Clash of the titans
This key conflict of the Miller government has been simmering on and off ever since the last election. Miller came to power publicly committed to reducing unemployment and maintaining economic growth. Very quickly, however, it became clear that both those goals were more difficult to achieve than might have at first seemed. Unemployment has continued to rise inexorably and is projected to hit the critical 20% level sometime over the summer. Of course, the slowdown on the economy is partly to blame. But the ultimate cause lies in continued inflexibilities in Poland's labor markets and the inevitability of unfavorable demographic changes as the baby-boom generation of the 1980s enters the workforce. As far as growth is concerned, however, there is a fundamental divergence of views among Poland's economists and politicians. No one denies the need to maintain healthy economic growth. Balcerowicz and his supporters point to the need for further fundamental reform in the field of continuing privatization, resisting monopolization and pushing forward the reform of public finances that would allow for pro-entrepreneur tax cuts - focusing on the supply side of the economic equation. The current Democratic Left Alliance (SLD) government, however, is very much of the post-Keynesian demand-side school of economic theory, believing that growth can be generated by government interventionism and monetary reflation.
That debate, which in Western Europe and the United States was broadly settled some 20 years ago in favor of the supply-side school, continues to rage on in Poland. Balcerowicz and his colleagues on the board of both the NBP, and the Monetary Policy Council (RPP) that sets interest rates, have made resistance to Miller's view of the economic world a point of principle. That was reflected a couple of weeks ago by the NBP's public criticism of the government's much-touted economic reform program as being too weighted to reflationary dogma, and by the refusal of Balcerowicz to cut interest rates at the speed the government would like. Matters came to a head last week during a parliamentary debate on interest rates, in the form of a direct confrontation between Balcerowicz and Belka. In the debate, Balcerowicz found himself the object of populist attacks from a range of parliamentarians from both left and right, using unparliamentary language to a degree rarely heard in Poland's legislature.
Against that background, Miller has made it clear publicly that his patience with Balcerowicz is beginning to run out. Until now, as a result of a rearguard action by Belka, the ruling SLD party has resisted calls to back a parliamentary bill that would increase the number of members of the RPP to allow new pro-government members to sit on it, as well as a subordination of the RPP to government policy. President Aleksander Kwaśniewski, too, has been unwilling to support a move that would be seen as undermining central bank independence. But now the mood within the SLD and the presidential chancellery is shifting.
On Miller's part, there is increasing frustration with the seeming inability of the government to reduce unemployment quickly and an awareness that results must be seen before key local elections in the autumn of this year. That is pushing him into taking action to impose his view of interest rate policy upon a recalcitrant RPP. On the side of Kwaśniewski, too, is recognition that in any test of strength with an SLD-dominated Parliament, his veto of such legislation would be rejected by Miller's supporters. That would be a humiliating defeat for the president and also tip the balance of power in the SLD to Miller and away from Kwaśniewski himself. So Kwaśniewski is weak in his ability to resist Miller's plans and he has little alternative but to work for a solution that allows him to claim he has defended bank independence, yet does not reduce his political power inside the SLD itself.
For those reasons, it seems that unless Balcerowicz himself undergoes a radical transformation of his economic views, and failing cuts in interest rates that satisfy Miller, the next few weeks may well see the SLD swing behind the current parliamentary bill and its swift passage through Parliament. For his part, Kwaśniewski will work to remove from the bill those elements that genuinely might lead to a complaint to the Constitutional Tribunal that the bill is undermining the NBP's constitutionally guaranteed independence, but preserve that which would bring it under de facto government control. It will be claimed that an RPP with substantially more members, who in themselves are independent in their decision making, preserves that constitutional independence. The political and economic effects of the passage of any such bill will be fascinating to observe. On the one hand, the government will have removed the last remaining alibi against the failure to reduce unemployment. Moreover, the new RPP will either reduce or not reduce rates to the government's liking. As far as Balcerowicz will be concerned, his decision whether to remain NBP head in such circumstances will have far-reaching consequences for foreign confidence in Poland. Whatever scenario is played out, it will quickly become apparent who was correct in their analysis of the nature of Poland's economic woes, and it will be a verdict given not by pundits, but by the brutal realities of the economy.
Marek Matraszek is the Warsaw director of CEC Government Relations. He can be e-mailed at director@cec.com.pl
