Poland: row with the EU could have negative impact on outlooks for growth, public finances

Investment premised on future EU funding will prove essential for determining the potential for long-run growth in Poland (rated A+/Stable). The government would have limited room for fiscal manoeuvre should EU financing continue to be withheld considering the nation’s sizeable allocation under the EU Recovery and Resilience Facility of EUR 58.7bn. The funding is made up of EUR 23.9bn in grants and EUR 34.8bn in loans – together equivalent to more than 10% of 2021 GDP – though Poland does not plan on making full use of available loans.

The row between Warsaw and Brussels follows the recently introduced ‘Rule of Law Conditionality Regulation’, which allows the EU to suspend payments to member states where violations of the rule of law “affect or seriously risk affecting” the management of EU funds. The European Commission has delayed approval of national recovery and resilience plans of Hungary and Poland over concerns around the rule of law and judicial independence.

Tensions between Poland and the EU are unlikely to subside soon

Tensions between Poland and the EU surrounding rule of law are unlikely to subside soon, and a recent ruling of Poland’s Constitutional Tribunal has only deepened divisions.

On 7 October 2021, Poland’s Constitutional Tribunal ruled some areas of EU treaties as being incompatible with the Polish Constitution, challenging the primacy of EU law. A group of 26 former judges of the Tribunal, including some former presidents, have criticised the ruling under a joint statement.

The ruling leaves the EU between a rock and a hard place. The strategic importance of Poland in the central and eastern Europe region and pressure on the EU to accelerate sustainability-linked financing in transport and energy sectors underscore a determination to punish Poland for transgressions but without pushing the point overly far. However, it is hard to see at this stage what room there is for compromise given the Tribunal’s ruling and another unresolved conflict around the independence of the Polish Supreme Court.

The European Court of Justice ruled last week that Poland will be required to forfeit EUR 1m per day until the government suspends a disciplinary chamber of the Supreme Court. Poland has responded it will not pay this fine.

The risk is that disagreements result in more prolonged suspension of EU funding for Poland

The government’s want to update fundamental provisions of EU law – on the basis of the Tribunal’s assessment of incompatibility with the Polish Constitution – is not realistic. Meanwhile, an exit of the European Union – ‘Polexit’ – remains highly unlikely. According to recent opinion polling, 9 of every 10 Poles support Poland’s membership of the EU.

Aside from added monetary penalties and an escalating row with the EU potentially adversely impacting foreign direct investment, the risk Poland faces is that current disagreements result in a more significant and prolonged suspension of EU funding. This could adversely impact the growth and public-finance outlook, the latter especially should the government use own resources to compensate for suspended EU financing.

For now, Poland’s economy remains resilient, weathering the Covid-19 crisis comparatively robustly. The government’s budgetary and monetary response has complemented unprecedented EU support in response to the crisis. Poland’s output will grow by around 5.6% in 2021, having returned to pre-crisis levels of output in Q2, and 4.6% next year.

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Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Levon Kameryan, Senior Analyst at Scope Ratings, contributed to writing this commentary.