Poland: the new success story?

[Martinus]

Poles repel fear of Europe's next recession

By Jan Cienski
Resilient Warsaw seeks to gain a place at the continent's top table

When the first wave of the global economic crisis hit Poland three years ago, Edyta Skutnicka's lingerie business almost went under as buyers cancelled orders. She had to halt production for three months.

Faced with the loss of Axami, the company she created 16 years ago, Ms Skutnicka created a new product range. "We spent those three months designing and making a new line of erotic underwear," she says. The resulting "Sexy Line" sold well and the company and its 56 workers survived. Now, Ms Skutnicka is returning to the drawing board. With the threat of a second downturn looming – especially in western Europe, the destination for 90 per cent of her production – she is hoping that a new range of racy lingerie pitched at larger women will save the day.

While plucky entrepreneurs can be found everywhere, Ms Skutnicka's chances of surviving the oncoming crisis are enhanced because Poland stands a good chance of repeating its feat of 2009 and again dodging a recession. That record should translate into increasing political weight for Warsaw within the European Union – where Poland sees itself as becoming one of the bigger beasts, at least on a par with fifth-ranking Spain.

This could, therefore, be a crucial year for those ambitions – and Donald Tusk, the prime minister, has been frank about what could derail them. "In recent months, we are hearing more and more boldly articulated the idea that the EU should return to its core, described today as the borders of the euro area," he told parliament recently. "From our point of view it is very important that Poland – if only because it is outside the euro area and has not yet achieved the level of development of the richest countries in the euro area – not become part of the second or third rank."

For Germany, Poland is now a more important trade partner than Russia; Polish factories are tightly integrated into the supply chain of Europe's economic powerhouse. That creates some risks if Germany stumbles but the combination of strong exports and a large and so far resilient domestic market leave Poland better placed than others. As Marek Belka, the central bank governor, says: "We have managed to nurture a real entrepreneurial class which is pretty resilient. Almost half of our exports to Germany come not from big multinationals like Volkswagen or Siemens with plants in Poland but from small Polish companies providing consumer and investment goods."

Warsaw's ambition is to become Berlin's indispensable eastern neighbour in the same way that France is in the west. Mr Tusk's centrist government has abandoned the hope of his conservative predecessors of being an eastern mirror of the UK – pro-market in its economics, standoffish about the EU and avowedly pro-American in its foreign policy.

The shift can be seen in the person of Radoslaw Sikorski. An Oxford-educated Atlanticist with links to neoconservatives in the US, he served as defence minister under Jaroslaw Kaczynski, the right-of-centre prime minister from 2005-07, before switching sides. As Mr Tusk's foreign minister, he has become the leading exponent of Warsaw's new policy towards its western neighbour. "I will probably be the first Polish foreign minister in history to say so, but here it is: I fear German power less than I am beginning to fear German inactivity," Mr Sikorski said in a recent speech in Berlin. "You have become Europe's indispensable nation."

For its part, Germany is a strong supporter of the so-called Weimar Triangle involving Poland in a regular tripartite debate with Berlin and Paris. Both because of its size and strategic location on Germany's eastern border, Poland was always regarded by the German government as the most important new member of the EU to join in the "big bang" enlargement of 2004.

Throughout the eurozone crisis, Berlin has been anxious to ensure that Warsaw would not be treated as an outsider to a reinforced eurozone. That was the most important factor motivating Angela Merkel, the German chancellor, in seeking to widen any new eurozone treaty to include non-eurozone members as signatories, according to senior officials in Berlin.

The drive for closer integration with the EU and Germany is at the same time forcing Warsaw to take a close interest in efforts to save the eurozone – of which Poland is, officially at least, still committed to becoming a member. The single currency may have been robbed of many of its original attractions, but for Poland's policymaking elite it is seen as a means of ensuring promotion from the political and economic second division.

Ryszard Petru, a partner at PwC, the consultancy, reckons that joining the euro could add 0.2-0.5 per cent to GDP, largely thanks to lower interest rates. By limiting currency risk it could also boost foreign investment. But the greatest benefits, he says, would be political. "Poland wants to play a larger role in the EU – without being in the euro it cannot do that."

Helped by an economy that has become the seventh largest in the EU and a population that ranks it sixth, Poland sees a place for itself not just as one of the EU's key countries – and the only one to come out of the old Soviet bloc. In addition, its success in undergoing deep economic reforms could serve as an example both to the eurozone periphery and to countries such as Ukraine and Belarus which are having trouble extricating themselves from Moscow's orbit.

"Poland has to choose which model is the safest – a unification where every country has fewer prerogatives, or a return to an archaic model of a concert of powers," Mr Tusk told parliament last month during a fiery debate about the eurozone crisis. Or as Mr Sikorski put it recently, Poland is changing locations while staying in the same place. It was in eastern Europe in 1989 when communism ended, it became central Europe by joining the EU in 2004 and now the goal is to make Poland a part of Germanic northern Europe: punctual, hardworking and fiscally sober.

"There was a saying that in a hopeless situation Poles wait for the Virgin Mary to help, while the miracle is for them to get to work," jokes Zbigniew Jagiello, chief executive of the state-controlled PKO Bank Polski, the country's biggest banking group. "That saying is no longer true. In a crisis situation we don't wait for Mary, we get to work – only a few people are waiting for a miracle."

Among those some see as holding out for supernatural intervention are Mr Kaczynski and his Law and Justice party, which denounced Mr Sikorski's Berlin speech as treason and the first step to the creation of a German-led "Fourth Reich" that would turn Poland into a Teutonic vassal.

"Herr Tusk and Sikorski, go and work for the Germans and leave Poland to the Poles," read a placard at a recent opposition rally that drew thousands to central Warsaw. At least one-quarter of the voting public supports those nationalist views. A recent opinion poll also showed almost two-thirds opposed adopting the euro.

The zloty's depreciation – it fell by 13 per cent against the euro in the last five months of 2011 – has helped exporters. But the currency's swings have made business planning difficult. "The zloty has caused us uncertainty," says Andrzej Marek, the chief executive of Kler, a furniture maker. "We import a lot of raw materials and it's almost impossible to protect ourselves against changes in its value."

There is also the example of next-door Slovakia, which adopted the euro in 2009. Slovakia did suffer a recession that year, but not much worse than the one that hit the neighbouring Czech Republic, which kept its koruna. Large foreign investors such as Volkswagen say they decided to expand operations in Slovakia because there was no currency risk.

The zloty's decline is putting economic growth at risk as it squeezes the 700,000 Poles – part of a nascent middle class – who took out mortgages denominated in foreign currencies, mostly Swiss francs. So far, people are making their payments, but as the zloty continues to fall against the franc there is a growing worry that it could choke off consumer spending.

Analysts offer various explanations for the nation's seeming ability to dodge recessionary bullets. Witold Orlowski, an economic adviser to Mr Tusk, says Poland is experiencing a catch-up boom similar to that seen by western Europe after the second world war – France's Trente Glorieuses and West Germany's Wirtschaftswunder – but delayed by the more than four decades it languished under communism.

Others look to initial reforms in the 1990s that freed prices, sold off state industries, established capital markets and drew in foreign investors – more thoroughgoing than those of Soviet-bloc neighbours. These helped to create an attractive environment for international investors drawn by a labour force that is well-educated yet cheap – average hourly wage costs stand at €7 ($9.10) compared with more than €29 in Germany – along with an entrepreneurial culture next door to the continent's biggest economy. A larger population – 38m – and deeper capital markets than elsewhere in central and eastern Europe also helped lure the estimated $100bn the country has booked in inward foreign investment since 1990.

At the moment Poland is benefiting from the downturn, as west European investors in service sectors such as business processes move into its cities in order to reduce costs. For 2012, the European Commission forecasts 2.5 per cent GDP growth, compared with 0.6 per cent for the EU as a whole. But a renewed EU recession would hurt exporters including an automotive industry that cannot rely on a rerun of the scrappage programmes of 2009.

Warsaw also has much less room for manoeuvre than it did in the first wave of the crisis, when an expansionary fiscal policy drove the deficit to 7.9 per cent of GDP in 2009, a big factor in the country's ability to eke out growth of 1.8 per cent that year.

Under pressure from ratings agencies, Mr Tusk recently announced a programme of benefits and spending cuts as well as tax rises. The government is promising, somewhat optimistically, to drive the public deficit below 3 per cent next year. With debt brushing against a self-imposed ceiling of 55 per cent of GDP, the call is for austerity, not higher spending.

Although Germany underwent the incorporation of the poorer east after the fall of the Berlin Wall, rising from devastation is something of which the EU's richer half has had little experience in the last half-century. As historian Norman Davies puts it: "Poland can bring its own experience over 20 years of transformation – having seen the old economy collapse and rise again from the ashes, an experience that western Europeans haven't had in living memory.

From the Financial Times.



Thought about posting something positive from the region, what with all the doom and gloom about Hungary. 

[Berkut]

The Poles certainly do need some good news, what with their best and brightest getting their asses kicked by random American redneck ground pounders.

[Valmy]

Pity all your money is going to go to bail out Greece 

[Martinus]

Pity all your money is going to go to bail out Greece 

It's not. We just chipped in a bit to be seen as supportive.

[szmik]

Pity all your money is going to go to bail out Greece 

It's not. We just chipped in a bit to be seen as supportive.

Just to ask for help, when falling during next wave. 

[Zanza]

Good development. Just keep the idiots from government and all will be fine.

[Admiral Yi]

Zanza (or any other Krauts):

Are there any things you consume on a regular basis that you know are produced in Poland?  Smiechna brand butter?

[Richard Hakluyt]

If anything I am surprised that Eastern Europe is taking so long to catch up, growth rates a percent or two above Germany when your wages are a third of their's..................it will take a century or so to catch up 

And Poland is doing so well compared to some of the others.

[Sheilbh]

Good development. Just keep the idiots from government and all will be fine.

Yeah.  Hungary aside I think the normalisation of Central Europe's been one of the best stories of recent years.  They're back where they belong in the heart of Europe not in some tragic gulag.

[syk]

Zanza (or any other Krauts):

Are there any things you consume on a regular basis that you know are produced in Poland?  Smiechna brand butter?

Nope. We call the day of bulky waste collection Polish Holiday though. Guess that's quite the business.

[Zanza]

Zanza (or any other Krauts):

Are there any things you consume on a regular basis that you know are produced in Poland?  Smiechna brand butter?

No idea. Just had a look in my kitchen and except for the Kellogg's cornflakes which said they might be produced in Poland (or a couple of other EU countries listed), none of the products was visibly from Poland. But I obviously have no idea where the milk or meat or wheat or whatever is produced that goes into my food.

Clearly foreign products in my kitchen were Kiwis from New Zealand, blueberries from Uruguay, cherry tomatos from Spain and fish from Norway. The rest had German company names on it, but that doesn't mean much as they might just have imported and packaged the stuff.

Not sure what other consumer goods Poland makes that I could see...Ikea furniture maybe?

[Admiral Yi]

Both you guys please do me a favor and next time you're in the ubermarkt scan around and see if spot any Polish labels.

[Syt]

I have a little Polish supermarket on the corner, but an ex-Polish colleague advised against visiting them, because they're supposedly all overpriced rip-offs.

In supermarkets we have Indian, Turkish stuff mostly that's obviously not locally produced, followed by ex-Yugo stuff, and some Italian.

[Richard Hakluyt]

The corner shop stocks Tyskie (a Polish beer), if they are short of my favoured English ales and bitters I buy that in preference to Stella, Kronenbourg and so on.

[Admiral Yi]

On a different note, how many languages (and which) are your product labels printed in?  Spanish is showing up on more and more stuff here in the States.