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Polish slippage

1 October 2015 By Rob Cox

During election season across most of Europe, talk of taxing banks and supermarkets, making public companies do the state’s bidding, raising the minimum wage and reducing the official retirement age may be standard fare. Not in Poland – until now.

Poland’s unparalleled success – its economy has more than doubled since 1990 – owes much to its embrace of a liberal, free-market economic agenda. So Hungarian-style rhetoric emanating from the two center-right parties vying for control in the Oct. 25 ballot is worrisome. It suggests a slippage from the principles that have made Poland the envy of its European neighbors.

True, politicians always make more promises than they can actually deliver. But if even a hint of the dirigiste palaver coming from Warsaw comes to fruition, it would have significant consequences for Polish markets and business – and could hamper the country’s sprint to break definitively free of the so-called middle-income trap.

To understand what’s at stake, reflect on how far Poland has come. When it blasted through the Iron Curtain, per capita GDP was lower than in Mexico, according to National Bank of Poland data. Today it’s larger by half. Since joining the European Union in 2004, economic output has increased by some 55 percent. By contrast, Hungary and Germany have grown by about 15 percent, in part because Poland avoided a contraction during the global financial crisis.

“The Polish people have good reasons to feel proud of their success,” Andrzej Rzonca, a member of the Monetary Policy Council of Poland’s central bank, told me this week in an interview. “But they feel it should always be like this.”

It won’t be if Poland backs away from the essential ingredients of its 25 years of achievement, as some leaders of both parties appear willing to do. Civic Platform (PO), led by Prime Minister Ewa Kopacz, has governed since 2007, so it has a legislative track record to defend. But its rival, Law and Justice (PiS), which won presidential elections in May and is leading in most polls, has issued a confounding catalogue of populist promises.

Consider a few PiS proposals. The party, whose nominee for prime minister is also a woman, Beata Szydlo, shocked the financial services industry by proposing a tax on banking assets and even potentially on investment funds. The idea, to charge a balance sheet tariff of 0.39 percent, would raise something like 6 billion zlotys ($1.6 billion) that the new government could use to pay for other promises. It also said it may impose a tax on supermarkets’ revenue, which could bring in another 3 billion zlotys.

As the idea scorched the shares of the mostly foreign-owned banking sector, PiS suggested an alternative: a financial transactions tax, which could bring in about 1.7 billion zlotys. Since the asset tax first floated in late June, Bank Pekao, controlled by UniCredit, has lost 14 percent of its value and Santander’s Bank Zachodni is down a tenth.

The money would be used, among other things, to roll back reforms made in 2012 that increased the official retirement age. That was part of an effort to put the country’s fiscal trajectory on solid footing, and within EU mandates on debt and deficits.

“A PiS-led government would bring a radical shift in Polish politics and policymaking,” argues Wojciech Szacki, senior political affairs analyst at Polityka Insight. “The opposition party is statist in economic policy, conservative on social issues, and national-interest driven on the foreign policy.”

Yet the ruling party has also shown some statist leanings. Civic Platform opposes bank asset taxes, arguing that on top of existing corporate income tax and levies used to fund a depositor protection fund it risks choking off credit in the economy. But it did something similar when it reformed the country’s pension system a year ago.

Kopacz’s predecessor, Donald Tusk, transferred around 150 billion zlotys of government bonds in pension assets overseen by privately managed funds to the state. It was an accounting trick that allowed Poland to reduce its overall debt, on paper, by replacing the bonds with promises to the pensioners. But it also sapped Warsaw’s fledgling capital markets of liquidity.

Similarly, the party has on occasion shown a willingness to use the state’s ownership of publicly listed companies as an instrument of industrial policy. Nowhere has this been more apparent than in its so-far failed attempts to revamp the country’s inefficient coal industry. Poland has the largest reserves of coal in the EU, and powers 80 percent of its electricity from the stuff.

Expectations that utilities will be forced to bail out the coal sector have sliced the market values of PGE and Tauron by 33 percent and 39 percent, respectively, over the past year. The biggest coal producer, Kompania Weglowa, is on the verge of bankruptcy and employs 50,000 people, comprising about half of the industry’s total workforce.

Polish business leaders say they are relatively unflustered by the leftist noise coming from both sides of the electoral debate. Campaign promises aren’t policy, they say. Given how far the country has come – and needs still to go – that complacency could prove dangerous.

As the country’s technocrat Finance Minister Mateusz Szczurek put it to me this week: “You can always value stability after you lose it. I would hate for Poland to wind up in a situation where that is what happens.”

 

 

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