US embassy cable - 05WARSAW3151

UNCLAS SECTION 01 OF 05 WARSAW 003151 
 
SIPDIS 
 
STATE FOR EUR/NCE TARA ERATH AND MICHAEL SESSUMS 
USDOC FOR 4232/ITA/MAC/EUR/JBURGESS AND MWILSON 
TREASURY FOR OASIA ERIC MEYER AND MATTHEW GAERTNER 
FRANKFURT FOR TREASURY JIM WALLAR 
 
E.O. 12958:  N/A 
TAGS: ECON, EFIN, PL, EUN 
SUBJECT:  Economic Impact of EU Accession on Poland 
 
CORRECTION TO WARSAW 3130/3131, PARA 26, LAST SENTENCE. 
 
This cable is sensitive but unclassified and NOT for 
Internet distribution. 
 
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Summary 
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1.  (SUB)  Sixteen months after Poland's EU accession, post 
surveyed a number of government officials and economic 
experts on the impact of accession.  Despite some caveats, 
there appears to be consensus that Poland has adapted 
smoothly to the EU's common market.  Dramatic export growth 
has fueled economic expansion even while the zloty has 
significantly appreciated.  Meanwhile, inflation is under 
control, foreign investment is on the rise, and unemployment 
is beginning to drop off.  Nevertheless, in many ways it is 
too early to evaluate the effect of accession.  It remains 
to be seen whether Poland will be able to sustain economic 
growth, cope with continuing emigration, and smoothly 
conform to some of the EU's more problematic regulations. 
However, on the eve of parliamentary and presidential 
elections, economic experts remain optimistic about Poland's 
future prospects in the EU's open market.  End summary. 
 
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Currency 
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2.  (SUB)  A key development in the Polish economy over the 
past year and a half has been the significant strengthening 
of the zloty.  Fueled by surging Polish exports, the zloty 
experienced sustained growth from March 2004 to March 2005 
against both the dollar and the euro.  In this 12-month 
period, the zloty appreciated by 24.6 percent against the 
dollar, according to Polish government data.   Since April 
2005, however, the zloty has weakened somewhat, in step with 
the weakening Euro. 
 
3.  (SBU)  Meanwhile, the National Bank (NBP) hopes to keep 
Poland on track for rapid Euro adoption.  NBP macroeconomic 
specialist Lucyna Sztaba said the Bank should enter the 
eurozone as soon as possible, though strong government 
support will be necessary to do so.  The Bank initially set 
the goal of adopting the euro in 2008-2009, though Sztaba 
acknowledges 2008 may now be out of reach.  The National 
Bank is concerned that Poland will be left behind in the 
race for investment by countries such as Slovakia and the 
Baltics, which are further along with preparations for the 
euro.  Sztaba thinks the next government--expected to be a 
coalition of the Citizens' Platform (PO) and Law and Justice 
(PiS) parties--may not be as keen on catching up, with PiS 
somewhat opposed and PO reportedly ambivalent about quickly 
joining the euro zone.  One of the arguments being used 
against rapid euro adoption is a recent IMF report 
suggesting the euro is not as important for Poland as for 
its neighbors because its market is so much larger. 
 
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Economic Growth 
--------------- 
 
4.  (SBU)  The Polish economy expanded rapidly in the months 
prior to EU accession, with 6.9 percent annualized GDP 
growth in first quarter 2004.  This growth, which was 
accompanied by a three percent real increase in salaries in 
the same quarter, may have been fueled in part by consumers' 
increased demand for durable goods in anticipation of EU 
accession-related price increases. 
 
5.  (SBU)  GDP growth continued after accession, though at a 
more modest 3-4 percent pace.  The driving force behind this 
growth was agriculture and food processing, which benefited 
from stronger-than-expected demand for Polish products in 
the EU, an effect amplified by the weakness of the zloty at 
the time of accession.  In 2004, food exports to EU-15 
countries increased by 60 percent.  Poland also benefited 
from nearly EUR 1.6 billion in net EU transfer payments in 
2004, a figure the Poles expect to more than double in 2005. 
First quarter 2005 statistics estimate growth at three 
percent, which represents a slight slowing of the initial 
post-accession export surge, due in part to the 
strengthening zloty.  Consensus estimates put Poland's GDP 
growth in 2005 and 2006 in the 4-5 percent range. 
 
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Unemployment 
------------ 
 
6.  (SBU)  Analysts agree it is too soon for EU accession to 
have had a dramatic impact on Poland's high unemployment 
rate, which has hovered around 19 percent since 2002. 
Economic analyst Bohdan Wyznikiewicz thinks the Polish work 
force is currently in its second major phase of 
restructuring since the fall of communism.  Labor 
productivity is increasing rapidly, and workers continue to 
leave farms.  Roughly 16.5 percent of the work force is now 
employed in agriculture, down from 20 percent in the mid- 
1990's. 
 
7.  (SBU)  Unemployment fell from 20.6 to 19.5 percent in 
the months leading up to accession, but the rate remained 
stable for the rest of 2004.  In the first half of 2005, 
however, the unemployment rate has dropped from 19.5 to 18.0 
percent.  Together, the 2.6 percent decrease in unemployment 
since the beginning of 2004 is the most significant drop 
since 1997.  Analysts suggest that increasing demand for 
Polish exports, coupled with opportunities for migration, 
should contribute to a continuing decline. 
 
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Inflation 
--------- 
 
8.  (SBU)  Post-accession inflation was one of the most 
feared consequences of joining the EU in Poland, and 2004 
statistics bear out that a greater-than-expected 
inflationary effect--averaging 4-5 percent (annualized) in 
the months immediately following accession--was observed. 
Price increases were driven by EU demand for agricultural 
products, which had a dramatic effect on certain goods. 
(For example, sugar prices rose 67 percent; beef prices 40 
percent.)  Overall, food prices increased by 7.8 percent, 
which had a powerful effect on public perceptions given the 
30 percent proportion of Polish household expenditures 
devoted to food purchases.  External factors--in particular, 
high oil prices--had an effect as well.  Only a few prices, 
mainly for technology and clothing, fell. 
 
9.  (SBU)  In 2005, in contrast, prices again stabilized as 
the market quickly adjusted to the new export dynamics. 
Food prices actually dropped in February-April 2005, due in 
part to the stronger zloty.  Current expectations are for 
continued price stability, with an end-of-year outcome 
perhaps below the National Bank's forecast of two percent. 
Many analysts suggested 1.2 percent annual inflation at year 
end is possible.  This would be comfortably below the 
government's long-term 2.5 percent target, in compliance 
with the Maastricht guidelines. 
 
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Foreign Investment 
------------------ 
 
10.  (SBU)  Foreign direct investment (FDI) inflows into 
Poland increased by 22.4 percent in 2004 to reach USDOL7.9 
billion, the highest level since the year 2000.  Polish 
Foreign Investment Agency (PAIiIZ) specialist Aleksandra 
Prachowska explains that the current inflows primarily 
represent reinvestment, since most major foreign players 
have long since entered the Polish market. 
 
11.  (SBU)  According to Prachowska, the effect of EU 
accession on FDI is unclear and nearly impossible to 
measure.  Statistics cannot yet be gathered on investment 
since accession, as new investments will take several years 
to be realized and measured.  However, Prachowska said she 
has personally noted a sharp increase in the number of 
inquiries from potential investors since accession.  It 
remains to be seen whether these enquiries will translate 
into actual deals, but PAIiIZ Director Andrzej Zdebski is 
confident that 2005 FDI would top the 2004 level. 
 
12.  (SBU)  According to a recently-published report by 
Ernst and Young, Poland is tied with Germany as the most 
attractive destination for foreign investment in Europe. 
The availability of cheap land and a large, relatively 
skilled labor force--in contrast to some neighboring 
countries, like Slovakia, that may soon face labor shortages- 
-are among Polish strengths that are contributing to the 
increase in FDI.  However, inadequate infrastructure and a 
high level of bureaucracy were highlighted in the report as 
areas needing significant improvement. 
 
13.  (SBU)  Officials said the lack of centralization in the 
Polish investment system is also a liability.  The Slovakian 
government's investment agency, for example, is prepared to 
immediately discuss incentive packages with firms 
considering investment, while PAIiIZ does not have the same 
capability and occasionally has difficulty cooperating with 
regional governments.  PiS and PO economic advisers 
Kazimierz Marcinkiewicz and Rafal Antczak, who are expected 
to play an influential role in Polish economic policy 
following this year's election, both agreed that reforming 
PAIiIZ and elevating the organization to a higher 
hierarchical level are among their priorities, alongside 
infrastructure development. 
 
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Migration 
--------- 
 
14.  (SBU)  Gloomy predictions of a massive brain drain and 
high levels of emigration to the EU countries that opened 
their borders to Polish labor--the UK, Ireland, and Sweden - 
-have for the most part failed to materialize.  Emigration 
levels from Poland have been below expectation, in contrast 
to several of the other new member states, like Lithuania, 
where outflows have surprised observers. 
 
15.  (SBU)  Analysts are optimistic that migration to 
Western Europe will be a transitory phenomenon, as both 
prices and salary levels in Poland catch up to the EU 
average in the long term.  They hope for a "circular 
migration" effect, in which Polish workers return home after 
gaining experience and skills abroad. 
 
16.  (SBU)  According to the Poles, migration from the new 
EU member states has had a positive economic impact on the 
host nation, largely due to the UK's low unemployment rates. 
Roughly 100,000 Poles have registered as workers in the UK 
since accession, about one-third of which were already in 
the country, many probably working illegally.  These workers 
have pumped PLN 1.7 billion into the British economy, and 
there is no evidence of a "flood" of immigrants into 
Britain.  There is some concern about "brain waste," which 
occurs when highly qualified workers from new member states 
work in unskilled labor positions in the UK.  However, local 
Polish observers are encouraged by the fact that Poles 
working in the UK are increasingly employed in the business 
and management sector, as opposed to unskilled positions in 
agriculture and fishing. 
 
17.  (SBU)  Concerns about a brain drain remain alive in the 
medical field.  With Poland's nursing schools now turning 
out drastically fewer graduates than they did several years 
ago, and anecdotal reports of nurses moving abroad, some 
worry that loss of skilled workers to Britain and other EU 
states could result in a shortage of medical staff at home. 
Still, the Polish government remains eager to open more 
borders to Polish workers within the EU, in particular 
hoping to encourage Germany--still the number- one 
destination for Polish workers--to allow Polish workers to 
cross the border freely.  However, many Polish economists 
believe that Germany will remain largely closed to Polish 
labor for the entire seven-year transitional period. 
 
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Trade 
----- 
 
18.  (SBU)  The biggest story of the first year after EU 
accession for Poland was a dramatic (38 percent) overall 
increase in agro-food exports in 2004.  Exports of meat, 
dairy products, fresh produce, and sugar rose by 54 percent 
to EUR 3.4 billion.  This overall increase in agro-food 
exports outpaced growth in imports (27 percent), more than 
doubling Poland's positive trade balance in the sector to 
over one billion euro. 
 
19.  (SBU)  Polish exports in general increased by 30 
percent in 2004 (measured in zlotys).  The effect was not 
limited to trade within the EU:  while exports to EU 
countries rose by 27 percent, exports to developing 
countries rose by 46 percent.  In fact, the most dramatic 
increase in trade relations in 2004 was an unexpected 77 
percent increase in exports to Russia.  According to 
Wyznikiewicz, this effect is probably unrelated to EU 
expansion and rather seems to stem from an earlier communist 
tradition of economic exchange with Russia 
 
20.  (SBU)  Dynamic export growth in the first five months 
of 2005 has continued in dollar and euro terms, though not 
so in zlotys because the currency has strengthened so 
significantly in the past year.  Exports to the EU in 
January-May 2005 increased 22 percent in dollar terms from 
the same period in 2004 but decreased one percent when 
measured in zlotys.  Still, increases in exports to 
developing countries, primarily in Eastern Europe, fueled an 
overall 3.7 percent export increase in zloty terms (28 
percent in dollars).  Poland's trade balance continues to 
improve, with export growth significantly outpacing import 
growth in this period (imports increased 16 percent in 
dollar terms but dropped six percent in zlotys). 
 
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Energy Sector 
------------- 
 
21.  (SBU)  One of the thorniest issues of EU accession has 
been the resolution of long-term contracts in the energy 
sector.  Over half of the energy on the Polish market is 
procured by the government at an above-market rate 
established by long-term contracts signed years ago.  The EU 
is insisting that Poland dissolve these contracts, arguing 
they constitute an inadmissible form of public support for 
the industry.  The government has been working to resolve 
the issue through a new compensation bill, but disagreements 
prevented it from being passed this term.  The PO party 
recently put forth its position on the issue, which 
advocated privatization of the state-owned energy companies 
and the use of the proceeds as lump-sum compensation for 
canceling the lucrative contracts. 
 
22.  (SBU)  But officials the Ministry of Economy were 
skeptical that such a plan would work, suggesting that the 
likely proceeds from privatization would not cover the high 
costs of compensation (up to PLN 26 billion).  They think 
that ultimately a surcharge may have to be applied to 
consumers' electricity bills to pay for the compensation, 
but this will not raise prices because consumers are 
currently paying a surcharge to cover the above-market price 
of the contracted energy.  Competition is expected to put 
downward pressure on prices, but in the long term prices are 
nevertheless expected to rise to the levels prevailing in 
the rest of the EU. 
 
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Emissions Trading 
----------------- 
 
23.  (SBU)  One of the major anticipated benefits of EU 
accession for Poland was access to the EU emissions trading 
market, which was expected to bring in billions of dollars 
due to Poland's relatively low emissions levels (initially 
estimated at 30-40 percent below the country's allocation). 
However, bureaucratic delays and disorganization have 
clouded the issue.  The European Commission allocated Poland 
16 percent less emissions for the next three years than the 
Polish government requested, partially because two 
government ministries separately issued conflicting sets of 
data on the country's emissions.  Rather than cut its 
proposed internal allocations by 16 percent across the 
board, the government is now in the midst of a controversial 
effort to reallocate the new emissions limit among relevant 
industries, several of which want to expand production. 
This may make it difficult to stay within the limits.  The 
thorny reallocation process, as well as the process of 
setting up a new emissions administrator, is delaying entry 
to the emissions trading system. 
 
24.  (SBU)  Boguslaw Debski of the Environmental Protection 
Institute said he is hopeful Poland will be ready to trade 
emissions by the end of 2005, but he admitted there is a 
chance the process will not be completed until next year, a 
situation he said would be "tragic."  Debski said that 
overall, Poland will certainly have a surplus of emissions 
allocations available to trade, but a number of individual 
producers fear they may exceed their quotas. 
 
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Comment 
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26.  (SBU)  Every contact consulted had positive things to 
say about the economic impact of EU accession in Poland; 
even the overall slowing of economic growth this year was 
interpreted primarily as a sign of stabilization rather than 
as a cause for concern.  Analysts are particularly heartened 
by the incipient signs of decreasing unemployment, as well 
as by the rapid return of stable prices.  But several tricky 
regulatory issues remain to be resolved, and their progress- 
-much like progress toward adopting the euro--is likely to 
rely on the incoming government's degree of motivation. 
While it is still too early to draw precise conclusions 
about the full impact of the EU accession on Poland's 
economy, it seems clear that the doomsday forecasts made 
before accession have not materialized. 
 
HILLAS