December 1, 2010 / 12:14 PM / in 7 years

FACTBOX-Key political risks to watch in Poland

WARSAW, Dec 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, as well as the results of a first round of municipal and regional elections held on Nov. 21, 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.

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.

However, the conservative-nationalist PiS has been hit by a wave of defections over the past month, further bolstering the position of Tusk and PO, a pro-business, pro-EU party.

The most urgent challenges for Tusk are a bulging budget deficit and rising public debt that have forced him to announce a hike in value-added tax (VAT) and some trimming of state spending, but such moves have so far not hit PO support.

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 new laws that include 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 strongly criticised 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 that it does not tackle such issues as generous pension rules for farmers or hiking the retirement age.

Tusk hopes economic growth -- now seen at 3.4 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 budget deficit seen at 7.9 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 17 billion so far. Markets would welcome success as it would help curb the deficit.

-- Social tensions. Poland, unlike some other EU countries, has not seen serious industrial unrest but some social groups could stage protests if Warsaw delivered on its plans to lay off 10 percent of the public sector or further cut spending.

COUNTDOWN TO PARLIAMENTARY POLL

President Komorowski has been working smoothly with the government and has not vetoed its laws, unlike his predecessor Lech Kaczynski, who died, along with 95 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.

PO topped the first round of municipal elections on Nov. 21 with around 34 percent of the vote and kept control of Warsaw and some other big cities. PiS came second with 27 percent and the ex-communist Democratic Left Alliance (SLD) had 16 percent.

A second round is set for Dec. 5.

What to watch:

-- A cautious rapprochement between PO and the opposition leftists. Tusk previously said he could imagine forming a coalition with the SLD if its current coalition partner, the Peasants’ Party, 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 members of PiS, unhappy with Kaczynski’s style, have quit the party to set up a new grouping called “Poland is most important”, but it is unclear whether this presages a wider breakup of PiS.

EURO HOPES

Poland’s fiscal challenges and the euro zone’s woes have pushed back Tusk’s membership drive at least until 2015 and Warsaw now only rarely speaks on the issue, noting the euro zone must solve its own troubles before considering enlarging.

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 escape recession.

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. Such a change has so far been blocked by PiS, which is sceptical on the euro.

A strong PO win next year would be welcomed by markets as a signal for fresh reforms clearing the way to euro adoption.

What to watch:

-- Will Tusk’s government revive preparing plans to put the zloty up 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 and analysts see the rapprochement going ahead despite some hiccups.

Russian President Dmitry Medvedev is due to visit Warsaw on Dec. 6 in a fresh sign of improving ties.

What to watch:

-- Will Russia’s handling of the investigation into the Smolensk crash further upset Poland? Warsaw has said it was not entirely satisfied with the inquiry and it now has some time to review draft conclusions from the Russian probe. (Writing by Gareth Jones, editing by Sonya Hepinstall)

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