The European Commission will launch a preliminary assessment of the Polish government's moves to alter the lineup and workings of the constitutional court and to tighten control over state-owned media, the EU executive announced on January 13.
The EU's discussion over Warsaw's commitment to the bloc’s democratic norms follows efforts by the ruling Law and Justice (PiS) to quickly consolidate power after its victory in the October elections. It is in the middle of controversial moves to impose its will on the country's Constitutional Tribunal and state-owned media.
Though the review is an initial step toward potential sanctions, in reality the EU can do little right now to rein PiS in by force. Instead, Brussels likely hopes that the probe will offer it leverage, and the time to allow political and economic pressures to build.
Commission Vice President Frans Timmermans announced the decision following a meeting of all 28 member states. “The purpose of the process we have launched is to clarify the facts in an objective way, assess the situation in more depth and start a dialogue with Polish authorities without prejudging any possible next steps,” he said.
The commission will now launch the first step of the rule of law procedure, in which it will make a formal assessment of Poland's commitment to EU norms. That will result in a recommendation, followed by potential action should the review find a “systemic threat” to the rule of law. Penalties could include a suspension of voting rights or EU funds.
The debate over Poland has run since the turn of the year, and has rapidly turned nasty. Officials from Brussels - many of them German - have accused PiS of leading a "Putinisation" of the country - anathema to the ardently nationalist and anti-Russian party. Polish officials and media have hit back by claiming the EU is interfering with sovereign policy, while also managing to make references to the invasion of the country by the Nazis and to Brussels' "leftwing" agenda.
Brussels appears to be worried that Poland is turning towards the "illiberal democracy" model espoused by Hungarian Prime Minister Viktor Orban. PiS chairman Jaroslaw Kaczynski - widely regarded as the ultimate boss in Poland despite holding no government post - met with Orban in a secret six-hour meeting in early January.
Brussels has fought an almost constant battle with the Hungarian leader over the past five years. However, Orban is currently feeling strengthened by support in some quarters in the EU with his hardline against migrants trying to enter the bloc.
Brussels is therefore in a tough spot, suggesting the decision to launch the long-winded probe is likely intended to bring Warsaw to the negotiating table, rather than begin a war on another front. “Our aim is to solve these issues,” insisted Timmermans, who has borne much of the brunt of Polish fury. “It is to not go into a polemic.”
The bitter accusations thrown back and forth since the new year have produced some very strong statements out of Brussels. However, the forces currently pulling the bloc apart - the migrant crisis, Brexit, Syria and the conflict in Ukraine and relations with Russia - mean that Brussels is in a weak position, despite the fact that the PiS government looks potentially more exposed to EU pressure than Fidesz.
On the one hand, the EU now has more flexibility to hand to deal with PiS than it previously enjoyed in trying to deal with Orban over the years. The "nuclear option" Article 7, which threatens to strip member states of voting rights has since 2014 been complemented by the longer "rule of law" processes to keep countries under review. The new option was a direct result of the EU's experiences in trying to rein in Orban.
The tactics and goals are also likely to vary in Poland. Kaczyski is an old fashioned ideologue, and is unlikely to soften his message much when talking to European officials. Orban is a skillful populist; he's spent years blasting the EU in front of his domestic audience, but quietly making concessions when in Brussels.
At the same time, Poland is a much bigger fish than Hungary, which until November was pushing for a seat at the top table in Brussels and closer relations with Germany. Whether that means the EU will try to move with more firmness to stem trouble, or shrink back from the challenge, is unclear. Much has also been made of the fact that Fidesz is protected by its membership of the EPP - the biggest political bloc in the EU. PiS - which is a member of the smaller European Conservatives and Reformists group - does not have that support.
Meanwhile, unlike Orban, PiS has no constitutional majority, which should stay its hand somewhat. It may also make make domestic legal challenges easier in the future.
Likely the key point, however, is the response of Poles themselves. Several large demonstrations have already protested against PiS' power grab. Meanwhile, polls suggest support for the party has plummeted in just its third month in office.
Despite all this, Brussels - which retains non-confrontation within its DNA - will tread extra carefully right now given the forces pulling at the EU and the rising Euroscepticism across the continent, and particularly at its eastern end.
"The commission faces a delicate balancing act as any formal steps against Warsaw will likely further fuel the very Eurosceptic sentiment, which the PiS is banking on politically," notes Otilia Dhand at Teneo Intelligence.
Indeed, it may be that the toughest penalty handed out to Poland for the meantime will be ejection from the European Song Contest. The European Broadcasting Union, which organizes the event, has said it could take the drastic step should Poland's new media legislation "breach the statutes of the EBU".
At the same time, the response in Brussels and western media is in danger of becoming excessive point out some, including the president of the European Council and former Civic Platform (PO) prime minister Donald Tusk. "Exaggerated opinions," he said, according to newswires, "can be counter-effective."
For investors, Poland's lurch rightwards and its confrontation with the EU will be distracting, but they are likely to be more concerned about populist policymaking.
Here the evidence is not conclusive so far. During its brief tenure in 2005-07, while its actions in other strands of government produced similar alarm to today, PiS kept a reasonably tight fiscal ship and oversaw decent economic growth.
"The last PiS government was quite good for the economy," Henryka Bochinarz who heads business lobby Lewiathan, told bne IntelliNews late last year. "They cut taxes, companies were doing well, and they cracked down on the oligarchs."
The new government is in now in the midst of appointing new members to the rate-setting Monetary Policy Council, and would clearly like to see the central bank offer a little additional stimulus to the economy and inflation. Meanwhile, its social spending programmes - which include a rise in the minimum wage and child benefits - should help consumption to continue to drive GDP.
"The economic policies announced so far amount to a loosening of fiscal policy," notes William Jackson at Capital Economics, "and this is one reason why we expect GDP to expand by a robust 3.5% this year and 4.0% in 2017."
In general then, the real economy looks unlikely in the near term to go through any fundamental changes compared with its time under the stewardship of the centre-right PO, during which Poland became a European star for investors. PO spent eight years in power before it fell to pieces in the October election, but scored just one meaningful reform - the raising of the retirement age.
Elsewhere, PO failed to carry out long called for reforms. The mining unions continue to resist any form of restructuring, while coal still produces a stunning 90% or so of power. The country's energy strategy as a whole remains confused.
The pension system is a disaster in waiting after the PO government grabbed a huge chunk of the assets held by private fund managers in 2014 (a similar move in Hungary in 2011 led to Orban being pilloried) and effectively shut down the second pillar. That in turn has hit the equities market hard.
An announcement in early January that PiS is studying a potential merger of the state-controlled oil and gas companies, is proof, claim some, that the government is now set to disrupt the economy as it continues its push for power. However, it's unclear what horrors are foreseen, or why building a regional fuels giant is necessarily a bad idea.
While there may be something in warnings that the statist PiS might be tempted to take another leaf out of the Fidesz playbook and seek to re-nationalise some companies, there have been no suggestions from officials to date. Certainly, little if any privatisation should be expected, but again, that's nothing new. State-controlled companies remain overwhelmingly powerful; at 20% or so, the Polish state controls a larger slice of the economy than does its Russian peer, Bochinarz points out.
Warsaw says the idea to merge the country's fuels and gas giants is motivated by a desire to defend them against potential hostile takeovers. It's a move that reflects the 2012 merger of the chemicals industry, as Russian suitors moved in on Azoty - Poland's largest gas consumer, and a company therefore key to efforts to reduce dependence on Russian gas - and other assets in the sector. In the run up to the last election, PO hatched a plan to build a second state-controlled banking giant on the back of insurer PZU, to pair it with Poland's biggest lender PKO.
As the European Central Bank pointed out in a missive on January 12, the banking tax that PiS hopes to have up and running is no boon to a sector already struggling with low interest rates and high contributions to the Bank Guarantee Fund. However, the claims by the Eurozone's central bank that the move could upset the financial stability of the Polish banking sector looks a little strong.
The bank tax is straight out of Orban's playbook, Hungary having put a high levy in place five years ago. However, Budapest is now in the midst of trying to persuade the banks to resume lending, as the central bank seeks to reduce its role as the only significant driver of credit growth. The banks are not keen, having been battered into deep losses by Fidesz since 2010, including huge costs inflicted in connection with forex loans.
PiS, however, has all but dropped earlier plans to force Polish banks to convert forex mortgages for the meantime, noting that it cannot risk banking stability.
"In Hungary, the banking sector was much more fragile than Poland’s is now, so the bank tax in Hungary had a larger impact on lending conditions than Poland’s probably will," suggests Jackson.
By the same token, although PiS is unlikely to wreck an economy in decent shape, it's also unlikely to carry out systemic reform. PO's raising of the retirement age was the first in the new government's sights as it took office.
Nevertheless doubts over the stability and effectiveness of legal and political systems will invariably have an impact.
"While these changes have a limited direct impact on the interests of foreign investors in Poland and on economic policy in the short-term," notes Dhand, "they raise concerns over the quality of the institutional environment and the effectiveness of checks and balances in the Polish political system, which could generate considerable legal uncertainty in the long-run."
Jackson is of the same mind. "The lurch to a more populist policymaking agenda … will harm medium-term growth prospects and, more immediately, depress asset prices," he writes. "We’re revising down our zloty forecast – we now see it falling to 4.60/€ by year-end." Meanwhile, he adds that "the gradual erosion of the business environment and institutions in Poland is likely to hold back foreign investment."