Speech by the EBRD President Thomas Mirow to the University of Warsaw, Poland

It is a great pleasure to stand today at the prestigious University of Warsaw, before this audience which represents Poland’s best intellectual traditions.

I am delighted to be back visiting Poland. I have already had the opportunity today to exchange views with senior members of the government. I am sure this lecture will give rise to yet another fruitful exchange following my intervention – which I will try to keep short.

Let me start with a simple statement: the importance of Poland is undoubtedly growing in Europe. On a political level, your government’s presidency of the Council of the European Union last year has attracted a lot of attention, both within and outside the Union. But what attracted even more attention is, I think, Poland’s recent economic success. Poland was among the very few countries in Europe (if not the only one) which managed to sustain growth throughout the deep recession in 2009, and has shown a very respectable expansion since then. This is, of course, in stark contrast to diminishing investor confidence and uncertainty over the medium term outlook elsewhere in the continent.

Yet, this success cannot be taken for granted, and Poland, like other countries, is facing significant challenges. The European economic environment is posing clear risks and should stimulate fresh thinking about a model of resilient and sustained growth for Poland. In my remarks today, I would like to try and sketch some elements of such a model.

A few words on the EBRD
Please allow me first a few words on the institution that I have the privilege to lead, the European Bank for Reconstruction and Development. The Bank was created in 1991, shortly after the fall of the Iron Curtain, to accompany the countries of the former Soviet block on their thorny path towards democracy and market economics. Our goal is to promote private initiative and entrepreneurship in 29 countries, from the Baltics to Turkey and from Poland to Mongolia. We invest today around EUR 9bn annually in both debt and equity, and engage in policy dialogue with governments on a wide range of policy issues.

And now, against the background of the Arab Spring, the international community has asked us last year to expand our mandate to the countries of the southern and eastern Mediterranean, where the challenges bear some similarities to those of central Europe twenty years ago. This process is ongoing, but we should be able to start investing in Morocco, Tunisia, Egypt and Jordan in the course of this year – technical cooperation projects have started already.

We have been closely engaged in Poland since the early days of the country's economic and political transformation, and Poland is still one of our largest countries of operations. Last year, we invested EUR 900 million in Poland, bringing our cumulative investments in the country to close to EUR 6 billion. The Bank’s annual business volume in Poland was on a descending path in the years preceding 2008, as its finance was less additional to what Poland could secure on international markets and Poland’s transition was at an advanced stage. However, the global financial crisis revealed some weaknesses and created renewed demand for our finance, mostly to support banks and to move the energy sector towards greater energy efficiency and clean energy use.

Poland, along with other new EU member states, is expected to graduate from the Bank in the medium term – this means in our jargon that the transition process will be well advanced and EBRD would no longer be additional to other potential sources of finance available on the market. In the meantime, we expect still several more years of close involvement, not just through our investments, but also through policy dialogue and technical assistance. After graduation we will continue to work with Polish firms as sponsors of EBRD projects in other countries of operations, as contractors and consultants on EBRD projects and as a source of transition know-how that can be shared with less advanced transition countries in our existing and new region of operations.

Poland’s growth within a troubled EU economy
But let me come to the substance of my intervention today.
The Polish economy, like the rest of the region, faces a challenging external environment, in terms of both prospects for exports and external funding.

The impact of the slowdown in global and European trade on the Polish economy has been fairly limited, because Poland is much more reliant on its domestic market than its peers in the region, and that has helped in sustaining growth in the crisis.

The most significant risk for Poland comes from a possible withdrawal of foreign capital or liquidity from its financial sector.  In December, we saw the initial signs of a new ‘credit crunch’ within the eurozone, with growth in credit falling to new lows and bank funding being withdrawn from the central Europe region. To its credit, the European Central Bank reacted swiftly and boldly through its two refinancing operations which totalled more than EUR 1,000 billion. This has helped to avert a liquidity crisis, but we don't know yet how much of this amount will trickle down to finance credit from the subsidiaries of foreign banks in central Europe.

There are also some fears that the higher bank capital requirements set by EU leaders will hurt central Europe, as banks unwind their foreign assets before reducing those in their home bases. Such an unbalanced ‘deleveraging’ is without doubt a risk, but there is little evidence thus far that large bank groups are doing so excessively – banks are seeking to improve their balance sheets primarily by increasing their capital.

Looking forward, we are reasonably optimistic for the eurozone.  The ECB’s funding injections have bought Europe some time and the orderly restructuring of the Greek debt – at least a first part of it – has now been successfully pulled together. Concerns over sovereign solvency may come back on the agenda. But, if a stronger fiscal governance framework is indeed implemented within the euro zone, we believe that further deterioration in the crisis can be avoided this year.

Nevertheless, structural reforms will not boost growth in the short term, and it is clear that the EU’s public and private debt problems will take many years to work out.

Elements of a new growth strategy for Poland
Against this background of scarce capital and slow growth in the eurozone, it is of the utmost importance that Poland progresses further with its long term structural reform agenda and lays down the foundation of its future growth. Let me touch upon a few ongoing and important areas for further reform.

· The programme of outstanding structural reforms
Like most observers, we were encouraged by the structural reform programme that Prime Minister Tusk announced early on in his second tenure. The implementation of the announced fiscal consolidation strategy is vital to sustaining investor confidence amid broader concerns over sovereign exposures. Realigning social expenditures and pension rights under this year’s budget might be painful, but events elsewhere in Europe last year underline how much more draconian adjustments can be when forced by market pressure. This is not just a fiscal imperative but should also give greater incentives to re-enter the labour market, raising Poland’s unusually low labour participation ratio.

But there are broader challenges in the business environment that may hold back growth. Poland’s rankings in internationally comparable ‘business environment’ indicators remain relatively low. The government’s commitment to introduce time limits for the approval of public and private investment projects, to give just one example, is very welcome.

Over the medium term, reducing the direct involvement of the state in the economy remains a priority. The privatisation programme has made very good progress but key companies in the energy, mining, and heavy industry sectors remain in state hands. In the infrastructure sector, giving more space to the private sector is essential. Poland has a very good record in utilising the EU’s structural funds but, ultimately, private commercial funding needs to emerge – indeed this is something the EU itself will increasingly encourage.

· Encouraging the knowledge economy
But as a relatively advanced transition economy, Poland will also need to adopt new strategies to sustain productivity growth. This can be done through attracting foreign direct investment, where Poland has sustained inflows better than many others over the past years. But it also needs to be fostered through home-grown innovation.

Already in 2010, the government adopted reforms for the university education system. Now is a good time to press on with its plans to incentivize private sector research and development. With its relatively young and well-educated workforce – of which you, students at the University of Warsaw, are clear evidence – and with a significant stock of foreign investment in manufacturing and other research-intensive sectors, Poland has substantial potential in the so-called knowledge economy.

This is an area in which the EBRD has also stepped up its efforts, in particular in central Europe which now needs to embrace its next growth phase. Provision of risk capital is a particular constraint and we stand ready to support the Polish SMEs and innovators through improving access to private equity funds, which are increasingly directed at young or innovative companies.

· Supporting a new model for sustainable banking
Finally, and I will dwell on this vital point, there is a need to develop the regulatory and market underpinnings of a more sustainable banking model.

As you know, after a series of local banking crises following the fall of the Berlin Wall, central Europe opened itself up very rapidly to foreign banks through privatisations, which in several countries placed 70-90 per cent of bank assets under the control of foreign-owned bank subsidiaries. Foreign capital flows into the region increased swiftly, mainly from European parent banks to their newly acquired subsidiaries. Rapid credit growth fuelled GDP growth, which in turn attracted more funding.

We continue to believe that this has not only supported the remarkable growth and convergence of incomes with the EU average that we have seen in central Europe – in part by allowing to import skills and technology into underdeveloped financial sectors – but that it has also displayed a degree of stability during the financial crisis of 2008-09.

But today, financial integration in Europe is such that national policies in one country affect negatively financial systems in other countries, through cross border banks that operate across many countries. The decision of the home country of a big bank group can affect the operations of the bank's subsidiaries in other countries. There can also be incentives to ring-fence national banking systems that drive up capital and liquidity needs, and lead to a further tightening of credit conditions. This can possibly undermine the very foundations of Europe’s single market in financial services.

In our view, this calls for closer regulatory coordination to safeguard the benefits of financial integration. Host countries should have a closer involvement in the supervision of the bank groups whose subsidiaries may well be small, but could be of systemic importance within the host country. This cooperation should also extend to up-front coordination on a potential bank resolution scenario. The trust thereby established would underpin supportive regulation during normal times.

These are some of the ideas that have encouraged us to launch a second phase of the so-called Vienna Initiative, the 'Vienna 2.0', which got underway last week, and is supported by numerous bank groups and regulators from across Europe – including from Poland. We trust that, given its importance in the region and rather positive experience, Poland will be able to play a prominent role under Vienna 2.0. 

At the same time the new reality of European funding conditions also calls for adjustments in the management of banks themselves. A stronger reliance on a local funding base could address many of the vulnerabilities exposed during the crisis. In this regard, Poland is at the forefront of developing local bond markets for private issuers, and EBRD has lent some support and advice to this effort. Local savings pools and institutional investors are growing and will give this market crucial liquidity. Poland has expended significant effort in building private pension funds – indeed it was one of the first countries in emerging Europe to do so – and these funds could now be an important support to the development of local capital markets, while providing a well diversified capital base for retirement income.

Concluding remarks – Poland’s role in Europe’s single market and beyond
But it is now time for me to conclude. Within Europe the focus will now hopefully turn from the imperative of stabilising public finances and calming financial markets to putting in place elements for renewed medium and long term growth.

On these reforms, Poland can speak with some weight. I would expect that in the coming years the completion of Europe’s internal market will once again return to the political agenda. The liberalisation of services and the recognition of national professional qualifications are policies integral to Europe’s freedoms and Poland stands to benefit, as has already been the case with free movement of labour.

Poland has done much to put the interests of the new member states on the agenda in Brussels. It has spoken up for the countries in Europe’s neighbourhood, who must continue to find open and supportive markets for their goods and services within the EU.

Market integration and sustained reform policies have propelled Poland’s transition over the past twenty years. This is a record you should be proud of. I wish you well in your studies, and I am sure you will find roles in which you can take this growth forward.

Thank you for your attention.