Poland: Tensions Are Rising But Funds Provide Motivation To Compromise with the European Commission

The European Commission (EC)’s recent actions pave the way for a period of intense uncertainty ahead of the pending approval of Poland's National Recovery and Resilience Plan (NRRP). The EC requested on September 7 that the Court of Justice of the European Union (CJEU) impose financial sanctions on Poland (rated A, Stable). Subsequently, the EC sent a formal notice to Poland (rated A, Stable) for not acting on the CJEU’s rulings related to the regime of the Disciplinary Chamber (DC) of the Supreme Court. The Polish DC, a body responsible for discipling judges, is part of a wider judiciary reform. The CJEU considers the Polish law on the disciplinary regime for judges as not compatible with European Union (EU) law and undermining judicial independence, in other words making judges subject to political control. DBRS Morningstar expects daily financial penalties, should they be imposed, to be of manageable amounts, but tensions could continue to escalate. This could arise for example should the Polish Constitutional Tribunal decide, in an upcoming ruling, that EU law does not have supremacy on the Polish law. This might further delay approval of Poland's NRRP by the EC, that is currently withheld. DBRS Morningstar sees motivation to reach a compromise. Support in Poland for the EU is high and EU funds have made a material contribution to past growth which averaged 3.7% annually since 2004. Moreover, the risk of anti-EU sentiment could rise in the country. However, should compromise not be possible, this could ultimately lead to lower EU funding which might weigh on Poland's economic recovery. If the Polish government replaces EU funds with national resources, this could lead to higher public debt. Consequently, failure to find a compromise leading to a significantly lower EU funding could ultimately have negative rating implications.

Key highlights include:
-- The EC's decisions follow a series of clashes over Poland's respect for the rule of law
-- Poland is a large recipient of EU funds and has strong incentives to reach a compromise
-- Significantly lower EU funding over the medium could ultimately have negative rating implications

“Tensions are rising again between Warsaw and Brussels. The Polish Constitutional Tribunal may rule that EU law does not stand above national law and that would further complicate the European Commission’s green light to Poland's National Recovery and Resilience Plan (NRRP). At this stage, as we saw in the past, there is motivation to find a compromise due to the large amount of EU funds at stake, but frictions will likely persist as the overall political stance of the Polish government is unlikely to change in the near term” notes Carlo Capuano, Vice President, Sovereign Global Ratings at DBRS Morningstar.