Hits to Poland's reputation stacking up

Hits to Poland's reputation stacking up
The democratic standards produced in Poland's parliament are under the international spotlight
By Wojciech Kosc in Warsaw April 13, 2016

Poland’s international reputation took another one-two on April 12, as a draft resolution of the European Parliament on the country’s constitutional crisis was made public and a negative review of the state of Polish democracy was issued by Freedom House.

Judging by the ruling Law and Justice (PiS) party’s reaction to the international bashing it has received over its invalidation of the Constitutional Tribunal and increased control of the media, the odds are that rather than backing down, Warsaw will only dig its heels in deeper. That's unlikely to go down well with investors.

The markets already showed how spooked they are by the PiS government's confrontational stance internationally and fumbling with the country's fiscal standing. Yields spiked and the zloty tumbled in mid-January, when Standard and Poor’s handed Poland a surprise downgrade. The agency noted the drop in institutional independence as one of the main factors, with little attention given to the country's strong economic fundamentals.

“Investors should be concerned, not about the downgrade, rather about the valid reasons for the downgrade,” John Hardy, head of foreign-exchange strategy at Saxo Bank, told Bloomberg at the time.

While the currency and Polish debt have recovered their composure somewhat from the plunge into which the 'political downgrade' sent them, the continuing advance of 'illiberal democracy' may have investors start questioning Poland’s credibility for the longer term. An annual survey from the Polish-German Chamber of Commerce (AHK Polska) said the country's attractiveness for investors has deteriorated. 

“For the first time in many years can I see the questions on political and social stability and lack of predictability of economic policy weigh on Poland’s investment attractiveness,” Katarzyna Szoszka of AHK told Deutsche Welle on April 6. “There’s the atmosphere of ‘wait and see’ if anything else is going to change. So investors may hold [back],” she added.

Moody's Investors Service has already warned more than once that it could join S&P in downgrading the country should the issues continue to build. "The emergence of anti-austerity and euro-sceptic political movements, most recently in Poland ... have the potential to reverse fiscal improvements, implement unorthodox economic policies and weaken cooperation and integration within the EU," the rating agency wrote in its latest broadside on April 13.

'Democracy in action'

In short, Warsaw risks losing the leading edge that helped it become the unquestioned star of Central and Eastern Europe for investors over the past decade: a stable and predictable political landscape, driven by goals such as building the country into an EU heavyweight.

PiS officials commonly talk of the EU as a problem rather than opportunity for Poland, while the confrontational stance only appears to be broadening. The government has even become engulfed in conflict over the Bialowieza Forest, a UNESCO world heritage site in which it wants to increase logging.

PiS has been consistent in telling the European Union and the US that the current political turmoil is actual “democracy in action” and that fundamental values are safe. However, that is exactly the substance of the European Parliament resolution and Freedom House reports, which were both issued on April 12. 

The draft resolution, proposed by the European People’s Party faction and likely to be adopted on April 13, says the parliament "is seriously concerned that the effective paralysis of the Constitutional Tribunal in Poland poses a danger to democracy, human rights and the rule of law.” The dcoument passed by MEPs adds its voice to those of senior officials from the European Council and Commission in “urging” the government to act to end the constitutional crisis.

The European Conservatives and Reformists faction to which PiS MEPs belong has prepared a counter resolution saying the dispute over the constitutional court is “an internal Polish issue and should be dealt with by the relevant national authorities.” However, the small group has little clout in Brussels.

Poland retains its status as a “consolidated democracy” in Freedom House's Nations in Transit report for 2016. However, Warsaw may note that Hungary - a model of 'illiberal democracy' for the Polish government - is only “semi-consolidated”. Little improvement can be expected in the future should PiS maintain its course, the US-government funded think tank warns.

“The Law and Justice party’s moves to rapidly take control of state institutions and weaken checks and balances in Poland damaged that country’s score in 2015 and portend further declines in 2016,“ Freedom House said. The organisation also says it expects PiS to 'reform' the electoral system. While Warsaw is likely to retain its Atlanticist orientation in foreign policy, the state of the Polish democracy “will continue to deteriorate,” it sums up.



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