Murray Gunn, Head of Global Research at Elliott Wave International, asks “Is Poland the next Turkey?”
Our outlook for the Polish Zloty suggests that Poland’s developing authoritarianism is likely to accelerate.
In case you have been living on Mars over the last few years and have missed what is going on, people around the world are becoming increasingly angry. This is especially true in the periphery of Europe, where countries like Turkey and Hungary are ruled by governments with an intolerance for people who disagree with them. After long negative trends in social mood, the so-called “populist revolution” has also resulted in the election of governments in Italy and Poland that have radical agendas. In Poland’s case, one policy of the ruling Law and Justice Party (nothing sinister about that name, eh) is to overhaul the judicial system by forcing judges to retire early. This, the European Union argues, is aimed at increasing political influence in the Polish legal system. On Monday, the EU stepped up threats of legal action against the Polish government which remains intransigent on the matter. It’s looking very probable that Poland is on the road to becoming internationally isolated.
Indeed, the chart of the Polish zloty versus the Euro suggests that Poland may be in for the same treatment as Turkey. A multi-year consolidation ended at the beginning of this year. It looks like EUR-PLN is entering a strong advance which should see the pair explode higher. Be prepared for that to be accompanied with a further breakdown in international relations with Warsaw.
The above via email. I do not have a link. The chart, as delivered, had an arrow pointing up. I edited the chart, adding a “? and put in arrows up and down.
Polish Zloty 1999-Present
The above chart better shows the the volatility of the Zloty.
- Between May 2001 and January 2004 the Zloty declined 33% vs. the Euro.
- Between January 2004 and May 2008, the Zloty rallied 54%.
- Between May 2008 and January 2009 the Zloty declined 35%
Poland Battles With EU
Bloomberg offers a Quick Take: How to Understand Poland’s Battles With the EU.
Almost three years into Poland’s populist revolution, the European Union is fighting with its most populous eastern member on two fronts. The bloc is edging toward suing the country over a judicial revamp and has recommended launching an unprecedented disciplinary process that could lead to penalties against the Polish government for failing to respect democratic standards. At stake is the value of Polish assets, with the zloty usually weakening when conflicts with the EU escalate, and the cohesion of the union itself.
What triggered EU action?
A law passed by Poland’s parliament went into effect, forcing out about two-fifths of Supreme Court justices and giving politicians more sway over a council that decides on court appointments. The law seriously jeopardizes independence of “all parts of the Polish judiciary,” according to the Venice Commission, which advises the Council of Europe human-rights group on constitutional law.
What are the possible penalties?
If four-fifths of EU members approve, Poland’s legal standards would be placed under monitoring by national governments in the Council of the EU. If the breach were to persist, fellow members could suspend certain rights that Poland enjoys as part the EU, including its voting rights in collective decisions. Such escalation, however, would require unanimous support from the bloc’s 27 other countries.
Does Poland have any allies?
Yes. It enjoys the support of Hungary, whose prime minister, Viktor Orban, has been steering his country on a similarly illiberal course. If it comes to a vote on sanctions, more nations may side with Poland in the spirit of supporting a fellow maverick state. Other former-communist nations such as the Czech Republic, Slovakia and Romania have strayed from the EU mainstream by rejecting refugees or moving to make it harder for officials to be prosecuted.
Does that mean sanctions are unlikely?
Through Article 7, yes. However, as the standoff escalates, the EU is separately considering limiting access to development funds in the post-2020 budget for countries that disrespect the bloc’s values. That could hit Poland hard since it’s the biggest net beneficiary of the EU’s budget, which may total 1.28 trillion euros ($1.5 trillion) in the 2021-2027 period. The money has helped power the Polish economy, contributing as much as a percentage point of growth to gross domestic product each year.
What could this dispute mean for markets?
While Poland’s economic performance has been robust, the zloty has lagged behind most eastern European peers. The currency has proven vulnerable when the conflict has escalated, as shown during street protests in July 2017 or when concerns about Poland’s sovereign ratings have mounted amid the dispute. More criticism from the European Commission is likely to undermine Poland’s status as a safe investment bet.
External Debt
Poland’s external debt is as bad as Turkey’s. If the EU does limit assistance to Poland, the Zloty is highly likely to come under pressure. The Zloty may come under pressure regardless, based on external debt concerns.
Yet, Poland is not Turkey. It is a member of the EU and nothing can be done about that, ever. Poland can voluntarily leave the EU, but it cannot be kicked out.
It takes unanimous agreement to make major changes, including trade deals. That is a huge, fundamental design flaw of the EU.
A bet against the Zloty vs the Euro seems like a reasonable idea, but it may take time to play out. I have no position in the idea and do not plan one.
Toothless Tiger
Flashback May 17, 2017: EU Opens Article Seven Process Against Poland.
I called the EU a “toothless tiger“.
My closing comment was “Dear EU: Talk is cheap. What are you going to do about any of this?“
Clearly the answer was nothing.
Polish Black Hole
For the ironic side of this discussion, please see EU Spent a Trillion Dollars of “Cohesion Money” Seeking Unity: Where’s Is It?
Short answer: There is no unity, but a lot of money vanished in a Polish black hole. The curious aspect is “Both Donor and Recipient Countries are Unhappy“.
EU discontent is high and rising.
Mike “Mish” Shedlock
“It looks like EUR-PLN is entering a strong advance which should see the pair explode higher.” – definitely true, but beware shorting zloty based on this statement. It will happen definitely – but when the global crisis will start. I made calculation that in case of EUR / USD will go to 1:0,8 (like in the early 2000) then one USD might cost 5 – 5,5 zloty. So the pair zloty / USD is much more interesting than zloty / EUR.
For current turmoil Central Bank in Poland has enough of foreign reserves. It lent just to USA 35 – 40 billion USD. All foreign reserves are on the level of 120 billion USD. Poland just gave up 3 years ago the special IMF loan that had not been ever used. It can be also renewed doubling the power of reserves. So only big global crisis will (will not might) undermine this currency like it used to happen in 2009 and in 2003.
That triangle pattern was the first thing that came to mind. In currencies, post triangle moves are most often very explosive.
It is the first thing that jumps out on the chart.
4.93 in Jan 2009 and 4.30 now means that there has been under 15% decline so the claim of 35% decline is a mistake.
In Turkey Turkish companies and Turkish people have massive exposure to debts in foreign currencies because the interest rates on them were lower than debts in Turkish Lira.
This led to a situation where drop in the value of Turkish Lira would cause repayment problems and debt management problems and bank solvency problems.
Then Erdogan stupidly wanted to take Turkey’s central bank under more control by him leading traders to start selling Lira.
This led to a drop in Lira along with other political mistakes by Erdogan like being authoritarian, oppressing kurds and putting political enemies in prison.
That in turn triggered the trap of currency debts.
Now due to the large drops in Turkey’s Lira many companies and people have trouble repaying or even managing their debts and this has created a massive bank solvency problem in Turkey and the more Lira has dropped the worse the situation has become.
There is NO way out for Turkey without massive pain.
IF Poland does NOT have massive debts in foreign currencies by Polish companies and Polish people then things will be OK for Poland.
Hi ML1. Poland had this game with private mortgage debt in foreign currencies as well as enterprises in 2008 – 2009. That was the reason of 4,95 zloty for one EUR. Since that loans in foreign currencies used to decrease continuously and you could hardly get any loan in foreign currency for last 3 years – unless you earn in this currency.
In many western EU countries judges are mostly leftists because the university law departments were infiltrated by leftists and communists in 1970’s and 1980’s and those leftists and communists made sure that other hires would also be leftists and communists and the education was leftist and communistesque.
Also these leftists and communists started their own lawyer and judge associations to make sure that as much leftist and communist judges would be working as possible.
Now since that happened in western EU countries image what the situation is like in Poland.
EVERYONE in Poland when it came to lawyers or judges was straight up communist until 1990’s so that was 28 years ago so there are 50-68 year old judges in Poland now that are through and through communists because there was nothing done to stop this after Poland became free because it was too sensitive and once joining EU it became impossible to do anything because EU institutions and many western EU countries top judges are also leftists and communists so they have used the threat of EU action to make sure that fellow communists and socialists are protected.
EU as it functions today is socialist/communist central planning economy through EU regulations and EU directives although in name it is capitalism.
And the problem with the EU judiciary, just like the US one, isn’t what petty political party their ranks used to storm barricades for when young and drunk, but rather that it makes a difference at all, what the judges happen to believe in. Which has been, is, and always will be, nothing different than “as much as possible from you to me.”
Limit government and the judiciary properly, and they’ll do just fine. Offer them unlimited license, as has been fashionable for the past 150 years, and they’ll use that license to enrich and empower themselves and their closest associates, at the expense of everyone else. The rest is theater. Tings really are, and will always be, as simple and crass as that.
Gunn is at EWI so I assume his arrow pointing up is based on his wave count, which I would expect is likely correct but I am not in that market at all.
At the same time EWI prognoses that polish stock market will go up. Strange.
That looks like the completion of a bullish horizontal triangle. Breakout to the upside soon IMO.
Mike you, probably accidentially, quoted leftist propaganda. Apparently you were to Prague recently? I’d recommend to rent a car and drive around in Poland for a while, not only in big cities but around the countryside as well, and talk to the people, some of them speak English pretty well. I bet you’ll find out that the quote that you used above is not quite appropriate…
I was amazed by the quote “a lot of money vanished in a Polish black hole” Mish is saying about the country that has inflation on the level of 2% and that just managed to boost it last year after 3 years of deflation. The GDP growth above 5%, the highest in the EU. The unemployment below 4% (EURO Stat). Last year Poland generated the most of EU working posts in the industry. All the EU money were the best used among EU countries. Misusage of money is penalized and many countries had problem with hat. Not in case of Poland.
Finally these talks about democracy, rule of law et cet. If you come to Poland you will see that democracy is doing very well. In fact the best in last 30 years. But I understand it is easier to quote just some institution without looking into reason of this opinion.
Perhaps once having lived under a an old Soviet system you would tend to rebel against a modern one, the EU.
And, having been indoctrinated from birth that all you can ever hope for, is that the next strongman will use more lube than the last one……
Cohesion funds do not target political cohesion but regional development disparities. Bullshit to keep harping on a wrong take on some teminology.
The odd thing here is that Poland has a debt to GDP ratio of 54.1%, while Turkey has a debt to GDP ratio that is even better, only 42.4%. The US is 105.4%.
Ah, Poland. Crummy economy, brain drain, interest rates at all time lows, super low birthrate (even by Euro standards) and the only national hero in recent memory is a former Pope.
Poland seems to get undue love on the blogosphere recently because of their disdain (understandably) for refugees, but to ignore the rest of their plight is folly. Glad Mish isn’t slurping the Kool-Aid like some others.
Who needs hero anymore?
You can easily write positives like: no recesion since 1991, best GDP growth etc.
Crummy economy… What you are reading? In 2007 – 2010 recession the only country in the EU with positive growth was Poland. Today’s score is GDP increase above 5% – the highest in the EU. Te national heroes: Malysz, Stoch, just few weeks ago 7 gold medals in European championships in athletics (2 years ago 1st position in Europe, this year second one), Pilsudski who stopped Soviets in 1920 that wanted to flood Europe with communisms. This was one of 10 most important battles in the world.
Tengen, your comment is funny. It’s like listening guys who say that USD is worth zero, or EU does not exist any more.
Mish ! Stop lie about Poland . Have you ever been in Poland ? Do you have any idea what’s going on with the Supreme Court ? What is it ? Who are those people in this Court ? Do you know that most of them sentenced patriots , people who fought with former totalitarian communist system before 1989 to jails and sometimes for tortures ? Some of them are “famous ” corrupted judges .
And so on , and so on . But who cares , right Mish ?
Poland is one of the last free countries in Europe . If you do not believe I invite you to Krakow and than you can see and maybe understand what’s the difference between the truth and your opinion . Unless you are some kind of leftist or neomarxists like many in Brusseles. That’s why they hate us, I mean my government . I can show you many examples as The European Commission uses double standards to Warsaw and ( for example ) Berlin or Paris . I ‘m 58 and I remember very well those times and what the judges did with anticomminists. Mish , I thought you were wise man .
Most of judges didn’t work during comunism. It was 28 years ago.
PIS introduces their own people into state companies and judiciary with fatal results.
PiS use comunist methods (invigilation, prosecutors, police) to crush oposition. Nothing good for society.
Germany and Austria had very light “denazification” after WWII. So the same with comunism.
All politicians are corupt whether it is US, UE, or East Europe.
More background is required; some justices being forced to retire were appointed illegally by the old government backed by Brussel ,after they lost the last election.Some were still from the old communist regime. European pressure and interference is odd.Mish,you are the most welcome and refreshing champion of freedom and please stay that way.
And they don’t want Tusk to return so perhaps not all bad.
Poland’s economic indicators are better than the Eurozone average.
Zloty issues will help the EU achieve Poland joining the Euro. There is a desire to see all EU states inside the Euro.
Also – I believe standardisation in the EU is inherently deflationary. Any standardisation commoditizes readily available needs. Be it products, services or labour.
Zloty is just another garbage currency that will soon fail, ala the Turkish Lira and Venezuelan Bolivar.
One by one, they will all pass into “Money” Heaven. The only question is, “In what order?”
An amazingly long article with lots of words without mentioning islam, muslims, rapes, immigration, welfare and culture.
Almost like they were forbidden words.
Other words like punishment and Brussels are also missing.
. The article was not “amazingly long”. More importantly, rapes, Muslims etc may be behind Polish court move or not. But they do not matter one bit. Poland made its decision. What matters is EU action and concerns over external debt.
So all those other EU countries with higher debt (both in total debt and % GDP) that are not being punished because they are in midst of the destruction of their own culture by the edicts of unelected bureaucrats in Brussels is just a coincidence?
A better question, if you can get over your nativity, is how badly this ends.
Bloodshed?
Russia invited in?
Bureaucrats hanging from lampposts?