Brexit-Weary EU Presses Poland Over Backsliding on Democracy

1469625908_GettyImages-536302876

Frans Timmermans.

Photographer: John Thys/AFP via Getty Images
  • EU moves closer to first-ever threat to strip voting rights
  • Row is affecting investment, may hit ratings, economist says

The European Union, reeling from the U.K.’s vote to leave the 28-nation bloc, took an unprecedented step closer to suspending Poland’s voting rights, saying the bloc’s biggest eastern member hasn’t done enough to uphold democratic values.

Escalating the first-ever probe into rule-of-law in a member state, Frans Timmermans, the European Commission’s principal vice president, gave the government in Warsaw three months to respond to recommendations on restoring the highest court’s ability to effectively review legislation. The stand-off has weighed on Polish assets and undercut investment, while prompting S&P Global ratings to downgrade the sovereign in January.

“Despite the dialog pursued with the Polish authorities since the beginning of the year, the commission considers the main issues that threaten the rule of law in Poland have not been resolved,” Timmermans said in Brussels on Wednesday. “The commission is recommending that the Polish authorities take appropriate action to address this systemic threat to the rule of law as a matter of urgency.”

Poland’s government, which won elections last year after promising to stand up to Brussels, said the EU is wasting its time on perceived lapses in its democratic track record and should instead focus on resolving the migrant crisis and ensuring more members won’t follow the U.K. in choosing to leave the bloc. The EU probe can potentially lead to the country of 38 million people losing its vote at EU meetings. But that’s a worst-case scenario that would require agreement from all 27 other countries in the Union, something that Hungary has said it will never back.

‘Premature’ Reaction

The commission’s comments are “premature” and the EU’s executive risks ‘losing its authority,” Poland’s Foreign Ministry said in a statement on its website. The Polish government, led by the ruling Law & Justice Party, is “determined” to restore a stable foundation for its Constitutional Tribunal, it said.

For a QuickTake explainer on Poland’s standoff with the EU, click here

Last week, Law & Justice overhauled the top court’s regulations for a second time in nine months, after its previous overhaul thrust the country into its worst dispute with European and U.S. partners since the Cold War. The revamp, which still needs to be signed by President Andrzej Duda to become law, falls short of meeting recommendations from Europe’s democracy watchdog, the Venice Commission. Among other issues, the watchdog criticized the government’s failure to implement past tribunal rulings and Duda’s refusal to swear in justices lawfully picked by the previous parliament.

“We’re not passing judgment on individual laws. We’re passing judgment on the issue that, if you have constitutional court, or tribunal like in Poland, it needs to be able to function,” Timmermans said. “And for it to function in Poland, it’s rulings need to be published.”

‘Good Place’

Law & Justice won’t back down unless the row endangers cash transfers that Poland receives from the EU’s common budget to help catch up with west European living standards, according to political analyst Wojciech Jablonski. The EU may fine Poland, the bloc’s biggest beneficiary with 107 billion euros ($118 billion) allotted in the 2014-2020 fiscal plan, if the budget deficit breaches 3 percent of gross domestic product.

“Poland is and will continue to bite the hand that gives it money as long as its funds aren’t at risk,” said Jablonski. Poland is “in a good place” to pursue its tough stance on the tribunal, he said, as the EU is preoccupied with Brexit, the immigration crisis as well as political instability in Turkey.

The zloty currency was worst performer among emerging European peers on Wednesday, losing 0.2 percent against the euro, and is the second-worst in the region this year after the Turkish lira. Businesses are slashing investment spending amid the rising political risk, even as new family subsidies implemented by the government are boosting consumption and limiting the impact on economic growth.

“Escalation of the EU conflict increases the risk of further credit downgrades,” said Michal Dybula, the chief economist at BNP Paribas SA in Warsaw. ”If this is coupled with decisions that are negative for public finances, it may impact rating decisions in the coming months and boost the risk premium on Polish assets.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE