EU’s ‘Funding Machine’ Has Poland Waiting to Make Up Lost Ground

  • Deputy development minister says EU funding will kick in soon
  • GDP growth stumbled last quarter, highlighting vulnerability

The European Union’s biggest recipient of funds needs the handouts to pick up again to set the gears of the economy running faster after a slowdown.

After decelerating last quarter to the slowest since 2013, Poland’s economy is poised to speed up as inflows resume, according to Deputy Development Minister Jerzy Kwiecinski. A delay of about a year in their disbursement was the main reason for the stumble in growth, he said in an interview in Warsaw.

“We literally fell into a vacuum in the first quarter, but the funding machine has already been switched on,” Kwiecinski said “So the second half of the year will already be supported by inflows of EU funds, while next year we’ll see the funds up and running in full.”

With Poland at odds with the EU about the state of its democracy and institutions, and the new government looking to curb the nation’s reliance on foreign financing, its economic performance continues to hinge on assistance from the bloc. It’s halfway through a 230 billion-euro ($258 billion) EU aid package, which helped it avoid a major downturn throughout the global financial crisis.

‘Too Slowly’

While the European Parliament allotted Poland 107 billion euros from the 2014-2020 budget two years ago, the funds have yet to kick in because of “prolonged negotiations and implementing new projects too slowly” before the new government took over last year, Kwiecinski said.

The six-month-old cabinet led by Beata Szydlo needs to quicken growth to be able to pay for its generous program of social spending. The Law & Justice party won an unprecedented parliamentary majority in October, months after after its ally, Andrzej Duda, became president.

Threats stemming from planned spending increases in Poland already prompted Moody’s Investors Service to cut its outlook on the sovereign to negative this month amid growing investor concern over government policies. Fitch Ratings has warned that an economic slowdown can further increase fiscal risks a year after the country exited the EU’s excessive-deficit procedure.

“Reopening it would damage policy credibility and potentially result in financial sanctions via reduced disbursement of EU funds, which have been a key driver of Poland’s economic growth since EU accession in 2004,” Fitch said last week.

Economic Crutch

The Development Ministry is considering some 800 applications for about 90 billion zloty ($23 billion) of EU financing, and it’s hopeful the economy will absorb at least 60 billion zloty this year, Kwiecinski estimated. That alone is set to boost gross domestic product by as much as 0.6 percentage point, putting it on track for an increase of 4 percent in 2016 from 3.6 percent in 2015, he said.

With the EU lending a hand, and the government seeking to harness 1 trillion zloty for investment in manufacturing and innovation, Kwiecinski said he stands by his forecast that growth may even reach 5 percent in 2017. The amount of the program is equal to almost half of Poland’s GDP.

The economy grew 3 percent in the first quarter from a year earlier, compared with 4.3 percent in October-December. Full-year growth will be 3.6 percent this year and then stall at 3.5 percent in 2017 and 2018, according the median forecasts in Bloomberg surveys.

Harnessing Investment

The government approved the multi-year investment program three months ago, basing almost half of it on EU transfers, with additional contributions from savings of domestic companies, excess liquidity at banks and loans. The goal is to help the country of 39 million people catch up with wealthier EU members, building a more inclusive model of growth that’s less dependent on foreign capital.

“Works on the plan are proceeding and its economic effects should be seen in the second half of this year,” Kwiecinski said. “Next year our pro-growth actions will coincide with a stronger impact of EU transfers, and that’s my justification for the 5 percent GDP growth forecast.”

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