Poland is by far the largest of the first wave of EU enlargement countries. Of the 10 candidate countries likely to enter the EU next, Poland’s population of 38.5m citizens outnumbers the 36m of the other nine nations and its own GDP is only slightly smaller than their combined GDPs. To say that Poland matters a lot is to rather understate the case.
However, according to ING Barings’ Emerging Europe team, Poland could well prevent all 10 entry treaties being signed this year. They argue that because of its size Poland is the most difficult to fit into the EU and that there may be some serious stumbling blocks ahead.
“The two killer issues still up for negotiation are regional funding and agriculture,” say ING-Barings. “Since Poland’s September 2001 elections concessions with the EU have been difficult to negotiate as the government is divided between the dominant urban-based ex-communist SLD Democratic Left_Alliance and the rural populists of the PSL Peasants’_Party.”
According to an EU decision this year, new member states’ farmers are scheduled to receive only 25% of the amount received by current member states in 2004, this figure rises to 35% by 2006. New members would have to wait until 2013 to gain full access to EU farm aid. Perhaps not surprisingly, the PSL has been angered by the EU’s proposals for reduced subsidies to Polish farmers. Its stance has been too rigid for the SLD, which seems more willing to compromise. Negotiations have been slow and problematic.
ING-Barings suggests that there is now too much good news priced in to the Polish market and those of the other nine front-runners. Investors who are concerned by the market’s belief in enlargement might like to buy protection, and those who remain enthusiastic should perhaps be turning their sights to the ‘second wave’ countries, such as Bulgaria, Croatia and Romania.
Acknowledging the political tensions within the Polish government, Merrill Lynch is still recommending a market weight to both the domestic Polish T-bond market and Polish external bonds. Merrill’s Eva Limanska-Moran, based in London, agrees that tensions are likely to escalate as the date of local elections some time in the autumn draws nearer, and that this potential risk cannot be discounted entirely. However, she believes that the chances of a government collapse over EU entry conditions are not particularly high, pointing out that the PSL does not command much popular support and might not want to quit the coalition and face a prolonged period out of power.
“Polish external bonds are very stable by emerging market standards,” says Limanska-Moran. “Although spreads on Polish eurobonds have already narrowed, we believe that in the medium term they will continue to converge with those of the current EU members. Though a small delay in accession cannot be completely ruled out, we believe Poland will be able to join the EU in the next wave of enlargement. EU politicians have indicated several times that enlargement towards the east would not make sense and would be unthinkable without Poland.”