June 25, 2010 12:58 am

Economy: Cool heads and good luck help avert crisis

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It is a proud boast: Poland was the only European Union member to escape recession and report positive growth last year. Yet with uncertainties over the strength of its recovery because of the eurozone crisis, and a sharp increase in the budget deficit last year, there is little time for self-congratulation.

Poland avoided an economic contraction through luck and some good decisions. Among the latter was that cutting some taxes and social security costs shortly before the crisis, giving a timely boost to the economy.



The country also accelerated use of EU funds in 2007-08, partly in preparation for co-hosting the Euro 2012 football championships with Ukraine.

Its government and citizens, say many observers, deserve credit, too, for cool-headedness. The Civic Platform-led government of Donald Tusk insisted that Poland was not heading for catastrophe – even while investors panicked over the broader outlook for central and eastern Europe – and ordinary Poles kept their nerve.

“There can be such a thing as a self-fulfilling prophecy,” notes Jan Winiecki, a member of Poland’s monetary policy council. “People didn’t buy the idea that we were facing a catastrophe, and so they didn’t change their spending patterns so much.”

Poland’s large domestic market, compared with neighbours such as the Czech Republic and Slovakia, helped it withstand the slump in its main EU export markets.

Witold Orlowski, chief economic adviser at PwC in Poland, notes, too, that Polish companies and consumers had not gorged on foreign currency borrowing as Hungary or the Baltic republics had, fuelling gaping current account deficits. But such borrowing was growing rapidly in Poland by 2008.

“Our neighbours hit the wall,” he says. “We were also running in the direction of the wall, but fortunately we were still far away when our neighbours started to hit it.”

Finally, the fact that Poland was neither within the eurozone – like Slovakia or Slovenia – nor had pegged its currency to the euro – like the Baltics and Bulgaria – meant a sharply depreciating zloty helped preserve competitiveness.

“The currency depreciated enough to help deal with the problem in the real economy, but not to such a degree that it would create problems in the banking industry,” Mr Orlowski says.

Yet Stanislaw Gomulka, a former deputy finance minister and professor at the London School of Economics, cautions that Poland’s achievement in maintaining growth should not be over-emphasised. The fall from its previous trend rate was as big as that of many other European countries.

“In advanced western countries, the standard rate of growth is 1-2 per cent [a year]. Then there are the emerging countries, which are catching up, where the standard rate is something like 5 per cent. Poland belongs to that category,” he says.

The consequences of the sharp fall in growth must now be faced. On top of the earlier tax cuts, lower growth hit tax receipts even as spending continued to rise. As a result, the budget deficit ballooned to 7.1 per cent of output last year, from 1.9 per cent in 2007 and 3.7 per cent in 2008.

The fact this figure is well above the 3 per cent ceiling for euro membership is not an immediate problem.

Talk of joining the euro by 2012 has been shelved. With Poland having experienced the benefits of an independent monetary policy and observing the eurozone’s escalating debt problems, membership is on the back burner and unlikely before 2015.

Poland’s deficit is also below those of the worst western European offenders such as Greece, Spain, Ireland and the UK. But it is at a level at which, without action to tackle it, markets could become jittery.

Having Bronislaw Komorowski of Civic Platform as president could assist the government in fiscal consolidation, ending the gridlock created when the late president Lech Kaczynski in 2008 vetoed reforms of pensions and healthcare.

But, notes Mr Gomulka, the government faces parliamentary elections in late 2011 so is “unlikely to produce any fiscal initiatives for next year”. A fiscal plan sent to Brussels sees the deficit remaining close to 7 per cent this year, with the bulk of consolidation put off until 2012.

Senior officials stress the government’s budgetary caution. “We have to resolve a difficult dilemma – how to harmonise the need to stabilise public finances with the need to grow,” says Michal Boni, the prime minister’s chief adviser.

Officials also point to rules that have been introduced limiting the rise in discretionary spending, about a quarter of the budget, to 1 per cent.

Yet the government will face significant reform challenges, notably of pensions and of the state-financed social security system for farmers. The eurozone’s woes, moreover, mean this could be played out against a background of economic growth slower than official forecasts of 3 per cent this year and 4.5 per cent in 2011.

Marek Belka, Poland’s new central bank governor, says only a “real pessimist” would foresee a double-dip recession, but suggests western Europe’s recovery could be very fragile, affecting Polish exports.

“We are seeing a recovery, but like the rest of Europe we are being careful. Until there is more of a revival in domestic demand it’s hard to say that the revival is on firm ground.”

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