European_Commission_Report_Convergence.pdf

EUROPEAN COMMISSION

Brussels, 7.6.2011

SEC(2011) 729 final

COMMISSION STAFF WORKING PAPER

Assessment of the 2011 national reform programme and convergence programme for

POLAND

Accompanying the document

Recommmendation for a

COUNCIL RECOMMENDATION

on the National Reform Programme 2011 of Poland and delivering a Council Opinion

on the updated convergence programme of Poland, 2011-2014

{SEC(2011) 824 final}

1. I NTRODUCTION

Poland was the only EU Member State that managed to avoid a recession during the crisis.

But this came at the cost of a rapidly deteriorating fiscal position. In response, the government

has started a fiscal consolidation programme and has introduced structural reforms to tackle

long-standing challenges in the labour and product markets. The reform plans of the

government are confirmed in the National Reform Programme (NRP) and the Convergence

Programme (CP) submitted to the Commission on 29 and 27 April 2011. These documents

also reflect the short-term commitments that the Polish government presented on 28 April

2011 under the Euro Plus Pact.

2. E CONOMIC S ITUATION

2.1. R ECENT E CONOMIC D EVELOPMENTS

Poland experienced strong growth before the crisis. Driven by domestic demand, increasing

interlinkages with global trade networks, foreign capital inflows and credit growth, annual

real GDP growth averaged 5.2 % between 2003 and 2008. Domestic demand thrived on robust

job creation, credit growth and EU funds that helped boost investment and private

consumption. The turnaround in the labour market (unemployment fell by 12.8 pps between

2002 and 2008) was brought about by accelerating foreign direct investment inflows and a

strong export performance by Polish industry, spurred by EU accession and improvements in

price- and non-price competitiveness.

After a period of successful disinflation in the mid-2000s, Polish inflation stabilised at a

remarkably moderate level in 2005-2007. Throughout much of the remainder of the decade,

energy and food prices were the major driving force of inflation, whereas inflation in services

was broadly contained. Consumer price inflation surpassed 4 % in 2008-2009 on the back of

emerging capacity constraints, surging commodity prices and higher import prices (also

reflecting the zloty’s depreciation against the euro by almost 35 % between July 2008 and

February 2009). In 2010, inflation fell to around 2 % by mid-year amid muted domestic

demand before picking up to just below 3 % by end of the year on the back of higher

commodity prices.

The global financial crisis led to a decline in the growth rate of real GDP, but Poland avoided

recession. Real GDP increased by 1.7 % in 2009, down from 5.1 % in 2008. The resilience of

the Polish economy during the crisis reflects the interplay of several factors, including the

absence of large macroeconomic imbalances, relatively low trade openness, a favourable

export structure and a timely monetary and fiscal policy response. Sharp currency

depreciation helped mitigate the impact of collapsing export markets and weak domestic

demand for domestic production. As a result, the current account deficit narrowed to around

2 % of GDP in 2009.

The labour market adjusted through wages and sectoral reallocation of labour from industry to

services. Unemployment rose to 9.6 % in 2010, up from 7.1 % in 2008, despite increasing

employment (by 0.7 % in 2009-2010). Nominal wage growth slowed down in 2009-2010 and

real wages remained broadly stable during this period.

The banking sector also weathered the financial crisis well. The support scheme for financial

institutions included mostly government guarantees. It served as a safety net but was never

used by any financial intermediary. The National Bank of Poland also took some non-

conventional measures to support both the financial sector and the real economy.

In 2010, real GDP is estimated to have grown by 3.8 %. Rebounding external demand fuelled

the domestic manufacturing sector and reduced inventories. Capital inflows picked up as

ample global liquidity, reduced risk aversion and a growing interest rate disparity led to

renewed interest in Polish portfolio assets. As a result, foreign investment in sovereign bonds

grew substantially in 2010, while yields remained stable. Moreover, re-emerging inflationary

pressure led the central bank to start raising interest rates in January 2011.

2.2. O UTLOOK

Economic activity is projected to increase by 4 % in 2011 and 3.7 % in 2012, as domestic

demand strengthens. The improving labour market situation and robust wage growth are

likely to stimulate household demand with an additional boost from the Euro 2012 football

championship 1 . The manufacturing sector is expected to gain from growing external demand,

while services will benefit from increased domestic spending. Construction activity, which

grew during the crisis on the back of sizeable investment in infrastructure, is likely to expand

as an easing off in public investment will be progressively compensated by growing demand

for housing. After deteriorating significantly over the last few years, public finances are

expected to improve in the years to come, driven by an ambitious consolidation package

aiming to reduce the general government deficit to below 3 % of GDP by 2012.

The rate of potential growth is expected to be lower than before the crisis, though the dip

appears to be relatively limited compared to that in the peer countries. Losses to capital stock

have been much more limited than in other countries, as shown by the lower level of

bankruptcies, not least due to moderate expansion of the construction and financial sectors in

the pre-crisis period. The labour market is more flexible than during the previous slowdown,

which limits hysteresis, and labour supply benefited from recent reforms (to reduce the tax

wedge and abolish special early pensions and pension reform). Lastly, increased public

investment in underdeveloped infrastructure network should increase private returns and total

factor productivity (TFP).

In the absence of adverse financial and external developments, GDP growth could average

some 3.5% in 2013-2015 . Unemployment would fall further to around 8.25% at the end of the

period. However, after 2015, unfavourable demographics will kick in and the GDP growth

rate is expected to drop again to below 3 % in 2020.

3. M ONITORING , PROCEDURAL ISSUES AND G OVERNANCE

Poland has ensured that its National Reform Programme and Convergence Programme are

consistent. The two documents outline in an integrated manner the fiscal consolidation efforts

and key structural reforms and reforms underpinning macro-economic stabilisation. The

National Reform programme was adopted by the Council of Ministers on 26 April 2011 after

a consultation with social partners. The Convergence Programme, adopted on the same day by

the government, is expected to be subsequently discussed by the parliamentary commission.

1 The Euro 2012 football championship is estimated to add around 0.2 percentage point to real GDP growth in

2012.

In the National Reform Programme, Poland also set national targets for employment, R&D,

education, energy and climate change and poverty reduction for the year 2020. These targets

set out the longer-term development trajectory to modernise the Polish economy and put

imminent reform priorities in a broader context. In addition, the National Reform Programme

describes Poland’s proposed measures in relation to the Euro Plus Pact.

Table 1: Polish national 2020 targets

Europe 2020 targets

Current situation in Poland 2

Polish Europe 2020 target in

the NRP

R&D investment (% of GDP)

0.68 %

1.7 %

Employment rate (%)

64.6 % (2010)

71 %

Early school leaving (%)

5.3 %

4.5 %

Tertiary education attainment

(%)

32.8 %

45 %

Reduction of number of people

in or at risk of poverty or

exclusion

10 .4 million

- 1.5 million

Energy efficiency – reduction of

energy consumption in Mtoe 3

Reduction in primary energy

consumption: 14 Mtoe (16 % of

the primary energy consumption

in 2005)

Reduction in greenhouse gas

emissions (from sources not

covered by the Emissions

Trading system)

+4 % 4

+14 % 5

Renewable energy (% of total

energy use)

9.60 %

15.48 %

4. P OLICY CHALLENGES , AGENDA AND ASSESSMENT

4.1. C HALLENGES

The consolidation of public finances is fundamental to maintaining the confidence of financial

markets and reining in unsustainable debt. This presents a number of challenges. High

headline and structural deficits are the result of structural weaknesses on the expenditure side

and expansionary fiscal policy during the boom phase. Even though it is below the 60 %

threshold, Poland’s debt has increased, relative to GDP, by 7.9 pps in 2008-2010. Poland’s

fiscal framework has been strengthened recently but some challenges remain. The binding

character of the debt rule is contingent on keeping the definition of public debt unchanged,

but the latter can be adjusted by amending the Public Finance Act. There are problems with

monitoring the implementation of the general government budget throughout the year and this

has resulted in recurrent slippages on the expenditure side, though the new expenditure rule is

This corresponds to the 2005-2008 trend in the emissions not covered by the EU Emissions Trading System.

As the scope of the Emissions Trading System changed between 2005 and 2008, these emissions are

estimated on the basis of the main relevant UNFCCC source categories (as opposed to the difference

between total emissions and EU ETS verified emissions).

5 The national emissions limitation target defined in Decision 2009/406/EC (or ‘Effort Sharing Decision’)

concerns the emissions not covered by the EU Emissions Trading System. It is expressed as the minimum

relative decrease (if negative) or the maximum relative increase (if positive) compared to 2005 levels.

Source: Eurostat 2009 unless stated

3 As estimated by the Commission. Mtoe = Million tonnes of oil equivalent

expected to improve budget execution somewhat. Lastly, a lack of coordination between

various tiers of government in the annual and multi-annual budgetary planning compromises

the efficiency of the process. In particular, the annual Budget Laws and the Multiannual

Financial Plans adopted by the central government do not cover the budgets of local

government sector entities, which set up separate, largely independent financial plans.

The increased foreign portfolio capital inflows to Poland need to be carefully monitored,

particularly in an environment of rising interest rate differentials and abundant global

liquidity. Further fiscal consolidation would support the task of monetary policy in preserving

price stability, thereby helping to limit potentially excessive and harmful short-term inflows

driven by interest-rate differentials.

The increase in overall employment has been reversed and the rates for young and older

workers still lag behind the EU averages . Structural barriers prevent full employment of these

groups. Mismatches between skills and qualifications provided by the secondary and tertiary

education system and actual labour market needs limit the employability of young people and

serious weaknesses persist in the vocational education system. The range of alternative routes

to early retirement available to older workers significantly lowers the effective retirement age

and their employment rate. Moreover, the level of involvement of older workers in training

remains very low (0.7 % in 2009). Lastly, the employment rate of women is increasing but

remains considerably below the EU average. The frequent cause of women being out of work

or in part-time work is the lack of suitable child and dependent care services.

Regional labour mobility is low. It is the result of a lack of affordable housing in fast-growing

urban areas, insufficient transport infrastructure and a relatively more generous social security

system for farmers, dissuading people from moving from rural to urban regions. Low labour

productivity in Polish agriculture is due to unfinished restructuring in agriculture and the

important role of subsistence agriculture. Moreover, the limited shift to the non-agricultural

sector is due to low levels of education and investment in human capital as well as scarce jobs

in rural areas.

In recent years, Poland has significantly reduced the number of people facing poverty and

exclusion measured by all indicators except for the at-risk-of poverty indicator. Children are

particularly affected by the risk of exclusion as poverty amongst this group started to rise

again, reaching 23 % in 2009. In addition, poverty amongst older people sharply increased

between 2007 and 2009. Access to work remains only a partial remedy, as the level of in-

work-poverty is high.

Poland faces a number of challenges related to infrastructure development, energy generation

and the environmental impact of both. The economic crisis has not reduced greenhouse gas

emissions to bring them into line with the 2020 national target. C ompetition among current

electricity providers is limited and there are only a few interconnections with other Member

States, which increases energy costs. Moreover, the energy generation capacity is ageing

(45 % of capacity is more than 30 years old and 77 % is more than 20 years) and reaching its

limits. Furthermore, Poland’s underdeveloped transport infrastructure continues to be a major

bottleneck to growth. Investment appears to be driven by the short-term availability of

structural funds and the policy is focused mainly on road construction. Neglecting other

modes of transport, including railways, also indicates a lack of focus on environmental

sustainability.

The low level of public R&D, which reached only 0.48 % of GDP in 2009, is the result of

insufficient long-term financial commitment to increase public funding for research and

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