How to lose friends and alienate people

The looming conflict between the government and the Monetary Policy Council (RPP) seemed to bear little relevance to the efforts of ordinary Poles struggling home after the Christmas and New Year holidays amid unprecedented snowdrifts and traffic chaos. Yet this is what will dominate the political agenda for the next month to come. The result of this conflict will have far-reaching consequences for Polish politics and the economy in the coming year. So we had better pay attention.

Few analysts expected the struggle between the government and the RPP to dominate the political agenda so quickly. There was little hint prior to the election that the existence of an independent body establishing interest rates and monetary policy was a problem for Prime Minister Leszek Miller, but bringing the council to heel has quickly developed into his No. 1 policy priority. It is true that Miller's government as such has taken no official stance. Instead it has let its two junior coalition partners - the Peasants Party (PSL) and Labor Union (UP) - threaten to introduce into Parliament a bill that would elect additional members of the council from the current Parliament and mandate the council to align its policies with that of the government, specifically the "promotion of growth." But in media interviews Miller has made no secret of his support for those arguments. The goal is to force, finally, a reduction in interest rates, which the government argues is the key to economic recovery. At a meeting of the government last week, Miller made the final governmental position on whether to support the bill hinge on the outcome of a full-scale meeting between the RPP and government by Jan. 12.

It is true that economic arguments are to the fore in the current government's rhetoric, although it is difficult to believe that anyone takes seriously the argument that a mechanistic cut in interest rates will save the economy. There is of course a legitimate debate over the tempo and timing of any cuts in 2002, but Miller seems to be implying that Poland's economic woes could be overturned by one administrative decision. That flies in the face of most credible economic analysis, which suggests that any short-term economic gains would be quickly offset by a devalued złoty, higher inflation, and higher government expenditure on dollar-denominated debt.

The truth is, however, that the argument is in fact a political question that has implications at three levels of government: the immediate style of political leadership under the new government of Miller; the relationship between the Democratic Left Alliance (SLD) party and other political forces, especially President Aleksander Kwaśniewski; and the constitutional and potential international political consequences. First, the clearest thing about the debate is how personally it has been championed by Miller himself, and how publicly he has let himself be placed hostage to the outcome, although it has been down to the PSL and the UP parties to propose the legislation. It also reflects his disdain, never especially concealed, for Finance Minister Marek Belka who he sees as having been foisted on him by Kwaśniewski to placate foreign bankers and journalists about the economy being in a "safe pair of hands." Despite Belka's opposition, Miller is showing who really runs the ship of the government.

That is perhaps the most fascinating aspect of the entire saga: its outcome - if it is not to be yet another messy Polish compromise - will in effect be the outcome of a test of strength between Miller and Kwaśniewski about who has primacy over economic policy. Is it the unspoken alliance between Kwaśniewski, the chairman of the National Bank of Poland (NBP) Leszek Balcerowicz, and influential Western analysts? Or is it the SLD party leadership around Miller and his own circle of political and economic advisers, together with leadership of the PSL and UP? As if to symbolize his opposition to the changes, Kwaśniewski last week nominated an outspoken critic of them, Witold Orłowski, as his economic adviser to replace Marek Belka. Were the RPP to stand its ground next week and refuse to cut rates, Miller will have no choice but to support a neutering of the council through parliamentary legislation. Yet that will put him on a collision course with his own president, who has threatened to veto the bill.

It is also fascinating to reflect that the entire saga is essentially a revolt by Miller and the SLD leadership against the very Constitution that they constructed and was established under the previous SLD-PSL government in 1997, which enshrines the independence of the RPP and the NBP. Although the proposed legislation retains that independence in nominal terms, there is little doubt that the RPP would quickly evolve into a tool of short-term political expediency. What is also paradoxical is that Miller came to office championing quicker Polish membership in the European Union (EU). Not only is central bank independence an EU totem, but Poland - under current plans - is due to replace the złoty with the euro in 2007. Within the next five years therefore, interest rates will be set not by Polish politicians or economists in Warsaw but by French and German bankers in Stuttgart. That makes the current row all the more inexplicable, if not disconcerting for the impression this must be making in Brussels about Poland's understanding of the implications of EU membership.

It is paradoxical that within two months of taking office, Miller has managed to aggravate relations with the three political forces that endowed him with political legitimacy in the first place: Belka, Kwaśniewski, and the EU. With rocky economic waters ahead, he may yet come to regret burning his political bridges with his allies at a time when his enemies are increasingly gathering strength.

Marek Matraszek is the Warsaw director of CEC Government Relations. He can be e-mailed at director@cec.com.pl

Marek Matraszek