Poland's geopolitics and risky business
Historians look back to these dates to identify the causes that were the seeds of future change. They look back to the decision makers; to their intentions - often very different from their actions - and to their mistakes.
2004 is a year in which a massive mistake is being made for the European continent, according to an independent adviser whose clients include the largest mutual funds and hedge funds in the USA.
According to Jephraim P. Gundzik, President of Condor Advisers Inc., the decision to expand the European Union so dramatically that it will change beyond all recognition this year is wrong, a mistake so massive that historians will look back to 2004 as a moment in history when the wrong decisions were made, leading to massive and disastrous consequences.
According to a new report by Condor Advisers, Poland and its fellow 'Visegrad' neighbors (Hungary, Slovakia and the Czech Republic) should be viewed with pessimism in terms of potential for interest rate and economic convergence with the rest of the EU. Of the four nations, Poland is ranked as the highest risk territory for investments in each category: geopolitically, politically, socially, economically, fiscally and in terms of its balance of payments.
Given that Condor Advisers accurately predicted the crash of the Thai Baht in 1997, as well as the Russian and Argentine financial crises of 1998 and 2002, respectively, we have cause for concern. What is remarkable about the Condor report is not necessarily that it is one of the most pessimistic current takes on Poland's predicament, but that it is so divergent from the remarkable, euphoric optimism about EU accession in many quarters.
For one, the Polish investment agency PAIiIZ maintains rosy predictions of Poland's EU future. This is partly based on foreign direct investment (FDI) expectations that will be driven by the privatization requirements forced by EU entry, and the likelihood of foreign investors buying up Poland's state assets.
As recently as last Thursday, PAIiIZ issued a prediction that FDI into Poland this year could rise to 24 percent more than last year's figure, from zł.25.6 billion ($6.42 billion) to zł.32 billion ($8 billion) respectively. Added to that, a long slump trend of FDI into Poland has apparently been reversed, with five percent year-on-year growth in 2003.
The agency has also pointed out that last year greenfield projects were responsible for 51 percent of FDI, whereas in 2002 only 37 percent of foreign investment went into such sites. This change in FDI structure, the agency argues, is a signal for optimism.
While the mid-nineties mainstay of FDI, the auto sector, is still a top priority for the agency, the financial services sector is apparently developing fast and still has massive growth potential. Indeed, FDI into this sector tripled between 2002 and 2003.
Last year, a report by Ernst & Young identified an eastward shift of FDI, showing that accession states were attracting investment normally intended for the EU. The continued appreciation of the euro and the vast savings on production costs available in Central Europe were key highlighted causes.
However, even at this time Poland was a regional anomaly, with red tape and a lack of infrastructure acting as barriers to investment, so that figures for this country were considerably behind those for Hungary, Slovakia and the Czech Republic.
A unique hope for Poland, its apparently special friendship with America characterized by military cooperation and the biggest offset program in history (whereby the Polish purchase of U.S.-built F-16s is part of a mechanism to stimulate long term U.S.-investment into this country) has been pushed time and again by the government as a reason for optimism. But its undramatic pace has also been frequently used by the politician-bating media as an example of the government's failure.
Until now, most commentators have maintained that large financial decisions are, by definition, made by hard-headed businesspeople. American investors are attracted to Poland because of a calculation of risk and reward, not a sentimental affinity with Poland because of its high-profile pro-American stance. Likewise, French and German investors were rarely expected to be turned away from Poland by its tough EU negotiating style, its Atlanticism and anti-federalism.
But not any more. According to Gundzik's investment risk analysis, the economic and political weight of the 'Visegrad Four' is already impacting the geopolitics of the EU, with a generally divisive result for the region. Poland, dominating the Visegrad Four with around two-thirds of its population, is the key geopolitical player.
Gundzik identifies two forces working to raise geopolitical risk for Poland, namely Pentagon policy and the age-old Franco-German axis. In his analysis, the EU's political institutions are already dividing into core and periphery groups, with the effect of slowing convergence and raising political, social and economic long-term risk. In short, the anticipated reward awaiting Poland on its arrival to the 'promised land' of the EU is an illusion. Furthermore, Poland's attempt to get to this promised land is creating self-inflicted and life-threatening dangers.
"Incomprehensibly, Poland's government...is pursuing fiscal reform more aggressively than any other country," Condor Advisers notes. This massive economic pressure is creating political and social risk to the benefit of populist nationalist or socialist sentiments now crystallized in the form of surging popularity for Samoobrona.
Looking back to two key geopolitical events of the last century, the settlements at the end of World War One and World War Two, Gundzik agrees that parallels can be made with the end of the Cold War and the fate of the former 'Eastern Bloc' nations. Economic austerity imposed on Germany after World War one contributed to the rise of extremist political and social solutions.
By contrast, the Marshall Plan and the creation of the EEC contributed to reconstruction and lasting democracy in Western Europe after the Second World War. Post Cold War economic austerity across the accession states (accelerated by the demands of EU accession most extremely in Poland) is creating a political extremist backlash.
"This backlash endangers the idea of interest rate convergence because social pressures are much greater [in Poland] than the EU," said Gundzik, speaking from California. "Greater fiscal pressure is demonstrated by much larger fiscal deficits [in Poland] than the EU. Large fiscal deficits imply higher interest rates not lower, especially if external funding i.e. aid for deficits... is not significant."
Drawing comparisons between the post-1945 Marshall Plan and the planned post-2004 EU funding for the accession states, Gundzik points to a sadly different scenario. "The Marshall Plan was funded by the allies and the ratio of funding to GDP at that time was huge," says Gundzik. "Funding to GDP ratio [in Poland] is much lower because resources in the EU are scarce thanks to fiscal deficit controls for EU countries."
During the collapse of the Brussels summit on voting weights in December, a six-nation block including France, Germany and the UK called for a freeze on the EU budget between 2007 and 2013, effectively reducing funds for Poland and Spain (the nations arguing most strongly for the conservation of the existing voting system). In response, Poland and the Visegrad group proposed for the budget to be increased by 25 percent across the same period.
"For the EU, there is no option to budget freeze because they have painted themselves into a corner by staking credibility of monetary policy and exchange rate on fiscal probity," says Gundzik. "Yes - EU accession for Poland in particular is way too early. The EU doesn't want to/can't pay the bill for the massive social dislocation that will occur in Poland."
This may be less of an issue for other countries that are smaller and already more privatised. "Ultimately political tension between the EU and accession countries and social tension in accession countries would be greatly eased if the EU was on more solid economic footing rather than in its current weak recovery phase," asserts Gundzik.
Political integration (most recognizable in the evolution of the institution's name from 'European Economic Community' to 'European Community' to 'European Union') is going ahead without the monetary union of the UK, Sweden and the ten accession states, and is still far from complete between the most federalist block of countries.
"Starting from political integration first, fiscal integration would be easier allowing for more uniform economic performance in the EU making a unified monetary policy more sensible," says Gundzik. "Now monetary policy is determined by averages which leaves it too tight for low inflation countries and too loose for high inflation countries. This institutionalises the growth disparity, making fiscal adjustments harder."
For Condor Advisers, the result (divergent economic growth rates and fiscal policies even within the Euro zone countries) is a massive obstacle to economic integration. Politics must precede economics, the argument runs: it has not, and therefore it is a myth to assume that Warsaw is joining a union that contains Frankfurt and London.
"Lacking economic focus, political integration has become the purview of foreign and defense policies where, until recently, EU-wide consensus was the rule," says Gundzik. At this point, when crucial foreign policy decisions take place such as the question about sending troops to Iraq, the fault lines in the enlarged EU are reinforced.
Poland's high risk of terrorist attack because of its presence in Iraq and obvious allegiance to America increases the geopolitical risk to investment, as does the increasing rift with Germany and France. The acrimonious exchanges between Polish and German officials threatens the pace of economic convergence.
The general implications of Gundzik's analysis for investments into Poland are that international bonds and equities appear to be significantly over-valued. By comparison to Poland's Visegrad partners, "Polish international bonds and equity values, in particular, seem strongly out of line with the high investment risk facing the country."
Though this outlook is gloomy, it is important. As a successful observer of bubbles and crashes, Gundzik is well aware of the risks of over confidence; and here there is a clear discrepancy between the dreams and the reality of Poland's economic and fiscal future. The strongest hand we can play is to deflate our own dangerous over-anticipation of reward that the historical events of 2004 will bring to this country.
2004 is a year in which a massive mistake is being made for the European continent, according to an independent adviser whose clients include the largest mutual funds and hedge funds in the USA.
According to Jephraim P. Gundzik, President of Condor Advisers Inc., the decision to expand the European Union so dramatically that it will change beyond all recognition this year is wrong, a mistake so massive that historians will look back to 2004 as a moment in history when the wrong decisions were made, leading to massive and disastrous consequences.
According to a new report by Condor Advisers, Poland and its fellow 'Visegrad' neighbors (Hungary, Slovakia and the Czech Republic) should be viewed with pessimism in terms of potential for interest rate and economic convergence with the rest of the EU. Of the four nations, Poland is ranked as the highest risk territory for investments in each category: geopolitically, politically, socially, economically, fiscally and in terms of its balance of payments.
Given that Condor Advisers accurately predicted the crash of the Thai Baht in 1997, as well as the Russian and Argentine financial crises of 1998 and 2002, respectively, we have cause for concern. What is remarkable about the Condor report is not necessarily that it is one of the most pessimistic current takes on Poland's predicament, but that it is so divergent from the remarkable, euphoric optimism about EU accession in many quarters.
For one, the Polish investment agency PAIiIZ maintains rosy predictions of Poland's EU future. This is partly based on foreign direct investment (FDI) expectations that will be driven by the privatization requirements forced by EU entry, and the likelihood of foreign investors buying up Poland's state assets.
As recently as last Thursday, PAIiIZ issued a prediction that FDI into Poland this year could rise to 24 percent more than last year's figure, from zł.25.6 billion ($6.42 billion) to zł.32 billion ($8 billion) respectively. Added to that, a long slump trend of FDI into Poland has apparently been reversed, with five percent year-on-year growth in 2003.
The agency has also pointed out that last year greenfield projects were responsible for 51 percent of FDI, whereas in 2002 only 37 percent of foreign investment went into such sites. This change in FDI structure, the agency argues, is a signal for optimism.
While the mid-nineties mainstay of FDI, the auto sector, is still a top priority for the agency, the financial services sector is apparently developing fast and still has massive growth potential. Indeed, FDI into this sector tripled between 2002 and 2003.
Last year, a report by Ernst & Young identified an eastward shift of FDI, showing that accession states were attracting investment normally intended for the EU. The continued appreciation of the euro and the vast savings on production costs available in Central Europe were key highlighted causes.
However, even at this time Poland was a regional anomaly, with red tape and a lack of infrastructure acting as barriers to investment, so that figures for this country were considerably behind those for Hungary, Slovakia and the Czech Republic.
A unique hope for Poland, its apparently special friendship with America characterized by military cooperation and the biggest offset program in history (whereby the Polish purchase of U.S.-built F-16s is part of a mechanism to stimulate long term U.S.-investment into this country) has been pushed time and again by the government as a reason for optimism. But its undramatic pace has also been frequently used by the politician-bating media as an example of the government's failure.
Until now, most commentators have maintained that large financial decisions are, by definition, made by hard-headed businesspeople. American investors are attracted to Poland because of a calculation of risk and reward, not a sentimental affinity with Poland because of its high-profile pro-American stance. Likewise, French and German investors were rarely expected to be turned away from Poland by its tough EU negotiating style, its Atlanticism and anti-federalism.
But not any more. According to Gundzik's investment risk analysis, the economic and political weight of the 'Visegrad Four' is already impacting the geopolitics of the EU, with a generally divisive result for the region. Poland, dominating the Visegrad Four with around two-thirds of its population, is the key geopolitical player.
Gundzik identifies two forces working to raise geopolitical risk for Poland, namely Pentagon policy and the age-old Franco-German axis. In his analysis, the EU's political institutions are already dividing into core and periphery groups, with the effect of slowing convergence and raising political, social and economic long-term risk. In short, the anticipated reward awaiting Poland on its arrival to the 'promised land' of the EU is an illusion. Furthermore, Poland's attempt to get to this promised land is creating self-inflicted and life-threatening dangers.
"Incomprehensibly, Poland's government...is pursuing fiscal reform more aggressively than any other country," Condor Advisers notes. This massive economic pressure is creating political and social risk to the benefit of populist nationalist or socialist sentiments now crystallized in the form of surging popularity for Samoobrona.
Looking back to two key geopolitical events of the last century, the settlements at the end of World War One and World War Two, Gundzik agrees that parallels can be made with the end of the Cold War and the fate of the former 'Eastern Bloc' nations. Economic austerity imposed on Germany after World War one contributed to the rise of extremist political and social solutions.
By contrast, the Marshall Plan and the creation of the EEC contributed to reconstruction and lasting democracy in Western Europe after the Second World War. Post Cold War economic austerity across the accession states (accelerated by the demands of EU accession most extremely in Poland) is creating a political extremist backlash.
"This backlash endangers the idea of interest rate convergence because social pressures are much greater [in Poland] than the EU," said Gundzik, speaking from California. "Greater fiscal pressure is demonstrated by much larger fiscal deficits [in Poland] than the EU. Large fiscal deficits imply higher interest rates not lower, especially if external funding i.e. aid for deficits... is not significant."
Drawing comparisons between the post-1945 Marshall Plan and the planned post-2004 EU funding for the accession states, Gundzik points to a sadly different scenario. "The Marshall Plan was funded by the allies and the ratio of funding to GDP at that time was huge," says Gundzik. "Funding to GDP ratio [in Poland] is much lower because resources in the EU are scarce thanks to fiscal deficit controls for EU countries."
During the collapse of the Brussels summit on voting weights in December, a six-nation block including France, Germany and the UK called for a freeze on the EU budget between 2007 and 2013, effectively reducing funds for Poland and Spain (the nations arguing most strongly for the conservation of the existing voting system). In response, Poland and the Visegrad group proposed for the budget to be increased by 25 percent across the same period.
"For the EU, there is no option to budget freeze because they have painted themselves into a corner by staking credibility of monetary policy and exchange rate on fiscal probity," says Gundzik. "Yes - EU accession for Poland in particular is way too early. The EU doesn't want to/can't pay the bill for the massive social dislocation that will occur in Poland."
This may be less of an issue for other countries that are smaller and already more privatised. "Ultimately political tension between the EU and accession countries and social tension in accession countries would be greatly eased if the EU was on more solid economic footing rather than in its current weak recovery phase," asserts Gundzik.
Political integration (most recognizable in the evolution of the institution's name from 'European Economic Community' to 'European Community' to 'European Union') is going ahead without the monetary union of the UK, Sweden and the ten accession states, and is still far from complete between the most federalist block of countries.
"Starting from political integration first, fiscal integration would be easier allowing for more uniform economic performance in the EU making a unified monetary policy more sensible," says Gundzik. "Now monetary policy is determined by averages which leaves it too tight for low inflation countries and too loose for high inflation countries. This institutionalises the growth disparity, making fiscal adjustments harder."
For Condor Advisers, the result (divergent economic growth rates and fiscal policies even within the Euro zone countries) is a massive obstacle to economic integration. Politics must precede economics, the argument runs: it has not, and therefore it is a myth to assume that Warsaw is joining a union that contains Frankfurt and London.
"Lacking economic focus, political integration has become the purview of foreign and defense policies where, until recently, EU-wide consensus was the rule," says Gundzik. At this point, when crucial foreign policy decisions take place such as the question about sending troops to Iraq, the fault lines in the enlarged EU are reinforced.
Poland's high risk of terrorist attack because of its presence in Iraq and obvious allegiance to America increases the geopolitical risk to investment, as does the increasing rift with Germany and France. The acrimonious exchanges between Polish and German officials threatens the pace of economic convergence.
The general implications of Gundzik's analysis for investments into Poland are that international bonds and equities appear to be significantly over-valued. By comparison to Poland's Visegrad partners, "Polish international bonds and equity values, in particular, seem strongly out of line with the high investment risk facing the country."
Though this outlook is gloomy, it is important. As a successful observer of bubbles and crashes, Gundzik is well aware of the risks of over confidence; and here there is a clear discrepancy between the dreams and the reality of Poland's economic and fiscal future. The strongest hand we can play is to deflate our own dangerous over-anticipation of reward that the historical events of 2004 will bring to this country.
