WARSAW (Reuters) - Stung by the end of an economic miracle which let him sell Poland as a green island of growth in a barren continent, Prime Minister Donald Tusk is under increasing pressure to give a little ground on his tough line on budgets.
A stream of indicators show the only country in Europe to avoid recession throughout four years of financial turmoil is finally succumbing, helped by the end of the huge cash injections for the Euro 2012 football tournament.
For a nation conditioned by 20 years of almost uninterrupted growth since the overthrow of the Communist system, it is coming as something of a shock.
Tusk has said he will announce a contingency plan next month to be launched if the outlook worsens for the EU’s biggest eastern economy. There are signs that could yet include easing back on deficit targets for later years which seem excessive to some at a time when the euro zone is slipping into recession.
But similarly to the UK, where thousands of Poles earn their daily bread, both Tusk and Finance Minister Jacek Rostowski are reluctant to give much ground for fear of undermining their credit rating and appeal to financial investors.
“The pace of the reduction could be slower,” Rostowski said on Friday, giving the first cautious official hint that he could tweak plans to reduce the deficit to 2.2 percent of national output next year and below 1 percent in 2015.
Two government officials have told Reuters that the cabinet could consider instead keeping the deficit stable at 2.9 percent of GDP next year.
But the worry among economists is that backing off the previous targets, among the most rigorous anywhere in Europe, will be too little too late.
There are signs everywhere that what some people dubbed Poland’s “economic miracle” is losing its magic.
To the south of Warsaw, office blocks and shopping malls that sprung up in what, until just months ago, were farmers’ fields now signs on them which read: “Do Wynajecia” - To Let - a good indicator that demand is lagging behind supply.
Where ministers would previously hold news conferences in front of a map that showed Poland in green and the rest of the world in red, the “green island” phrase has now been dropped from officials’ vocabulary.
But Tusk and his economic team have made getting the deficit below the European Union’s 3 percent of gross domestic product (GDP) ceiling by the end of this year a cornerstone of policy and he and Rostowski have staked their reputations on the idea.
“The government’s in a tight spot,” said Janusz Jankowiak, a former advisor to the government. “On the one hand it must find ways to help growth, on the other, it cannot afford to drop its debt and deficit plans as that would scare off markets and ratings agencies.”
At least as long as the economy was generating growth, responsible fiscal policy kept the zloty currency healthy, and borrowing costs for Polish companies, consumers and government relatively low for a still developing economy.
But cutting another two percentage points off the deficit over the next two years would seem a step too far if, as some analysts say, the economy is slowly in danger of contracting.
The central bank predicts growth will slow to 2.9 percent this year and 2.1 percent next, from 4.3 percent in 2011. A majority of analysts polled by Reuters predict higher growth next year, at 2.6 percent, but others are more pessimistic.
A source close to the government told Reuters on condition of anonymity that the government forecasts were too optimistic and that growth in the first few months of next year may fall below 1 percent year-on-year.
Michal Dybula, an economist at BNP Paribas, went further. “There is a growing risk that we will soon have a technical recession,” he said.
Poland’s approach has looked increasingly rigid at a time when leaders in other parts of Europe, particularly French President Francois Hollande and Italian Prime Minister Mario Monti, have been questioning if fiscal discipline is still the right response to the slowdown.
But Tusk and Rostowski both come from a neo-liberal tradition that has its roots in the Polish economists, led by Leszek Balcerowicz, who designed the shock therapy transition from communism.
Rostowski, born in London to a family of Polish exiles, has been in his job since 2007 and is the combative architect of the policy of fiscal discipline.
When EU commissioner Olli Rehn expressed concern about whether Poland and some other EU states about were on track to cut their deficits, Rostowski wrote a blistering reply saying Poland was doing better on deficit reduction than most other members of the bloc.
After expending so much capital championing his policy of fiscal discipline, departing from it now would mean an embarrassing loss of political face.
The other classic response to a slowdown is to cut interest rates. The central bank is likely to do that, but only modestly. It raised rates only 3 months ago, and may not want to be seen performing a dramatic U-turn now.
Ultimately, compromising on its cherished deficit target may be the price Poland’s government has to pay for keeping the economy out of recession.
“Growth is something that must be cared for,” said Dybula, the economist at BNP Paribas. “After all, the economy is about people, not targets.”
Additional reporting by Marcin Goclowski; Editing by Christian Lowe and Patrick Graham