Photo via (cc) Flickr user Πρωθυπουργός της Ελλάδας

Reluctant Reformer

Prime Minister Donald Tusk’s center-right PO won 207 of the 460 seats in the lower house at elections held in October 2011, and the PSL, the junior partner in the incumbent coalition, won 28 seats, good enough for a five-seat majority. The center-left SLD still holds enough seats to deliver a majority for the government should the PSL refuse to back an administration initiative, and the surprisingly strong showing of the libertarian RP theoretically broadens Tusk’s options for achieving majority backing for reforms.

Immediately after winning re-election, Tusk sent a strong signal that he intended to maintain the cautious approach to reform, but the EU insisted that Poland must stick to its plan to reduce the deficit to less than 3% of GDP in 2012. Given the sensitivity of the markets to any sign of backsliding amid the euro-zone debt crisis, Tusk was in no position to argue otherwise.

A further fall in the value of the zloty, which has depreciated by 13% against the euro since mid-2011, will increase the debt burden, pushing it closer to the 55% of GDP threshold at which austerity measures would be required. The central bank has expressed doubts regarding the potential for monetary tightening to promote currency stability, and given the likely dampening effect of higher interest rates on growth, the initiation of tightening would make it that much more difficult to keep the deficit-reduction program on track.

To a large extent, then, Poland’s macroeconomic stability is almost entirely dependent on the government adhering closely to a deficit-reduction program that it has only reluctantly embraced.

Forecast Summary

SUMMARY OF 18-MONTH FORECAST

REGIMES & PROBABILITIES Center-Right Majority 65% Broad Coalition 20% PO Minority
15%
RISK FACTORS CURRENT
Turmoil Low Same SLIGHTLY MORE SLIGHTLY MORE
Investment
  Equity Moderate SLIGHTLY LESS SLIGHTLY LESS Same
  Operations High SLIGHTLY LESS Same Same
  Taxation Low Same Same SLIGHTLY MORE
  Repatriation Low Same Same Same
  Exchange Moderate Same Same Same
Trade
  Tariffs Moderate Same Same Same
  Other Barriers Moderate Same Same Same
  Payment Delays Low Same SLIGHTLY MORE Same
Economic Policy
  Expansion Very High SLIGHTLY LESS SLIGHTLY LESS Same
  Labor Costs Low Same SLIGHTLY MORE SLIGHTLY MORE
  Foreign Debt Moderate SLIGHTLY MORE MORE SLIGHTLY MORE

SUMMARY OF FIVE-YEAR FORECAST

 REGIMES & PROBABILITIES Center-Right Majority 50% Broad Coalition 35% PO-PiS
15%
RISK FACTORS BASE
Turmoil Low Same Same Same
Restrictions
   Investment Moderate SLIGHTLY LESS SLIGHTLY LESS Same
   Trade Moderate SLIGHTLY LESS SLIGHTLY LESS Same
Economic Problems
   Domestic High Same Same SLIGHTLY MORE
   International High Same Same SLIGHTLY MORE
   * When present, indicates forecast of a new regime

For more information, check out the Poland Full Report!