Kaczynski Foes May Miss Bigger Threat to Polish Budget as Lawmakers Balk

Jaroslaw Kaczynski’s foes say his election as Poland’s president would slow efforts to cut the budget deficit. The bigger impediment may be parliamentary elections next year that will keep lawmakers from acting regardless of who wins the presidency, economists say.

Kaczynski’s showing against Acting President Bronislaw Komorowski in the first round of voting, when he ran stronger than polls predicted, raised investor concern about his go-slow approach to the euro and pledges to boost spending. In fact, legislators seeking to avoid displeasing voters may postpone action on deficit reduction until after next year’s election even if Komorowski wins the presidency on July 4.

“A Kaczynski victory won’t plunge Poland into a crisis overnight,” said Michal Dybula, an economist at BNP Paribas in Warsaw. “On the other hand, a Komorowski win wouldn’t prompt immediate reforms as upcoming elections mean a real risk that fiscal consolidation will be scaled down.”

Poland’s budget deficit widened to 7.1 percent of gross domestic product last year, more than double the European Union limit. Almost 75 percent of expenditures, including subsidies for local government, social insurance and debt service, can’t be altered without special legislation, so any government needs a strong majority to make cuts.

Komorowski won 41.5 percent of the vote in the first round on June 20 to Kaczynski’s 36.5 percent. The mean of 17 polls conducted in June showed a margin of 11 percentage points.

The zloty has fallen 2.5 percent against the euro since June 18, the third worst return among 26 emerging market currencies tracked by Bloomberg. The zloty traded at 4.1461 per euro at 3:45 p.m. in Warsaw, down from 4.132 late yesterday.

Long-Term Focus

“A victory for Komorowski, still the most likely outcome, would be zloty- and generally market-positive in the short- term,” said Nigel Rendell, senior emerging-market strategist at RBC Capital in London. “Longer term, whoever wins, Poland will still face significant challenges, particularly on the fiscal and reform fronts.”

The candidates squared off in televised debates on June 27 and June 30. While Komorowski, 58, won the first contest by 52 percent to 28 percent, his lead narrowed to 41 percent to 37 percent after the second, the daily Rzeczpospolita reported today, citing a poll of 1,000 adults by GFK Polonia.

“The zloty will fall, bond yields will rise” if the 61- year-old Kaczynski wins, said Ryszard Petru, chief economist at BRE Bank in Warsaw. “The short-term reaction of the financial market is less important than longer term prospects for the Polish economy, which needs reforms.”

Political Rivals

The presidential race is the latest episode in the five- year rivalry between Poland’s two largest political parties -- Komorowski’s Civic Platform, led by Prime Minister Donald Tusk, and Kaczynski’s Law & Justice.

Law & Justice defeated Civic Platform in the 2005 general elections. The same year, Tusk lost his presidential bid after leading the first round by 3 percentage points. Kaczynski’s twin brother, Lech, won the runoff by 8 points. Two years later, Civic Platform won early elections after Law & Justice lost its majority in parliament.

Since then, Civic Platform has said its efforts to modernize the country were blocked by Lech Kaczynski, who was killed in April plane crash in Russia. That rhetoric has continued during the presidential election.

‘Cassandra-Like Prophecies’

Law & Justice’s spending programs “are rash enough to trigger a sharp collapse in our public finances,” Finance Minister Jacek Rostowski said in a June 22 interview with Radio Tok FM. Rostowski’s deputy, Dominik Radziwill, said the plunge in Hungarian markets after the new government drew parallels to the Greek crisis showed that reckless comments “can have a disastrous impact.”

“Instead of Cassandra-like prophecies by the finance minister, which only worsen the situation, Civic Platform should immediately come up with an emergency plan,” said Slawomir Sowinski, a political scientist at Cardinal Stefan Wyszynski University in Warsaw. “That may mean calling early parliamentary elections to build a majority that’s able to overturn a presidential veto.”

The president represents Poland abroad, is head of the army and can veto legislation. His veto can be overturned by a three- fifths majority in parliament.

Tired of Excuses

The government has yet to present its 2011 budget or publish concrete measures for meeting deficit target.

“Market players are tired of the excuse about an unfriendly president,” Dybula said. “There is no time left for postponing the reforms.”

The government forecasts Poland’s economy will expand about 3 percent this year, after growing 1.7 percent in 2009, the slowest pace in almost a decade.

Law & Justice last year called for increased spending to offset the impact of the global economic crisis. Kaczynski has campaigned to boost benefits for older people and boosting minimum salary.

“Poland has to be fair to every Pole,” he said June 24 in the city of Rzeszow. Civic Platform intends to “make richer regions that are already rich,” he said.

The country also struggled to articulate a unified euro policy while Lech Kaczynski was alive. The late president and his brother opposed the government’s 2012 target for joining the euro, which was abandoned after the credit crisis.

Euro Policy

Jaroslaw Kaczynski has urged Poland not to surrender the zloty too quickly. He argues the country must first strengthen its economy and boost wages, which are a fourth of the EU average, to reduce the impact of the switch on the poor.

Twenty-five percent of Kaczynski’s supporters favored adopting the euro, compared with 68 percent of those who backed Komorowski, according to an April survey of 1,056 people by Warsaw-based researcher CBOS.

“A Kaczynski victory would add another risk factor,” said Janusz Jankowiak, an economist at the Polish Business Council in Warsaw. “In the case of a Komorowski victory, the markets will want to see budget savings, which no longer can be avoided as the only alternative is market turmoil in the autumn.”

To contact the reporter on this story: Dorota Bartyzel in Warsaw at dbartyzel@bloomberg.net;

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