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W/C Monday, 28 October – Coalition talks to begin in Bulgaria and Lithuania following parliamentary elections
Yesterday, both Bulgaria and Lithuania held general elections with none of the leading parties able to secure an absolute majority, setting the stage for coalition talks in both countries.
In Bulgaria’s seventh parliamentary election since 2021, voter turnout remained low, reflecting growing fatigue amid the country’s prolonged political deadlock. Former Prime Minister Boyko Borissov’s GERB party emerged on top once again, securing 26.08% of the votes. However, GERB lacks the clear majority needed to form a government independently. The reformist “We Continue the Change” (PP) party came in second with 14.76%, followed closely by the ultra-nationalist, pro-Russian Revival party, which garnered 13.8%. Borissov, who led Bulgaria for 13 years, remains a polarising figure, especially following nationwide protests in 2020 over corruption and oligarchic influence in state institutions. This latest election follows Bulgaria’s ongoing struggle to form a stable government, triggered by the inconclusive outcome of a June election. Former Prime Minister Nikolay Denkov of PP stated that GERB now bears the responsibility to build a functional government, but Borissov signalled that GERB would cooperate with all parties except Revival. Forming a lasting coalition will be critical as Bulgaria faces pressing goals, including accelerating the flow of EU funding to improve infrastructure and preparing for eurozone accession, now targeted for January 2025 after consecutive delays.
In Lithuania, the opposition Social Democratic Party (LSDP) claimed victory over the ruling centre-right Homeland Union (TS-LKD) in Sunday’s election, ousting Prime Minister Ingrida Simonyte’s party. With all votes from the 63 remaining constituencies counted following the 13 October first round, LSDP secured a total of 52 seats out of 141, while TS-LKD gained 28 seats. The nationalist-populist Dawn of Nemunas won 20 seats, the Union of Democrats “For Lithuania” (DSVL) took 14, the Liberal Movement 12, and the Lithuanian Farmers and Greens Union (LVZS) 8.The ruling centre-right Homeland Union, led by Prime Minister Ingrida Simonyte, has been in power since 2020 but has faced growing criticism, despite overseeing solid economic growth and low inflation rates within the EU. Public dissatisfaction has largely centred around Simonyte’s handling of COVID-19 measures and the ongoing migrant crisis along the border with Belarus.
LSDP leader Vilija Blinkeviciute expressed intentions to form a coalition with DSVL and LVZS to establish a stable centre-left government. Despite this centre-left shift domestically, with increased focus on domestic issues like inequality and migration, Lithuania's foreign policy is unlikely to shift dramatically. The country’s strong stance on Russia and support for Ukraine is a consensus shared across the political spectrum, and President Gitanas Nauseda, who was re-elected earlier this year, remains influential in shaping foreign policy.
Wednesday, 30 October – EU member states likely to break the impasse on proposal to tax digital platforms; Estonia likely to drop its veto
EU member states have tentatively agreed to a softened VAT reform plan, hoping it will lead to Estonia lifting its longstanding veto on the initiative, with a final deal likely to be formalised this week.
Unveiled in December 2022, the European Commission’s proposal (ViDA) aims to hold platforms like Uber and Airbnb responsible for VAT collection when service providers fail to comply. According to the Commission’s own 2022 VAT Gap report, member states lost €93 billion in VAT revenues in 2020, with conservative estimates suggesting that one quarter of the missing revenues can be directly attributed to VAT fraud linked to intra-EU trade. Additionally, current VAT arrangements can be burdensome for businesses, especially for SMEs, scale-ups, and companies operating cross-border.
In previous meetings in May and June, the EU finance ministers failed to reach an agreement after Estonia vetoed the proposal, arguing it would burden consumers with higher costs and unfairly impact Small and Medium Enterprises (SMEs) using these platforms. Estonia’s veto has largely been seen as an effort to safeguard Bolt, the Tallin-based mobility app. More specifically, Estonian former Finance Minister Mart Vorklaev contended in June that the additional taxes would raise prices for services booked through platforms compared to traditional channels, by stating that "this is not a tax on platforms, it’s a tax on SMEs that provide their services on a platform." Although the Belgian presidency in June came up with a compromise proposal exempting small firms on platforms like Airbnb from the sales tax, the Baltic state claims it could create excessive bureaucracy.
However, in their meeting last week, EU tax experts agreed to a phased approach to address Estonia’s concerns. Under the new terms, countries may opt to apply the extra VAT requirements on small and medium-sized businesses from 1 July 2028, with full implementation mandatory by 1 January 2030. Key backers of the original ViDA proposal, notably Italy and Spain, have reluctantly accepted the diluted agreement. EU envoys are expected to endorse the final text on Wednesday, paving the way for finance ministers to give the deal a green light next week.
Wednesday, 30 October – UK Chancellor Rachel Reeves to unveil 2025 Budget
On Wednesday, Labour Chancellor Rachel Reeves is set to present the UK's autumn Budget on 30 October, marking Labour's first Budget since 2010. Facing what she describes as “difficult decisions” to stabilise finances, Reeves aims to prioritise sustainable growth while dealing with a projected £22billion deficit. In her op-ed for the Financial Times published on Friday, she outlined that her primary goals include driving economic stability, boosting productivity, and raising living standards across the UK. Despite having to deal with long-running government debts, Reeves stated determined to ‘’show that we have a choice between investment and decline. I am choosing to invest in Britain so we can turn the page on 14 years of slow growth.”
Labour’s Budget will feature £40 billion in combined tax increases and spending cuts. Reeves plans to raise funds without adding burdens on “working people” by avoiding VAT, income tax, or National Insurance (NI) hikes on employees, a pledge central to her campaign. Employer contributions to NI, however, are under consideration for an increase, which could make hiring costlier for businesses. Reeves has also signalled potential freezes to income tax and NI thresholds, extending a policy from the Conservative government in 2022, meaning people will continue to pay more as inflation raises wages into higher tax brackets. A review of inheritance tax exemptions and capital gains tax (CGT) adjustments are also likely to be announced, potentially impacting high-value estates and gains from assets like property and shares.
Reeves sees public investment as essential for raising productivity and supporting sustainable growth. She will establish the National Wealth Fund to co-invest with private entities, enhancing the impact of public funds. To ensure the stability rule succeeds, Reeves has noted that "tough decisions on spending and welfare" are essential, signalling imminent changes to welfare policy as part of Labour’s broader economic reset. Reeves’s Budget will also address support for sectors that have suffered from prior spending cuts, particularly health and education, aiming to avoid the “austerity” approach of previous years.
The UK has seen the fastest growth in the G7 over the first half of 2024, rebounding from a brief recession in late 2023. Nonetheless, projections from the Office for National Statistics (ONS) in August warned of slower growth going forward, stressing the need for renewed focus on investment to avoid another period of stagnation.
Meanwhile, a recent Ipsos poll highlights mixed public sentiment ahead of the upcoming budget. The survey, conducted from October 11-14, reveals that half of Britons are more fearful than hopeful about how Labour’s Budget announcements will impact public services (46% vs. 18%) and their personal finances (53% vs. 11%). Despite these concerns, Labour still leads the Conservatives in public trust on the economy, with 31% of respondents preferring Labour’s economic management compared to 24% favoring the Conservatives. This margin, however, has already decreased from a +14-point lead in August to +7 in October.
Thursday, 31 October – Deadline for final EU decision on tariffs on Chinese EVs; bilateral technical talks to continue
This week, the European Commission will take its final decision on whether to extend the recently imposed provisional tariffs on Chinese electric vehicles (EVs) for a period of five years.
On 4 October, the Commission secured the necessary support to impose the tariffs despite limited backing from national governments. The vote saw 10 countries in favour and 12 abstaining, while Hungary, Malta, Slovakia, Slovenia, and Germany opposed the tariffs. Chancellor Olaf Scholz reportedly decided just the night before to oppose the tariffs, and his last-minute lobbying efforts failed to convince a sufficient number of other member states. The Commission deemed this outcome as “necessary support” for the plan to implement additional duties ranging from 7.8% to 35.3% for a period of five years.
In an effort to reach an alternative solution, the EU and China have engaged in multiple rounds of technical negotiations, exploring options such as voluntary price commitments from Chinese EV manufacturers to avoid the tariffs. While no compromise has yet been achieved and the tariffs are set to take effect this week, both the European Commission and China’s Ministry of Commerce confirmed on Friday that technical negotiations would continue beyond the 31 October deadline. Following a video call between EU Trade Commissioner Valdis Dombrovskis and Chinese Minister of Commerce Wang Wentao on Friday, both sides committed to ongoing discussions, with possible solutions including minimum price commitments or increased Chinese investments in Europe. Beijing also welcomed a potential EU delegation visit to China to advance negotiations. Chinese officials have urged the EU not to conduct separate discussions with individual companies, warning that doing so could undermine the negotiations. Nevertheless, the Commission indicated it would continue engaging with both the China Chamber of Commerce for Import and Export of Machinery and Electronic Products (CCCME) and individual exporters.
In response to the EU's new tariffs on Chinese EVs, Beijing announced earlier this month a retaliatory (provisional) increase in tariffs on European brandy imports by as much as 39%. The decision primarily impacts French brandy producers, as France accounted for nearly all of the EU’s brandy exports to China last year. Chinese officials stated that preliminary findings from an anti-dumping investigation indicated that EU brandy imports “substantially damaged or threatened” the domestic industry. Beyond brandy, Chinese officials hinted at the possibility of expanding retaliatory measures to other European goods, including large-engine car imports, a key concern for Germany and other car-producing member states. China has also launched retaliatory investigations into EU exports of pork and dairy, which are expected to conclude in 2025.
Thursday, 31 October – Eurozone flash inflation estimate for October
On Thursday, Eurostat will release its flash inflation estimate in the euro area for October. According to inflation data released earlier this month, inflation eased to 1.7% in September, down from 2.2% in August, falling below the ECB’s target of 2% for the first time in over three years. Excluding food and energy, core inflation in the euro area decreased from 2.9% year-on-year in August to 2.7% in September, also in line with expectations. In Q2 2024, the euro area grew by a sluggish 0.3%. The latest inflationary easing, along with weakening wage growth and economic activity paved the way for the ECB to drop rates by 25 basis points on 17 October, its third rate cut this year, from 3.50% to 3.25%.
While inflation continues to fall, the euro zone economy is expected to show only modest growth, with 0.2% of projected growth in Q4 and 0.7% for 2024, before picking up slightly to 1.2% in 2025. Germany, the bloc’s largest economy, remains sluggish, projected to contract in 2024 for the second consecutive year, with only a gradual recovery over the next two years.
In previous months, the members of ECB’s Governing Council refrained from committing to a specific rate cut path, with its more hawkish ECB members stressing the importance of data-driven decisions. However, economic activity has contracted further, as shown by October’s flash composite PMI at 49.7, remaining below the 50-point mark, which signals growth. Last week, the International Monetary Fund’s (IMF) downgraded the Eurozone’s 2025 growth forecast to 1.2% which aligns with the ECB’s own outlook, signalling potential headwinds as Germany’s economic struggles affect the broader bloc. Recent ECB surveys revealed a downward adjustment in 2025 inflation expectations to 1.9% from the 2% target, deepening concerns over stagnant growth.
The worsening economic outlook appears to have prompted a rethinking among the GC members. Portugal’s central bank governor Mario Centeno on Wednesday suggested that the ECB’s December meeting may consider a more aggressive cut, noting that the latest data “could support a more significant reduction in rates", hinting at the possibility of a 50-basis-point cut if economic pressures persist. In a similar spirit, Italy’s Fabio Panetta argued that "given the pace of disinflation and the weakness of the real economy, we cannot exclude that we may need to go below the neutral rate," suggesting the ECB could prioritise support for growth over inflation targets if needed. However, some of their peers have been more cautious. ECB President Christine Lagarde has previously tempered expectations for aggressive cuts, stating the ECB’s current moves are based on the view that the "disinflationary process is well on track." Austrian central bank chief Robert Holzmann has also expressed doubts about a 50-basis-point cut, suggesting that recent data does not yet warrant such an intervention.
Thus, this makes the October inflation report on Thursday, along with the release of the Q3 GDP estimates the previous day, a key factor in deciding the ECB’s next move, potentially shifting the Bank’s focus from inflation control to growth stimulation.
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