Downturn challenges Poland's tea-drinking fiscal hawk

WARSAW Thu Jun 13, 2013 2:04am EDT

Poland's Finance Minister and Deputy Prime Minister Jacek Rostowski gestures prior to a meeting at the Finance Ministry in Warsaw March 1, 2013. REUTERS/Peter Andrews

Poland's Finance Minister and Deputy Prime Minister Jacek Rostowski gestures prior to a meeting at the Finance Ministry in Warsaw March 1, 2013.

Credit: Reuters/Peter Andrews

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WARSAW (Reuters) - With his fondness for tea in china cups and upper-class English accent, British-born Jacek Rostowski projects an air of cultivated calm, but the economic slowdown has put his job as Poland's finance minister in the balance.

Rostowski, an admirer of ex-British leader Margaret Thatcher, has overseen one of Europe's few economic success stories. When its neighbors were in recession, Poland grew robustly for most of the past six years, and stuck to tough fiscal discipline.

Now its economy, the biggest in central Europe, has slowed and much more sharply than Rostowski had expected, leaving him struggling to balance the budget.

There is a growing sense in some government circles that, with the economy stalled on the edge of recession, the only way to restore growth is to loosen fiscal discipline and spend its way back to growth.

That change of direction would jar with Rostowski's ideology: a fiscal hawk, he is on first name terms with George Osborne, his British counterpart, and he flew to London in April to attend Thatcher's funeral.

The question, say several people close to the government, is whether Prime Minister Donald Tusk might prefer to have someone else overseeing this new phase of policy.

"His job is certainly on the line," said a former senior official who is still involved in some economic policymaking. "It is not excluded that Tusk will decide he needs a 'new chapter' in economic policy. But this can only be done with a new face as finance minister."

Tusk this week gave the strongest hint yet that Rostowski may be moving on, saying he was one of a handful of senior Poles who would be a good candidate for jobs in Brussels that will be available between now and spring 2014.

Tusk has promised a government reshuffle this summer. His party is trailing in the opinion polls, and he faces a parliamentary election in 2015.

As the economy has slowed, the aura of confidence that has surrounded Rostowski has slipped, said one former government adviser still close to ruling circles.

"I have seen and heard Rostowski being questioned by people close to the prime minister," said the source. "That is unusual."

The finance ministry did not reply to requests from Reuters for comment on Rostowski's plans, or on how he would respond to the budget crunch. The government's press office also declined to comment on any plans to move Rostowski.

THE JOKER

The finance minister still has support from many. "Rostowski is one of the pillars of this government and I just can't see him leaving," said a senior member of parliament in Tusk's party. "This would be taken badly by the markets and in many European capitals."

Yet it is an uncomfortable time for a man who is accustomed to success. He has been feted for keeping Poland out of recession, the only European Union country to manage that since the global slump, while still driving down debt.

At work in his office, Rostowski -- born into a Polish family exiled to London when Nazi Germany invaded Poland -- seems unfazed by the challenges, receiving visitors while leaning back in his armchair and cradling a cup of tea.

On the wall hangs the cover of a business magazine depicting him as criminal genius the Joker, from the Batman movies. The point seems to be that he can laugh off criticism.

But people who know the 62-year-old and have worked with him say the slowdown has him under pressure. "It seems that this will be the first real test," said another senior member of Tusk's party.

He is facing profound challenges on two fronts.

The most pressing is balancing the budget. The slowdown means revenues are far below the level assumed in the budget. Some economists say the shortfall in revenues that he needs to bridge could be as high as 20 billion zloty ($6.14 billion).

Rostowski cannot by law put up taxes this year. He has some other options for finding revenue, including tapping into reserves, squeezing state-controlled firms for higher dividends, and asking the state pension fund to borrow more money.

But one initiative the government had hoped would ease the budget squeeze has not lived up to expectations. A reform of the state-guaranteed private pension system, which depending on its final form could have lowered state debt and reduced budget spending, will not happen soon.

"There is no consensus in the government," said the source from Tusk's party.

LOOSER PURSE STRINGS

Rostowski's second big challenge is the wider economy which stagnated in the last three months of 2012 and grew just 0.1 percent in the first quarter of this year.

Even if Poland stays out of recession, economists say it is hard to see where recovery can come from.

In previous slowdowns, exports to the European Union have restored growth, but those markets are struggling too. Domestic consumption, the other reliable driver of growth, has slumped. The next wave of European Union infrastructure funds will not start flowing for at least another year.

Central bank Governor Marek Belka told a news conference this month that, compared to other slowdowns in the past two decades, this one will be the toughest to pull out of.

The only realistic solution, say many economists, is for the government to increase public spending, funding it by running a bigger deficit and borrowing money. That would require breaking the rules that have won Poland praise for its fiscal discipline.

The practical obstacles can be overcome. Several of the laws that cap the deficit and state debt can be changed by a majority in parliament, which Tusk's government commands. EU debt limits can be breached without dramatic consequences, as other members states have shown.

But Rostowski himself is a big obstacle.

He is famous for his combative style and his scathing put-downs of legislators who criticize him. Asking parliament to support law changes which amount to a big policy U-turn would be particularly hard for him to stomach.

"I really don't envy the finance minister right now. He's in a tough spot. And he obviously won't increase the deficit, if it breaks the law," said a serving official who is kept updated on the government's work on the budget.

($1 = 3.2577 Polish zlotys)

(Editing by Mike Peacock)

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