Poland is racing ahead with military spending – but will it help or damage its economic growth story?
In the first article in a series on the Polish economy, we look at the country’s defence boom and its implications A short distance north from Warsaw along the Vistula river, camouflaged missile launchers roll through the quiet village of Czosnów. As recently as two years ago, their destination – a hi-tech weapons facility opened this month – had been a cornfield. Now, as Poland drives up defence…
Poland's defense budget has surged at an unprecedented rate since Russia's invasion of Ukraine five years ago. In 2022, Poland's defense spending as a percentage of GDP reached 4.8%, more than double its previous level of 2.2%. This investment has translated into $53 billion, making Poland the fourth-highest spender on defense in the EU after Germany, France, and Italy.
The primary driver behind this military spending boom is Russia's aggression towards Ukraine. Poland is taking swift action to bolster its defense capabilities in response to this threat. Jim Price, managing director of MBDA Polska, the local subsidiary of the European arms group, notes that Poland is rapidly shifting from importing weapons to manufacturing them domestically. This transformation has created a significant number of jobs within the country.
While the main focus of Poland's defense spending is to counter Russian aggression, there is also a recognition of its potential economic benefits. Deputy Foreign Minister Marcin Bosacki believes that strengthening economic ties as part of military readiness can discourage Putin from further aggressive actions. He argues that unity and strength among NATO members make Putin less likely to provoke NATO states.
Historically, Poland has experienced significant economic growth since transitioning from communism in the early 1990s. Living standards have improved dramatically, and the country joined the EU in 2004, securing substantial catch-up funds for infrastructure development. Poland's economy has grown at an annualized rate of 3.9% in the second quarter of 2022, despite global headwinds caused by the Iran conflict.
However, Poland's defense spending has not come without costs. The country is projected to run the largest fiscal deficit in the EU next year, with a budget deficit of 7.1% of GDP. This has led to Moody's downgrading Poland's long-term sovereign credit rating to its lowest level since 2002. Some economists argue that this path is unsustainable and question whether Poland's politicians will be willing to adjust their fiscal policies.
The combination of high defense spending and a growing economy is likely to create political polarization in Poland. The upcoming general election next year is expected to be heavily influenced by issues related to national security, support for Ukraine, and Poland's relationship with the EU. Right-wing politicians, who are opposed to EU and Ukraine support, have gained traction in recent months, particularly in opposition to the Polish government's access to €44 billion in defense investment loans under the EU's Security Action for Europe program.
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