Central Europe’s economies. A rising tide

Economies are growing, but reforms are needed to keep them that way

A STRENGTHENING economy has lifted the Polish mood from the depths it plumbed when Leszek Miller and his sleaze-plagued government resigned three months ago. GDP growth may even beat early forecasts by topping 6% this year, Poland's best performance since 1997. Other central European countries are doing well too. Accession to the European Union on May 1st has removed the last few barriers to trade for all eight new central European countries, and given a lift to flagging foreign direct investment (FDI). The Vienna Institute for International Economic Studies says it expects the eight to attract 50% more FDI this year than last.

Poland's growth is rising fastest in this upswing, mainly because depreciation of the zloty has kept labour costs down. Even farmers are cheering up, because EU entry has meant new markets and higher prices for beef and other products, says Katarzyna Pietka of CASE, a think-tank. Things could be a lot worse for Marek Belka, Poland's new prime minister; his minority government has a chance of staying in office until elections due next year. Mr Miller may even wish he had held on longer.

Yet a grimmer picture is painted in a new survey of Poland by the OECD. The structural problems of the Polish economy, it says, still need fixing. Foremost is a labour market that the OECD calls the worst-performing in all its 30 rich-country members. Only 51% of the working-age population is in employment, against 56% in Hungary, 58% in Slovakia and 65% in the Czech Republic. High payroll taxes, a minimum wage and restrictions on firing workers all deter hiring. Ill-targeted welfare schemes encourage able-bodied people to stay at home, or on the farm, since farm-workers get especially generous treatment. Agriculture accounts for one-fifth of employment, but only 3% of GDP. Getting rural folk into more productive jobs could add 30% to Polish output, says the OECD.

Poland's ex-communist neighbours share similar problems. All have inherited welfare states and entitlement cultures that eat up public money. All have subsidised workers pushed into unemployment or early retirement by the collapse of communist-era industry. Most have big budget deficits. Poland's has reached 6-7% of GDP, pushing public debt close to its legal limit. Hungary's deficit topped 9% in 2002, unnerving markets, but a change of finance minister has restored confidence. Concern has moved on to the Czech Republic, where the IMF in May attacked “inaction in some key policy areas”. Since then the government has collapsed, and a new one may be no better. Czech growth may be the lowest in the region this year, and its budget deficit one of the highest.

Poland matters most, because it has a bigger population and GDP than all its central European neighbours put together, and because its politics are as wobbly as its economy. In European elections last month a populist farmers' party called Samoobrona (Selfdefence), and a right-wing Catholic anti-EU party, the League of Polish Families, took 26% of the vote between them. The entry of either into government could seriously damage Poland's already testy relations with the EU.

This explains why some Polish business leaders are reconciled to letting economic policy drift aimlessly for a few months under Mr Belka. They think this is less risky than an austerity drive that could bring down the government and raise support for the populists, says Henryka Bochniarz, president of the Polish Confederation of Private Employers. The hope is that recovery will drain support from fringe parties and shore up moderate ones in time for an election next year.

Any new government will face pressure to deregulate the labour market, cut benefits, sell industries still in state hands and spend some savings on better roads. A tall order: but the alternative will be stagnation and fiscal crisis. The example of Slovakia gives hope. After radical fiscal and labour-market reforms five years ago, Slovakia enjoys booming inward investment, strong export growth, rising domestic demand and a rising currency. Poland can either follow or flounder.

Feature concentrates on looking at the economic situation in Poland.