Policy “mess” threatens Polish recovery
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Emerging Markets

Policy “mess” threatens Polish recovery

Poland needs to enact fundamental fiscal and economic reform as a matter of urgency, former finance minister Grzegorz Kolodko told Emerging Markets

Poland must tackle its fiscal “mess” and embark on strategic reform to close the gap between the country’s underperforming growth rate and its full potential, according to one of the architects of Polish economic reform following the collapse of the Berlin Wall.

Grzegorz Kolodko, a four time finance minister between 1994 and 2007, said he believed Poland should join the euro but that accession would not take place until 2016 at the earliest.

He said while Poland had been the only European country to withstand the impact of the global crisis without slipping into recession, the economy was still “muddling through” at well below its full potential.

“There is a real need for a comprehensive long-term development programme which unfortunately we are lacking at this time,” he told Emerging Markets.

“We need a new strategy for Poland which takes into consideration durable and equitable growth and sustainable development based on growing the competitiveness of Polish businesses.”

Poland is seen as one of the strongest economic performers in central and eastern Europe. It posted the fastest growth in the EU in 2010 and the Commission forecasts growth of 3.9% and 4.2% for this year and 2012 respectively.

Kolodko said Poland had the potential to post annual growth of between 6% and 7% but was held back by delays in implementing measures to tackle its budget deficit, currently running at 7.9%.

“We have to carry forward a proper fiscal adjustment and it is not enough to say that expenditures must be cut or transfers must be constrained,” he said. “Tax rises are inevitable but the question is what extent.”

He said he was highly sceptical the government would hit a target of 2.9% next year. His comments come just days after the IMF warned in its Artice IV assessment that current plans would only cut the deficit to 3.6% and urged the authorities to target a 1% deficit.

“It would be good for this additional adjustment to begin sooner rather than later,” the IMF said, recommending changes to pension and disability payments, streamlining public administration employment, limiting tax reliefs and exemptions, and enhancing VAT yields.

He said deficit reduction was essential to prepare the country for joining the euro between 2016 and 2018 but added: “It is not a matter of the timing: the critical question is the exchange rate.

“Yes we will join the euro but we have to join the euro at the proper exchange rate.”

Economists say Poland and other CEE countries have performed better than expected since the crisis hit but are too dependent on exports, particularly from Germany and the rest of western Europe.

“Exports are leading the recovery and pulling domestic demand behind,” said Ralf Wiegart, a senior economist at IHS Global Insight.

“The recovery has legs but the question is how soon domestic demand will recover. People are not so confident about spending and this has much to do with the relatively high level of unemployment.”

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