The Star Student

The leaders of most E.U. members all too aware that European integration must move forward if it is to avoid moving backward, but are reluctant to take the plunge. Poland, by contrast, suffers no such angst. For while it weathered the E.U. recession and the euro crisis with aplomb, it’s well understood that the country’s long term prospects for economic convergence with its far more affluent neighbors to the west are closely tied to European integration. (The Polish Prime Minster Donald Tusk is pictured above at the Nobel Prize ceremony with German Chancellor Angela Merkel and French President Francois Holland.)

To understand where Poland wants to go, consider where it’s been for the past few decades. Long gone are the days of post-communist trauma, when shock therapy transformed the centrally-planned economy to a free market model. Poland was the only country in the European Union to avoid recession altogether in 2008-2009. The economy grew by 12 percent between the third quarter of 2008 and the first quarter of 2012 — a striking contrast to zero growth in the European Union as a whole. Polish exports did take a knock in the peak year of the crisis, falling 16 percent in 2009. But in 2010 they rebounded by 23 percent, then settled down to a healthy 12 percent growth rate in 2011.

Poland’s economic stability, moreover, is recognized by the capital markets. The yield on Poland’s euro-denominated 10-year government bonds is now hovering around 2.5 percent. Comparable Spanish bonds yield 5.8 percent, while Hungary is paying 7 percent.

Poland’s bright record is due to several factors — chief among them are good governance, the structure of its economy and pure luck. Poland developed enviable macroeconomic tools long (and the will to use them well) long before they proved essential. A ceiling on public debt was written into the constitution adopted in 1997. Meanwhile, post-communist reforms left the economy with efficient bank supervision and a relatively flexible labor market.

Arguably most important, when the crisis hit, Polish authorities came up with the appropriate level of fiscal stimulus to cushion the shock without leaving a legacy of waste or inflation. Outlays on planned infrastructure projects (co-funded by the European Union) were frontloaded to offset falling demand from recession-hobbled trade partners.

As for the second factor — the structure of the economy — Poland is fortunate to have a relatively large internal market with a well-developed ecology of small and medium-sized enterprises that reduce the economy’s dependence on exports. Moreover, the Polish labor force is highly mobile (some two million Poles work elsewhere in Europe), which reduced cyclic pressure on local markets. Finally, Polish exporters have proved remarkably adaptable: While sales to the eurozone grew by a modest nine percent in 2011 (a reflection of eurozone fiscal austerity), exports to Russia, Ukraine and other post-soviet republics jumped by 18 percent.

Then there’s the aforementioned element of luck: As an outsider to the eurozone, Poland was able to buffer the impact of external events through sharp depreciation of its currency in 2009. There was an element of luck, too, in the fact that Poles did not indulge in the consumption credit bubble that left most Europeans overleveraged and deeply in debt when the bubble burst in 2008.

A variety of obstacles still threaten Poland’s march toward economic convergence (its per capita income in purchasing power terms is still just 60 percent of the E.U. average). The obvious threat is the ongoing euro crisis. A eurozone break-up that led to a deep recession in Europe would almost certainly echo through the Polish economy. About one-quarter of Poland’s exports go to Germany and another fifth end up in France, Italy and the Netherlands combined.

Consider, too, that Poland must walk a narrow line between fiscal austerity (needed to retain the confidence of global lenders) and maintenance of adequate demand to sustain growth and employment (joblessness is chronically in double digits). For the moment, the emphasis is on the former: The huge budget deficits of 2009 (8 percent of GDP) and 2010 (7 percent) were brought below 5 percent in 2011 and will run about 3.4 percent in 2012.

While Poland’s policymakers must continually adapt to the changing political and economic environment, Polish policy toward Europe is firmly rooted in a handful of formal goals: openness, competitiveness and solidarity.

It seeks openness and competitiveness — here meaning a level playing field in the European Union for Polish enterprise, the free movement of capital, and liberal immigration policy, as well as an open door with respect to both E.U. enlargement and trade with non-members. By the same token, it favors a light regulatory regime and low taxes as a means to increase productivity and hasten convergence with northern Europe.

As for the third principle, having benefitted from many E.U. policies aimed at narrowing differences in living standards and productivity — among them, the Common Agriculture Policy and subsidies for infrastructure — Poland has strongly opposed initiatives that would undermine the principle of solidarity as the cornerstone of the integration process. Poland’s leaders rightly suspect that a "two-speed Europe" would consign a non-euro country with a relatively low per capita income to the second tier of integration in the continent. But the goal of solidarity, it’s worth noting, does not only apply to policies aimed at redistribution; it is at the heart of Poland’s commitment to collective European defense and a common European foreign policy.

In the near term, joining the euro currency would be risky (like the countries on the eurozone’s southern periphery, Poland would be vulnerable to speculative attacks) and unpopular (a majority of Poles strongly oppose accession, which is not surprising in light of the trials of Greece, Spain and Portugal). But in spite of the fundamental coordination problems exposed by the ongoing euro crisis, Poland wants to join the common currency area in the medium-term. This is based in part on geopolitical considerations, but also on economic logic: Poland’s private sector needs the access to capital and low transactions cost that only a single currency can assure.

Meanwhile, Poland must deal with the difficulties of influencing the European integration process while being outside of the eurozone. This explains why Poland signed the fiscal austerity pact pressed on the European Union by core eurozone countries. Poland expects to meet all the Maastricht macroeconomic criteria for eurozone membership by 2016. That should be not be much of a reach, as the country already meets the criteria for price stability and the public debt.

Poland’s economy fate has long been intertwined with Germany’s — and that hasn’t changed in recent years. This has proved a blessing, as German demand for Polish exports helped sustain growth through the crisis. And it explain in part why Poland’s  Foreign Minister Radoslaw Sikorski has openly embraced Germany’s leadership of Europe in spite of historical enmity. As he put it: "I fear Germany’s power less than her inactivity [in the fight to keep the eurozone intact]."

Poland’s economic interests in European integration are even more direct: Between 2007-2013, the country received around € 70 billion in infrastructure subsidies from the E.U. budget as part of the E.U.’s "cohesion" policy. And, as noted above, it is a net beneficiary of the Common Agricultural Policy. Changes in E.U. priorities in the wake of the eurozone crisis that undercut the goal of cohesion would thus slow the pace of public investment in Poland, perhaps drastically.

Actually, Poland’s growing economic ties to western Europe are part and parcel of a broader movement toward the integration of western and central Europe. Poland is the largest national economy by far among the so-called the Visegrad Four (with Slovakia, Hungary and Czech Republic, all of which joined the E.U. in 2004).  The region’s economic clout is growing rapidly; its collective GDP now exceeds $1 trillion — a four-fold increase since the mid-1990s. And Germany’s trade with the V4 now exceeds that with France (its largest single trading partner) and is almost three times higher than with Russia.

Along with being a testament to Poland’s determination to distance itself from the Soviet nightmare, the country’s economic transformation is proof positive of benefits of European integration. Poland has thrown in its lot with a united Europe — a gamble, in essence, that the union will not be fatally damaged by the flaws in the eurozone’s rules for economic coordination. If the E.U. flourishes, so will Poland. Indeed, for the first time in its modern history, Poland’s uncomfortable proximity to Europe’s great powers will prove an asset rather than a liability.