Poland escapes EU's deficit sin bin despite rising political risk

By bne IntelliNews May 13, 2015

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The European Commission recommended the closure of the EU's excessive deficit procedure against Poland on May 13, despite suggestions that the tightened political race could see purse strings loosened ahead of October's general election.

Ignoring such talk, Minister of Finance Mateusz Szczurek pledged earlier in the day that the recent shock in the first round of the presidential election would not knock Poland off track in its bid to finally escape the EDP after six years in the EU budget gap sin bin. That came in the wake of reports that the ruling Civic Platform (PO) is mulling increasing spending in the run up to the October parliamentary election.

Poland recorded deficit of 3.2% in 2014, and insists it will squash the gap below the EDP's 3% threshold this year. As widely expected, the EU executive recommended that the Council of Ministers of the EU close the EDP for Malta and Poland.

Indeed, the commission had already signalled it had accepted Szczurek's argument that Poland's 2014 deficit was still being affected by the country's systemic pension reform in 1999. "Once these net costs from 1999 are taken into account, the deficit is below 3% of GDP in 2014 (2.7% in 2015)," Brussels body said in a statement. "Thus the commission considers that Poland respects the deficit criterion of the Stability and Growth Pact."

New economic view

However, some suggest Brussels will be keeping a close eye on Warsaw in light of recent political events. EU Ministers will discuss the recommendations in June before their planned endorsement on June 25-26 and formal adoption in July. Poland will then need to implement the recommendations by including them in its national policies and budget plans for 2015-2016.

Yet with the main opposition shocking the ruling party in the first round of the country's presidential election on May 10, PO officials have suggested the government could be forced into more populist economic and fiscal policy.

President Bronislaw Komorowski now faces a run off against Andrzej Duda from the populist, conservative Law and Justice (PiS). Previously seen as a shoe-in, the incumbent's struggles are seen as a possible signpost for the parliamentary vote in the autumn.

The surprise already has PO srcambling to shore up its support. Komorowski has already pledged referendums on the country's voting system and political funding. However, faced with PiS policy promises that would roll back pension changes - including a recent rise in the retirement age - and impose losses on banks to help borrowers struggling with FX mortgages, PO officials are now reportedly admitting in private that the ruling party may need to do more.

The zloty retreated on the back of PiS' strong showing, as the markets fretted about the effects on policy. PO has done little to calm those nerves.

"The results of the first round of the election point to several issues, among them looking at the economy in a different way," a senior PO source told Reuters in comments published on May 12. 

The source said options include bringing forward a planned reduction in VAT, or a release of public sector spending from the current freeze in 2016. The ministry of finance told the newswire only that it is planning to review family benefits later this year, refusing comment on any other plans. 

Wiggle room

The government may have some room to play with, given the strong recovery the economy is seeing. GDP grew 3.3% y/y in the final three months of 2014, and GDP data due on May 15 is expected to show it expanded by at least the same rate in the first quarter.

Ahead of the presidential vote, the European Commission had more or less concurred with Warsaw on its deficit projections, which are well within 3% of GDP for coming years. However, the risen political uncertainty threatens to cast shadows over the economy in the latter half of 2015 and beyond, according to analysts.

RBS sees two potentially troublecome outcomes following the October vote: a PiS-dominated scene with Duda as president and a PiS-led government, or a co-habitation of a PO-led government with Duda as president. 

In either case, there would be increased policy uncertainty with the likelihood that important structural reforms would be blocked, while an increased focus on issues such as the earlier age retirement would be seen. “We would expect an anti-euro adoption environment with potentially higher costs to the budget,” the analysts also warn.

Brussels will likely be worried by the same concerns, suggests Commerzbank. "The question of the election arises because the [commission] may see a risk that PO will now have to embrace more populist policies to regain its footing, or that a PiS govt will take over in the autumn and implement very different fiscal policies, which [commission] would first have to examine," they write in a note.

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