Tusk takes measures to see Poland through crisis

By bne IntelliNews November 18, 2011

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Poland may be sitting relatively pretty compared with the Eurozone countries that are sinking into the mire, though that hasn't stopped Prime Minister Donald Tusk pledging a raft of austerity measures aimed at safeguarding the country's growth in these dangerous times.

Re-elected in October, Tusk had hoped to give a speech laying out his government's priorities in the first week of December. However, a sign of how urgent his government views the task ahead, Tusk moved that up to Friday, November 18 and announced measures that were much more reform-minded than many had expected a month ago. "Only strong players will make it through the crisis," newswires quoted Tusk as saying. "Someone once said that in the EU, one has a choice - either to eat at the table or be on the menu. Poland will eat at the table."

Tusk vowed to use his second consecutive term to bring the general government deficit down to the EU ceiling of 3.0% of GDP next year and rein in the national debt to 52% of GDP from the current 53.8%. By 2015, the end of Tusk's new term in office, the deficit would come down to about 1% of GDP, while total debt would fall to about 47% of GDP.

How to get there? Tusk said the government would reduce special pension privileges for farmers, miners, soldiers and police. Tusk said that he might also negotiate with the Vatican in an effort to bring Catholic priests into the national pension system. The retirement age for men and women would be raised to 67 years, which the government reckons should reduce Poland's public debt to about 35% of GDP by 2040. There would also be tax hikes on raw materials like copper, silver and future shale gas supplies in Poland.

Investors liked the approach, with Bloomberg reporting that the zloty climbed as much as 1% against the euro, while the yield on the five-year bond maturing in October 2016 fell 33 basis points to 5.163%.

Stiffer brush

During his first four-year term in office, Tusk disappointed many of his business supporters with his cautious approach to economic reforms, preferring a series of "small steps" that kept the political costs of any changes low. The most significant step was making it more difficult to take early retirement, but once the global economic crisis struck in late 2008, Tusk and his finance minister, Jacek Rostowski, concentrated (successfully) on keeping public debt from passing a domestic legal threshold of 55% of GDP.

Analysts and the big three credit rating agencies essentially gave Tusk a pass on demands for greater action, in part because Poland ended up being the only EU country not to fall into recession in 2009, and because they understood that parliamentary elections this October made it politically difficult for Tusk to do more.

But with the elections won, and Tusk's centrist Civic Platform party also controlling the presidency and with allies in charge of the central bank and other key institutions, there are no excuses left for inaction. "There are a lot of things that we do not control, so we should focus on things that we can, like fiscal consolidation," says Piotr Kowalski, head of the Warsaw office of Fitch Ratings, the credit rating agency. "The situation is difficult, and certainly worse than it was a few months ago. But we have a lot of advantages that could allow us to pass through a second wave of the crisis."

Just how difficult was shown in November by Rostowski. Until the election, he had been insisting that earlier predictions that Poland would grow by 4% in 2012 were still realistic, despite the worsening outlook for Western Europe. But after the election, he released three new scenarios for the economy: an optimistic one with growth of 3.2%, a realistic one with growth coming in at 2.5% and a negative one with the economy contracting by 1.1% - which would make it Poland's first true recession in 20 years. A recent European Commission forecast put Polish growth at 2.5% in 2012 and 2.8% in 2013, down from 4.0% this year.

As Rostowski points out, there is a certain paradox in preparing for the worst, because at the moment the situation doesn't look dire. Polish consumers are still spending - retail sales were up by an unexpectedly strong annual 11.4% in September - and industrial production and exports are also still rising. That puts Poland in a much stronger position than much of the rest of the EU, but the risks are clearly on the downside.

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