Wednesday, October 11, 2006

Political rows may harm Polish economy

Prolonged political turmoil will undermine Poland's economy by jeopardizing fiscal consolidation plans and undermining investor confidence, Finance Minister Zyta Gilowska said on Tuesday.

She said the European Union's biggest newcomer might grow fast and cut its budget deficit significantly in the next three years if the country returns to political stability. Or it can see its economy suffer if rows continue.

"We face a very stormy situation. We are at a cross-roads: it's either make or break," Gilowska told Reuters in an interview after a meeting of EU finance ministers. "Looking at the turmoil on our political scene, which has lasted three years, I cannot rule out that things will turn out bad," she said.

Poland's parliament will vote this week on a motion to shorten its term after conservative Prime Minister Jaroslaw Kaczynski lost his majority in the lower house last month, putting the country on the verge of early elections.

Kaczynski voiced optimism on Tuesday about averting snap polls as he continued efforts to cobble together a new coalition with the small Polish Peasants Party and independent deputies.

His government could also struggle on in a parliamentary minority, making it extremely difficult to move forward with reforms needed to prepare Poland for entry to the euro zone.

"If the current situation continues for more than two or three months, the consequences will be bad," said Gilowska. "We cannot continue with an uncertain situation. Nothing harms the economy and reforms more than a lack of stability and uncertainty about what can be done."


Gilowska said she was an optimist so she did not want to go into details on the economic consequences of a prolonged political stalemate.

She has spoken out in favor of the deeper structural reforms economists and the central bank say are necessary to secure the future of Poland's public finances against any significant dip in the economy's brisk 5-percent growth.

On Tuesday, she reaffirmed her plans to cut the budget deficit to below the euro zone's limit of 3 percent of gross domestic product (GDP) in 2009 from next year's planned 4.1 percent, as long as the strong economic expansion continues.

"The current good condition of the economy will translate into a good scenario for the future, unless we mess it up, and here we may do a lot," she said.

The 3-percent target has long been Poland's chief problem with meeting criteria for adoption of the single currency pushing back forecasts for its expected entry to the euro zone into the next decade.

She said that Hungary, where politicians have allowed the budget deficit to soar to 10.1 percent of GDP, should serve as a warning for Poland.

"The example of Hungary shows it is enough to have two or three years of thoughtless belt-loosening to worsen all marcro-economic indicators," she said.