Polish $300 Billion Aid Package Hides EU Expansion Flaws

The pristine metal and glass laboratories and landscaped lawns of the Olsztyn Science and Technology Park are a shiny emblem of Poland’s transition from communist state to European Union member, at least on appearance.

Paid for with EU aid, the $23 million development 200 kilometers (124 miles) north of Warsaw opened in November to attract startup companies. Yet with two smaller science parks already close to the northeastern Polish town, half of the space remains empty in a region with among the highest poverty rates in Europe and where more people are leaving than arriving.

“The EU certainly helps fulfill Polish dreams, even the completely unrealistic and costly ones,” said Sylwia Tymicka, 40, who set up her accounting and business advice company in Olsztyn just as Poland joined the EU on May 1, 2004. “That often leads to spending for spending’s sake. It doesn’t correspond to basic needs.”

As Poles mark 10 years of absorption into the world’s biggest single market, the fault lines remain.

Halfway through a 229 billion-euro ($317 billion) EU aid package, more than the entire Marshall Plan for postwar Europe in today’s dollars, the money kept the Polish economy growing when the rest of the continent went into recession. The new business parks, highways, soccer stadiums and airport terminals also mask how for many Poles the passage to prosperity is still to come, with 17 percent of families of four living on less than $400 a month.

Poorest Regions

After two decades of uninterrupted growth, International Monetary Fund figures show gross domestic product per capita adjusted for the cost of living caught up more quickly with the EU average than in Hungary or the Czech Republic, also among the 10 nations absorbed by the eastward expansion.

Yet, in Poland it remains at about 62 percent of the average, surpassing Hungary, though still below the Czechs. Five of the EU’s 20 poorest regions are in Poland.

Unemployment is 13.5 percent. While that’s half the rate of crisis-hit Greece, it’s higher than Ireland, whose economy shrank for four of the last six years and remains a destination for many young Poles. Among those working, more than 1 million earn less than 5 zloty ($1.66) an hour.

“The only way to alleviate the misery is by drafting projects that directly concern this social group,” said Marcin Krol, who was a member of the Solidarity movement committee that negotiated the end of communist rule 25 years ago and is now a sociology professor as Warsaw University. “Many governments have come and gone without affecting their situation whatsoever. Then came the EU programs, which failed to improve it either.”

Red Tape

Tymicka blames the red tape involved with accessing the money for smaller businesses, even in a country used to four decades of communist-era bureaucracy.

Poland ranks 45th in the World Bank’s latest Doing Business report covering 189 countries, placing it in the top 25 percent. When it comes to starting a business, it slips down to 116th, beneath Ivory Coast and Yemen.

Zortrax, a startup that makes three-dimensional printers based four blocks down the road from the Olsztyn science park, is exactly the kind of company it was meant to attract. Karolina Boladz, one of Zortrax’s three founders, raised $200,000 for the business through a crowd-funding program. She said it was quicker than embarking on an application for EU money.

Too Slow

“We couldn’t risk wasting time and energy,” Boladz, who at age 25 is as old as Polish capitalism, said in her office holding a toy tiger printed in blue plastic on the company’s flagship product. “We don’t need to wait for the EU to tell us what’s good for us. Our plan is simple and efficient. It seemed beyond the EU’s funds framework.”

The Olsztyn site attracted the attention of Poland’s Supreme Audit Office, which challenged eight out of 60 science and technology parks over the past two years, saying they didn’t do enough to warrant the investment. The warning fell on deaf ears and construction in Olsztyn began in 2012 to create 11,000 square meters of lab space, the equivalent of 1 1/2 soccer fields.

There’s little doubt most big-ticket items the EU money has bankrolled helped successfully transform the country.

A Polish government report this week showed domestic companies have completed 62,600 projects to the tune of 85.5 billion zloty in EU financing. There are 683 new sewage plants, 700 investments in renewable energy, 13 brand new or modernized airports, as well as scores of schools and kindergartens. Then there are the 1,481 kilometers of new roads, with expressways linking Warsaw with the rest of Europe. You can now drive to Barcelona without leaving the network.

Learning Lessons

“The EU is vigilantly monitoring spending and evaluating its purpose and use,” Janusz Lewandowski, a Pole who is responsible for the EU’s budget at the European Commission, said in February. Municipalities in Poland “should learn from the example of other countries” that wasted EU aid, he said during a trip to Warsaw.

The EU funds from the bloc’s seven-year budget cycles are giving Poland a chance to catch up with the west of the continent after a beleaguered 20th century.

The Solidarity movement against the communists in the early 1980s led to martial law being imposed by the regime. Earlier, the country’s population was decimated and its cities destroyed during World War II. Warsaw had 80 percent of its buildings leveled, as the Soviet army entered and the Germans departed.

The Marshall Plan for European recovery was $150 billion in current money, though Poland didn’t get a cent because it was part of the Russian-dominated eastern bloc as the military conflict gave way to the Cold War. It was the revolutions of 1989 that put it on the road to EU accession.

Unbroken Record

A survey last week found 89 percent of Poles in favor of that integration, the highest since 2007, with 62 percent of respondents of an opinion that it provided more benefits than disadvantages, especially when it comes to roads and other basic infrastructure. Warsaw-based researcher CBOS questioned 1,098 adults in February and March.

The aid contributed as much as one percentage point of growth each year, according to the Ministry of Infrastructure and Development. That kept the economy expanding when the rest of Europe went into sharp reverse in 2009.

“Even with the turmoil in the world economy, the last decade was fruitful for Poland,” said Marek Buczak, a money manager at fund company Quercus TFI SA in Warsaw. “The majority of the EU funds were invested in infrastructure, which increased competitiveness.”

Low Debt

Poland’s national debt is capped at 55 percent of its economic output by law, a level most of western Europe can only dream of. The debt-to-GDP ratio in Spain, a country with a similar population that emerged from a dictatorship 15 years earlier, is about twice that, as is unemployment.

Poles, though, are still heading for the exit in droves, taking advantage of another opportunity opened by EU membership: freedom of movement.

At least 2.5 million Poles departed the country over the past decade, with 300,000 later returning, according to the Central Statistics Office in Warsaw. About half a million Poles left last year, the largest emigration wave after the exodus immediately after Poles became EU citizens, based on a study by Krystyna Iglicka, a professor of demography in Warsaw who looked at labor markets in western Europe. The average age of those who quit the country in search of jobs and prosperity is 32, the statistics office said.

‘No-Brainer’

Only 17 percent of Poles wouldn’t consider emigrating for work, according to a survey by the Milford Brown Institute. Among Poles younger than 34, the group shrank to 8 percent. “This is no surprise,” said Tymicka, whose son, Zorian, 19, plans to leave as soon as he finishes high school. “Emigration has become sort of no-brainer for young Poles.”

More than 600,000 went to Britain, where the latest census data gathered from Warsaw showed Polish women are now twice more likely to have children than in their native country.

In Skajboty, a village 15 kilometers from Olsztyn in the heart of Poland’s Land of Thousand Lakes where storks and eagles swoop around the forests and waterways, Ewa Legierzynska is resigned to losing another child to the migration wave.

Of her five daughters, four quit the village, with two leaving the country, and the fifth girl will most likely follow her sisters. “Regardless of how beautiful the area is, life here has no prospects,” said Legierzynska, 66.

Giving Children

One of her daughters is now based in Brussels and another in Berlin, while two live in Gdansk, in northern Poland.

“We are located at the end of the world, but we give our children to the world, so the world will eventually find out about us,” she said. In the neighboring house, 11 children left Skajboty for Ireland and Scotland.

Rafal Mikulowski, 53, returned to Poland two decades after leaving for France as a child in 1969. He settled near Olsztyn, where he runs a foundation that uses art to educate children. He said the exodus resembles the aftermath of a catastrophe.

“The usual reasons for large waves of emigration are war, famine and natural disasters,” said Mikulowski. “We freed the country, we strengthened democracy and we even evaded recession, yet all the young people from around here have either left or talk about nothing else but leaving. I doubt anyone will be left to use those parks built with the EU money.”

Making Money

While critics like Mikulowski talk of the kind of white elephants built by indebted euro-region nations Spain, Portugal and Greece, plenty of people have made money on the back of Poland’s graduation to an EU state.

The economy has more than doubled since the collapse of communism. Poland’s accumulated GDP gained 46 percent in years eight years after EU membership, when the euro region increased by 9 percent, according to Eurostat data.

Polish 10-year government bonds returned 124 percent since May 1, 2004, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies. Polish euro-denominated debt of the same maturity currently yields 2.38 percent, less than EU founder member Italy.

The benchmark stock index, the WIG20, has risen 40 percent since EU accession, led by companies such as Europe’s largest copper producer, KGHM SA, and PKO Bank Polski. While the gain is less than that of Germany’s DAX Index, which has soared 148 percent, it’s more than benchmarks in France and Spain.

In Warsaw, where per-capita incomes are three times the national average, glass skyscrapers are still sprouting up, reflecting the city’s status as a modern financial center and the biggest market in the region.

EU Convergence

“The convergence of the Polish economy supplied with EU subsidies made it possible for the capital market to gain importance,” said Buczak, the fund manager at Quercus, which set up in 2007, the year before the global financial crisis started sinking businesses elsewhere. “Nevertheless the coming years are going to be a challenge to the Polish economy.”

Few people in the country understand that more than those the region of Olsztyn, where GDP per capita is 46 percent of the EU average. The unemployment (POUER) rate is as high as 34 percent in some parts. The region received 1.5 billion euros of EU funds since 2004, excluding subsidies for farmers.

“If you tell me that some foreign investors view Poland as a success story, then I’m just stunned,” said Tymicka.

More help is on the way. In January, the EU concluded its 2014-2020 budget, pledging a total of 115 billion euros in aid for Poland, including 32 billion euros for agriculture.

More Cash

The country will remain the largest beneficiary of EU funds until the end of this decade, which should help it join the top 20 global economies by 2022, Prime Minister Donald Tusk said at the time. The country’s GDP by then probably will reach 80 percent of the EU average and at least 1.5 million Poles will exit poverty, said Tusk, in power since 2007.

Polish local governments “will now have more funds at their disposal so that ordinary people get better access to the money,” said Marceli Niezgoda, deputy minister for infrastructure and development in Warsaw. He helps oversee how the EU money is spent. “They know their regions and their needs so they can react more quickly.”

In Olsztyn, once famous across the eastern bloc for its Stomil tire plant and whose lakes were a recreational area of choice for communist leaders, entrepreneur Szymon Piekarz is counting on it. The 30-year-old returned five years ago from a stint in Britain where he started Limtel, a software company. He just moved into the new science park.

“Almost everybody is asking me why I came back,” Piekarz, who employs 15 people and plans to double that team by the end of the year. “I see the manifold changes that have occurred. This makes me believe the EU money has had an effect.”

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

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Rodney Jefferson

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