Poland's summer of economic discontent

WLADYSLAWOWO, Poland — The beach in Wladyslawowo, one of Poland’s premier seaside destinations, is so packed with baking Poles that it is difficult to take a step without standing on someone — but to regular beach-goers, the view is actually pretty dismal, in large part because of the economic crisis.

“I can see empty spaces on the beach — on a normal year it would be even more packed,” said Aleksander Andrzejewski, who runs the Solmare guesthouse just steps from the beach.

The economic crisis is keeping Poles closer to home, with travel agencies reporting a fall in interest in foreign holidays thanks in large measure to the recent gyrations of the zloty caused by the Greek meltdown.

Although the zloty has shown signs of strength in the last weeks, earlier it had dropped sharply against the dollar, the currency in which trips to popular destinations like Turkey and Egypt are priced.

In-country holidays have also taken a bit of a beating thanks to floods earlier this year that devastated parts of southern Poland, popular with tourists. The economy is also casting a pall, despite the summer heat wave that cooked most of central Europe.

“Although the weather is great, I can tell that the economy is having an impact,” Andrzejewski said. “Instead of staying a week, people are coming for three or four days, and when they call, they haggle over the price; that never used to happen. They are afraid of staying too long and losing their jobs.”

Poland’s government Tourism Institute finds that domestic tourist trips fell by 12 percent in 2009 compared with the same period in 2008, and that the length of holidays shrank. The number of foreign trips fell by 17 percent. The institute does not expect the statistics to return to pre-crisis levels for several years. The number of foreign tourists coming to Poland also dropped by 8 percent in 2009.

 

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Andrzejewski’s gloomy view of the beach scene shows that the global economic crisis has not spared Poland, despite it being the only European Union country not to fall into recession last year.

This year the economy is expected to grow by more than 3 percent, probably the fastest pace in the EU; but bad news from the rest of the continent, and an unemployment rate of 11.6 percent, has made many Poles reluctant to open their wallets.

Increased caution is also being seen in the government, which last year spent most of its time patting itself on the back for Poland’s narrow escape from the recession that affected the rest of the developed world.

Now, together with most of the rest of Europe, Poland is staring at rising budget deficits (estimated at about 7 percent of GDP this year), and a public debt that is creeping ever closer to 55 percent of GDP, a level at which Polish law mandates spending cuts to begin bringing the budget back into balance.

Prime Minister Donald Tusk is pushing a cautious reform package, which at the moment consists of little more than raising the value added tax by one point to 23 percent and ramping up the sale of state assets next year.

Coming from a government which recently won the presidency and controls all of Poland’s most important posts, the timidity of the reforms is exasperating economists, who worry that Poland is missing a chance to get its fiscal house in order while it is still in a relatively strong position, and investors are still fairly confident that they are making a sensible bet by putting their money into the country.

Krzysztof Rybinski, a former deputy governor of the central bank, points out that despite the government’s rhetoric of slashing the bureaucracy that stifles Polish business, the number of civil servants has actually grown by about 100,000 over the last five years, and the cost of paying them absorbs all of Tusk’s planed tax increase.

“The increase in the VAT will not be enough,” said Rybinski, who predicts that the government will also have to increase income tax rates and dramatically slash spending in order to keep the budget deficit under control in the next few years.

The danger for Poland if it does too little over the next year or two is that it will start to fall behind more ambitious countries like the three Baltic states and eurozone countries like Greece and Spain, which may have endured worse recessions last year, but which have learned the lesson of loose budgets and are undertaking deep reforms.

“Foreign investors could at some moment decide to limit their purchases of Polish bonds and shares,” Rybinski said.

Tusk, normally favorably viewed by market analysts, recently lashed out at what he called “pseudo-expertises” that attacked his government’s cautious approaches to fiscal reforms, but if the government does not get its spending under control, Andrzejewski could find next year’s beach even emptier, no matter how steamy the weather.