Poland Watch: EU dispute strirs "Polexit" fears, weakening PLN

The current escalation of tensions with the EU has led to Polexit speculations while the root of the dispute goes back to 2015 when Law and Justice won elections and introduced a reform of the judiciary. The changes have been a source of domestic and external criticism and led to accusations of posing a threat to the independence of the judiciary. They also resulted in a launch of the EU's Article 7 sanctions procedure for the rule of law breach in Poland, however, there were no conclusions nor consequences so far. This time however it seems more is at stake as Poland awaits the approval of its Recovery Plan, necessary to receive NGEU funds, and with the threat of financial penalty.

Current dispute

Tensions escalated again after rulings from both sides with the European Court of Justice (EUCJ) decision that changes to the Disciplinary Chamber violate EU law and therefore must be reversed and the Disciplinary Chamber suspended as an interim measure. In response, the Polish Constitutional Tribunal ruled that the EU cannot decide about the Disciplinary Chamber. Based on that ruling the President of the Polish Supreme Court decided that the Chamber can resume operations. As a result, Poland has not adhered to the EUCJ ruling. These developments occur amid internal disagreements within the judiciary which have persisted ever since it had been reformed. On top of that, still awaited is the ruling from the Polish Constitutional Tribunal whether the Polish Constitution has primacy over the EU law — as per request from the Polish Prime Minister Mateusz Morawiecki. The ruling was awaited last week but has been delayed until 3 August at the latest.

Latest developments

Following last week’s decisions and due to the lack of adherence on the Polish side to the EUCJ ruling, the European Commission yesterday announced a deadline until 16 August for Poland to adhere. In case Poland declines to do so, the Commission will put a motion to the EUCJ for a penalty payment.

Moreover, Poland is still awaiting approval from the European Commission on its Recovery Plan before the first NGEU funds can be released. The VP of European Commission Věra Jourová declared that the assessment of the Plan is independent of the proceedings related to the judiciary and there will be no impact from the dispute on the acceptance of the Recovery Plan.

Politics aside, the outlook for a Polexit is surely not a scenario favoured by the Poles. According to a CBOS poll from 2020, 89% of Poles are in favour of Poland being in the EU. Interestingly, according to recent Euro barometer survey, the support for euro adoption has increased in 2021 and is now at 56%.

Market impact

The tensions and speculations of Polexit are surely not positive for the Polish market, the złoty in particular. However, current weaker global sentiment and stronger USD are in our opinion the key factors for recent PLN weakness, intensified by the reluctance of the Polish central bank to raise interest rates, against such changes made in the region. Meanwhile, the escalation of tensions of EU and speculations about the future of Poland in the EU or the impact on EU funds release is surely adding to the złoty weakness and may prevent a fast return towards lower EUR/PLN levels.