• Crisis in Poland

  • By Krzysztof Pilawski | 20 May 09
  • After years of economic upheaval in Poland, the financial crisis has hit the country dramatically. Alongside a rise in unemployment and decrease of industrial output, the crisis is leading to a grotesque split into supporters of liberal and social policy.

    In June 2008, a well-known Polish journalist announced in the most important opinion-making weekly Polityka: “Strong zloty, sinking dollar, low import duties at last give millions of Poles the opportunity to consume, an opportunity that no other living generation can even remember. Millions of Poles, common people, rapidly entered the world of joyful consumption.” After less than four months the same author announced again: “It’s a crisis. We cannot expect it to end in a typical periodic economic revision. It will result in a fundamental change of mentality, civilisation, ideology and a geopolitical change which already is partly discernible”.

    For many months, information about the decline of US financial market and the travails of many common American citizens evicted from their homes because they lost creditworthiness were observed in Poland as curiosities from a distant world that could not possibly have anything to do with their own.

    Economic Upheavals 

    The social mood in Poland last year was the best it had ever been since the system transformation of 1989. Public opinion research centres registered record-braking satisfaction levels in response to the abolition of communism and its replacement by a new system. In July 2008 an average wage in Poland was equal to one thousand euro. It was an 11.6 % increase over that of July 2007. Wages exceeded the inflation rate by three times. It seemed that Poles would soon stop looking for better paid job abroad. 

     

    GDP Increase in Poland in the Years 2001-2008 

    (based on Central Statistical Office – GUS data)

    Year - GDP change as compared to last year  (in percent) - GDP value (in billion zlotys)

    2001 10 7508

    2002 14 7811

    2003 38 8147

    2004 53 8837

    2005 32 9677

    2006 61 10602

    2007 67 11753

    2008 4.8 (estimated data)

     

    Average Annual Salary in Poland in the Years 2001-2008 

    (based on Central Statistical Office data)

    Year

    Salary (in zlotys)

    2001

    2,062

    2002

    2,133

    2003

    2,201

    2004

    2,290

    2005

    2,380

    2006

    2,477

    2007

    2,691

    2008

    2,944

    A rise in salaries was accompanied by a decrease in unemployment. In 2008, for the first time since November 1998, it dropped below 10 %. Construction workers, workmen and engineers of many sectors, salesmen and drivers could choose from numerous offers. Employers who suffered from personnel shortages tempted potential employees by high salaries. 

    In a short period of time, most Poles thought of this state of affairs – rising salaries and employment security – as eternal. And this conviction was ratified by analysts from top financial institutions. The social mood that resulted was one of consumer optimism, and this was one of the driving forces behind economic development. Poles bought houses and apartments, cars, new furniture, plasma TV sets and computers. An increasing number of people decided to go for holiday abroad twice a year – in summer and winter. In order to finance all of it, they took out loans from banks that tried to compete with each other, offering money without worrying about ability to pay and collateral.

    Unemployment Rate in Poland in the Years 2001-2008  

    (Central Statistical Office data)

    month and year

    unemployment rate (in percent)

    December 2001

    175

    December 2002

    200

    December 2003

    200

    December 2004

    190

    December 2005

    176

    December 2006

    148

    December 2007

    112

    December 2008

    95

     

    The decline of the zloty

    The fall in the exchange rate of the zloty, noted since August, was the first presage of the approaching crisis. In October, the first rapid changes in the exchange rate appeared, and it was said that a speculative attack on the zloty had been made by foreign financial institutions (in February 2009, Goldman Sachs’s bank revealed that it reached a profit level of 7.9% in operations with the Polish zloty).

    The zloty was still losing value against foreign currencies: the euro, dollar, Swiss franc and British pound. When in the middle of February 2009 the exchange rate was 4.06 zloty to a euro (in July 2008 it was 3.2), Prime Minister Donald Tusk announced that the government would begin to intervene (sell euro), if the exchange rate were to drop below five zloty to a euro. This point has not yet been reached.

    Nevertheless, the decline of the zloty was resented by both those citizens who took loans for buying a house or apartment in foreign currencies and by entrepreneurs. Thousands of companies concluded agreements for currency options with banks when the zloty was strong, hoping to sell euros to banks at a higher rate than an official one. However, in the situation of a weak zloty this currency rate appeared to be much lower than the official one, and the companies had to sell euros to banks at an exchange rate much lower than the official one. Some of them, who could not meet their currency option obligations declared insolvency. The losers were companies with Polish owners, while the option sellers were international financial institutions. 95% of the agreements for currency options were concluded in July 2008 when the zloty was strongest.

    Polish special security services are investigating whether there was a breach of law in this respect, whereas Deputy Prime Minister, Minister of the Economy, Waldemar Pawlak, who is also a leader of Polskie Stronnictwo Ludowe – PSL (Polish Peasant Party) which is entering into a coalition with Platforma Obywatelska – PO (Civic Platform),  declares he will nullify currency options which according to him is “robbing Polish companies”. 

    The decline of the zloty meant a loss by the owners of farms who get area payments (there are over 1.3 million of them) calculated on the basis of a EU rule, which is based on the exchange rate of September 30, 2008 and its value was considerably lower on that date than it is today. Meanwhile the means of agricultural production (e.g. agricultural machines, fertilisers) are to a great extent dependent on the exchange rate of the euro.

    In the first quarter of 2008, GDP rose by 6% in relation to the previous year’s first quarter, in the second quarter – by 5.8%, and in the third quarter by 4.8%. It was not before the fourth quarter that a more significant decline in the development rate was perceived as the GDP increase amounted to 2.9 %. However, compared to other European Union countries this ratio was still favourable for the Polish economy. While GDP in the euro zone shrunk in the fourth quarter of 2008 by 1.2%, in Poland it rose by nearly 3%.

     

    Change of GDP in the fourth quarter of 2008 in relation to the fourth quarter of 2007 in Poland and in selected countries from the euro zone  (Eurostat and Central Statistical Office data)

    country

    GDP change (in percent)

    Poland

    29

    Greece

    26

    Austria

    5

    Belgium

    -5

    The Netherlands

    -5

    Spain

    -7

    France

    -1

    Germany

    -16

    Portugal

    -21

    Italy

    -26

      

     

    The economic position of Poland is also quite good, especially when compared to the situation of Hungary or of the Baltic states, in the eastern region of the EU.  

     

    Change of GDP in the fourth quarter of 2008 in relation to the fourth quarter of 2007 in Poland and other countries in the eastern part of EU (Eurostat and Central Statistical Office data)

    country

    GDP change (in percent)

    Rumania

    45

    Bulgaria

    36

    Poland

    29

    Slovakia

    27

    Czech Republic

    10

    Lithuania

    -15

    Hungary

    -2

    Estonia

    -94

    Latvia

    -105

     

    Decrease of industrial output and rise of unemployment

    Since November 2008 industrial output has slumped. In November the drop amounted to 9.2% in relation to November 2007, in December it was 4.4% while in January 2009 the decrease was double digit and amounted to 14.4%. 

    Industrial output slump is an effect of decreased internal demand and although primarily the situation in the global market, including the euro zone, the U.S. and the Ukraine. The euro zone is the main economic partner of Poland. Foreign exchange with Germany alone accounts for one fourth of Poland’s total foreign exchange. GDP shrinking in the euro zone caused the decrease of demand for Polish goods. 

    Krosno in the Podkarpacie region with fifty thousand residents was the first Polish town to be severely affected by the crisis. In the town that not so long ago was proud of its extremely low unemployment rate (4.9%), two thousand people lost work within a few months. There was no demand for glass products, shock absorbers, furniture, airplane components and yachts manufactured there. Dismissed employees drastically reduced their shopping, they stopped going to restaurants, cafés and cinema, which leads to the loss of jobs in the service sector and to the bankruptcy of small companies. The situation in other small towns like KraÊnik, Stalowa Wola or Ostrzeszów, whose economy depends on one or a few companies, is similar.  

    In January 2009 there were 160.6 thousand more unemployed people than in December 2008, and the unemployment rate exceeded 10% (it was 10.5%). At the same time, the crisis aggravated the division of the country into poorer and richer regions. In January, unemployment rates in Wielkopolskie, Âlàskie and Mazowieckie voivodeships did not exceed 8% while in Warmiƒsko-Mazurskie voivodeship it reached 18.1% and in Âwi´tokrzyskie, Zachodniopomorskie, Kujawsko-Pomorskie, Lubuskie and Podkarpackie it was over 14%. According to government forecasts, the unemployment rate will increase in Poland to 12.5-13.5% this year, while in 2010 it will reach a level of 14%, which means that over two million people will be unemployed. At the beginning of March “Gazeta Wyborcza” wrote that there were people who were willing to take a job for a monthly salary equivalent to two hundred euro.

    It is not only workers from the construction and industrial sectors who are losing jobs and also, as a result, their creditworthiness. The group affected also includes young, dynamic people whose career was rapidly halted by the crisis. They are workers in banks, insurance companies, advertising agencies, representatives of company management and journalists. They belong to the groups who are enthusiastic about capitalism and are the core of Platforma Obywatelska’s liberal electorate. 

    Donald Tusk, who travelled to Great Britain before the parliamentary election in 2007 and, promising them jobs, tried to convince Poles employed there to return home after his party’s triumph, is no longer conveying this message to them. A lot of people returning from abroad remain unemployed.

    Reactions from politicians

    The draft budget for 2009, prepared by the government in June 2008, assumed a rise in GDP of 4.8%. In December this was amended and the rise in GDP was changed to 3.7% for 2009. Now Donald Tusk’s government is estimating this year’s growth in GDP at 1.7%. However, it is not unlikely that it will sink even more. A budget-act amendment should be ready by the middle of the year. 

    As late as October, Prime Minister Donald Tusk was convinced that Poland is “an island of stability” among the other developed European countries and the world and that there are no grounds for worry as regards the recession in the financial markets. He admitted that rapid entry into the euro zone is the best way of protecting Poland from the financial crisis. He set a date for this  – the end of 2011.

    PSL (the party mainly representing peasants who take advantage of area payments) as well as SLD (Democratic Left Alliance), which aims at the fullest integration of Poland into the EU, are both for rapid entry into Euroland.

    Prawo i Sprawiedliwoy´s´c – PiS (Law and Justice), the main opposition force led by Jarosl/aw Kaczy´nski, decided to play up the issue of the euro as its main argument in the crisis debate. This debate is about to divide the society into euro advocates and opponents before the June election to the European Parliament. PiS politicians, supported by President Lech Kaczy´nski, is convinced that the non-adoption of the euro is not the cause of the Polish crisis because the countries that adopted the euro have worse economic indicators than Poland does. PiS demanded a referendum on euro adoption and warned that the new currency would cause an avalanche of price increases worsening the living standards of Polish citizens, especially the poorest ones.

    PO, admitting that the euro is not the cause of recession, claimed that not being in the euro zone deepens the crisis in Poland. It allows for speculating on the zloty, creates inflation threats, impedes profitable selling of state treasury obligations that now have strong competitors in the form of other countries’ obligations issued in the stable euro. PO associates introduction of the euro with fuller integration into the EU, a better climate for foreign investment, profits for Polish companies collaborating with Euroland, as well as the reduction of inflation and decrease of interest rates which stimulates investment development. Adducing the example of Slovakia, which adopted the euro on January 1, 2009, PO was convinced that threats of rising prices were groundless.

    As time went on, the dispute became less polarised because PiS no longer questioned the adoption of the euro. They only insisted on delaying it (until 2015 or even later), while the government was postponing possible introduction of the euro until 2012 or 2013 and, moreover, agreed that it is rather the provisions of Poland’s entrance into Euroland than the date of euro adoption that is important.

    The government’s idea of combating recession is personified by Minister of Finance, Jacek Rostowski (Jan Vincent-Rostowski), an economist born in London, who spent most of his life in Great Britain. His neoliberal views have earned him the name, “the second Balcerowicz”. Rostowski was Leszek Balcerowicz’s advisor when the latter, as Deputy Prime Minister and Minister of Finance (1989-1991) practised his so-called “shock therapy”. 

    Rostowski wants to keep this year’s budget deficit down to a planned level of PLN 18.2 billion at any cost. In his opinion, Poland cannot afford a higher deficit, especially because this year the state has to sell bonds worth PLN 155 billion in order to fulfil its obligations to foreign creditors, which will be extremely difficult due to the enormous amount of securities issued by other countries of the European Union. The Minister of Finance claims that the direction taken by the bigger European countries in combating the crisis, that is to increase public debt through the issuing of securities, is the wrong choice and that for poorer Poland it would even be fatal.

    In his interview for Gazeta Wyborcza (February 13, 2009) Rostowski stated: “It’s too early to know what problems will confront those countries that are so willing to increase their deficits. Until we know those results, it would be adventurist to increase our debt. The Polish path out of the crisis is a cautious one; it consists of building reserves and preparing for what will doubtless be a very difficult period for our economy”. 

    “Privatisation is a better way of acquiring financial means than running up a debt”, Rostowski claims. This year the Ministry of the Treasury wants to sell off a number of big enterprises, including those from the power sector. Rostowski’s views are shared by Donald Tusk who has identified with the liberal wing ever since the beginning of the transformation. The Minister of Finance is also supported by Leszek Balcerowicz who is always present in the media.

    The position of the neoliberals is so strong that Rostowski can publicly declare that he will use this opportunity to undertake “the second transformation” (the first one having occurred in 1990 under Balcerowicz).

    A second key figure in the Tusk government involved in anti-crisis strategy is Michal/ Boni, chairman of the Permanent Committee of the Council of Ministers and a head of the Prime Minister’s Team of Strategic Advisers. He had also been an associate of Leszek Balcerowicz’s. Boni is actually responsible for social policy. He played a crucial role in adopting a law in autumn 2008 that deprived hundreds of people of the right to earlier pensions. One of his tasks is to watch over social expenditures, and also those connected with preserving workplaces, in order to keep them strictly with the budget parameters. Thus these expenditures are modest. The government is ready to destine PLN 2.5 billion for employers who want to retain workplaces at the expense of shortening working time. Moreover, in spite of the trade unions’ resistance, the government insists on paying every employee half of the minimum wage irrespective of how long he/she works: six or four hours a day. 

    The Tusk government’s strategy, i.e. financial discipline and privatisation, is supported by big capital. A lot of employers are decreasing salaries and cutting employees’ social benefit packages. The purpose of some of the dismissals is to re-employ people under conditions more profitable for employers, rather than a wish to match the number of employees to the sales orders the company has. Employers made good use of the recession to push more strongly for changes in the Labour Code, introducing, among other things, so-called flexible working hours.

    Another vision of combating the crisis is represented by PSL, PO’s coalition partner. Waldemar Pawlak is looking to broadening his party’s base. He is very familiar with Poland’s industrial environment and uses his position as Deputy Prime Minister and Minister of the Economy to make himself into Polish industry’s principal spokesperson. Pawlak argues with Rostowski in that he does not focus on financial discipline but on looking for ways to revive the economy. It is Pawlak who prepared the anti-crisis plan for stability and development presented by Donald Tusk at the end of 2008. His plan provides for funding the Polish economy with PLN 91.3 billion in the years 2009-2010. The plan assumes higher guarantees for loans granted to small and medium companies – the total amount of aid, including loan guarantees, is equal to approximately PLN 60 billion. Moreover, the anti-crisis plan provides, among other things, for speeding up investments realised from EU funds (approximately PLN 20 billion) and for investments in renewable power resources (PLN 1.5 billion).

    Pawlak was the first to have the idea of the state paying off some part of the mortgage loans taken out by people who have lost their jobs through no fault of their own. This was then seized on by Donald Tusk as his own idea, since he believed that the beneficiaries of this policy would be the keenest supporters of Platforma Obywatelska.

    Pawlak’s proposal of invalidating currency options is so far the most daring act of state interference into the economy. Minister Rostowski firmly opposes it. The Minister of Labour and Social Policy, Jolanta Fedak from PSL, who represents a more pro-worker outlook and seeks good contacts with the trade unions, could replace Boni in the government.

    The opposition – Prawo i Sprawiedliwoy´s´c and Sojusz Lewicy Demokratycznej – supported by the trade unions (including „Solidarity” which has links to the right wing and also to the All-Poland Alliance of Trade Unions which has leftist tendencies) accuse Rostowski of cooling down the economy through decreasing internal demand. They accuse him of behaving like Balcerowicz who in 1997 was appointed Deputy Prime Minister and Minister of Finance in the government of Jerzy Buzek. They also emphasise that the Tusk government concentrates on cuts, savings and belt-tightening while other countries look for ways to revive their economies.

    Liberal versus social policy

    The line of dispute around the euro is moving toward a split between supporters of liberal and social policy. The latter is mainly represented by the right-wing conservative PiS, because SLD, due to long-standing disputes within the party, is not able to work out its own coherent anti-crisis strategy.

    PiS not only has a large group of representatives in the Parliament (156 Members of Parliament in the 460-person Sejm and 38 Senators in the 100-person Senate), but also has the sympathy of President Lech Kaczy´nski who is a doctor of labour law and an opponent of neoliberalism, and who is for a social dialogue taking workers’ interests into account. In February, the President appointed two economic advisors with similar views. One of them is Ryszard Bugaj, well-known opposition activist in the time of the Polish People’s Republic. In the 1990s Bugaj was one of the leaders of a left-wing party called Unia Pracy (Labour Union). He represented the party in the Sejm and was a passionate critic of Balcerowicz.

    PiS is demanding an increase in this year’s deficit from PLN 18.2 billion to PLN 25 billion. It is strongly opposed to the government’s privatisation plans and demands of the government instead that it concentrate on protecting workplaces and assisting people suffering from the recession rather than focus on budget discipline. PiS was opposed (as was the SLD) to cutting the Ministry of National Defence budget for the purchase of new equipment produced in Polish factories. On March 6, when thousands of trade union members from armament industry factories were protesting in Warsaw in front of Sejm and Chancellery of the Prime Minister, an official from the  President’s National Security Office welcomed the delegation of trade union members and expressed support for their action.

    Although the crisis in Poland is only gaining momentum, it is visible that the political scene is dividing into two blocs: liberal and social. The liberal Platforma Obywatelska is still in the lead. According to the results of polls it has the support of 45-50% of citizens. The PiS’s support is 25%, SLD – 8% whereas PSL is 6%. Support for other parties is below the 5 % election threshold. The proportions may change this year. Growing unemployment, fear of job loss and problems with finding work, as well as a slow down in wage growth and the high costs of living – all these are factors unfavourable to the government, especially for PO. On March 1st in the presidential elections in Olsztyn, the capital of high unemployment in Warmi´nsko-Mazurskie voivodship, the PSL candidate defeated the PO representative despite Prime Minister Tusk’s support. 

    Weakening support for PO will probably be accompanied by a restoration of PiS influence. This party has ceased focusing on anti-communist slogans and is concentrating on economic problems. A further strengthening of PSL independence within the government coalition as a moderate party positioned in the political centre might also occur. PSL may take the place of SLD as a third political power.

    Being ideologically adrift, SLD is not able to play a the role of the main opposition group demanding jobs, protection for the poorest and social justice. The social demands of this party were taken over to a great extent by the Kaczy´nski brothers. On the other hand, there is no left-wing party that could replace SLD. If the crisis in Poland becomes more severe it is more probable that a new national-Catholic party may emerge instead of a new social left-wing party. It is also possible that a completely new political force may appear that could come together during social protests if the economic situation is very bad (like Andrzej Lepper’s Samoobrona in the 1990s).

    For now, the situation in Poland seems to be more stable than the zloty. No party represented in the Polish Parliament, not even the biggest trade unions, are interested in disturbing stability. The demands that are made are moderate in character. The temperature of the dispute is lower than it was during the electoral campaigns of 2005 and 2007. The ruling political and social forces understand that an attempt at destabilisation will not profit them, as it did western financial institutions due to the attack on Polish zloty. On the contrary, it may turn against them.