Clashing With Europe Costs Poland

(Bloomberg) -- For Poland’s nationalist government, the cost of defying the European Union is now getting real.

The standoff with Brussels over political appointments to the country’s independent judiciary have so far come at a price that’s been relatively easy to accept for the ruling Law & Justice party: a hit to Poland’s status as a reliable EU member and some testy exchanges with France and Germany.

But if the chaos of Brexit and Italy’s climbdown this week over its budget show anything, it’s that the cost of defiance can only escalate – especially for a country that gets more money from the EU on a net basis than anywhere else.

Recent decisions in Berlin and Brussels along with comments from one of the world’s biggest bond investors signal the fallout from losing more powerful friends is taking on another dimension. It’s one that will be tougher to swallow for a Polish leadership facing elections in 2019.

Clashing With Europe Costs Poland

EU paymaster Germany wants to link access to the bloc’s funds with preserving democratic values such as judicial independence. New rules on minimum wages for road hauliers agreed this month pose an existential threat to Poland’s thriving $57 billion trucking and logistics industry. This week, the EU’s highest court affirmed an earlier ruling that the country “immediately suspend” its latest overhaul of the Supreme Court.

“After three years of undermining its strategic interests, Poland’s coalition-building ability within the EU is zero on most issues,” said Marcin Zaborowski, a senior associate at think-tank Visegrad Insight. “It’s at logger-heads with France and Germany, which will decide the EU’s future and the shape of the next budget.”

Indeed, investors in Poland’s $255 billion debt market may be neglecting risks, according to Michael Hasenstab, who manages $35 billion at Franklin Templeton. The country, along with fellow rebels in the EU’s east, are gravitating toward norms more familiar in Moscow than Brussels, he said.

Clashing With Europe Costs Poland

The premium on Polish debt compared with Germany, the benchmark for Europe, has been rising. The additional yield on Poland’s bonds is now half a percentage point more than when Law & Justice won power in 2015.

In the broader economy, greenfield investments in Poland plunged 23 percent last year to $12 billion, the lowest level since 2014, central bank data show.

“Hungary, Poland and the Czech Republic have slid ever further toward protectionism and far-right nationalism, building barriers and increasingly emulating the Russian approach to governance rather than the EU’s,” Hasenstab wrote in an outlook for 2019. “Investors may be overlooking the growing political and structural risks across Europe.”

It echoes the concerns of some European leaders. Last month, French President Emmanuel Macron spoke of nationalism as a “betrayal” at the commemoration of the end of World War I. In Warsaw on the same weekend, Poland’s leadership marked the country’s Independence Day by marching with far-right groups.

In response to criticism, the Polish government points to its economic track record of 5 percent growth and a budget deficit shrunk by improvements in tax collection. In September, Prime Minister Mateusz Morawiecki called his country an “economic miracle” as Poland’s stock market was upgraded in London to “developed” from “emerging” status.

Since joining the EU in 2004, the former communist country of 38 million punched above its weight because it was regarded as a model of democratic and economic transformation. More than anywhere else, Poland was a symbol of what the EU wanted to achieve in bridging the gap between the east and west.

The last three years have destroyed that view, according to a senior EU official, who asked not to be identified by name when talking about internal affairs. The latest EU measures aren’t about punishing anyone, the official said, but a consequence of Poland’s failure to respect democratic values or take part in core projects, such as joining the euro currency and building a common defense force.

Worryingly for Poland, the EU has also moved on. The European Commission proposed cutting a quarter of Poland’s funding in the 2021-2027 budget as a starting point for discussions. The new EU trucking directive affects a market where Polish companies have a 40 percent share.

Clashing With Europe Costs Poland

The developments aren’t lost on Law & Justice, whose showing in October’s local elections was hit by concern about the state of relations with Europe. During the campaign, Morawiecki said the bloc’s funds were good for “fixing sidewalks.” President Andrzej Duda called the EU an “imaginary union from which Poles derive few benefits.”

With elections to the European parliament due in May, a general election expected in the autumn and a corruption scandal at the country’s financial regulator, there was a U-turn at Saturday’s party convention. 

Morawiecki said his government “guaranteed” that Poles will fulfill their European aspirations and unveiled the party’s new slogan: “Poland -- the beating heart of Europe.”

Beyond the political hype, international companies are holding back decisions because of risks to the rule of law, according to Marcin Matczak, a professor at Warsaw University.

“Large state-controlled companies often don’t want to consent to international arbitration and investment deals collapse,” Matczak said. “Foreign investors aren’t keen on jurisdiction in Polish courts because they may be subordinated to the government.”

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