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Poland dodged the recession bullet last year through a combination of skill and luck, and the hope is that both of those qualities still remain in force as the country grapples with serious fiscal imbalances that will put the largely unrealised reformist promises of the government to the test.

Last year’s good economic news – the country eked out a 1.7 increase in gross domestic product – will be followed by even better news this year, with growth of 3.5 per cent as the economy gains speed thanks to continuing buoyancy in domestic demand and to Germany’s economic revival, which is pulling in large amounts of Polish exports.

“We didn’t get hit by the crisis, and now we are on a very fast path of development,” says Jan Kulczyk, Poland’s wealthiest man, who has ambitious plans for Poland after being largely absent for several years and is hoping to buy state-owned Enea, the country’s third largest power generator, in an attempt to build a private utility company.

Poland’s exceptional performance is drawing attention from investors. When the treasury ministry was book building for the initial public offering of the Warsaw Stock Exchange, institutional investors snapped up the offering in only 10 hours. Large private equity funds are keeping an eye on big potential deals, like the impending $5bn sale of Polkomtel, a mobile telephone operator.

“There is enormous enthusiasm for Polish debt, both denominated in zlotys and in euros or dollars,” says Dominik Radziwill, the deputy finance minister, who notes that rates for Polish 10-year bonds are below those of troubled eurozone countries such as Portugal, Ireland and Italy.

In the first eight months of this year, Poland saw financial inflows of €24bn ($33bn), the same level as in 2008, the peak of the boom. But there is a big difference. Two years ago much of the money pouring into Poland was used to buy real estate or set up factories, while now 70 per cent of it is portfolio investment, which can be withdrawn in a hurry.

That underscores the fragility of Poland’s current situation.

Jacek Rostowski, the finance minister, insists that public debt will not reach 55 per cent of gross domestic product, a legal threshold that, if crossed, forces the government to undertake painful spending cuts. The debt ratio is likely to hover very close to that number – without crossing over – thanks to some massaging of statistics, but the slightest turbulence in currency markets or investor sentiment could cause insuperable problems.

Donald Tusk, the prime minister, is resisting calls from some of the country’s most prominent economists, including Leszek Balcerowicz, the architect of the 1990 reforms that launched Poland’s market economy, to undertake radical steps to bring the budget back into balance. The deficit this year is expected to reach 7.9 per cent, although the government says it will fall next year and drop to 3 per cent by 2013.

However, the steps taken so far are fairly cautious, including a temporary increase in the VAT rate, a fairly porous public sector wage freeze and a spending rule that limits increases in discretionary expenditures to 1 per cent above inflation.

That is too unambitious for many economists. “There is a risk of complacency on the fiscal side,” says Christian Keller with Barclays Capital. “Poland overall looks very robust, in a region that suffered significantly from the global crisis, but if inertia prevails in making the necessary fiscal adjustment, that could backfire.”

However, the government has made it clear it is not interested taking more radical steps.

“I cannot agree that the Tusk government operates on the basis of expediency,” says Jan Krzysztof Bielecki, a former prime minister who is one of Mr Tusk’s closest advisers. “This government operates on the basis of principles, but also on the fundamental assumption that Poland does not need a new round of shock therapy.”

Although Mr Tusk was elected in 2007 on a programme of reform and economic freedom, including slashing away at the red tape that throttles Polish businesses, he has been very cautious in governing. Several initiatives aimed at reducing the level of bureaucracy have produced lacklustre results, and Poland now trails the rest of the region in the World Bank’s Doing Business rankings.

But the government is not keen to rock the boat politically, pointing to parliamentary elections set for next year. That has been a familiar refrain – the previous barrier hindering a more activist approach was presidential elections, won this year by Bronislaw Komorowski, Mr Tusk’s ally.

After next year’s vote, there will be an unusual three-year lull with no elections, which theoretically opens the road for politically difficult reforms, but Mr Tusk’s team has not shown much appetite for radical steps for a good reason – except for the fiscal imbalances, Poland is actually doing very well.

The country has become the EU’s largest building site, thanks in large part to the €67bn in structural funds flowing into Poland during the 2007-2013 budget cycle. The signs of activity are visible everywhere, from the south-eastern border with Ukraine, site of the future A4 highway linking the region to Germany, to the outskirts of Warsaw, where a new bridge is being thrown across the Vistula River.

“Poland had a slowdown and not a recession because of European Union funds,” says Elzbieta Bienkowska, the minister of regional development, the body responsible for administering much of the EU’s structural funds programme.

The real estate market has stabilised after being rocked in late 2008 by the global crisis, and banks are again lending, although more cautiously than before. With unemployment at only 11.5 per cent, Polish consumers are continuing to spend.

That creates little domestic pressure for dramatic reforms. Coupled with that is Civic Platform’s dominant political position. Opinion polls consistently show the party with the support of about half of the electorate, while the rightwing opposition Law and Justice party usually manages to garner the support of about a third of voters.

The reason is that Law and Justice, founded by the Kaczynski twins, has become increasingly irrelevant following the April 10 air disaster that killed President Lech Kaczynski and 95 others. Jaroslaw Kaczynski, the party leader, is obsessed with finding out what happened that foggy morning near Smolensk, Russia, and some of his more febrile supporters see a Russian plot to murder the president. When not hunting for the guilty in the air crash – although all evidence points to pilot error as the leading cause – the party has engaged in poisonous infighting.

The result is that, as Mr Tusk has quipped, “There is no one to lose against.”

Poland’s domestic well-being is mirrored abroad, where Warsaw has been forging an ever-closer alliance with Berlin – a relationship that Radoslaw Sikorski, the foreign minister, calls “the best in history”.

Ties with Russia are much improved, although the bloody past continues to loom over the relationship, particularly Russia’s reluctance to co-operate fully in investigating the 1940 murder of 20,000 Polish officers by the Soviet Union.

“Our history is a tough one. We would like a Polish-Russian reconciliation to match the Polish-German one,” says Mr Sikorski.

Secure abroad and relatively content at home, Poland is in a sweet spot, as long as the external environment continues to be benign. “I don’t think there is a need for dramatic change,” says Mr Bielecki.

Copyright The Financial Times Limited 2017. All rights reserved.

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