Economic Impact of EU Accession on Poland

UNCLAS SECTION 01 OF 05 WARSAW 003151

SIPDIS

STATE FOR EUR/NCE TARA ERATH AND MICHAEL SESSUMS
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS AND MWILSON
TREASURY FOR OASIA ERIC MEYER AND MATTHEW GAERTNER
FRANKFURT FOR TREASURY JIM WALLAR

E.O. 12958: N/A
TAGS: ECON EFIN PL EUN
SUBJECT: Economic Impact of EU Accession on Poland

CORRECTION TO WARSAW 3130/3131, PARA 26, LAST SENTENCE.

This cable is sensitive but unclassified and NOT for
Internet distribution.

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Summary
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1. (SUB) Sixteen months after Poland's EU accession, post
surveyed a number of government officials and economic
experts on the impact of accession. Despite some caveats,
there appears to be consensus that Poland has adapted
smoothly to the EU's common market. Dramatic export growth
has fueled economic expansion even while the zloty has
significantly appreciated. Meanwhile, inflation is under
control, foreign investment is on the rise, and unemployment
is beginning to drop off. Nevertheless, in many ways it is
too early to evaluate the effect of accession. It remains
to be seen whether Poland will be able to sustain economic
growth, cope with continuing emigration, and smoothly
conform to some of the EU's more problematic regulations.
However, on the eve of parliamentary and presidential
elections, economic experts remain optimistic about Poland's
future prospects in the EU's open market. End summary.

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Currency
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2. (SUB) A key development in the Polish economy over the
past year and a half has been the significant strengthening
of the zloty. Fueled by surging Polish exports, the zloty
experienced sustained growth from March 2004 to March 2005
against both the dollar and the euro. In this 12-month
period, the zloty appreciated by 24.6 percent against the
dollar, according to Polish government data. Since April
2005, however, the zloty has weakened somewhat, in step with
the weakening Euro.


3. (SBU) Meanwhile, the National Bank (NBP) hopes to keep
Poland on track for rapid Euro adoption. NBP macroeconomic
specialist Lucyna Sztaba said the Bank should enter the
eurozone as soon as possible, though strong government
support will be necessary to do so. The Bank initially set
the goal of adopting the euro in 2008-2009, though Sztaba
acknowledges 2008 may now be out of reach. The National
Bank is concerned that Poland will be left behind in the
race for investment by countries such as Slovakia and the
Baltics, which are further along with preparations for the
euro. Sztaba thinks the next government--expected to be a
coalition of the Citizens' Platform (PO) and Law and Justice
(PiS) parties--may not be as keen on catching up, with PiS
somewhat opposed and PO reportedly ambivalent about quickly
joining the euro zone. One of the arguments being used
against rapid euro adoption is a recent IMF report
suggesting the euro is not as important for Poland as for
its neighbors because its market is so much larger.

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Economic Growth
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4. (SBU) The Polish economy expanded rapidly in the months
prior to EU accession, with 6.9 percent annualized GDP
growth in first quarter 2004. This growth, which was
accompanied by a three percent real increase in salaries in
the same quarter, may have been fueled in part by consumers'
increased demand for durable goods in anticipation of EU
accession-related price increases.


5. (SBU) GDP growth continued after accession, though at a
more modest 3-4 percent pace. The driving force behind this
growth was agriculture and food processing, which benefited
from stronger-than-expected demand for Polish products in
the EU, an effect amplified by the weakness of the zloty at
the time of accession. In 2004, food exports to EU-15
countries increased by 60 percent. Poland also benefited
from nearly EUR 1.6 billion in net EU transfer payments in
2004, a figure the Poles expect to more than double in 2005.
First quarter 2005 statistics estimate growth at three
percent, which represents a slight slowing of the initial
post-accession export surge, due in part to the
strengthening zloty. Consensus estimates put Poland's GDP
growth in 2005 and 2006 in the 4-5 percent range.

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Unemployment
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6. (SBU) Analysts agree it is too soon for EU accession to
have had a dramatic impact on Poland's high unemployment
rate, which has hovered around 19 percent since 2002.
Economic analyst Bohdan Wyznikiewicz thinks the Polish work
force is currently in its second major phase of
restructuring since the fall of communism. Labor
productivity is increasing rapidly, and workers continue to
leave farms. Roughly 16.5 percent of the work force is now
employed in agriculture, down from 20 percent in the mid-
1990's.


7. (SBU) Unemployment fell from 20.6 to 19.5 percent in
the months leading up to accession, but the rate remained
stable for the rest of 2004. In the first half of 2005,
however, the unemployment rate has dropped from 19.5 to 18.0
percent. Together, the 2.6 percent decrease in unemployment
since the beginning of 2004 is the most significant drop
since 1997. Analysts suggest that increasing demand for
Polish exports, coupled with opportunities for migration,
should contribute to a continuing decline.

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Inflation
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8. (SBU) Post-accession inflation was one of the most
feared consequences of joining the EU in Poland, and 2004
statistics bear out that a greater-than-expected
inflationary effect--averaging 4-5 percent (annualized) in
the months immediately following accession--was observed.
Price increases were driven by EU demand for agricultural
products, which had a dramatic effect on certain goods.
(For example, sugar prices rose 67 percent; beef prices 40
percent.) Overall, food prices increased by 7.8 percent,
which had a powerful effect on public perceptions given the
30 percent proportion of Polish household expenditures
devoted to food purchases. External factors--in particular,
high oil prices--had an effect as well. Only a few prices,
mainly for technology and clothing, fell.


9. (SBU) In 2005, in contrast, prices again stabilized as
the market quickly adjusted to the new export dynamics.
Food prices actually dropped in February-April 2005, due in
part to the stronger zloty. Current expectations are for
continued price stability, with an end-of-year outcome
perhaps below the National Bank's forecast of two percent.
Many analysts suggested 1.2 percent annual inflation at year
end is possible. This would be comfortably below the
government's long-term 2.5 percent target, in compliance
with the Maastricht guidelines.

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Foreign Investment
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10. (SBU) Foreign direct investment (FDI) inflows into
Poland increased by 22.4 percent in 2004 to reach USDOL7.9
billion, the highest level since the year 2000. Polish
Foreign Investment Agency (PAIiIZ) specialist Aleksandra
Prachowska explains that the current inflows primarily
represent reinvestment, since most major foreign players
have long since entered the Polish market.


11. (SBU) According to Prachowska, the effect of EU
accession on FDI is unclear and nearly impossible to
measure. Statistics cannot yet be gathered on investment
since accession, as new investments will take several years
to be realized and measured. However, Prachowska said she
has personally noted a sharp increase in the number of
inquiries from potential investors since accession. It
remains to be seen whether these enquiries will translate
into actual deals, but PAIiIZ Director Andrzej Zdebski is
confident that 2005 FDI would top the 2004 level.


12. (SBU) According to a recently-published report by
Ernst and Young, Poland is tied with Germany as the most
attractive destination for foreign investment in Europe.
The availability of cheap land and a large, relatively
skilled labor force--in contrast to some neighboring
countries, like Slovakia, that may soon face labor shortages-
-are among Polish strengths that are contributing to the
increase in FDI. However, inadequate infrastructure and a
high level of bureaucracy were highlighted in the report as
areas needing significant improvement.


13. (SBU) Officials said the lack of centralization in the
Polish investment system is also a liability. The Slovakian
government's investment agency, for example, is prepared to
immediately discuss incentive packages with firms
considering investment, while PAIiIZ does not have the same
capability and occasionally has difficulty cooperating with
regional governments. PiS and PO economic advisers
Kazimierz Marcinkiewicz and Rafal Antczak, who are expected
to play an influential role in Polish economic policy
following this year's election, both agreed that reforming
PAIiIZ and elevating the organization to a higher
hierarchical level are among their priorities, alongside
infrastructure development.

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Migration
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14. (SBU) Gloomy predictions of a massive brain drain and
high levels of emigration to the EU countries that opened
their borders to Polish labor--the UK, Ireland, and Sweden -
-have for the most part failed to materialize. Emigration
levels from Poland have been below expectation, in contrast
to several of the other new member states, like Lithuania,
where outflows have surprised observers.


15. (SBU) Analysts are optimistic that migration to
Western Europe will be a transitory phenomenon, as both
prices and salary levels in Poland catch up to the EU
average in the long term. They hope for a "circular
migration" effect, in which Polish workers return home after
gaining experience and skills abroad.


16. (SBU) According to the Poles, migration from the new
EU member states has had a positive economic impact on the
host nation, largely due to the UK's low unemployment rates.
Roughly 100,000 Poles have registered as workers in the UK
since accession, about one-third of which were already in
the country, many probably working illegally. These workers
have pumped PLN 1.7 billion into the British economy, and
there is no evidence of a "flood" of immigrants into
Britain. There is some concern about "brain waste," which
occurs when highly qualified workers from new member states
work in unskilled labor positions in the UK. However, local
Polish observers are encouraged by the fact that Poles
working in the UK are increasingly employed in the business
and management sector, as opposed to unskilled positions in
agriculture and fishing.


17. (SBU) Concerns about a brain drain remain alive in the
medical field. With Poland's nursing schools now turning
out drastically fewer graduates than they did several years
ago, and anecdotal reports of nurses moving abroad, some
worry that loss of skilled workers to Britain and other EU
states could result in a shortage of medical staff at home.
Still, the Polish government remains eager to open more
borders to Polish workers within the EU, in particular
hoping to encourage Germany--still the number- one
destination for Polish workers--to allow Polish workers to
cross the border freely. However, many Polish economists
believe that Germany will remain largely closed to Polish
labor for the entire seven-year transitional period.

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Trade
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18. (SBU) The biggest story of the first year after EU
accession for Poland was a dramatic (38 percent) overall
increase in agro-food exports in 2004. Exports of meat,
dairy products, fresh produce, and sugar rose by 54 percent
to EUR 3.4 billion. This overall increase in agro-food
exports outpaced growth in imports (27 percent),more than
doubling Poland's positive trade balance in the sector to
over one billion euro.


19. (SBU) Polish exports in general increased by 30
percent in 2004 (measured in zlotys). The effect was not
limited to trade within the EU: while exports to EU
countries rose by 27 percent, exports to developing
countries rose by 46 percent. In fact, the most dramatic
increase in trade relations in 2004 was an unexpected 77
percent increase in exports to Russia. According to
Wyznikiewicz, this effect is probably unrelated to EU
expansion and rather seems to stem from an earlier communist
tradition of economic exchange with Russia


20. (SBU) Dynamic export growth in the first five months
of 2005 has continued in dollar and euro terms, though not
so in zlotys because the currency has strengthened so
significantly in the past year. Exports to the EU in
January-May 2005 increased 22 percent in dollar terms from
the same period in 2004 but decreased one percent when
measured in zlotys. Still, increases in exports to
developing countries, primarily in Eastern Europe, fueled an
overall 3.7 percent export increase in zloty terms (28
percent in dollars). Poland's trade balance continues to
improve, with export growth significantly outpacing import
growth in this period (imports increased 16 percent in
dollar terms but dropped six percent in zlotys).

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Energy Sector
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21. (SBU) One of the thorniest issues of EU accession has
been the resolution of long-term contracts in the energy
sector. Over half of the energy on the Polish market is
procured by the government at an above-market rate
established by long-term contracts signed years ago. The EU
is insisting that Poland dissolve these contracts, arguing
they constitute an inadmissible form of public support for
the industry. The government has been working to resolve
the issue through a new compensation bill, but disagreements
prevented it from being passed this term. The PO party
recently put forth its position on the issue, which
advocated privatization of the state-owned energy companies
and the use of the proceeds as lump-sum compensation for
canceling the lucrative contracts.


22. (SBU) But officials the Ministry of Economy were
skeptical that such a plan would work, suggesting that the
likely proceeds from privatization would not cover the high
costs of compensation (up to PLN 26 billion). They think
that ultimately a surcharge may have to be applied to
consumers' electricity bills to pay for the compensation,
but this will not raise prices because consumers are
currently paying a surcharge to cover the above-market price
of the contracted energy. Competition is expected to put
downward pressure on prices, but in the long term prices are
nevertheless expected to rise to the levels prevailing in
the rest of the EU.

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Emissions Trading
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23. (SBU) One of the major anticipated benefits of EU
accession for Poland was access to the EU emissions trading
market, which was expected to bring in billions of dollars
due to Poland's relatively low emissions levels (initially
estimated at 30-40 percent below the country's allocation).
However, bureaucratic delays and disorganization have
clouded the issue. The European Commission allocated Poland
16 percent less emissions for the next three years than the
Polish government requested, partially because two
government ministries separately issued conflicting sets of
data on the country's emissions. Rather than cut its
proposed internal allocations by 16 percent across the
board, the government is now in the midst of a controversial
effort to reallocate the new emissions limit among relevant
industries, several of which want to expand production.
This may make it difficult to stay within the limits. The
thorny reallocation process, as well as the process of
setting up a new emissions administrator, is delaying entry
to the emissions trading system.


24. (SBU) Boguslaw Debski of the Environmental Protection
Institute said he is hopeful Poland will be ready to trade
emissions by the end of 2005, but he admitted there is a
chance the process will not be completed until next year, a
situation he said would be "tragic." Debski said that
overall, Poland will certainly have a surplus of emissions
allocations available to trade, but a number of individual
producers fear they may exceed their quotas.

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Comment
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26. (SBU) Every contact consulted had positive things to
say about the economic impact of EU accession in Poland;
even the overall slowing of economic growth this year was
interpreted primarily as a sign of stabilization rather than
as a cause for concern. Analysts are particularly heartened
by the incipient signs of decreasing unemployment, as well
as by the rapid return of stable prices. But several tricky
regulatory issues remain to be resolved, and their progress-
-much like progress toward adopting the euro--is likely to
rely on the incoming government's degree of motivation.
While it is still too early to draw precise conclusions
about the full impact of the EU accession on Poland's
economy, it seems clear that the doomsday forecasts made
before accession have not materialized.

HILLAS