Poland and Central Europe: black sheep or unicorn?

Tom White, Director, Global Counsel was joined by Stanisław Pietrzak, CEC Group’s Director, Intelligence; and Anikó Zsebik, Senior Associate for Central and Eastern Europe, Global Counsel. They looked at the root causes of the current challenges, the domestic debate in CEE countries and discussed possible scenarios for the short and medium-term.

Highlights from the discussion:

• The volatile political and regulatory environment remains the main risk for corporates and investors. The heavy state presence in the energy, banking and media sectors means the government is likely to be more protective here. However, in sectors where there is significant inward investment (e.g. e-commerce), the impact of politics is likely to be limited: the economies of Poland, Hungary, and others in the region remain very much dependent on FDI, despite rhetoric clearly favouring national players. Opportunities are still open in green and digital transition, the ICT sector, and manufacturing.
   
• ‘Polexit’, as well as other EU exits, are unlikely, while the possibility of a conditionality mechanism for granting EU funds is a risk affecting growth prospects. Considering the wide public support for EU membership, Poland, Hungary and others are unlikely to opt for leaving the EU. Poland and Hungary may continue to haggle with Brussels over rule of law issues, but a possible conditionality mechanism for EU funds could trigger different approaches. Warsaw is likely to be more accommodating, as the public would not forgive the government if EU recovery funds were not received, while in Budapest, the commission’s decision to withhold approval for Hungary’s national recovery plan plays well into the government’s Eurosceptic campaign ahead of the parliamentary elections.
   
• A change of government in Poland and Hungary can only happen if the opposition manages to join forces. While governments in the region are ‘losing steam’ in the polls, they will manage to stay in power if the opposition fails to join forces, as is currently the case in Poland. In the Czech Republic, five opposition parties are on their way to form a government after having defeated prime minister Andrej Babiš, but major differences will still need to be bridged for the coalition to succeed. In Hungary, ahead of next year’s parliamentary elections, the government will do everything to break up the opposition, including through running a contentious referendum, possibly on election day, affecting the LGBTQ+ community.