A high turnout and voters tired of political polarization helped the Polish opposition to win the election – despite a strong performance by the ruling party.
A new centrist government will likely end disputes with Brussels over the rule of law, engage in EU reforms, and improve ties with Germany.
Still, the next coalition will face programmatic internal differences and potential resistance from institutions controlled by the previous government.
Implications for International Business
Successful resolution of the rule of law row will give Poland access to the EU recovery fund, resulting in a significant rise in investment and GDP growth.
It will also lower Poland’s risk premium due to increased legal certainty, greater predictability in reforms, and the effective exclusion of the Polexit option.
State of Play
Record turnout leading to opposition win
The ruling Law and Justice (PiS) party received the highest support in last Sunday’s parliamentary election, but the next government will probably be formed by three opposition parties: the liberal Civic Coalition (KO) of Donald Tusk, the conservative-liberal Third Way, and the New Left. The fifth party in parliament and a potential partner for a PiS-led government, the far-right Konfederacja, suffered a surprising defeat with just seven percent of the votes. The election has been deemed free, but not fair, as PiS dominated the airwaves and involved officials and state-controlled enterprises in the campaign, such as through publicly funded picnics and a targeted reduction of gas prices by oil monopolist Orlen.
What makes the vote special is a 74.17 percent turnout – the country’s highest since the end of communism in 1989. However, voting patterns seem to hold: In large and medium-sized cities, the opposition won, whereas PiS had a clear advantage in smaller towns and rural areas. The ballot also confirmed Poland’s old geographical divide: eastern regions of the country voted more conservative than the liberal west. Among young voters up to 24 years old, the ruling PiS took last place, with KO coming out on top. Only in the 60+ age group did PiS outperform the opposition parties.
The path to forming a government will be bumpy. The new Sejm must convene within 30 days, then President Andrzej Duda has 14 days to nominate a candidate for prime minister. He will most likely propose the incumbent, Mateusz Morawiecki, as a sign of loyalty towards PiS. Failing to win a majority, the opposition's candidate can then be elected in the second round, with a cabinet formed around the end of the year.
The new government’s political agenda is primarily to restore the rule of law and to depoliticize public media, state-controlled enterprises, and the judiciary. Setting a more detailed social and economic program will be a challenge due to ideological differences between the parties. Another threat will be a potential blockade by President Duda and conflicts with PiS-controlled institutions, like the Constitutional Court or the central bank (NBP).
Key Issues The Polish vote also strengthens the EU…
The election result signifies Poland’s return to the EU mainstream after eight years of hardening populist and nationalist tendencies. A KO-led government will settle the long-running rule of law dispute with the European Commission, unlocking so far withheld funds and thus strengthening Polish investments in energy transformation and digitization. It will also display greater openness towards reforms at EU level, including expanding the scope of majority voting in foreign policy or taxation. Other thorny topics will remain, like immigration regulations, nor is Poland’s accession to the Eurozone currently in the cards.
At bilateral and multilateral level, Poland will aim to improve relations with Germany and revive the Weimar Triangle – a platform for cooperation between Berlin, Warsaw, and Paris. Divisive issues such as war reparations will likely be moved aside in favor of Germany increasing its commitment to strengthening NATO’s eastern flank or providing financial support for the energy transition. One possible way could be to upgrade the EU Just Transition Fund to accelerate the phasing out of coal and further boost the already rising investment in renewables.
In Central Europe, one should anticipate a clash with pro-Russian and increasingly authoritarian Hungary and simultaneously closer relations with the Baltic states, Czechia and Romania, with which Poland shares security interests. The new government will also focus on building a strategic partnership with Ukraine, advocating for Kyiv's quick path to the EU. Warsaw will certainly try to settle the Ukrainian grain export issue within a European frame and mobilize funding to reassure its own farmers. There will be no changes regarding the alliance with the United States and the priority given to transatlantic relations. While Washington remains the main partner in security policy, Poland will also be interested in strengthening EU defense initiatives, e.g., joint anti-aircraft defense. Also, relations with China will remain shaky. Already the PiS government abandoned hopes for developing the cooperation format 16+1 (now 14+1) between Beijing and Central Europe. Now, the new government will work more on an EU-wide answer to the China challenge.
…though economic uncertainties prevail
The expected boost from the unlocked EU’s recovery funds will lead to a rapid increase in investments, which so far has underperformed with just 16,7% of GDP in 2022 (Germany: 22,6%). This will lead to faster GDP growth, and in general the appreciation of the Polish zloty. Markets pushed the exchange rate up by 1.5% immediately after the election results were announced. Further positive effects should follow from drastically lowered risk of the suspension of structural funds access. From an investor’s point of view, another important factor is that the new government likely delivers a much higher level of legal predictability in internal reforms of taxes and employment rules, as well it will devote more attention to private business needs than the statist and redistribution-oriented policies of PiS.
The coming political change in Poland is also key given European businesses current efforts to diversify supply chains and reduce dependence on China. Many of them may seek for investment opportunities, particularly if they represent branches with high exposure to imports of critical components from other regions of the world. The recent decision of Intel to build a chip factory near Wrocław for $4,8 billion may herald a larger inflow of FDIs. Another reason for this trend is the expected launch of the reconstruction of Ukraine: given its geographical proximity, Poland is considered a good location for management centers and large warehouses. It might be particularly interesting for German business – already well positioned in the Polish economy with €41 billion of FDI and 9.500 enterprises, many of which consider further expansion to Ukraine.
Poland's departure from the PiS-path does not mean that increasing engagement of potential investors is care-free. The economy of the country is sensitive towards geopolitical risks, like an extended war in Ukraine or rising tensions in the Middle East. Internal stakes are also high. Although Poland's public finances show a low level of debt (49% of GDP), rapidly increasing expenditure needs and the implementation of electoral promises can worsen the fiscal balance. The opposition parties will sustain social transfers introduced by PiS, add a tax-free amount to €12.000, and up wages in the public sector by up to 30%. Also, the war in the East pushes the country to boost defense spending much above 2% of GDP. On top of that, at the beginning of 2024, the anti-inflation shield expires, which may lead to an acceleration of inflation (with 8,2% in September much higher than EU-average) and uncertainty about possible return of the central bank to a hawkish monetary policy.