Week Ahead (2 June)

W/C Monday, 2 June – Poland enters new phase of political cohabitation following presidential election result 

Poland is entering a new phase of political cohabitation after nationalist candidate Karol Nawrocki narrowly defeated liberal challenger Rafal Trzaskowski in the second round of the country’s presidential election. With all votes counted, Nawrocki secured 50.89%, edging out Trzaskowski at 49.11%, according to the official results from the state electoral commission (PKW). The result marked a reversal from initial exit polls, which had shown Trzaskowski in the lead, prompting him to briefly claim victory before conceding. 

Nawrocki, a conservative historian backed by the Law and Justice (PiS) party, is now set to assume the presidency, preserving PiS’s institutional foothold after its loss of parliamentary power in 2023. His victory paves the way for continued political cohabitation in Warsaw and is likely to reinforce veto standoffs with the centrist, pro-EU government of Prime Minister Donald Tusk. While the presidency is formally limited in power, it holds a critical legislative veto, a power outgoing President Andrzej Duda has used repeatedly to block Tusk’s reform agenda. Nawrocki is expected to follow the same path, complicating efforts to advance judicial reform, liberalise abortion laws, and unlock remaining EU recovery funds. 

Despite expectations of a stronger liberal performance, the margin between the two candidates was narrower than predicted. In the first round, Trzaskowski had led with 31.2%, narrowly ahead of Nawrocki’s 29.7%. The run-off became a high-stakes contest for swing voters, particularly those who had supported far-right libertarian candidate Slawomir Mentzen. Although Mentzen declined to endorse either candidate, his supporters, drawn to his anti-tax, Eurosceptic platform and opposition to Poland’s military involvement in Ukraine, appear to have leaned toward Nawrocki, tipping the balance in his favour. 

Nawrocki’s win is a blow to the Tusk government and Brussels. Nawrocki campaigned on a nationalist, Catholic-conservative platform, pledging to protect Polish sovereignty within the EU and resist the bloc’s migration and climate policies. He has voiced support for continued assistance to Ukraine but has said he opposes Kyiv’s accession to NATO or the EU during the ongoing war.  

The outcome breaks a recent trend of electoral wins for pro-EU centrists across Europe, following Romania’s Nicusor Dan and Portugal’s centre-right Democratic Alliance. Nawrocki’s narrow win will re-energise the nationalist right and strengthen PiS’s belief that it can regain full power in the 2027 parliamentary elections. 

Nevertheless, one area of continued convergence remains national security. Both Trzaskowski and Nawrocki back further defence spending increases, underlining a growing political consensus on security in response to regional threats. Poland has raised its defence budget from 2.7% of GDP in 2022 to 4.2% in 2024, with projections reaching 4.7% by 2025, the highest level in NATO after the US. 

Overall, Nawrocki’s victory locks in a period of institutional friction and will significantly constrain Donald Tusk’s governing agenda. For the next three years, Poland will be governed through uneasy cohabitation, with power split between a pro-European prime minister and a nationalist president. 

Monday, 2 June – EU Phase 1 decision deadline for joint venture deal between BAE Systems, Leonardo and Japan Aircraft 

Today, the European Commission is expected to issue its Phase 1 decision on the proposed creation of a joint venture between BAE Systems (UK), Leonardo (Italy), and Japan Aircraft Industrial Enhancement to develop and deliver the Global Combat Air Programme (GCAP): a next-generation fighter jet intended to serve well beyond 2070. The project represents one of the most ambitious transnational defence initiatives in recent years. 

The new company, jointly owned in equal parts by the three firms, will be headquartered in the UK and will serve as the design authority throughout the aircraft's lifecycle. Even though the JV will oversee the programme centrally, manufacturing and final assembly will be subcontracted to BAE Systems, Leonardo, Mitsubishi Heavy Industries, and other suppliers. The goal is for the aircraft to enter service by the mid-2030s, with the joint venture expected to be operational by mid-2025. 

Since the notification last month, the Commission has been assessing the potential competitive impact of the joint venture under the EU Merger Regulation. Although national security considerations fall outside the EU's direct competence, the Commission is examining whether the concentration could reduce competition or restrict alternatives in key segments of the European defence industry. However, previous remarks by regulators suggest such concerns may be limited. 

Overall, the GCAP review takes place amid a broader shift toward consolidation in Europe’s defence sector as the EU officials have signalled a more flexible stance on defence cooperation. Speaking in April, Commissioner for Defence and Space Andrius Kubilius warned of “colossal shortfalls” in EU military materiel and called for a “big bang approach” to expand production and consolidate industrial efforts.  

The Commission’s ruling on GCAP could either result in an unconditional clearance, approval subject to commitments, or the launch of an extended Phase 2 investigation. Given the strategic importance of the programme and the companies' complementary roles, the deal is widely expected to be cleared in Phase 1. 

Tuesday, 3 June – Eurozone flash inflation estimate for May 

Tomorrow, Eurostat will release its Eurozone flash inflation estimate for May, with markets expecting a modest decline in headline inflation from 2.2% to 2.0%. The release comes just two days ahead of the ECB’s 5 June monetary policy meeting and will be closely watched for signs of sustained disinflation as policymakers weigh a widely anticipated rate cut. 

In April, euro area annual inflation remained stable at 2.2%, unchanged from March and down from 2.4% a year earlier. In the wider EU, annual inflation eased to 2.4% in April from 2.5% in March. Among euro area countries, France (0.9%) and Cyprus (1.4%) recorded the lowest annual rates, while Estonia (4.4%) posted the highest. Month-on-month, inflation declined in thirteen member states, held steady in three, and rose in eleven. Services continued to be the main driver of inflation, contributing +1.80 percentage points to the headline figure. This was followed by food, alcohol and tobacco (+0.57 pp), non-energy industrial goods (+0.15 pp), while energy exerted a negative contribution of -0.35 pp. 

Tuesday’s inflation reading will be a significant data point ahead of the ECB’s rate decision and may influence how the Governing Council communicates its forward guidance for July and beyond. 

Wednesday, 4 June – Bulgaria set to get greenlight for the adoption of the Euro 

Bulgaria is expected to receive formal approval from the European Central Bank (ECB) and the European Commission this week to join the eurozone as of 1 January 2026. This would mark a key step in the country’s long-delayed accession process, with final discussions among EU finance ministers and heads of government anticipated later this year. 

Bulgaria’s path to the euro has been repeatedly delayed due to economic and political instability. The country originally aimed to join in January 2025, but persistent inflation and successive government collapses in 2023 and 2024 forced Sofia to revise its timeline. In mid-2024, Bulgaria’s inflation stood at 5.1%, 1.8 percentage points above the reference value under the Maastricht criteria. At the same time, public support for euro adoption remained limited, with Eurobarometer data showing that only 49% of Bulgarians were in favour, and 64% feared it would drive up prices. 

The situation began to shift in late 2024. Inflation declined 2.6%, and a more stable government enabled renewed engagement with EU institutions. According to current estimates, Bulgaria is broadly in line with the convergence criteria. To qualify for euro adoption, a country’s average inflation over the previous 12 months must not exceed 1.5 percentage points above the average of the three best-performing EU member states. In 2024, those reference states were Ireland (1.0%), Italy (1.4%), and Luxembourg (1.6%).  

If accession proceeds as planned, Bulgaria will become the 21st member of the euro area. Even though the lev has long been pegged to the euro through a currency board, formal membership would grant Bulgaria’s central banker a seat on the ECB Governing Council. Given the country’s relatively small share of eurozone GDP, however, its influence on monetary policymaking is expected to be limited. 

Despite institutional momentum, political and public scepticism remains. Concerns persist that euro adoption could trigger a one-off increase in prices, particularly for basic goods in rural areas, and contribute to a wider adjustment toward higher price levels in line with eurozone norms. Citing these concerns, President Rumen Radev recently called for a national referendum to delay the introduction of the euro, though such a vote is considered unlikely, given past Constitutional Court rulings and a lack of support in Parliament. Prime Minister Rossen Jeliazkov has rejected the idea as unwarranted and politically unhelpful, stating that the government should focus on strengthening economic confidence and avoiding fear-based narratives. 

Pending formal approval by the ECB and Commission, the remainder of 2025 will focus on technical preparations for euro changeover, including dual pricing, public information campaigns, and coordination with the financial and retail sectors. If all goes to plan, Bulgaria will adopt the euro on 1 January 2026. 

Thursday, 5 June – ECB set to cut rates again 

On Thursday, the ECB is expected to deliver a widely anticipated rate cut, reducing the deposit rate by 25 basis points to 2.0%. The move would mark the eighth rate cut in nine meetings and is seen as a continuation of the ECB’s effort to counter soft growth and external uncertainty. However, growing internal caution suggests the easing cycle could pause after June. 

In April, the ECB Governing Council announced its third rate cut for this year, reducing the deposit rate by 25 basis points to 2.25%. Minutes from the ECB’s April meeting showed strong agreement on downside risks to growth and disinflationary pressures. Members noted that “the economic outlook was clouded by exceptional uncertainty” and that “inflation would likely be lower in 2025 than foreseen” in earlier projections. However, the same minutes also revealed that a few members had contemplated a pause or even a larger 50 bps cut, suggesting diverging views on the pace of easing. 

Recent commentary from senior policymakers adds weight to the view that Thursday’s cut could be followed by a pause. ECB Executive Board member Isabel Schnabel warned that medium-term inflation could rise due to structural shifts, including de-globalisation and labour constraints. Speaking in a conference at Stanford University last week, Schabel argued that “tariffs may be disinflationary in the short run but pose upside risks over the medium term’’. Klaas Knot also echoed that concern, pointing to the “supply shock” dimension of the global trade conflict. 

Adding to the complexity, the external backdrop remains volatile. On 24 May, US President Trump announced that reciprocal tariffs on EU goods would rise to 50% in June. However, following a call with Commission President Ursula von der Leyen, the suspension was extended to 9 July, reviving hopes for a deal. This six-week window is critical and could influence ECB forward guidance. 

Markets currently price a terminal rate of 1.75% by the end of 2025, but the ECB may use Thursday’s meeting to reframe expectations. President Lagarde’s press conference will be closely watched for any signal on whether the easing cycle pauses in July or resumes later in the year, depending on inflation trends and external developments. 

Thursday, 5 June – Germany’s chancellor Merz to meet Trump in Washington 

Germany’s Chancellor Friedrich Merz will travel to Washington this week for his first official visit to the US since taking office on 6 May, with a high-stakes meeting scheduled with President Donald Trump at the White House on Thursday. The visit comes against a backdrop of growing friction in transatlantic relations over trade policy and will mark the first in-person exchange between the two leaders. 

The meeting’s agenda will include discussions on the war in Ukraine, instability in the Middle East, and US-EU trade tensions. The meeting follows two earlier phone calls between Merz and Trump, most recently during the German chancellor’s joint trip to Kyiv alongside French President Emmanuel Macron and UK Prime Minister Keir Starmer. 

Even though Merz has struck a pragmatic tone since entering office, the run-up to the visit has been overshadowed by public clashes with key members of the Trump administration. Both Vice President JD Vance and Secretary of State Marco Rubio have criticised Berlin over its domestic security agency’s decision to label the far-right Alternative for Germany (AfD) a “proven extremist organisation”. In response, Merz rebuked Washington for overstepping, stating that German authorities expect “the same level of restraint” from US officials as Berlin has shown during recent American elections. 

In terms of substance, trade is expected to be a flashpoint. Shortly after taking office in May, Merz urged Trump to roll back punitive tariffs on European goods, describing a “zero-for-zero” solution as the only sustainable outcome. With Washington’s tariff threat against the EU still suspended until 9 July, Merz will likely seek to de-escalate tensions while defending the integrity of the EU’s single market. However, expectations of a breakthrough this week remain low. More broadly, the visit is expected to highlight Berlin’s evolving stance on transatlantic relations. In the aftermath of his electoral victory in February, Merz made headlines by stating that his “absolute priority” would be ‘’to strengthen Europe to the point where it can achieve real independence from the US.”