WARSAW, Jan 9 (Reuters) - Prime Minister Donald Tusk's domination of Polish politics looks unassailable three months after his centre-right party won re-election but an economic slowdown sparked by the euro zone crisis could erode public support for painful reforms.
Poland, an enthusiastic member of the European Union but outside the euro, is also worried that the debt crisis may lead to a two-speed Europe in which it is relegated to the slow lane with no say over policies that will affect it.
Tusk’s pro-European Civic Platform (PO) won 39 percent of the vote in the Oct. 9 election, becoming the first party in Poland to win a second successive four-year term since the fall of communism in 1989.
PO has renewed a coalition with its previous partner, the small, rural-based Peasants’ Party (PSL), promising steady but not revolutionary reforms aimed at bolstering the resilience and competitiveness of the EU’s largest eastern economy.
With a small but adequate parliamentary majority, a compliant president — Bronislaw Komorowski is a former PO lawmaker — and a weak political opposition, the main risks facing Tusk now are external, but economists say the pace and quality of his reforms will also shape perceptions of Poland.
Here are the main political risks facing Warsaw.
ECONOMIC REFORMS
Alarmed by the deepening sovereign debt crisis in the euro zone that has sent bond yields for many member states soaring, Tusk has unveiled fiscal reforms that go beyond what critics of his generally cautious approach had expected.
Addressing the first session of parliament on Nov. 18, Tusk vowed to raise the retirement age, slash tax breaks and pension exemptions for various occupations and cut red tape in a drive to put public finances on a more sustainable footing.
Poland will slash public debt to 52 percent of gross domestic product and its budget deficit to below the EU’s 3 percent of GDP ceiling next year, he said, in comments welcomed by ratings agencies that had previously threatened downgrades.
But with its main trade partner, the euro zone, on the brink of recession, Poland may struggle to generate the growth needed to hit fiscal targets. The government has revised its 2012 GDP growth forecast down to 2.5 percent from 4 percent.
Despite the slowing economy, the Polish central bank has limited scope to reduce interest rates because of still-high inflation and concerns over the zloty currency, spurned by investors fleeing riskier assets due to the euro zone crisis.
What to watch:
* Will the austerity measures trigger more protests? Most of those so far have been quite subdued, reflecting the country’s relatively robust economic performance.
* Will Tusk’s coalition partner PSL, which sees itself as a champion of the underdog, try to dilute some reforms, especially moves to bring farmers into the main pension and tax system? There have been some early signs of PSL discontent.
* The euro zone crisis: any further deterioration could again dent Polish growth prospects and also hammer the zloty, possibly forcing the central bank to jack up rates again, which would exacerbate the country’s economic problems.
Even as speculation has grown about a possible breakup of the euro zone, Tusk has reaffirmed Poland‘s ambition to join the common currency if and when it overcomes its debt crisis. He said Poland would meet all the entry criteria by the end of his second term in office in late 2015.
For Poland, the benefits of euro membership are as much political as economic. As well as conferring lower borrowing costs and eliminating currency volatility, euro membership would put Poland at the heart of EU economic decision-making.
With its history of invasion and occupation by stronger neighbours, Poland‘s desire to belong to Europe‘s inner core has deep psychological roots.
Keen to demonstrate to Germany, Europe‘s paymaster, that Poland is a serious and responsible partner, Tusk has backed a Berlin-led push for a change in the treaty of the 27-nation EU to allow for greater fiscal integration.
Warsaw is worried that the alternative would be a deal taken at the level of the 17-strong euro zone excluding Poland.
Unlike Britain and Denmark, the mostly post-communist countries that have joined the EU since 2004 have no legal opt-out from the euro, though they can decide the timing of their entry, in consultation with the EU institutions.
Warsaw has also urged the European Central Bank to take a more active role in ending the crisis, a view shared with many EU leaders but resisted by Germany as illegal and dangerous.
In a landmark speech in Berlin in November, Foreign Minister Radoslaw Sikorski begged Germany to take a more active stance in averting an "apocalyptic" breakup of the euro zone.
"I will probably be the first Polish foreign minister in history to say so but here it is: I fear German power less than I am beginning to fear German inactivity," he said.
Poland‘s main opposition party, the right-wing, eurosceptic Law and Justice party (PiS) of Jaroslaw Kaczynski, accused Sikorski and Tusk of preparing to surrender the country’s hard-won independence.
What to watch:
* If the euro zone crisis subsides, will Tusk take the zloty into the pre-euro European Exchange Rate Mechanism (ERM) in which the currency would trade in a fixed range?
* Will PiS strike a popular chord with its accusations of national betrayal? Will public support for joining the common currency fall further (a majority oppose euro membership according to opinion polls last year), hampering the government’s plans to amend the constitution to allow for eventual euro membership?
THE BEAR NEXT DOOR
Warsaw‘s relations with Moscow, long strained over history, defence and energy, will remain a challenge for the government.
Russian Prime Minister Vladimir Putin, who looks set to return to the Kremlin in this year’s presidential election, is suspicious of Polish and EU efforts to draw ex-Soviet republics such as Ukraine closer to the West and is also distrustful of U.S. plans for missile defence that Warsaw strongly backs.
Russia recently threatened to deploy Iskander ballistic missiles in its Baltic enclave of Kaliningrad, which borders Poland, in retaliation for the missile defence plans.
For more on Polish-Russian relations, see:
Since first taking office in late 2007, Tusk’s ambition was to mend ties with the Kremlin, but the cautious rapprochement took a hit from their differences over the causes of a plane crash near Smolensk in April 2010 that killed Polish President Lech Kaczynski and 95 others, mostly senior state officials.
Russia puts sole blame on the Polish pilots while Warsaw says ground controllers at the airport also contributed to the disaster. Jaroslaw Kaczynski — the late president’s twin — says the Tusk government and Moscow share direct responsibility for the Smolensk crash.
What to watch:
* What stance will the freshly returned government take on relations with Russia? Will it be able to revive the rapprochement with Moscow?
