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Quantifying the costs of a prolonged clash with the EU

The recent escalation of the conflict between Poland and the European Union has significantly increased the odds of a decisive response from the EU. The EU’s most powerful bargaining chip are the NGEU and structural funds of which a total of around €110bn (22% of GDP) was allocated to Poland over the 2021-2027 period. To quantify the economic impact of a prolonged clash with the EU, we have created a downside scenario, where we assumed that NGEU and structural funds are being withheld from Poland until end-2023. In the scenario, government investment in 2022-2023 is over 20% lower compared to our baseline forecast, even after new domestic funding is taken into consideration. The PLN depreciates by over 12% against USD in H1 2022, pushing inflation up from already elevated levels. Although curbing the flow of EU funds does not derail the near-term recovery, the economic impact is nonnegligible: GDP growth is cut by a cumulative 1.4ppts over the next two years and the total output lost until end-2026 is 170bn PLN (8% of GDP).To complement the analysis, we have run an upside scenario as well, where we assumed that the conflict is soon resolved. However, as we continue to assume in the baseline that NGEU funds will flow from mid next year, the positive impact is relatively limited, boosting GDP growth by 0.3ppts to 5.0% y/y in 2022.There are a number of legal, political, and economic factors at play, rendering the outcome of the clash very uncertain, thus elevating the idiosyncratic risk for Polish assets. However, given an overwhelming popular support for the Polish presence in the EU, we still view Polexit as extremely unlikely.

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