Poland

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

SUMMARY OF FIVE-YEAR FORECAST

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