Tusk’s Multi-billion Bailout

Last month, Polish prime minister Donald Tusk stamped his authority on a 91 billion zloty ($31 billion) package to help prevent the Polish economy from falling prey to the rapidly spreading global recession.

Tusk announced that the package would ensure Poland’s financial stability, provide protection to its poorest citizens and continue to allow the country to catch up economically with its Western neighbours. The billions pledged will be used for bank guarantees, loans for small businesses and to help develop renewable energy sources.

Speaking at the announcement of the stimulus package, Tusk put the economic bailout into context: “The consequences of the global crisis for Poland are not so grave,” he stated. “[This] is a stabilisation and development programme, because Poland is a country that is still developing.” He maintained that the plan would not affect the government’s plans to join the euro zone, pencilled in for 2012, adding that being a member of the common currency would help the country in times of economic uncertainty. However, in a clear sign that the government doesn’t expect Poland to remain immune from financial woes, it has revised its 2009 forecast for growth downwards from 4.8 percent to 3.7 percent. In another telling move, it is also increasing the excise tax on alcohol and imported cars and plans to set aside the estimated 1.14 billion zlotys raised to pay for a possible surge in welfare claims caused by a recession.

Tusk’s injection of cash into an economy that although not in free fall is peering nervously over its shoulder, mirrors the action taken by other European countries, such as Italy and Spain, to stave off recession. It was also followed a few days later by the European Union’s announcement that it would plough 200 billion euro into the economies of its 27 members.

However, on 12 December, International Monetary Fund (IMF) Chief Dominique Strauss-Kahn overshadowed these measures with ominous words about what could lay in store for Poland this year. While warning that the financial crisis would worsen in 2009 and that the IMF was expecting negative growth, he stated: “This crisis is globalised and there is no way for one country to have (an isolated) reaction or policy. In Europe, some countries, especially Central European countries, may experience a very difficult situation because they have developed in the last 10 years with a lot of (foreign) capital inflows.” The implication being that a withdrawal of just some of that overseas investment could have significant economic repercussions. In 2006 alone Poland benefited from $10 billion in foreign investment.

Tusk’s plan has yet to receive the approval of Parliament, but it has already been criticised as unlikely to do what he hopes it will achieve – ensuring the country can ride the world recession out relatively intact. Polska comments that the 91 billion zlotys allocated is too small an amount to make much difference and it’s unrealistic to expect the package alone to prevent a crisis. Other critics point out that the plan provides little stability and substance and almost no development for the economy. Despite this, most economists believe that industry needs whatever help it can get and the plan must be ratified by Parliament.

Another perspective is that as Tusk does not anticipate Poland to be as greatly affected by the downturn as some other countries, the measure is designed to be a bare minimum for the problems Poland may encounter.

The point of state intervention in the market place is to jump start business and to give consumers the confidence to start spending again. The bigger the stimulus the more they should see the benefits, and in turn their ability to spend will gradually be restored. However, economists note that there is a time lag between governments bolstering the economy and the public feeling the trickle-down effects. So how long this stimulant will take is anyone’s guess. The other problem is that the more governments borrow from their banks, the less cash is available to flow between global markets for banks to tap into, preventing them from increasing their capital and restricting their lending power. Consequently, the brakes are again applied to growth. So Tusk’s initiative not to “over stimulate” the economy could pay off.

It remains to be seen if the limits Tusk has set in his stimulus package will prove to be a prudent move giving the Polish economy just the right amount of grease to keep its wheels well oiled and coasting along into the New Year.