November 1, 2010 / 1:19 PM / 9 years ago

FACTBOX-Key political risks to watch in Poland

WARSAW, Nov 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.

A bulging budget deficit and rising public debt have forced Tusk to announce a hike in the value-added tax (VAT) and trim state spending. This, however, has so far not hit PO support.

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 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.

— Will Warsaw, along with 8 other EU members, win looser stance on public finances for EU members who have reformed their pension systems? [ID:nLDE69S0SV]

— Social tensions. Poland, unlike France, 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.

Latest opinion polls show PO retaining its strong lead, with up to 50 percent of the vote, against around 20 to 30 percent for PiS. The Democratic Left Alliance (SLD), whose candidate also outperformed expectations in the presidential election, has lately gained in support and now polls at up to 20 percent.

The polls also 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 rival parties could further temper Tusk’s reforms appetite.

— A cautious rapprochement between PO and the opposition leftists. Tusk previously said he could imagine forming a coalition with the SLD if PSL fails to get into parliament. Will SLD’s recent rise in polls prove a solid trend?

— 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 and Warsaw now only rarely speaks on the issue, noting the euro zone must solve its own troubles before considering widening.

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 reapprochement going ahead despite some hiccups.

Moscow remains sceptical about Poland’s decision to go ahead with the temporary deployment of a U.S. Patriot missile battery near to the Russian exclave of Kaliningrad.

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 two months to review draft conclusions from the Russian probe. The recent findings on the crash site may also spark calls for exhumations of the victims potentially inspiring some anti-Russian sentiment. [ID:nLDE68L1OV] [ID:nLDE69P16N]

— Will the EU formally approve a new Polish-Russian gas deal signed on Oct.28? Refusal to do so could force Warsaw into another round of negotiations leaving it at least temporarily short of gas with winter nearing. [ID:nLDE69S12F]

For political risks to watch in other countries, please click on [ID:nEMEARISK] (Writing by Gabriela Baczynska; editing by Ralph Boulton)

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