October 1, 2010 / 10:41 AM / 7 years ago

FACTBOX-Key political risks to watch in Poland

WARSAW, Oct 1 (Reuters) - Poland’s centre-right ruling party Civic Platform (PO) is trying to avoid painful economic reforms in the countdown to next autumn’s parliamentary election when it hopes to increase its majority.

Opinion polls suggest Prime Minister Donald Tusk’s party is well placed to become the first in Poland since the fall of communism in 1989 to win a second consecutive four-year term.

However, a bulging budget deficit and rising public debt have forced Tusk to announce a hike in the value-added tax (VAT) by one percentage point and to trim state spending, measures that could cut into PO support and bolster its rivals.

PO’s Bronislaw Komorowski won this summer’s presidential election but his main rival Jaroslaw Kaczynski, leader of the right-wing main opposition party Law and Justice (PiS), did better than expected, raising the political price of reforms.

Following are the key political risks facing Poland.

REINING IN DEFICIT, DEBT

Poland’s public debt remains well below western European levels, but the government is anxious to prevent it topping 55 percent of gross domestic product (GDP) as this would by law trigger painful spending cuts likely to hurt support for PO.

The government has approved a long-term financing plan that includes a cap on discretionary spending and more privatisations to help plug the hole in public finances. The planned rise in VAT from 2011 -- to 23 percent for many items -- is meant to be temporary but opposition parties have vowed to fight the move.

Following Hungary’s example and partly in response to opposition suggestions, the government has also proposed a bank tax to raise cash but has not yet said how much it might be.

Tusk has ruled out “radical” measures to slash spending or raise other taxes. Liberal critics accuse the government of timidity, noting the plan does not tackle such issues as generous pension rules for farmers or hiking the retirement age.

Tusk hopes economic growth -- seen at 3.0-3.5 percent this year, up from 1.7 percent in 2009 when Poland was the only country in the 27-strong EU to avoid recession -- will help narrow a general government deficit now expected to top 7 percent of GDP this year.

But the scale of the recovery will hinge on still-uncertain growth prospects for the euro zone, Poland’s main trade partner.

What to watch:

-- Will financial markets start to demand that Poland tackle its deficit more aggressively? They appear relaxed for now but Poland may begin to stand out in the region as other countries tighten their belts.

-- Can the government reach its ambitious target of 25 billion zlotys ($8.47 billion) in revenues from privatisations this year? It has raised about 13 billion so far. Markets would welcome success as it would help curb the deficit.

-- Social tensions. Teachers and others are demanding salary hikes and may stage protests. Other groups have already staged protests gathering several thousand people. Poland also faces EU pressure to start phasing out subsidies to coal mines, which may trigger miners’ protests. Poland still relies on heavily polluting coal for more than 90 percent of its electricity.

COUNTDOWN TO PARLIAMENTARY POLL

President Komorowski is expected to work smoothly with the government and not to veto its laws, unlike his predecessor Lech Kaczynski, who died, along with scores of other top officials, in a plane crash in Smolensk, western Russia, on April 10.

PiS leader Jaroslaw Kaczynski, twin brother of the late president, won more votes than expected in the election after toning down his nationalist rhetoric, but he has tilted back to the right since Komorowski’s victory.

Latest opinion polls show PO retaining its strong lead, with up to 52 percent of the vote, against around 25 to 35 percent for PiS. The Democratic Left Alliance (SLD), whose candidate also outperformed expectations in the presidential election, has around 9 percent support.

The polls show Tusk’s junior coalition partner, the Peasant’s Party (PSL), failing to breach the 5 percent threshold required to enter parliament in next year’s election.

What to watch:

-- Local elections set for Nov. 21 and Dec. 5. A good result for opposition parties could further temper Tusk’s appetite for reforms.

-- A cautious rapprochement between PO and the opposition leftists. Tusk said in a recent interview he could imagine forming a coalition with the SLD after the 2011 election if PSL fails to get into parliament.

-- Rising political tensions. Kaczynski has sharply criticised PO and President Komorowski over what he says is their lack of respect for his late brother. He has pledged to have no contact with Komorowski. Some analysts speculate that Kaczynski’s hardline rhetoric and brusque treatment of party members he suspects of disloyalty could presage a breakup of PiS, a scenario that would bolster PO’s domination of Poland’s political scene.

EURO HOPES

Poland’s fiscal challenges and the euro zone’s woes have pushed back Tusk’s membership drive at least until 2015.

Though joining the euro zone remains an official strategic objective for Warsaw, some in Poland have cooled to the idea as the free-floating zloty’s sharp fall during the financial crisis played a key role in helping Poland to escape recession.

The lack of political consensus in parliament is also an obstacle. PO needs to win, alone or with allies, a two-thirds majority in the new parliament in order to amend the constitution to pave the way for eventual euro adoption.

PiS, which is sceptical on the euro, has been blocking any amendment in this parliament. A strong PO win next year would be welcomed by markets as a signal for fresh reforms and for clearing the way to eventual euro adoption.

What to watch:

-- Will Tusk’s government revive preparing plans to put the zloty for entry into the pre-euro ERM-2 mechanism?

THE BEAR NEXT DOOR

Warsaw and its communist-era overlord Moscow have said the April crash in Russia should serve as a catalyst for an improvement in long-frosty relations.

However, Moscow has criticised Poland’s decision to go ahead with the temporary deployment of a U.S. Patriot missile battery near to the Russian exclave of Kaliningrad, saying it harms regional trust. Warsaw says the deployment, designed to upgrade its air defences, poses no possible threat to Russia.

What to watch:

-- Will Poland and Russia finally agree a new long-term deal on gas supplies? Last-minute EU objections scuppered a preliminary accord that had envisaged Poland importing Russian gas totalling 10 billion cubic metres per year until 2037. [ID:nLDE68M0QZ]

-- Will Warsaw accept a request from Moscow to extradite exiled Chechen leader Akhmed Zakayev, wanted by Russia on murder, kidnap and terrorism charges? A court briefly ordered Zakayev’s detention when he visited Poland in September but then freed him. Zakayev, who has since returned to Britain where he has political asylum, has said he will return to Poland if needed to attend court hearings in his case. Few expect Poland to extradite Zakayev to Moscow in the end. [ID:nLDE68K1LB]

-- Will Russia’s handling of the investigation into the Smolensk crash further upset Poland? Polish officials have recently said Warsaw is not entirely satisfied with the inquiry. [ID:nLDE68L1OV] For political risks to watch in other countries, please click on [ID:nEMEARISK] (Editing by Sonya Hepinstall)

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