Polityka Insight: Prognosis of business and politics
Polityka Insight partnered with Poland Today to provide a prognosis of what issues will be making the headlines in business and politics over the coming year.
Exports: between protectionism of the West and crisis in the East
Although Poland’s exports are at their highest since 1989, the political situation to the East and to the West could curtail their growth.
Among exporters’ concerns are Brexit, regulations coming from Brussels, the crisis in Ukraine and the economic situation in post-Soviet states. Early data published by Poland’s Central Statistical Office (GUS) shows that Polish exports in 2016 hit their peak, reaching EUR 183 bn. This is a 2.3 percent growth year-to-year and a surplus of EUR 4.8 bn, up from EUR 3.7 bn in 2015. This third consecutive surplus resulted not only from low commodity prices but also – and perhaps more importantly for the future of Polish trade – from the growing number of Polish companies looking for business opportunities abroad.
The terms and conditions of the UK’s divorce from the EU’s single market are still unknown. Brexit will have a significant direct effect upon Polish exporters and the Polish trade surplus of EUR 6.8 bn. The introduction of customs duties would hit Polish exporters who compete on the UK market primarily by price. The automotive, machine, food processing, furniture and household appliances sectors would suffer most. Polish exporters could also be hurt by non-tariff barriers and the decline of the pound. A decline in exports will also have a direct effect on the profitability of Polish logistic firms, for which transport to the UK constitutes 20 percent of operations.
The European Commission is looking at a number of regulations which are intended to put an end to so called “social dumping” of Polish companies which provide services to EU markets. These include the extension of foreign posting regulations to include truck drivers, potentially harmful for Polish transportation companies. The Commission is considering a scenario in which drivers would be treated as posted workers after working nine days a month in a country different than the company’s headquarters. The requirement would necessitate signing separate contracts with drivers for each country in which the monthly limit is reached, leading to increased administrative costs for transport companies, increased costs of employing additional legal help, and accountancy costs for preparing contracts in line with country-specific regulations.
The economic crisis in Russia, Ukraine, Belarus and Moldova has resulted in growing poverty and shrinking consumer markets. This trend continues in the post-Soviet Community of Independent States. Whereas the share of Polish export to V4 – also including the Czech Republic, Slovakia and Hungary – reached 12 percent in 2016, for CIS it stands at 5.6 percent. Hence, despite the improving macroeconomic data in Russia and Ukraine, it’s going to take another year or more before the markets recover. The problem with eastern Europe economies also lies with the oligarchic nature of the state and governments’ inability to introduce political and institutional reforms that would improve business environment and attract FDI.
To summarize, the tense political situation in Europe and beyond, as well as the potential rise of populist and anti-European groupings in France, Italy and the Netherlands, wars to the east and south, and Donald Trump’s “America first” policy will all contribute to a growing sense of anxiety and uncertainty among the business community in Poland. Polish exporters and investors have to prepare themselves for a roller-coaster ride.
Olaf Osica is Polityka Insight’s director for risk assessment. Olaf holds a PhD in social and political science from European University Institute in Florence. He is a former visiting fellow of the US State Department, Ministry of Foreign Affairs of France and of GFPS-Polska. From 2011 until 2016 executive director of the Centre for Eastern Studies (OSW), at present chairman of OSW Advisory Council.
The retail sector: difficult times could lead to M&As
After the 500+ programme which spurred consumption, morale isn’t very high in a sector which is waiting for legislation that will most probably dent its profits in the years ahead.
British retailer Tesco is said to be reviewing its options on the Polish market. Some M&As could follow suit. The departure of Tesco’s managing director in February renewed speculation about a possible sale of the British group’s assets in Poland. Finding a potential buyer would not be easy for the retail chain: instead of an acquisition, other chains may simply choose to wait until Tesco frees attractive office space, for instance in shopping centres. The decision of the British owners of Tesco would also be influenced by a model of trade relations between the EU and United Kingdom, one that would take shape during Brexit negotiations.
The Polish retail market is relatively concentrated with Carrefour, Auchan and Tesco competing in the hypermarket sector and large discount chains (Biedronka, Lidl) undercutting the rest of the competition. Poland also has a well-developed sector of convenience stores dominated by Żabka and chains belonging to the Portuguese Eurocash group. Intense competition might lead to M&As, other than a potential exit of Tesco. One big transaction is certain: the private equity firm Mid Europa Partners is close to selling the Żabka chain convenience stores to another fund for around EUR 1 bn.
The market is also closely following proposed legislative changes that would further reduce margins. The government and the European Commission are still locked in a dispute over the retail tax. The tax was suspended by the Ministry of Finance in September 2016 as a result of an injunction issued by the Brussels-based Directorate General for Competition. The Commission claims that a high tax-free amount (PLN 17 mn a month) and the tax’s progressive nature (0.8 and 1.4 percent of revenue) can constitute illegal state aid. The government is ready to fight the Commission in the European Tribunal, but in the meantime it can reshape the tax to alleviate the concerns from Brussels, for example by introducing a flat 0.8 percent tax rate.
Another significant upset that could hit retailers is the draft law banning Sunday trading prepared by the Solidarity trade union. It is currently subject to the works of a parliamentary committee, but the government should present its official position about the draft by the end of mid-2017. MPs will almost certainly change some details of the draft legislation, with an exemption of terminals at ports and airports from the ban, for example, seemingly a foregone conclusion. It is also highly likely that individual franchisees who are currently covered by the ban, will be allowed to work on Sundays. An increase of retail workers’ minimum wage instead of a ban is also an option.
Piotr Semeniuk heads the legal desk at Polityka Insight. He is responsible for monitoring legislation, court rulings and acts of Polish regulators. Prior to joining Polityka Insight he worked at top legal offices in Warsaw. Piotr cooperates with the Centre for Antitrust and Regulatory Studies of the University of Warsaw and often publishes articles on antitrust and consumer protection law. He is an attorney-at-law of New York State, he holds a PhD in law from Jagiellonian University and an LLM from New York University.
The legal system: a power struggle for the judiciary
A new set of laws on the functioning of Poland’s legal system is on the table, with the ministry wanting to exert more power over judges.
This conflict could be one of the more important, if less mediatised, battlegrounds over the rule of law in Poland. Draft legislation that aims to strengthen the position of court directors was submitted to Poland’s lower house in the last days of 2016. According to the proposal, each activity of a chief justice that results in financial consequences that are not included in the financial plan would necessitate a prior approval from an appropriate director. The directors would be independently appointed by Justice Ministry Zbigniew Ziobro (currently, the ministry does so at the request of chief justice). Mr. Ziobro would also like to restrict the powers of chief justices or department heads with regard to selecting the make-up of adjudicating panels. The ministry is planning to create an IT system of automatically selecting adjudicating panels, managed by the ministry.
Furthermore, in January Mr. Ziobro proposed the setting up of an autonomous disciplinary chamber at the Supreme Court which would consider disciplinary issues concerning judges (including the Supreme Court ones) and prosecutors, as well as advocates and legal advisers. The chamber’s head would be appointed by the president at the request of the general assembly of the chamber’s judges. This tool is meant to discipline judges – it was preceded by the amended law on courts that came into effect on January 1. It includes a new disciplinary penalty: lowering the salary by five–20 percent for a period of 6-24 months.
It would also make it more difficult for judges to take up additional employment, for instance at universities. A formal acceptance of a judge’s request to seek such employment would be necessary. Currently, they merely need to declare the fact. In addition, Mr. Ziobro wants to extend a catalogue of information on the judges’ income, which they have to include in their declaration of assets – since the beginning of the year, such declarations have to be published online on court websites. The minister also wants to limit the number of judges holding functional positions (currently there are 4,000 of them, out of a total of 10,000). The list includes department heads or court inspectors, which would result in the judges losing functional allowance.
The National Council of the Judiciary (KRS) would now mainly be involved in presenting the president with requests for judges’ appointments. Currently, only eight members of a 25-person strong council are not judges. Mr. Ziobro would like to create two chambers in the council – one consisting of judges, the other one including MPs. All KRS resolutions would have to be approved by both chambers. The council would present the president with at least two candidates for a single position of a judge. The changes are included in draft legislation submitted by the ministry, which is currently held up in public consultations.
Maciej Czapluk is Polityka Insight’s legal affairs analyst. He has experience both in the private sector as well as public administration. Previously he worked in PGE Energia Odnawialna S.A. and the Chief Sanitary Inspectorate. He studied law at the University of Warsaw.
Foreign policy: Poster child no more
Once a European favourite, Poland has become a thorn in side for Brussels. According to the European Commission, the government’s rule is not a rule of law by EU standards, straining relations between the bloc and Poland’s conservative government. At the same time Poland is trying to take the initiative. Jarosław Kaczyński has a plan for Europe – what he needs is like-minded allies.
In January last year Brussels launched a special procedure against Poland hoping it would make the PiS government withdraw from its most controversial decision concerning the Constitutional Tribunal. As it hasn’t, Brussels is now in a tricky situation between giving Warsaw underserved leeway or trying to fight it on issues it does not have a clear competence over. PiS wants to see the EU reformed – Kaczyński is calling for power to be moved back to capitals, national parliaments to regain influence and decisions on matters of energy and migration to be taken unanimously. Regardless of this, public support for European integration remains very high.
Often referred to as Europe’s /i/enfant terrible/i/, Hungarian strongman Victor Orbán inspires Jarosław Kaczyński, for whom Hungary is the best example of how to stand up for “European democratic standards.” The Polish government would like to set up a CEE bloc including Hungary in order to fight for what it sees as long-neglected interests of the region. Still, this concept is not entirely carried by Hungary, which has its own strategy of looking for partnerships with Russia and Turkey. Poland and Hungary’s views on many issues differ – not least in areas prioritised by Warsaw, for example the Russian invasion in Ukraine or energy policy. At the same time, Warsaw has Budapest’s back when facing criticism from EU institutions. Both countries also agree on the way the refugee crisis should be handled, both rejecting the EU’s open-door policy.
After years of strengthening Polish-German ties under the PO-led cabinet (in government between 2007 and 2015), times have changed for relations between the two countries. In internal debates PiS’s rhetoric is strongly anti-German. Conversely, fears of isolation (in an increasingly hostile international environment) push Warsaw to look for rapprochement with Berlin. However, old differences remain, the main one being climate and energy matters – Poland depends on coal and opposes the EU’s climate policy, whereas Germany is pushing for renewable energy sources and deeper CO2 emission cuts. Warsaw counts on more solidarity in gas supply matters, while Berlin supports the construction of the Nord Stream II pipeline that links Russia with the West, bypassing Poland and Ukraine.
Britain was among the first EU countries to open its borders to workers from new member states. Almost one million Poles took the opportunity and settled in the UK, including many young people who could not find a job back home. Warsaw supported London’s push for deepening the single market, and both countries shared views on the Ukrainian crisis and security issues. Upon taking power, PiS identified Britain as Poland’s strategic ally in the EU – only to find it heading for the exit six months later. Bilateral relations will become tense in 2017 as the UK starts its Brexit negotiations and will inevitably use EU residents’ benefits on the isles as a bargaining chip. Britain’s businesses remain very active in Poland, where such UK giants as Tesco, Cadbury’s, Schweppes, Imperial Tobacco, Aviva and BP have been operating for years.
Joanna Popielawska heads the European Affairs desk at Polityka Insight. A graduate of European Affairs at Collegium Civitas in Warsaw, between 2007 and 2013 she worked in the European Parliament, focusing on internal markets, as well as constitutional and foreign affairs. She is a former advisor to the minister of administration and digitisation. Recently she worked as advisor to former deputy Foreign Minister Rafał Trzaskowski, dealing with preparations of Poland’s positions for European Council meetings.