February 2, 2006

Poland flexes muscles in East-West EU stand-off

By Tomasz Janowski - Analysis

WARSAW (Reuters) - Poland's brinkmanship on an EU- wide
sales tax deal showed the bloc's newcomers are a force to be
reckoned with while cementing Warsaw's reputation for
aggressive tactics in asserting itself in the enlarged Union.

The Poles, backed at first by the Czech Republic and
Cyprus, clashed with "old" European Union members by opposing a
deal to prolong reduced rates of Value Added Tax on haircuts,
home improvements and bike repairs, in the first major row
pitting the bloc's long-time rich members against its

Prague and Nicosia dropped their opposition at the weekend
leaving Warsaw holding out alone until it struck a compromise
with EU president Austria and the European Commission on
Wednesday, averting another major blow for the 25-member bloc.

Poland earned mixed reviews for its handling of the crisis.

To critics, it lived up to a reputation as a troublemaker.
To supporters, it won concessions and cemented its role as a
champion of the bloc's poorer eastern underdogs.

The stand-off showed the EU's founders and heavyweights and
Brussels establishment could ill afford to ignore the
newcomers' interests and sensitivities, analysts and diplomats

"That episode reinforces the message that, yes, now we have
10 new members who are willing to fight for their interests,"
said Katinka Barysch, chief economist at the Center for
European Reform London-based think-tank.

Some analysts said the VAT talks, like a December
compromise on the EU's long-term budget, showed only Poland
among the new members had the muscle and nerve to risk an open
confrontation with the EU's biggest powers -- Germany, France
and Britain.

"Poland is a large country and it has acted mainly in its
own interest, but also reinforced the identity of other new
members which are at a similar stage of development," says
Eugeniusz Smolar, president of the Warsaw-based Center for
International Relations think-tank.

Polish Finance Minister Zyta Gilowska, who negotiated the
deal with Brussels and Vienna, said Warsaw had opposed an
initial deal because it was unfair to newcomers, giving rich
long-time members better terms than poorer eastern neighbors.


But others are skeptical about whether it can play a larger
regional role, contending that other smaller nations can
achieve as much with quiet behind-the-scenes diplomacy and
skillful compromises as Warsaw has by grandstanding.

"I don't see any leading role for any of those new
members," a Brussels-based diplomat from another new member
state said.

"What the VAT conflict showed was more a difference in
national mentality. You could see that the Poles proceeded in
this manner several times -- very vocal, with an 'all or
nothing' attitude. Other countries, for example the Czechs, are
used to negotiate more," the diplomat said.

The Czechs said they won virtually the same concessions as
the Poles in the VAT row -- assurances that they will be able
to extend low tax rates to much of their housing sector --
without taking the bloc to the brink of a crisis.

"Poland is missing a great opportunity. Instead of being
one of the large members that give the direction to the
European Union policy, the government is taking on a role of a
defender of its own and others' interests, even against their
will," said Cornelius Ochmann of the Bertelsmann Foundation in

Commentators say Warsaw, which counts on billions of EU aid
to modernize its economy and narrow the wealth gap with the
rich West, may yet pay a high price for its confrontational

Poland's new conservative government, which made an
election promise fiercely to defend national interests in
Brussels, is also locked in a row with the EU over its
opposition to a bank merger that the European Commission has
already cleared.

Upping the stakes in a battle that legal experts say it is
bound to lose, Poland threatened on Thursday to declare void a
1999 privatization deal if Italy's UniCredito bank went ahead
with a merger of two Polish banks which Warsaw opposes.

Some diplomats say a combination the government's lack of
experience and distrust of Brussels may yet backfire.

"Poland's approach to EU issues now is a mix of mistrust
and inability of acting within the bounds of European
diplomacy," a senior Polish diplomat said.

"If the EU wasn't so preoccupied with overcoming its
institutional crisis, the VAT debate could have ended up in a
great confrontation. I am afraid that the UniCredito case may
be the last straw," he said.