Poland's political dispute with the European Commission could threaten the country's impressive economic growth of recent years, reports Stefanie Linhardt.
Disagreements between the Polish government and the EU have recently been dominating the headlines. Poland’s reforms to its justice system in particular have put it loggerheads with the European Commission (EC), which says they undermine the rule of law.
Consequently, the EC triggered unprecedented Article 7 disciplinary procedures, which, if followed through, would culminate in sanctions against Poland and a suspension of its EU voting rights. While this is unlikely to happen – as the process requires unanimity across all EU leaders and the prime minister of Hungary, Viktor Orbán, has already said he would vote against such a measure – could central and eastern Europe’s largest economy still take an indirect hit?
Outpacing the region
Grzegorz Zielinski, regional director Poland and the Baltics at the European Bank for Reconstruction and Development (EBRD), says: “Whatever has been happening on the political side in this country over the past two years has not held back the economic activities of Polish corporates and small and medium-sized enterprises, which are developing at an impressive rate.”
Since the establishment of the euro area in 1999, the Polish economy has significantly outpaced the common currency zone. In 2017, eurozone gross domestic product (GDP) grew 2.5%, its fastest growth rate since a 3% rise in 2007. This compares to Poland’s 7% increase in 2007 and a 4.6% real GDP increase in 2017, according to preliminary government figures, and 3.8% growth estimates at constant prices according to the International Monetary Fund (IMF). For the next three years, the government forecasts 3.8% growth in Poland, compared with IMF forecasts of about 3%.
A key driver of Poland’s economic development is consumption, which makes up about 60% of GDP. To boost consumption (and reverse demographic trends), in April 2016 the country's government introduced the ‘Family 500 plus’ social benefit programme, giving families an extra 500 zloty (about $150) for every second and further child. The programme cost the state an estimated 0.9% of GDP in 2016, and 1.2% of GDP in both 2017 and 2018.
Drop in support
But investment, especially from EU funds, is also crucial. Poland will receive some €105.8bn in EU funding from the 2014-2020 programme, including €72.9bn in cohesion funds and €28.5bn under the common agricultural policy, according to government data.
We want to be a member of the EU and want to have a key role in Europe. There will be no Polexit
However, the support the country will receive in the next EU budget is widely expected to be lower – in part due to the UK vote for Brexit but also due to Poland’s economic success. And there is a risk the EC and several member states might push through a link between cohesion funds and eligibility criteria reflecting countries’ solidarity with the EU, which could reduce funds further.
“The big question is what is going replace [the huge inflow of EU funds] to help sustain the level of development the country has experienced over the past two decades?” asks Mr Zielinski.
FDI to the rescue?
The answer could be foreign direct investment (FDI) – an area so far unaffected by political noise. In 2017, FDI into Poland reached $17.2bn, its highest level since 2008, while in January 2018 investments were higher than in any January in the past five years, at $1.17bn, according to data from greenfield monitor fDi Intelligence.
Still, keeping investor confidence at healthy levels is key, which requires “solid rules of the game” – something that is “particularly important for long-term investment in infrastructure and infrastructure-like assets”, says Mr Zielinski.
And some experts are suggesting recent reforms to the judiciary are not sending a positive signal in that respect. Still, the Polish government suggests reforms to the justice system were necessary. “If you take the World Bank’s Doing Business report, [enforcing] of contracts was one of the weakest points in Poland – and businesses were demanding changes,” says Polish deputy finance minister Piotr Nowak.
In the 2018 Doing Business report, Poland is ranked 27th globally (down from 24th in 2017) – but 55th for enforcing of contracts. If the recent reforms change things for the better, the next report might show this, but it is not expected until October 2018, based on data collected up until June 1.
A moderate replacement
Where the political dispute will take Poland is unclear. Relations have improved since a December government reshuffle, which saw the more moderate former minister of finance and development, Mateusz Morawiecki, become prime minister. “With the new government, tensions have come down,” says Mr Nowak. “The dialogue we opened with the EU shows that we want to be a member of the EU and want to have a key role in Europe. There will be no Polexit.”
On March 7, 2018, Mr Morawiecki presented the government’s position on Poland’s judicial reforms to the EC in a white paper. And so far, the Bulgarian presidency is keeping the Article 7 proceedings off the EU Council’s agenda to avoid a vote on the issue – something several EU members including Romania, Lithuania and Slovakia are also keen on, according to a Eurasia Group report.
But even if the formal Article 7 process is halted and EU relations improve, the situation might still bring repercussions for the Polish economy. “[An] external assessment of the rule of law in Poland does not necessarily translate very quickly into macro numbers,” says Mateusz Szczurek, former finance minister of Poland and EBRD lead regional economist. “The economic cycle, as strong as it is, is going to mask a lot.
“Still, at the advanced level of development, institutions are crucial. Their deficiencies do constitute a major drag on growth over the long term, as the past centuries taught us.”
What this might mean for Poland, only time will tell.
