Central Europe Faces Financial Strain After $10 Billion Flood Damage

Following the pandemic, even if the European Union requires the members to set yearly deficits to 3% of GDP, the budget deficit in the region grew to 9% of GDP in Romania and 7% in Poland and Hungary.

Just one week before the tragic floods that swept through central Europe, the Czech Republic was the first country in the region since COVID-19 to bring its budget deficit below 3% of the GDP ceiling set by the European Union rules. 

That slight victory for public finances is in jeopardy since the Czech Republic and Poland are weighing the cost of the worst flood to impact that area in at least 20 years. Based on the local officials’ estimate, the damage to infrastructure can account for $10 billion in these two countries alone. 

Poland’s finance minister states that some expenses caused by the floods will be covered by the $5.6 billion allotted by the EU funds. The state finances, which were already under stress by the COVID-19 pandemic and the spike in inflation after Russia invaded Ukraine, are further burdened by the economic losses caused by extreme weather.

Following the pandemic, even if the EU requires the members to set yearly deficits to 3% of GDP, the budget deficit in the region grew to 9% of GDP in Romania and 7% in Poland and Hungary.

Inflation and the generous pledges of largesse that accompanied elections in Poland, Hungary, and Romania further impeded deficit reductions. Increasing debt payment, inflation-linked spending on pensions, and growing military investment will cause a strain on the budget. 

In the 2024 budget amendments, the Czech finance ministry said it will allocate 30 billion crowns ($1.3 billion) and 0.4% of GDP for flood damage. It is 25% more than the prediction made by ING economist David Havrlant early this week. It brings the Czech deficit to 3%, set under EU rules, up from the original mark of 2.5%. The upcoming year’s deficit will be higher than anticipated. 

The unexpected pressure on Czech finances brings to light the magnitude of the challenge that the remaining eastern members of the EU are still grappling whose deficit was over 5% in Poland and Hungary to 7% in Romania. 

Romania will not reach the fiscal goal until the 2030s, whereas Poland and Hungary need most of the decade to reduce shortfalls to less than 3%.

Poland predicts general government debt rise to 60% of GDP by 2027 due to increasing borrowing, which will lift debt-related spending.

Poland’s budget deficit will surpass 5% of GDP in 2025, followed by gradual consolidation to a 3% shortfall in the next four to five years.

Poland has to cover the cost of flood repairs, so it will push for EU flexibility in strengthening its national budget.

Despite having a revenue base that provided support, spending pressures in Poland were more than expected after the release of the 2025 budget draft. The floods have a long-term impact on the state finances in an area already suffering due to the faltering German economy and serving as a destination for 20–30% of central Europe exports.

Slower medium-term development could pressure public budgets at a time when the cost of government funding remains high. The cost of debt servicing increased to 4.7% of GDP in Hungary, 2% in Poland, and 4% in Romania in 2018. The only country where the expenses were lower than the EU average but still over twice as high as before COVID-19 was the Czech Republic, with an interest bill of 1.3% of GDP.

Romania has not yet released its budget for 2025. Bucharest is planning a seven-year plan to reduce the deficit, which some predict exceeds 8% of GDP due to costly pension reform. Hungary has promised to reduce its budget deficit to 4.5% of GDP from over 7% during the pandemic.