger than ever, more so than Moscow. With Ukraine’s commander-in-chief estimating that Russia has 695,000 troops deployed across an expanded front line, there’s increasing pressure on them to be right. 

Rescue services search the site of a Russian air strike on a residential building in Kyiv, on June 23. Photographer: Andrew Kravchenko/Bloomberg

Around the Region

Slovenia: The alpine nation became the first European government to link its bond interest payments to environmental targets. It sold €1 billion ($1.2 billion) of 10-year notes where the coupon hinges on meeting greenhouse gas emission goals. 

Czech Republic: The boss of the biggest steelmaker in the country said in an interview that Europe must protect the struggling industry or risk undermining its drive to bolster its military capabilities.

Romania: The new government unveiled plans to scale back the budget deficit by 30 billion lei ($6.8 billion) this year as part of a broader package that may involve a one-off bank levy and pension and wage caps. 

Lithuania: The Baltic state called on the US to maintain its military presence on the European Union’s eastern flank while playing down the risk that Washington’s planned review of troops would leave the countries bordering Russia exposed.

Hungary: Prime Minister Viktor Orban told the EU to stay out of his nation’s affairs after European Commission President Ursula von der Leyen called on authorities to revoke a ban of the Pride parade in Budapest.

Chart of the Week

Poland’s most successful mobile-payment company is hoping that its new shareholder will help accelerate its expansion. Erste Group Bank agreed to buy the Polish unit of Banco Santander SA, a co-owner of Blik. The fintech has nearly 19 million monthly users, roughly half of Poland’s population.

By the Numbers

• Czechoslovak Group raised $2.16 billion through a junk bond sale, more than double its original intention, as investors clamor for exposure to the defense industry.
• Hungary’s central bank kept its key interest rate unchanged at 6.5% for a ninth month, with fresh forecasts pointing to persistent inflation and faltering economic growth. The forint gained against the euro.
• The Czech central bank, meanwhile, signaled that interest rates will remain on hold at least for several months after keeping the benchmark at 3.5%.

Things to Watch

• Thousands are expected on Saturday to march in the Budapest Pride parade, which is scheduled to be held despite a police ban.
• Poland’s Supreme Court is set to decide on whether to validate the presidential election amid growing controversy around alleged irregularities at polling stations.
• The Polish central bank is likely to keep interest rates unchanged on Wednesday. Governor Adam Glapinski will speak at a news conference the next day.

Final Thought

Viktor Orban may be under a bit of political pressure in Hungary, but his son-in-law continues to go from strength to strength. A group controlled by Istvan Tiborcz agreed to buy the Marriott on Budapest’s Danube waterfront, the latest expansion in the city’s luxury hotel market. His company, BDPST Group, already owns establishments such as the landmark Gellert across the river. Orban’s opponents say Tiborcz’s success is a prime example of the cronyism that Hungary has been criticized for by the EU. Tiborcz denies those accusations. He told Bloomberg last year that he’s on a mission to revamp Budapest. The Marriott is the next step. 

The Marriott hotel on the Danube river in Budapest. Photographer: Gennadiy Kravchenko/Getty Images

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