Eastern European markets, buoyed by a close relationship with the United States under President Donald Trump, are now facing potential setbacks due to looming tariffs.
Hungarian Prime Minister Viktor Orban has been commended as “tough” and “smart” by President Trump. This accolade comes with the expectation that aligning with the US could yield economic benefits for Hungary and similar countries in Eastern Europe. However, this optimism confronts the stark reality of a potential US-Europe trade war and its ramifications on financial markets.
Following Trump’s election, hopes that his favorable stance could shield Eastern European markets from global economic fluctuations led to record highs on Hungarian stock exchanges. Notably, shares of the telecommunications company 4iG Nyrt. surged after its executive visited Trump’s Mar-a-Lago estate with Orban.
Despite the positive sentiment, the threat of US tariffs on the European Union, reportedly certain according to Trump, presents a significant risk. Deutsche Bank estimates a potential 10% tariff could reduce annual economic output by 0.5 percentage points. The sectors most at risk include automotive and industrial goods, with countries like Hungary and Slovakia heavily involved in these industries.
Currencies such as the Hungarian forint and the Czech koruna appear vulnerable. Analysts, including those from Barclays, forecast these currencies may face challenges if tariffs are imposed. Tamas Cser, managing assets worth approximately $2.5 billion with Hold Alapkezelo Zrt., highlights the regional focus on whether drastic tariffs could push the already fragile European economy into recession.
While Orban’s rapport with Trump is undoubtedly favorable, Cser remains unconvinced that Hungary’s economy can significantly outpace the region’s broader economic trends. Other leaders in Slovakia and Serbia similarly bank on connections with Trump, though the economic outlook remains uncertain.
The complexities of aligning closely with Trump’s administration are evident as Hungary navigates its EU membership. According to Marcus Weyerer from Franklin Templeton Investment Management, Hungary’s ability to leverage its relationship with Trump is limited by the EU’s collective stance.
While some emerging markets like Turkey and India might gain from US relations without EU constraints, Hungary may not enjoy the same flexibility. Poland, meanwhile, despite a recent shift towards a pro-EU government, has seen its stocks rally by 13% this year, attributed to increased EU financial support and favorable defense spending perception by the US.
Investors continue to keep a close watch on political developments and economic indicators, including rate decisions and inflation data across multiple Eastern European countries.
As Eastern Europe navigates its economic trajectory amid potential tariffs, reliance on US relations presents both opportunities and challenges. The region’s future market stability will depend largely on broader geopolitical and economic developments.
