Polish PM seeks course through economic storm

WARSAW Wed Oct 10, 2012 11:04am EDT

Poland's Prime Minister Donald Tusk addresses a news conference after an European Union leaders summit in Brussels June 29, 2012. REUTERS/Laurent Dubrule

Poland's Prime Minister Donald Tusk addresses a news conference after an European Union leaders summit in Brussels June 29, 2012.

Credit: Reuters/Laurent Dubrule

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WARSAW (Reuters) - Polish Prime Minister Donald Tusk will try to persuade voters on Friday he is the best man to deal with an economic slowdown that has made one of eastern Europe's most stable governments look suddenly vulnerable.

Tusk, in a speech setting out his response to the faltering economy, is likely to announce some measures to try to stimulate growth, as well as limited reforms aimed at making public finances more streamlined.

In reality, he has few levers for influencing economic growth, so he will focus instead on trying to seize back the political initiative from the opposition which, according to one poll at the weekend, has overtaken his party in popularity.

"This year has been very intense and not easy," Tusk said this week. "I knew that the opposition would start making us feel them snapping at our heels."

Poland's economy will slow to 2.1 percent growth next year, the central bank forecasts, still healthy by the standards of its European neighbors but a big drop for a country that last year grew more than twice as fast.

Largely untrusted by financial markets, the opposition has made inroads into Tusk's lead by painting a picture of oncoming economic collapse. That is overdone, but Tusk's efforts on Wednesday again to talk down the zloty currency - which the government has previously moved actively to weaken - were one measure of the concern in government ranks the slowdown in growth has spawned.

In his second term as prime minister, Tusk does not face an election for three years, but falling popularity over the economy will make it harder to hold together his coalition.

It has a slender four-seat majority in parliament and the collapse of coalitions and early elections are a familiar story in the two decades since Poland swapped communism for democracy.

There is no workable political alternative to the coalition but it will be Tusk's ability to hold onto some popular support - and prevent MPs' defections or a collapse of the alliance with junior partner the Peasants Party which will decide if he sees out his term.

On the other side, the country also needs to convince financial markets - which still see Poland as one of Europe's few brightspots - that he is not about to break with a decade of relatively prudent budget policy.

As such, the options for stimulating growth are limited.

Spending its way out of trouble would undermine the government's fiscal promises to markets and Brussels, while the central bank is only cautiously reducing interest rates that are 4 full percentage points above those in the euro zone.

Possible stimulus measures include encouraging banks to lend more freely and making it easier for employers to hire and fire workers. The government has promised changes in these areas and Tusk could propose initiatives to speed up progress.

QUICK CASH

The government also wants to find ways to sustain infra-structure spending, which has helped prop up Polish growth even while the euro zone slumped.

Poland has spent most of the money given to it by the European Union for new roads and other projects, and the next round of cash will not kick in for two years, so Tusk needs to find other sources of funds quickly.

Possible solutions, which may feature in his speech, are to speed up privatizations, or to encourage private financing of infra-structure projects by offering state guarantees.

Schemes like the latter have tended to fail in Poland in the past and while the administration has had some success with sales of state companies it has now disposed of most of its best assets and now faces a much less welcoming market environment.

While seeking ways to maintain spending, Tusk will also signal he is still committed to fiscal discipline, crucial to his strategy of improving Poland's sovereign debt rating.

A person who is outside the government but familiar with its thinking said Tusk's speech may mention plans to reform the inefficient public health system, and to cut some of the privileges enjoyed by teachers.

These reforms are risky because they could provoke trade unions which are already angry over pay and conditions. "There's a strong grassroots movement to take action," said Jan Guz, president of the All-Poland Alliance of Trade Unions.

However, big market-moving announcements are unlikely in Tusk's speech, said Michal Dybula, economist with BNP Paribas.

"It's ... going to be focused on trying to give the impression that the situation in the country and in the economy is calm, although we are facing a slowdown," said Dybula.

Until now Poland's political stability under Tusk - in contrast to upheavals in regional neighbors like Romania and Hungary - has helped pull in investors. In one indicator of Polish attractiveness, foreign holdings of Polish bonds hit an all-time high last month.

(Additional reporting by Marcin Szczepanski, Karolina Slowikowska and Rob Strybel)

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