Will Poland Lead Europe? The Economic and Political empowerment of Poland

As Europe navigates treacherous waters, Germany and France, the traditional helmsmen, appear to be steering with a hand hesitant and unsure, leaving the continent adrift and longing for visionary leadership. Poland stepping in and taking over the wheel of Europe may seem presently inconceivable, but the future of the nation should not be dismissed to lie with the European periphery– we may very well soon find ourselves at the beginning of a Polish golden age.

Indeed, for over two decades, Poland has been on a remarkable journey of growth and development – a testament to the unwavering ambition of up-and-coming Eastern European nations. The strong fundamentals of the Polish economy are exemplified by its notable resilience, both in 2009 – emerging virtually unscathed at a staggering 2.7% growth (2008-2013) – and in 2020 – experiencing a comparatively mild dip of -2% real GDP growth, versus the -5.6% across the European Union (EU). Now at a pivotal crossroads, Poland must consider how to effectively leverage its potential and become the European powerhouse it aspires to be.

In this article, we consider the unique position of Poland within Europe, exploring the economic history of the nation since 1989, focusing in particular on the factors which propelled its growth forward. We then consider how Poland may harness an unprecedented opportunity to reshape the dynamics of the EU and the European continent – and, what challenges it may face while attempting to do so.

Post-1989: The Path Towards the West

Following the fall of the Iron Curtain, the economies of Eastern Europe embarked on a journey to ‘become like Western Europe’, with the prospect of enjoying the many benefits of the European Union on the horizon. To achieve accession, they would need to meet a strict set of politically and economically liberal conditions under the Copenhagen Criteria. Thus, Poland’s new policymakers – democratically elected, well-educated in the West, and aided by bodies such as the International Monetary Fund and the World Bank – commenced the securing of a swift transition to a stable free market economy.

Under the ‘Balcerowicz Plan’, named after Finance Minister Leszek Balcerowicz, Poland engaged in ‘shock therapy’ – swift and transparent privatization of enterprises, liberalization of ≈ 90% of prices, deregulation of foreign trade, devaluation of the currency (zloty), … While the aggressive nature of shock therapy is not without criticism, rapidly changing the structure of the economy to the initial detriment of inefficient companies and their employees (with unemployment reaching 16.4% in 1993) – its promising results were promptly apparent. A Schumpeterian wave of ‘creative destruction’ may be recognized, as the subjection of inefficient companies – formerly kept alive by state subsidies under communism – to free market pressures and competition allowed for the survival of only the most productive (or the most innovative) businesses. Indeed, state-owned enterprises in particular faced difficulties in becoming more efficient; the key driver of growth was thus not the restructuring of these old enterprises (with large bureaucratic overhead and fixed costs), but rather the creation of dynamic new private businesses that could thrive in a competitive environment at a low fixed cost. As Slay (2000) documents, the early drivers of growth were found in investment and exports (though note that the latter would later decrease in favour of domestic consumption, which is the prime driver of growth today).

What makes Poland Special?

Of course, all of Eastern Europe engaged in similar structural transitions – so, what makes Poland special? Indeed, the situation is further mystified when one considers that Poland is not particularly well-endowed in natural resources, nor engaged in excessive government stimulation of the economy. And yet, it was able to maintain positive growth in times when its counterparts faced crises – such as the currency crises occurring in Czechia in 1997 or Russia in 1998 (or, more recently in 2008). Thus, we must ask the question: what are the unique fundamentals of the Polish economy that grant it this remarkable resilience?

Firstly, and importantly, Poland managed to organize its privatization process in such a way that already influential actors under communist rule were largely not able to seize state assets or manipulate capital in order to endow themselves with greater wealth and political power – in other words, Poland minimized the development of oligarchs that could impede the transition process and undermined the development of democracy (as was particularly the case in Russia). The benefits of growth were (and are) thus distributed amongst the population through higher incomes and greater opportunity, instead of being concentrated amongst rent-seeking elites. Interestingly, both Poland and Russia engaged in a similar shock therapy – however, the reason it led to the creation of oligarchs in Russia, and not in Poland, was because Poland ensured that appropriate market regulations and property laws had been established. Further possible reasons for the relative avoidance of oligarchs in Poland may be due to the decentralized nature of the Polish government, political party funding laws limiting external influence, or even a cultural distrust of the excessively wealthy and/or powerful due to historical or cultural/religions reasons (particularly through Catholicism).

Secondly, the egalitarian preconditions created under communism allowed for equality of opportunity as never before seen in Poland, allowing for greater inclusivity both in professional opportunities and educational attainment. Indeed, according to the 2018 OECD PISA study examining various categories of educational attainment, Polish 15-year-olds consistently rank amongst the top 11 of 78 participating countries – above many Eastern and Western European counterparts, including Germany and France. Additionally, according to the 2022 EF English Proficiency Index, Poland ranks 13th in the world in English fluency – solidifying its ambitions and attractiveness for international politics and business. The expansion and improvement of Polish education allowed for human capital formation, whose high skills and relative affordability gave Poland a competitive edge. According to a 2018 McKinsey report, education and experience of workers have made up 19% of GDP growth from 2004-2008, which will rise to 41% from 2018-2030. However, as wages rise with increasing development, the Polish labour market may also need new pushers of growth, such as ensuring greater productivity or increasing the number of workers, e.g. through skilled migrants (perhaps from Ukraine).

It is particularly Poland’s domestic market, which not only allows for a degree of self-sufficiency that protects it from external crises, but is also a key driving force behind economic growth. In this regard private consumption has been essential, originating from low unemployment (2022: 2.9%) and rising wages. That is not to say that the Polish economy is immune to external forces – for instance, Poland is particularly dependent on Germany, its largest business partner. Indeed, Polish manufacturers benefit greatly from seemingly no shortage of demand from Germany, such as for the more economical Polish cars during the 2009 crisis. Additionally, the impact that the 2004 EU accession had on Poland cannot be overstated – When Poland joined the EU, it was one of the poorest member states, while now it is the sixth largest economy in the EU. EU accession allowed for, what the Guardian calculates to be, ‘one of the largest wealth transfers between nations in modern history’ with investment equivalent to double the value of the Marshall Plan (2014 $ values). Indeed, EU Structural Funds and Cohesion Policy allowed for massive infrastructure development and bridging of regional disparities, while the Common Agricultural Policy lent large subsidies to Polish farmers. Still today, Poland is the largest recipient of EU cohesion funds. On top of this, accession opened the door for greater freedom of movement (of goods, services, capital, and labor) in a larger European Single Market, now roughly 450 consumers strong. Poland was finally lent a greater political legitimacy and attractiveness to foreign business through the stable reputation of the EU and the adoption of EU financial regulations – this resulted in an astonishing increase in foreign direct investment, 2.5 times greater in 2004 than 2003.

A Golden Opportunity?

Poland’s strong fundamentals place it in a unique position within Europe – located at the crossroads between the West and the up-and-coming East, Poland may naturally take on the role of representative of the latter. Possessing the biggest population (≈ 38 million) and surface area amongst Eastern European countries lends it additional weight.

As the war in Ukraine pushes Europe’s political focus towards the east, Poland, in particular, has become recipient to political clout – its previous warnings of Russia, particularly of German-Russian economic relations, and its underlining of the importance of the military (being one of the only countries meeting NATO guidelines on defense expenditure), created a turning of the tables of the moral high ground, as Senior Policy Fellow Piotr Buras of the European Council on Foreign Relations comments.

Indeed, Poland’s newfound political dynamism is apparent in its role as a starch advocate for the support of Ukraine, accepting over 3 million Ukrainian refugees (the most of any other country) and providing 2.55 billion US dollars in military assistance (as of January 2023), as well as through the strengthening of the US-Polish security partnership, as exemplified by Joe Biden’s speech on the anniversary of Russia’s invasion taking place in Warsaw.

The rise of Poland’s importance in the European political space coincided with the decline of the traditional German-French leadership alliance at the head of the EU. The European power-couple has seemingly fallen into a row, with unified leadership dwindling – from energy to defense policy and beyond. For instance, France has refused Germany’s Mid-Cat gas pipeline ideas, instead making separate deals with Spain and Portugal. On the other hand, Germany blindsided France by stalling a range of German-French military objectives in favor of their own, including an air defense program associated with 13 different NATO members. With an apparent leadership vacuum present – will Poland take the reins of Europe?

Politico has previously noted that a Polish-Baltic alliance, particularly in matters of defense policy amidst the war in Ukraine, could be a contender for an EU leadership alliance. Exemplary of greater collaboration within the Baltic space may be the 2020-founded ‘Lublin Triangle’ between Poland, Lithuania, and Ukraine (in reference to the large and powerful Polish-Lithuanian Commonwealth of the 16th and 17th centuries). Though Politico concludes that Poland (and its eastern cousins) lack ‘the economic weight and political connections to lead’, it would perhaps be truer to conclude that the coming decade – and the coming years especially – will be decisive in determining whether Poland will achieve the strength to earn a powerful seat at the leadership table of the EU and Europe.

The question of whether Poland achieves this goal or not is not one of whether Poland can or cannot – but rather, if it wants to or not. The increasingly authoritarian demeanor of the Polish ruling party not only leads to the blocking of important EU funds, but also threatens Poland’s political legitimacy.

Concerns about steps taken by the ruling party PiS (Prawo i Sprawiedliwość, ‘Law and Justice’) to undermine the independence of the Polish judiciary have previously led the EU to withhold billions of euros in funding until Poland addresses the issue. These funds include €36 billion in pandemic recovery funds, as well as €75 billion in cohesion funds. Their freeze not only impairs the investment plans of local Polish governments, but could also very well complicate the recovery of the Polish economy, which, despite its strong fundamentals, is struggling. Indeed, an uncertain economic environment has contributed towards a slowing of economic growth to 0.7% in 2023 (compared to 5.1% in 2022) as real incomes are affected by the 11.7% high inflation. Simultaneously, the budget deficit is expected to rise to 5% of GDP in 2023, owing to the large aid packages of the state. Note that although a Polish plan to address the rule of law concerns has been approved of by the European Commission, it will first have to be implemented before any funds are released.

The animosity between Poland and the EU reveals that Poland may just not have enough friends to take the lead over Europe. Not only has Poland fallen into legal trouble with the European Union, including being fined €1 million per day (later €500 thousand) for non-compliance with the ruling of the European Court of Justice on a rule of law dispute, but it has also soured relations with Germany as PiS continues an anti-German propaganda campaign in an attempt to secure electoral support. Fearmongering of a German plot to reform the EU into a ‘Fourth German Reich’ with Poland enslaved to German-Russian powers, draws on the historical trauma of the country. Indeed, old wounds have resurfaced as PiS demands Germany to pay €1.3 trillion in reparation payments for the second world war. In the case of Russia, Polish suspicions were proven to be well-founded – however, unfound accusations and aggressions made on the basis of populist tactics towards supposed allies, with Germany also happening to be Poland’s largest business and trading partner, leads one to question the reliability of Poland as a political ally. The political instability the ruling party engineers within the EU is not one expectant of a leader, but rather that of a hot-headed periphery country.

Conclusions

Poland is in an unprecedently fortuitous position to improve both its political and economic standing – the overcoming of political rifts between Warsaw and its counterparts in Berlin and Brussels is integral to ensuring its political future, since, regardless of its economic strength, it will otherwise be subject to the sidelines of Europe. However, in a scenario where political barriers are overcome, we may well stand at the onset of the golden age of Poland. Coupled with the un-freezing of EU funds and a sober but ambitious economic policy, Poland could sprint towards the finish line of becoming a major, globally competitive economy – according to a 2018 McKinsey report, Poland has the potential to double its GDP by 2030.

Are these likely scenarios? It is difficult to conclude – protests against the ruling party, some of which reached half a million people in size, may signify a changing of the winds. However, we will not know for sure which path Poland will strive to follow until after the elections in Autumn 2023. What is clear is that the policy decisions taken by the Polish government in the coming months will determine the trajectory of Poland in Europe for the foreseeable future.