July 5, 2010 / 4:19 PM / 9 years ago

Analysis: Polish PM weighs reform costs after presidential win

WARSAW (Reuters) - Polish Prime Minister Donald Tusk can speed up market reforms now that his party has captured the presidency, but he risks hurting his chances in parliamentary elections next year if he cuts the budget deficit too painfully.

Tusk’s centrist Civic Platform (PO) no longer faces the threat of vetos after its candidate Bronislaw Komorowski won Sunday’s cliffhanger presidential election.

The late President Lech Kaczynski, killed in a plane crash in April, blocked health and pension bills put forward by PO.

But after Komorowski narrowly beat Kaczynski’s twin Jaroslaw, a populist right-winger, Tusk could upset key voter groups if he pursues painful reforms.

“The political logic will be to avoid painful cuts this fall (for the 2011 budget cycle),” Preston Keat of Eurasia Group, a London-based risk consultancy, wrote in an analysis.

“The political logic of incrementalism will prevail for at least the rest of 2010, unless outside factors come into play,” he said, adding that criticism from the European Commission or credit ratings agencies may force swifter fiscal consolidation.

Poland’s main economic problems are a budget deficit equal to 7 percent of gross domestic product (GDP) — twice the European Union’s ceiling — and public debt.

Although low by west European standards, public debt is nearing 55 percent of GDP and if that level is breached, this would trigger deep spending cuts under Polish law.

Tusk is banking on a strong revival of economic growth to help to rein in the deficit and debt levels. The economy, the only one in the 27-strong EU to avoid recession in 2009, is forecast to grow 3 percent in 2010 after 1.8 percent in 2009.

NO PAIN, NO GAIN

Analysts say Poland remains a rare economic bright spot in Europe and rule out the kind of budget crisis that hit Hungary and Greece. However, failure to tackle the deficit aggressively could spell more pain for Poles later.

“The relatively poor business climate and large public sector could impede sustained high economic growth rates over the medium term unless addressed with structural reforms,” David Heslam, a director at Fitch ratings agency, told Reuters.

“The measures to be implemented to bring the budget deficit down to below 3 percent of GDP in 2012 have yet to be detailed by the government. A failure to implement measures to reduce the deficit ... and stabilize the general government debt ratio would increase negative pressure on Poland’s sovereign credit rating.”

Economists say Poland needs to raise its retirement age, eliminate pension privileges for farmers, policemen and other groups of workers, slash generous disability benefits and shake up its creaking public health system.

Polish liberals lament a lack of debate on issues such as luring immigrant workers, providing incentives to women to have children and bureaucratic burdens on business.

In the annual Doing Business report for 2010, Poland ranked 72nd of 183 countries, below Rwanda and Belarus. It was 23rd among the EU’s 27 member states on the list.

In a lackluster presidential election campaign, Komorowski and Kaczynski barely touched on such concerns, preferring to trade insults instead over their opponent’s alleged plans to privatize health care or to abolish farm subsidies.

“It seemed that both candidates were rather unaware of the seriousness of the situation when it comes to the fiscal deficit or public debt matters,” said Maciej Reluga, chief economist at Bank Zachodni WBK in Warsaw.

ELECTION STRENGTHENS PO OPPONENTS

The unexpectedly strong result for Kaczynski, the Polish politician with the highest negative rating before his brother’s death, is another factor likely to quell the government’s reform appetite. Komorowski, a loyal Tusk ally, won 53 percent of votes on Sunday while Kaczynski won 47 percent.

“I think they (PO) are to some extent shocked by Kaczynski’s result ... (PO) may choose now just to be passive and follow a wait-and-see strategy. I don’t believe in some ‘big bang’ of reforms,” said Adam Balcer of the DemoEuropa think-tank.

Other analysts predicted only modest steps such as trimming administrative costs along with possible personnel changes in the government to give an impression of activity.

Balcer said Kaczynski’s election strategy of moving to the middle-ground, toning down his customary nationalist rhetoric and promoting media-friendly aides within his entourage would serve him well in the countdown to the 2011 parliamentary poll.

Analysts say his Law and Justice party (PiS), which despite its conservative Catholic stance on moral and social issues tilts to the left on the economy, is also trying to build bridges to Poland’s main left-wing party after its candidate did better than expected in the first round of voting on June 20.

“In a sense (Kaczynski) ‘won’ the presidential election before the vote even happened yesterday — the fact that PiS was even in a close race with PO highlighted the success of the PiS makeover,” said Eurasia Group’s Keat.

“They are no longer stuck in the nationalist-populist cul-de-sac. This puts a new type of pressure on PO, and as result the political downside of fiscal reform just got bigger.”

(For report on election result, double click on [nLDE66406W])

Additional reporting by Kuba Jaworowski; editing by David Stamp

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