Entrepreneurship Must Return to Europe

Andrzej Domański in an interview with Marek Tejchman

For months now, everyone has been talking about the report written by Mario Draghi, former president of the European Central Bank and former prime minister of Italy, warning of Europe’s economic decline. Deregulation and investments in growth can be a lifesaver. Will investments in the Polish economy finally increase significantly?

To grow investments, you need predictable economic conditions, good availability, and the right capital costs. As for the former, our government has unlocked funding under the National Recovery Plan and brought Poland back into the heart of European structures. We are restoring the rule of law step by step. You will see the first effects of these measures in 2025: we expect the growth of investments in the economy to pick up significantly. At the Ministry of Finance, we are working hard on new comprehensive solutions to support access to capital as part of capital market reform. However, when it comes to the cost of capital, namely interest rates, these are the responsibility of the National Bank of Poland. It is not my role as Minister of Finance to comment on the activity of the NBP.

Going back to the Draghi report, slow economic growth is, in fact, what ails Europe, and the eurozone in particular. While Poland’s economy is one of the fastest growing in Europe, we are stymied by the weakness of our EU trading partners. In my view – and this is something I am talking to my EU partners about – economic growth must be a priority in the context of all policies. One way to restore dynamic growth is to remove red tape in existing processes. The Union has put on a regulatory corset that impedes investments and thus also GDP. Delays in processes directly affect costs via the cost of capital. The Union’s economy is becoming uncompetitive, and it is unfortunately losing the global race. Our socio-economic model is under threat. Rebuilding the competitiveness of the European economy will be our priority during the Polish Presidency of the Council of the European Union, which begins on 1 January.

What needs to be done to rebuild the competitiveness of the European economy? Is this even possible, given the extremely ambitious climate targets?

Deregulation, lower energy prices, greater venture capital availability, and the creation of clusters to facilitate knowledge exchange and encourage risk-taking. 15 years ago, California’s GDP was equivalent to around 50 percent of German GDP. Now, the economy of this single US state is well on track to outgrow that of Germany or France. The secret of that success? A combination of ambitious and competent people, and venture capital. At the end of the day, economic growth is all about labour, capital and technological progress. This is why we are providing additional funding to the National Science Centre, which finances basic research. We want the knowledge economy to have a solid foundation so that science can generate projects with high commercialisation potential. We want to create a support system that recognises and deploys innovative solutions and is prepared to take risks.

When it comes to European competitiveness, I am certain that now is the time to rethink some of the decisions of the past. Technological neutrality must be taken seriously in the energy transition.

Industry should have more autonomy in decision making, and international competitiveness should be recognised as a legitimate policy goal. I am discussing this with represent atives of the new European Commission, which has pledged to put forward, within its first 100 days in office, a framework for the Clean Industrial Deal, a document that I hope will address this thinking. But we cannot fool ourselves: Europe does not have raw material deposits comparable to those of the US or China. We will always be an importer. This is why smart development of RES (renewable energy sources) is a must. We also need to have a serious discussion about the importance of nuclear energy.

Europe casts an envious eye at Chinese and US stimulus packages. Are you more of a fan of German austerity, or Chinese or US extravagance?

Economic policy must be ambitious and define new development goals. This is the policy aim we are pursuing in Poland. Not only do we want to close the gap with Western European economies but we also want to set out a course for Europe to grow. Poland is today the sixth and, in terms of purchasing power parity, the fifth largest economy in the EU, which means it has a growing responsibility for the EU economy. Energy transition and infrastructural development are key for us. I believe the countries that forget this and fail to invest in infrastructure are making a serious mistake. Public spending alone, however, is not enough. It is up to the government to create conditions that encourage private business to invest, grow production capacity, improve efficiency and expand into foreign markets. What is key here is deregulation and scrapping regulation that hinders investments in Europe and forces companies to relocate production outside Europe. We are particularly keen to create a favourable environment for investments in sectors where productivity is highest.

Let’s circle back to this question: should the European economy be stimulated more? Are the Germans too frugal?

The aggregate EU budget deficit is currently in the region of 3 percent. It is hard to describe the fiscal policies of the Member States as particularly restrictive. However, it is clear that there is a shortage of both public and private investments.

We have to do everything we can to ensure that entrepreneurship and optimism return to Europe. First the Southern European debt crisis, then the Covid pandemic and now the war in Ukraine and the energy crisis – all have left their mark on the economy.

We need to show that these problems are behind us and that Europe knows how to compete in the global technology race. After all, the geopolitical situation presents us with new challenges that we must face.

You say that we need to increase private investments. Does the Ministry of Finance see a need to support bank lending by amending the bank tax formula?

The Polish banking sector is liquid and competitive. However, we know that demand for credit is still too low. As far as capital shortages go, these mainly affect higher-risk capital, necessary to finance contributions for projects or more innovative investments.

Of course, Polish businesses must also be viewed from the perspective of what is happening in the EU. For more than a decade, EU policymakers have been talking about the need to strengthen the banking union, to improve the flow of European capital. I know that a six-month presidency will not unleash a revolution, but we will support solutions that increase the availability of capital for investment.

In the context of the availability of money for investments, including innovation, how can we help our capital market? What about the previously announced changes to the capital gains tax? When will they come into effect? Will there be new instruments, such as REITs?

As I’ve said, at the Ministry of Finance, we are working on a larger plan for the capital market, both public and private. No interesting companies will be floated on the Warsaw Stock Exchange unless we improve the availability of capital in the early stages of company growth. We are determined to improve the mechanism for mobilising savings for investments and develop ways to support innovation financing. We are looking at the possibility of introducing UCITS ETFs, REITs and creating an infrastructure to support venture capital. We want to build an ecosystem that will become a powerhouse of investment.

When it comes to the capital gains tax (the so-called ‘‘Belka tax’’ – eds.), we are looking into how it can be reduced and changed to promote long-term investment.

Do you feel more like a guardian of taxpayer money or a specialist in finding cash to satisfy every need? And who is the government’s economic strategist? When PiS headed the government, they would launch flashy presentations, strategies with cool names, etc. It was clear who came up with them.

When PiS was in charge, PowerPoint presentations were all we got. Most of the key investment projects announced by the previous government never happened or remained unprepared and, when implemented, generated huge losses, such as the politically motivated Orlen or Grupa Azoty projects. We will not do that and waste public money. Investment projects need to be budgeted and thought out to a T, even if takes a little longer to prepare.

Prime Minister Donald Tusk is responsible for the government’s strategy. I try to support him on economic issues, for instance by chairing the Economic Committee of the Council of Ministers. We are focusing on energy projects. We have discussions on the capacity market, wind and nuclear power investments. We are laying the groundwork for laws that are later discussed by the Council of Ministers.

In the context of economic policy, especially fiscal policy, it is hard not to ask about the transparency of public finance. On the one hand, Covid Fund and PFR bonds will be redeemed in 2025, and on the other, is the Armed Forces Support Fund growing in the best way it can?

We inherited a public finance shambles from our predecessors, which required immediate corrective action. We are publishing information about the funds you are referring to, and the PFR bonds will be redeemed by the state budget. Last December, the Sejm passed a law on the Fiscal Council, which will issue opinions on the draft budget law and monitor the Minister of Finance. Transparency in public finance has improved dramatically over the past year and this will continue. However, we simply cannot fix everything that PiS broke in the past eight years in such a short time.

How about selling patriotic “arms bonds”?

We are discussing various sources of funding for the modernisation of the Polish military. What is important for me is that this major expenditure, as we will be spending a substantial 4.7 percent of GDP on defence in 2025, remains largely a capital expenditure. We want our investments to strengthen the potential of Polish industry. Poland must be ready for new challenges. ©Ⓟ