ECONOMY

How vulnerable are Poland and Hungary to EU financial pressure?

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The big story of the week in the EU is the showdown between Poland and the union’s institutions and other member states, especially those contributing to the communal budgets from which Warsaw is a net recipient. The long debate in the European parliament on Tuesday will be followed by a confrontation between country leaders on Thursday and Friday.

The European Commission is under pressure by parliamentarians and many member states to get tougher on both Poland and Hungary, which are defying values they seemed to commit themselves to when they joined the EU. Commission president Ursula von der Leyen seems to have gotten the message — she toughened her rhetoric in her European parliament speech, which listed the three tools at the EU’s disposal: suing the governments in breach of treaty commitments, financial sanctions and the Article 7 procedure that can curtail a country’s voting rights in the EU.

The general sense is that only the second tool has a realistic chance of making Poland’s de facto leader Jaroslaw Kaczynski and Hungary’s prime minister Viktor Orban change course. The third can be blocked by two countries that support one another; the first takes time and Warsaw, at least, is increasingly showing a willingness to defy the European Court of Justice’s judgments. So it is useful to ask how vulnerable to financial pressure (the second tool) Poland and Hungary really are.

To start, look at the economic record of both governments. The chart below shows Poland and Hungary’s impressive long-term catch-up with the EU average income per capita. This has been as quick under their current EU-bashing governments as under any previous one — indeed, in the case of Orban, his return to office in 2010 heralded the end of a period of relative stagnation. Both countries held up as well as the EU average during the pandemic.

A second important point to note is how the fruits of this catch-up growth have been distributed. Both countries have reduced poverty rates since 2015. In Poland, inequality has gone down in the same period (but not in Hungary).

Chart showing poverty rates in the EU27, EA19, Poland and Hungary

Third, some of this has to be attributed not just to good luck but to economic and social policy, some of which has flown in the face of conventional policy thinking. In Poland, the signature policy of the Law and Justice party (PiS) was a very generous subsidy to poorer (and often rural) families with children — the party’s clear political base. Hungary, meanwhile, has pursued a policy of large minimum wage increases, partly compensated with cuts in social security taxes, in the hope of higher productivity as businesses adjust.

In addition, both Poland and Hungary have reasonably strong public finances, with low public debt burdens compared with western Europe.

At first glance, all this could be taken to mean that they can resist financial pressure from the EU should the commission withhold or curtail payments under the new recovery and resilience facility (RRF) or the pre-existing structural fund transfers. Both countries are certainly able to borrow to fill any budgetary gaps — indeed, Hungary issued a record amount of foreign currency bonds last month in part to bridge-finance RRF payments for a recovery plan that Brussels has not yet been willing to approve.

But I think the better interpretation is this: the fact that these economies have been well-managed suggests that both Kaczynski’s and Orban’s support depends a lot more on economic performance than we tend to think. Their ideological appeal, which is what we pay most attention to, has not yet been tested. The pandemic was a shock, of course, but it was a shock that hit every country and, as the first chart shows, both Poland and Hungary have recovered from it as well as the rest of Europe.

But the scale of EU transfers is so big that if they stop flowing, the effect cannot be staved off for very long. EU money spent in Poland amounts to about 4 per cent of its national income; for Hungary it is closer to 5 per cent. The one-off RRF grants will again amount to about 5 per cent of their annual national incomes. Will their strong electoral support survive a sustained underperformance because of a withdrawal of EU financial support? We do not know — again, this has not been tested. But we may be about to find out. There are good reasons to think Brussels’ financial weapon can hurt enough, and fast enough, to be as effective as opponents of Warsaw and Budapest think.

Other readables

  • The EU is restarting its debate on the budget rules for member countries. While agreement on new rules is unlikely, the commission has legal tools to tweak the rules unilaterally.

  • Early in the pandemic, those sceptical of lockdowns asked whether we should not treat coronavirus like the flu. Not before time, people are starting to ask the reverse question: shouldn’t we treat flu more like we have treated Covid-19? That need not mean lockdowns, but masks, social distancing and air purification. As Linsey Marr, an expert on the airborne transmission of viruses, puts it in a New York Times op-ed:
    “You wouldn’t drink a glass of water full of pathogens, chemicals and dirt. Why should we put up with breathing contaminated air? . . . The results of investments in water infrastructure are considered one of the greatest public health achievements of the 20th century. Making air quality healthier as a way to cut down on disease should be a public health focus for this century.”

  • In a riveting Twitter thread, Paul Poast tells the story of supply chain disruptions during the first world war, which caused commodity prices and shipping rates to rise much like today. It led western allies to create international institutions for supply chain management, which should serve as inspiration for the problems we have in the pandemic. (It also featured an early achievement by Jean Monnet, who after the next war became the founding father of the EU.)

Numbers news

  • UK year-on-year inflation slowed in September. The monthly change, at 0.3 per cent, still suggests prices are rising much faster than the Bank of England’s annualised target of 2 per cent per annum.

    Chart showing UK CPI inflation year on year

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